1.1 Business activity
1.1.1 The purpose and nature of business activity
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Concepts of needs, wants, scarcity and opportunity cost
Need: A good or service which is essential to living
Want: A good or service which people would like, but is not essential for
living
Scarcity: There are not enough goods and services to meet the wants of the
population
Opportunity cost: The benefit that could have been gained from an
alternative use of the same resource
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Importance of specialisation
Specialisation is important because this means that the business is efficient
and it reduces costs of production.
•
Purpose of business activity To create products and services
•
Concept of adding value and how added value can be increased
Adding value is when a business tries to add value at every stage of the
production process so that they can sell the product or service to customers
at a greater price. They can do this by branding, adding special features,
providing excellent service, making it convenient etc.
1.2 Classification of businesses
1.2.1 Business activity in terms of primary, secondary and
tertiary sectors
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Basis of business classification
Primary sector: Firms whose business activity involves the extraction of
natural resources such as farming, fishing, mining and forestry
Secondary sector: Firms that process and manufacture goods from natural
resources such as manufacturing, construction and refining
Tertiary sector: Firms that supply a service to consumers and other
businesses such as shops restaurants, banks, cinemas and airlines
•
Reasons for changing importance of business classification, e.g. in
developed and developing economies
Because the size of a country's different sectors of business activity often
indicates if it has a developing or developed economy
1.2.2 Classify business enterprises between private sector and
public sector in a mixed economy
Mixed economy: An economy where the resources are owned and controlled by
both the private and public sectors
Private sectors: The part of the economy that is owned and controlled by
individuals and companies for profit. Including: Sole traders, Partnerships,
limited companies, franchises, joint ventures and social enterprises
Public sectors: The part of the economy that is owned and controlled by the
state or government. Including government departments, public corporations
and nationalised industries
1.3 Enterprise, business growth and size
1.3.1 Enterprise and entrepreneurship
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Characteristics of successful entrepreneurs
- Innovative: Good at thinking of new ideas for goods and services or new
ways of presenting existing goods and services
- Self motivated and determined: They have the drive to keep going, even
when things get difficult
- Self confident: They have a strong belief in their own ability and ideas
- Multi-skilled: They have the ability to see an idea through from
development to profitable sales. This requires a good understanding of the
functions of finance, operations, human resources and marketing
- Leadership qualities: They have good communication skills, the ability to
motivate others and are good decision makers
- Initiative: They not only have good ideas but are also able to develop a
good plan for achieving the business's objectives
- Results driven: They are focused on achieving results and make sure
products are sold for profit
- Risk taker: They are prepared to take risks, knowing that failure is a
possibility. They see failure as a positive experience to be learned from
•
Contents of a business plan and how business plans assist entrepreneurs
The information it contains can be used to persuade lenders such as banks
and investors to provide finance to the business. The plan gives the business
a sense of purpose and direction. It sets out the resources required by the
business such as finance, the number and skills of workers needed, and how
the goods and services will be market to consumers. The objectives and
financial forecasts provide the business with targets to aim at and enable the
business to monitor its progress.
•
Why and how governments support business start-ups, e.g. grants, training
- To create jobs so unemployment rates are lower
- Increase variety of products available so consumers have more choice
- Create more competition, which usually results in lower prices and better
quality of goods and services
- To create large businesses which the country could benefit from for the
economy
Government supports include:
- Grants and interest free or low interest loans
- Lower taxation rates on profits in the early years
- Rent free premises for a certain period of time
- Free or subsidised training for workers
- Information, advice and support from specialist agencies
1.3.2 The methods and problems of measuring business size
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Methods of measuring business size, e.g. number of people employed, value
of output, capital employed (profit is not a method of measuring business
size)
- Capital employed: The value of long-term finance invested in a business, to
buy things such as factories, office building, machinery etc. (also known as
assets)
- Market share: How large a business owns a share in the market.
- Number of employees: How many employees there are working for a
particular company.
- Value of output: How much a business is earning from selling their
products or service.
• Limitations of methods of measuring business size
Because many methods are not as straightforward as it seems, this is
because the methods can produce different results so more than one
method should be used in measuring the size of the business
1.3.4 Why some (new or established) businesses fail
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•
Causes of business failure
- Poor planning
- Poor cash-flow management
- Poor management skills
- Lack of objectives
- Economic influences
- Competition
- Poor marketing
- Poor choice of location
- Lack of finance
Why new businesses are at greater risk of failing
Because they are new to the market and may not have a lot of recognition so
there may not be a lot of sales and they usually don't have enough money to
support themselves after a certain period of time
1.4 Types of business organisation
1.4.1 The main feature of different forms of business
organisation
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Sole traders, partnership, private and public limited companies, franchise
and joint venture
Sole trader: A business that is owned and controlled by just one person who
takes all of the risks and receives all of the profits
Advantages:
- Quick and easy to set up
- Makes all the decisions
- Has complete control
- Keeps the profit
Disadvantages:
- Unlimited liability (responsible for business debts )
- May not be able to raise funds to expand the business
- Maybe have to work long hours
- Difficult to compete with larger rival firms
-May not have the business skills to run a business
Partnership: A business formed by two or more people who will usually share
responsibility for the day-to-day running of the business.
Advantages:
- Easy to set up a deed of partnership
- Partners invest in the business so greater access to funds
- Shared decision making - Shared management and workload
Disadvantages:
- Unlimited liability
- Share the profits
- Business ceases to exist if one partner leaves
- Decisions binding on all partners
- Difficult to raise finance
Private limited companies: Often a small to medium-sized company, owned
by shareholders who have limited liability. The company cannot sell its
shares to the general public
- Usually a very small number of shareholders
- Usually fairly small
- Can only be sold privately
- Often difficult to sell shares because it must be sold privately
- Only a few shareholders, ownership is not separated from control
- May be difficult to raise finance
- Profit belongs to shareholders
- Legal documents must be completed when setting up the business
- Limited liability
- Shareholders vote on major decisions taken by the company
- The business continues even if one or more shareholders die
Public limited companies: Often a large company; owned by shareholders
who have limited liability. They can sell its shares to the general public
- Usually a very large number of shareholders
- Most common form of organisation for very large companies
- Shares can be offered to the public and other organisations
- Quick and easy to sell their shares
- There are often thousands of shareholders
- Ownership and control are separated
- Each year, they have a annual general meeting to make major decisions
- Often very successful in raising capital
- Setting up is very costly
- Director's decision making is sometimes influenced by major investors
who seek to satisfy their own objectives
- The company is at risk of takeovers
- The legal requirements for the publication of information about the
company is much stricter than it is for private limited companies
Franchises: A business system where entrepreneurs buy the right to use
to the name, logo and product of an existing business
Advantages (to entrepreneurs):
- Less chance of failure
- Franchises often provides advice and training to the franchisee
- Franchisors finance the promotion of the brand through national
advertising
- The franchisor would have already checked the quality of suppliers.
Disadvantages:
- Initial cost of buying into a franchise can be very expensive
- The franchisor will take a percentage of the revenue or profits made by
the franchisee each year
- There are very strict controls over what the franchisee is allowed to do
with the product, pricing, store layout
- The franchisee doesn't gain any personal recognition, they only gain
recognition because of the existing brand
Joint ventures: Two or more businesses agree to work together on a project
and set up a separate business for this purpose.
Advantages:
- Reduces risks for each business and cuts costs
- Each business brings different expertise to the joint venture
- Market and product knowledge can be shared
Disadvantages:
- Any mistakes made may damage the reputation of all firms in the joint
venture
- The businesses may have different business cultures or styles of
leadership, making decision are difficult
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•
Difference between unincorporated businesses and limited companies
An unincorporated business does not have a separate legal identity from
its owners. Whereas, an incorporated business does.
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Concepts of risk, ownership and limited liability
Unincorporated business ownership have a greater legal and financial
risk than incorporated business because
- Owners and the business have the same legal identity, e.g. if a
customer is injured from the business's products, then the owners may
be sued for damages
- Owners have unlimited liability for business debts
Limited liability is when the owner is not personally responsible for the
business's debts, unlimited liability is when the owner is personally
responsible for the business's debts.
Business organisations in the public sector
Public corporations:
- Are owned and controlled by the state
- Are financed mainly through taxation
- Most of the times, their objectives are social rather than profit
- The services provided are often free or at a very low price
1.5 Business objectives and stakeholder objectives
1.5.1 Businesses can have several objectives - and the
importance of these can change
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Need for business objectives and the importance of them
Objectives need to be SMART
Specific - specific to the business
Measurable - how much they want this objective to affect their business e.g.
85% of seats in an airline are economy class
Achievable - owners must discuss how they want to act on these objectives
Realistic - should be able to be financed by the business
Time-specific - set a date for the objective to be achieved by
Business objectives are important because it sets out what the business
wants to achieve and it gives an idea to employees, potential investors, stake
holders etc. So the business may be more successful in gaining people's
trust that the business is legit and capable of running the business
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Different business objectives
- Survival: To last at least more than a year
- Profit: To gain more money for the owners
- Growth: to gain recognition, reduce costs, reduce competitiveness,
increase profits
- Market share: Increased market share often develops a strong brand image
which makes it easier to sell products to customer
- Corporate social responsibility: The environmental, social, ethical impacts
of business's decisions
• Objectives of social enterprises
- Help people who are in need
- Help the underprivileged
- Help the economy
- Help the government
- Help decrease unemployment rates
- Increase GDP
1.5.2 The role of stakeholder groups involved in a business
activity
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•
Main internal and external stakeholder groups
Objectives of different stakeholder groups
Internal stakeholders
- Owners: Interested in the performance of the business and profits
- Shareholders: Interested in the amount of dividends they will receive
- Managers: Responsible for the performance of the business, if they do well
they may gain bonuses or promotions
- Employees: Interested in the performance of the business, so they can earn
good pay and get better job security
External stakeholders
- Lenders: They are interested in the capability of the business to repay loans
and if they can get any interest from the loans they give
- Suppliers: They are interested in the amount of cash the business has to be
able to pay the suppliers at required dates and if they can get success from
supplying the business
- Customers: They have an interest in the activities of the business because
they want to be sure that the business if going to continue to exist in the
future and that they are charged fair prices for the products
- Government: Interested in the capability of the business earning high profits
so they can receive more tax for spending on things such as education,
health etc.
- Local community: Interested in what the business offers to the local people,
in terms of employment, whether or not the business will have a negative
impact on the business etc.
1.5.3 Demonstrate an awareness of the differences in the aims
and objectives of private sector and public sector enterprises
Private sector:
- Earn profit
- Survive
- Increase market share
- Growth
- Economies of scale
Public sector:
- Increase GDP
- Decrease unemployment rates
- Provide a better standard of living
- Help the economy
2.1 Motivating workers
2.1.1 The importance of a well-motivated workforce
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Why people work and what motivation means
People work for many different reasons, including:
- Provide for themselves
- Have a better standard of living
- They are passionate about the job
- Gain status e.g. being a lawyer is normally seen as an important job and
its normally a job of high status
- Friendship
Motivation are the factors that influence the behaviour of workers towards
achieving set business goals
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The concept of human needs - Maslow's Hierarchy
1. Physical needs: basic needs we must have to be able to survive. They
include water, food etc.
2. Safety needs: We need to be safe from physical danger and individuals
need to know that they have job security
3. Social needs: Most people want to be accepted by others and to feel that
they are loved and trusted. It is important to have friends and belong to a
group where social activities can be shared and enjoyed together
4. Esteem needs: Individuals want to be respected and to have their
achievements recognised by others. For some people, having a certain
status is also an important need
5. Self-actualisation: Not everyone will reach their full potential, but for
some individuals it is a very important need. A lot of people rarely achieve
this because they may set more challenges for themselves
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Key motivational theories: Taylor and Herzberg
Taylor's theory:
Taylor believes that workers are only motivated by money, so scientific
management is used to reduce inefficiency. This is achieved by finding the
fastest way of performing each task and training all the workers to use the
same method. The piece-rate method is developed from Taylor's research,
workers are paid a fixed amount for every unit they produce.
Herzberg's theory:
Herzberg's theory is separated into two factors, hygiene factors
and motivators
The hygiene factors include:
- Working conditions: Things like how clean and safe the workplace is and
what facilities are provided for workers, such as washroom, drink machines
etc
- Relationship with others: This considers the importance of having
friendship, relationships with managers and a sense of belonging to the
workplace
- Salary and wage: People need to be paid well to be encouraged to do the
job, but it is not the only factor
- Supervision: This considers the importance of leadership styles and how
the workers are supervised and how decisions are made
- Company policy and administration: These include rules and
procedures that affect the way workers work and their relationship with
others
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The motivators include:
- The work itself: The tasks and what the workers need to do. Some people
may find that work needs to be varied and challenging, this is known as job
enrichment
- Responsibility: Giving workers more responsibility for the tasks they
perform, like making decisions which shows that the managers trust them
and value them
- Advancement: Workers have the opportunity for promotion
- Achievement: Workers need to feel that they have reached challenging
goals
- Recognition achievement: Workers need to have their achievements
recognised by managements and the other people they work with, this can
related to 'self esteem' in Maslow's hierarchy of needs
2.1.2 Methods of motivation
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Financial and non-financial rewards and methods
Financial rewards: Cash and non-cash rewards paid to workers which are
often used to motivate workers to increase their efforts. These include:
Financial rewards:
- Hourly wage rate: Payment to workers based on a fixed amount for each
hour a worker works. An advantage of this is that the business only pays
workers for the number of hours they are at work. However, this type of
payment is not linked to how much they produce e.g. one worker may
produce 28 units in an hour but another worker produces 20 units.
- Salary: Fixed annual payment to certain grades and types of staff not
based on hours worked or output. An advantage of this is that workers do
not receive more pay if they have to work long hours to complete a task.
However, the salary is not linked to their efforts.
- Piece-rate: Payment to workers based on the number of units produced.
An advantage of this is that workers are only paid for the number of items
they produce. However the quality of goods produced may be poor
because workers try to work too quickly to increase their output and pay
- Commission: Pay based on the value of sales made by the staff. An
advantage of this is that the pay is linked to the value of goods. However,
workers are never certain how much they will earn.
- Bonus scheme: An additional reward paid to workers for achieving targets
set by managers, this is a method of performance-related pay which is a
bonus scheme used to reward staff for performing to the required standard.
An advantage of this is that it is linked to performance targets. However, if
targets set are unrealistic then workers would become demotivated. Also, if
the target is group-bases and the target is reached all worker in the group
will receive the bonus even if some have worked harder than other, which
can cause conflict.
- Fringe benefits: Non-cash rewards such as discounts of company's
products, healthy insurance etc. often used to recruit or retain workers and
to recognise the status of certain employees. An advantages of this is that
they can help in recruitment and retention of workers. However, fringe
benefits are often linked to status and not performance
- Profit-sharing: An additional payment to workers based on the profits of
the business. An advantage of this is that it is directly linked to the
performance of the business. However, profit given to employees may
reduce dividends
Non financial rewards:
- Job rotation: Doing a variety of jobs to prevent boredom and improves
worker's skills and flexibility
- Job enlargement: Workers are given greater variety of similar-level tasks
to do, this helps makes things more interesting and reduces boredom
- Job enrichment: This method was developed from Herzberg's research,
work is organised so that workers are able to use more of their skills and
abilities. This makes the workers feel more valued and creates a sense of
belonging
2.2 Organisation and management
2.2.1 Draw, interpret and understand simple organisational
charts
•
Simple hierarchical structures: span of control, hierarchy, chain of command
and delegation
Span of control: the number of subordinates reporting to each
supervisor/manager
Chain of command: The route in which authority is passed down an
organisation
Hierarchy: The levels in an organisational structure
Delegation: When authority is passed onto subordinates
•
Roles, responsibilities and inter-relationships between people in
organisations
Workers that are higher in the hierarchy have power over subordinates,
generally people higher up in the hierarchy have more responsibility than
those at the bottom. This is because they have to supervise a number of
workers to make sure the work is done properly.
Directors and chief executive officer
They are the most senior level of management in any limited company, they
are responsible for setting out strategies, making sure that the resources are
available to achieve objectives, reviewing the performance of managers,
protecting the interests of shareholders and other stakeholders. Lastly,
providing leadership to ensure the success of the business
Managers
They day-to-day running of a department is usually the responsibility of a
manager, they are responsible for making sure that the decisions of the
directors are carried out, delegating tasks to members of their department,
motivating workers, and solving problems that may arise within the
department
Supervisor and other workers
In large departments, supervisors may be responsible for giving out tasks to
workers and other workers must complete their tasks efficiently at the
required quality standard set by the managers and work towards achieving
individual, group or department targets
2.2.3 The role of management
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Functions of management – Planning, organising, co-ordinating,
commanding and controlling
Planning: Looking at where the business is not and where it wants to be in
the future. Once this has been decided, management must then set clear
objectives and decide on the actions needed for these to be achieved
Organising: This function of management is about preparing and organising
the resources needed to achieve the planned goals and objectives.
Management will have to decide the best way of completing important tasks
at the lowest possible cost to the business
Commanding: This function involves the control and supervision of
subordinates. Commanding should also aim to motivate workers towards
achieving the planned objectives.
Coordinating: Making sure that all of the different parts of the business are
working together towards achieving the business's goals and corporate
objectives
Controlling: Involves checking to make sure that the plan is working
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Importance of delegation; trust versus control
Delegation is important because it is not possible for the managers to
complete all the tasks that are set out to be done. So delegation gives
authority to subordinates to control so the workload is decreased for the
managers and spread more evenly across other workers. This enables
managers to have more time to focus on more complex tasks of greater
importance. Delegation can also help motivate the workers because they are
given responsibility, which makes them feel like they are valued. It can help
with increasing the flexibility and developing their skills.
2.2.3 Leadership styles
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Features of the main leadership styles - autocratic, democratic and laissezfaire
Autocratic: A leadership style where the leader makes all the decisions
Democratic: A leadership style where workers take part in decisionmaking
Laissez-faire: A leadership style where most of the decisions are left
to the workers
Autocratic
Set by the leader
without any input
from workers
Democratic
Laissez-faire
Objectives
Set by the
Usually set by
leader, but the
the leader with or
workers are
without the input
consulted
from workers
Decision-making Taken by the
Workers are
Delegated to
leader without
encouraged to
workers who
any input
take
take the
from workers
part, but leader
decisions
still makes the
final decision
Supervision of
Closely
Leader is
No supervision
workers
supervised by
available to solve by leader
the leader
problems but
close supervision
is not needed
Availability of
Workers are
Workers given
Workers
information
given very
information
provided with all
limited
which allows
the information
information
them to fully
they need to take
about the
participate in the decisions
business
business
Communication One-way, from
Two-way,
Little feedback
leader to worker. feedback is
from manager,
No feedback
encouraged
mostly
communication
is with the leader
from
subordinates
Motivation levels Likely to be low Likely to be high Could be high or
low, depending
on the task and
skill of workers
2.2.4 Trade unions
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What a trade union is and the benefits of workers being union members
A trade union is an organisation of workers aimed at improving pay and
working conditions and providing other services, such as legal advice, for
members. Benefits include:
- Workers who join together have a greater power in influencing employer's
decisions
- Trade unions help to provide legal advice to members and it is
inexpensive
2.3 Recruitment Selection and training of workers
2.3.1 The methods of recruiting and selecting workers
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Recruitment and selection
Recruitment is essential because there will be times when employees leaves
the company and has to be replaced by another person, and selection is the
process where employers decide whether or not they want to hire certain
people
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Difference between internal and external recruitment
Internal recruitment: Filling a vacant post with someone already employed in
the business
Advantages:
- Vacancy can be filled more quickly and cheaply
- Applicants already knows how the business works
- Business already knows the strengths and weaknesses of applicants
- Workers can become motivated when they see that there is a change for
promotion
Disadvantages:
- A better candidate may have been available from outside the business
- It could cause conflict between the workers if they wanted the promotion
- Does not bring in new ideas
- The previous job of the person who has been promoted needs to be
replaced
External recruitment: Filling a vacant post with somebody not already
employed in the business
Advantages:
- External applicants may bring in new ideas
- Wider choice of applicants with different skills and experience
- Avoids the risk of upsetting workers when someone who is internal is
promoted
Disadvantages:
- Takes longer to fill the vacancy
- More expensive because the job needs to be advertised
- Applicants will need training
•
Main stages in recruitment and selection of staff
1. The business identifies the need for a new worker and carries out job
analysis
2. A job description is produced
3. A person specification is produced
4. The job is advertised
5. Send out application forms and job details
6. Receive completed applications
7. Select a shortlist from all of the applicants
8. Interview shortlisted candidates
9. Select the right candidate
Job analysis is when the human department identifies the job that needs to be
filled and what are the main skills needed for this job
Job description is a list of the key points about job, job title, key duties,
responsibility and accountability.
A person specification is a list of the qualifications, skills, experience and
personal qualities that the business is looking for.
•
Benefits and limitations of part-time and full-time workers
Part-time workers
Benefits:
- Provides greater flexibility, so if workers are sick then part-time workers can
cover their duties
- Business can often attract well-qualified workers
- Sometimes they are more productive than full-time workers
Limitations:
- Increase in induction and training costs
- Could be communication problems
- Quality of service may not be as good as full-time workers
Full-time workers
Benefits
- They know the business better than part-time workers
- They may be more experienced
- They may be more loyal to the business
- Available for longer hours
- Carry out more tasks
Limitations:
- Workers may not be always so motivated
- More expensive than part-time workers
2.3.2 The importance of training and the methods of training
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Importance of training to a business and workers
Training helps to increase efficiency, quality, productivity, customer service,
safety and overall, the success of the business. Training is an essential
factor to a business' success because without it, running the business may
be difficult and it can lead to poor service, customer dissatisfaction, failure of
the business etc.
•
Benefits and limitations of induction training, on-the-job training and off-thejob training
Induction training: A training programme to help new recruits become
familiar with their workplace, the people they work with and the
procedures they need to follow
Benefits
- The workers quickly feel part of the business making them more motivated
and more willing to perform tasks efficiently
- The training is specific to the business making it more relevant to what the
business requires
Limitations
- Increases business costs
- Induction training workers receive wage and salary but don't contribute to
the output
On-the-job training: Training at the place of work. Watching or
following an experienced worker
Benefits:
- Relatively cheap
- Workers learn the way that the business wants the job done
- Workers are producing output while training
Limitations:
- Workers may pick up bad habits from some experienced workers
- Workers may not learn the most up-to-date methods
- Workers make more mistakes when learning and this increases waste
- It slows down the production of the experienced worker
Off-the-job training: Training that takes place away from the
workplace
Benefits:
- Workers learn the latest methods and techniques
- It does not disrupt the production of other workers
Limitations:
- Expensive
- Worker does not produce any output during training
- Training may not be specific to the business' requirements
2.3.3 Why reducing the size of the workforce might be
necessary
•
Difference between dismissal and redundancy with examples to illustrate the
difference
Dismissal: Termination by the employer because the worker has broken
company rules or is not performing work to the required standard. Examples
include, incompetence or poor conduct
Redundancy: Termination of employment by the employer because the job
is no longer needed. Examples include, people being replace by machines,
relocation to another country or when the business closes
•
Understand situations in which downsizing the workforce might be necessary
- When there is a fall in demand for the product that the worker produces. If
demand does not increase, the business may need to reduce the size of its
workforce because it is costly to employ workers who have nothing to do
- When new technology is introduced
- Relocation
2.3.4 Legal controls over employment issues and their impact
on employers and employees
•
Legal controls over employment contracts, unfair dismissal, discrimination,
health and safety, legal minimum wage
Contract of employment include details such as
- Name of employer and employee
- Date of commencement of the employment
- The amount the employee will be paid
- The number hours of working time
- Job title and main responsibilities
- Number of holidays they receive
- The period of time the worker has to give the employer if they wish to leave
their employment
Unfair dismissal
There are laws that protect worker from unfair dismissal, employers must
have a good reason to dismiss the employee and if the employee feels that
he/she has been unfairly dismissed, they can take legal action against the
employer
Discrimination
There are laws that protect workers from discrimination when recruiting new
workers. Laws prevent any discrimination from age, gender, race, colour,
religion and disability. Trade unions can also provide legal advice to support
any of their members
Health and safety
Health and safety laws are enforced to ensure that the environment of the
workplace is safe to work in and that the workers feel comfortable working
there
Legal minimum wage
This law prevent employers from exploiting workers by paying very low
wages
2.4 Internal and external communication
2.4.1 Why effective communication is important and the methods used to
achieve it
•
Effective communication and its importance to business
Communication ensures that all parts of a business's operations run
smoothly and that employees understand what they need to do.
Everything needs to be clear to prevent costly mistakes and waste.
Effective communication can help
- Reduce the risk of mistakes
- Enable faster decision-making
- Enable quicker responses to market changes
- Improve coordination between departments
- Improve morale and motivation of the workforce
- Improve customer relationships
•
Benefits and limitations of different communication methods including those
based on information technology
Oral communication: Most appropriate when more than two people
need to discuss things
Benefits
- Easy to communicate
- Direct feedback
- May help build relationships between employees or even customers
- Personal contact
Limitations
- May be hard to make an appointment as people may be busy
- Takes up quite some time
- No permanent record
- Receiver might not listen
Written communication: Provide a permanent record of a message and
can be looked at more than once to check understanding
Benefits
- The information is clear and can be looked at more than once
- Message cannot be changed
- Can be sent to many receivers
Limitations
- Slower way of communicating
- Messages may be lost or destroyed
- Time consuming
- No personal contact
Main types of written communication include:
- Purchase order
- Minutes of meeting (written record of what was discussed at a meeting )
- Agenda (Order for the conduct of a meeting )
- Memorandum (communication within the business )
- Job descriptions (written statement of what every worker's job involves )
- Invoice (Official form sent to customer requesting payment for goods )
- Company magazine
Electronic communication: Communicating via email, fax or text
messaging
Benefits
- Messages received instantly
- Video chats making it more real
- Can be sent to many receivers
Limitations
- Connection problems
- Emails sometimes sent to junk
- Not everyone has electronic communication
- Equipment and software can be expensive
Visual communication: Includes presentations using graphs, charts,
videos etc
Benefits
- Information more interesting
- Photographs or videos often have a greater impact than just words
- Pictures and charts are easier to understand
Limitations
- Takes time for preparation
- Costs money to create visual communication - Details may be lost
Factors included when choosing the best method of communication:
- How urgent the message is
- The length and complexity of the message
- How many people need to receive the message
- How far away is the receiver from the sender
2.4.2 Demonstrate an awareness of communication barriers
•
How communication barriers arise and problems of ineffective
communication; how communication barriers can be reduced or removed
How communication barriers arise:
- Language is too complex
- Channel of communication is too long
- Demotivated workers don't listen to the message properly
- Poorly disciplined workers
- Too much noise between the sender and receive
- Language barrier
Problems of communication barriers:
- Tasks are not completed which increases waste
- Damaged reputation of the business
- Higher risk of accidents
- Poor sales
- Recruitment problems
How they can be reduced or removed:
- Make sure the language used is appropriate to the receiver
- Keep the channel of communication as short as possible
- The sender must always insist on receiving a feedback for they know it has
been read and understood
- Physical barriers such as noise should be removed
- Management must build a culture of trust and respect between all
employees
3.1 Marketing, competition and the customer
3.1.1 The role of marketing
•
Identifying customer needs
Needs are goods and services essential to living
Wants are goods and services that are not essential to living
•
Satisfying customer needs
The main role of marking is to convert the wants of an individual into a need
and this satisfies customer's needs
•
Maintaining customer loyalty; building customer relationships
It is essential to businesses to create a group of customers that the business
can sell its products to, they must build customer relationships in order to get
customers to buy their products. Building customer relationships requires
collecting as much information as possible about each individual customer so
it can be used to identify and satisfy customer's needs.
3.1.2 Market changes
• Why customer/consumer spending patterns may change
- The price of the product
- The price of competitor's products
- Changes in consumer income
- Changes in population size and structure
- Changes in tastes and fashion
- Spending on advertising and other promotional activities
•
The power and importance of changing customer needs
Changing customer needs is very important to businesses as they need to
make changes in order to satisfy customers and to survive and earn a profit
•
Why some markets become more competitive
- Legal controls that prevent individual firms from dominating the market
- Deregulation - the removal of government controls from an industry
- Providing financial and other assistance to new and small to medium-sized
businesses - E-commerce and social networks. This increases the level of
competition because the websites are available worldwide
•
How business can respond to changing spending patterns and increase
competition
- Develop their products
- Improve efficiency
- Increase promotion - Look for new markets
3.1.3 Concepts of niche marketing and mass marketing
•
Benefits and limitations of each approach to marketing
Niche marketing: Developing products for a small segment of the
market
Benefits
- Small firms are able to survive and earn profit even in markets that are
dominated by larger firms because there target market is only a small part of
the market
- There is less competition so firms do not waste scarce resources because of
competitors - Consumers will usually pay more for a high status, exclusive
product. Which means that the firm is more likely to have a high profit
margin
Limitations
- The opportunity to earn high profits may attract potential competitors
- The small size of the market means that economies of scale are unlikely to
be achieved - Small changes in consumer spending patterns could have a
very significant impact on firms
Mass marketing: Selling the same product to the whole market
Benefits
- Larger firms benefit from economies of scale which reduces unit cost
- Larger market has the potential for high sales and profits
- Changes in consumer patterns might have less effect on firms selling to a
mass market
Limitations
- Much more competition in the market which lowers prices and profit margins
- Not all markets are large enough to support a mass marketing approach
- Consumers today often look for something slightly different and unique
3.1.4 How and why market segmentation is undertaken
•
How markets can be segmented, e.g. according to age, socio-economic
grouping, location, gender
Market segmentation: Dividing the whole market into segments by
consumer characteristics and then targeting different products to each
segment
Geographic segmentation: Dividing consumers in the market by geographic
area
Demographic segmentation: Diving consumers in the market by factors
such as age, gender, income, ethnic background and social class
•
Potential benefits of segmentation to business
- Goods and services can me designed to meet the specific needs of
consumers which increases sales
- Small firms which may not be able to compete in the whole market are able
to operate in on or two segments - perhaps a niche market
- Marketing strategies can be better targeted at each segment
- May be possible to charge higher prices
3.2 Market research
3.2.1 The role of market research and methods used
•
Market-orientated businesses (uses of market research information to a
business)
Market-orientated businesses: Products are developed based on consumer
demand as identified by market research
Uses of market research information
- Identify customer needs
- Discover the current and future market size for the product
- Provide information about the business's existing products and markets
- Identify strengths and weaknesses of competitor products
- Decide on how to price the product and promote the product
- Predict how changes and trends in customer tastes and fashion may affect
the future demand
•
Primary research and secondary research (benefits and limitations of each)
Primary research: The collection of first-hand data for the specific needs
of the firm
Benefits
- Data is up to date
- Data is collected for a specific purpose that is directly relevant to the
business
- It is not available to other businesses, which may provide competitive
advantage
Limitations
- Costly
- Time consuming - Risk of inaccurate data
Secondary research: The collection of data from second-hand sources
Benefits
- Fairly cheap to obtain
- Easier and quicker to obtain
Limitations
- May not be up to date
- May not be directly relevant to the business
•
Methods of primary research, e.g. postal questionnaires, online survey,
interviews, focus groups; the need for sampling
Focus groups: A group of people are invited to discuss topics such as new
products, packaging, brand names and advertisements. Advantages include,
getting first hand information of the product and getting it tested by people so
the business can get direct feedback. However it is time-consuming and there
is no numerical data collected, which makes statistical analysis impossible
Observation: The behaviour of consumers is secretly observed and recorded
by market researchers. Advantages include, often more accurate then
answering questions and it is directly relevant to the business. However it is
time-consuming and costly because businesses need trained observers to
analyse customer behaviour
Test market: A limited quantity of the product is produced and sold in a
carefully selected area of the market. Feedback from consumers is used to
make changes to the product or other elements of the marketing mix.
Advantages include, this research method leads to a better chance of a
successful introduction of the product into the main market. However, it takes
longer to get the product to its main market and the cost of producing
products for the test market makes this method more expensive than others.
Consumer surveys: Surveys can collect both qualitative and quantitative
data. This includes interviews, postal surveys, and online surveys.
Interviews: A trained interviewer asks questions to an interviewee and
records their answers. An advantage of this is that the interviewer can
explain any questions that the interviewee doesn't understand and they can
often tell if the interviewee is replying honestly or not. However, this is
more expensive if a trained interviewer was used and if a trained
interviewer was not used then the data may be bias.
Postal surveys: Questionnaires are posted to people's homes and asked
to complete and return them. An advantage of this method is that it is a
good way of getting opinions from a wide spread group of people from
different areas and this is a cheaper option. However, most of these mails
are considered junk mail so they get thrown away.
Online surveys: This uses the internet to carry out surveys. An advantage
of this is that it can cover a wide geographical area and anyone with
internet access can take part. Also, the results can instantly be collected
and analysed. However, they are normally seen as electronic junk mail so
people may not have any interest in replying
The need for sampling: It is too expensive, time consuming and almost
impossible to get every view of every consumer in the market. This is where
sampling comes in, samples are a representative sample of the target market
selected to take part in market research. Samples are taken to predict what
the whole market wants and don't wants, this is a less time-consuming
method and a cheaper method. However, the samples may produce bias or
misleading results.
•
Factors influencing the accuracy of market research data
- The sample chosen may be too small
- The business may have chosen the wrong type of method to collect the data
- People may not answer the questions truthfully
- Questions asked may be bias, which forces the interviewee to not give their
true view
- Language may be unclear
- Secondary data may be out of date
- Data may be recorded incorrectly
3.2.2 Presentation and use of market research results
• Analyse market research data shown in the form of graphs, charts and
diagrams: draw simple conclusions from such data
Tables
Advantages
- Large amount of data can be grouped and presented more clearly
- It is easy to extract numerical data
Disadvantages
- Lack visual impact
- Too much data in the table can make it hard to understand
Barcharts
Advantages
- You can easily see the importance of each piece of data
- You can read numerical values from the axis
Disadvantages
- When the data values are very similar, it is difficult to compare
Pie charts
Advantages
- Shows how important each part of the data is compared to other parts
- Easier to understand for people who dislike numerical values
Disadvantages
- If there are too many fractions then it is difficult to see the relative
importance of different parts of the data
Pictograms
Advantages
- Data is presented by pictures
Disadvantages
- Difficult to show exact quantities using pictures
Line graphs
Advantages
- They clearly show trends
- Values can be read from both axis
- Data can be added for future time periods
Disadvantages
- They can be difficult to draw and accuracy depends on choosing appropriate
scales for both axes
3.3 Marketing mix
3.3.1 Product
• The costs and benefits of developing new products
Costs of new product development
- Market research to identify customer needs
- Development of a new product
- Investment
Benefits of new product development
- Charge higher prices for new products
- Increase potential sales, revenue and profit
- May achieve growth and economies of scale
- Spreads risks because business have other products and adding new ones
spreads the risk
•
Brand image - impact on sales and customer loyalty
Brand image is the general impression of a product held by consumers
- Consumers recognise their product more easily when looking at similar
products
- Their product can be charged higher than less well-known brands
- Easier to launch new products into the market
• The role of packaging
- Protect the product
- Provide information about the product
- To help consumers recognise the product
- To keep product fresh
•
The product life cycle: main stages and extension strategies; draw and
interpret a product life cycle diagram
Introduction
Product
Growth
Maturity
Decline
Only a basic
model of the
product is
available
Changes
Extension
The product
might be
strategies
and packaging
made to the
might be used is not altered
product as a to keep the
result of feed product in
back from
this, the most
consumers in profitable
the test
stage of its
market
life cycle
Price
Prices might Brand image Price
will The price
lower than
helps to create remain
might be
competitors customer
similar to that reduced to
prices to
loyalty
of competitor maintain sales
attract
products
or sell off the
consumer
remaining
stock before
withdrawing
the product
Promotion High
Promotional Promotional Advertise the
promotional activity still
activities are products at a
activity
high to
aimed at
lower price
continue
reminding the
persuading
customers
customers
that the
products are
still available
Place
The product The product is The product is The product is
may be
more widely now available only available
offered for
available,
for purchase in profitable
sale in
which helps to through a
outlets
specially
increase sales wide
selected
distribution
outlets
network
Extension strategies: marketing activities to extend the maturity stage of a
product
- Finding new markets for the product
- Finding new uses for the product
- Adapting the product or the packaging to improve its appeal to consumers
- Increased advertising and other promotional activities
• How stages of the product life cycle can influence marketing decisions, e.g.
promotion and pricing decisions
3.3.2 Price
• Pricing methods: cost plus, competitive, penetration, skimming and
promotional; their benefits and limitations
Market skimming: Setting a high price for a new product that is unique or
very different from any other product on the market
Advantages
- Profit earned is very high
- Helps to recover research and development costs
Disadvantages
- Laws may have been placed to stop this
- It may backfire if competitors produce similar products at a lower price
Penetration pricing: Setting a low price to attract customers to buy a new
product
Advantages
- Attracts customers more quickly
- Can increase market share quickly
Disadvantages
- Possible loss of revenue due to lower prices
- Cannot recover development costs quickly
Competitive pricing: Setting a price similar to that of competitor's products
which are already established in the market
Advantages
- Business can compete on other things such as service
Disadvantages
- Still need to find ways of competing in order to attract sales
Cost plus pricing: Setting price by adding a fixed amount to the cost of
making or buying the product
Advantages
- Quick and easy to work out the price
- Makes sure that the price covers all of the costs
Disadvantages
- Price might be set higher than competitors or more than customers are
willing to pay, which reduces sales and profits
Loss leader pricing/Promotional pricing: Setting the price of a small
number of products at below cost to attract customers into the outlet in the
hope that they will buy other products priced to earn a profit
Advantages
- Good way to sell off unwanted inventory before it becomes out of date
- A good way of increasing short term sales and market share
Disadvantages
- Revenue on each item is lower so profits may also be lower
•
Recommend and justify an appropriate pricing method in given
circumstances
When deciding the price you should consider:
- Is it a new or existing product?
- Is the product unique?
- Is there a lot of competition in the market?
- Does the business have a well-known brand image?
- What are the costs of making and supplying the product?
- What are the marketing objectives of the business?
•
Understand the significance of price elasticity: difference between price
elastic demand and price inelastic demand; importance of the concept in
pricing decisions
Price elasticity of demand: Measures by how much demand for a product
changes when there is a change in price
Price inelastic demand: The percentage change demand is less than the
percentage change in price. Products that are not very responsive to changes
in price
Price elastic demand: The percentage change demand is greater than the
percentage change in price. Products that are more responsive to changes in
price
Price change
Price elasticity of demand
Effect on revenue
Increase
Price inelastic demand
Increase
Decrease
Price inelastic demand
Decrease
Increase
Price elastic demand
Decrease
Decrease
Price elastic demand
Increase
3.3.3 Place - distribution channels
•
Advantages and disadvantages of different channels
Channels of
distribution
Channels of
distribution 1
Advantages
Disadvantages
- All of the profit is earned
- Consumers are not always
by the producer
- The producer controls all
parts of the marketing
mix
- Quickest method of
getting the product to the consumer
-
Channels of
distribution 2
Channels of
distribution 3
- Consumers can see and
try the product before
buying it
- The cost of holding
inventories of the
product Is paid by the
retailer
- The retailer will pay for
advertising and other
promotional activities Retailers are usually
more conveniently
located for consumers
- The wholesaler buys in
bulk from the producer
- Wholesalers will
advertise and promote
the product to retailers The transport cost to the
retailer is paid by the
wholesaler
- Wholesalers pay for
-
-
able to see or try the
product before they buy it
Delivery costs may be high
if there are customers over
a wide area
All storage costs must be
paid for by the producer
All promotional activities
must be carried out and
financed by the producer
The retailer takes some of
the profit away from the
producer
Producers lose some
control of the marketing mix
- The producer must pay for
delivery costs to the
retailers
- Retailers usually sell
competitors’ products as
well
- Another middleman so more
profit is taken away from
the producer
- The producer loses even
more control of the
marketing mix
transport costs
- Wholesalers pay for
storage costs
Channels of
distribution 4
- The agent has specialist
knowledge of the market
- Another middleman is added
so even more profit is taken
away from the producer
3.3.4 Promotion
•
The aims of promotion
Promotion: Marketing activities used to communicate with customers and
potential customers to inform and persuade them to buy a business's
products
- Attract the attention of consumers by making them aware of the product
- Persuading consumers to buy to product
- Explaining how a product is better than competitors' products
- Creating and developing brand image
- Encouraging wholesalers and retailers to stock the product
- Reassuring consumers
•
Different forms of promotion and how they influence sales, e.g. advertising,
sales promotion
•
Advertising: Paid-for communication with consumers which uses printed and
visual media. The aim is to inform and persuade consumers to buy a product
Informative advertising: Information about the product is communicated to
consumers to create product awareness and attract their interest
Persuasive advertising: Communication with consumers aimed at getting
them to buy a firm's product rather than a competitor's product
Sales promotion: Incentives used to encourage short-term increases in
sales or repeat purchases
Below-the-line promotion: Promotion that is not paid for communication bus
uses incentives to encourage consumers to buy. Incentives include money-off
coupons or vouchers, loyalty reward schemes, competitions and games with
cash or other prizes
Personal selling: Sales staff communicate directly with consumer to achieve
a sale and form a long-term relationship between the firm and consumer
Direct mail: Also known as mailshots, printed materials which are sent
directly to the addresses of customers
Sponsorship: Payment by a business to have its name or products
associated with a particular event
• The importance of marketing budget in making promotion decisions; need for
cost effectiveness in spending the marketing budget
Marketing budget: the amount of money made available by a business for
its marketing activities during a particular period of time
Businesses must make sure they don't overspend when promoting their
products and they must consider which promotion method they should use to
maximise sales of their products. They must be cost-efficient so that money is
not wasted on useless promotion
3.3.5 Technology and the marketing mix
• Define and explain the concept of e-commerce
E-commerce: The use of the internet and other technologies used by
businesses to the market and sell goods and services to customers.
Examples of e-commerce include
- Online shopping
- Electronic payment
- Internet banking
- Online ticketing
- Online auctions
- Hotel reservations
•
The opportunities and threats of e-commerce to business and consumers
Opportunities of
ecommerce to
businesses
Increased
market –
the business is
able to sell its
goods and
services to more
consumers
Reduced costs
– The staffing
and other costs
of shops are
saved
Better
information –
the website can
provide potential
consumers with
all the
information they
need about the
goods and
services
Threats of
ecommerce for
businesses
Increase
competition –
competitors can
now be from any
part of the world,
not just the local
market
Unfamiliarity –
consumers are
less likely to buy
products from
new business
they don’t know
Opportunities of
ecommerce to
consumers
Convenience –
Consumers can
order their
products from
the comfort of
their own homes
Threats of
ecommerce for
consumers
Fraud – A
website might
take a
consumer’s
money and not
deliver goods
Wider choice –
Consumers are
now able to buy
goods which they
would not have
had access to if
they were only
able to uses local
shops
Lower prices –
competition is
worldwide and
this reduces
prices
Hacking – A
consumer’s
personal details
or bank account
details might be
‘stolen’
Better
information –
Consumers are
able to read
about the goods
and services
available from
websites of
different
businesses
Returning items
– it can be
inconvenient and
expensive to
return goods
which do no
meet the
consumer’s
needs
No personal
service – There
is no face-toface contact
between the
consumer and
seller
•
Use of the internet and social networks for promotion
Many promotions can be done through the internet by pop ups or video
advertisements when watching youtube videos
3.4 Marketing strategy
3.4.1 Justify marketing strategies appropriate to a given
situation :
• Importance of different elements of the marketing mix in influencing consumer
decisions in given circumstances
Place - affects whether or not the consumer wants to go to the shop, this
depends on how convenient it is to reach, how far away it is and how
important it is to go there
Price - affects whether or not the consumer wants to buy the product, if its
too expensive they may not be willing to pay for the product, if it is too cheap
they may think the product is dodgy Promotion - affects whether or not the
consumer is aware of the product and how many consumers are aware of the
product
Product - affects whether or not the consumer wants to buy the
product, if it is not unique enough or not useful then consumers may not
want to buy it
3.4.2 The nature and impact of legal controls related to
marketing :
• Impact of legal controls on marketing strategy, e.g. misleading promotion,
faulty and dangerous goods
Legal controls: laws that control the activity of businesses
- Protect consumers from faulty and dangerous goods
- Prevent the businesses from using advertising to mislead consumers
- Protect consumers from being exploited in industries where there is little or
no competition, also known as monopolising
These laws impact the decisions the business has to make including the
pricing of the product, the quality of the product and the advertisement used
to promote the product
3.4.3 The opportunities and problems of entering new markets
abroad:
•
Growth potential of new markets in other countries
Growing in other countries can increase sales, revenue and profits. This is
because the business is now available to a wider group of people, which
increases potential customers
•
Problems of entering foreign markets, e.g. cultural differences and lack of
knowledge
- Difference in language and culture: It may be hard to communicate with
people in other countries because of language barriers and as for the
culture, different images, colours and symbols have different meanings and
importance in different places so for religious reasons, it may not be
appropriate to use some images in advertisements
- Lack of market knowledge: The business doesn't really know the new
market that they are entering into and consumers may not know the
business so it may lead to failure
- Economic differences: The cost and prices may be lower or higher
depending on the economy of the country so businesses may not be able
to sell the product at the price they want to earn a profit
- Social differences: Different people will have different needs and wants
from people in other countries such as the UK and India.
- Difference in legal controls to protect consumers: The business may
have to spend more money on producing the products in a certain way that
the country wants it to be produced so it protects consumers
• Benefits and limitations of methods to overcome such problems, e.g. joint
ventures
Joint venture: an agreement between two or more businesses to work
together on a project
Advantages
- Reduces risks and cuts costs
- Each business brings different expertise to the joint venture
- The market potential for all the businesses in the joint venture is increased
- Market and product knowledge can be shared to the benefit of the
businesses
Disadvantages
- Any mistakes made will reflect on all parties in the joint venture, which may
damage their reputations
- The decision-making process may be ineffective due to different business
culture or different styles of leadership
4.1 Production of goods and services
4.1.1 The meaning of production
• Managing resources effectively to produce goods and services
Operations management involves managing business resources so that it can
be produced to sell to consumers. They must:
- Use resources in the most cost-effective way
- Produce the required output to meet consumer demand
- Meet the quality standard expected by consumers
•
Difference between production and productivity
Productivity is a measure of the efficiency of inputs used in the production
process, especially labour and capital
Labour productivity = Total output ÷ Number of production workers
Production is the process of converting inputs such as land, labour and capital
into saleable goods.
•
Benefits of increasing efficiency and how to increase it, e.g. increasing
productivity by automation and technology, improved labour skills
To improve labour productivity you must:
- Increase output with the same number of workers
- Keeping output at the same level but with fewer workers
This can be achieved by:
- Improving the skill level
- Improving motivation
- Introducing more automation and better technology
- Improving the quality of management decisions
•
Why businesses hold inventories
Inventories include
- Raw materials and components needed for production
- Work-in-progress, which are partly finished goods that have not yet
completed the production process
- Finished goods ready to be sold or sent out to customers
Costs include:
- Warehousing costs: the business will need to rent or purchase a
warehouse to store the inventories
- Handling costs: Inventories need to be moved out of the warehouse
- Shrinkage costs: Damaged, lost or stolen inventories will need to be
replaced
- Insurance costs: These will cover the cost of losses from shrinkage
- Obsolescence: The business may not be able to sell out of date goods
- Opportunity cost: Working capital is tied up in inventories which could be
used more profitably by the business
•
Concept of lean production; how to achieve it, e.g. just-in-time inventory
control and kaizen; benefits of lean production
Lean production is the production of goods and services with the minimum
waste of resources
Just-in-time inventory control is when businesses don't hold any inventories
and raw materials and components arrive from suppliers just when they are
needed in the production processes. This reduces warehousing costs but the
business must have a good relationship with the supplier in order to achieve
this
Kaizen is a Japanese term for 'continuous improvement'. This is when
workers suggest improvements that can be made to speed up the production
process and to manufacture products efficiently. The changes made by each
worker is very small but these small changes can lead to big improvements.
4.1.2 The main methods of production
•
Features, benefits and limitations of job, batch and flow production
Job production: The production of jobs one at a time
Benefits
- Unique, high quality products are made
- Workers are often more motivated and take pride in their work
Limitations
- Uses skilled labour rather than machinery so selling prices are usually
higher
- Product can take a long time and can be expensive
- Economies of scale are not possible
Batch production: The production of goods in batches. Each batch passes
through on stage of production before moving onto the next stage
Benefits
- Since larger numbers are made, unit costs are lower
- Offers the customer some variety of choice
- Materials can be bought it bulk so it is cheaper
Limitations
- Workers are often less motivated because the work become repetitive
- Goods have to be stored until they are sold, which is expensive
Flow production: The production of very large quantities of identical goods
using a continuously moving process
Benefits
- More capital intensive (production process uses a high quantity of capital
equipment compared with labour input) which lowers labour cost
- Materials can be purchased in large quantities, so they are often cheaper
due to bulk-buying.Which means economies of scale can be achieved
- Large number of goods are produced
Limitations
- Requires very large capital investment in production line
- Workers are not very motivated, since their work is very repetitive
- It is not a very flexible method as production lines are difficult to change
- If one part of the production line breaks down, the whole production process
will have to stop until it is repaired
- High levels of raw material, work in progress and finished goods inventories
are held. This increases business cost
4.1.3 How technology has changed production methods, e.g.
using computers in manufacturing and design
Technology has increase production efficiency by producing less waste because
computers make much less mistakes than humans do. It also makes production
more cost effective and decreases the costs of hiring labour. Computer aided
designs are a very fast way of producing designs of a product, the colour, size,
structures can be easily changed and altered to suit the consumers needs. It
can also give a 3D visual representation of the product which eliminates the
need to actually produce the product and this decreases costs. Although
technology is very useful in production and designing, it is very expensive to
obtain and requires a lot of investment, which small businesses may not be able
to afford.
4.2 Costs, scale of production and break-even analysis
4.2.1 Identify and classify costs
• Classifying costs - fixed, variable, average, total; use examples to illustrate
these
Fixed costs: Costs that do not change with output Examples include:
- Rent
- Electricity
- Maintenance
- Advertising
- Wage
Variable costs: Costs that change in direct proportion to output Examples
include:
- Raw materials
- Packaging
Total cost: All the variable and fixed costs of producing the total output
Total cost = variable costs + fixed costs
• Use cost data to help make simple cost-based decisions, e.g. to stop
production or continue
If a company is losing money because of high costs, then the business may
decide to decrease the cost by buying in bulk, stopping a certain process or
cutting labour.
4.2.2 Economies and diseconomies of scale
•
The concepts of economies and diseconomies of scale; examples of both
Economies of scale: The reduction in average costs as a result of
increasing the scale of operations
Types of economies of scale:
Financial economies - Lenders such as banks often prefer to lend to large
businesses because they consider them less of a risk than smaller
businesses
Managerial economies - As a business grows, it often employs specialist
managers for the different functional area, which improves the quality of
business decisions and make fewer mistakes
Marketing economies - Average costs of marketing falls as output and
sales increase Purchasing economies - Large businesses usually buy
greater quantities of raw materials. Suppliers often offer discounts on large
or bulk purchases
Technical economies - Technology enables businesses to produce very
high levels of output at lower unit costs
Diseconomies of scale: Factors that cause average costs to rise as
the scale of operations increases Factors include:
- Poor communication
- Demotivation of workers
- Poor Control
4.2.3 Explain, interpret and use a simple break-even chart
• The concept of break-even
Break-even: The level of output where revenue equals total costs; the
business is making neither profit nor loss. Break-even analysis shows the
relationship between revenue, costs and volume of output/sales. They may
use it to
- Calculate how many units it needs to sell before it starts to make a profit
- Calculate the effect on profit of increasing or decreasing the price of a
product
- Calculate the effect on profits of an increase or decrease in business costs
•
Construct, complete or amend a simple break-even chart
TR stands for total revenue
TC stands for total costs
FC stands for fixed costs
TR = Sales x cost for each unit
TC = variable costs + fixed costs
FC = fixed costs
•
Understand the limitations of break-even charts
- It assumes that all costs and revenues can be represented by straight lines
- It is not easy to separate costs into fixed and variable
- It assumes that all output is sold - it does not allow for inventories and the
costs of holding these
4.3 Achieving quality production
4.3.1 Why quality is important and how quality production
might be achieved
•
What quality means; why it is important for all businesses
Quality: Ensuring a good or service that meets the needs and requirements
of its customer It is important for all businesses because if the product or
service does not meet the requirement of the customer then this may cause
them to not buy products or services from this particular business, which
decreases their sales, reputation, profit and others
•
Concept of quality control and how businesses implement quality control
Quality control: Checking the quality of goods through inspection
The business may have quality checks at different stages of production to
ensure that the product is produced to the requirements of the customers.
However there are problems of quality inspection, this is because workers
may find it boring and repetitive, which can demotivate workers and cause
them to not perform the task properly
•
The concept of quality assurance
Quality assurance: A system of setting agreed standards for every stage of
production This it to makes sure that raw materials or components are up to
standard, products are designed to minimise quality issues and quality
standards are agreed at each stage of production. This helps to encourage
teamwork and this can be motivating, reduces the costs of faulty products
4.4 Location decisions
4.4.1 The main factors influencing the location and relocation
decisions of a business
• Factors relevant to the location decision of manufacturing businesses and
service businesses
Quantitative factors:
- Cost of site
- Availability and cost of labour
- Transport costs
- Market potential
- Issues
- Government incentives
Qualitative factors
- Size of site
- Legal controls
- Infrastructure
- Ethical
• Factors that a business could consider when deciding which country to locate
operations in
- Barriers to trade
- Economy of the country
- Legal controls
- Costs
- Cultural differences
- Communication problems
- Ethical concerns
- Quality issues
• The role of legal controls on location decisions
Governments may restrict businesses from operating near local housing or
areas that could be harmed by noise pollution, light pollution, air pollution etc.
So the business must decide whether or not the legal controls enforced by the
government of the country would be a problem for the business
5.1 Business finance: needs and sources
• Internal sources and external sources with examples
Internal sources
Retained profit: Profit remaining after all expenses, tax and dividends have
been paid. Profit which is ploughed back into the business.
Benefit
- There is no extra cost (bank loans have interest rates but retained profits are
money that the business owns)
Limitations
- Takes time to have a lot of retained profits - Only available when the
business is profitable
Sale of non-current (fixed) assets: Selling non-current assets such
as machinery
Benefit
- No direct cost to the business
- Can often raise a lot of money
Limitations
- May be hard to sell
- Future fixed costs of the business will increase as they now have to pay
annual leasing charges to the new owner
Use of working capital: This can be used to raise additional funds, it may
come from cash balances, reducing inventory levels, reducing trade
receivables
Cash balances is any cash a business has that can be used to finance
capital expenditure.
Reducing inventory levels is when businesses reduce the quantity of raw
materials and components or finished goods it holds
Reducing trade receivables is when businesses sell goods to customer on
credit, this means that customers receive the goods but pay for them at an
agreed date in the future. By reducing the total of trade receivables, the
business's cash balances increase and this provides a possible source of
internal funds
External sources (short term sources)
Overdrafts: An agreement with the bank which allows a business to spend
more money than they have in its account up to an agreed limit. The loan has
to be repaid within 12 months
Benefits
- Flexible source of finance
Limitation
- Cost of this method is higher
Trade credit: When businesses pay the cost of raw materials and their
resources at a later date
Benefits
- The business has more days of having more money (in other words,
increase in short-term finance)
Limitations
- Any discount offered by the supplier for prompt payment will be lost
- Supplier may refuse further deliveries until outstanding payment has been
made
- If delayed payment occurs too often, then the supplier may demand
payment before delivery
Debt factoring: Selling trade receivables to improve business liquidity. Trade
receivables is the amount owed to a business by its customers who bought
goods on credit. Debt factoring works by selling debt to a debt-factoring
company which the debt-factoring company buy at a discounted amount and
this provides the business with immediate cash.
Benefits:
- Immediate cash is provided
Limitations
- The business doesn't get the full payment because it is bought at a discount
External sources (long term sources)
Bank loan: Provision of finance by a bank which the business will repay with
interest over an agreed period of time
Benefits
- Cash is available immediately
- Often large amounts can be lent to large businesses
Limitations
- It is hard for sole traders to obtain bank loans
- Added cost to the money borrowed
Leasing: Obtaining the use of a non-current current by paying a fixed amount
per time period for a fixed period of time. Ownership remains with the leasing
company
Benefits
- Leasing company is responsible for the maintenance and repair
- Payment does not need to be payed immediately
Limitations
- Business does not own the asset
- Interest rates are higher than other finance options
Hire purchase: The purchase of an asset by paying a fixed repayment
amount per time period over an agreed period of time. The asset is owned by
the business on completion of the final repayment
Benefits
- Cost is spread over time
Limitations
- Repair and maintenance is financed by the business
- Interest rates are higher than other finance options
Mortgage: Long term loans used for the purchase of land or buildings
Benefits
- A large amount of cash does not need to be taken out to pay for land or
building immediately
Limitations
- Interest rates
Debenture: Bonds issued by companies to raise long-term finance usually at
a fixed rate
Benefits
- Cash is available immediately
- Doesn't dilute control of the company
- Interest rates are fixed
Limitations
- Interest rates
- It is not secured by collateral (collateral are non-current assets offered as
security against borrowing)
- May increase financial leverage which reduces the ability of the business to
borrow in the future
-
Share issue: Source of permanent capital available to limited liability
companies
Benefits
- Share issue becomes permanent capital and never has to be repaid
- Public limited companies can sell shares to the general public
Limitations
- Private limited companies can only sell shares to existing shareholders or
private investors
•
Importance of micro-finance in developing economies
Micro-finance: Small amounts of capital loaned to entrepreneurs in countries
where business finance is often difficult to obtain. These loans are usually
repaid after a relatively short period of time. This type of finance is important
to people who come from poor backgrounds and do not have savings, or
lenders such as families or friends to lend money. Banks would most likely not
be willing to lend money to them as they are considered as a high risk. So
micro finance is very useful to those in need
•
The main factors considered in making the financial choice
- Size and legal form of business: Unincorporated business such as sole
traders or partnerships are unable to raise finance by issuing shares and
banks are less willing to lend them money as they are considered a risk. Even
if unincorporated businesses can get loans, they often charged at a higher
interest rate
- Amount required: If large capital amount is require then share issues and
debentures are more appropriate. A smaller amount might be financed
through bank loans, leasing or hire purchase - Length of time: The business
needs to plan carefully to decide how long it will need the finance for. If it is
long term then debentures or share issues would be most appropriate. If it is
short-term, then overdrafts may be the most flexible solution
- Existing borrowing: If a business already has existing borrowing then they
might find it more difficult to borrow further amounts from banks and other
lenders as it will be seen as a greater risk.
5.2 Cash flow forecasting and working capital
5.2.1 The importance of cash and of cash-flow forecasting
•
Why cash is important to a business
Cash is important to the business because it needs to be able to make
payments to suppliers, production process, rent, wages etc.
•
What a cash-flow forecast is, how a simple one is constructed and the
importance of it
Cash-flow forecast: An estimate of the future cash inflows and outflows of a
business
Net cash flow = inflows - outflows
Closing balance = opening balance + net cash flow
•
How to interpret a simple cash-flow forecast
Look at the closing balance, if a lot of the values are negative, the owner may
decide to get an overdraft of a short period of time so the business has
enough cash to pay for expenses.
•
How a short-term cash-flow problem might be overcome
- Ask trade receivables to pay for more goods more quickly by offering
discounts to customers
- Negotiate longer credit terms with suppliers
- Delay the purchase of non-current assets until the cash flow improves
- Find other sources of finance for the purchase of non-current assets
5.2.2 Working capital
• The concept and importance of working capital
Working capital measure the liquidity of the business, liquidity is the ability of
a business to pay its short term debts. Working capital is important for day-today expenses such as wages, buying raw materials etc.
The length of the capital cycle depends on:
- The level of inventories held by a business and how quickly suppliers are
paid
- How long it takes to produce goods for sale
- How quickly the business finds buyers for its products
- The length of credit sales
A business can improve its working capital by:
- Decreasing the length of credit sales
- Negotiating long credit terms with suppliers
- Reduce inventory levels
5.3 Income statements
5.3.1 What profit is and why it is important
•
How profit is made
There are three different types of profit
Gross profit = Revenue - cost of sales
Profit = Revenue - total sales
Retained profit: Profit after expenses, taxes and dividends have been paid.
Profit that is ploughed back into the business
Revenue = selling price x quantity sold
•
Importance of profit to private sector businesses
Profit is a reward to business owners for the risk they take in investing
their capital into the business. It is also used to:
- Measure the success of a business
- Measure the performance of managers
- Decide whether or not to continue making or selling a product
- Finance the purchase of non-current assets, expand the business etc.
- Attract investors who will provide additional funds for the business
-
• Difference between profit and cash
Examples:
- Money invested in businesses increases cash but not profit
- Capital expenditure decreases cash but does not decrease profit
Cash is important for the business at all times
Profit is more important for the long-term success of the business
5.3.2 Income statements
• Main features of an income statement
Income statement: Financial record of the business's profits, costs and
revenue over a given period of time
Stakeholder
Owners/
shareholders
Shareholders
Employees
Lenders
Government
Use
- Profit after tax belongs to the owner/shareholders. They
can see how much they have earned for their investment
in the business
- Usually the higher the profit the higher the dividend
payment
- The market value of shares will often rise or fall
depending on high or low profits earned
- High profit increases job security
- Employees might expect to receive a good pay rise if a
business is making good levels of profit
- Some businesses have profit-sharing schemes, so high
profits means high shares of profits for employees
- They want to be sure that profit is enough to pay
interest on loans
- Is the business earning enough profit to be able to
repay loans when due?
- The higher the profit, the more tax the government will
receive
Suppliers
Managers
- A firm that is profitable will continue to purchase raw
materials and other supplies, which helps supplier earn
profit
- They can compare profit from one year to the next or with
competitor’s profits to measure the performance of the
business
- Retained profit is an important source of finance for
businesses
5.4 Balance sheets
5.4.1 The main elements of a balance sheet
•
The main classifications of assets and liabilities
Balance sheet is an accounting statement that records owner's equity, assets
and liabilities of a business at a particular date
Assets are resources owned by the business
Liabilities are debts and payments that will have to be paid in the future
•
Examples to illustrate these classifications
Assets
Current assets are resources that a business expects to turn to cash before
the date of the next balance sheet
Non- current assets are the resources that a business does not expect to
turn into cash within a year
Liabilities
Current liabilities are debts and payments that a business expects to pay
before the date of the next balance sheet
Non current liabilities are debts and payments that business expects to pay
after more than a year
Owner's equity is money that a business owes to its investors which includes
capital and retained profit
5.4.2 Interpret a simple balance sheet and make deductions
from it
A balance sheet shows:
- The assets the business owns
- What the business is owed
- What the business owes
- How to the business finances its activities
Balance sheets are only a snapshot of a business's financial position at a
particular point in time and figures can change in a short space of time so
balance sheets are not a reliable measure of how much a business is worth
because of these reasons.
5.5 Analysis of accounts
5.5.1 How to interpret financial statements by calculating and
analysing accounting ratios
•
Gross profit margin
Gross profit margin = Gross profit ÷ Revenue x 100
The higher the percentage the better because it means that the business
earns more gross profit for every dollar they get from revenue
•
Profit margin
Profit margin = Profit ÷ Revenue x 100
The higher the percentage the better because it means that the business
earns more profit for every dollar they get from revenue
•
Return on capital employed
R.O.C.E = Profit ÷ Capital employed x 100
The higher the percentage the better because this means the investor gets
more money for every dollar they invest into the business
•
Current ratio
Current ratio = Current assets ÷ Current liabilities
1:1.5 - 1:2 would be the best ratio because this shows that the business has
more cash than it needs to meet its short-term liabilities and has spare cash
to pay unexpected expenses. Ratio higher than 1:2 would show that a
business is not using their cash well because they have too much spare cash
or that their assets are unprofitable
•
Acid test ratio
Acid test ratio = (Current assets - inventories) ÷ Current liabilities
1:1 would be the best ratio because if it is lower than that then theres a risk of
the business not having enough money to pay its liabilities and if it is too high
then cash is being tied up in unprofitable assets.
5.5.2 Liquidity
• The concept and importance of liquidity
Liquidity is the ability of a business to pay its short-term debts. The more
liquid, the better because this means that the business can pay its liabilities
and unexpected payments. However, the business should not be too liquid,
otherwise this means that the business has money tied up in unprofitable
assets and that they are not using their cash wisely. If the business is not very
liquid, then they would have trouble paying back their liabilities because of
insufficient amounts of cash
5.5.3 Why and how accounts are used
•
Needs of different users of accounts and ratio analysis
•
How users of account and ratio results might use information to help make
decisions
Owners/shareholder - They will want to know how well the business is
performing and how well their money is being spent so that they can get a
good return on the money they have invested in the business. This can help
then decide whether or not they want to continue investing the business or
the invest in other businesses
Potential investors - Before investing in a business, investors will want to
know how profitable the business is before deciding in investing in the
business so that they can get good returns from their investment
Managers - They can compare the accounts with previous years to measure
the performance of the business and to see if they have achieved any
objectives. They will also want to see how high their retained profits are so
they can consider buying non-current assets to upgrade the business or to
expand the business
Employees - They will be interested in the profitability of the business
because they want to have job security
Trade payables - Suppliers would be interested in seeing if the business has
the ability to pay its debts when they need to be paid. This can help them
decide whether or not they want to supply the business with materials and
components
Lenders - Bank and other lenders will want to know if it will be a risk to lend
money to the business and whether or no they will receive interest on the
money loaned
Government - They will be interested in the profits made by the business
because the higher the profits are, the higher the taxes paid
Customers - They will want to know whether or not a business will continue
to supply them with goods and services
6.1 Government economic objectives and policies
6.1.1 How government control over the economy affects
business activity
• Government economic objectives
- Positive balance of payments: When the value of exports is greater than
the value of imports (balance of payments surplus) More exports means
more money coming into the country and less imports means less money
flowing out of the country, which means the country earns more money.
- Low unemployment: This ensures that people contribute to the total
output of the country to improve economic growth, to provide a better
standard of living, to decrease money being spent on unemployment
benefits and higher level of employment means more taxes are received. Low inflation: People can enjoy a better standard of living because they
are able to afford goods and services, it becomes easier for companies to
set up new ventures and expand. If inflation increases then people may not
be able to afford local goods and they may buy foreign goods which may
be cheaper, and this affects local businesses in the country as they have
fewer sales
- Economic growth: GDP (gross domestic product) shows whether a
country's economy is growing. GDP increase means that more goods and
services have been produced than the year before which increases the
standard of living and increases business opportunities
•
Main stages of the business cycle; growth, boom, recession, slump
Growth: This is when the economy recovers or grows
- Positive outlook for businesses
- Existing businesses grow and make profit
- Increases GDP
- Falling unemployment
- Raises standard of living
Boom: This is the peak of the business cycle
- Business investments and profits are at their higher levels
- Most sectors of the economy are performing at their best
- High levels of demand for good and services which causes inflation
- Very low unemployment rates
Recession: This is when the economy shrinks in size
- Business confidence falls leading less investment in new and existing
businesses
- Decline in economic activity until it reaches a minimum (slump )
- Falling demand by consumers lead to decrease in profits - Unemployment
rises because businesses have to cut costs
Slump: This is when the recession stage of the economy is at its worst
- Very low business confidence with very little investment
- Low production of goods and services
- Low demand for goods and services
- High unemployment
•
How changes in taxes and government can affect business activity
Direct tax: The tax charged on personal income or tax on the profit made
by a business Indirect tax: The tax charged on the price of goods and
services, which is added to the price of goods and services before being
bought
Disposable income: The amount of income left for individuals after
taxes have been paid
Tax rates are charged to achieve economic objectives, high tax rates means
that there is less disposable income for the business and this may affect the
business negatively, which may make them protest. They may also decrease
shareholder's dividends or decrease production because they don't have
enough money. It may also cause them to relocate their operations in a
foreign country with a lower tax rate.
•
How changes in interest rates can affect business activity How businesses
might respond to these changes
High interest rates means that the cost of borrowing is more expensive and
interest costs are high, which may cause businesses to delay or cancel their
plans to expand as the cost of borrowing money is high
6.2 Environmental and ethical issues
6.2.1 Environmental concerns and ethical issues as both
opportunities and constraints for businesses
• How business activity can impact on the environment
Air pollution
Caused by fumes from manufacturing units and exhaust
fumes created by vehicles. Can lead to respiratory disorders
in humans and affects plants and animals. Corrosive
chemicals in the air can damage buildings
Land pollution
Waste that cannot be recycled finds its way into landfill.
Harmful and possibly nuclear waste from factories can end
up in land fill too. Some of this does not decompose and is
toxic and unpleasant to see
Thermal
pollution
Exhaust fumes in the air that trap heat lead to an increase in
air temperatures. Water is used as a coolant in factories and
then returned to the environment at a higher temperature,
damaging the plants and animals in the area.
Light pollution
Electronic billboards used by businesses for advertising and
over-illumination can interfere with ecosystems and
astronomical observations
Water
pollution
Caused by improper waste disposal and contamination by
toxic, chemical waste from factories. This can seriously
damage the plant and animal life in the water and can be
lifethreatening if consumed by humans
Visual
pollution
Unattractive views such as power lines (needed by a
manufacturing plant) and overcrowding can be unpleasant
and prevent people from enjoying the natural environment
Noise pollution
Caused by manufacturing plants and cars and aeroplanes,
Can be irritant and affect people's quality of life
Waste:
- Paper waste
- Commercial waste
- IT waste
- Packaging waste
- Chemical and hazardous waste
• The concept of externalities; possible external costs and external benefits of
business decisions
Externality: The effect of business activities on unrelated parties
Socials costs: Negative impact of a business decision on society
Social benefits: Positive impact of a business decision on society
Some social costs include:
Traffic congestion
Air pollution
Some social benefits include:
More hospitals
More products being sold to a wider population
• Sustainable development
- how business activity can contribute to this Sustainable development:
When a business has a positive over impact on the environment and its
stakeholders
Ways of achieving sustainable development:
- Use renewable energy
Use recycled products to produce packaging
Avoid unnecessary travelling
Reduce waste
Use energy efficient processes
•
How/why business might respond to environmental pressures and
opportunities
If businesses don't respond to pressure groups when they are doing
something wrong then it may damage their reputation and stop customers
from buying goods and services from the business, which decreases sales
and revenue and can have an overall decrease in profit. Governments may
also inspect the business and may close it down if any regulations have been
followed. Furthermore, companies or people can sue the business for legal
actions. Business may respond to the pressure groups by giving them what
they want by changing processes or selling their products at a cheaper price
etc.
•
The role of legal controls over business activity affecting the environment
The government can impose penalties on businesses that are harming the
environment, they may not permit certain businesses from setting up some
areas, they may set standards that the business has to meet. Furthermore,
they may make environmental information more accessible, enable recycling
by providing recycle, give awards for the most environmental companies and
more.
Ethical issues a business might face; conflicts between profits and ethics
Sector
Examples of unethical practice
•
Finance
- Failing to tell customers about extra costs
Marketing
- False advertising
- Providing products that are unsafe to use
- Non disclosure of risks
Human
resources
-
Unfair payments to employees
Use of child labour
Production in sweatshops
Discrimination
Operations
- Dumping: selling products at a very low cost internationally
to drive out competition
- Improper waste disposal
- Exceeding of pollution limits set by the government
Conflict between profits and ethics:
Businesses may find it hard to achieve ethical objectives if it increases their
costs which decreases profits. So they may practice unethical actions in order to
earn a profit which is bad and harming to stakeholders involved. Earning profit
by unethical means is not good for longterm survival of the business because
governments or people may find out about these unethical practices and may
sue them or shut the business down
•
How business might react and respond to ethical issues
Businesses may change their practices in order to satisfy their stakeholder.
There are many advantages involved in this but also disadvantages.
Advantages
Long-term survival will be more successful
Good reputation
Increase potential customers
Motivating workers
Attract investors
Disadvantages
- High costs
- Lower profits
6.3 Business and the international economy
6.3.1 The importance of globalisation
• The concept of globalisation and the reasons for it
Globalisation is the process by which countries are connected with each
other because of the trade of goods and services Reasons for
globalisations include:
- Growth in international trade
- Global recognition for brands
- Greater movement of products, services, people and money
- Company operating in more than one country
-
• Opportunities and threats of globalisation for businesses
Opportunities
- Business can access more markets
- Increase of sales
- Wider customer case
- Increase in profit
- More brand recognition
- Economies of scale
Threats
- Local businesses may suffer because of foreign companies
- Exchange rates may cause lower profits
- Increased competition for both local and international businesses
• Why some governments might introduce import tariffs and quotas
Tariff: Tax applied to the value of imported and exported goods
Governments may place a tariff on imports to decrease the amount of imports
so that the economy can have a positive balance of payments. Governments
may also add tax on exported products to make sure that the country itself
has sufficient amounts of the products and not all of the products are being
exported leaving the country with nothing.
Quotas: A physical limit on the quantity of goods that can be imported and
exported
Governments may set up quotas to decrease the level of competition so that
local businesses can survive. This may have a negative impact on
businesses because they cannot import as much goods as they would like to,
which may decrease sales and revenue
6.3.2 Reasons for the importance and growth of multinational
companies (MNCs )
• Benefits to a business of becoming a multinational
A multinational company is when the company has operations in more than
one country.
Benefits include:
- More brand recognition
- Wider base of customers
- More sales
- More profits
- Spread of risk
- Lower production costs
- Access to bigger markets
- Premium pricing (such as Prada, their brand is well-known so they can
charge high prices )
Drawbacks include:
- Language barriers
- High costs
- Cultural differences
- Shortage of labour (MNCs may have to bring in specialist workers and
managers from other countries, which is expensive)
- Strict regulations
- Local opposition or threat from pressure groups
- Currency fluctuations
•
Potential benefits to a country and/pr economy where a MNC is located
- Increase job opportunities
- Increase in choice of goods and services
- Improves balance of payments
- Knowledge-sharing
- Generates income in the form of tax
- Improves the country's reputation
- Improves infrastructure (MNC may have to invest in transportation and
communication networks)
•
Potential drawbacks to a country and/pr economy where a MNC is located
- Undue influence on the government (MNCs may try to influence
government policies that affect them to benefit from them)
- Increased competition
- Environmental damage
- Exploitation of labour
- Repatriation of profit (MNCs may send the profits back to their home
country leaving the host country with very little financial benefit
- Exploitation of natural resources
- Negative social impact
- Less sense of social responsibility (MNCs are mainly driven by profit so
they pay not pay a lot of attention to healthy and safety etc.)
6.3.3 The impact of exchange rate changes
•
Depreciation and appreciation of an exchange rate
Exchange rate is the rate at which one country's currency can be exchanged
for that of another
Depreciation is when the value of the currency goes down with respect to
another
Appreciation is when the value of currency increases with respect to another
currency
•
How exchange rate changes can affect businesses as importers and
exporters of products
Depreciation Impact on businesses Importers:
- Imports will appear to be expensive
- Businesses which rely on imports will have to pay more Ex porters:
- Exports are relatively cheaper overseas and this increases demand for them
- Businesses which export will benefit from increased sales
Impact on country
- Inflation could occur if a lot of raw materials are being imported
- More demand for its currency thus value of currency rises
- More exports may lead to balance of payments surplus
Appreciation Impact on business Importers:
- Imports will appear to be cheaper
- Businesses selling imported goods will benefit from reduced costs Ex
porters:
- Exports are relatively more expensive overseas, which may decrease
demand
- Businesses may suffer from reduced sales
Impact on country
- More imports may lead to balance of payments deficit
- Local businesses compete with cheaper imported goods and reduce costs
and selling price, which reduces inflation
- A fall in exports may result in a fall in GDP and unemployment in affected
sectors