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AS – Business – Unit 3: Marketing
Chapter 17: The nature of marketing
Role of marketing
Marketing involves a number of related management functions, including:
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market research
product design and packaging design
pricing, advertising and distribution
customer service.
Marketing objectives and corporate objectives
Marketing objectives include a measurable increase in:
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the share of the market, perhaps to gain market leadership
total sales (value or volume, or both)
average number of items purchased per customer visit
frequency of shopping by loyal customers
percentage of customers who return (customer loyalty)
number of new customers
customer satisfaction
brand identity.
To be effective, marketing objectives should:
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be linked to corporate objectives and be focused on helping the business achieve those overall
targets
be determined by senior management, because the key marketing objectives will impact on the
markets and products a business trades in for years to come
be realistic, motivating, achievable, measurable and clearly communicated to other
departments.
Why are marketing objectives important?
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They provide a sense of focused direction for the marketing department and help the business
to achieve its overall corporate objectives.
Business success can be measured against the targets set by the objectives.
Marketing objectives can be broken down into regional and product sales targets.
Marketing objectives form the basis of marketing strategy.
Marketing objectives will impact on the marketing strategies adopted. It is necessary to have a clear
vision of the business’s objectives in order to discuss how marketing decisions can help to achieve them.
Examples of marketing strategies include:
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penetrating existing markets more fully by selling more to existing and new customers
entering new markets in other countries
developing new, or updating existing, products.
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Coordination of marketing with other departments
Finance
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The finance department will use the sales forecasts of the marketing department to help
construct cash flow forecasts and operational budgets.
The finance department will have to ensure that the necessary capital is available to pay for the
agreed marketing budget for promotional expenditure.
Human resources
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Sales forecasts will be used by human resources to help prepare a workforce plan. For example,
additional workers will be needed in sales teams and production to increase sales.
Human resources must ensure the recruitment and selection of qualified and experienced
workers. There must be sufficient workers to produce and sell the increased number of products
planned by the marketing department.
Operations
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Market research data will play a key role in new product development.
The operations department will use sales forecasts to plan the capacity needed, the purchase of
the machines that will be used and the raw material inventories required for the higher output
level.
Demand and Supply
Graphs
Demand
Supply
Factors affecting
• price of the good itself
• consumer incomes
• prices of substitute goods and
complementary goods
• population size and structure
• fashion and taste
• advertising and promotion spending.
These factors are called the determinants
of demand.
• price of the product itself
• costs of production, such as an increase
in labour costs
• government taxes imposed on the
suppliers, raising their costs
• government subsidies to suppliers,
reducing their costs
• weather conditions and other natural
factors
• advances in technology which lower the
cost of production. These factors are
called the determinants of supply.
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Markets
The term ‘market’ also refers to the group of customers who are interested in a product and have the
resources to purchase. This understanding of the term ‘market’ can be broken down into:
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The potential market for a product, which is the total population interested in the product.
The target market, which is the market segment of the total available market that the business
has decided to direct its product towards.
An industrial market deals with products bought by businesses. These include specialist
industrial machines, trucks and office supplies.
A consumer market deals with products bought by the final users of the products. These include
mobile phones, holidays and fashion clothing.
Some businesses just sell in local areas to local customers. They only operate in the local market.
Examples of such businesses include laundries, florist shops, hairdressers and car repair garages.
Some businesses expand their operations to the national market, selling their products to
customers throughout the whole country. Common examples include banks, supermarket
chains and large clothing retailers.
The rapid rise of multinationals that operate and sell in many different national markets
illustrates the sales potential from exploiting international markets. Expanding into foreign
markets is a significant strategic decision.
Customer (or market) orientation and product orientation
Customer (or market)
orientation
Best suited in fast-changing,
volatile consumer markets.
Product orientation
Best suited when market for the
products they make, are fast
disappearing.
Advantages
• The chances of newly developed products failing in the market
are reduced. Effective market research helps to prevent product
failures. With the huge cost of developing new products, such as
cars or computers, most businesses use the customer-oriented
approach to reduce the risk of failure.
• Products based on consumers’ needs will have a longer lifespan
and be more profitable than those that are sold using a productled approach.
• Market research never ends. Constant feedback from customers
will allow the product and the method of marketing it to be
adapted to changing tastes before competitors get there first.
However,
• Frequently updating market research can be expensive.
• If a business tried to respond to every passing consumer trend or
market fashion, then it may waste its resources and end up not
doing anything particularly well.
Advantages
• Product-oriented businesses invent and develop products as they
believe that they will find consumers to purchase them. Pure
research into technical innovations without consumer research is
rare but still exists.
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• Product-oriented businesses concentrate their efforts on
efficiently producing high-quality goods. They believe quality will
be valued above market fashion.
However,
• Researching and developing a truly innovative product, is
expensive and risky
• New products developed in this way may come to market too
late or fail to match competing products.
Market share and market growth
The market size can be measured in two ways: by the quantity of sales (units sold) or by the value of
products sold (revenue) by all businesses in the market over a given time period.
Market size is important for three reasons:
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It allows a marketing manager to assess whether a market is worth entering or not.
It allows a business to calculate its own share of the market.
The growth or decline of the market over time can be identified.
Market growth
The rate of market growth depends on several factors:
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a country’s rate of economic growth
changes in consumer incomes
development of new markets and products that reduce sales in existing markets and products
changes in consumer tastes
technological change, which can boost market sales following a new innovation
whether the market is saturated because most consumers already own the product.
Implications of a change in market growth
Reduced Market growth
• Sales will increase if the business’s market
share remains the same.
• It may be possible to increase prices and profit
per unit.
• Increased sales could lead to cost savings
• More businesses might be attracted to the
market, increasing the level of competition.
Increased Market growth
• Sales will increase more slowly even if the
business’s market share remains the same.
• Competitors might reduce prices to increase
sales in a slow-growing (or shrinking) market.
• Lower prices might result in lower profit per
unit.
• Businesses might consider expanding into
faster-growing markets (e.g. in other countries).
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Implications of a change in market share
Increase in Market share
• Sales are rising faster than those of competing
businesses in the same market and this could also
lead to higher profits.
• Retailers will be keen to stock and promote the
best-selling brands. These brands may be given
the most prominent position in shops.
• The business producing the brand leader may
be able to reduce the discount rate to retailers.
The combination of this factor and the higher
sales level should lead to higher profitability for
the producer of the leading brand.
• The fact that an item or brand is the market
leader can be used in advertising and other
promotional material. Consumers are often keen
to buy the most popular brands.
Fall in Market share
• Sales are likely to fall unless there is rapid
market growth.
• Retailers will be less keen to stock and promote
the product.
• Larger discounts to retailers might have to be
offered.
• The product may no longer be a brand leader,
so promotions will not be able to state this.
Consumer marketing (B2C) and industrial marketing (B2B)
The differences between selling to consumers and selling to other businesses start with the type of
products.
Classification of products
A general distinction can be made between goods and services produced for sale to individuals and
households (consumer products) and those produced for industrial use (industrial products).
Consumer products are often classified into:
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convenience products – purchased frequently, often bought on impulse and sold to a large
target market (e.g. sweets, soft drinks)
shopping products – usually require some planning and research by consumers before being
purchased; consumers do not buy these frequently (e.g. washing machines)
speciality products – bought infrequently, often expensive and with strong brand loyalty (e.g.
cars and designer clothing).
Industrial products are often classified into:
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materials and components – needed for production to take place (e.g. steel and electric motors
for washing machines)
capital items – equipment, machinery and vehicles (e.g. lathes, IT systems and industrial
buildings)
services and supplies – business services and utilities (e.g. power supplies and IT
support/maintenance).
The key differences between selling to businesses rather than consumers are:
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Most industrial products, such as equipment for power stations, are much more complex than
many consumer products so specialist sales employees and support services will be more
important with B2B selling.
Industrial buyers often have much more market power and are better informed than the
average consumer. They need to be sold products by well-trained and experienced sales
employees.
Industrial buyers will rarely buy on impulse. They will only purchase after long consideration and
detailed analysis of alternative products. A business selling B2B needs to keep in regular contact
with industrial customers.
Traditional mass media advertising and sales promotion techniques are not used in most
industrial markets. Selling can be via trade fairs or direct contact with industrial buyers, often,
initially, via websites.
Mass marketing and niche marketing
Mass market
• This large market is made up
of customers who are willing to
purchase a standardised
product (undifferentiated
product).
• High sales levels allow for high
levels of production.
• Low price is often a key
element in selling the product.
Niche market
• Customers want to buy
differentiated products.
• Size of a niche market is often
small.
• Market research is often
necessary to establish
customers’ special needs.
Advantages
• A mass-market strategy with
high sales of a standard product
can lead to lower average costs
of production.
• Cost advantages can lead to
lower prices to consumers
which help to reinforce the
position of the product in the
market.
• Mass marketing can result in
extensive publicity for the
business and its product leading
to clear brand identity.
• By using niche marketing,
small businesses can survive
and thrive in markets that are
dominated by larger firms.
• An unexploited niche has no
competitors. Selling to this
niche offers the chance to sell
at high prices and high profit
margins until competitors react
by entering too. Consumers will
often pay more for an exclusive
product.
• Niche market products and
exclusive marketing can be used
by large firms to create status
and image. Their mass-market
products may lack these
qualities.
Disadvantages
• Lack of differentiated
products and differentiated
marketing does not appeal to
many consumers.
• The focus on low prices does
not help to establish a premium
brand image for the product.
• Technological or other
changes could lead to a fall in
demand for the standardised
product. Overdependence on
this product is therefore a risky
strategy.
• Small market niches do not
allow economies of scale to be
achieved.
• There is limited scope for
business growth if the niche
market has few customers.
• The business is vulnerable to
market changes if it only
operates in one niche market.
This makes it a risky strategy.
• If selling in a niche market is
profitable, this is likely to attract
competitors. This could lead to
lower prices and profitability.
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Market Segmentation
Geographical differences
• Consumer tastes often vary
between different geographic
areas. These might result from
cultural, social and climatic
differences. Many businesses
therefore offer different
products and market them in
locationspecific ways.
• A geographic segmentation
approach is the opposite of
adopting the same marketing
strategy for the whole area or
region. This is sometimes
referred to, for example, as
pan-Asian or pan-European
marketing.
Methods of market segmentation
Demographic differences
• Demography is the study of
population data and trends, and
demographic factors, such as
age, gender, income, family
size, social class and ethnic
background, can all be used to
segment the market.
• The main socioeconomic
groups that are commonly
referred to are:
A – higher managerial,
administrative and professional
personnel, for example
directors of big companies and
successful lawyers
B – managerial staff, including
professionals such as teachers
C1 – supervisory, clerical or
junior managerial staff
C2 – skilled manual workers
D – semi-skilled and unskilled
manual workers
E – casual, part-time workers
and the unemployed.
Advantages of market segmentation
• Businesses can define their target market
precisely, and design and produce goods that are
specifically aimed at these groups, leading to
increased sales.
• It enables identification of gaps in the market
and groups of consumers that are not currently
being targeted, which might then be successfully
exploited.
• Differentiated marketing strategies can be
focused on different target markets. This avoids
wasting money on trying to sell products to the
whole market.
• Small firms that are unable to compete in the
whole market are able to specialise in one or two
market segments.
• Price discrimination between consumer groups
can be used to increase revenue and profits
Psychological factors
• These factors are to do with
differences between people’s
lifestyles, personalities, values
and attitudes. Many are
influenced by an individual’s
social class. For example, many
middle-class families spend
considerable sums of money on
private education for their
children.
•Products such as activity
holidays are aimed at outgoing
people who wish to pursue
relatively dangerous sports.
These include mountain
trekking, bungee jumping and
whitewater rafting.
Disadvantages of market segmentation
• Research and development and production
costs might be high as a result of needing to
make and market different product variations.
• Promotional costs might be high as different
advertisements and promotions might be needed
for different segments. Marketing economies of
scale may not be fully exploited.
• Production and inventory holding costs will be
higher than for producing and selling just one
undifferentiated product.
• By focusing on one or two limited market
segments, excessive specialisation could lead to
problems if consumers in those segments change
their purchasing habits significantly.
• Extensive market research is needed to identify
market segments and their needs.
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Customer relationship marketing (CRM)
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The objective of customer relationship marketing (CRM) is to develop customer loyalty to
ensure that customers buy from the business in the future.
The aim is to gain as much information as possible about each existing customer. This includes
income, product preferences, buying habits and so on. Using this information, marketing tactics
can then be adapted to meet the customer’s needs.
This is virtually segmenting each customer and is the complete opposite of mass marketing.
Now that technology has made the collection of customer data so much easier and cheaper,
CRM is becoming a widely adopted marketing strategy.
Developing effective long-term relationships can be achieved by:
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Targeted marketing – giving each customer the products and services they have indicated, from
records of past purchases, that they most need.
Customer service and support – after-sales service and effective call centres are good examples
of the support essential to building customer loyalty.
Communicate regularly with customers – to give frequent updates on new products / special
offers / new features / new promotions and support services.
Using social media – some CRM systems use social media sites to track and communicate with
customers. This allows businesses to make more accurate decisions about which products to
supply to satisfy customers’ needs.
Benefits of CRM
• IT systems and software are needed and
employees need to be trained to respond to
customer feedback.
• Effective CRM campaigns may require the use
of an external marketing consultancy at high cost.
• CRM needs an existing customer base to be
established first before investing in CRM. If this is
not done, the costs will not lead to higher sales.
• It may be costly to respond to each customer’s
feedback, especially if it contains special requests
or requirements
Limitations of CRM
• For businesses with an existing customer base,
CRM has proved to be cost-effective. Higher sales
from effective CRM nearly always exceed its cost.
• It is a sustainable strategy creating long-term
customers unlike ‘special price offers’ or similar
promotions.
• Loyal customers often recommend the business
to friends and family, providing additional
marketing benefit at no cost.
• It costs less per customer than trying to attract
new customers.
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Chapter 18: Market Research
Market research can be used to measure customer reactions to:
new products
different price
levels
alternative forms
of promotion
new types of
packaging
online
distribution.
The purposes of market research
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Identify the main features of the market: Overall size, growth and competition
Reduce the risks of new product launches
Identify consumer characteristics
Explain patterns in sales of existing products and market trends
Predict future demand changes
Assess the most popular designs, promotions, styles and packaging for a product
New product development process
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4.
identify consumer needs and tastes
product idea and packaging design
brand positioning and testing of advertising
product launch and after-launch period
Primary research and secondary research
Primary research
USEFULNESS
• To find out about completely new markets, for
example, for innovative products for which no
secondary data exists.
• To collect data for the specific purposes of the
business. The information gathered will provide
direct answers to the questions the business is
asking.
• To gather qualitative data which supports and
helps to explain quantitative data. For example, if
a business has falling sales in one market, it can
question consumers about why they have
changed their buying patterns.
• To focus research on market reaction to specific
changes made by the business, such as lower
prices or increased advertising.
• To gain information from a particular target
group of consumers.
• When up-to-date data is essential, such as in
rapidly changing markets.
• When data needs to be cross checked for
accuracy – different methods of primary data
Secondary research
USEFULNESS
• It can provide information about the
population, the economy, the market conditions
that a business operates in or plans to operate in
and major trends in that market.
• It can help identify the key areas of market
information that primary research needs to focus
on.
• It provides evidence that can be used as a
baseline against which primary research data can
be compared.
• Large samples are often used, which increases
accuracy and reliability.
• Many of the sources of secondary data can be
accessed via the internet.
• If time or finance is very limited, secondary
research might be the only option.
• There is so much of this data, which opens up
new business possibilities if it is analysed
carefully. ‘Big data’ is a term used to describe the
vast amounts of publicly available data on
websites, social media posts, retail purchase
records and healthcare records.
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collection allow for results to be verified and for
different types of information to be gathered.
• There are many sources of secondary data,
which allows information from one source to be
checked against another for accuracy.
LIMITATION
• The selection of a sufficiently large and
representative sample greatly influences the
accuracy of data.
• Business start-ups may not be able to finance
detailed primary research.
• Newly formed businesses have no customers
yet to gain important data from.
• It can be time-consuming to collect and analyse
primary research data.
LIMITATION
• Data may be out of date as not all sources
update every year. This could lead to inaccurate
conclusions based on old data.
• Data is unlikely to have been collected for the
specific needs of the business. It might not be
directly relevant or may not use the population
samples that the business really wants.
• Not all secondary data is available to all
potential users
• Secondary data might indicate the potential for
a new market, but primary research will be
needed to gather specific information for
potential consumer profiles and their product
preferences.
• Big data is so vast that it is not easy to analyse
and to make useful for an individual business.
Methods
Questionnaire
Interview
Observation
Primary research
Test marketing
Focus groups
Government reports
Trade organisations
Secondary
research
Market research
agencies
Internal company
records
Company reports
and accounts
Details
Questionnaires can include detailed, open questions which
give qualitative and quantitative data.
Interviews allow personal contact with respondents.
Follow-up questions can be asked.
If people know they are being observed, they could
behave differently.
The results might indicate whether the national launch of
a new product will achieve sales targets.
Focus groups encourage debate between consumers
about a product or advertisement. Discussion is observed
and recorded.
These are usually available for free on the internet. They
may be several years out of date
Membership of the trade organisation may be needed to
obtain detailed data.
These are often very expensive. They are not usually
updated annually.
Secondary data exists within any business. This can include
customer sales records, feedback from customers, daily
sales figures etc.
These allow analysis of competitor performance. Detailed,
confidential information is not available from this source.
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Sampling
Limitations of sampling
1. Sample may be too small
2. Risk of sampling bias
3. Researchers may not use the most appropriate methods of sampling
Reliability of data collected depends upon,
1. Sampling bias
2. Questionnaire bias
3. Other forms of bias: sufficiency and adequacy concerns
Analysis of quantitative data
Averages
Mean
(Arithmetic
average)
Mode
(Most
repetitive
number)
Median
(central value
of ordered
data)
Uses
• Used as an indicator of likely
sales levels per period of time.
This could be used to help
determine reorder levels.
• Used for making comparisons
between sets of data such as
attendance at football clubs.
• Could be used for inventory
ordering purposes (e.g. a shoe
shop would order more pairs of
size 7 shoes than any other size
if this is the modal size).
• Could be used in wage
negotiations (e.g. ‘Half of union
members earn less than $50
per week’).
• Often used in advertising (e.g.
‘our products are always in the
best-performing 50% of all
brands’).
Advantages
• Includes all of the
data in its calculation.
• The most well-known
average; it is widely
used and easily
understood
Disadvantages
• Affected by one or
two extreme results.
• Usually not a whole
number.
• It is easily observed
and no calculation is
necessary.
• The result is a whole
number and easily
understood.
•It does not consider
all of the data,
therefore it cannot be
used for further
statistical analysis.
• There may be more
than one modal result,
which could cause
confusion.
• It is less influenced by • Calculation from
extreme results than
grouped data is
the mean. So, it is more complicated.
appropriate than the
• An even number of
mean when there are a results means the value
few very high or very
is approximated.
low results.
• It cannot be used for
further statistical
analysis.
Interpretation of information presented in tables, charts and graphs
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2.
3.
4.
Tables: comparing alpha-numeric data
Pie charts: comparing the % relations among different entities
Line graphs: comparing certain attribute of different entities overtime
Bar graphs: comparing different attributes of different entities for a certain period of time
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Chapter 19: The marketing mix – product and price
The elements of the marketing mix
The marketing mix is a range of tactical decisions for marketing a product. The marketing mix is made up
of four interrelated decisions, often called the 4Ps. These are product design and performance, price,
promotion (including advertising) and place (where and how a product will be sold to consumers).
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Product. Consumers require the right product. This might be an existing product, an update to
an existing product or a newly developed one.
Price. The right price is important too. If the price is set too low, then consumers might lose
confidence in the product’s quality. If the price is set too high, then many consumers will be
unable or unwilling to afford it.
Promotion must be effective, telling consumers about the product’s availability and convincing
them, if possible, that the brand is the one to choose.
Place refers to how the product is distributed to the consumer through distribution channels. If
the good or service is not available at the right time in the right place, even the best product in
the world will not be bought in the quantities expected.
Product: why is this a key part of the marketing mix?
Tangible and Intangible attributes of a product
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Tangible attributes refer to the features of a product in its physical form. These would be the
features that can enable consumers to see, hear, touch, smell, or taste the product. Some
tangible attributes include the size, quantity, materials, and other physical characteristics of the
product.
Intangible attributes refer to unobservable characteristics which a physical good possesses or
the other features of the product that are not physical in form. This is where things such as
beauty, quality, strength or style are considered and add value to the product.
The importance of product development
Why is new product development so important? There are seven possible reasons:
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Changing consumer tastes and preferences.
Increasing competition.
Technological advancement
New opportunities for growth.
Risk diversification.
Improved brand image
Use of excess capacity.
For a new product to succeed, it must:
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have desirable features that consumers are prepared to pay for
be sufficiently different from other products to make it stand out and offer a unique selling
point (USP)
be marketed effectively to consumers, who need to be informed about it.
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Product differentiation and unique selling point (USP)
Product differentiation can be an effective way of distancing a business from its rivals and creating
competitive advantage. Effective product differentiation creates a USP.
The benefits of an effective USP include:
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promotion that focuses on the differentiating feature of the product or service
opportunities to charge higher prices due to exclusive and unique features, design or customer
service – higher prices should lead to higher profit margins
free publicity from media reporting on the USP of the product
higher sales compared to undifferentiated products
customers being more willing to be identified with the brand because it is different.
Product positioning
Before deciding on which product to develop and launch, businesses analyse how the new brand will
relate to the other brands in the market, in the minds of consumers. This is called product positioning,
and it is done using techniques such as market mapping.
Product portfolio analysis
Product life cycle
The significance of each stage in the product life cycle:
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Introduction: This is when the product has just been launched after development and testing.
Sales are often quite low to begin with and may increase only quite slowly. But there are
exceptions, such as a newly launched music download by a global rock star.
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Growth: If the product is effectively promoted and well received by customers, then sales
should grow. This stage cannot last forever. Eventually, sales growth will begin to slow. The
slowing down of sales growth may take days, weeks or even years. This leads the product into
the next stage.
The reasons for growth slowing or sales falling include increasing competition, technological
changes making the product less appealing, changes in consumer tastes and saturation of the
market.
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Maturity or saturation: At this stage, sales fail to grow, but they do not decline significantly
either. This stage can last for years, as for example with Coca-Cola.
Decline: During this phase, sales will decline steadily. Either no extension strategy has been tried
or it has not worked, or else the product is so obsolete that the only option is replacement.
Newer products from competitors are the most likely cause of declining sales and profits. When
the product becomes unprofitable or when its replacement is ready for the market, it will be
withdrawn.
Extension: These strategies aim to lengthen the life of an existing product before the market
demands a completely new product. Examples of extension strategies include selling in new
markets (export markets, for example), repackaging and relaunching the product, or finding new
uses for the product.
Product life
cycle stages
Introduction
Product
Price
Promotion
Place
Basic model with
few variations.
May be high
(skimming) or low
(penetration)
compared to
competitors’ prices.
In restricted
outlets, possibly
high-class outlets
Growth
Product
improvements
and developments
to maintain
consumer appeal.
If successful, an
initial penetration
pricing strategy
could now lead to
rising prices.
Maturity
New models,
colours,
accessories as part
of extension
strategies.
As competitors
enter the market,
prices for the
product need to
stay at competitive
levels.
Decline
Slowly withdraw
product from
certain markets
and prepare to
Lower prices may be
needed to sell off
inventory, but if the
product has a small
High levels of
informative
advertising are
needed to make
consumers aware of
the product
Consumers need
encouraging to
make repeat
purchases and
branding will help
win consumer
loyalty.
Brand imaging
continues to stress
the positive
differences
compared to
competitors’
products.
Advertising is likely
to be very limited
and may just be
In growing
numbers of
outlets in areas
indicated by the
strength of
consumer
demand.
Highest
geographical
spread possible,
including new
distribution
channels.
Unprofitable
outlets for the
product are
eliminated.
15
launch new
products.
niche following,
prices could even
rise.
used to inform of
lower prices.
Limitations of using the product life cycle for marketing decisions
•
•
•
•
It is very difficult to determine the particular stage in which a product is.
The determination of length of each stage in the life cycle is a complicated process.
It is not necessary that all stages can be applicable to every product.
Product life cycle alone cannot be a device for marketing success.
Boston matrix
It highlights the position of the products of a business when measured by market share and market
growth.
Low market growth, high market share: (cash cow): This is a well-established product in a mature
market. Typically, this type of product is profitable and creates a high positive cash flow. Sales are high
relative to the market and promotional costs are likely to be low, as a result of high consumer
awareness. The cash from this product can be ‘milked’ and injected into some of the other products in
the portfolio. Hence, this product is often referred to as a cash cow. The business will want to maintain
cash cows for as long as possible.
High market growth, high market share: (star): This is clearly a successful product as it is performing
well in an expanding market. It is often referred to as a star. The business will be keen to maintain the
market position of this product in what may be a fastchanging market. Therefore, promotion costs will
be high to help differentiate the product and reinforce its brand image. Despite these costs, a star is
likely to generate high amounts of income.
High market growth, low market share: (question mark): The question mark consumes resources but
generates little return. If it is a newly launched product it is going to need heavy promotion costs to help
become established. This finance could come from the cash cow. The future of the product may be
16
uncertain, so quick decisions may need to be taken if sales do not improve. These could include revising
the design, relaunching with a new brand image or even withdrawal from the market. It should,
however, have potential as it is selling in a market sector that is growing fast.
Low market growth, low market share: (dog): The dog seems to offer little to the business in terms of
either existing sales and cash flow or future prospects, because the market is not growing. It may need
to be replaced shortly with a new product development. The business could decide to withdraw from
this market sector altogether and position itself into faster-growing sectors.
Impact of Boston Matrix analysis on marketing decisions
This analytical tool has relevance when:
•
•
•
analysing the performance and current position of existing product portfolios
planning action to be taken with existing products
planning the introduction of new products.
By identifying the position of all products of the business, a full analysis of the portfolio is possible. This
should help focus on which products need marketing support or which need corrective action. This
action could include the following marketing decisions:
•
•
•
•
Building – supporting question mark products with additional advertising or further distribution
outlets. The finance for this could be obtained from the established cash cow products.
Holding – continuing support for star products so that they maintain their good market position.
Work may be needed to freshen the product in the eyes of the consumers so that high sales
growth can be sustained.
Milking – taking the positive cash flow from established products and investing it in other
products in the portfolio.
Divesting – identifying the worst-performing dogs and stopping the production and supply of
these products. This strategic decision should not be taken lightly as it will involve other issues,
such as the impact on the workforce and whether the spare capacity freed up by stopping
production can be used profitably on another product.
Limitations of using the Boston Matrix for marketing decisions
No technique can guarantee business success. This will depend on the accuracy of the marketing
managers’ analysis and their skills in making marketing decisions. The Boston Matrix helps to establish
the current situation of the firm’s products, but it is of little use in predicting future success or failure.
•
•
•
On its own, the Boston Matrix cannot tell a manager what will happen next with any product.
Detailed and continuous market research will help. However, decision-makers must always be
conscious of the potentially dramatic effects of competitors’ decisions, technological changes
and the fluctuating economic environment.
The Boston Matrix is only a planning tool and it has been criticised for simplifying the complex
set of factors that determine product success.
The Boston Matrix assumes that higher rates of profit are directly related to high market shares.
This is not necessarily the case when sales are being gained by reducing prices and profit
margins.
17
Price is a key part of the marketing mix
The price level set for a product will also:
•
•
•
impact on the level of value added by the business to bought-in components
affect the revenue and profit made by a business due to its impact on demand
help establish the psychological brand image of a product.
The pricing decision: how do managers determine the appropriate price?
•
•
•
•
•
•
Costs of production: If the business is to make a profit on the sale of a product, then, at least in
the long term, the price must cover all of the costs of producing it and of bringing it to the
market.
Competitive conditions in the market: If the business is a monopolist, it is the only seller of a
product. It is likely to have more freedom in price setting than if it is one of many businesses
selling the same type of product.
Competitors’ prices: It may be difficult to set a price that is very different from that of the
market leader, unless true product differentiation (see above) can be established.
Business and marketing objectives: If the aim is to become market leader through mass
marketing, this will require a different price level to that set by a business aiming for select niche
marketing. If the marketing objective is to establish a premium-branded product, then this will
not be achieved with very low prices.
Price elasticity of demand: This measures the responsiveness of demand following a change in
price.
Whether it is a new or an existing product: For a new product, a decision will have to be made
as to whether a skimming strategy or a penetration strategy is to be adopted.
Pricing methods
Cost-based methods of pricing
•
•
Mark-up pricing
Mark-up pricing is often used by retailers. They add a percentage mark-up to the unit cost of
each item bought from the producer or wholesaler. The size of the mark-up usually depends on
the strength of demand for the product, the number of competitors and the stage of the
product’s life cycle.
Example: Total cost of bought-in product = $40
50% mark-up on cost = $20
Selling price = $60
Cost-plus pricing
Cost-plus pricing is often used by manufacturers. The business calculates or estimates the total
cost per unit. The price is then this cost plus a fixed profit mark-up.
Example: A business makes industrial training films and the annual fixed costs are $10 000. The
variable cost of producing each film is $5. The business is currently producing 5 000 units per
year. The total costs of this product each year are: $10 000 + (5 000 × $5) = $35 000 The average
or unit cost of making each film is: $35 000/5 000 = $7 The business will have to charge at least
18
•
•
$7 for each film in order to break even. If a 300% profit mark-up is added, then the total selling
price becomes $28.
Contribution-cost (or marginal-cost) pricing
The contribution-cost pricing method does not try to allocate the fixed costs to specific
products. Instead, the business calculates a variable cost per unit of the product. It then adds an
extra amount, which is known as a contribution towards fixed costs and profit. If enough units
are sold, the total contribution will be enough to cover the fixed costs and to return a profit.
Example: A business produces a single product that has variable costs of $2 per unit. The total
fixed costs of the firm are $40 000 per year. The business wants each unit sold to make a
contribution of $1. The selling price is therefore $3. Every unit sold makes a contribution
towards the fixed costs of $1. If the firm sells 40 000 units in the year, then the fixed costs will
be covered. Every unit sold over 40 000 will mean the business makes a profit. If the firm sells 60
000 units, then the fixed costs will be covered and a $20 000 profit will be made. Many
businesses that have excess capacity use contribution-cost pricing to attract extra business that
will absorb the excess capacity.
Loss leaders
This is a common tactic used by retailers. It involves the setting of very low prices for some
products, possibly even below variable costs (meaning a negative contribution).
Competition-based methods of pricing
There are two main reasons why a business might adopt competitive pricing and set the price of its
products at the same or a very similar level to that of its competitors:
•
•
There is one dominant business in the market. This business often becomes the price leader.
Once it sets its prices it would be very difficult for a smaller business to charge higher prices
unless it sold a clearly differentiated product. It might be impossible to charge lower prices than
the dominant business if the latter has the lowest costs of production per unit.
Some markets have a number of businesses of the same size selling similar products. The prices
are very similar in order to avoid a price war which would reduce profit for all the businesses. An
example of this would be large petrol retail companies.
Price discrimination
This pricing method is often used in markets where it is possible to charge different groups of
consumers different prices for the same product. An example of price discrimination would be bus or
train companies charging lower prices for the elderly than they do for other adults, for the same
journey.
Dynamic pricing
The dynamic pricing method involves setting constantly changing prices when selling products to
different customers, especially online through e-commerce. E-commerce has become a hot spot for
dynamic pricing models, due to the way consumers can be separated by and communicated with over
the internet. Consumers cannot tell what other buyers are paying. Businesses can vary the price
according to demand patterns or knowledge that they have about a particular consumer and their ability
19
to pay. Airlines often use this method of pricing. On a typical flight it is rare to find any two passengers
who have paid the same fare.
Penetration pricing
Firms tend to adopt penetration pricing because they are attempting to use mass marketing and gain a
large market share. If the product gains a large market share, then the price could slowly be increased
during the growth stage of the product life cycle. This would increase the profit margin on the product
Market skimming
The aims of market skimming are to maximise short-run profits before competitors enter the market
with a similar product. This pricing strategy also helps to create an exclusive image for the new product.
Methods
Cost plus pricing
Contributioncost (marginal
cost) pricing
Competitor
pricing
Price
discrimination
Advantages
• The price set covers all costs of
production.
• This is easy to calculate for
singleproduct firms where there is no
doubt about fixed cost allocation.
• It is suitable for businesses that are
price-makers due to market
dominance.
• All variable costs are covered by the
price and a contribution is made to
fixed costs.
• It is suitable for firms producing
several products and fixed costs do not
have to be allocated.
• It is flexible. The price can be adapted
to suit market conditions or to accept
special orders.
• This is almost essential for firms with
little market power – pricetakers.
• It can be flexible to reflect market
and competitive conditions.
• This uses price elasticity (the
responsiveness of demand to price
changes) to charge different prices to
increase total revenue.
Disadvantages
• It is inaccurate for businesses with
several products where there is doubt
over the allocation of fixed costs.
• It does not take market/competitive
conditions into account.
• It tends to be inflexible (e.g. there
might be opportunities to increase
price even higher).
• If sales fall, average costs often rise
and this could lead to the price being
raised using this method.
• Fixed costs may not be covered.
• If prices vary too much, due to the
flexibility advantage, then regular
customers might be annoyed.
• The price set may not cover all the
costs of production.
• The price may have to vary frequently
due to changing market and
competitive conditions.
• There are administrative costs of
having different pricing levels.
• Customers may switch to lowerpriced
markets.
• Consumers paying higher prices may
object and look for alternatives.
20
Chapter 20: The marketing mix – promotion and place
Promotion is about communicating with actual or potential customers. Effective promotion not only
increases awareness of products, but also creates images and product personalities that consumers can
identify with.
Promotion objectives
Businesses allocate resources to promotion to achieve certain objectives. The success of promotion
campaigns can be measured against these objectives. They can include:
•
•
•
•
•
•
•
•
Increasing sales by raising consumer awareness of a product, which is especially important for
newly launched ones.
Increasing consumer recall of an existing product and its distinctive qualities.
Increasing purchases by existing consumers or attracting new consumers to the brand.
Demonstrating the superior specification or qualities of a product compared with those of
competitors, often used when the product has been updated or adapted in some way.
Creating or reinforcing the brand image or personality of the product. This is becoming
increasingly important in consumer markets where it is often claimed that all products look the
same.
Correcting misleading reports about the product or the business to reassure the public after a
scare or an accident involving the product.
Improving the public image of the business, rather than the product, through corporate
advertising.
Encouraging retailers to hold inventories of the product and actively promote products to the
final consumer.
Advertising promotion
•
•
Informative advertising – adverts that give information about a product to potential purchasers,
rather than just trying to create a brand image. This information could include price, technical
specifications, main features or places where the product can be purchased. This style of
advertising is most effective when promoting a new product that consumers are unlikely to be
aware of, or when communicating a substantial change in price, design or specification.
Persuasive advertising – adverts trying to create a distinct image or brand identity for the
product. They may not contain any details at all about the materials, ingredients used, prices, or
places to buy the product. This form of advertising is very common, especially in markets where
there might be little differentiation between products. Advertisements then try to create a
perceived difference in the minds of consumers.
Advertising methods
1. Print advertising: This includes advertising in newspapers, magazines and specialist publications.
It provides hard copy, which can be cut out and kept by the consumer for future reference.
However, evidence suggests that it is now much less effective with younger consumers than
digital communications.
21
2. Broadcast advertising: This is advertising on TV and radio, and in cinemas. Adverts have visual
appeal and can create a brand image through the actors used. However, it is expensive to buy
media time, to design and produce the adverts.
3. Outdoor advertising: This includes advertising on billboards and bus shelter posters. It can be
located in prime positions with many potential consumers passing by. However, the best
locations are the most expensive and many passers-by will not notice this type of advertising.
4. Product placement advertising: Products are featured in TV shows and films. It is not explicit
advertising. Some consumers assume the product is being used because it is desirable, not
because a business has paid for the placement. However, the show, film or actors may become
less popular.
5. Guerrilla advertising: Products are advertised at surprising and unconventional events to make
the public take notice. It is low cost as graffiti paint on walls is low cost, but it is best to gain
permission first! However, the message may be misunderstood.
6. Sponsorship: This involves payment by a business to become associated with an event, an
individual or a sports team. It could lead to the business logo appearing on a team’s shirts, for
example. The success of the team or individual can lead to greatly increased interest in the
brand. However, failure of the event, team or individual can reflect badly on the brand.
Advertising methods: which one to use?
1.
2.
3.
4.
5.
Cost of promotion
The consumer profile of the target audience
The message and image to be communicated
Other aspects of marketing mix
Legal constraints
Sales promotion methods
Sales promotion generally aims to achieve short-term increases in sales, whereas advertising often aims
to achieve returns in the long run through building customer awareness of and confidence in the
product. A wide range of incentives and activities can be referred to as sales promotion. They include:
•
•
•
•
•
•
price offers – temporary reductions in price, such as 10% reduction for one week only
loyalty reward programmes – consumers collect points, air miles or credits for purchases and
redeem them for rewards
money-off coupons – redeemed when the consumer buys the product
point-of-sale displays in shops
BOGOF – buy one, get one free
games and competitions on packaging.
Direct promotion methods
1. Direct mail: Direct mail is sent out by post. This is low cost and well-defined areas/regions can
be targeted. However, the mailing may be viewed as junk mail and quickly thrown away.
2. Telemarketing: This includes all marketing activities conducted over the telephone (often from
customer call centres), including selling, market researching and promoting products. It is easy
to monitor the response/rejection rate. However, many consumers object to cold-calling.
22
3. Personal selling: Salesperson is employed to sell to each individual customer. It is effective with
expensive and complex products that require specialist knowledge. Often done in business-tobusiness marketing. However, customers may complain about being pressured into buying,
especially if the sales employees are paid a high bonus for each sale made.
Methods of digital promotion
1.
2.
3.
4.
5.
Social media marketing: via Facebook, Twitter, Instagram, Snapchat etc.
Email marketing: via newsletters, purchase confirmation emails, notification emails etc.
Online advertising: via pop-up advertisements or banners on websites and mobile applications
Smartphone marketing: subscribing messages or calls on smartphones
Search engine optimization: used to ensure a high ranking on a search engine results page, such
as optimising the content for specific keywords for example, on Google, Amazon etc.
6. Viral marketing: creating posts, video, memes or similar short form of content that spreads
across the web like a virus.
Benefits of digital promotion
•
•
•
•
•
•
•
Worldwide coverage – a website allows businesses to find new markets and trade globally,
increasing potential market size.
Relatively low cost – a well-planned and well-targeted digital marketing campaign can reach the
right customers at a much lower cost than traditional forms of advertising.
Easy to track and measure results – web analytics and other techniques of measuring response
rates make it easy to establish how effective a promotion campaign has been. Detailed
information about how customers use a website or respond to advertising is available, which
helps to improve the effectiveness of future campaigns.
Personalisation – this is a very important benefit of digital promotion. Each customer can be
made to feel that only they are being sent a special offer. The business’s customer database
needs to be linked to the website, then whenever someone visits the site, the business can greet
them with targeted offers.
Social media communication builds customer loyalty – involvement with social media and
quick responses to customers’ messages can build customer loyalty and create a reputation for
being easy to converse with.
Content marketing – digital marketing allows a business to create engaging campaigns using
content marketing. This means producing varied content such as images, videos and articles,
which can help a business gain social currency, especially if it goes viral.
Website convenience increases sales – the conversion rate of visits to websites (when
customers buy something) is higher than with other forms of selling. It is more convenient too,
unlike other forms of media which require people to get up and make a phone call or go to a
shop.
Limitations of digital promotion
•
Time-consuming – unless a digital promotion agency is used (which can be high cost), tasks such
as optimising online advertising campaigns and creating marketing content can be timeconsuming. The success of promotions needs to be judged against the cost of preparing them.
23
•
•
•
Skills and training – employees must have up-to-date knowledge and expertise to carry out
digital marketing with success. Tools, platforms and trends change rapidly. Employees may need
training to keep their skills at the right level.
Global competition – reaching a worldwide audience is easy but this means competitors can do
so too! Standing out clearly against a large number of competitors can be difficult and costly.
Search engine optimisation is one way of trying to do this.
Complaints and feedback – unhappy customers can quickly send out negative messages about a
business or its products. Any negative feedback or criticism of a brand can be visible to the
target audience through social media and review websites. It is essential for a business to
respond quickly and effectively to such criticism.
Measuring success of promotions
•
•
•
•
•
Sales performance before and after the promotion campaign: By comparing the sales of the
product before the campaign was launched, with the daily and weekly sales during and after the
campaign.
Consumer awareness data: Each week, market research agencies publish results of consumer
recall or awareness tests, based on answers to a series of questions concerning the
advertisements they have seen and responded to. This gives businesses rapid feedback on the
progress of a promotion campaign.
Consumer panels: These are useful for giving qualitative feedback on the impact of promotions
and the effectiveness of advertisements.
Response rates to advertisements: Newspaper and magazine adverts often have tear-off slips
for consumers to request more details. Even TV adverts can ask for consumers to ring in,
perhaps with the chance of winning a competition. Websites can record the number of hits and
video-sharing sites can record the number of times an uploaded advert has been viewed.
Social media feedback: The rapid response rate of social media users to new products or new
promotions is perhaps now the most widely used measure of marketing success or failure.
The role of packaging in promotion
The quality, design and colour of materials used in packaging can have an important supportive role to
play in the promotion of a product. Packaging can perform the following functions:
•
•
•
•
protect and contain the product, both during transportation and in stores
give information – depending on the product – to consumers about the contents, ingredients,
cooking instructions, assembly instructions and so on
support the brand image of the product created by promotional campaigns
make the product attractive and help the consumer to recognise it.
The role of branding in promotion
A brand is the name given by a firm to a product or a range of products. The aims of branding products
include:
•
•
•
aiding consumer recognition
making the product distinctive from competitors
giving the product an identity or personality that consumers can relate to.
24
The benefits of effective branding include:
•
•
•
•
•
It increases the chances of brand recall by consumers, for example, when several similar
products are available.
It clearly differentiates the product from others, including reinforcing the difference by
promotion.
It allows for the establishment of a family of closely associated products with the same brand
name.
It reduces the responsiveness of consumer demand to a price increase. Consumers often have
preferences for well-known brands and are prepared to pay a high price for them. This gives the
business a high profit margin.
It increases consumer loyalty to brands, which is a major marketing benefit.
Place: an important part of the marketing mix
Place decisions are about how products should pass from manufacturer to the final customer. This
process is known as distribution. Getting the right product to the right consumer at the right time in a
way that is most convenient to the consumer is a good definition of distribution.
Channel of
distribution
Direct selling
Advantages
Disadvantages
• No mark-up or profit margin is taken
by intermediaries.
• The producer has complete control
over the marketing mix.
• It is quicker than other channels so
may lead to fresher food products.
• Direct contact with consumers offers
useful market research.
Single
intermediary
channel
• Retailers incur the cost of holding
inventories.
• Retailers display the products and
offer after-sales service.
• Retailers should be in locations that
are convenient to consumers.
• Producers focus on production, not on
selling the products to customers
Two
intermediary
channels
• Wholesalers hold the goods and buy in
bulk from producers.
• It reduces producers’ inventory costs.
• Wholesalers pay for the costs of
transport to retailers.
• Wholesalers buy in large quantities
and sell in small quantities.
• All storage and inventory costs have to
be paid by the producer.
• There are no retail outlets so
consumers cannot see and try before
they buy.
• It may not be convenient for
consumers.
• No after-sales service is offered by
shops.
• It is expensive to deliver each item to
consumers.
• The intermediary takes a profit markup, making the product more expensive
to consumers.
• Producers lose control over the
marketing mix.
• The outlet is not exclusive as retailers
sell competitors’ products too.
• Producers pass on delivery costs to
retailers.
• Another intermediary takes a profit
mark-up, making the product more
expensive to consumers.
• Producers lose further control over
the marketing mix.
• It slows down the distribution chain.
25
Benefits of e-commerce
• It is relatively inexpensive if the cost is
compared to the number of consumers reached.
• Companies can reach a worldwide audience for
a small proportion of traditional promotion
budgets.
• Consumers interact with the websites and
make purchases and leave important data about
themselves.
• The internet is convenient for consumers to use
if they have access to a computer.
• Businesses can keep accurate records on the
number of clicks or visitors, and quickly measure
the success rate of different web promotions.
• Computer and smartphone ownership is
increasing in all countries of the world.
• Selling products on the internet involves lower
fixed costs than traditional retail stores.
• Dynamic pricing – charging different prices to
different consumers – is easier.
Limitations of e-commerce
• Some countries have low-speed internet
connections and, in poorer countries, computer
ownership is not widespread.
• Consumers cannot touch, smell, feel or try on
tangible goods before buying, which may limit
their willingness to buy certain products online.
• Product returns may increase if consumers are
dissatisfied with their purchases once they have
been received.
• The cost and unreliability of postal services in
some countries may reduce the cost advantage of
internet selling.
• Websites must be kept up-to-date and
userfriendly, and good websites can be expensive
to develop.
• Worries about internet security (e.g. consumers
may wonder who will use information about
them or their credit card details) may reduce
future growth potential.
Factors influencing the choice of distribution channel
•
•
•
•
•
•
•
Should the product be sold directly to customers or through retailers?
How long should the channel be (i.e. how many intermediaries should there be)?
In which locations should the product be made available?
Should the internet (online selling) be the main channel?
How much will it cost to keep the product inventory on store shelves and in warehouses?
How much control does the business want to have over the marketing mix?
How will the distribution channel integrate with other marketing-mix components?
The choice of distribution channel is important because:
•
•
•
Consumers can benefit from easy access to products. This allows them to see and try products
before they buy, makes purchasing easy and allows, if necessary, for the return of goods.
Manufacturers need outlets for their products that give a wide geographical market coverage.
However, they also want the desired image of the product to be promoted effectively.
Retailers, which sell goods to the final consumer, add on a mark-up to cover their costs and
make a profit. If price is very important to consumers, using few or no intermediaries is an
advantage as the manufacturer should be able to charge a lower price.
Digital and physical distribution
Products that can be converted into digital format are now being widely distributed to consumers by
digital means over the internet rather than in a physical form. Digital distribution bypasses the
traditional physical distribution formats, such as paper, optical discs and film cassettes. For example,
Netflix, YouTube, Spotify, NFTs, Gamecards etc.
26
An intergrated marketing mix
Integrated marketing mix is a combination of several marketing elements such as advertising, public
relations, direct marketing, promotional activities, social media and other elements of the marketing
mix. It is a strategy to ensure that all elements of the marketing mix are used in a unified way to
effectively reach the target audience. The main aim of an integrated marketing mix is to create a synergy
between the different marketing techniques used to reach the target customers. An integrated
marketing mix is used to create a well-coordinated marketing campaign that increases the efficiency and
effectiveness of the marketing efforts.
27
AS – Business – Unit 5: Finance and Accounting
Chapter 29: Business Finance
The need for business finance
All business activity requires finance. Inadequate finance can lead to business failure. Choosing
appropriate sources of finance is a vital decision for managers to take.
Why businesses need finance
•
•
•
•
•
Setting up a business will require cash injections from the owner(s) to purchase essential capital
equipment and, possibly, premises. This is called start-up capital.
All businesses need to finance their working capital, the day-to-day finance needed to pay bills
and expenses and to build up inventories. In accounting terms, working capital = current assets
– current liabilities.
When businesses grow, further finance will be needed to buy more assets and to pay for higher
working capital needs. Growth through developing new products will require finance for
research and development.
Growth can be achieved by taking over other businesses. Finance is then needed to buy out the
owners of the other firm.
Special situations may lead to a need for finance. A decline in sales, possibly as a result of
economic recession, could lead to the need for additional finance so that the business can pay
its debts. If a large customer fails to pay for goods, finance will quickly be needed to pay for
essential expenses. In these cases, finance is needed for the survival of the business.
The distinction between short- and long-term need for finance
Short term finance: Short-term loans are helpful to businesses that experience seasonal demand, such
as retail businesses in a tourist region, which have to hold more inventory for the holiday season. Such a
business might need a short-term loan to buy inventory before the busiest months. It probably will not
be able to repay the loan until after the holidays. This is an excellent example of the need for short-term
finance.
Long term finance: When a business is expanding by buying more buildings and equipment, a shortterm loan of less than one year would be inappropriate. The chances of being able to pay back a shortterm loan from the income earned on these assets in just one year would be small. This is a good
example of the need for long-term finance.
The difference between cash and profit
•
•
•
Cash refers to the physical currency or other forms of payment that a business has available to
use for expenses, investments, or other financial transactions. It can include cash on hand,
money in bank accounts, and other liquid assets that can be easily converted into cash.
Profit, on the other hand, is the amount of money that a business earns after subtracting all of
its expenses from its revenues. It is a measure of a company's financial performance and is an
important indicator of its overall health.
There is a difference between cash and profit in that cash represents the actual money that a
business has available to use, while profit is a measure of the excess of revenues over expenses
28
and does not necessarily correspond directly to the amount of cash a business has on hand. A
business can have a profit but not have a lot of cash, for example, if it has invested its profits in
assets such as property or equipment, or if it has outstanding debts that it has not yet paid.
Working capital - Meaning and importance of working capital
•
•
•
•
•
Working capital is the finance needed by all businesses to pay for everyday expenses, such as
wages and buying inventory.
Without sufficient working capital, a business will be illiquid and unable to pay its immediate or
short term debts.
A high level of working capital can also be a disadvantage. There is an opportunity cost of having
too much capital tied up in inventories, accounts receivable and idle cash. It is likely that this
money could earn a higher return elsewhere in the business, possibly by being invested in fixed
assets.
The working capital requirement for any business will depend upon the length of its working
capital cycle. The longer the time period from buying materials and paying for them to receiving
payment from customers, the greater the working capital needs of the business.
When businesses expand, they generally need higher inventory levels and the total value of
products sold on credit will increase. This increase in working capital is likely to be permanent,
so long-term or permanent sources of finance will be needed, such as bank (long-term) loans or
share capital.
29
Managing working capital
Managing the level of working capital can be achieved by managing inventory, managing trade payables
and/or managing trade receivables (debtors who owe the business money). Inventory can be managed
in the following ways:
•
•
•
•
•
keeping smaller inventory levels
using computer systems to record sales and inventory levels, and to order inventory as required
efficient inventory control, inventory use and inventory handling so as to reduce losses through
damage, wastage and shrinkage
minimise the working capital tied up in inventories by producing only when orders have been
received (just-in-time inventory ordering)
getting goods to customers as quickly as possible to speed up payments from them.
Trade payables can be managed by:
•
•
delaying payments to suppliers to increase the credit period
only buying goods from suppliers who will offer credit.
Trade receivables can be managed by:
•
•
only selling products for cash and not on credit
reducing the credit period offered to customers.
Capital and Revenue expenditure
•
•
Capital expenditure (CAPEX) refers to the money that a business spends on acquiring,
maintaining, or improving long-term assets such as property, buildings, equipment, or
technology. These assets are expected to provide benefits to the business over a period of
several years.
Revenue expenditure, on the other hand, refers to the money that a business spends on
expenses that are incurred in the normal course of its operations and that are expected to be
used up or consumed within one year. These expenses may include things like rent, salaries,
utilities, and advertising.
Sources of finance
Retained profits
Bank over draft
Hire purchase
Debentures
Government grants
Micro financing
INTERNAL SOURCE OF FINANCE
Sales of unwanted
Reduction in working
Sales of leaseback of
assets
capital
non-current assets
EXTERNAL SOURCE OF FINANCE
Short term financing (within one year)
Trade credit
Debt factoring
Long term financing (more than one year)
Leasing
Share capital
Bank loans
Business mortgage
Venture capital
Crowd funding
30
Internal sources
of finance
Retained profits
Sales of
unwanted assets
Advantages
Disadvantage
• it allows a company to have a
cushion of funds available for
unexpected expenses or opportunities
that may arise.
• used to invest in the business, such
as through the development of new
products, expansion into new
markets, or the acquisition of other
businesses.
• It can generate additional income
that can be used to pay down debt,
invest in the business, or distribute to
shareholders.
• It helps a company to streamline its
operations by getting rid of excess
capacity or assets that are not being
used efficiently.
• This can improve a company's cash
flow and overall financial flexibility.
• Releases cash tied with inventories,
therefore can be able to pay off debts.
• This may be seen as a disadvantage
for shareholders who rely on dividends
as a source of income.
• If a company retains profits but does
not use them effectively, it may be
seen as mismanaging its resources.
• If a company sells an asset that has
the potential to generate future value,
it may be giving up on that potential
value.
• This can be a disadvantage if the
company relies on the asset to produce
its products or services.
Sales of leaseback
of non-current
assets
• Receive a lump sum payment
upfront, which can be used to pay off
debt, invest in the business, or
distribute to shareholders.
• It can make the company's financial
statements look more favorable, as it
may have lower levels of debt and
higher levels of equity.
• Decreased ability to meet short-term
obligations for example paying to its
suppliers and employees
• Reduced ability to take advantage of
short-term opportunities
• Loss of control for example, the
purchaser of the asset may be able to
dictate the terms of the lease or make
changes to the asset that the company
does not agree with.
• If the company expects the asset to
generate significant value over the long
term.
External sources
of finance
Advantages
Disadvantages
Reduction in
working capital
Bank overdraft
Trade credit
• Flexibility to make payments or
withdraw money even if it does not
have sufficient funds available in its
account.
• Easy to set up and can be accessed
quickly and easily through the
company's existing bank account.
•Company can purchase goods or
services without having to pay for
• Carry interest charges and fees,
which can be expensive if the overdraft
is used frequently or for an extended
period of time.
• If a company consistently uses its
overdraft and is unable to pay it back, it
may damage its credit rating and make
it more difficult to access other forms
of financing in the future.
• If a company is unable to pay its bills
on time, it may damage its credit rating
and make it more difficult to access
31
Debt factoring
Hire purchase
Leasing
Share capital
Debentures
them upfront, which can improve its
cash flow and financial flexibility.
• Improved relationships with
suppliers, for example company can
establish a good relationship with its
suppliers, which may lead to more
favorable terms in the future or access
to additional credit.
• Receive immediate payment for its
outstanding invoices
• This can make the company's
financial statements look more
favorable
• This can be helpful if the asset is
necessary for the company's
operations or if it will generate
significant value over the long term.
• It typically involves fixed payments
over an agreed-upon period of time,
which can make it easier for a
company or individual to budget and
plan for the future.
• It does not require a large upfront
payment, which can be helpful for a
company or individual that does not
have the funds to purchase an asset
outright.
• It involves fixed payments over an
agreed-upon period of time, which
can make it easier for a company or
individual to budget and plan for the
future.
• As the investors who purchase the
shares are typically expecting to hold
them for an extended period of time.
• If the value of a company's shares
increases over time, the investors who
hold the shares may benefit from
capital appreciation.
• Debentures are a long-term source
of funding for a company, as they
typically have a maturity date that is
several years in the future.
trade credit or other forms of financing
in the future.
• It may also result in higher costs in
the long term due to interest charges
or other fees.
• Company will receive less than the
full amount of the invoices
• Company may lose some control over
the collection process
• It can also result in higher overall
costs due to interest charges and other
fees.
• If the customer wants to make
changes to the asset or sell it before
the installments are paid in full.
• It can also result in higher overall
costs due to interest charges and other
fees.
• When a company or individual leases
an asset, they do not own it. This can
be a disadvantage if the company or
individual wants to make changes to
the asset or sell it at a later date.
• When a company issues new shares
of stock, it dilutes the ownership stake
of existing shareholders. This can be a
disadvantage if the existing
shareholders do not want their
ownership stake to be diluted.
• By issuing shares of stock and
becoming a publicly traded company, a
company may be subject to increased
scrutiny from investors, analysts, and
the media.
• If a company is unable to make its
payments on its debentures, it may
default on the debt, which can damage
its credit rating and make it more
32
• It involves fixed payments of interest
and principal, which can make it easier
for a company to budget and plan for
the future.
Bank loans
Business
mortgage
Government
grants
Venture capital
• It can provide a company with
immediate access to a large sum of
money, which can be helpful in
situations where the company needs
to meet unexpected expenses or make
a large purchase.
• It typically involve fixed payments of
interest and principal, which can make
it easier for a company to budget and
plan for the future.
• Business mortgages typically have a
long-term repayment period, which
can provide a company with a stable
source of financing for a real estate
purchase.
• Interest paid on a business mortgage
may be tax-deductible, which can
provide a company with a financial
benefit.
• It can provide a company or
individual with access to funding that
may not be available through other
sources.
• It can often be used to leverage
additional funding from other sources,
such as private investors or banks.
• It can provide a startup or small
business with access to funding that
may not be available through other
sources.
• Venture capital firms often provide
not only financial support but also
expertise and support to the
companies they invest in. This can be
helpful for startups and small
businesses that are looking to scale
and grow.
difficult to access other forms of
financing in the future.
• Company may have less financial
flexibility to respond to unexpected
expenses or opportunities.
• If a company is unable to make its
payments on a bank loan, it may
default on the debt, which can damage
its credit rating and make it more
difficult to access other forms of
financing in the future.
• Many bank loans require collateral,
which means that the company must
pledge assets as security for the loan. If
the company is unable to make its
payments, the bank may be able to
seize the pledged assets to recoup its
losses.
• If a company is unable to make its
payments on a business mortgage, it
may default on the debt, which can
damage its credit rating and make it
more difficult to access other forms of
financing in the future.
• Many business mortgages require
collateral, which means that the
company must pledge the property
being purchased as security for the
loan.
• It is typically only available to
companies or individuals that meet
certain eligibility requirements, such as
operating in a specific industry or
geographic region.
• It often come with strict reporting
requirements that must be met in
order to receive the funds.
• Venture capital firms typically take an
equity stake in the companies they
invest in, which means that the
founders and management of the
company may lose some control over
the direction of the business.
• Startups and small businesses are
often high-risk investments, and it is
not uncommon for venture capitalbacked companies to fail. This can be a
disadvantage if the company was
33
Crowd funding
Micro financing
• It can provide a company or
individual with access to funding that
may not be available through other
sources.
• Crowdfunding campaigns can be a
good way to generate buzz and
awareness for a project or business,
which can help to attract additional
funding or customers in the future.
• It can provide individuals and small
businesses with access to financing
that may not be available through
traditional sources.
• It can help to empower individuals
and small businesses by providing
them with the financial tools and
resources they need to grow and
succeed.
relying on the venture capital funding
to achieve its growth goals.
• Crowdfunding platforms can be
crowded with a large number of
campaigns vying for funding, which can
make it difficult for a campaign to
stand out and attract contributors.
• Crowdfunding campaigns typically
involve small contributions from a large
number of people, which means that
the total amount of funds raised may
be limited compared to other forms of
financing.
• Microfinance loans often have higher
interest rates than traditional loans,
which can make them more expensive
for borrowers.
• Microfinance loans are typically small
in size, which means that they may not
be sufficient to meet the needs of
larger businesses or projects.
Finance for unincorporated businesses
Unincorporated businesses – sole traders and partnerships – cannot raise finance from the sale of
shares. They are unlikely to be successful in selling debentures as they are likely to be relatively
unknown firms. These businesses can obtain finance from:
•
•
•
•
•
•
bank overdrafts and bank loans, including microfinance
crowd funding
credit from suppliers (trade payables)
loans from family and friends
owners’ investment
taking on partners with capital to invest.
Factors affecting the source of finance
•
•
•
•
•
•
Why finance is required and the time period it is needed for
Cost of finance
Amount required
Form of the business ownership and desire to retain control
Level of existing borrowing
Flexibility
34
Chapter 30: Forecasting and managing cash flows
Cash flow forecasts: meaning and purpose
The planning of cash flows using cash flow forecasts is particularly important for entrepreneurs starting
a new business because:
•
•
•
New business start-ups are often offered much shorter credit to pay suppliers than larger,
well established firms.
Banks and other lenders will need to see evidence of a cash flow forecast before making any
finance available.
Finance is often very tight at start-up, so accurate planning is much more significant for new
businesses.
Interpretation of cash flow forecasts
Cash inflows
•
•
•
•
Owner’s own capital injection: This is easy to forecast as it is under direct control.
Bank loan payments: These are easy to forecast if they have been agreed with the bank in
advance, in terms of both amount and timing.
Customers’ cash purchases: These are difficult to forecast as they depend on sales, so a sales
forecast will be necessary. But how accurate might this be?
Trade receivables payments: These are difficult to forecast as they depend on two unknowns.
What proportion of sales will be on credit? When will trade receivables (debtors) actually pay?
One month’s credit may have been agreed with customers, but payment after this period can
never be guaranteed.
Cash outflows
•
•
•
•
•
Lease payment for premises: This is easy to forecast as it will be in the estate agent’s details of
the property.
Annual rent payment: This is easy to forecast as this will be fixed and agreed for a certain time
period. However, the landlord may increase the rent after this period.
Electricity, gas, water and telephone bills are difficult to forecast as these will vary with many
factors, such as the number of customers, seasonal weather conditions and energy prices.
Wage payments: These forecasts will be based largely on demand forecasts and the hourly wage
rate that is to be paid. These payments could vary from week to week if demand fluctuates and
if staff are on flexible contracts.
Cost of materials and payments to suppliers: The cost of materials should vary with the level of
output or sales. The longer the period of credit offered by suppliers, the lower the initial start-up
cash needs of the business will be.
Benefits of cash flow forecasting
•
•
They show negative closing cash flows. This means that plans can be made to source additional
finance, such as a bank overdraft or the injection of more capital from the owner.
They indicate periods of time when negative net cash flows are excessive. The business can plan
to reduce these by taking measures to improve cash flow.
35
•
They are essential to all business plans. A business start-up will never gain finance unless
investors and bankers have access to a cash flow forecast and the assumptions behind it.
Limitations of cash flow forecasting
•
•
•
Mistakes can be made in preparing the revenue and cost forecasts, or they may be drawn up by
inexperienced entrepreneurs or staff.
Unexpected cost increases lead to major inaccuracies in forecasts.
Incorrect assumptions can be made in estimating the sales of the business, perhaps based on
poor market research. This will make the cash inflow forecasts inaccurate.
Causes of cash flow problems
•
•
•
•
•
Lack of planning
Poor credit control
Allowing customers too long to pay debts
Expanding too quickly
Unexpected events
Methods to improve cash flows
•
•
Managing cash inflows
o Overdrafts
o Short term loans
o Sales of assets
o Sale and lease back
o Manage trade receivable
▪ Not extending credit to customers
▪ Selling claims on trade receivable to specialized firms
▪ Finding out whether new customers are credit worthy
▪ Offering discounts to customers who pay promptly
Managing cash outflows
o Delay capital expenditure
o Use leasing, not outright purchase of equipment
o Cut overhead costs
o Manage trade payables
▪ Purchasing more supplies on credit and not cash
▪ Extend the period of time taken to pay
36
Chapter 31: Costs
The need for accurate cost information
Effective business decisions would not be possible without cost data. Here are just some of the business
uses of cost information:
•
•
•
•
•
•
Calculation of profit or loss: costs are a key factor in the profit equation. To calculate profits or
losses, accurate cost information is required. If businesses do not keep a record of their costs,
they will be unable to take profitable decisions, such as where to locate.
Pricing decisions: marketing managers use cost data to help make pricing decisions for new and
existing products.
Measuring performance: cost information allows comparisons to be made with past periods of
time. In this way, the efficiency of a department or the profitability of a product may be
measured and assessed over time.
Setting budgets: cost information can help to set budgets and plans. These can act as targets for
departments to work towards. Actual cost levels can then be compared with budgets.
Resource use: comparing cost data can help in decisions about resource use. For example, if
wage rates are very low, then labour intensive methods of production may be preferred over
capital intensive ones.
Making choices: calculating and comparing the costs of different options can assist managers in
their decision-making. For example, comparing the costs of different production machinery or
alternative locations can increase the chance of the most profitable decision being made.
Types of costs
Direct costs or variable cost: These costs are easy to identify as being incurred by a particular cost
centre. For example, one of the direct costs of:
•
•
•
a fast-food business is the purchase of the meat to make hamburgers
a garage is the labour cost of the mechanic when repairing a car
the Business department of a school is the salary of the Business teacher.
The two most common direct costs in a manufacturing business are labour and materials. The most
important direct cost in a service business, such as retailing, is the cost of the goods being sold.
Indirect costs or fixed cost: Indirect costs are often referred to as overheads. They are incurred by the
business, but they cannot easily be divided up between cost centres. For example, one of the indirect
costs of:
•
•
•
•
a farm is the purchase of a tractor
a supermarket business is its promotional expenditure
a garage is the rent
a school is the cost of cleaning it.
Problems in classifying costs
•
•
Overhead costs (utilities and rent)
Variable costs (raw material with different material)
37
•
•
•
•
Mixed costs (salaries and advertisements)
Non-monetary costs (opportunity cost, social cost, time cost)
Changes in cost behaviors (cost might be fixed in short term and may become variable in long
term)
Inflation
Approaches to costing
Cost centers
•
•
•
in a manufacturing business: products, departments, factories, particular processes or stages in
production, such as assembly
in a hotel: the restaurant, reception, bar, room letting and conference section
in a school: different subject departments.
Profit centres
•
•
•
each branch of a chain of shops
each department of a department store
in a multi-product firm, each product in the overall portfolio of the business.
The benefits of using cost and profit centres are:
•
•
•
•
•
•
•
•
Managers and employees have targets to work towards. If these are reasonable and achievable,
this should have a positive impact on motivation.
These targets can be used to compare with actual performance and help identify those areas
that are performing well and not so well.
The individual performances of divisions and their managers can be assessed and compared.
Work can be monitored and decisions made about the future. For example, should a profit
centre be kept open or should the price of a product be increased? Overheads These indirect
expenses of a business are usually classified into four main groups:
Production overheads: including factory rent and rates, depreciation of equipment and power.
Selling and distribution overheads: including warehouse, packing and distribution costs, and
salaries of sales employees.
Administration overheads: including office rent and rates, clerical and executive salaries.
Finance overheads: including interest on loans.
Average cost
Average cost provides useful information for business managers. It is sometimes referred to as unit cost.
The average cost of producing each unit of output is calculated by this formula:
38
Full costing technique
Full costing allocates all costs to each product. If the business is only producing one type of product,
then this is not a problem. In this case, the stages in full costing are:
•
•
•
•
Identify and add up all of the direct costs.
Calculate the total overheads of the business for a given time period.
Add the total direct costs of making the product.
Calculate the average cost of producing each product by dividing total costs by output.
Example 1: Single product
A pump manufacturer produces 5 000 pumps per year.
Total direct costs = $100 000
Total overhead costs = $50 000
Full cost of producing pumps = $150 000
Average (or unit) full cost per pump = $30
Example 2: Multiple products
Direct cost for each product
Allocated overheads (total overheads = $20,000)
Total or full cost
Annual output
Average full cost
Product A
$45,000
$10,000
$55,000
10,000
$5.50
Product B
$5,000
$10,000
$15,000
500
$30
Product A
$45,000
90%
90% of $20,000 =
$18,000
$63,000
10,000
$6.30
Product B
$5,000
10%
10% of $20,000 =
$2000
$7,000
500
$14
Example 3: Complex situation with multiple products
Direct cost of each product
Proportion of total direct costs
Allocated overheads (total overheads = $20,000)
Total or full cost
Annual output
Average cost
Uses of full costing
• Full costing is particularly relevant for single-product businesses. In these businesses there is no
uncertainty about the share of overheads to be allocated to the product.
• All costs are allocated so no costs are left out of the calculation of total full cost or unit full cost.
• Full costing is a good basis for pricing decisions in single-product firms. If the full unit cost is
calculated, this could then be used for cost-plus pricing.
• Full costing data can be compared from one time period to another to assess performance, as
long as the same method of allocating overheads is used.
39
Limitations of full costing
• There is no attempt to allocate each overhead cost to cost centres or profit centres on the basis
of actual expenditure incurred. For example, a product may take up a large proportion of factory
space but use low-cost and easy-to-maintain machinery. Should all overheads be allocated on
the basis of factory space?
• Inappropriate methods of overhead allocation can lead to inconsistencies between departments
and products.
• It can be risky to use this cost method for making decisions. The cost figures arrived at can be
misleading. See the section on ‘Contribution costing and decision-making’.
• If full costing is used, it is essential to allocate overheads on the same basis over time as
otherwise sensible year-on-year comparisons cannot be made.
• The full unit cost will only be accurate if the actual level of output is equal to that used in the
calculation. A fall in output will push up the allocated overhead costs per unit.
Contribution or marginal costing
Contribution costing solves the problem of deciding on the most appropriate way to allocate or share
out overhead costs between products – it does not allocate them at all. Instead, the method
concentrates on two very important accounting concepts:
• Marginal cost – the cost of producing an extra unit – is a variable direct cost.
For example,
if the total cost of producing 100 units is $400 000
total cost of producing 101 units is $400 050,
the marginal (or extra) cost is $50.
•
The contribution of a product is the revenue gained from selling a product less its marginal
(variable direct) costs. This is not the same as profit. Profit can only be calculated after
overheads have also been deducted.
For example,
if the 101st unit with a marginal cost of $50 is sold for $70,
it has made a contribution towards indirect costs of $20.
The unit contribution is the difference between the sale price ($70)
the marginal cost ($50) = $20.
Contribution costing and decision-making
$000
Novel
Revenue
50
Direct material
15
Direct labour
20
Other direct costs
10
Total direct costs
45
Contribution
5
Textbook
100
35
50
5
90
10
40
This statement does not allocate overhead costs between the two products. Overheads cannot be
ignored altogether, however. They are needed to calculate the profit or loss of the business:
• Total contribution for Cambridge Printers Ltd = $15 000.
• Total indirect costs amounted to $12 000.
• Profit = contribution less overheads.
• Therefore, the business has made a profit of $3 000.
Contribution costing and decisions on stopping selling a product
If a business sells more than one product, contribution costing shows managers which product is making
the greatest or least contribution to overheads and profit. If full costing were used instead, a manager
could decide to stop producing a product that seemed to be making a loss. However, if it is still making a
positive contribution, what would happen to profit if production was stopped? In cases such as this,
stopping production of a product while it is earning a positive contribution will reduce the overall profits
of the business. This is because the fixed overhead costs will still have to be paid, but there will be
reduced contribution to pay for them.
Contribution costing and special order decisions
If a customer offers a special order contract at a price below full unit cost, this can lead to an increase in
the total profits of the business. This is because the fixed overhead costs are being paid anyway and any
extra contribution earned will increase profit. There are dangers in this policy, however:
• Existing customers may realise lower prices are being offered to new customers and demand a
similar price. If all goods or services being sold by a business are sold at just above marginal cost,
then this could lead to an overall loss being made.
• When high prices are a key feature in establishing the exclusivity of a brand, then to offer some
customers lower prices could destroy a hard-won image.
• Where there is no excess capacity, sales at a price based on contribution cost may be reducing
sales based on the full cost price.
• In some circumstances, lower-priced goods or services may be resold into the higher-priced
market by customers themselves.
Situations when contribution costing would be used
• Contribution costing avoids inaccuracies and arbitrary indirect cost allocations and gives a
contribution, not a profit total. Contribution costing can therefore be used in setting prices that
just cover the direct costs of production.
• Decisions about a product or profit centre are made on the basis of its contribution to indirect
costs – not profit or loss based on what may be an inaccurate full cost calculation. Contribution
costing can therefore be used in decision-making over whether to close a cost/profit centre.
• Excess capacity is more likely to be effectively used, if special orders or contracts that make a
positive contribution are accepted. Contribution costing can therefore be used in decisionmaking on special order decisions.
Situations when contribution costing would not be used
• By ignoring indirect costs, contribution costing does not take into account that some products
may result in much higher indirect costs than others. In addition, single-product firms have to
41
•
•
•
cover the fixed costs with revenue from this single product, so using contribution costing would
not be used in this case.
Contribution costing would not be used when making decisions about business expansion or
developing new products. All costs of these developments will need to be considered, not just
the direct costs.
Contribution costing may lead managers to choose to maintain the production of goods just
because of a positive contribution. Perhaps a brand-new product should be launched instead
that could, in time, make an even greater contribution.
As in all areas of decision-making, qualitative factors may be important too, such as the image a
product gives the business.
Break-even analysis
The graphical method: the break-even chart
The break-even chart requires a graph with the axes. The chart itself is usually drawn showing three
pieces of information:
• Fixed costs, which, in the short term, will not vary with the level of output and which must be
paid whether the firm produces anything or not.
• Total costs, which are the addition of fixed and variable costs; we will assume, initially at least,
that variable costs vary in direct proportion to output.
• Revenue, obtained by multiplying selling price by output level.
42
The benefits of break-even analysis
• Charts are relatively easy to construct and interpret.
• Analysis provides useful guidelines to management on break-even points, safety margins and
profit/loss levels at different rates of output.
• Comparisons can be made between different options by constructing new charts to show
changed circumstances.
• The equation produces a precise break-even result.
• Break-even analysis can be used to assist managers when taking important decisions, such as
location decisions, whether to buy new equipment and which project to invest in.
• A marketing decision – the impact of a price increase which makes the sales revenue line
steeper. The assumption made in this example is that maximum sales will still be made. With a
higher price level, this may be unlikely.
• An operations management decision – the purchase of new equipment which raises fixed costs
but which reduces variable costs resulting in reduced total costs.
• A location decision – using break-even data to help decide which location to select.
The limitations of break-even analysis
• The assumption that costs and revenues are always represented by straight lines is unrealistic.
Some variable costs do not change directly with output. For example, labour costs may increase
as output reaches its maximum due to higher shift payments or overtime rates.
• The revenue line could be influenced by the price reductions needed to sell a high level of
output. The combined effects of these changing assumptions could create two break-even
points in practice.
• Not all costs can be easily classified into fixed and variable costs. The introduction of semivariable costs will make the technique much more complicated.
• The break-even chart makes no allowance for inventory levels. It is assumed that all units
produced are sold. This is unlikely to always be the case in practice.
• It is also unlikely that fixed costs will remain unchanged at different output levels up to
maximum capacity.
• For new businesses, break-even data will be based on forecasts and these could be inaccurate.
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Chapter 32: Budget
The meaning and purpose of budgets
Financial planning for the future is important for all businesses. If no plans are made, a business will:
• be without a direction or purpose
• be unable to allocate the scarce resources of the business effectively
• have demotivated employees with no plans or targets to work towards
• be unable to measure its progress by measuring the plans against actual performance.
Benefits of using budgets
• Planning: The budgetary process makes managers consider future plans carefully so that realistic
targets can be set. With a clear sales budget, for example, departments in the business will
know how much to produce or how much to spend on sales promotion.
• Allocating resources: Budgets can be an effective way of making sure that the business does not
spend more resources than it has access to. Without a detailed and coordinated set of plans for
allocating the business’s money and resources, who would decide ‘who gets what’?
• Setting targets: Most people work better if they have a realistic target to aim for. This
motivation will be greater if the budget holder or profit centre manager has been delegated
some accountability for setting and reaching budget levels.
• Coordination: Discussion about the allocation of resources to different departments and
divisions requires coordination between these departments. Once budgets have been set,
people will have to work effectively together if targets are to be achieved.
• Controlling and monitoring a business: Plans cannot be ignored once they have been set and
agreed with the budget holder. Checks must be undertaken regularly to control and monitor the
performance of the budget holder and their department. Many factors might have changed
since the budget was set. Managers cannot assume that the budget target will be achieved
without careful control and monitoring.
• Measuring and assessing performance: Once the budgeted period ends, variance analysis is used
to compare actual performance with the original budgets. This is an important way of assessing
managers’ performance. It would not be possible to assess how well individual departments had
performed without a clear series of targets to compare actual performance with.
Potential drawbacks of using budgets
• Lack of flexibility: If budgets are set with no flexibility built into them, then sudden and
unexpected changes in the external environment can make them very unrealistic. Unrealistic
budgets will demotivate the budget holder and other employees.
• Focus on the short term: Budgets tend to be set for the relatively short term, for example, the
next 12 months. Managers may take a short-term decision to stay within budget that may not
be in the best long-term interests of the business. For example, cutting the size of the workforce
to stay within the labour budget may restrict the ability of the business to increase output if
sales rise quickly in the future.
• Unnecessary spending: If managers have underspent their budgets just before the end of the
budgeting period, they might make decisions to spend unnecessarily so that the same level of
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•
•
budget can be justified next year. If a large surplus exists at the end of the budget period, how
could managers justify the same level of resources next year?
Training on budgets: Setting and keeping to budgets is not easy and all managers with delegated
responsibility for budgets will need extensive training in this role.
Budgets for new projects: Setting budgets for big new projects is very difficult and often
inaccurate. This is particularly true if similar projects – like a super-fast train line – have not been
undertaken before.
Key features of effective budgeting
• A budget is not a forecast but a plan that businesses aim to fulfil. A forecast is a prediction of
what could occur in the future given certain conditions.
• Budgets may be established for any part of an organisation as long as the outcome of its
operation is measurable. This means most cost centres and profit centres will have budgets set,
including budgets for sales, capital expenditure, labour costs and profit.
• Coordination between departments when establishing budgets is essential. This should avoid
departments making conflicting plans.
• Budget setting should involve participation. Decisions regarding budgets should be made with
the managers who will be responsible for meeting the targets. Those who are responsible for
fulfilling a budget should be involved in setting it. This sense of ‘ownership’ not only helps to
motivate the department concerned to achieve the targets but also leads to the establishment
of more realistic targets. This approach to budgeting is called delegated budgets.
• Budgets are used to review the performance of each manager controlling a cost or profit centre.
The managers will be appraised on their effectiveness in reaching targets. Successful and
unsuccessful managers can therefore be identified.
Setting and using budgets
There are several ways in which the budget level can be set.
• Incremental budgeting: This method takes last year’s budget and makes changes for this year
based on last year’s budget. The revised budget might be raised or lowered, depending on
market conditions. Cost budgets will be adjusted for forecasted inflation and expected changes
in output. Incremental budgeting does not allow for unforeseen events. Using last year’s figure
as a basis means that each department does not have to justify its whole budget for the coming
year – only the change or increment. There is no fundamental appraisal of each department’s
targets or need for resources.
• Zero budgeting: The zero budgeting approach requires all departments and budget holders to
justify their whole budget each year. This is time-consuming, as a fundamental review of the
work and importance of each budget holding section is needed each year. However, it does
provide added incentive for managers to defend the work of their own section. Also, changing
situations, such as the external environment, can be reflected in very different budget levels
each year.
• Flexible budgeting: Most budgets are fixed for the time period under review. This means that
they are based on the assumption that the level of output remains at the predicted or budgeted
level. If actual output falls or rises above this level, then this could lead to obvious variances
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from the fixed budgets. However, these variances do not necessarily indicate real efficiency
problems.
Variance analysis
A variance is the difference between a budget and the actual figures achieved at the end of the budget
period. It is important to calculate and analyse the reasons for these variances because:
• Variances measure differences from the planned performance of each department over a given
period. Measuring performance is a key benefit of budgets.
• Finding out the reasons for variances can help set more realistic budgets in the future.
• Finding out the reasons for variances can help the business take better decisions. For example, if
the revenue variance for a business was negative because of lower sales caused by an economic
recession, then reducing prices might be the right decision to make.
• The performance of each individual cost centre and profit centre may be appraised in an
accurate and objective way.
Possible causes of adverse variances
• Revenue is below budget because either fewer units were sold or the selling price had to be
lowered due to competition.
• Actual raw material costs are higher than planned because either output was higher than
budgeted or the cost per unit of materials increased.
• Labour costs are above budget because either wage rates were raised due to shortages of
workers or the labour time taken to complete the work was longer than expected.
• Overhead costs are higher than budgeted, perhaps because the annual rent rise was above the
forecast.
The benefits to be gained from regular variance analysis include:
• Identifying potential problems early so that remedial action can be taken. Perhaps, in this case,
a new competing computer retailer has opened up and WIC (work in progress) will have to
quickly introduce strategies to combat this competition.
• Allowing managers to concentrate their time and efforts on the major problem areas. This is
known as management by exception. In this case, it seems that managers should quickly
investigate the likely causes of the lower-than-expected sales figures.
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Definitions with example
UNIT 1: BUSINESS ENVIRONMENT
1. Business enterprise: A business enterprise is a company or organization that is engaged in
commercial, industrial, or professional activities. For example, a small bakery that produces and sells
baked goods to customers is a business enterprise.
2. Factors of production: Factors of production are the resources that are used to produce goods and
services. These include land, labor, capital, and entrepreneurship. For example, a factory that
produces automobiles uses land, labor (workers), capital (machinery and equipment), and
entrepreneurship (the ability to organize and manage the business) as factors of production.
3. Intrapreneur: An intrapreneur is an individual who innovates and takes risks within a large
organization, rather than starting a new business. For example, an employee at a technology
company who develops a new product idea and works to bring it to market within the company
could be considered an intrapreneur.
4. Adding value: Adding value refers to the process of increasing the worth of a product or service.
This can be done through improvements in quality, features, or other factors that make the product
or service more appealing to customers. For example, a company that produces smartphones may
add value to its products by including new features such as a better camera or longer battery life.
5. Social cohesion: Social cohesion refers to the bonds and connections that exist within a society or
group. Strong social cohesion can lead to a sense of community and belonging, while weak social
cohesion can lead to social isolation and conflict. For example, a neighborhood with strong social
cohesion may have residents who regularly come together for events and activities, while a
neighborhood with weak social cohesion may have residents who do not interact with each other.
6. Dynamic business environment: A dynamic business environment is one that is constantly changing
and evolving. This can be due to factors such as technological advances, shifts in consumer demand,
and changes in economic conditions. Companies operating in a dynamic business environment must
be agile and adaptable in order to stay competitive.
7. Local business: A local business is a company that operates in a specific geographic area, such as a
city or town. Local businesses may serve the needs of the local community, such as providing goods
or services to local residents. For example, a small grocery store located in a neighborhood is a local
business.
8. Customer base: A customer base is the group of customers that a business serves. This group may
be defined by factors such as location, demographics, or interests. For example, a clothing store may
have a customer base that consists of young, fashion-conscious consumers.
9. National business: A national business is a company that operates within a single country. This type
of business may serve customers across the country or may have a specific region or market that it
serves. For example, a chain of fast food restaurants that operates locations in multiple states across
the United States is a national business.
10. Business plan: A business plan is a document that outlines the goals and strategies of a business. It
may include details such as the target market, marketing and sales strategies, financial projections,
and operational plans. A business plan is often created when starting a new business or seeking
funding from investors.
11. International business: International business refers to the exchange of goods, services, and
information across national borders. This can include exporting, importing, and conducting business
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12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
in foreign markets. For example, a clothing company that sells its products in multiple countries
around the world is engaged in international business.
Multinational business: A multinational business is a company that operates in multiple countries
around the world. This type of business may have operations, production facilities, and offices in
several different countries, and may serve customers in many different markets. For example, a
multinational corporation such as Coca-Cola has operations in multiple countries and sells its
products in many different markets around the world.
Economic growth: Economic growth refers to an increase in the production of goods and services
within an economy. It is typically measured by the increase in a country's gross domestic product
(GDP) over a period of time. Economic growth can be driven by factors such as an increase in
population, an increase in productivity, and an increase in investment.
Entrepreneur: An entrepreneur is a person who starts and runs a business, typically taking on
financial risk in the process. Entrepreneurs are often seen as innovators and risk-takers, as they
often develop new products or services and seek out opportunities for growth and expansion. For
example, a person who starts a small bakery and takes on the risk of purchasing the necessary
equipment and ingredients is an entrepreneur.
Personal development: Personal development refers to the process of improving oneself and one's
skills and abilities. This can involve activities such as learning new things, setting and working
towards goals, and building relationships. Personal development is often viewed as an ongoing
process that occurs throughout an individual's life. For example, a person who takes a course to
learn a new skill or who sets a goal to improve their fitness is engaging in personal development.
Economic sectors: Economic sectors are the different industries or areas of economic activity within
a country or region. There are typically four main economic sectors: primary, secondary, tertiary,
and quaternary.
Primary sector: The primary sector includes industries that are involved in the extraction and
production of raw materials, such as agriculture, forestry, mining, and fishing. For example, a farmer
who grows crops or a logger who harvests timber is part of the primary sector.
Secondary sector: The secondary sector includes industries that are involved in the manufacturing
of goods, such as construction, automotive, and textiles. For example, a person who works in a
factory assembling car parts or a person who works in a construction company building houses is
part of the secondary sector.
Tertiary sector: The tertiary sector includes industries that provide services, such as healthcare,
education, and retail. For example, a nurse who works in a hospital or a teacher who works in a
school is part of the tertiary sector.
Quaternary sector: The quaternary sector includes industries that are involved in knowledge-based
activities, such as research and development, and information technology. For example, a scientist
working in a research laboratory or a software engineer working in the tech industry is part of the
quaternary sector.
Industrialization: Industrialization refers to the process of a country or region transitioning from an
economy based on agriculture and manual labor to one based on industry and machine
manufacturing. Industrialization typically leads to increased productivity, economic growth, and
technological advancement. For example, the Industrial Revolution in Europe during the 18th and
19th centuries saw the widespread adoption of steam-powered machinery, leading to significant
advances in manufacturing and transportation.
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22. Deindustrialization: Deindustrialization refers to the process of a country or region experiencing a
decline in its industrial sector. This can be due to a variety of factors such as technological advances,
globalization, and shifts in economic conditions. Deindustrialization can lead to job losses, economic
decline, and social disruption. For example, the deindustrialization of the United States in the 20th
century saw the decline of manufacturing jobs in the country, leading to economic and social
changes.
23. Public corporations: Public corporations are companies that are owned by the government and
operate for the benefit of the public. These companies may be involved in a variety of industries,
such as utilities, transportation, and healthcare. For example, a public corporation such as the
Canadian National Railway is owned by the Canadian government and operates as a transportation
company for the benefit of the public.
24. Public sector: The public sector refers to the portion of a country's economy that is controlled and
funded by the government. This includes industries such as education, healthcare, and defense. For
example, a public school is part of the public sector, as it is funded and controlled by the
government.
25. Private sector: The private sector refers to the portion of a country's economy that is controlled and
funded by private companies and individuals, rather than the government. This includes industries
such as manufacturing, retail, and finance. For example, a privately-owned retail store is part of the
private sector, as it is owned and operated by a private company.
26. Sole trader: A sole trader is a type of business structure in which a single person owns and operates
the business. This type of business is typically small and may not have any employees. For example,
a person who starts a small consulting business and works as the sole employee is a sole trader.
27. Partnership: A partnership is a type of business structure in which two or more individuals own and
operate the business together. Partnerships can be either general partnerships, in which all partners
are equally responsible for the business, or limited partnerships, in which some partners are only
responsible for a portion of the business. For example, two people who start a law firm and work
together as partners are operating a partnership.
28. Private limited company: A private limited company is a type of business structure in which the
company is privately owned and the shareholders have limited liability for the company's debts. This
type of business is common in countries with a common law legal system. For example, a small
software company that is owned by a group of shareholders and operates as a private limited
company is a common business structure.
29. Public limited company: A public limited company is a type of business structure in which the
company is publicly traded and the shareholders have limited liability for the company's debts. This
type of business is common in countries with a common law legal system. For example, a large
multinational corporation such as Apple that is publicly traded and operates as a public limited
company is a common business structure.
30. Cooperatives: Cooperatives are businesses that are owned and controlled by their members, who
are often the customers or employees of the business. Cooperatives operate for the benefit of their
members, rather than for the profit of a small group of owners. For example, a food cooperative
that is owned and controlled by its members, who are also the customers of the cooperative, is a
common business structure.
31. Franchise: A franchise is a type of business in which the owner (franchisor) grants the use of a
trademark and business model to a third party (franchisee) in exchange for a fee and ongoing
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32.
33.
34.
35.
36.
37.
38.
39.
royalties. Franchises are typically part of a larger chain of businesses and operate under the same
brand and business model. For example, a person who owns a franchise of a fast food restaurant
chain is operating a franchise business.
Franchiser: A franchiser is the owner of a franchise business and grants the use of the franchise's
trademark and business model to franchisees. The franchiser is typically responsible for providing
support and guidance to the franchisees, as well as enforcing standards and policies. For example,
the owner of a fast food restaurant chain who grants the use of the franchise to individual
franchisees is the franchiser.
Franchisee: A franchisee is a person or company that has obtained the rights to operate a franchise
business. The franchisee pays a fee and ongoing royalties to the franchiser in exchange for the use
of the franchise's trademark and business model. The franchisee is typically responsible for
operating the franchise according to the standards and policies set by the franchiser. For example, a
person who owns and operates a franchise of a fast food restaurant chain is the franchisee.
Joint ventures: A joint venture is a type of business partnership in which two or more companies
come together to undertake a specific project or venture. Joint ventures are typically formed for a
specific purpose and are often dissolved once the project is completed. For example, two companies
that come together to develop a new product and then dissolve the partnership once the product is
launched are engaged in a joint venture.
Social enterprise: A social enterprise is a type of business that is focused on creating a positive social
or environmental impact, rather than solely on maximizing profits. Social enterprises often use
business practices and strategies to achieve their social or environmental goals. For example, a
company that sells environmentally-friendly products and uses its profits to fund environmental
conservation efforts is a social enterprise.
Triple bottom line: The triple bottom line is a business concept that refers to a company's focus on
social and environmental responsibility in addition to financial performance. This concept suggests
that companies should consider the impacts of their actions on people and the planet, in addition to
profits. For example, a company that measures its success not only by its financial performance, but
also by its impact on the environment and the well-being of its employees, is following the triple
bottom line.
Unlimited liability: Unlimited liability refers to the legal responsibility that a business owner has for
the debts and obligations of the business. In an unlimited liability business, the owner's personal
assets, such as their home and savings, may be used to pay the business's debts if the business is
unable to pay them. For example, a sole trader who operates a business and has unlimited liability is
personally responsible for any debts that the business incurs.
Separate legal identity: A separate legal identity refers to the legal status of a business as a separate
entity from its owners. This means that the business has its own legal rights and responsibilities, and
the owners of the business are not personally liable for the debts and obligations of the business.
For example, a limited liability company that has a separate legal identity is a separate legal entity
from its owners, who are not personally liable for the company's debts.
Incorporated business: An incorporated business is a type of business that has received a legal
charter from the government and has a separate legal identity from its owners. Incorporated
businesses can be either for-profit or non-profit and may have different types of legal structures,
such as a corporation or a limited liability company. Incorporated businesses often have certain legal
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40.
41.
42.
43.
44.
45.
46.
47.
protections and tax advantages. For example, a corporation that is incorporated and has a separate
legal identity from its owners is an incorporated business.
Unincorporated business: An unincorporated business is a type of business that is not legally
separate from its owners. This means that the business does not have a separate legal identity and
the owners are personally liable for the debts and obligations of the business. Unincorporated
businesses can take various forms, such as sole proprietorships or partnerships. For example, a
person who operates a small consulting business as a sole proprietorship is operating an
unincorporated business.
Capital employed: Capital employed refers to the amount of money invested in a business, including
the money used to purchase assets and cover operating costs. Capital employed is a measure of a
business's financial resources and can be used to determine its financial performance and stability.
For example, a company that has a large amount of capital employed may be seen as financially
stable, while a company with a small amount of capital employed may be seen as financially
vulnerable.
Market share: Market share refers to the percentage of total sales in a particular market that is held
by a particular company. Market share is often used as a measure of a company's competitive
position in the market. For example, a company that has a large market share in the smartphone
industry is likely a major player in the market.
Market capitalization: Market capitalization, also known as market cap, is a measure of the value of
a company based on its current stock price and the total number of outstanding shares. It is
calculated by multiplying the stock price by the number of outstanding shares. Market capitalization
is often used as a measure of a company's size and is an important factor in investment decisions.
For example, a company with a large market capitalization is likely seen as a financially stable and
successful company.
Business growth: Business growth refers to the increase in the size or scope of a business over time.
Business growth can be driven by a variety of factors, such as increased demand for the company's
products or services, expansion into new markets, and increased efficiency. For example, a company
that experiences an increase in sales and expands into new markets is experiencing business growth.
Internal growth: Internal growth refers to the growth of a business that is achieved through the
company's own efforts, such as expanding its product line or increasing its marketing efforts.
Internal growth is often achieved through the company's own resources and does not involve
external acquisitions or partnerships. For example, a company that increases its sales by introducing
new products and expanding its distribution channels is experiencing internal growth.
External growth: External growth refers to the growth of a business that is achieved through
acquisitions, partnerships, or other external means. External growth may involve the acquisition of
other businesses or the formation of strategic partnerships with other companies. For example, a
company that acquires a rival business or forms a partnership with a supplier is experiencing
external growth.
Takeover: A takeover is the acquisition of one company by another company. Takeovers can be
friendly, in which the acquiring company reaches an agreement with the target company, or hostile,
in which the acquiring company attempts to acquire the target company without the agreement of
its management. For example, a company that acquires a rival business through a friendly takeover
is engaging in a takeover.
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48. Merger: A merger is the combination of two or more companies into a single entity. Mergers can be
friendly or hostile and may involve the combination of companies in the same industry (horizontal
merger) or companies at different stages of the production process (vertical merger). For example,
the merger of two rival banks to form a larger, more competitive financial institution is a common
type of merger.
49. Horizontal integration: Horizontal integration refers to the expansion of a company into the same
or similar industry through acquisition or merger. Horizontal integration allows a company to
increase its market share and reduce competition, but it can also lead to antitrust concerns. For
example, a company that acquires a rival business in the same industry is engaging in horizontal
integration.
50. Vertical forward integration: Vertical forward integration refers to the expansion of a company into
the distribution or retail stages of the production process. This type of integration allows a company
to have more control over the distribution of its products and can reduce costs by eliminating
intermediaries. For example, a manufacturer that acquires a chain of retail stores is engaging in
vertical forward integration.
51. Vertical backward integration: Vertical backward integration refers to the expansion of a company
into the raw materials or production stages of the production process. This type of integration
allows a company to have more control over the supply chain and can reduce costs by eliminating
intermediaries. For example, a retailer that acquires a supplier of raw materials is engaging in
vertical backward integration.
52. Conglomerate: A conglomerate is a large corporation that is made up of a number of different
businesses in different industries. Conglomerates often diversify their operations in order to reduce
risk and increase stability. For example, a company that owns businesses in a variety of industries,
such as healthcare, finance, and media, is a conglomerate.
53. Rationalization: Rationalization refers to the process of making a business more efficient and costeffective through the reorganization of operations, the elimination of unnecessary activities, and the
standardization of processes. Rationalization is often undertaken to improve competitiveness and
increase profitability. For example, a company that streamlines its production process and reduces
its number of suppliers in order to increase efficiency is engaging in rationalization.
54. Strategic alliance: A strategic alliance is a partnership between two or more companies that is
formed for the purpose of achieving a specific goal or gaining a competitive advantage. Strategic
alliances can take various forms, such as joint ventures, licensing agreements, and distribution
partnerships. For example, two companies that form a joint venture to develop a new product are
engaged in a strategic alliance.
55. Corporate culture: Corporate culture refers to the values, beliefs, and behaviors that are shared by
the employees of a company. Corporate culture can have a significant impact on the success of a
business and can influence things such as employee morale, productivity, and innovation. For
example, a company with a strong culture of innovation and collaboration may be more successful
in developing new products and services.
56. Corporate social responsibility (CSR): Corporate social responsibility (CSR) refers to the ethical and
social obligations of a company to stakeholders such as employees, customers, shareholders, and
the broader community. CSR can involve activities such as charitable giving, environmentallyfriendly practices, and responsible labor practices. For example, a company that implements a
recycling program and donates a portion of its profits to charity is engaged in CSR.
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57. Business ethics: Business ethics refers to the principles and values that guide the behavior of a
business and its employees. Business ethics can encompass topics such as honesty, integrity,
fairness, and respect for others. For example, a company that has a strong code of ethics that
emphasizes honesty and integrity in all business dealings is following good business ethics.
58. Business objectives: Business objectives are the goals that a business aims to achieve. Business
objectives can be financial, such as increasing profits or expanding market share, or non-financial,
such as improving customer satisfaction or increasing employee retention. For example, a company
that aims to increase its profits by expanding into new markets has a financial business objective.
59. Mission statement: A mission statement is a statement that defines the purpose and values of a
business. A mission statement can serve as a guide for decision-making and help align the actions of
the business with its goals and values. For example, a company that has a mission statement that
emphasizes customer satisfaction and innovation may prioritize these values in its business
decisions.
60. Tactics: Tactics are the specific actions that a business takes in order to achieve its objectives.
Tactics can include marketing campaigns, product development, and cost-cutting measures. For
example, a company that launches a new advertising campaign in order to increase sales is using a
marketing tactic.
61. Business strategy: Business strategy refers to the overall plan that a business has for achieving its
objectives. Business strategy can involve a variety of tactics and can be influenced by factors such as
the company's strengths, the market environment, and the competition. For example, a company
that focuses on cost leadership in order to increase profits has a business strategy.
62. Business decision making process: The business decision making process refers to the steps that a
business follows in order to make informed and effective decisions. The process can involve
gathering and analyzing data, identifying options, evaluating the pros and cons of each option, and
choosing the best course of action. For example, a company that follows a structured decision
making process, such as the SWOT analysis, is more likely to make well-informed and effective
decisions.
63. SMART objectives: SMART objectives are specific, measurable, achievable, relevant, and timebound goals that a business sets for itself. SMART objectives can help a business focus its efforts and
track progress towards achieving its goals. For example, a company that sets a SMART objective of
increasing sales by 10% in the next quarter is setting a specific, measurable, achievable, relevant,
and time-bound goal.
64. Corporate aims: Corporate aims are the long-term goals that a company sets for itself. Corporate
aims may be related to financial performance, such as increasing profits or expanding market share,
or non-financial, such as improving customer satisfaction or increasing employee retention. For
example, a company that aims to become the market leader in its industry has a corporate aim.
65. Departmental objectives: Departmental objectives are the specific goals that a particular
department within a company aims to achieve. Departmental objectives are typically aligned with
the overall corporate aims of the company and can help the department contribute to the
achievement of the company's goals. For example, the marketing department of a company may
have an objective of increasing sales through the development of new marketing campaigns.
66. Stakeholders: Stakeholders are individuals or groups that have an interest in or are impacted by the
actions of a business. Stakeholders can include shareholders, employees, customers, suppliers, and
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67.
68.
69.
70.
the broader community. For example, employees of a company are stakeholders because they are
impacted by the actions of the company and have an interest in its success.
Shareholders: Shareholders are individuals or entities that own shares in a company. Shareholders
have a financial stake in the company and are entitled to a share of the company's profits and
assets. Shareholders also have the right to vote at shareholder meetings and can influence the
decision-making of the company. For example, an individual who owns shares in a publicly-traded
company is a shareholder.
Local communities: Local communities are the people who live and work in a particular area. Local
communities can be impacted by the actions of businesses operating in the area and can also be
stakeholders in the business. For example, a company that operates a factory in a particular town
may have an impact on the local community and may be expected to be a good corporate citizen.
Industrial actions: Industrial actions are actions taken by workers or trade unions to protest or
improve working conditions or pay. Industrial actions can include strikes, boycotts, and other forms
of protest. For example, a group of workers who go on strike to protest low pay are engaging in an
industrial action.
Trade unions: Trade unions are organizations that represent the interests of workers and negotiate
with employers on matters such as pay, working conditions, and benefits. Trade unions can also
engage in industrial actions, such as strikes, to advocate for the rights of their members. For
example, a group of workers who are represented by a trade union may negotiate with their
employer for better pay and working conditions.
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UNIT 2 – PEOPLE IN ORGANIZATION
1. Human Resource Management (HRM): Human Resource Management (HRM) is the process of
managing the people who work for an organization. HRM involves a variety of activities, including
recruitment, selection, training, performance management, and employee development. The goal of
HRM is to ensure that the organization has the right people with the right skills in the right jobs in
order to achieve its goals.
2. Recruitment: Recruitment refers to the process of attracting and selecting candidates for a job
opening. Recruitment can involve a variety of activities, such as advertising job openings, reviewing
resumes, and conducting interviews. The goal of recruitment is to identify and hire the best
candidates for the job.
3. Selection: Selection refers to the process of choosing the best candidate for a job opening. Selection
typically involves evaluating candidates based on their qualifications, skills, and experience and may
include activities such as interviews, aptitude tests, and reference checks. The goal of selection is to
identify the candidate who is most likely to be successful in the role.
4. Job description: A job description is a document that outlines the responsibilities, duties, and
requirements of a particular job. A job description can be used to help attract candidates, evaluate
their suitability for the role, and determine their pay and benefits. For example, a job description for
a customer service representative may include responsibilities such as answering customer
inquiries, resolving customer complaints, and maintaining customer records.
5. Person specification: A person specification is a document that outlines the skills, knowledge, and
experience that are required for a particular job. A person specification is often used in conjunction
with a job description to help identify the most suitable candidates for a role. For example, a person
specification for a sales manager may include requirements such as a bachelor's degree in business,
five years of sales experience, and strong leadership skills.
6. Internal recruitment: Internal recruitment refers to the process of filling a job opening with an
employee who is already working for the organization. Internal recruitment can involve promoting
current employees or transferring them to new roles within the organization. For example, a
company that promotes an employee from a customer service role to a management position is
engaging in internal recruitment.
7. External recruitment: External recruitment refers to the process of filling a job opening with a
candidate who is not currently employed by the organization. External recruitment can involve
advertising the job opening, reviewing resumes, and conducting interviews with candidates from
outside the organization. For example, a company that hires a new employee from a different
company is engaging in external recruitment.
8. Labour turnover: Labour turnover refers to the rate at which employees leave an organization and
are replaced by new hires. High labour turnover can be costly and disruptive for an organization and
may indicate issues with employee satisfaction or retention. For example, a company that has a high
labour turnover rate may need to review its recruitment and retention practices in order to reduce
turnover.
9. Training of employees: The training of employees refers to the process of providing employees with
the knowledge and skills needed to perform their job duties effectively. Training can take various
forms, such as on-the-job training, formal classroom training, or online courses, and can be provided
by the organization or by external trainers. For example, a company that provides new employees
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with a week-long training program on company policies and procedures is engaging in the training of
employees.
Induction training: Induction training is training that is provided to new employees when they first
join an organization. Induction training is designed to help new employees understand the
company's policies, procedures, and culture and to familiarize them with their job duties. For
example, a company that provides new employees with a week-long training program on company
policies and procedures is engaging in induction training.
On-the-job training: On-the-job training is training that is provided to employees while they are
performing their job duties. On-the-job training is often practical in nature and allows employees to
learn by doing. For example, a company that provides new customer service representatives with
training on how to use the company's customer relationship management software is providing onthe-job training.
Off-the-job training: Off-the-job training is training that is provided to employees outside of their
normal job duties. Off-the-job training can take various forms, such as formal classroom training,
workshops, or online courses, and is often more theoretical in nature. For example, a company that
sends its sales managers to a week-long sales training program is providing off-the-job training.
Employee appraisal: Employee appraisal, also known as performance appraisal, is the process of
evaluating an employee's job performance. Employee appraisals can be formal or informal and may
involve activities such as setting performance goals, reviewing job duties, and providing feedback.
The goal of employee appraisal is to help employees improve their performance and contribute to
the success of the organization.
Dismissal: Dismissal, also known as termination or firing, refers to the process of ending an
employee's employment with an organization. Dismissal can be initiated by the employer or the
employee and may be due to poor performance, misconduct, or other reasons. For example, a
company that dismisses an employee for failing to meet performance standards is engaging in
dismissal.
Redundancies: Redundancies refer to the process of reducing the number of employees in an
organization due to changes in business needs or economic conditions. Redundancies can be
voluntary, in which employees agree to leave the organization, or involuntary, in which employees
are laid off without their consent. For example, a company that reduces the number of employees in
its marketing department due to budget cuts is engaging in redundancies.
Unfair dismissal: Unfair dismissal refers to the unlawful termination of an employee's employment.
Unfair dismissal can occur when an employee is terminated for discriminatory reasons, such as their
race, gender, or age, or when the termination is not consistent with the terms of the employee's
contract or with the company's policies. For example, a company that dismisses an employee
because of their race would be engaging in unfair dismissal.
Work-life balance: Work-life balance refers to the balance between an employee's work and
personal responsibilities. Work-life balance can be affected by factors such as the demands of the
job, the employee's hours of work, and the availability of flexible work arrangements. For example,
a company that offers flexible work hours or the option to work from home may be promoting
work-life balance for its employees.
Equality policy: An equality policy is a set of principles and practices that an organization follows in
order to promote equality and prevent discrimination. An equality policy may address issues such as
race, gender, age, and disability and may include practices such as equal pay for equal work and
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non-discrimination in hiring and promotion. For example, a company that has an equality policy that
prohibits discrimination against employees based on their race is promoting equality.
Diversity policy: A diversity policy is a set of principles and practices that an organization follows in
order to promote diversity and inclusion within the workplace. A diversity policy may address issues
such as race, gender, age, and disability and may include practices such as equal opportunity in
hiring and promotion, and providing training and support to diverse employees. For example, a
company that has a diversity policy that promotes the inclusion of people with disabilities in the
workplace is fostering diversity.
Outsourcing: Outsourcing is the process of hiring an external vendor or contractor to perform a
business function or provide a service that is normally carried out in-house. Outsourcing can be used
to reduce costs, access specialized expertise, or increase efficiency. For example, a company that
outsources its IT support to a third-party vendor is engaging in outsourcing.
Labour productivity: Labour productivity refers to the amount of output that is produced per unit of
labour. Labour productivity can be measured by dividing the total output of an organization by the
number of hours worked by its employees. For example, a company that produces $100,000 of
goods in a month with 50 employees working a total of 1,000 hours has a labour productivity of
$100 per hour.
Absenteeism: Absenteeism refers to the rate at which employees are absent from work. High
absenteeism can be costly and disruptive for an organization and may indicate issues with employee
health, morale, or retention. For example, a company that has a high absenteeism rate may need to
review its policies and practices in order to reduce absenteeism.
Workforce planning: Workforce planning is the process of identifying an organization's current and
future workforce needs and developing strategies to meet those needs. Workforce planning can
involve activities such as analyzing current workforce demographics, forecasting future workforce
requirements, and identifying skills gaps. For example, a company that engages in workforce
planning may identify the need to hire more employees with expertise in a particular area in order
to meet future demand.
Workforce audit: A workforce audit is an assessment of an organization's workforce in order to
identify strengths, weaknesses, and opportunities for improvement. A workforce audit may involve
activities such as analyzing workforce data, conducting employee surveys, and reviewing current
policies and practices. For example, a company that conducts a workforce audit may identify
opportunities to improve employee engagement or to increase diversity within the workforce.
Development of employees: The development of employees refers to the process of providing
employees with the skills and knowledge they need to grow and advance in their careers. Employee
development can take various forms, such as training, coaching, and mentorship, and can be
provided by the organization or by external trainers. For example, a company that provides its
employees with a tuition reimbursement program for professional development courses is engaging
in the development of employees.
Employee contract: An employee contract is a legal agreement between an employee and an
employer that outlines the terms and conditions of employment. An employee contract can include
details such as the employee's job duties, salary, benefits, and working hours. For example, a
company that provides its employees with a written contract that outlines their job duties and
benefits is using an employee contract.
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27. Flexible working: Flexible working refers to work arrangements that allow employees to have some
control over their work schedule and location. Flexible working can take various forms, such as parttime work, telecommuting, and flexible hours, and can help employees balance their work and
personal responsibilities. For example, a company that allows its employees to work from home one
day a week is offering flexible working.
28. Teleworking: Teleworking, also known as remote work or telecommuting, refers to the practice of
working from a location outside of the office, typically using communication and information
technologies. Teleworking can allow employees to have greater flexibility and control over their
work environment and can also help organizations reduce costs and increase productivity. For
example, a company that allows its customer service representatives to work from home is engaging
in teleworking.
29. Job sharing: Job sharing is a work arrangement in which two or more employees share the
responsibilities and duties of a single full-time position. Job sharing can allow employees to have a
better work-life balance and can also provide organizations with a way to retain valued employees
who may not be able to work full-time. For example, a company that allows two employees to share
a full-time marketing position is engaging in job sharing.
30. Sabbatical periods: A sabbatical period is a period of time during which an employee takes a break
from work, typically for the purpose of professional or personal development. Sabbatical periods
can be unpaid or partially paid and can be granted by the employer or taken by the employee with
the employer's permission. For example, a company that allows an employee to take a six-month
sabbatical to pursue further education is offering a sabbatical period.
31. Industrial actions: Industrial actions are actions taken by workers or trade unions to protest or
improve working conditions or pay. Industrial actions can include strikes, boycotts, and other forms
of protest. For example, a group of workers who go on strike to protest low pay are engaging in an
industrial action.
32. Work to rule: Work to rule is a form of industrial action in which employees follow all rules and
regulations to the letter in order to slow down work and protest working conditions or pay. Work to
rule can involve activities such as strictly adhering to break times and refusing to work overtime. For
example, a group of employees who follow all rules and regulations to the letter in order to protest
low pay are engaging in work to rule.
33. Overtime bans: An overtime ban is a form of industrial action in which employees refuse to work
overtime in order to protest working conditions or pay. Overtime bans can be partial, in which
employees only refuse to work certain types of overtime, or complete, in which employees refuse to
work any overtime. For example, a group of employees who refuse to work overtime to protest low
pay are engaging in an overtime ban.
34. Strike actions: A strike is a form of industrial action in which employees stop work in order to
protest working conditions or pay. Strikes can be partial, in which only some employees stop work,
or complete, in which all employees stop work. For example, a group of employees who stop work
to protest low pay are engaging in a strike action.
35. No strike agreement: A no strike agreement is a legally binding agreement between an employer
and a trade union that prohibits employees from engaging in strikes. No strike agreements are often
included in collective bargaining agreements and can be used to provide stability and avoid
disruption to business operations. For example, a company that has a no strike agreement with its
unionized employees is committed to avoiding strikes.
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36. Motivation: Motivation is the psychological force that drives individuals to act in order to achieve a
goal. Motivation can be intrinsic, meaning it comes from within the individual, or extrinsic, meaning
it comes from external factors such as rewards or incentives. For example, an employee who is
motivated by a desire to learn new skills may be more likely to take on additional responsibilities at
work.
37. Demotivation: Demotivation is the opposite of motivation, and refers to a lack of desire or
inclination to act. Demotivation can be caused by a variety of factors, such as a lack of meaningful
work, low pay, or a negative work environment. For example, an employee who is demotivated due
to a lack of recognition for their work may be less likely to go above and beyond in their job duties.
38. Work measurement: Work measurement is the process of determining how long it takes to perform
a particular task or job. Work measurement can be used to improve efficiency, identify bottlenecks,
and set performance standards. For example, a company that measures the time it takes to
complete an order from start to finish may be able to identify opportunities to streamline the
process.
39. Method study: Method study is the process of analyzing and improving work processes in order to
increase efficiency and productivity. Method study involves identifying and analyzing the steps in a
process, identifying any bottlenecks or inefficiencies, and suggesting improvements. For example, a
company that conducts a method study on its manufacturing process may be able to identify
opportunities to reduce waste and increase output.
40. Hawthorne effect refers to the phenomenon in which individuals alter their behavior due to being
observed or studied. For example, if a group of workers are being studied to see how their
productivity is affected by different lighting conditions, the workers may work harder simply
because they know they are being observed. This can affect the results of the study, as the
improvement in productivity may not be due to the lighting conditions, but rather to the fact that
the workers are being observed.
41. Physical needs refer to the basic needs that a person must meet in order to survive, such as food,
water, and shelter.
42. Job safety needs refer to the need for a safe and secure work environment. This includes things like
proper training, protective equipment, and clear guidelines for how to safely perform job tasks.
43. Social needs refer to the need for social interaction and relationships with others. This includes
things like the need for friendship, love, and a sense of belonging.
44. Esteem needs refer to the need for self-esteem and respect from others. These can be divided into
internal esteem needs (which refer to self-esteem and self-respect) and external esteem needs
(which refer to the respect and admiration of others).
45. Self-actualization refers to the highest level of Maslow's hierarchy of needs, and refers to the need
to reach one's full potential and to achieve personal growth and fulfillment. It is the drive to become
the best version of oneself and to achieve one's goals and aspirations.
46. Hygiene factors are factors that are necessary to prevent dissatisfaction in the workplace, but do
not necessarily lead to motivation or satisfaction. According to the Herzberg theory of motivation,
hygiene factors include things like salary, working conditions, and company policies. For example, if
an employee is dissatisfied with their salary, they may become demotivated and less productive.
47. Motivators, are factors that lead to motivation and satisfaction in the workplace. According to the
Herzberg theory, motivators include things like achievement, recognition, and responsibility. For
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example, an employee who is given the opportunity to take on additional responsibilities and is
recognized for their contributions may feel motivated and satisfied in their work.
Achievement motivation refers to an individual's desire to achieve success and to excel in their
work. According to the McClelland theory of motivation, individuals with high levels of achievement
motivation tend to seek out challenges and opportunities for personal growth, and are motivated by
the prospect of success and accomplishment.
Affiliation motivation refers to an individual's desire to form and maintain social relationships.
According to the McClelland theory, individuals with high levels of affiliation motivation tend to be
more sensitive to social cues and value being part of a team or group.
Valence, in the Vroom theory of motivation, refers to the value or importance that an individual
places on a particular outcome. For example, an individual may place a high value on being
promoted to a managerial position, while another individual may place a low value on the same
outcome.
Expectancy, in the Vroom theory, refers to the individual's belief that their efforts will lead to a
particular outcome. For example, an employee who believes that their hard work will be recognized
and rewarded by their employer may be more motivated to put in extra effort.
Instrumentality, in the Vroom theory, refers to the belief that a particular outcome will lead to a
desired result. For example, an employee who believes that being promoted to a managerial
position will lead to increased pay and responsibilities may be more motivated to work towards that
goal.
Salary is a regular payment made by an employer to an employee, typically on a monthly or
biweekly basis, in exchange for their work. A salary is usually based on the employee's job title, level
of experience, and education. For example, a teacher with a master's degree might have a higher
salary than a teacher with a bachelor's degree.
Piece rate is a system of pay in which an employee is paid a certain amount for each unit of work
that they complete. For example, a worker in a factory might be paid a certain amount for each
widget they produce.
Time-based pay is a system in which an employee is paid based on the amount of time that they
work. This could be an hourly wage, in which the employee is paid a certain amount for each hour
that they work, or a salary, in which the employee is paid a fixed amount each month regardless of
the number of hours worked.
Wage rate is the amount of money that an employee is paid per unit of time. For example, an
employee who is paid an hourly wage of $20 per hour is earning a wage rate of $20 per hour.
Increment is a raise in salary or wage rate that is given to an employee as a result of their job
performance or length of service.
Bonus is a financial reward that is given to an employee in addition to their regular salary or wage.
Bonuses can be based on individual or company performance and are often given around the
holidays or at the end of the fiscal year.
Commission is a payment that is made to an employee based on the sales that they make. For
example, a salesperson who works on commission might receive a percentage of each sale that they
make.
Performance-related pay is a system of pay in which an employee's salary or wage is based on their
job performance. This could include things like meeting sales targets or meeting certain productivity
goals.
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61. Profit sharing is a system in which a portion of a company's profits are distributed among its
employees. This can be based on the employee's contribution to the company's profits or on their
length of service.
62. Fringe benefits are additional perks or benefits that are given to employees in addition to their
salary or wages. These can include things like health insurance, retirement plans, and paid time off.
63. Shared ownership is a system in which employees are given ownership stakes in the company for
which they work. This can include things like stock options or employee stock ownership plans
(ESOPs).
64. Job enlargement refers to the practice of giving an employee more tasks or responsibilities within
their current job role. For example, if an employee is responsible for assembling one part of a
product, job enlargement might involve giving them additional tasks such as packaging and shipping
the finished product. The goal of job enlargement is to increase an employee's sense of
accomplishment and to make their job more interesting.
65. Job enrichment is similar to job enlargement, but goes a step further by giving employees more
control and autonomy in their work. This might involve giving them the ability to make decisions or
to take on additional challenges and responsibilities. The goal of job enrichment is to increase an
employee's sense of ownership and responsibility, and to increase their job satisfaction and
motivation.
66. Job rotation is the practice of moving employees from one job to another within the organization.
This can be done to give employees exposure to different tasks and responsibilities, to provide them
with new challenges, or to help them develop new skills.
67. Job redesign is the process of changing the way a job is structured or performed in order to make it
more efficient, effective, or satisfying. This could involve changing the tasks that an employee is
responsible for, the way that they are performed, or the tools and resources that are used.
68. Delegation is the practice of assigning tasks or responsibilities to others, usually to employees at a
lower level in the organization. This can be done to allow employees to develop new skills, to free
up time for more important tasks, or to improve efficiency.
69. Employee involvement refers to the practice of involving employees in decision-making and
problem-solving within the organization. This can be done through things like participative
management, suggestion programs, and quality circles.
70. Empowerment is the practice of giving employees the authority and resources to make decisions
and take actions in their work. This can include things like allowing employees to make decisions
about how their work is performed, or giving them the authority to solve problems or resolve
customer issues.
71. Team working refers to the practice of organizing work around teams or groups, rather than
individual employees. This can involve employees from different departments or levels of the
organization working together towards a common goal.
72. Quality circles are small groups of employees who meet regularly to discuss and identify ways to
improve quality, efficiency, and other aspects of their work. The goal of quality circles is to involve
employees in continuous improvement efforts and to encourage their participation in decisionmaking.
73. Worker participation refers to the involvement of employees in decision-making and problemsolving within the organization. This can take a variety of forms, such as participation in quality
circles, suggestion programs, or employee involvement committees. The goal of worker
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participation is to involve employees in the decision-making process and to encourage their
engagement and commitment to the organization.
Non-financial motivators are factors that can motivate employees beyond financial rewards or
incentives. These can include things like recognition, responsibility, personal growth, and the
opportunity to make a positive impact. For example, an employee who is recognized for their
contributions or given the opportunity to take on additional responsibilities may feel motivated and
satisfied in their work.
Financial motivators are factors that are related to an employee's financial well-being, such as
salary, bonuses, and benefits. These can be effective motivators for employees, especially when
they are tied to performance or achievement.
Leadership is the process of guiding and directing the activities of a group or organization. There are
several different leadership styles, including:
Autocratic leadership: This style involves a leader who makes decisions without seeking input from
others and who exerts a high level of control over their team.
Democratic leadership: This style involves a leader who encourages participation and collaboration
among team members and who makes decisions based on the input of the group.
Paternalistic leadership: This style involves a leader who takes a more nurturing and protective
approach to leading their team, and who makes decisions based on what they believe is best for the
team.
Laissez-faire leadership: This style involves a leader who takes a hands-off approach to leading their
team and who gives team members a high level of autonomy and freedom in their work.
Formal leader is a person who has been formally designated as a leader, such as a manager or
supervisor. They have the authority to make decisions and to direct the activities of their team or
organization.
Informal leader is a person who emerges as a leader within a group or organization due to their
influence or charisma, but who may not have a formal leadership role. Informal leaders may not
have the same level of authority as formal leaders, but they can still have a significant impact on the
direction and functioning of the group.
Interpersonal roles refer to the ways in which leaders interact with and influence others. According
to the concept of leadership roles developed by Henry Mintzberg, there are several different
interpersonal roles that leaders may play:
Figure head: This role involves representing the organization and serving as a symbol of authority.
Liaison: This role involves building relationships with other groups or individuals and serving as a link
between different parts of the organization.
Leader: This role involves setting direction and guiding the activities of the team or organization.
Informational roles refer to the ways in which leaders gather and disseminate information.
According to Mintzberg, there are several different informational roles that leaders may play:
Disseminator: This role involves receiving and passing on information to others within the
organization.
Spokesperson: This role involves communicating information about the organization to external
stakeholders, such as the media or customers.
Decision-making roles refer to the ways in which leaders make decisions and solve problems.
According to Mintzberg, there are several different decision-making roles that leaders may play:
Entrepreneur: This role involves identifying and pursuing new opportunities for the organization.
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92. Disturbance handler: This role involves dealing with conflicts or problems within the organization
and finding solutions.
93. Theory X managers assume that employees are inherently unmotivated and need to be controlled
and motivated through punishment and rewards.
94. Theory Y managers, on the other hand, assume that employees are naturally motivated and capable
of self-direction, and focus on creating an environment that supports and empowers employees.
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UNIT 3 – MARKETING
1. Marketing: Marketing is the process of creating, communicating, delivering, and exchanging
offerings that have value for customers, clients, and society at large. Marketing involves activities
such as research, advertising, and sales and is used to attract and retain customers and to build
relationships with them. For example, a company that engages in marketing activities such as
creating a brand, developing a website, and conducting market research is engaged in marketing.
2. Marketing strategy: A marketing strategy is a plan that outlines the actions an organization will take
in order to achieve its marketing objectives. A marketing strategy may include activities such as
identifying target markets, developing a brand, and creating promotional campaigns. For example, a
company that develops a marketing strategy to target young adults and uses social media
advertising and influencer marketing as part of its campaign is implementing a marketing strategy.
3. Demand: Demand refers to the desire for a particular product or service, as well as the ability and
willingness to pay for it. Demand is influenced by factors such as price, income, and the availability
of substitutes. For example, if the price of a particular product increases, demand for that product
may decrease.
4. Supply: Supply refers to the quantity of a particular product or service that is available for sale.
Supply is influenced by factors such as production costs, the number of suppliers, and the availability
of raw materials. For example, if the cost of producing a particular product increases, the supply of
that product may decrease.
5. Equilibrium price: Equilibrium price is the price at which the quantity of a product demanded by
consumers is equal to the quantity of the product supplied by producers. At equilibrium price, there
is no excess supply or demand for the product and the market is in balance. For example, if the
equilibrium price for a particular product is $10, and the price is set at $8, there will be excess
demand for the product and a shortage will occur.
6. Industrial market: An industrial market is a market that consists of organizations that buy goods and
services for use in the production of other goods and services. Industrial markets are typically made
up of manufacturers, wholesalers, and other business-to-business (B2B) buyers. For example, a
company that sells industrial equipment to manufacturers is operating in the industrial market.
7. Consumer market: A consumer market is a market that consists of individuals or households that
buy goods and services for personal consumption. Consumer markets are typically made up of retail
buyers and are influenced by factors such as income, demographics, and lifestyle. For example, a
company that sells clothing to consumers is operating in the consumer market.
8. Local market: A local market is a market that is confined to a specific geographic area, such as a city
or region. Local markets are typically smaller in size than national or international markets and may
be influenced by local factors such as culture, customs, and competition. For example, a company
that sells products only in a particular city is operating in a local market.
9. National market: A national market is a market that spans across a country. National markets are
typically larger in size than local markets and may be influenced by national factors such as
economic conditions, regulations, and competition. For example, a company that sells products
across the United States is operating in a national market.
10. International market: An international market is a market that spans across multiple countries.
International markets are typically the largest in size and may be influenced by global factors such as
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economic conditions, cultural differences, and political risks. For example, a company that sells
products in multiple countries around the world is operating in an international market.
Customer orientation: Customer orientation is a business philosophy that focuses on understanding
and meeting the needs and preferences of customers. Companies that are customer-oriented may
prioritize customer satisfaction and loyalty and may use customer feedback and data to inform
decision-making. For example, a company that regularly surveys its customers to gather feedback
and uses that feedback to improve its products and services is customer-oriented.
Product orientation: Product orientation is a business philosophy that focuses on the quality and
features of a product. Companies that are product-oriented may prioritize product development
and innovation and may place less emphasis on customer needs and preferences. For example, a
company that spends a significant portion of its budget on research and development and focuses
on creating high-quality products is product-oriented.
Market growth: Market growth refers to the increase in the size of a market over a period of time.
Market growth can be measured by the volume of sales or the number of customers in a market and
can be influenced by factors such as population growth, economic conditions, and technological
changes. For example, if a market grows by 10% over the course of a year, it is experiencing market
growth.
Market share: Market share is the percentage of total sales in a market that is captured by a
particular company or product. Market share can be used to measure a company's competitiveness
and can be influenced by factors such as pricing, marketing, and product quality. For example, if a
company has a market share of 25% in a particular market, it means that 25% of all sales in that
market are attributed to that company.
Market size: Market size refers to the total number of potential customers or the total value of sales
in a market. Market size can be used to gauge the potential of a market and can be influenced by
factors such as population, income, and demand. For example, if a market has a size of $100 million,
it means that the total value of sales in that market is $100 million.
Consumer products: Consumer products are goods and services that are purchased by individuals or
households for personal consumption. Consumer products can be classified as convenience goods,
shopping goods, specialty goods, or unsought goods, depending on the level of involvement and the
decision-making process required to purchase them. For example, food, clothing, and electronics are
all examples of consumer products.
Industrial products: Industrial products are goods and services that are purchased by organizations
for use in the production of other goods and services. Industrial products can include raw materials,
component parts, and capital equipment and can be classified as capital goods, intermediate goods,
or maintenance, repair, and operating (MRO) goods, depending on their intended use. For example,
steel, machine tools, and industrial lighting are all examples of industrial products.
Consumer marketing: Consumer marketing is a type of marketing that focuses on promoting and
selling products and services to individuals or households for personal consumption. Consumer
marketing involves activities such as advertising, branding, and market research and is used to
attract and retain customers. For example, a company that engages in consumer marketing activities
such as creating a brand, developing a website, and conducting market research is engaged in
consumer marketing.
Industrial marketing: Industrial marketing is a type of marketing that focuses on promoting and
selling products and services to organizations for use in the production of other goods and services.
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Industrial marketing involves activities such as account management, technical support, and market
research and is used to build relationships with business customers. For example, a company that
engages in industrial marketing activities such as providing technical assistance and training to its
customers is engaged in industrial marketing.
Mass marketing: Mass marketing is a marketing strategy that involves targeting a large,
undifferentiated market with a single product or message. Mass marketing is used to reach a broad
audience and can involve activities such as advertising, sales promotions, and public relations. For
example, a company that uses mass marketing techniques such as television advertising and coupon
promotions is engaging in mass marketing.
Niche marketing: Niche marketing is a marketing strategy that involves targeting a specific, narrow
market with a specialized product or message. Niche marketing is used to reach a specific, welldefined audience and can involve activities such as advertising, social media marketing, and content
marketing. For example, a company that uses niche marketing techniques such as targeted email
campaigns and social media advertising is engaging in niche marketing.
Market segment: A market segment is a group of consumers with similar characteristics or needs
that can be targeted with a specific product or marketing message. Market segments can be
identified using factors such as demographics, behaviors, and needs. For example, a market
segment composed of young professionals who are interested in fitness may be targeted with a gym
membership or fitness apparel.
Market segmentation: Market segmentation is the process of dividing a market into smaller, more
defined groups of consumers with similar characteristics or needs. Market segmentation can be
used to tailor marketing efforts and create more targeted and effective campaigns. For example, a
company that segments its market based on age, income, and lifestyle may be able to create more
targeted marketing campaigns that are more likely to be successful.
Customer relationship management: Customer relationship management (CRM) is the practice of
managing and optimizing interactions with current and potential customers. CRM involves activities
such as customer service, sales, and marketing and can be used to improve customer loyalty,
retention, and satisfaction. For example, a company that uses CRM tools such as a customer
database and a customer service platform is engaged in customer relationship management.
Targeted market: A targeted market is a specific group of consumers that an organization is trying
to reach with its products or services. Targeted markets are identified using market segmentation
techniques and can be based on factors such as demographics, behaviors, and needs. For example, a
company that is targeting young professionals who are interested in fitness may offer gym
memberships or fitness apparel.
Market research: Market research is the process of gathering and analyzing information about a
particular market or industry. Market research can be used to identify trends, understand customer
needs and preferences, and assess the competitiveness of a market. For example, a company that
conducts market research to understand the size and composition of a particular market may be
able to identify opportunities for growth.
New product development: New product development is the process of creating and launching new
products or services. New product development can involve activities such as market research,
product design, and testing and is used to bring new products to market. For example, a company
that is engaged in new product development may conduct market research to identify customer
needs, design a product that meets those needs, and test the product to ensure it is of high quality.
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28. Primary research: Primary research is research that is conducted by an organization itself, rather
than using data that has already been collected by others. Primary research can involve activities
such as surveys, focus groups, and interviews and is used to gather first-hand information about a
particular topic. For example, a company that conducts a survey to gather customer feedback about
a new product is engaging in primary research.
29. Secondary research: Secondary research is research that uses data that has already been collected
by someone else. Secondary research can involve activities such as reviewing existing research
studies, analyzing data from government or industry sources, and reviewing trade publications. For
example, a company that reviews existing research studies to understand consumer behavior in a
particular market is engaging in secondary research.
30. Big data: Big data refers to large sets of structured and unstructured data that can be analyzed to
reveal patterns, trends, and associations. Big data can be used to improve decision-making and gain
insights into customer behavior and market trends. For example, a company that uses big data
analytics to understand customer preferences and purchasing habits may be able to improve its
marketing efforts and target its products more effectively.
31. Qualitative data: Qualitative data is data that is descriptive and can be difficult to quantify or
measure. Qualitative data can include information such as opinions, attitudes, beliefs, and behaviors
and is often collected using methods such as interviews, focus groups, and open-ended surveys. For
example, a company that conducts interviews with customers to gather feedback about a new
product is collecting qualitative data.
32. Quantitative data: Quantitative data is data that is numerical and can be easily measured and
analyzed. Quantitative data can include information such as counts, amounts, and percentages and
is often collected using methods such as closed-ended surveys, experiments, and online tracking.
For example, a company that conducts a survey to gather information about customer spending
habits is collecting quantitative data.
33. Questionnaire: A questionnaire is a research tool that consists of a set of questions that are used to
gather information from a sample of individuals. Questionnaires can be administered in a variety of
ways, including online, in person, or by mail, and can be used to collect both qualitative and
quantitative data. For example, a company that conducts a survey to gather customer feedback
about a new product may use a questionnaire as part of its research.
34. Interviews: Interviews are a research method that involves asking questions and gathering
information from a sample of individuals through face-to-face, telephone, or online communication.
Interviews can be structured, with a set of predetermined questions, or unstructured, with more
open-ended questions, and can be used to collect both qualitative and quantitative data. For
example, a company that conducts in-depth interviews with customers to gather detailed feedback
about a new product is using interviews as a research method.
35. Observation: Observation is a research method that involves watching and recording the behavior
of individuals or groups in a natural setting. Observation can be either participative, where the
researcher becomes involved in the activity being observed, or non-participative, where the
researcher remains a passive observer. Observation is often used to collect qualitative data and can
be a useful tool for understanding behavior in context. For example, a company that observes
customer behavior in a store to understand purchasing patterns is using observation as a research
method.
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36. Test marketing: Test marketing is a research method that involves introducing a new product or
service in a limited geographic area to test its appeal and feasibility. Test marketing can involve
activities such as market research, advertising, and sales and is used to gather information about
consumer response and to identify any issues or challenges before launching the product more
widely. For example, a company that conducts test marketing to gather customer feedback about a
new product before launching it nationally is using test marketing as a research method.
37. Focus groups: Focus groups are a research method that involves gathering a small, diverse group of
individuals to discuss and provide feedback on a particular topic or product. Focus groups can be
conducted in person or online and are often used to collect qualitative data. For example, a
company that conducts focus groups to gather customer feedback about a new product is using
focus groups as a research method.
38. Sampling: Sampling is the process of selecting a portion of a population to represent the entire
population in research. Sampling is used to reduce the time and cost of research and to gather data
that is representative of the population. There are various sampling methods, including random
sampling, stratified sampling, and cluster sampling, which can be used depending on the research
question and the characteristics of the population. For example, a company that conducts a survey
to gather customer feedback about a new product may use a random sampling method to select a
representative sample of customers from its customer database.
39. Arithmetic mean: The arithmetic mean, also known as the average, is a measure of central tendency
that is calculated by summing all the values in a dataset and dividing by the number of values. The
arithmetic mean is often used to summarize a dataset and can be influenced by extreme values or
outliers. For example, if a company has sales of $100, $200, and $300 in a particular month, the
arithmetic mean is calculated by summing the values and dividing by 3, resulting in an average of
$200.
40. Median: The median is a measure of central tendency that is calculated by arranging all the values in
a dataset in numerical order and selecting the value in the middle. The median is often used to
summarize a dataset and is less influenced by extreme values or outliers than the arithmetic mean.
For example, if a company has sales of $100, $200, and $300 in a particular month, the median is
the value in the middle, which is $200.
41. Mode: The mode is a measure of central tendency that is calculated by identifying the value that
occurs most frequently in a dataset. The mode is often used to summarize a dataset and can be used
with datasets that have both numerical and categorical data. For example, if a company has sales of
$100, $200, and $300 in a particular month, the mode is the value that occurs most frequently,
which is $200.
42. Tables: Tables are a visual representation of data that consists of rows and columns. Tables can be
used to organize and display data in a clear and concise manner and can be used to compare and
contrast different data points. For example, a company that uses a table to display the sales of its
products in different regions may be able to identify trends and patterns in sales data.
43. Pie chart: A pie chart is a visual representation of data that displays the proportions of different data
points as slices of a pie. Pie charts are often used to show the relative sizes of different data points
and can be useful for comparing proportions. For example, a company that uses a pie chart to
display the sales of its products in different regions may be able to identify which regions contribute
the most to overall sales.
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44. Bar chart: A bar chart is a visual representation of data that displays the values of different data
points as bars. Bar charts are often used to compare the magnitude of different data points and can
be useful for identifying trends and patterns. For example, a company that uses a bar chart to
display the sales of its products in different regions may be able to identify which regions have the
highest sales.
45. Line chart: A line chart is a visual representation of data that displays the values of different data
points as a line. Line charts are often used to show trends and patterns over time and can be useful
for identifying trends and forecasting future values. For example, a company that uses a line chart to
display the sales of its products over time may be able to identify trends in sales and forecast future
sales.
46. Marketing mix: The marketing mix is a concept that refers to the combination of marketing
strategies and tactics that are used to promote and sell products or services. The marketing mix is
often referred to as the "4Ps" and includes product, price, promotion, and place. For example, a
company that is developing a marketing mix for a new product may consider the features of the
product, the price at which it will be sold, the promotions and advertising that will be used to
promote it, and the channels through which it will be sold.
47. Tangible attributes: Tangible attributes are physical characteristics of a product or service that can
be seen, touched, or experienced. Tangible attributes can include features such as size, shape, color,
and texture and are important for creating a product's appearance and appeal. For example, the
tangible attributes of a smartphone may include its screen size, battery life, and operating system.
48. Intangible attributes: Intangible attributes are non-physical characteristics of a product or service
that cannot be seen or touched, but that can be experienced or perceived. Intangible attributes can
include elements such as brand image, customer service, and reputation and are important for
creating a product's value and appeal. For example, the intangible attributes of a smartphone may
include its brand reputation, user experience, and customer service.
49. Product differentiation: Product differentiation is the process of creating unique and distinct
characteristics for a product or service that set it apart from its competitors. Product differentiation
can be based on tangible or intangible attributes and is used to create a competitive advantage and
increase customer loyalty. For example, a smartphone manufacturer that differentiates its product
based on features such as camera quality, battery life, and design is engaging in product
differentiation.
50. Unique selling point: The unique selling point (USP) is a feature or characteristic of a product or
service that sets it apart from its competitors and is unique to that product or service. The USP is an
important element of a company's marketing strategy and is used to differentiate the product or
service in the market and appeal to a specific customer segment. For example, a smartphone
manufacturer that offers a unique camera feature that is not available on competitors' phones may
use that feature as its USP.
51. Branding: Branding is the process of creating a unique identity and image for a product or company.
Branding can involve elements such as a company's logo, brand name, color scheme, and messaging
and is used to create a recognizable and consistent image in the market. For example, a smartphone
manufacturer that creates a strong brand image through its marketing efforts and customer service
may be able to differentiate its products and build customer loyalty.
52. Product positioning: Product positioning is the process of positioning a product or service in the
market relative to its competitors. Product positioning can be based on factors such as price, quality,
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features, and customer needs and is used to create a unique and desirable image for the product or
service in the mind of the customer. For example, a smartphone manufacturer that positions its
products as high-quality and innovative may be able to differentiate its products and appeal to
customers who value those attributes.
Product portfolio analysis: Product portfolio analysis is the process of evaluating a company's
product offerings in relation to its overall business strategy. Product portfolio analysis can involve
activities such as analyzing the market potential of each product, assessing the resources required to
support the products, and identifying opportunities for growth. For example, a smartphone
manufacturer that conducts a product portfolio analysis may be able to identify opportunities for
new product development and optimize its product mix to maximize profits.
Product life cycle: The product life cycle is the stages that a product goes through from its
introduction to the market to its withdrawal from the market. The product life cycle includes stages
such as development, introduction, growth, maturity, and decline and is used to understand the
evolution of a product in the market and identify opportunities for growth or decline. For example, a
smartphone manufacturer that understands the product life cycle of its products may be able to
anticipate changes in demand and adjust its marketing and production strategies accordingly.
Boston matrix: The Boston matrix, also known as the BCG matrix, is a tool used to analyze a
company's product portfolio and assess its growth potential. The Boston matrix divides a company's
products into four categories based on their market growth rate and market share: stars, cash cows,
dogs, and question marks. The Boston matrix can be used to identify which products should be given
more resources and which products may need to be phased out. For example, a smartphone
manufacturer that uses the Boston matrix to analyze its product portfolio may be able to identify
which products are performing well and which products may need to be reevaluated.
Introductory stage of product life cycle: The introductory stage of the product life cycle is the first
stage of a product's life in the market. During this stage, the product is introduced to the market and
is typically accompanied by marketing efforts to create awareness and generate demand. The
introductory stage is typically characterized by low sales and high marketing and production costs.
For example, a smartphone manufacturer that is launching a new product may incur high marketing
and production costs in the introductory stage as it seeks to create awareness and generate demand
for the product.
Growth stage of product life cycle: The growth stage of the product life cycle is the second stage of
a product's life in the market. During this stage, the product begins to gain traction in the market
and sales begin to increase. The growth stage is typically characterized by increased demand,
increased competition, and increased profitability. For example, a smartphone manufacturer that
has successfully launched a new product and is experiencing increased demand may enter the
growth stage of the product life cycle.
Maturity stage of product life cycle: The maturity stage of the product life cycle is the third stage of
a product's life in the market. During this stage, the product is well established in the market and
sales begin to level off or decline. The maturity stage is typically characterized by intense
competition, lower profitability, and a focus on cost management. For example, a smartphone
manufacturer that has a product that is well established in the market may enter the maturity stage
of the product life cycle.
Decline stage of product life cycle: The decline stage of the product life cycle is the final stage of a
product's life in the market. During this stage, the product experiences declining sales and may be
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phased out or replaced by a new product. The decline stage is typically characterized by reduced
demand, lower profitability, and a focus on reducing costs. For example, a smartphone
manufacturer that has a product that is no longer in demand may enter the decline stage of the
product life cycle.
Extension strategies in product life cycle: Extension strategies are marketing techniques that are
used to extend the life cycle of a product and delay or avoid the decline stage. Extension strategies
can include activities such as introducing new product versions, adding new features, or creating
new marketing campaigns. For example, a smartphone manufacturer that is seeking to extend the
life cycle of a product may introduce a new version of the product with updated features or launch a
new marketing campaign to generate renewed interest in the product.
Balanced product portfolio: A balanced product portfolio is a product mix that consists of a range of
products at different stages of the product life cycle. A balanced product portfolio can help a
company manage risk and achieve a stable stream of profits. For example, a smartphone
manufacturer that has a balanced product portfolio may have products at different stages of the life
cycle, such as a new product in the introductory stage, an established product in the growth stage,
and a mature product in the maturity stage.
Stars in Boston matrix: In the Boston matrix, stars are products that have a high market growth rate
and a high market share. Stars are typically characterized by high profitability and high investment
requirements. For example, a smartphone manufacturer that has a product that is experiencing
rapid market growth and has a high market share may consider that product a star in its product
portfolio.
Cash cows in Boston matrix: In the Boston matrix, cash cows are products that have a low market
growth rate and a high market share. Cash cows are typically characterized by high profitability and
low investment requirements. For example, a smartphone manufacturer that has a product that is
experiencing low market growth but has a high market share may consider that product a cash cow
in its product portfolio.
Problem child in Boston matrix: In the Boston matrix, problem child is a term used to describe
products that have a low market share in a high market growth rate market. Problem child products
may require significant investment in order to achieve market success and may not be as profitable
as other products in the portfolio.
Dogs in Boston matrix: In the Boston matrix, dogs are products that have a low market growth rate
and a low market share. Dogs are typically characterized by low profitability and low investment
requirements. For example, a smartphone manufacturer that has a product that is experiencing low
market growth and has a low market share may consider that product a dog in its product portfolio.
Price elasticity of demand: Price elasticity of demand is a measure of the sensitivity of demand for a
product or service to changes in price. Price elasticity of demand can be elastic, inelastic, or unit
elastic, depending on the degree to which demand changes in response to price changes. For
example, a smartphone manufacturer that increases the price of its products may experience a
decrease in demand if the price elasticity of demand for its products is elastic.
Cost-based methods of pricing: Cost-based methods of pricing involve setting prices based on the
costs of producing and distributing a product or service. Cost-based pricing methods can include
cost-plus pricing, contribution-cost pricing, and break-even analysis. For example, a smartphone
manufacturer that uses a cost-plus pricing method may set prices based on the costs of producing
and distributing its products, plus a markup to cover overhead and profit.
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68. Mark-up pricing: Mark-up pricing is a cost-based pricing method that involves setting prices based
on the costs of producing and distributing a product or service, plus a percentage markup to cover
overhead and profit. For example, a smartphone manufacturer that uses mark-up pricing may set
prices based on the costs of producing and distributing its products, plus a markup of 50% to cover
overhead and profit.
69. Cost-plus pricing: Cost-plus pricing is a cost-based pricing method that involves setting prices based
on the costs of producing and distributing a product or service, plus a fixed dollar amount to cover
overhead and profit. For example, a smartphone manufacturer that uses cost-plus pricing may set
prices based on the costs of producing and distributing its products, plus a $100 markup to cover
overhead and profit.
70. Contribution-cost pricing: Contribution-cost pricing is a cost-based pricing method that involves
setting prices based on the contribution that a product or service makes to covering overhead and
profit. Contribution-cost pricing can be used to optimize pricing for individual products or product
lines. For example, a smartphone manufacturer that uses contribution-cost pricing may set different
prices for different products based on the contribution that each product makes to covering
overhead and profit.
71. Loss leaders pricing strategy: Loss leaders pricing is a pricing strategy that involves setting prices for
certain products or services below cost in order to drive traffic to a store or website. Loss leaders
pricing is often used to generate interest in a product or service and can be used in conjunction with
other pricing strategies. For example, a smartphone manufacturer may use loss leaders pricing to
offer a discounted price on a new product in order to drive traffic to its store or website.
72. Price discrimination: Price discrimination is the practice of charging different prices for the same
product or service to different customers or customer segments. Price discrimination can be based
on factors such as quantity purchased, location, or customer type and is used to maximize profits.
For example, a smartphone manufacturer may use price discrimination to charge higher prices for
its products in countries with higher incomes and lower prices in countries with lower incomes.
73. Dynamic pricing: Dynamic pricing is a pricing strategy that involves setting prices for products or
services based on real-time demand and supply conditions. Dynamic pricing can be used to optimize
pricing and increase profits and is often used in industries with fluctuating demand, such as the
airline and hotel industries. For example, a smartphone manufacturer may use dynamic pricing to
adjust the prices of its products based on real-time demand and supply conditions in the market.
74. Competitor pricing: Competitor pricing is the practice of setting prices based on the prices of
competitors' products or services. Competitor pricing is often used to remain competitive in the
market and can involve activities such as price matching or price undercutting. For example, a
smartphone manufacturer may use competitor pricing to set its prices based on the prices of similar
products offered by its competitors.
75. Penetration pricing: Penetration pricing is a pricing strategy that involves setting low prices for a
product or service in order to rapidly gain market share. Penetration pricing is often used to enter a
new market or to disrupt an existing market and can be used in conjunction with other pricing
strategies. For example, a smartphone manufacturer may use penetration pricing to set low prices
for a new product in order to quickly gain market share.
76. Price skimming: Price skimming is a pricing strategy that involves setting high prices for a product or
service in order to maximize profits from early adopters or high-demand segments. Price skimming
is often used for new or innovative products and can be used in conjunction with other pricing
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strategies. For example, a smartphone manufacturer may use price skimming to set high prices for a
new product in order to maximize profits from early adopters and high-demand segments.
Psychological pricing: Psychological pricing is a pricing strategy that involves setting prices in a way
that uses psychological principles to influence customer perception and behavior. Psychological
pricing techniques can include using odd prices, setting prices at round numbers, or using symbolic
prices. For example, a smartphone manufacturer may use psychological pricing by setting the price
of a product at $299.99 instead of $300 in order to create the perception of a better value for the
customer.
Promotion - marketing mix: Promotion is one of the four elements of the marketing mix, along with
product, price, and place. Promotion refers to the activities and tactics that a company uses to
communicate with and influence its target market. Promotion can include activities such as
advertising, direct promotion, and sales promotion.
Advertising: Advertising is a form of promotion that involves using various media to communicate
information about a product or service to a target audience. Advertising can be paid or unpaid and
can include activities such as print, radio, television, and online advertising. For example, a
smartphone manufacturer may use advertising to promote its products through television
commercials or online ads.
Direct promotion: Direct promotion is a form of promotion that involves direct communication with
a target audience through channels such as email, direct mail, or telemarketing. Direct promotion is
often used to generate leads or sales and can be targeted to specific customer segments. For
example, a smartphone manufacturer may use direct promotion to send emails or direct mail to its
customer database to promote its products.
Sales promotion: Sales promotion is a form of promotion that involves using tactics such as
discounts, coupons, or contests to stimulate demand for a product or service. Sales promotion is
often used to increase short-term sales and can be targeted to specific customer segments. For
example, a smartphone manufacturer may use sales promotion to offer discounts on its products to
students or to promote a contest to win a free product.
Promotion mix: The promotion mix is the combination of promotion tactics that a company uses to
communicate with and influence its target market. The promotion mix can include a variety of
tactics, such as advertising, direct promotion, and sales promotion, and can be customized to meet
the specific needs and goals of a company. For example, a smartphone manufacturer may use a
promotion mix that includes advertising, direct promotion, and sales promotion to effectively reach
and influence its target market.
Informative advertisement: Informative advertisement is a type of advertising that aims to educate
the target audience about a product or service. Informative advertising is often used to introduce
new products or to increase awareness of an existing product or service. For example, a smartphone
manufacturer may use informative advertising to educate customers about the features and
benefits of its products.
Persuasive advertisement: Persuasive advertisement is a type of advertising that aims to convince
the target audience to purchase a product or service. Persuasive advertising often uses emotional
appeals and can be used to increase sales or to establish brand preference. For example, a
smartphone manufacturer may use persuasive advertising to convince customers to choose its
products over those of its competitors.
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85. Advertising agencies: Advertising agencies are companies that specialize in developing and
implementing advertising campaigns for clients. Advertising agencies can provide a range of
services, such as market research, creative development, media planning and buying, and campaign
execution. For example, a smartphone manufacturer may work with an advertising agency to
develop and implement an advertising campaign to promote its products.
86. Guerrilla advertising: Guerrilla advertising is a type of unconventional advertising that aims to
surprise and engage the target audience through unexpected and unconventional tactics. Guerrilla
advertising can include activities such as flash mobs, street art, or unconventional marketing stunts.
For example, a smartphone manufacturer may use guerrilla advertising to create a flash mob event
to promote its products.
87. Sponsorship: Sponsorship is a form of promotion that involves a company providing financial or
other support to an event or activity in exchange for the opportunity to promote its products or
services. Sponsorship can be an effective way for a company to reach its target market and can take
many forms, such as sponsoring a sports team or event. For example, a smartphone manufacturer
may sponsor a music festival to promote its products to a large and targeted audience.
88. Digital advertising: Digital advertising is a form of advertising that uses digital channels to reach and
influence its target audience. Digital advertising can include activities such as search engine
advertising, social media advertising, and mobile advertising. For example, a smartphone
manufacturer may use digital advertising to promote its products through targeted ads on social
media platforms or through search engine advertising on Google.
89. Telemarketing: Telemarketing is a form of direct promotion that involves using the telephone to
communicate with potential customers. Telemarketing can be used to generate leads, make sales,
or provide customer service and support. For example, a smartphone manufacturer may use
telemarketing to call potential customers to promote its products or to provide customer support
for its existing customers.
90. Personal selling: Personal selling is a form of promotion that involves face-to-face communication
between a salesperson and a potential customer. Personal selling can be used to generate leads,
make sales, or build relationships with customers. For example, a smartphone manufacturer may
use personal selling to train its sales staff on how to effectively promote its products to customers.
91. Digital promotion: Digital promotion is a form of promotion that uses digital channels and tactics to
reach and influence its target audience. Digital promotion can include activities such as email
marketing, social media marketing, and search engine optimization. For example, a smartphone
manufacturer may use digital promotion to reach its target audience through targeted email
campaigns or through social media marketing on platforms such as Facebook or Instagram.
92. Search engine optimization (SEO): Search engine optimization (SEO) is a digital promotion tactic
that involves optimizing a website or online content to rank higher in search engine results. SEO can
help a company improve its visibility online and attract more qualified traffic to its website. For
example, a smartphone manufacturer may use SEO to optimize its website and online content to
rank higher in search engine results for relevant keywords and phrases
93. Viral marketing: Viral marketing is a digital promotion tactic that involves creating content or
campaigns that are designed to be shared and spread quickly through social media and other online
channels. Viral marketing can be an effective way to quickly reach and influence a large audience
and can be used in conjunction with other promotion tactics. For example, a smartphone
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manufacturer may use viral marketing to create a social media campaign that encourages customers
to share and spread the campaign to their friends and followers.
Packaging: Packaging is the physical and visual elements that surround a product, including the
container, label, and any accompanying materials. Packaging can serve a number of purposes, such
as protecting the product, providing information about the product, and helping to differentiate it
from competitors. For example, a smartphone manufacturer may use packaging to protect its
products during shipping and to provide information about the features and benefits of its products
to customers.
Channel of distribution: A channel of distribution is the route that a product or service takes to
reach its final destination. Channels of distribution can involve intermediaries such as wholesalers,
retailers, or distributors, and can be physical or digital. For example, a smartphone manufacturer
may use a channel of distribution that includes wholesalers, retailers, and distributors to reach its
target market.
Intermediaries - channel of distribution: Intermediaries are entities that play a role in a channel of
distribution by facilitating the movement of a product or service from the producer to the final
destination. Intermediaries can include wholesalers, retailers, and distributors, and can provide a
range of services such as storage, transportation, and marketing. For example, a smartphone
manufacturer may use intermediaries such as wholesalers and retailers to reach its target market
through a channel of distribution.
Digital distribution - channel of distribution: Digital distribution is a channel of distribution that
involves the use of digital channels to deliver products or services to customers. Digital distribution
can include activities such as online sales or digital downloads and can be an effective way to reach
a global market. For example, a smartphone manufacturer may use digital distribution to sell its
products online or to offer digital downloads of its products.
Physical distribution - channel of distribution: Physical distribution is a channel of distribution that
involves the use of physical channels to deliver products or services to customers. Physical
distribution can include activities such as transportation and warehousing and can be used to reach
a local, national, or international market. For example, a smartphone manufacturer may use
physical distribution to ship its products to retailers or to set up its own stores to sell its products
directly to customers.
Integrated marketing mix: The integrated marketing mix is the combination of marketing tactics
and strategies that a company uses to reach and influence its target market. The integrated
marketing mix can include elements such as product, price, promotion, and place and can be
customized to meet the specific needs and goals of a company. For example, a smartphone
manufacturer may use an integrated marketing mix that includes advertising, social media
marketing, and personal selling to effectively reach and influence its target market.
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UNIT 4 – OPERATIONS MANAGEMENT
1. Transformation process: The transformation process is the process of converting raw materials or
inputs into finished products or services. The transformation process can take many forms and can
involve a range of activities such as manufacturing, assembly, or service provision. For example, a
smartphone manufacturer may use a transformation process that includes activities such as
component assembly, testing, and packaging to produce its smartphones.
2. Added value: Added value is the value that a company adds to its products or services through the
transformation process. Added value can be measured as the difference between the cost of the
inputs used in the transformation process and the final selling price of the product or service. For
example, a smartphone manufacturer may add value to its products through the transformation
process by incorporating high-quality components, adding features, and packaging the products in a
way that appeals to customers.
3. Effective process: An effective process is a process that achieves the desired results or outcomes. An
effective process can be evaluated by measuring how well it meets the needs and expectations of its
customers or stakeholders. For example, a smartphone manufacturer may consider its
transformation process to be effective if it produces high-quality smartphones that meet the needs
and expectations of its customers.
4. Efficient process: An efficient process is a process that uses resources effectively and efficiently to
produce the desired results or outcomes. An efficient process can be evaluated by measuring how
well it uses resources such as time, money, and materials to produce the desired results. For
example, a smartphone manufacturer may consider its transformation process to be efficient if it
uses resources effectively and efficiently to produce high-quality smartphones.
5. Productivity: Productivity is a measure of how efficiently a company produces goods or services.
Productivity can be evaluated by measuring the output of a company in relation to the inputs used
in the production process. For example, a smartphone manufacturer may measure its productivity
by calculating the number of smartphones produced per unit of time or per unit of input.
6. Efficiency: Efficiency is a measure of how well a company uses its resources to produce goods or
services. Efficiency can be evaluated by comparing the inputs used in the production process to the
output produced. For example, a smartphone manufacturer may measure its efficiency by
comparing the number of smartphones produced to the amount of materials, labour, and other
resources used to produce them.
7. Effectiveness: Effectiveness is a measure of how well a company meets the needs and expectations
of its customers or stakeholders. Effectiveness can be evaluated by measuring how well a company's
products or services meet the needs and expectations of its customers or stakeholders. For
example, a smartphone manufacturer may measure its effectiveness by evaluating customer
satisfaction with its products.
8. Labour intensive: A labour intensive process is a process that relies heavily on the use of human
labour to produce goods or services. Labour intensive processes can be characterized by a high level
of manual labour and a low level of automation. For example, a smartphone manufacturer may use
a labour intensive process to produce its smartphones if it relies heavily on manual assembly and
testing.
9. Capital intensive: A capital intensive process is a process that relies heavily on the use of capital
resources such as machinery and equipment to produce goods or services. Capital intensive
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10.
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12.
13.
14.
15.
16.
17.
processes can be characterized by a high level of automation and a low level of manual labour. For
example, a smartphone manufacturer may use a capital intensive process to produce its
smartphones if it relies heavily on automated assembly and testing equipment.
Specialization: Specialization is the process of focusing on a specific product or service and
developing expertise in that area. Specialization can help a company to become more efficient and
effective in its operations and can also help it to differentiate itself from competitors. For example, a
smartphone manufacturer may specialize in producing smartphones with high-end camera features,
which could help it to become more efficient and effective in producing those products and
differentiate itself from other smartphone manufacturers.
Flexibility in operation: Flexibility in operation is the ability of a company to adapt to changing
circumstances or customer needs. A company that has flexibility in its operations can respond
quickly to changes in the market or customer demand, which can help it to remain competitive and
successful. For example, a smartphone manufacturer may have flexibility in its operations if it can
quickly adapt to changing customer preferences or market trends.
Process innovation: Process innovation is the development of new or improved processes for
producing goods or services. Process innovation can help a company to become more efficient and
effective in its operations and can also help it to differentiate itself from competitors. For example, a
smartphone manufacturer may engage in process innovation by developing a new manufacturing
process that reduces production costs or improves the quality of its products.
Work in progress: Work in progress (WIP) is a term that refers to goods or products that are in the
process of being produced. WIP can include raw materials, partially completed products, and
finished goods that are waiting to be shipped or sold. For example, a smartphone manufacturer may
have WIP in its production process if it has raw materials that are waiting to be assembled into
smartphones or finished smartphones that are waiting to be shipped to retailers.
Just in case: Just in case is a term that refers to a practice of keeping inventory on hand in case of
unexpected demand or supply disruptions. Just in case inventory can help a company to avoid
shortages or delays in its operations, but it can also tie up capital and increase storage costs. For
example, a smartphone manufacturer may keep just in case inventory on hand in case of
unexpected demand for its products or in case of supply disruptions for components.
Just in time: Just in time (JIT) is a term that refers to a practice of producing and delivering goods or
services just in time for them to be used or consumed. JIT can help a company to reduce its
inventory and storage costs and to be more responsive to customer demand, but it also requires
good forecasting and coordination with suppliers. For example, a smartphone manufacturer may
use a JIT production process to reduce its inventory and storage costs and to be more responsive to
customer demand.
Economic order quantity: Economic order quantity (EOQ) is a term that refers to the optimal
amount of inventory to order at a given time to minimize the total cost of ordering and holding
inventory. EOQ can be determined using a formula that takes into account factors such as the cost
of ordering inventory, the cost of holding inventory, and the expected demand for the product. For
example, a smartphone manufacturer may use EOQ to determine the optimal amount of
components to order from its suppliers at a given time to minimize the total cost of ordering and
holding inventory.
Buffer inventory: Buffer inventory is a term that refers to a reserve of inventory that can be used to
cushion against unexpected events or changes in demand. Buffer inventory can help a company to
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19.
20.
21.
22.
23.
24.
maintain its operations in the face of unexpected disruptions or changes in demand and can include
things like finished goods, raw materials, and work in progress. For example, a smartphone
manufacturer may keep a buffer of finished smartphones in its warehouse to cushion against
unexpected changes in demand or supply disruptions.
Re-order level: The re-order level is the point at which a company should place an order for more
inventory to replenish its stock. The re-order level can be determined by considering factors such as
the rate of usage of the inventory, the lead time for the inventory to arrive, and the safety stock
needed to cushion against unexpected demand or supply disruptions. For example, a smartphone
manufacturer may set a re-order level for its components based on the rate of usage of the
components, the lead time for the components to arrive, and the amount of safety stock needed to
cushion against unexpected demand or supply disruptions.
Re-order quantity: The re-order quantity is the amount of inventory that should be ordered when
the re-order level is reached. The re-order quantity can be determined by considering factors such
as the amount of inventory needed to meet demand, the cost of ordering inventory, and the cost of
holding inventory. For example, a smartphone manufacturer may determine the re-order quantity
for its components based on the amount of components needed to meet production needs, the cost
of ordering the components, and the cost of holding the components in inventory.
Lead time: Lead time is the time it takes for an order to be received after it has been placed. Lead
time can be affected by factors such as the distance between the supplier and the company, the
mode of transportation used, and the availability of the inventory. For example, a smartphone
manufacturer may have a longer lead time for components from a supplier that is located farther
away or that uses a slower mode of transportation.
Inventories: Inventories are the goods or materials that a company has on hand for use in its
operations or for sale to customers. Inventories can include raw materials, work in progress, and
finished goods and can be managed to ensure that they are sufficient to meet demand and minimize
waste. For example, a smartphone manufacturer may manage its inventories of components to
ensure that it has enough on hand to meet production needs and minimize waste.
Opportunity cost: Opportunity cost is the value of the next best alternative that is given up as a
result of a decision or action. Opportunity cost can be used to compare the benefits and costs of
different options and to help a company make the most efficient use of its resources. For example, a
smartphone manufacturer may consider the opportunity cost of investing in a new production line
versus expanding its existing production line when deciding how to allocate its resources.
Idle resourcing: Idle resourcing refers to the use of resources that are not being fully utilized or that
are being used inefficiently. Idle resourcing can lead to wasted resources and higher costs for a
company and can be caused by things like overproduction, bottlenecks in the production process,
and inefficient use of resources. For example, a smartphone manufacturer may have idle resources
if it has production equipment that is not being used to capacity or if it has employees that are not
fully utilized due to inefficient processes.
Obsolescence cost: Obsolescence cost is the cost of replacing or disposing of assets or inventory
that are no longer useful or relevant. Obsolescence can be caused by things like technological
changes, changing customer preferences, or the expiration of patents or licenses. For example, a
smartphone manufacturer may incur obsolescence costs if it has to dispose of old production
equipment that is no longer useful or if it has to write off inventory that is no longer in demand.
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25. Capacity utilization: Capacity utilization is a measure of how much of a company's production
capacity is being used. Capacity utilization is calculated by dividing the company's actual output by
its maximum possible output. For example, a smartphone manufacturer that is producing 100,000
smartphones per month with a maximum capacity of 120,000 smartphones per month has a
capacity utilization of 83.3%.
26. Excess capacity: Excess capacity is the amount of production capacity that is not being used. Excess
capacity can be caused by things like a decline in demand, inefficient production processes, or the
availability of cheaper alternatives. For example, a smartphone manufacturer may have excess
capacity if it is producing fewer smartphones than its maximum production capacity due to a decline
in demand.
27. Spare capacity: Spare capacity is the amount of production capacity that is available to be used if
demand increases. Spare capacity can help a company to be more responsive to changes in demand
and can be created by things like idle resources, excess capacity, or the ability to ramp up
production quickly. For example, a smartphone manufacturer may have spare capacity if it has idle
resources or excess capacity that can be used to increase production if demand increases.
28. Capacity shortage: Capacity shortage is a situation where a company does not have enough
production capacity to meet demand. Capacity shortages can lead to delays in delivery, lost sales,
and increased costs and can be caused by things like a sudden increase in demand, bottlenecks in
the production process, or a lack of resources. For example, a smartphone manufacturer may have a
capacity shortage if it has a sudden increase in demand for its smartphones and does not have
enough production capacity to meet that demand.
29. Sub-contracting: Sub-contracting is a practice where a company outsources some or all of its
production or other business processes to another company. Sub-contracting can help a company to
reduce costs, increase efficiency, and access specialized expertise and can be used for things like
manufacturing, logistics, and customer service. For example, a smartphone manufacturer may subcontract the production of some of its components to another company to reduce costs and
increase efficiency.
30. Outsourcing: Outsourcing is a practice where a company contracts with another company to
perform a business function or process that is normally done in-house. Outsourcing can help a
company to reduce costs, increase efficiency, and access specialized expertise and can be used for
things like manufacturing, logistics, and customer service. For example, a smartphone manufacturer
may outsource the production of some of its components to another company to reduce costs and
increase efficiency.
31. Off shoring: Off shoring is a practice where a company moves some or all of its production or other
business processes to another country. Off shoring can help a company to reduce costs and access a
larger pool of labor and can be used for things like manufacturing, logistics, and customer service.
For example, a smartphone manufacturer may off shore the production of some of its components
to another country to reduce costs and access a larger pool of labor.
32. Full capacity: Full capacity is the maximum production capacity of a company. Full capacity can be
affected by things like the availability and capacity of the company's production equipment, the
availability and skill level of its labor, and the efficiency of its production processes. For example, a
smartphone manufacturer may have a full capacity of 120,000 smartphones per month if it has the
production equipment, labor, and processes in place to produce that many smartphones.
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33. Business process outsourcing: Business process outsourcing (BPO) is a practice where a company
contracts with another company to perform business processes or functions that are normally done
in-house. BPO can help a company to reduce costs, increase efficiency, and access specialized
expertise and can be used for things like payroll, human resources, and customer service. For
example, a smartphone manufacturer may use BPO for its payroll and human resources processes to
reduce costs and increase efficiency.
34. Optimum capacity utilization: Optimum capacity utilization is the level of capacity utilization that
maximizes a company's profits. Optimum capacity utilization can be affected by things like the cost
of production, the price of the product, and the demand for the product. For example, a
smartphone manufacturer may have an optimum capacity utilization of 90% if that is the level of
capacity utilization that maximizes its profits based on the cost of production, the price of its
smartphones, and the demand for its smartphones.
35. Average cost: Average cost is the total cost of production divided by the number of units produced.
Average cost can be used to compare the efficiency of different production processes or to
determine the optimal production volume. For example, a smartphone manufacturer may calculate
its average cost per smartphone to compare the efficiency of different production processes or to
determine the optimal production volume for its smartphones.
36. Fixed cost: Fixed cost is a cost that does not vary with the level of production. Fixed costs can
include things like rent, salaries, and insurance and are generally not affected by changes in the
volume of production. For example, a smartphone manufacturer's rent and salaries may be fixed
costs that do not vary with the volume of production.
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UNIT 5 – FINANCE AND ACCOUNTING
1. Startup capital: Startup capital is the money that a company needs to start and operate a business.
Startup capital can come from a variety of sources, including personal savings, loans, grants, and
investments from friends and family. For example, a smartphone manufacturer may need startup
capital to purchase production equipment, hire employees, and cover other expenses during the
early stages of the business.
2. Working capital: Working capital is the money that a company needs to cover its short-term
expenses and obligations. Working capital can be calculated by subtracting a company's current
liabilities from its current assets. For example, a smartphone manufacturer's working capital may be
used to cover expenses like payroll, rent, and utilities.
3. Short term finance: Short term finance is financing that is intended to meet a company's short-term
needs, usually less than one year. Short term finance can include things like lines of credit,
overdrafts, and trade credit. For example, a smartphone manufacturer may use a line of credit to
finance its working capital needs.
4. Long term finance: Long term finance is financing that is intended to meet a company's long-term
needs, usually more than one year. Long term finance can include things like loans, bonds, and
equity financing. For example, a smartphone manufacturer may use a long-term loan to finance the
expansion of its production facility.
5. Profit: Profit is the excess of a company's revenue over its costs. Profit can be used to measure a
company's financial performance and can be a key indicator of its success. For example, a
smartphone manufacturer's profit may be calculated by subtracting its costs of production,
marketing, and other expenses from its revenue.
6. Bankruptcy: Bankruptcy is a legal process that allows a company to restructure or liquidate its
assets in order to pay off its debts. Bankruptcy can be a last resort for companies that are unable to
pay their debts and can have serious consequences for the company, its creditors, and its
shareholders. For example, a smartphone manufacturer may file for bankruptcy if it is unable to pay
its debts and is unable to restructure its finances.
7. Liquidation: Liquidation is the process of selling a company's assets in order to pay off its debts.
Liquidation can be a result of bankruptcy or can be voluntary and can result in the dissolution of the
company. For example, a smartphone manufacturer may be liquidated if it is unable to pay its debts
and is unable to restructure its finances through bankruptcy.
8. Current assets: Current assets are assets that are expected to be converted into cash or used up
within one year. Current assets can include things like cash, inventory, and accounts receivable. For
example, a smartphone manufacturer's inventory of smartphones and its accounts receivable may
be considered current assets.
9. Current liabilities: Current liabilities are obligations that are expected to be paid within one year.
Current liabilities can include things like accounts payable, taxes, and short-term loans. For example,
a smartphone manufacturer's accounts payable to its suppliers and its taxes may be considered
current liabilities.
10. Capital expenditure: Capital expenditure is money that is spent on long-term assets, such as
buildings, equipment, and land. Capital expenditure is also known as "capex" and is typically
considered a long-term investment in the company's future. For example, a smartphone
manufacturer may make a capital expenditure to purchase a new production facility.
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11. Revenue expenditure: Revenue expenditure is money that is spent on operating expenses, such as
salaries, rent, and utilities. Revenue expenditure is also known as "opex" and is typically considered
a short-term expense that is incurred in the course of normal business operations. For example, a
smartphone manufacturer's salaries and rent may be considered revenue expenditure.
12. Internal sources of finance: Internal sources of finance are sources of financing that are generated
within the company, such as retained earnings and the sale of assets. Internal sources of finance do
not require the company to incur any additional debt or give up any ownership stake in the
company. For example, a smartphone manufacturer may use its retained earnings as an internal
source of finance to expand its production facility.
13. External sources of finance: External sources of finance are sources of financing that come from
outside the company, such as loans, bonds, and equity financing. External sources of finance can
involve the incurrence of debt or the giving up of ownership stake in the company. For example, a
smartphone manufacturer may use a loan from a bank as an external source of finance to purchase
new production equipment.
14. Bank overdraft: A bank overdraft is a type of short-term financing that allows a company to borrow
money from its bank up to a certain limit. An overdraft can be used to cover short-term cash
shortages and is typically repaid within a few weeks or months. For example, a smartphone
manufacturer may use a bank overdraft to cover its working capital needs during a slow sales
period.
15. Debt factoring: Debt factoring is a financial transaction in which a company sells its accounts
receivable to a third party at a discount in order to get immediate cash. Debt factoring can be used
to improve a company's cash flow and is typically used by companies that have a high volume of
accounts receivable. For example, a smartphone manufacturer may use debt factoring to improve
its cash flow if it has a large number of accounts receivable that are not being paid quickly.
16. Hire purchase: Hire purchase is a type of financing in which a company purchases an asset and pays
for it in installments over a period of time. Hire purchase allows a company to acquire an asset
without having to pay the full amount upfront. For example, a smartphone manufacturer may use
hire purchase to finance the purchase of new production equipment.
17. Leasing: Leasing is a type of financing in which a company rents an asset for a period of time rather
than purchasing it outright. Leasing can be a cost-effective alternative to purchasing an asset and
allows a company to use an asset without having to pay the full purchase price upfront. For
example, a smartphone manufacturer may lease production equipment rather than purchasing it
outright in order to save money.
18. Long term loans: Long term loans are loans that are intended to meet a company's long-term
financing needs, usually more than one year. Long term loans can be used to finance a variety of
things, including the purchase of assets, expansion of a business, and working capital needs. Long
term loans can be secured or unsecured and can have fixed or variable interest rates. For example, a
smartphone manufacturer may use a long term loan to finance the expansion of its production
facility.
19. Debentures: Debentures are a type of long-term debt that are issued by a company and are typically
backed only by the creditworthiness of the issuer. Debentures do not give the holder any ownership
stake in the company and are usually unsecured. Debentures can be traded on the secondary
market and typically have fixed interest rates. For example, a smartphone manufacturer may issue
debentures to raise capital for expansion.
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20. Share capital: Share capital is the money that a company raises by issuing shares of stock. Share
capital is a type of equity financing that gives the holder an ownership stake in the company. Share
capital can be used to finance a variety of things, including the expansion of a business, the purchase
of assets, and working capital needs. For example, a smartphone manufacturer may issue shares of
stock to raise capital for expansion.
21. Business mortgages: Business mortgages are loans that are used to finance the purchase or
construction of commercial real estate. Business mortgages are typically secured by the property
being financed and can have fixed or variable interest rates. Business mortgages can be used by a
variety of businesses, including small businesses, to finance the purchase or construction of a
commercial property. For example, a smartphone manufacturer may use a business mortgage to
finance the purchase of a new production facility.
22. Venture capital: Venture capital is a type of equity financing that is provided by venture capital
firms to early-stage or high-growth companies. Venture capital is typically used to finance the
development and expansion of a business and can involve the giving up of a significant ownership
stake in the company. For example, a smartphone manufacturer may receive venture capital to fund
the development of a new product line.
23. Crowdfunding: Crowdfunding is a type of financing that involves raising small amounts of money
from a large number of people, typically through an online platform. Crowdfunding can be used to
finance a variety of things, including the development of a new product or the expansion of a
business. Crowdfunding can be a way for a company to get funding from a large number of people
without giving up equity in the company. For example, a smartphone manufacturer may use
crowdfunding to finance the development of a new product.
24. Microfinancing: Microfinancing is a type of financing that is provided to small businesses and
entrepreneurs in developing countries. Microfinancing can be used to finance a variety of things,
including the expansion of a business, the purchase of equipment, and working capital needs.
Microfinancing is typically provided by microfinance institutions and can be used by businesses that
may not have access to traditional sources of financing.
25. Insolvent: Insolvent refers to a company that is unable to pay its debts as they come due. Insolvency
can be caused by a variety of factors, including financial mismanagement, market downturns, and
competition. Insolvent companies may be forced to restructure or liquidate their assets in order to
pay their creditors.
26. Cash flow forecast: A cash flow forecast is a projection of a company's future cash inflows and
outflows. A cash flow forecast can help a company plan for its future financial needs and identify
potential cash shortages. A cash flow forecast can be prepared on a monthly, quarterly, or annual
basis. For example, a smartphone manufacturer may prepare a cash flow forecast to plan for its
future financial needs and identify potential cash shortages.
27. Cash inflow: Cash inflow refers to the money that a company receives from its operations, such as
the sale of goods or services. Cash inflow is an important source of financing for a company and can
be used to cover operating expenses, pay debt, or invest in the company's future. For example, a
smartphone manufacturer's cash inflow may come from the sale of its smartphones.
28. Cash outflow: Cash outflow refers to the money that a company spends on its operations, such as
salaries, rent, and utilities. Cash outflow is an important factor in a company's financial planning and
can affect its ability to meet its financial obligations. For example, a smartphone manufacturer's
cash outflow may include its salaries and rent.
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29. Net cash flow: Net cash flow is the difference between a company's cash inflows and outflows. Net
cash flow can be positive or negative and is an important indicator of a company's financial health. A
positive net cash flow indicates that a company is generating more cash than it is spending, while a
negative net cash flow indicates that a company is spending more cash than it is generating. For
example, a smartphone manufacturer with a positive net cash flow may be in a good financial
position, while a smartphone manufacturer with a negative net cash flow may be in financial
distress.
30. Opening cash balance: The opening cash balance is the amount of cash that a company has at the
beginning of a period, such as a month or a year. The opening cash balance is an important factor in
a company's financial planning and can affect its ability to meet its financial obligations. For
example, a smartphone manufacturer with a large opening cash balance may be in a good financial
position, while a smartphone manufacturer with a small opening cash balance may be in financial
distress.
31. Closing cash balance: The closing cash balance is the amount of cash that a company has at the end
of a period, such as a month or a year. The closing cash balance is an important factor in a
company's financial planning and can affect its ability to meet its financial obligations. For example,
a smartphone manufacturer with a large closing cash balance may be in a good financial position,
while a smartphone manufacturer with a small closing cash balance may be in financial distress.
32. Credit control: Credit control is the process of managing a company's credit policies, including the
granting of credit, the setting of credit limits, and the collection of outstanding debts. Credit control
is an important aspect of financial management and can help a company minimize its risk of bad
debts and improve its cash flow. For example, a smartphone manufacturer may have a credit control
system in place to manage the credit policies of its customers.
33. Bad debts: Bad debts are debts that are unlikely to be collected, either because the customer is
unable to pay or has gone bankrupt. Bad debts can have a negative impact on a company's financial
health and can be a source of financial stress. For example, a smartphone manufacturer may have a
high level of bad debts if its customers are unable to pay for the products they have purchased.
34. Overtrading: Over trading is a situation where a company is taking on more business than it can
handle, either because it is unable to meet the demand or because it lacks the capacity to handle
the additional business. Over trading can lead to financial strain and can be a source of financial risk.
For example, a smartphone manufacturer may be overtrading if it is unable to meet the demand for
its products.
35. Break-even point: The break-even point is the level of sales or production at which a company's
total revenues and total costs are equal, resulting in no profit or loss. The break-even point is an
important financial metric that can help a company determine when it will become profitable and
how much it needs to sell to break even. For example, a smartphone manufacturer may need to sell
a certain number of phones to reach its break-even point.
36. Cost centers: Cost centers are parts of a business that are responsible for generating costs, but do
not directly generate revenue. Cost centers are typically used to track and manage the costs of
certain activities or functions within a business. For example, a smartphone manufacturer may have
a cost center for research and development, a cost center for marketing, and a cost center for HR.
37. Profit centers: Profit centers are parts of a business that are responsible for generating revenue and
profit. Profit centers are typically used to track and manage the financial performance of certain
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38.
39.
40.
41.
42.
43.
44.
45.
activities or functions within a business. For example, a smartphone manufacturer may have a profit
center for sales and a profit center for service.
Direct costs: Direct costs are costs that can be directly traced to a specific product, service, or
project. Direct costs are typically variable costs, meaning that they vary in relation to the level of
production or sales. Examples of direct costs include materials, labor, and commissions. For
example, a smartphone manufacturer may have direct costs such as the cost of the materials used
to make the phones, the cost of labor to assemble the phones, and the cost of commissions paid to
salespeople.
Indirect costs: Indirect costs are costs that cannot be directly traced to a specific product, service, or
project. Indirect costs are typically fixed costs, meaning that they do not vary in relation to the level
of production or sales. Examples of indirect costs include rent, utilities, and insurance. For example,
a smartphone manufacturer may have indirect costs such as the cost of rent for its factory, the cost
of utilities for its factory, and the cost of insurance for its factory.
Variable costs: Variable costs are costs that vary in relation to the level of production or sales.
Examples of variable costs include direct materials, direct labor, and variable overhead. For
example, a smartphone manufacturer may have variable costs such as the cost of the materials used
to make the phones, the cost of labor to assemble the phones, and the cost of variable overhead
such as electricity and water used in the manufacturing process.
Total costs: Total costs are the sum of a company's direct costs and indirect costs. Total costs can be
used to determine the overall cost of producing a product or providing a service. For example, a
smartphone manufacturer may calculate its total costs by adding its direct costs (such as materials
and labor) to its indirect costs (such as rent and utilities).
Overheads: Overheads are indirect costs that are not directly associated with the production of a
product or provision of a service. Overheads can include fixed costs such as rent and utilities, as well
as variable costs such as electricity and water used in the manufacturing process. For example, a
smartphone manufacturer may have overheads such as the cost of rent for its factory, the cost of
utilities for its factory, and the cost of variable overhead such as electricity and water used in the
manufacturing process.
Full costing: Full costing is a method of cost accounting that includes both direct costs and indirect
costs in the calculation of the cost of a product or service. Full costing is also known as absorption
costing. For example, a smartphone manufacturer may use full costing to determine the total cost of
producing a smartphone by adding the direct costs of materials and labor to the indirect costs of
rent and utilities.
Contribution costing: Contribution costing is a method of cost accounting that only includes direct
costs in the calculation of the cost of a product or service. Contribution costing is also known as
marginal costing. For example, a smartphone manufacturer may use contribution costing to
determine the direct cost of producing a smartphone by only considering the costs of materials and
labor.
Marginal cost: Marginal cost is the additional cost of producing one more unit of a product or
service. Marginal cost is calculated by taking the difference between the total cost of producing one
more unit and the total cost of producing the previous unit. Marginal cost is an important financial
metric for businesses as it can help them to determine the profitability of producing additional units.
For example, a smartphone manufacturer may calculate the marginal cost of producing additional
smartphones to determine whether it is financially viable to increase production.
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46. Margin of safety: The margin of safety is the amount by which a company's sales can decline before
it becomes unprofitable. The margin of safety is calculated by subtracting the break-even point from
the projected sales. For example, a smartphone manufacturer may calculate its margin of safety by
subtracting its break-even point (the level of sales at which it will break even) from its projected
sales.
47. Contribution per unit: Contribution per unit is the amount of money that is available to cover fixed
costs and contribute to profit after the direct costs of producing a unit have been accounted for.
Contribution per unit is calculated by subtracting the direct cost of producing a unit from the selling
price of the unit. For example, a smartphone manufacturer may calculate the contribution per unit
of its smartphones by subtracting the direct cost of producing the phones from the selling price of
the phones.
48. Budgeting: Budgeting is the process of creating a plan for the allocation of financial resources over a
given period of time. Budgeting is an important aspect of financial management and can help
businesses to plan and control their spending, as well as to monitor their financial performance. For
example, a smartphone manufacturer may create a budget to plan its spending on marketing,
research and development, and other expenses.
49. Budget holder: A budget holder is a person or department within a company that is responsible for
managing and controlling the budget allocated to them. Budget holders are typically accountable for
ensuring that their budget is used effectively and efficiently, and for providing regular updates on
their budget performance. For example, a smartphone manufacturer may have budget holders for
marketing, research and development, and other expenses.
50. Variance analysis: Variance analysis is the process of comparing actual financial results to budgeted
or planned results in order to identify and explain any differences. Variance analysis is an important
tool for financial management and can help businesses to identify areas where their financial
performance is better or worse than expected, and to take corrective action if necessary. For
example, a smartphone manufacturer may conduct variance analysis to compare its actual sales to
its budgeted sales and to identify any differences.
51. Delegated budgets: Delegated budgets are budgets that are allocated to lower-level managers or
departments within a company. Delegated budgets give these managers and departments more
control over their budget and allow them to make decisions about how the budget is used. For
example, a smartphone manufacturer may delegate budgets to its marketing, research and
development, and other departments.
52. Incremental budgeting: Incremental budgeting is a budgeting process in which the budget for the
current period is based on the budget for the previous period, with any additional funds allocated
for specific new projects or initiatives. Incremental budgeting is a relatively simple and
straightforward approach to budgeting, but it can be inflexible and may not adequately account for
changes in the business environment.
53. Flexible budgeting: Flexible budgeting is a budgeting process in which the budget is adjusted to
reflect changes in the level of activity or production. Flexible budgeting allows businesses to better
account for changes in the business environment and can be more responsive to changes in demand
or other factors. For example, a smartphone manufacturer may use flexible budgeting to adjust its
budget based on changes in demand for its products.
54. Zero budgeting: Zero budgeting is a budgeting process in which all budgeted amounts are set to
zero at the beginning of the budgeting period, and all spending must be justified and approved
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through a rigorous review process. Zero budgeting is a form of budgeting that emphasizes cost
control and is typically used in government and other public sector organizations.
55. Favorable variance: A favorable variance is the difference between the actual result and the
budgeted or planned result when the actual result is better than expected. A favorable variance can
indicate that a business is performing better than expected, and may be a sign of strong financial
performance.
56. Adverse variance: An adverse variance is the difference between the actual result and the budgeted
or planned result when the actual result is worse than expected. An adverse variance can indicate
that a business is performing worse than expected, and may be a sign of financial problems or other
issues.