AS Business Studies
Business Activity
Resources – the inputs that are used in the production process to produce goods and services. These
are also called Factors of Production:
 Capital – the finance needed to set up a business and pay for its continuing operation as well as
all the man-made resources used in production
 Enterprise – the driving force, provided by risk-taking individuals known as entrepreneurs, that
combines the other factors of production into a unit that is capable of producing goods and
services. It provides a managing, decision making and co-ordinating role.
 Labour – manual and skilled labour make up the workforce of the business
 Land – the general term not only includes land itself but all of the renewable and non-renewable
resources of nature
Self-Sufficient – depending on one’s own goods that were personally made or grown by oneself
‘The Economic Problem’ – there are insufficient goods to satisfy all of our needs and wants at any
one time
Opportunity Cost – the benefit of the next most desired option which is given up e.g. if a consumer
were to choose to purchase salad over fries, fries would be the opportunity cost for this consumer
Consumer Goods – these are physical and tangible goods sold to the general public.
Consumer Services – non-tangible products that are sold to the general public e.g. hotel
accommodation, insurance services, train journeys
Capital Goods – physical goods that are used by industry to aid in the production of other goods and
services e.g. machines, commercial vehicles
Primary Sector – those firms engaged in the extraction of natural resources so that they can be used
and processed by other firms
Secondary Sector – those firms that manufacture and process products from natural resources
Tertiary Sector – those firms that provide services to consumers and other businesses
Public Sector – comprises of organization accountable to and controlled by central or local
government (the state)
Private Sector – comprises of businesses owned and controlled by individuals or groups of
individuals
Enterprise
Entrepreneur – someone who takes the financial risk of starting and managing a new business
venture. The characteristics of an entrepreneur include:
 Innovative – creates original ideas and an ability to do things differently
 Committed and Self-Motivated – having a willingness to work hard, keen ambition to
succeed and energy and focus
 Multi-skilled – able to take on multiple roles in the firm through their multiple qualities and
knowledge
 Leadership Skills – able to lead by example and has a personality that encourages people in
the business to follow them and be motivated by them
 Self-Confidence – able to ‘bounce back’ and not be discouraged from any failures or
setbacks
 Risk Taking – must be willing to sacrifice in order to see results e.g. investing own savings in
new business
Challenges of an entrepreneur include:
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Identifying successful business opportunities
Sourcing capital
Determining a location
Competition
Building a customer base
Why do new businesses often fail?
 Lack of record keeping – they need to ensure they keep up-to-date records (e.g. customer
orders, deliveries) especially financial records to ensure they are making a profit. Without
record keeping, the organisation of the business will be poor, causing poor relationships
with suppliers and customers, as well as making decisions more time consuming and
possibly affecting staff morale.
 Lack of cash and working capital – they need to ensure they have enough funds for the day
to day running of the business. This can be done through establishing a relationship with the
bank to ensure short term and long term solutions or by using effective credit control for
customers. Cash flows should be constructed so that the liquidity and working capital needs
of the business can be assessed month by month.
 Poor management skills – there may be poor leadership skills, cash handling and cash
management, planning and coordinating, decision making skills, communication skills, or
marketing, promotion and selling skills. Without such skills, there may be issues in several
departments of the new firm.
 Changes in the business environment – new competitors, legal changes (e.g. safety
regulations), economic changes (e.g. during a recession) and technological changes may
cause a loss in profits.
Impacts of Enterprise on the Economy
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Employment Creation
o Employing workers into business
o If business expands, possibly causes suppliers to employee more workers
o More income for workers to spend; greater circulation of money in the economy
Economic Growth
o Increase in product output means a growth in Gross Domestic Product
o Increased living standards for the population, through larger choice of products
o Increased output and consumption leads to increased tax revenues for government
Firms’ survival and growth
o Expansion leads to important businesses in the business world
o Enhancing the customers, economies and countries needs
o Takes place of declining businesses
Innovation and Technological change
o Dynamism added to economy through innovative businesses
o Businesses become more competitive with more creative products and services
o Increased use of technology in firms, helps to advance businesses and makes more
higher quality products for consumers
Exports
o Through expansion abroad, businesses can bring more international competitiveness
o Increase the value of the export market
Personal Development
o Starting and managing a business aids in developing the skills of the nation
o Will encourage others to set up to help then further benefit the economy
o Successful start-ups will help an individual reach self-actualisation
Increased Social Cohesion
o Unemployment leads to serious social problems
o Enterprises bring jobs and income to achieve social cohesion
o Enterprises provide a good example for others to follow
Industrialisation
Industrialisation – a growing importance of the secondary sector manufacturing industries in
developing countries.
Advantages
Total national output (GDP) increases and this
raises standards of living
Increasing output of goods can result in lower
imports and higher exports of such products
Value is added to the countries’ output of raw
materials, rather than just exporting these as
basic, unprocessed products
Expanding and profitable firms will pay more tax
to the government
Expanding manufacturing businesses will result
in more jobs being created
Disadvantages
The chance of work in manufacturing can
encourage a huge movement of people from the
countryside to the towns, which leads to housing
and social problems
Imports of raw materials and components are
often much needed, which can increase the
country’s import costs
Much of the growth of manufacturing industry is
due to the expansion of multinational companies
Economies
Economy – the state of a country or region in terms of the production and consumption of goods
and services, and the supply of money
Mixed Economy
Mixed Economy – economic resources are owned and controlled by both private and public sectors
Advantages
It has the advantage of taking the benefits of
capitalist nature of private companies and
socialist nature of government.
Less inequality of income because government
aims to have a balanced economic growth
Individuals can run businesses and make profits
Government can break up monopolies
Disadvantages
Since welfare of society is important in a mixed
economy, it leads to lower than optimum use of
the resources
Private enterprises have to face a lot of difficulty
because of various government regulation
Free Market Economy
Free Market Economy – economic resources are owned by the private sector with little state
intervention
Advantages
A variety of goods and services produced
Businesses respond quickly to changes in
consumer demand
Businesses will innovate due to profit motive
There is no taxation
Disadvantages
Businesses will only produce profitable goods
Businesses will only sell products to customers
who can afford to pay most for them
Resources will only be employed if profitable
Harmful goods may be produced if profitable
Harmful effects of the products may be ignored
Firms may dominate market supply of a product
Command Economy
Command/Planned Economy – economic resources are owned, planned and controlled by the state
Advantages
Prices are kept under control and thus
everybody can afford to consume goods/services
There is less inequality of wealth
There is no duplication as the allocation of
resources is centrally planned
Low level of unemployment as the government
aims to provide employment to everybody
Elimination of waste resulting from competition
between firms
Disadvantages
Consumers cannot choose and only those goods
and services are produced which are decided by
the government
Lack of profit motive may lead to firms being
inefficient
A lot of time and money is wasted in
communicating instructions from the
government to the firms
Legal Structures
Unlimited Liability – the owners of the business are held responsible for the debts of the business,
meaning their personal assets are at risk.
Limited Liability – the only liability, or potential loss, a shareholder has if the company fails is the
amount invested in the company, not the total wealth of the shareholders.
Sole Trader – a business in which one person provides the permanent finance and, in return, has full
control of the business and is able to keep all of the profits
Advantages
Easy to set up – few legal formalities
Owner has complete control
Owner keeps all profits
Business can be based off of interests and skills
of the owner, rather than working as an
employee for a larger firm
Able to choose times and patterns of working
Able to establish close relationships with staff
and customers
Disadvantages
Unlimited Liability
Long hours often necessary
Difficult to raise additional capital
Owner is unable to specialise in interesting areas
of the business as they are responsible for all
aspects of management
Can face intense competition from bigger firms
Lack of continuity – there is no separate legal
status so when the owner dies, the business will
end too
Partnerships – a business formed by two or more people to carry on a business together, with
shared capital investment and, usually, shared responsibility. Partners are bound by the terms of the
Partnership Act 1890.
Advantages
Partners may specialise in different areas of
business management
Shared decision making
Additional capital injected by each partner
Greater privacy than corporate organisations
Easy to set up as less formalities than limited
companies
Shared responsibility so business losses are
shared between the partners
Disadvantages
Lack of continuity – the partnership will have to
be reformed in the event of a death of a partner
Unlimited Liability for all partners
Profits are shared
Not possible to raise capital from selling shares
All partners are bound by the decisions made by
any one of them
A sole trader, taking on partners, will lose
independence of decision making
Limited access to capital when compared to
Limited companies
Potential for conflict between partners
Sleeping Partner – a partner who usually supplies the business with capital, however they do not
have an active role in running the business. These have limited liability.
Deed of Partnership – provides agreement issues, such as voting rights, the distribution of profits,
the management role of each partner and who has the authority to sign contracts.
Share – a certificate confirming part ownership of a company and entitling the shareholder owner to
dividends and certain shareholder rights
Shareholder – a person or institution owning shares in a limited company
Limited Companies – incorporated business with limited liability, a separate legal personality and
continuity of a business. In setting up, these must register with the Registrar of Companies at
Companies House. To do this they must complete:
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Memorandum of Association
o Details the name of the company
o Details the address of the head office
o Details the maximum share capital for which the company seeks authorisation
o Details the companies declared aims
Articles of Association
o Details the internal workings of the business and control of the business e.g. it
details the names of directors and the procedure to be followed at meetings
Private Limited Companies – an incorporated business that is owned by shareholders but does not
have the legal right to offer shares for sale to the public
Advantages
Shareholders have limited liability
Separate legal personality
Continuity in the event of a shareholder’s death
Able to raise capital from sale of shares to
family, friends and employees
Original owner is still often able to retain control
Greater status than an unincorporated business
Disadvantages
Legal formalities involved in establishing the
business
Quite difficult for shareholders to sell shares
Capital cannot be raised by sale of shares to the
general public
End of year accounts must be sent to Companies
House – available for public inspection there
Public Limited Companies – an incorporated business that has the legal right to offer shares for sale
to the public. Shares of these companies are listed on the Stock Exchange
Advantages
Limited Liability
Ease of buying and selling of shares for
shareholders encourages investment
Separate legal identity
Access to substantial capital sources due to the
ability to issue a prospectus to the public and to
offer shares for sale
Continuity
Disadvantages
Legal formalities in formation
Cost of business consultants and financial
advisers when creating such a company
Risk of takeover due to the availability of shares
Legal requirements concerning disclosure of
information to shareholders and the public e.g.
annual publication of reports and accounts
Share prices subject to fluctuation – sometimes
for reasons beyond business control
Directors influenced by short-term objectives of
major investors (Short-termism)
Separate Legal Personality/Identity – the company is recognised in law as having a legal identity
separate from that of its owners
Cooperatives – business organisations owned and controlled by a group of people to undertake an
economic activity for mutual benefit.
Consumer Cooperatives – members buy goods in bulk, sell them, and divide the profits between
members
Worker Cooperatives – workers buy the business and run it; decisions and profits are shared by the
members.
Producer Cooperatives – producers organise distribution and sale of products themselves
Advantages
Good motivation for all members to work hard
as they will benefit from shared profits
Working together to solve problems and take
decisions
Members share responsibilities, decision making
Bulk Buying
Disadvantages
Poor management skills unless professional
managers are employed
Capital shortages because no sale of shares to
the non-member general public is allowed
Slow decision making if all members are to be
consulted on important issues
Franchises – a business that uses the name, logo and trading systems of an existing successful
business; based upon the purchase of a franchise licenser from the franchiser. Franchise businesses
have a lower failure rate than non-franchise firms.
Advantages
Fewer chances of new business failing as an
established brand and product are being used
Advice and training offered by franchiser
National advertising paid by franchiser
Supplies obtained from established suppliers
Franchiser agrees not to open another branch in
local area
Disadvantages
Share of profits or revenue has to be paid to
franchiser each year
Initial franchise license fee can be expensive
Local promotions may be paid by franchisee
No choice of supplies or suppliers to be used
Strict rules over pricing and layout of outlet
reduce owner’s control over their own business
Joint Ventures – where two or more businesses agree to work closely together on a particular
project and create a separate business division to do so.
Advantages
Costs and risks of a new business venture are
shared
Different companies might have different
strengths and experiences and they therefore fit
well together
They might have their major markets in different
countries and they could exploit these with the
new product more effectively than if they both
decided to ‘go it alone’
Disadvantages
Errors and mistakes might lead to one blaming
the other for mistakes
The business failure of one of the partners would
put the whole project at risk
Styles of management and culture might be so
different that the two teams do not blend well
together
Holding Companies – a business organisation that owns and controls a number of separate
businesses, but does not unite them into one unified company. They often have separate businesses
in different markets altogether. The holding company has diversified interests.
Public Corporations – businesses enterprise owned and controlled by the state. They often do not
have profit as a main objective.
Advantages
Managed with social objectives rather than
solely with profit objectives
Loss-making services might still be kept
operating if the social benefit is great enough
Finance raised mainly from the government
Disadvantages
Tendency towards inefficiency due to lack of
strict profit target
Government may interfere in business decisions
for political reasons
Subsidies can encourage inefficiencies
Family-owned Businesses – businesses actively owned and managed by at least two members of the
same family
Advantages
Commitment/dedication
Reliability and pride
Knowledge and Continuity; training provided
from young age
Disadvantages
Succession/Continuity problems
Informality in setting practices and procedures
Traditional/Lack of innovation
Family Conflict
Stakeholders
Stakeholders – individuals or groups that have a direct interest in the activities of a business.
Stakeholders can influence what a business does, and as they will be affected by the business, they
will try to get the business to do what they want.
Stakeholder Theory/Concept – the view that businesses and their managers have responsibilities to
a wide range of groups, not just shareholders
Stakeholder Group
Customers
Employees
Local Community
Management
Shareholders
Government
Suppliers
Banks/Lenders
Competitors
Objectives
Good prices, good quality goods, good company image
Good working conditions, good pay, job security, good corporate image
Good employer, non-polluting, social responsibility
Power, prospects, pay and perks, good corporate image
Good return on investment, healthy share price and dividend rate, good
corporate image, max short-term profits, long-term growth
Pays taxes, meets legislative requirements, provides employment
Good prices, stable demand, good corporate image, prompt payers, longterm growth (as to increase orders to suppliers)
Paid back in full when repayments due, receive interest on loans
Compete by lawful means, differentiate its products from other businesses,
compare and contrast performance with other businesses
Business Sizes
Business Category
Micro
Small
Medium
Large
Employees
10 or fewer
11 – 50
51 – 250
251 or more
Sales Turnover
Up to 2 Million
2 Million – 10 Million
10 Million – 50 Million
Over 50 Million
Capital Employed
Up to 2 Million
2 Million – 10 Million
10 Million – 34 Million
Over 34 Million
Methods to measure the size of a business
 Number of employees – a larger number of employees suggests a larger business. It is the
simplest method and easy to understand, however it does not represent a business which
requires little amounts of workers.
 Sales Turnover – a larger sales turnover (revenue) represents a larger business. It is often used
when comparing industry businesses. Less effective if in different industries e.g. high value
production such as previous jewels compared to low value production such as cleaning services
 Capital Employed – generally the larger the business, the greater the value of capital needed.
However comparisons in different industries may be misleading e.g. a hair dresser and an
optician
 Market Capitalisation – businesses with higher market capitalisation are generally larger,
however it can only be used with businesses that have shares on the stock exchange. Due to the
fluctuations, it can be very unstable to compare.
 Market Share – if a business has a high market share then it must be among the leaders in the
industry or comparatively large. However, if the total size of the market is small, a high market
share will not indicate a very large firm.
Capital Employed – the total value of all long-term finance invested in the business
Market Capitalisation – the total value of a company’s issued shares
MARKET CAPITALISATION = current share price
current no. of shares
Market Share – sales of the business as a proportion of total market sales
MARKET SHARE =
Why are businesses measured in size?
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So investors can compare businesses and know which to invest in
So governments can know where to put different tax rates
So competitors can gain a competitive advantage
So workers of the business can gain more confidence in financial situation
So banks know how much loan they should lend to the business
Internal (Organic) Growth – expansion by opening a new branch, shops or factories
External Growth – when a business takes over or merges with another business
Benefits of Business Growth
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Increased profits
Increased market share
Increase in economies of scale
Increased power and status
Reduced risk of being a takeover target
Advantages of Large Businesses
Can afford to employ specialist managers
May benefit from economies of scale due to
large scale production
May be able to set low prices that others have to
follow
Usually can afford Research and Development
and New Product Development
Can diversify into several markets and products
to spread risks
Have access to different forms of finance
Disadvantages of Large Business
Decision making can be slow
May get diseconomies of scale with large scale
production
May be difficult to manage, especially if
geographically spread
Poor communication can occur due to the large
structure
Can have a divorce between ownership and
control that can lead to conflicting objectives
Benefits of Small Businesses
 Job Creation – the small businesses usually employ a significant proportion of a working
population
 Entrepreneurs – the small businesses are normally run by entrepreneurs; creates variety and
choice in the market
 Competition – more competition for larger businesses causes an increase in quality of goods
 Specialist goods – they may form niche markets
 Lower average costs – small firms do not have to pay as much as big firms to produce their
products
 Supplier to larger businesses – small firms can supply goods to larger firms
Government assistance for Small Businesses
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Reduced rate of tax on profits (corporation tax)
Loan guarantee scheme
Information, advice and support
Financing workshops e.g. training, unemployment
Helping particular issues e.g. specialist management expertise, start up finance, marketing
risks, finding the correct location
Advantages of Small Businesses
Can be managed and controlled by the owner
Often able to adapt quickly – meets changing
customer needs
Can offer person service to customers
Knows each worker and the business is more
‘human’ to employees
Disadvantages of Small Businesses
May have limited access to sources of finance
The owner may have to carry a large burden of
responsibility if unable to afford to employ
specialist managers
May not be diversified so greater risks with
negative impact of external change
Business Objectives
Hierarchy of Objectives – the aims and objectives of a firm are placed in descending order of
strategic importance
Aim
Mission
Corporate objectives
Divisional Objectives
Departmental Objectives
Individual Targets
Management by Objectives – a method of coordinating and motivating all staff in an organisation by
dividing the overall aim into specific targets for each department, manager and employee to assist in
the achievement of a company’s goal.
Aim – where the business wants to go in the future; its goals.
Corporate Aims – very long-term goals which a business hopes to achieve.
Strategy – the long-term plans of action of a business that focus on achieving its aims
Tactic – short-term policy or decision aimed at resolving a particular problem or meeting a specific
part of the overall strategy
Why set aims?
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They highlight key areas of development
They help businesses keep a focus upon key areas
They outline the ‘destination’ of where the company wants to reach
Provides a framework which strategies and plans can be drawn up
Mission Statement – a statement of the business’ core aims, phrased in a way to motivate
employees and to stimulate interest by outside groups.
Corporate Objectives – the long-term goals of the corporation that give focus and direction to the
business. These form the foundation for the strategic plans for the business. These are SMART.
SMART – Specific, Measurable, Achievable, Realistic, Time Specific
Why set Objectives?
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Objectives give the business a clearly defined target
Enables businesses to measure progress towards its aims
Can help motivate employees
Factors that determine Objectives
 Size and Legal Form – Smaller businesses will be more concerned with survival or satisficing,
whereas larger business may be more concerned rapid business growth or profit maximisation.
 Corporate Culture – the code of behaviour and attitudes that influence the decision-making
style of the managers and other employees of the business. Culture is about people, how they
perform and deal with others, how aggressive they are in the pursuit of objectives and how
adaptable they are in the face of change.
 Sector of Business – state-owned organisations tend not to have profit as a major objective,
instead ‘quality of service’ measures are often used.
 Number of Years in Operation – newly formed businesses are likely to be driven by survival.
Once well established, the business may pursue other objectives such as growth and profit.
Common Corporate Objectives
 Profit Maximisation – private sector firms want to gain the highest profit through increasing
revenue and decreasing costs of production
 Growth – this is usually measured in terms of sales or value of output; growth can reduce risk of
takeovers, appeal to new competitors, and motivate managers
 Maximising shareholder value – helps to direct management action towards taking decisions
that would increase share price and returns to shareholders
 Increasing Market share – indicates that the marketing mix of the business is proving to be more
successful than that of its competitors. Becoming the ‘brand leader’ would make customers and
retailers want to be more involved with this product over the competitors.
 Maximising short-term sales revenue – would benefit managers and staff when salaries and
bonuses are dependent on sales revenue levels
 Survival – likely to be key objective of most new business start-ups. There is a high failure rate of
new business, which means that to survive for the first two years of trading is a very important
aim for entrepreneurs.
 Profit Satisficing – aiming to achieve enough profit to keep the owners happy but not aiming to
work flat out to earn as much profit as possible. Once a satisfactory level of profit has been
achieved, the owners consider that other aims take priority – such as more leisure time.
 Corporate Social Responsibility
Stages in Decision Making
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2.
3.
4.
5.
6.
7.
Set objectives
Assess the problem or situation
Gather data about the problem and possible solutions
Consider all decision options
Make the strategic decision
Plan and implement the decision
Review its success against the original objectives
Social Enterprises
Social Enterprise – a business with mainly social objectives that reinvests most of its profits into
benefiting society rather than maximising profits. They directly produce goods or resources and use
social aims and ethical ways to achieve them. They need surplus or profit to survive.
Triple Bottom Line – three main aims of Social Enterprises:
 Social – provide jobs or support for local, often disadvantaged communities
 Economic – make a profit to reinvest some of it back into the business and provide some
return to owners
 Environmental – to protect the environment and to manage the business in an
environmentally sustainable way.
Corporate Social Responsibility and Ethics
Corporate Social Responsibility – the concept that accepts that businesses should consider the
interests of society in its activities and decisions, beyond the legal obligations that they have
Reasons for CSR
Marketing and promotional advantage – good
reputation
Reduces the changes of breaking laws, avoiding
bad publicity and heavy court fines
Long term financial gain – through increase in
demand etc.
Improvement in the number and quality of
employee applications
Reasons against CSR
Cost involved in ensuring a socially responsible
approach
Reduction in Profits
Distraction from main business activity
In developing countries, it is argued that
economic growth is more important than CSR
Businesses just using it for publicity not actually
doing it for society
Ethics – the moral guidelines that determine decision making
Ethical Code – a document detailing a company’s rules and guidelines on staff behaviour that must
be followed by all employees
Social Audit – a report on the impact a business has on society – this can cover pollution levels,
health and safety record, sources of supplies, customer satisfactions and contribution to the
community. Annual targets will be detailed to help improve the businesses activities.
Problems with Social Audits
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Timely and expensive to produce
May be used as a publicity stunt by companies
Due to them not being compulsory, companies may not take them seriously
Finance
Start-up Capital – the capital needed by an entrepreneur to set up a business
Working Capital – the capital needed to pay for raw materials, day-to-day running costs and credit
offered to customers.
WORKING CAPITAL = Current Assets – Current Liabilities
Working Capital Cycle – the longer it takes for this cycle to be completed, the more working capital
needed. It needs to be managed effectively by concentrating on the four main components:
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Debtors
o No extending credit to customers
o Debt factoring
o By being careful to discover whether new customers are creditworthy
o By offering discount to clients who pay promptly
Credit
o Increasing the range of goods and services bought on credit
o Extend the time taken to pay
Inventory
o Keeping smaller inventories
o Using technology to enhance re-ordering
o Efficient inventory control
o Use Just in Time (ordering stock just before necessary)
Cash
o Use of cash flow forecasts
o Wise use or investment of excess cash
o Planning for periods where there may be insufficient cash inflows
Sell On
Credit
Production
Cash
Materials
and Stock
Liquidity – the ability of a firm to be able to pay its short-term debts
Liquidation – when a firm ceases trading and its assets are sold to pay for suppliers and creditors
Insolvent – when a business cannot meet its short-term debts
Capital Expenditure – the purchase of assets that are expected to last for more than one year, such
as building or machinery
Revenue Expenditure – spending on all costs and assets other than fixed assets and includes wages
and salaries and materials bought for stock
Business Plan – a detailed document giving evidence about a new or existing business, that aims to
convince external lenders and investors to extend finance to the business
Why do businesses need finance?
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Expansion
Purchasing of assets
Special situations – decline in sales, economic downturn
Setting up a business
Working Capital
Takeovers or acquisitions
Equity Finance
Equity Finance – permanent finance raised by companies through the sale of ownership of the
business/shares. This can be done in two ways:
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Obtain a listing on the Alternative Investment Market (AIM), which is part of the stock
exchange concerned with smaller companies
Apply for a full listing on the stock exchange by selling at least 50,000 worth of shares and
having a satisfactory record of investment to feel confident. This sale of shares can be
undertaken in two main ways:
o Public issue by prospectus
o Arranging a placing of shares with institutional investors without the expense of a
full public issue. This is often done by means of a rights issue of shares.
Rights Issue – existing shareholders are given the right to buy additional shares at a discounted price
Internal Sources of Finance
o
o
o
Retained Profit – earned profit that is not taken as tax or used to pay owners or shareholders
 Once invested back into the business the retained earnings will not be paid out
 Newly formed companies or ones trading at a loss will not have access
Sale of Assets
 Assets can be sold to leasing company and leased back
 Opportunity cost of selling assets that could be used in the future
Reductions in Working Capital
 Money raised through selling assets or reducing debt
 Firm’s liquidity may be reduced to risky level
External Sources of Finance
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Short-Term
o Bank Overdraft – bank agrees to a business borrowing up to an agreed limit as and when
required
 Amount raised can vary from day-to-day
 Often High Interest Rates, Bank can ‘call in’ overdraft – force firms to pay back
o Debt Factoring – selling of claims over trade receivables to a debt factor in exchange for
immediate liquidity
 Any debts to the business can be received immediately
 Only a proportion of the value of the debts will be received as cash
o Trade Credit – delaying the bills for goods and services to suppliers or creditors
 Extra existing finance, no interest rates must be paid for this ‘loan’
 Supplier confidence lost, quick payment discounts lost
Medium-Term
o Leasing – obtaining the use of equipment or vehicles and paying a rental or leasing
charge over a fixed period
 Avoids raising long-term capital to buy assets, leasing company repairs/upgrades
 Periodic payments may total more than one payment, asset returned after use
o Hire purchase – when an asset is sold to a company that agrees to pay fixed repayments
over an agreed time period
 The asset belongs to the company, purchase made over time
 Periodic payments may total more than one payment
o Medium-term Loan
 Bank can supply large sum quickly
 Interest rates must be paid back to bank, collateral must be provided
Long-Term
o Share Issue – selling some ownership of the business to investors
 Nothing needs to be paid back
 Ltds cannot sell shares publicly, expensive to join stock exchange, risk of
takeovers, some loss of ownership,
o Debentures – bonds issued by companies to raise debt finance, often with a fixed rate of
interest
 Usually not secured on an asset, convertible debentures can be turned into
shares overtime so the company issuing them will not have to pay it back
 Company must pay fixed rate of interest each year up to 25 years, if secured on
an asset and the firm ceases trading the investors may sell the asset
o Long-term Loan – loans that do not have to be repaid for at least one year
 Bank can supply a large sum quickly that does not have to be paid back for
awhile
 Interest rates must be paid back to bank, collateral must be provided
o Grants – money donated to the business by outside agencies
 Do not have to be repaid if conditions are met
 Difficult to receive – the business has no choice over who gets the grants
Other Sources of Finance
Venture Capital – risk capital invested in business start-ups or expanding businesses that have good
profit potential but do not find it easy to gain finance from other sources
Microfinance – providing financial services for poor and low-income customers who do not have
access to banking services, such as loans and overdrafts offered by traditional commercial banks
Crowd Funding – the use of small amounts of capital from a large number of individuals to finance a
new business venture
Factors Influencing Choices of Finance
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Use of finance
Size of existing borrowing
Flexibility of firm’s need for finance
Legal structure and desire to retain control
Amount required
Cost of debt
Time period for which finance is required
Existing assets of the firm
Costs
Fixed Costs – costs which do not change with output. These must be paid even when output is zero
Variable Costs – costs of variable factors that do change with output.
Direct Costs – costs that can be clearly identified with each unit of production and can be allocated
to a cost centre
Indirect Costs – costs that cannot be identified with a unit of production or allocated accurately to a
cost centre
Marginal Costs – the extra cost of producing one more unit of output
Total Costs – all costs required in the production process
TOTAL COSTS = Fixed Costs + Variable Costs
Revenue – total value of sales made by a business in a given time period
TOTAL REVENUE = Price x Quantity
Profit/Loss – how much money the firm has made once costs of production have been taken into
account
PROFIT/LOSS = Total Revenue – Total Cost
Break Even Analysis
Breaking Even – the level of output where total revenue is equal to total cost
BREAKEVEN POINT OF OUTPUT =
Contribution – how much per unit a company’s variable cost can contribute to paying the fixed costs.
Once the fixed costs are covered, it can then contribute to profit.
CONTRIBUTION = Selling Price – Variable Cost
Margin of Safety – the difference in terms of units of production, between the current production
level and the break-even level
Total Revenue
Total Costs
$
Variable Costs
Break Even
Point
Margin of Safety
Fixed Costs
Output
Advantages
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.
Break-even analysis can be used to assist
managers when taking important decisions.
The equation produces a precise breakeven
result.
Disadvantages
Assumption that costs and revenues are
represented by straight lines is unrealistic.
There is no allowance made for inventory levels
on the break-even chart. It is assumed that all
units produced are sold. This is unlikely to always
be the case.
It is unlikely that fixed costs remain unchanged
at different output levels up to maximum
capacity.
Not all costs can be conveniently classified into
fixed and variable costs e.g. electricity
Accounting
Financial Accounting
Collection of data on daily transactions
Preparation of the published report and
accounts of a business – statement of financial
position, income statement and cash statement
Information is used by external groups
Accounts are usually prepared once or twice a
year
Accountants are bound by the rules and
concepts of the accounting profession
Covers pasts periods of time
Management Accounting
Analysing internal accounts such as budgets
Preparation of information for managers on any
financial aspect of a business, its departments
and products
Information is only available to internal users
Accounting reports and data prepared as and
when required by managers and owners
Not set rules – accountants will produce
information in the form requested
Can cover past time periods, but can also be
concerned with the present or projections into
the future
Accounting Concepts and Conventions
The Double-Entry Principle: Every time a business engages in a transaction e.g. buying materials,
there are two sides to the transaction. This means that the accounts of the business must include it
twice to ensure the accounts balance
Accruals: These arise when services have been supplied to a business but have not yet been paid for
at the time the accounts are drawn up. If no adjustment was made for this accrued expense, then
the profits in the current accounting period will be overstated. The accruals adjustment add the
unpaid costs to the total costs of the current accounting period
The Money-Measurement principle: Accountants need a common form of measuring the wealth and
performance of the business they work for. All accounting data are converted into money – hence
the principle of money measurement. Only items and transactions that can be measured in
monetary terms are recorded in a business’s account books.
Conservatism/Prudence Concept: Accountants are trained to be realistic about the values used in
accounts. The conservatism principle states that accountants should provide for and record losses as
soon as they are anticipated. Profits, on the other hand, should not be recorded until it is certain
that goods or services have been sold at a profit and not a loss.
The Realisation Concept: The realisation concept states that all revenues and profits should be
recorded in the accounts when the customer is legally bound to pay for them, unless they can be
proven to be faulty. So sales are not recorded when an order is taken or when payment is actually
made – but when the goods or services have been provided to the customer.
Business Accounts
Cash Flow Statement – shows where the firms funds have come from and how they have been used
during the previous financial year
Cash inflow/outflow – cash coming into/out of the business
Opening Balance – cash held by the business at the start of the month
Closing Balance – cash held by the business at the end of the month, becoming next month’s
opening balance
Net monthly cash-flow – estimated difference between monthly cash inflow and outflow
Cash-flow forecast – estimate of a firm’s future cash inflows and outflows
Example Cash Flow
Month
Cash Inflows
Bank Loan
Sales Revenue
Owners Savings
Total Cash Inflows
Cash Outflows
Purchases
Fixtures
Loan Repayments
Mortgage
Rates
Expenses
Advertising
Insurance
Wages
Total Cash Outflows
Opening Balance
Net Cash Balance
Closing Balance
January
11760
11760
4998
February
4000
11760
6000
21760
4998
15000
750
750
800
175
150
3528
10401
5675
1359
7034
800
175
150
3528
25401
7034
-3641
3393
March
April
May
11760
11760
12720
11760
11760
12720
4998
4998
5406
325
750
260
800
175
150
3528
10986
3393
774
4167
325
750
260
800
175
150
3528
10986
4167
774
4941
325
750
260
800
175
150
3528
11682
4941
1038
5979
Limitations of Cash Flow
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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 can lead to major inaccuracies in forecasts e.g. fluctuations in oil
prices can lead to the cash-flow forecasts of airlines being misleading
Wrong assumptions can be made in estimating the sales of the business, perhaps based on
poor market research and this will make the cash inflow forecasts inaccurate
Causes of Cash-Flow Problems
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Lack of planning
Poor credit control
Allowing customers too long to pay debts
Expanding too rapidly/Overtrading
Unexpected events i.e. equipment breakdowns, weather
Credit Control – monitoring of debts to ensure that credit periods are not exceeded
Bad Debt – unpaid customers’ bills that are now very unlikely to ever be paid
Overtrading – expanding a business rapidly without obtaining all of the necessary finance so that a
cash-flow shortage develops
How to Improve Cash flow


Increase cash inflows
o Get Overdrafts – allows for business to draw as necessary up to limit, however these
can be withdrawn from bank and come with possibly high interest rates
o Short Term Loans – fixed inflow borrowed for agreed length in time, however with
interest costs and must be repaid by due date
o Sale of assets – cash receipts can be obtained from selling off redundant assets,
which will boost cash inflow; however selling assets quickly may result in low prices
or assets may be required at a later date for expansion or as collateral
o Reduce credit terms to customers – cash flow can be brought forward by reducing
credit terms, however customers may purchase the product from other firms that
offer extended credit terms
o Debt factoring – debt factors can buy the customers’ bills and offer immediate cash;
however the firm does not receive the entire debt
Reduce outflows
o Delay payment to suppliers (creditors) – cash outflows will fall in the short term if
bills are paid later; however with delayed payment the supplier may reduce
discounts or perceive this as too much of a risk
o Delay spending on capital equipment – by not buying these, cash will not have to be
paid to suppliers; however efficiency of business may fall if outdated and inefficient
equipment is not replaced, as well as making expansion difficult
o Use leasing of capital equipment – no large cash outflow is required to use the
equipment, however the firm must pay leasing charges and the firm has no
ownership of the asset
o Cut overhead spending e.g. promotion costs – costs will not reduce production
capacity and cash payments will be reduced; however future demands may be
affected
Income Statement – records the revenue, costs and profit or a business over a given period of time.
There are three sections to an income statement:
1. Trading Account – calculates the gross profit made on trading activities
Cost of Sales/Goods Sold – the direct cost of the goods that were sold during the financial year
COST OF GOODS SOLD = Opening Stock + Purchases – Closing Stock
GROSS PROFIT = Sales Revenue – Cost of Goods Sold
2. Profit and Loss Section – calculates the overall level of profit made
NET (OPERATING) PROFIT = Gross Profit – Expenses and Overheads
PROFIT FOR YEAR (PROFIT AFTER TAX) = Operating Profit – (Interest Costs + Tax)
3. Appropriation Account – shows how any profits made by the business have been distributed
Dividends – the share of the profits paid to shareholders as a return for investing in the company
Retained Earnings/Profit – the profit left after all deductions, including dividends, have been made;
this is ‘ploughed back’ into the company as a source of finance
Balance Sheet (Statement of Financial Position) – shows the value of a business’ assets and
liabilities at a particular time
Assets – those items of value which are owned by the business.
Non-current Assets (Fixed Assets) – assets to be kept and used by the business for more than one
year
Intangible Assets – items of value that do not have a physics presence, such as patents and
trademarks
Current Assets – assets that are likely to be turned into cash before the next balance-sheet date
Trade Receivables (Debtors) – the value of payments to be received from customers who have
bought goods on credit
Liabilities – items owned by the business either long-term (fixed/non-current) or short-term(current)
Non-Current Liabilities – value of debts of the business that will be parable after more than one year
Current Liabilities – debts of the business that will usually have to be paid within one year
Accounts/Trade Payable (Creditors) – value of debts for goods bought on credit payable to suppliers
Shareholders’ Equity – total value of assets – total value of liabilities
Share Capital – the total value of capital raised from shareholders by the issue of shares
Example Income Statement
Sales Revenue
1315860
Cost of Sales
48826
Gross Profit
1267034
Expenses
15000
 Fixtures
2500
 Loan Repayments
750
 Mortgage
2600
 Other Expenses
2100
 Advertising
1800
 Insurance
42336
 Wages
67086
Total:
Net Profit
1199948
Interest
10500
Profit Before Tax
1189448
Tax at 20%
237890
Profit After Tax
951558
Dividends
55000
Retained Profit
896558
Example Balance Sheet
Non Current Assets
Premises
889000
Machinery
126000
Vehicle
200000
Current Assets
Stock
9500
Cash
2260
Accounts Receivable
35798
Total Assets
1262558
Current Liabilities
Accounts Payable
49000
Overdraft
7000
Non Current Liabilities
Mortgage
300000
Loan
4000
Total Liabilities
360000
Share Equity
6000
Retained Profit
896558
Total Equity and Liabilities
1262558
Goodwill – arises when a business is valued at/sold for more than the balance-sheet value of assets
Intellectual Capital/Property – amount by which the market value of a firm exceeds its tangible
assets less liabilities
Information not in Published Accounts
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Details of the sales and profitability of each good or service produced by the company and of
each division or department
The research and development plans of the business and proposed new products
The precise future plans for expansion or rationalisation of the business
The performance of each department or division
Evidence of the company’s impact on the environment and the local community
Future budgets or financial plans
Window Dressing – presenting the company accounts in a favourable light – to flatter the business
performance. Common ways of window dressing include:
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Selling assets at the end of the financial year then lease them back
Reduce the amount of depreciation of fixed assets; increase profits and asset value
Ignoring some trade receivables
Giving stock levels a higher value than what they are worth
Delaying the payment of bills or incurring expenses until after they have been published
Users of Accounts
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Business Managers
o To measure the performance of the business to compare against targets, previous
time periods and competitors
o To help them take decisions, such as new investments, closing branches and
launching new products
o To control/monitor the operation of each department and division of the business
o To set targets or budgets for the future and review these against actual performance
Banks
o To decide whether to lend money to the business
o To assess whether to allow an increase in overdraft facilities
o To decide whether to continue an overdraft facility or loan
Creditors
o To see if the business is secure and liquid enough to pay off its debts
o To assess whether the business is a good credit risk
o To decide whether to press for early repayment of outstanding debts
Customers
o To assess whether the business is secure
o To determine whether they will be assured of future supplies of the goods they are
purchasing
o To establish whether there will be security of spare parts and service facilities
Government/Tax Authorities
o To calculate how much tax is due from the business
o To determine whether the business is likely to expand and create more jobs
o To assess whether the business is in danger of closing down
o To confirm that the business is staying within the accounting regulations
Investors
o To assess the value of the business and their investment in it
o To establish whether the business is becoming more/less profitable
o To determine what share of the profits investors are receiving
o To decide whether the firm has potential for growth
Workforce
o To assess whether the business is secure enough to pay wages and salaries
o To determine whether the business is likely to expand or be reduced in size
o To determine whether jobs are secure
o To find out whether, if profits are rising, a wage increase can be afforded
o To find out how the average wage in the business compares with the salaries of
directors
Local Community
o To see if the business is profitable and likely to expand, which could be good for the
local economy
o To determine whether the business is making losses and whether this could lead to
closure
Ratio Analysis of Accounts
Gross Profit Margin – shows the relationship between gross profit (before overheads and expenses)
and sales revenue (turnover)
GROSS PROFIT MARGIN =
Net Profit Margin – shows the relationship between net profit and sales revenue (turnover)
NET PROFIT MARGIN =
Current Ratio – measures the relationship between current assets and current liabilities
CURRENT RATIO =
Acid-Test Ratio – measures liquidity but does not take stock into account
ACID-TEST RATIO =
LIQUID ASSETS = Current Assets – Stock
How to Improve Profit Margins
 Reducing direct costs – consumers’ perception of quality may be damaged and therefore
affect the product’s reputation or they may expect lower prices. Motivation levels may fall if
wage costs cut, or replaced by machinery which may also require retraining.
 Increase selling price – total profit could fall is consumers switch to competitors. Consumers
may consider this to be a ‘profiteering’ decision and the long-term image of the business
may be damaged
 Reducing overhead costs – efficient operation may be damaged if fewer managers or lower
salaries. Lower rental costs could mean moving to a cheaper area, which may affect the
company’s image. Promotion costs may be cut which could lead to sales falling.
How to Improve Liquidity
 Sell off fixed assets for cash – if assets are sold quickly, they may not raise their true value. If
assets are still needed by the business, then leasing charges will add to overheads and
reduce operating profit margin
 Sell of inventories for cash – this will only improve the current ratio. This will reduce the
gross profit margin if inventories are sold at a discount. Consumers may doubt the image of
the brand if inventories are old off cheaply. Inventories might be needed to meet changing
customer demand levels and therefore JIT may be difficult to adopt in some countries.
 Increase loans – There will be an increase in gearing ratio, working capital and interest costs
Low-Quality Profit – one off profit that cannot easily be repeated or sustained
High-Quality Profit – profit that can be repeated or sustained
Management
Managers – responsible for setting objectives, organising resources and motivating staff so that the
organisation’s aims are met. Managers must also coordinate activities in the firm, as well as
controlling and measuring performance against targets.
Directors – senior managers elected into office by shareholders in a limited company. They are
usually head of a major functional department, such as marketing.
Supervisors – appointed by management to watch over the work of others. This is usually not a
decision-making role but they will have responsibility for leading a team of people in working
towards pre-set goals
Workers’ Representatives – elected by the workers in order to discuss areas of common concern
with managers
Informal Leader – a person who has no formal authority but has the respect of colleagues and some
power over them
Delegation – passing authority down the organisational hierarchy
Empowerment – allows workers some degree of control over how their task should be undertaken
Mintzberg’s Management Roles
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Interpersonal Roles – dealing with and motivating staff at all levels of the organisation
o Figurehead – symbolic leader, takes on social or legal nature
o Leader – motivating subordinates, selecting and training staff
o Liaison – linking with managers and leaders of other divisions of the business and
other organisations
Informational Roles – acting as a source, receiver and transmitter of information
o Monitor (receiver) – collecting data relevant to the business operations
o Disseminator – sending information collected from internal and external sources to
the relevant people within the organisation
o Spokesperson – communicating information about the organisation, such as current
position and achievements, to external groups and people
Decisional Roles – taking decisions and allocating resources to meet the organisations’
objectives
o Entrepreneur – looking for new opportunities to develop the business
o Disturbance Handler – responding to changing situations that may put the business
at risk, assuming responsibility when threatening factors develop
o Resource allocator – deciding on the spending of the organisations financial
resources and allocation of physical and human resources
o Negotiator – representing the organisation in all important negotiations
Leadership
Leadership – the art of motivating a group of people towards achieving a common objective
Autocratic – a style of leadership that keeps all decision making at the centre of the organisation.
Lower levels of the hierarchy are given little delegated authority and communication is usually just
one way.
Advantages
Experienced leaders have full control of decision
making
Good in crisis situations
Disadvantages
Demotivates staff who want to contribute and
accept responsibility
Decisions do not benefit from staff input
Democratic – a style of leadership that allows the majority opinion of staff to influence decisions. It
involves a great deal of participation from the workforce but can be time consuming.
Advantages
Encourages participation in decision making
Two-way communication is used which allows
feedback from staff
Disadvantages
Consultation with staff can be time consuming
Issues may be sensitive to staff e.g. job losses or
too secret for staff to be aware of
Laissez-Faire – a style of leadership that leaves much of the running and decision making of the
business to the workforce. This may be appropriate in research and development departments
staffed by skilled specialists that are self motivated.
Advantages
Gives employees as much freedom as possible
Managers communicate goals to employees but
allow them to choose how they wish to work
Disadvantages
Lack of feedback may be demotivating
Workers may not appreciate lack of structure
and direction in their work
Paternalistic – a style of leadership based on the approach that the manager is in a better position
than the workers to know what is best for the organisation
McGregor’s Theory X – managers believe the workers dislike work, will avoid responsibility and are
not creative
McGregor’s Theory Y – managers believe that workers can derive as much enjoyment from work as
from rest and play, will accept responsibility and are creative
General View – workers will behave as a result of management attitudes
Emotional Intelligence – the ability of managers to understand their own emotions, and those of the
people they work with, to achieve better business performance. Emotional Intelligence
competencies should try to develop and improve on:
 Self Awareness – knowing what we feel using that to guide decision making
 Self Management – being able to recover quickly from stress
 Social Awareness – sensing what others are feeling
 Social Skills – handling emotions in relationships well and understanding social situations
Motivation
Motivation – the act or process of stimulating an action, providing an incentive or motive, especially
for an act completed. It also defined as what caused people to act or do something in a positive way.
Motivation Theory – the study of factors that influence the behaviour of people in the workplace.
Why motivate employees?
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Low labour turnover
Low absenteeism
They are more prepared to accept responsibility
They may begin to make suggestions for improvements
High productivity
Indicators of poor staff motivation
 Absenteeism – a deliberate absence for which there is not a satisfactory explanation, often
follows a pattern
 Lateness – arriving late may often becomes habitual
 Poor Performance – poor-quality work; low levels of work or greater waste of materials
 Accidents – poorly motivated workers are often more careless, concentrate less on their
work or distract others which will increase accidents
 Labour Turnover – people leave for reasons that are not positive; even if they do not get
other jobs, they spend time trying to get them
 Grievances – there are more of them within the workforce and there might be more union
disputes
 Poor Response Rate – workers do not respond very well to orders or leadership and any
response is often slow
F.W. Taylor’s Scientific Management
F.W. Taylor – an American engineer who invented work-study and founded the scientific approach
to management. He considered money to be the main factor that motivated workers, so he
emphasised the benefits of Piece Work.
Scientific Management – business decision making based on data that are researched and tested
quantitatively in order to improve efficiency of an organisation. Higher efficiency would generate
higher profits and thus higher wages to workers.
What did Taylor recommend?
 Division of Labour – breaking a job into small repetitive tasks, each of which can be done at a
speed with little training
 Piece work – payment by results e.g. for every unit made they receive a certain amount of
money
 Tight Management – ensures workers concentrate on their jobs and follow the correct
processes
Elton Mayo – The Hawthorne Effect
Elton Mayo – motivational theorist based on his studies known as The Hawthorne Effect. He
concluded that:
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Changes in work conditions and financial rewards had little or no effect on productivity
When management consulted workers and took an interest, motivation improved
Team work and developing team spirit can improve productivity
When some control over their own working lives is given, there is a positive motivational
effect
Groups can establish their own targets or norms and these can be greatly influenced by
informal leaders of the group
Maslow’s – Hierarchy of Needs
Abraham Maslow – an American psychologist whose work on human needs has had a major
influence of management thinking. His Hierachy of Needs suggests that people have similar types of
needs from low level basic needs to the need for achievement.
SelfActualisation
Self-Esteem
Needs
Social Needs
Security and Safety Needs
Physiological Needs
Self-Actualisation – the need to fulfil one’s potential through actions and achievements, Maslow did
not believe this need could be filled fully and thought people would always strive to develop further
and achieve more.
Self-Esteem Needs – the need to have self-respect and respect from others, positive feedback, gain
recognition and status for achievement, and opportunities from promotion.
Social Needs – the desire for friendship, love and a sense of belonging, or being part of a team.
Facilities like staff rooms and canteens are important to fulfil this.
Safety Needs – the need for security, a secure job, safe working environment, clear lines of
accountability and responsibility.
Physiological Needs – the requirement for food, clothes and shelter. In relation to work it’s the need
to earn income to acquire these things and to have reasonable working conditions.
Herzberg’s Two Factor Theory
Frederick Herzberg – an American psychologist whose research led him to develop the Two-Factor
theory of job satisfaction and dissatisfaction.
Motivators
Sense of Achievement
Recognition for effort and achievement
Nature of the work itself
Responsibility
Promotion and improvement opportunities
Hygiene/Maintenance Factors
Working Conditions
Supervision
Pay
Interpersonal relations
Company police and Admin e.g. paperwork, rules
Motivators – aspect of a worker’s job that can lead to positive job satisfaction
Hygiene Factors – aspects of a worker’s job that have the potential to cause dissatisfaction
David McClelland – Motivational Needs Theory
Achievement Motivation – a person with a strong need to achieve goals and job advancement
Authority/Power Motivation – a person with a dominant need is ‘authority motivated’
Affiliation Motivation – a person with a need for affiliation, friendly relationships and interaction
with other people
Vector Vroom – Expectancy Theory
Vroom’s Theory – that an employee’s motivation to a complete a task is influenced by their personal
views regarding the possibility of completing the task and the possible outcome or consequence of
completing the task. The theory is based on three beliefs:
 ‘Valence’ – the depth of the want of an employee for an extrinsic reward, such as money or
an intrinsic reward such as satisfaction
 ‘Expectancy’ – the degree to which people believe that putting effort into work will lead to a
given level of performance
 ‘Instrumentality’ – the confidence of employees that they will actually get what they desire,
even if it has been promised by the manager
Financial Motivators
 Wages – where staff are paid each week for the level of hours work
 Commission – where people are paid a percentage of the value sold
 Bonus – where an employer pays a set value to congratulate achievement
 Salaries – where staff are paid the same level each month regardless of how little work is put
in
 Performance Related Pay – where an employer opts to try and provide set targets to aspire
to
 Profit Sharing – where the profits are distributed evenly with employees being given a
percentage of them
 Piece Rate – where an employer opts to pay his staff according to their direct productivity
 Promotion – where career prospects are enhanced as a result of efforts made
 Share Options – where the employee is offered the opportunity to be a shareholder in the
company
 Fringe Benefits – benefits given, separate from pay, by an employer to some or all
employees
Non-Financial Rewards
 Job Rotation – increasing the flexibility of the workforce and the variety of work they do by
switching from one job to another. There would be a decrease in boredom and an increase
in multiple skills. It does not provide any authority or promotion.
 Job Enlargement – attempting to increase the scope of a job by broadening or deepening the
tasks undertaken. There would be an increase in workload and sense of responsibility but a
decrease in job satisfaction.
 Job Enrichment – aims to use the full capabilities of workers by giving them the opportunity
to do more challenging and fulfilling work. There is a decrease in direct supervision and an
increase in responsibility, as well as some decision making authority.
 Job Redesign – this involves the restructuring of a job, usually with employees’ involvement
and agreement, to make work more interesting, satisfying and challenging. There would be
an increase in chance of promotion and an increase in employee development.
 Quality Circles – voluntary groups of workers who meet regularly to discuss work-related
problems and issues. There is an increase in voice for the workers and a hands on approach
to solving problems
 Worker Participation – workers actively encouraged to become involved in decision making
within the organisation. There would be an increase in team working, motivation and
responsibility.
 Team Working – production is organised so that groups of workers undertake complete
units of work. There is a decrease in labour turnover but an increase in quality and improved
ideas
Human Resource Management
Human Resource Management – the strategic approach to the effective management of an
organisation’s workers so that they help the business gain a competitive advantage
Role of HRM
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Appropriate Pay Systems
Workforce Planning
Staff Morale and Welfare
Appraising and Training
Recruitment and Selection
Preparation of Contracts
Measuring Staff Performance
Involving managers in development of staff
Strategic Workforce Planning – analysing and forecasting the numbers of workers and the skills of
those workers that will be required by an organisation to achieve its objectives
Workforce Audit – a check on the skills and qualifications of all existing workers and management
Factors affecting Workforce Demand

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Demand for existing and new products
Business disposals and product closures
Introduction of new technology
Cost reduction programmes
Changes to the business organisational structure
Business acquisition, joint ventures, strategic partnerships
Factors affecting Workforce Supply

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
Changes to the composition of the existing workforce
Normal loss of workforce e.g. through retirement
Potential exceptional factors e.g. actions of competitors that create problems of staff
retention
Workforce Gap – a forecast of having too few or too many workers. The key HRM activities to
manage the workforce gap comprise:
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
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Recruitment plans
Training plans
Redundancy plans
Staff Retention plans
Recruitment and Selection
Recruitment – the process of identifying the need for a new employee, defining the job to be filled
and the type of person needed to fill it and attracting suitable candidates for the job
Selection – involves the series of steps by which the candidates are interviewed, tested and screened
for choosing the most suitable person for vacant post.
Recruitment and Selection Process
1.
2.
3.
4.
5.
Establishing the exact nature of the job vacancy and drawing up a job description
Drawing up a person specification
Preparing a person specification
Drawing up a shortlist of applicants
Selecting between the applicants
Job Description – lists the tasks and responsibilities the person appointed will be expected to carry
out. It may also state the job title, location, nature of the business and the salary and conditions.
Person Specification – outlines the ideal profile of the person needed to match the job description. It
may state qualifications, experience, interests and personality.
Advertising Job Vacancy Internally
Advantages
Managers know the internal candidates
Motivates staff as this can encourage promotion
Shorter and less expensive than external
recruitment
Internal candidates know the business and its
objectives
Disadvantages
Internal promotion leaves another job to be
filled
It can cause resentment among colleagues who
are not selected
Advertising Job Vacancy Externally
Advantages
External recruits bring in fresh ideas
Larger pool of applicants to choose from
They bring in experience from other
organisations
Disadvantages
External recruits usually need longer induction
process
Managers do not know the applicant
It is usually a long and expensive process
Training – work-related education to increase workforce skills and efficiency
Induction Training – introductory training programme to familiarise new recruits with the systems
used in the business and the layout of the business site
On-the-job training – instruction at the place of work on how a job should be carried out
Off-the-job – all training undertaken away from the business
Contracts
Employment Contract – a legal document that sets out the terms and conditions governing a
worker’s job. A contract includes:
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Employees responsibilities
Working hours
Rate of pay and holiday entitlement
Notice period both employee or employer
Zero-Hours Contract – no minimum hours of work are offered and workers are only called in – and
paid – when work is available
Temporary employment contract – employment contract that lasts for a fixed time period e.g. 6
months.
Part time employment contract – employment contract that is less than the normal full working
week e.g. 37.5 hours per week
Flexitime contract – employment contract that allows the staff to be called in at times most
convenient to employers and employees e.g. busy times of the day
Teleworking – staff working from home but keeping contact with the office by means of modern IT
communications
Outsourcing – not employing staff directly, but using an outside agency or organisation to carry out
some business functions
Core workers – full time and permanent staff
Peripheral workers – temporary, past time and self employed workers
Charles Handy, Shamrock Organisation – shows the trend towards
fewer core staff on permanent and salaried contracts.
Equality Policy – practices and processes aimed at achieving a fair
organisation where everyone is treated in the same way and has the
opportunity to fulfil their potential
Core Workers
(strategists, knowledge and
core processes)
Flexible Workers
(part-timers, contractors,
consultants)
Outsourced Work
(IT, marketing, HR,
training, franchising,
finance)
Diversity Policy – practices and processes aimed at creating a mixed workforce and placing positive
value on diversity in the workplace
Work-life Balance – a situation in which employees are able to give the right amount of time and
effort to work and to their personal life outside of work i.e. to family
How is a contract ended?
Dismissal – where an employee’s contract is ended as a result of their actions, such as due to
misconduct or harassment, being incapable, or non-disclosure of a relevant criminal record. Before
dismissing staff they must follow a disciplinary procedure.
Unfair dismissal – ending a workers employment contract for a
reason that the law regards as being unfair, such as pregnancy,
religion, discrimination, non-relevant criminal record
Gross Misconduct – indiscipline so serious that it justifies the
instant dismissal of an employee, even on the first occurrence.
Redundancy – when a job is no longer required, so the
employee doing this job becomes redundant through no fault
of his or her own. This might happen if the employer ceases
trading, the employer changes location or if sales
unexpectedly fall. When this happens the employer must make a redundancy payment, which
depends upon the number of year’s service and the employees current pay level.
Termination by Notice – this might happen because a short-term contract is not going to be renewed
or if an employee wants to leave. Notice can be given by either part and failure to give sufficient
notice will result in financial penalties.
Types of Human Resource Management
Hard HRM – an approach to managing staff that focuses on cutting costs
Advantages
Managers can keep control of workforce
Mistakes are less likely to be made
Easy to replace workers
Increased profits and customer satisfaction
Disadvantages
Employees not used to their full potential
Demotivated staff
Due to employees not using their full potential
they could be missing out on new ideas
Soft HRM – an approach to managing staff that focuses on developing staff so that they reach selffulfilment and are motivated to work hard and stay with the business
Advantages
Increase in staff morale and motivation
Staff retrained will be easier within the business
Employees ideas and kills will benefit the
business through their development
Disadvantages
Some staff may not motivated by empowerment
or development, and if so there will be a waste
of time and money
Appraisal and Staff Development
Appraisal – the process of assessing the effectiveness of an employee judged against pre-set
objectives. This will:

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Be a continuous process
Enable workers to continually achieve self fulfilment at work
Establish a career plan that the individual feels is relevant and realistic
Absenteeism
Absenteeism – measures the rate of workforce absence as a proportion of the employee total.
LABOUR TURNOVER =
Labour Turnover
Labour Turnover – measures the rate at which employees are leaving an organisation
LABOUR TURNOVER =
Benefits
Rationalisation (reduction in wastage)
New ideas brought into the workplace
Low skilled and less productive workers may
leave – replaced by better workers
Costs
Recruiting, selecting and training new staff
Poor output levels and customer service
Loyalty and consistency
Difficult to establish team spirit
Marketing
Marketing – the management task that links the business to the customer by identifying and
meeting the needs of the customers’ profitability – it does this by getting the right product, at the
right price to the right place at the right time
Consumer Markets – goods or services bought by the final user of them
Industrial Markets – goods or services bought by businesses to be used in the production process of
other products
Marketing Objectives – goals set for the marketing department e.g. increasing market share,
rebranding a product, increasing total sales level, market development. To be effective, marketing
objectives should:
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Fit in with the overall aims and mission of the business
Be determined by senior management
Be SMART
Be made through coordination with other departments
Marketing Strategy – long-term plan established for achieving marketing objectives
Market Orientation – customer led organisations start the planning process by focusing on the
customers
Product Orientation – production-led organisations start the planning process by focusing on the
firm
Asset-Led Orientation – asset-led organisations match the customer needs to the firms strengths
Direct Competitors – businesses that provide the same or very similar goods or services
Unique Selling Point – the special feature of a product that differentiates it from competitor’s
products
Product Differentiation – making a product distinctive so that it stands out from competitors
products in consumer perceptions
Consumer Profile – a quantified picture of consumers of a firm’s products, showing proportions of
age groups, income, gender, location and social class
Factors that determine Marketing Success
 Societal Marketing – this approach considers not only the demands of consumers but also
the effects on all members of the public involved in some way when firms meet these
demands
 Demand
 Supply
 Price
The Market
Market – any situation where buyers and sellers are in contact in order to establish a price
Formal Market – a shop or financial market such as the Stock Exchange
Informal Market – selling goods from a street corner or an advert in a local newspaper
Demand – the quantity that people in a particular market actually can and will purchase at each
price. Demand is affected by:
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
Income
Advertising, Promotional offers and Public Relations
Taste and Fashion
Demographic Changes
Price of Complementary and Substitute goods
Supply – the quantity of a given product that suppliers are prepared to supply at a given price in a
time period. Supply is affected by:
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
Costs of Production – change of labour or raw materials
Tax imposed on the suppliers and government – raise of costs
Subsidies paid by government to suppliers – reduce costs
Weather conditions and other natural factors
Advances in technology – low costs
Equilibrium Price – the market prices that equates supply and demand for a product
Niches
Niche marketing – identifying and exploiting a small segment of a larger market by developing
products to suit it
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Smaller businesses try to find a gap in the market
A large business has the money to research and develop products in competitive markets
Small businesses look for a gap, where there are fewer competitors
Finding a product or service that is not often offered by main stream competition
Small businesses can survive and thrive as market is not dominated by large firms
High prices and profit margins
Create status and image
Mass Marketing
Mass marketing – selling the same products to the whole market with no attempt to target groups
within it

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Businesses benefit from economies of scale
Fewer risks
Market Segments
Market Segmentation – identifying different segments within a market and targeting different
products or services to them
Market Segment – sub group of the whole market. Different segments can be identified with:

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Geographic Differences
o Consumer tastes may vary between different areas so it may be appropriate to offer
different products and market them in location specific ways
o Different countries have different cultures so some forms of advertising are not
going to be acceptable in different countries
Demographic Differences
o The most common use for segmentation and helps organisations become more
efficient
o Demography is the study of the population data and identifies the following
characteristics: Age, Income, Sex, Religion, Ethnicity, Social Class
Psychographic Differences
o Differences in consumers’ lifestyles, personalities, values and attitudes. These can be
influenced by the consumer social class.
Advantages
Defines target market more precisely
Enables identification of a gap in the market
Small firms unable to compete in whole market
so are specialised
Differentiated marketing strategies
Price discrimination
Disadvantages
Extensive market research
Danger of excessive specialisation
Costs may be high – R&D, production and
marketing (especially advertising)
Class System
A – Upper Class – higher managerial, administrative and professional
B – Middle Class – managerial staff including professions
C1 – Lower Middle Class – supervisory, clerical or junior manager
C2 – Skilled Manual Workers
D – Working Class – semi and unskilled manual workers
E – Casual, part-time, workers and unemployed
Market Size – the total level of sales of all producers within a market, either in volume or value
Market Growth – the percentage change in the total size of a market over a period of time
Market Research
Market Research – this is the process of collecting, recording and analysing data about customers,
competitors and the market. Businesses need Market Research for:

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To reduce the risks associated with new product launches
To predict future demand changes
To explain patterns in sales of existing products and market trends
To assess the most favoured designs, flavours, styles, promotions and packages for a product
Market Research Process
1. Management Problem Identification
 Businesses need to have a clear idea of the purpose of the research of the problems
needed to be investigated
 Examples can include: What size is the potential market? Why are our sales falling?
How can we break into the market in another country?
 If the problem is not clear, there could be a high loss in money through wastage
2. Research Objectives
 These objectives must obviously tie in with the original problem
 At the end of the research they will have needed to provide information to solve the
problem
 Examples can include: How many people are likely to buy our products in Country X?
If the price of Good Y is reduced, how much will this increase sales volume?
3. Sources of Data
 Primary Research – the collection of first-hand data that is directly related to a firms
needs
 Secondary Research – collection of data from second-hand resources e.g. newspaper
articles
Primary Data
Advantages
Relevant – collected for a specific purpose –
directly addresses the questions the business
wants
Up to date and therefore more useful than most
secondary data
Confidential – no other business has access to
this data
Disadvantages
Costly – market research agencies can charge
thousands of dollars for detailed customer
surveys and other market research reports
Time-consuming – secondary data could be
obtained from the internet much more quickly
Doubts over accuracy and validity – largely
because of the need to use sampling and the risk
thst the samples used may not be fully
representative of the population
Sources of Primary Data
Qualitative Data – research into the in-depth motivations behind consumer buying behaviour or
opinions
Quantitative Data – research that leads to numerical results that can be statistically analysed
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Focus Groups – a group of people who are asked about their attitude towards a product,
service, advertisement or new style of packaging. Researchers will be part of this discussion
and will have to keep them ‘on target’ as they may get off track, and they may also present a
bias from them leading or influencing the decision too much.
Observing and Recording – market researchers can observe how consumers behave i.e. how
many people will look at a display in their shop, however could be distorted as people will
behave differently if they know they are being watched
Test Marketing – involves promoting and selling the product in a limited geographical area
and then recording consumer reactions and sales figures. The region selected however, must
reflect as closely as possible the social and consumer profiles of the rest of the country.
Consumer Surveys – involves directly asking consumers or potential consumers for their
opinions and preferences. They can obtain both qualitative and quantitative data. The four
important issues for market researchers to be aware of whilst conducting surveys are: Who
to ask? What to ask? How to ask? How accurate is it?
Sampling
Sample – the group of people taking part in a market research survey selected to be representative
of the overall target market. When there is a larger sample, there will be more confidence in results
Random Sampling – every member of the target population has an equal chance of being selected. It
is considered fair and easy to setup and represents the whole population.
Stratified Sampling – this draws a sample from a specified sub group of segment of the population
and uses random sampling to select an appropriate number from each stratum. This may give more
relevant information and may be more cost effective however there is a potential to miss out on
whole population views with the focus of just one group
Quota Sampling – when the population has been stratified and the interviewer selects an
appropriate number of respondents from each stratum. This is a cheaper method, however is not
random and therefore may not be fully representative.
Questionnaire Design
Open Question – invites a wide ranging or imaginative response; very difficult to collate and present
numerically
Closed Question – questions to which a limited number of pre-set answers is offered
Secondary Data
Advantages
Often obtainable very cheaply – apart from the
purchase of market intelligence reports
Identifies the nature of the market and assists
with the planning of primary research
Obtainable quickly without the need to devise
complicated data-gathering methods
Allows comparison of data from different
sources
Disadvantages
May not be updated frequently and may
therefore be out of date
As it was originally collected for another
purpose, it may not be entirely suitable or
presented in the most effective way for the
business using it
Data-collection methods and accuracy of these
may be unknown
Might not be available for completely new
product developments
Sources of Secondary Data
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Government Publications – Population Census, Social Trends, Economic Trends, Annual
Abstract of Statistics, Family Expenditure Survey
Local libraries and government offices – For a small area: Local population census, number
of households in the area, proportions of local population from different ethnic or cultural
groups etc.
Trade Organisations – information concerning products can be received from trade
organisations that produce regular reports on the state of the markets their members
operate in.
Market Intelligence Reports – very detailed reports on individual markets and industries
produced by specialist market research agencies.
Newspaper reports and specialist publications – could show weekly advertising spend data,
consumer ‘recall of adverts’ results, as well as regular articles on key industries and detailed
country reports.
Internal Company Records – Customer Sales Records Guarantee Claims,
Daily/Weekly/Monthly sales trends, feedback from customers on
product/service/delivery/quality
The Internet – has access to data that has already been collected from other sources. The
accuracy and relevance of the source would always have to be checked.
Presenting Data
Mean – calculated by totalling all the results and dividing by the number of results
Median – the value of the middle item when data has been ordered of ranked
Mode – the value that occurs most frequently in a set of data
Range – the difference between the highest and lowest value
Interquartile Range – the range of the middle 50% of data
Marketing Mix

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

Product – methods used to improve/differentiate the product and increase sales or target
sales more effectively to gain a competitive advantage e.g.
o Design
o Technology
o Usefulness
o Convenience
o Quality
o Packaging
o Branding
o Accessories
o Warranty
Price
o How much will the business charge customers?
o Is there a link with the perception of quality?
o What pricing strategies could the firm use?
o Importance of knowing the market and keeping an eye on rivals
Promotion - Strategies to make the consumer aware of the existence of a product or service
e.g.
o Special offers
o Advertising
o User trials
o Leaflets
o Posters
o Competitions
Place – the means by which products and services get from producer to consumer and
where they can be accessed by the consumer
o The more places to buy the product and the easier it is made to buy it, the better for
the business and the consumer
o The further the places are the more costs the business will incur
o E.g. retail stores, wholesale, mail order, internet, direct sales, multichannel
Integrated Marketing Mix
Integrated Marketing Mix – the key marketing decisions complement each other and work together
to give customers a consistent message about the product
 Customer Solution – what the firm needs to provide to meet customer needs
 Cost to Customer – total cost of the product
 Communication with Customer – up to fate and easy two way communication
 Convenience to Customer – providing easy access for the customer to gain the product
Customer Relationship Marketing/Management – using marketing activities to establish successful
customer relationships so that existing customer loyalty can be maintained; CRM is about not
necessarily gaining new customers but keeping existing ones
Portfolio Analysis
Portfolio Analysis – analysing the range of existing products of a business to help allocate resources
effectively between them. It is linked to:
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

Market Segmentation
Market Research
Product Development
Product Life Cycle (and extension strategies)
Product Life Cycle
Product – the end result of the production process sold on the market to satisfy a consumer need
Product Life Cycle – shows the stage that products go through from development to withdrawal
from the market; refers to their life span as such
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Each product may have a different life cycle
PLC determines revenue earned
Contributes to strategic marketing planning
May help the firm to identify when a product needs support, redesign, reinvigorating,
withdrawal etc.
May help in new product development
May help in forecasting and managing cashflow
Introduction:
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Advertising and promotion campaigns
Target campaign at specific audience
Monitor initial sales
Maximise publicity
High cost/low sales
Length of time – type of product
Growth:

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Increased consumer awareness
Sales rise
Revenues increase
Costs – fixes costs/variable costs, profits may be made
Monitor market – competitors reaction
Maturity:

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
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Sales reach peak
Cost of supporting the product declines
Ratio of revenue to cost high
Sales growth likely to be low
Market Share may be high
Competition likely to be greater
Monitor Market – changes/amendments/new strategies
Decline:

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Product outlives/outgrows its usefulness/value
Fashions change
Technology changes
Sales decline
Cost of supporting starts to rise too far
Decision to withdraw may be dependent on availability of new products and whether
fashions/trends will come around again
Product Extension Strategy
Product Extension Strategy – a medium to long-term plan for lengthening a products life cycle. It is
likely implemented during the Maturity stage or early Decline. Extension strategies can include:




Redesigning the product – New and improved
Adding an extra feature – Now with...(colour, quality, etc.)
Changing the packaging and advertising to appeal to a new Market Segment
Providing a Unique Selling Point
Branding
Brand – an identifying symbol, name, image or trademark that distinguishes a product from its
competitors because of it’s:
 Logo
 Packaging
 Colour
 Taste
 Performance
Brand Extensions – introducing new or modified products

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
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Brands bring sustained high prices and may help the firm become a market leader
Brands may be able to change premium prices
Customers will be loyal to your product and trust it
Brands can be re-invented
In a fast changing world, it is difficult for brands to change and keep customers happy
People are more willing to spend money to get a ‘quality’ product
Market leaders are nearly always brands
Price Elasticity of Demand
Price Elasticity of Demand - measures the responsiveness of the quantity demanded of a good or
service to a change in its price
Elastic Demand – a change in price brings about a large change in the quantity demanded. These
have a coefficient greater than 1
Inelastic Demand – a change in price brings about a small change in the quantity demanded. These
have a coefficient between 0 and 1
Inelastic Demand
PED =
Elastic Demand
% Change in Quantity
Demanded
% Change in Price
Factors of Price Elasticity of Demand

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


Proportion of Income – small proportion = inelastic; large proportion = elastic
Addictiveness – addictive = inelastic; not addictive = elastic
Necessity or luxury – necessity = inelastic; luxury = elastic
Time period – short time period = inelastic; long time period = elastic
Substitutes – not many substitutes = inelastic; many substitutes = elastic
Special Price Elasticity Curves
Perfectly Elastic - a change in price brings about an infinite response (a tiny price change will cause a
huge change in quantity demanded/supplied) giving a coefficient of infinity (∞)
Perfectly Inelastic – a change in price brings about no response (even if price drastically changes,
Qd/Qs will stay the same) giving a coefficient of 0
Unitary Elasticity - this occurs when a percentage change in the price results in an equal change in
demand giving a coefficient of 1.
Perfectly
Inelastic
Perfectly Elastic
Unitary
Elasticity
Importance of PED



Firms can use PED estimates to predict:
o The effect of a change in price on quantity demanded
o The effect of a change in price on total revenue
o The likely price volatility in a market following unexpected changes in supply
o The effect of a change in indirect tax onto the consumer
o Information on the price elasticity of demand can be utilized as part of a policy or
price discrimination
Can be used to make more accurate sales forecasts and assist in pricing decisions
Is bad because:
o PED assumes nothing has changed in the market
o PED can become outdated quickly
o It is not always easy and indeed possible to calculate PED
Pricing Strategies
Mark-Up Pricing – adding a fixed mark-up for profit to the unit price of a product
e.g.
Total Cost of bought-in materials = $40; Firm wants 50% Mark-Up
Therefore, Selling Price =
= $60
Target Pricing – setting a price to give the company a targeted rate of return at certain output levels
e.g.
Total costs for 10000 units = $400000; Targeted Rate of Return = 20% of Sales
Therefore, Selling Price =
= $48
Full-cost (absorption) pricing – setting a price by calculating a unit cost for the product (allocating
fixed and variable costs) and then adding a fixed profit margin
e.g.
Fixed Costs = $10000; Variable Cost for 5000 units = $25000; Profit Margin = 300%
Therefore, Selling Price =
Advantages
Suitable for firms that are ‘price-makers’ due to
market dominance
Easy to calculate for single-product firms where
there is no doubt about fixed cost allocation
Price set will cover all costs of production
= $28
Disadvantages
Inaccurate for multi-product businesses where
there is doubt over allocation of fixed costs
If sales fall, average costs often rise – this could
lead to the price being raised using this method
Tends to be inflexible
Doesn’t consider market/competitive conditions
Contribution-cost pricing – setting prices based on the variable cost of making a product in order to
make a contribution towards fixed costs and profit
e.g.
Variable Cost = $2; Total Fixed Costs = $40000; Expects to sell 60000 units
If Selling Price = $3, $1 Contribution covers Fixed Costs, plus makes $20000 profit
Advantages
Variable costs covered and contribution to fixed
Suitable for firms producing several products –
fixed costs do not have to be allocated
Price can be adapted to suit market condition
Disadvantages
Fixed costs may not be covered
If prices vary too much – due to the flexibility–
then regular customers may be annoyed
Competition Pricing – setting a price based upon what the price competitors set
Advantages
Necessary for firms with little market power
Flexible to market and competitive conditions
Disadvantages
Price set may not cover all of the costs
Price Discrimination – uses price elasticity knowledge to charge different prices. This takes place in
markets where is possible to charge different groups of consumer’s different prices for the same
product. Examples include:


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
Cheaper prices of travel for children and elderly
Different prices for different export markets
Higher priced goods in higher socio-economic areas
Occupational discounts such as teachers getting stationery cheaper
Advantages
Uses PED knowledge to charge different prices in
order to increase total revenue
Disadvantages
Costs of having different pricing levels
Customers may switch to lower-price rate
Consumers paying higher prices may object
Dynamic Pricing – offering goods at a price that changes according to the level of demand and the
customer’s ability to pay
Penetration Pricing – when a firm enters a new market, it sets its price lower than the competitor’s
Price/Market Skimming – setting a high price for a new product when a firm has a unique or highly
differentiated product with lower price elasticity of demand
Advantages
Help establish a product in the market
Consumers may assume it is of good quality
Disadvantages
Potential customers might be put off because of
the high prices
Promotional Pricing – when the firm sets price lower for a set amount of time, in cases such as:


Buy One Get One Free
Psychological Pricing – setting prices as appropriate for the quality of the good e.g. perfume sold at a
high price as to not effect perception of quality. This also refers to making prices appear lower than
actually are e.g. $2.99 instead of $3.00
Loss Leaders – setting prices very low for some goods, knowing that whilst in store they will
purchase other goods at usual prices. The firms hope that the profits earned by these other goods
will exceed the loss made on the lower priced ones
Promotion
Promotion – the use of advertising, sales promotion, personal selling, direct mail, trade fairs,
sponsorship, and public relations to inform consumers and persuade them to buy. Promotional
objectives often include:
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To Inform prospective customers of the product and the business
To show the benefits of the product
To persuade potential customers to buy the product
To present a good image
Promotion Mix – the combination of promotional techniques that a firm uses to sell a product
Above-The-Line – a form of promotion that is undertaken by a business by paying for
communication with consumers
Advertising – paid-for communication with consumers to inform and persuade. There are two types:
 Informative Advertising – adverts that give information to potential purchasers of a product,
rather than just trying to create a brand image
 Persuasive Advertising – adverts trying to create distinct image/brand identity for products
Factors contributing towards determining Advertising Media
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Cost
Size of audience
Profile of target audience in terms of age/income levels/interests etc.
Message to be communicated
Other aspects of the Marketing Mix
Legal and other constraints
Below-the-Line – promotion that is not a directly-paid for means of communication, but based on
short-term incentives to purchase
Sales Promotion – incentives such as special offers or special deals directed at consumers or retailers
to achieve short term sales increases and repeat purchases by consumers e.g. price deals, loyalty
reward programmes, money-off coupons, ‘buy one get one free’, point-of-sale displays, competitions
Personal Selling – a member of the sales staff communicates with one consumer with the aim of
selling the product and establishing a long-term relationship between company and consumer
Direct Mail/Marketing – directs information to potential customers who have a potential interest in
a type of product e.g. junk mail, pop-up ads, mail shots
Sponsorship – payment by a company to the organisers of an event/team/individuals so that the
company name becomes associated with that event/team/individual
Public Relations – the deliberate use of free publicity provided by newspaper, TV, and other media
to communicate with and achieve understanding by the public
Marketing/Promotional Expenditure Budget – the financial amount made available by a business for
spending on marketing promotion during a certain time period. These are set in a number of
different ways:
 Competitor-Based – setting the budget based on competitor’s budget. When two or more
firms are of roughly the same size in terms of sales, it is possible that they will attempt to
match each other in terms of spending which can lead to a spiralling of promotion costs.
 Objective-Based – analysing what sales are required to meet objectives, then assess how
much support spending is required
 Percentage of sales – expenditure will vary dependant on sales
 What the business can afford – many managers adopt a view that marketing is a luxury and
may not provide a large amount of budget towards it
 Incremental – what was set last year, adding a percentage for inflation of different sales
targets
Impacts on Society from Promotional Expenditure
Benefits
It informs people about new products and thus
helps increase competition between firms
By helping create mass markets, promotion can
assist in reducing average cost per unit
Generates income for TV, radio, and newspaper
businesses
Drawbacks
Waste of resources – could be used to lower
prices instead
Promotion is powerful – could encourage
purchases that are unwanted
Promotes consumerism – people are judged by
the amount they own
Encourages consumption – environmentalists
argue that it’s against conserving resources
Internet
Internet Marketing – refers to advertising and marketing activities that use the internet, email and
mobile communications to encourage direct sales via electronic commerce. It involves:
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Selling directly to consumers
Advertising through websites
Sales lead to customers leaving details
Dynamic Pricing
Advantages
Relatively low cost
Worldwide audience
Access to consumers information for research
Convenience of the internet
Lower fixed costs
Dynamic Pricing
Disadvantages
Some countries have low-speed or no internet
Cannot touch/feel/smell/try-on products
Product returns may increase
Cost and unreliability of postal service
Must be kept up to date (particularly for apps)
Worries about internet security
E-commerce – the buying and selling of goods and services by businesses and consumers through an
electronic medium
Viral Marketing – the use of social media sites or text messages to increase brand awareness or sell
products
Channel of Distribution
Channel of Distribution – refers to the chain or intermediaries a product passes through from
producer to final consumer. The intermediaries include:
Wholesalers
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Breaks down bulk and buys from producers and sell small quantities to retailers
Provides storage facilities
Reduces contact cost between producer and consumer
Wholesaler takes some of the marketing responsibility e.g. sales force, promotions
Agents
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Mainly used in international markets, however control is difficult due to cultural differences
Commission agent – does not take the title of the goods
Stockist agent – hold ‘consignment’ stock
Training, motivation etc. is expensive
Retailer
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They have a much stronger personal relationship with the consumer
Holds a variety of products and builds retailer ‘brand’ in the high street
Offers consumers credit
Promote and merchandise products prices the final product
Direct Selling/Zero Intermediary – when no intermediaries are used in the distribution process
Advantages
No mark-up or profit margin by other businesses
Producer has full control over marketing mix
Quicker than other channels
May lead to fresher food products
Direct contact with consumers offers research
Disadvantages
Producer must pay for storage and stock costs
May not be convenient for consumer
Limits chance for consumers to see and try good
No promotion paid for by intermediaries
Can be expensive to deliver goods to consumers
One Intermediary Channel – when one intermediary is used in the distribution process
Advantages
Retailers pay for stock and storage
Retailer has product displays
Retail locations convenient for consumer
Producers can focus on production
Disadvantages
Intermediary takes a profit mark-up
Producers lose some control over marketing mix
Retailers may sell competitor’s goods too
Producer has delivery cost to retailer
Two Intermediary Channel – when two intermediaries are used in the distribution process
Advantages
Reduces stock-holding costs
Wholesaler pays for transport costs to retailer
May be best way to enter foreign markets where
producer has no direct contact with retailers
Disadvantages
Another intermediary takes profit mark-up
Producer loses most control over marketing mix
Slows down distribution chain
Operations
Operations Planning – preparing input resources to supply products to meet expected demand
Production Process/Transformation Process – the inputs of resources, land, capital, labour are
produced into finished goods, services and components for other firms.
Creating Value – increasing the difference between the cost of purchasing bought-in materials and
the price the finished goods are sold for
Adding Value – the difference between the cost of purchasing raw materials and the prices the
finished goods are sold for. The degree of values added will depend on:
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Design of the product
Impact of the promotional strategy
Efficiency with which the input resources are combined and managed
Intellectual Capital – intangible capital of a business that includes human capital, structural capital
and relational capital
Human Capital – well trained and knowledgeable employees
Structural Capital – databases and information systems
Relational Capital – good links with suppliers and customers
Production – converting units into outputs
Level of Production – the number of units produced during a time period
Productivity – the ratio of outputs to inputs during production. It can be raised through:
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Improve training or staff to raise skill levels
Improve worker motivation
Purchase more technologically advanced equipment
Labour-Intensive – involving a high level of labour input compared with capital equipment
Capital-Intensive – involving a high quantity of capital equipment compared with labour input
Efficiency – producing output at the highest ratio of output to input
Effectiveness – meeting the objectives of the enterprise by using inputs productively to meet
consumer needs
Production Methods
Job Production – producing a one-off item specifically designed for the customer; requires a skilled
workforce e.g. personalised wedding cakes
Advantages
Able to undertake specialist projects or jobs,
often with high value added
High levels of worker motivation
Disadvantages
High unit production costs
Time-consuming
Wide range of tools and equipment needed
Batch Production – producing a limited number of identical products – each item in the batch passes
through one stage of production before passing onto the next stage
Advantages
Some economies of scale
Faster production with lower unit costs than job
production
Some flexibility in design of product in each
batch
Disadvantages
High levels of stocks at each production stage
Unit costs likely to be higher than with flow
production
Flow Production – producing identical items in a continually moving process; used for products with
high steady demand
Advantages
Low unit costs due to constant working of
machines, high labour productivity and
economies of scale
Disadvantages
Inflexible – often very difficult and timeconsuming to switch from one type of product to
another
Expensive to set up flow-line machinery
Mass Customisation – the use of flexible computer-aided production systems to produce items to
meet individual customers’ requirements at mass-production cost levels; requires flexible equipment
and workers
Advantages
Combines low unit costs with flexibility to meet
customers’ individual requirements
Disadvantages
Expensive product redesign may be needed to
allow key components to be switched to allow
variety
Expensive flexible capital equipment needed
Factors that Influence the Change of Production Method
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Size of market
Amount of capital available
Availability of other resources
Market demand exists for products adapted to specific customer requirements
Operational Flexibility – the ability of a business to vary both the level of production and the range of
products following changes in consumer demand
Process Innovation – the use of a new/much improved production method/service delivery method
Technology
Computer Aided Design (CAD) – the use of computer programmes to create two or three
dimensional graphical representations of physics objects
Advantages
Lower product development costs
Increased productivity
Improved product quality
Faster time-to-market
Good visualisation of the final product and its
constituent parts
Great accuracy, so errors are reduced
Disadvantages
Complexity of programmes
Need for extensive employee training
Large amounts of computer processing power
required and this can be expensive
Computer Aided Manufacturing (CAM) – the use of computer software to control machine tools and
related machinery in the manufacturing of components or complete products
Advantages
Precise manufacturing and reduced quality
problems – compared to production methods
controlled by people
Faster production/increase labour productivity
Integrating with CAD, CAM allows more design
variants of a product to be produced as well as
mainstream mass market products.
More flexible production allowing quick
changeover from one product to another
Disadvantages
Cost of hardware, programmes and employee
training – these costs may mean that smaller
businesses cannot access the benefits of CAM –
although technology is becoming cheaper
Hardware failure – breakdowns can and do occur
and they can be complex and time consuming to
solve
Location
Optimal Location – a business location that gives the best combination of quantitative and
qualitative factors
Quantitative Factors – these are measureable in financial terms and will have a direct impact on
either the costs of a site or the revenues from it and its profitability
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Labour Costs
Transport Costs
Sales Revenue Potential
Government Grants
Qualitative Factors – non-measureable factors that may influence business decisions
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Safety
Infrastructure
Environmental Concerns
Ethics
Managers Preference
Further Expansion
Economies of Scale
Scale of Operation – the maximum output that can be achieved using available inputs – this scale
can only be increased in the long term by employing more of all inputs
Economies of Scale – when average costs decrease as a result of producing on a large scale
Internal Economies of Scale – average costs per unit decrease as scale of production is expanded
within a firm
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Purchasing Economies – larger firms buy their supply in bulk. Suppliers generally offer price
discounts for bulk purchases as delivery is cheaper.
Marketing Economies – larger marketing costs can be spread over high levels of sales of
large firms
Financial Economies – large firms can generally borrow money at lower interest rates as
banks view them as less risky than small firms.
Technical Economies – large firms generally have sufficient finance for investment in new
machinery, training/recruiting skilled workers, and research and development.
Risk-bearing Economies – as larger firms tend to have more customers, they are safe from
being too reliant on one customer. Diversification allows large firms to spread their risk over
a range of products
Managerial Economies – larger firms are able to employ specialist managers who should
operate more efficiently than general managers and make fewer mistakes due to training
External Economies of Scale – when the expansion of an entire industry benefits all firms within that
industry
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Access to a skilled workforce – Large firms may have access to a skilled workforce because
they can recruit workers trained by other firms within the industry
Ancillary firms – firms which develop and locate near large firms in particular industries to
provide them with specialised equipment and services
Joint Marketing Benefits – firms locating in the same area well known for producing high
quality produce may benefit from reputation
Shared infrastructure – the growth of one industry may persuade firms in other industries to
invest in new infrastructure
Diseconomies of Scale
Diseconomies of Scale – when firms experience an increase in average costs as they try to increase
production and expand too much and too quickly
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Management Diseconomies – if a firm has offices in different locations, produce many
products and have many different layers of management, this can slow down the decision
making process
Labour Diseconomies – large firms generally employ computer-controlled equipment and
machines. Workers operating this machinery may become bored and become less
productive
Agglomeration Diseconomies – this can occur when a company merges with too many
different firms at different stages of production. It can become difficult to coordinate all
different activities of the merged firms.
Inventory Management
Inventory (stock) – materials and goods required to allow for the production and supply of products
to the customer. Stocks include Raw Materials, Work In Progress, or Finished goods. Without
effective management of the stock, several serious problems can arise for the firms:
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Insufficient inventories to meet unforeseen changes in demand
Out-of-date inventories might be held if an appropriate rotation system is not used
Inventory wastage might occur due to mishandling or incorrect storage conditions
Very high inventory levels may result in excessive storage costs and a high opportunity cost
for the capital tied up
Poor management of the supplies purchasing function can result in late deliveries, low
discounts from suppliers or too large a delivery for the warehouse to cope with
Inventory-Out Costs (Costs of Not Holding Enough Stock)
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Lost sales
Idle production resources
Special orders could be expensive
Small order quantities
Total Inventory Holding Costs
Stock-Holding Costs
Costs ($)
Total Costs
Optimum
Out-of-Stock Costs
Quantity of Stock Held
Cost per Order ($)
Economic Order Quantity – the optimum or least-cost quantity of stock to re-order taking into
account delivery and stock holding costs
Total Costs
Stock-Holding Costs
EOQ
Re-order Costs
Order Size
Inventory Control Chart
Buffer Inventories – the minimum inventory level that should be held to ensure that production
could still take place should a delay in delivery occur or should production rates increase
Re-order Quantity – the number of units ordered each time
Lead Time – the normal time taken between ordering new stocks and their delivery
Just-In-Time (JIT)
Just-In-Time – an inventory control method that aims to avoid holding inventories by requiring
supplies to arrive just as they are needed in production and completed products are produced to
order
Advantages
Capital invested in inventory is reduced and the
opportunity cost of inventory holding is reduced
Costs of storage and inventory holding are
reduced. Space released from holding of
inventories can be used for a more productive
purpose
The greater flexibility that the system demands
leads to quicker response times to changes in
consumer demand or tastes
Any failure to receive supplies of materials or
components in time will lead to expensive
production delays
Much less chance of inventories becoming
outdated or obsolescent. Fewer goods held in
storage also reduces the risk of damage or
wastage
Disadvantages
The multi-skilled and adaptable staff required for
JIT to work may gain improved motivation
Delivery costs will increase as frequent small
deliveries are an essential feature of JIT
Order-administration costs may rise because so
many small orders need to be processed
There could a reduction in the bulk discounts
offered by suppliers because each order is likely
to be very small
The reputation of the business depends
significantly on outside factors such as the
reliability of supplying firms
Multi-Site Locations
Multi-site Location – a business that operates from more than one location. Business decide to
locate internationally to:
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Reduce costs, with cheaper prices in other countries
Access global markets
Avoid protectionist trade barriers
Advantages
Greater convenience for consumers
Lower transport costs
Reduce risk of supply disruption
Opportunities for delegation
Cost Advantages
Disadvantages
Coordination problems between the locations
Potential lack of control and direction
Different cultural standards and legal systems
Offshoring – the relocation of a business process done in one country to the same or another
company in another country
Multinational – a business with operations or production bases in more than one country
Trade Barriers – taxes or other limitations on the free international movement of goods and services