Chapter 1: Purpose of Business Activity

The Economic Problem

Need: a good or service essential for living. Examples include water and food and
shelter.

Want: a good or service that people would like to have, but is not required for living.
Examples include cars and watching movies.

Scarcity is the basic economic problem. It is a situation that exists when there are
unlimited wants and limited resources to produce the goods and services to satisfy
those wants. For example, we have a limited amount of money but there are a lot of
things we would like to buy, using the money.

Opportunity cost

Opportunity cost: It is the next best alternative for when choosing another item.
Due to scarcity, people are often forced to make choices. When choices are made it
leads to an opportunity cost

SCARCITY → CHOICE → OPPORTUNITY COST

Example: the government has a limited amount of money (scarcity) and must
decide on whether to use it to build a road, or construct a hospital (choice). The
government chooses to construct the hospital instead of the road. The opportunity
cost here are the benefits from the road that they have sacrificed (opportunity cost).

Factors of Production

Factors of Production: These are resources required to produce goods or services.

They are classified into four categories.

Land: the natural resources that can be obtained from nature. This includes
minerals, forests, oil and gas. The reward for land is rent.
Labour: the physical and mental efforts put in by the workers in the production
process. The reward for labour is wage/salary

Capital: the finance, machinery and equipment needed for the production of goods
and services. The reward for capital is interest received on the capital

Enterprise: the risk taking ability of the person who brings the other factors of
production together to produce a good or service. The reward for enterprise is profit
from the business.

Specialisation

Specialisation: It occurs when a person or organisation concentrates on a task at

which they are best at.

Advantages:

1. Workers are trained to do a particular task and specialise in this, thus

increasing efficiency

2. Saves time and energy: production is faster by specialising

3. Quicker to train labourers: workers only concentrate on a task, they do not

have to be trained in all aspects of the production process

Disadvantages:

1. It can get monotonous/boring for workers, doing the same tasks repeatedly

2. Over-dependency: if the worker(s) responsible for a particular task is absent,

the entire production process may halt since nobody else may be able to do
the task.
Purpose of Business Activity

Business: It is any organisation that uses all the factors of production (resources) to
create goods and services to satisfy human wants and needs.

Added Value

Added value: It is the difference between the cost of materials bought in and the
selling price of the product.

Which is, the amount of value the business has added to the raw materials by
turning it into finished products. Every business wants to add value to their products
so they may charge a higher price for their products and gain more profits.

For example, logs of wood may not appeal to us as consumers and so we won’t buy it
or would pay a low price for it. But when a carpenter can use these logs to transform
it into a chair we can use, we will buy it at a higher cost because the carpenter has
added value to those logs of wood.

How to increase added value?

- Reducing the cost of production: Added value of a product is its price less the
cost of production. Reducing cost of production will increase the added value.

- Raising prices: By increasing prices they can raise added value, in the same
way as described above.

In a practical sense, you can add value by:

- Branding
- Adding special features
- Provide premium services etc.

Example Jewellery Store

- Design an attractive package to put the jewellery items in.
- An attractive shop-window-display.
 - Well-dressed and knowledgeable shop assistants.

All of this will help the jewellery store to raise prices above the additional costs
involved.

Chapter 2: Classification of Business

Primary sector: this involves the use/extraction of natural resources. Examples

include agricultural activities, mining, fishing, wood-cutting, oil drilling etc.

Secondary sector: this involves the manufacture of goods using the resources from
the primary sector. Examples include auto-mobile manufacturing, steel industries,
cloth production etc.

Tertiary sector: this consists of all the services provided in an economy. This includes
hotels, travel agencies, hair salons, banks etc.

Up until the mid 18th century, the primary sector was the largest sector in the world, as
agriculture was the main profession. After the industrial revolution, more countries began
to become more industrialised and urban, leading to a rapid increase in the manufacturing
sector (industrialization).

Nowadays, as countries are becoming more developed, the importance of the tertiary sector
is increasing, while the primary sector is diminishing. The secondary sector is also slightly
reducing in size (deindustrialization) compared to the growth of the tertiary sector .

This is due to the growing incomes of consumers which raises their demand for more services
like travel, hotels etc.

Private and Public Sector

Private sector: where private individuals own and run business ventures.
Their aim is to make a profit, and all costs and risks of the business are undertaken
by the individual.
Examples: Nike, McDonald’s, Virgin Airlines etc.

Public sector: where the government owns and runs business ventures. Their aim is
to provide essential public goods and services (schools, hospitals, police etc.)They
are not profit - oriented.

In order to increase the welfare of their citizens, they don’t work to earn a profit.It is
funded by the taxpayers' money, so they work in the interest of these citizens to
provide them with services. Example: the Indian Railways is a public sector
organisation owned by the govt. of India.

In a mixed economy, both the public and private sector co - exist .

Chapter 3: Enterprise, Growth and Size

Entrepreneur: is a person who organises, operates and takes risks for a new
business venture. The entrepreneur brings together the various factors of
production to produce goods or services.

Qualities of a good entrepreneur

Risk taker: Has general risk with each decision

Creative: A business needs new ideas about how to attract customers
Optimistic: Has to look forward to a better future.
Self-confident: Necessary to prove your skills.
Innovative: Put new ideas to practice
Independent: Should be well - motivated to work without any help
Effective communicator: Talk clearly and confidently
Hard working: Long hours and short holidays might be common.

Business plan

Business Plan: It is a document containing the business objectives and important

details about the operations, finance and owners of the new business.
It provides a complete description of a business and its plans for the first few years; explains
what the business does, who will buy the product or service and why; provides financial
forecasts demonstrating overall viability; indicates the finance available and explains the
financial requirements to start and operate the business.

Contents of a regular business plan are:

1. Executive summary: brief summary of the key features of the business and
the business plan

2. The owner: educational background and what any previous experience in

doing previously

3. The business: name and address of the business and detailed description of
the product or service being produced and sold; how and where it will be
produced, who is likely to buy it, and in what quantities

4. The market: describe the market research that has been carried out, what it
has revealed and details of prospective customers and competitors

5. Advertising and promotion: how the business will be advertised to potential

customers and details of estimated costs of marketing

6. Premises and equipment: details of planning regulations, costs of premises

and the need for equipment and buildings

7. Business organisation: whether the enterprise will take the form of sole
trader, partnership, company or cooperative

8. Costs: indication of the cost of producing the product or service, the prices it
proposes to charge for the products

9. Finance: how much of the capital will come from savings and how much will
come from borrowings
 10. Cash flow: forecast income (revenue) and outgoings (expenditures) over the
first year

11. Expansion: brief explanation of future plans

Advantages of a business plan:

- By documenting the various details about the business, the owners will find
it much easier to run it.

- There is a lesser chance of losing sight of the mission and vision of the
business as the objectives have been written down.

- Moreover, having the objectives of the business set down clearly will help
motivate the employees.

- A new entrepreneur will find it easier to get a loan or overdraft from the bank
if they have a business plan.

Government support for business startups

Why do governments want to help new start-ups?

- They provide employment to a lot of people

- They contribute to the growth of the economy
- They can also, if they grow to be successful, contribute to the exports of the
country
- Start-ups often introduce fresh ideas and technologies into business and
industry

How do governments support businesses?

 - Organise advice: provide business advice to potential entrepreneurs, giving
them information useful in starting a venture, including legal and
bureaucratic ones

- Provide low cost premises: provide land at low cost or low rent for new firms

- Provide loans at low interest rates

- Give grants for capital: provide financial aid to new firms for investment

- Give grants for training: provide financial aid for workforce training

- Give tax breaks/ holidays: high taxes are a disincentive for new firms to set
up.

- Governments can thus withdraw or lower taxation for new firms for a certain
period of time

Measuring business size

Business size can be measured in the following ways:

Number of employees: larger firms have larger workforce employed

Limitation: It might not be accurate as a capital intensive firm ( one that employs a
large amount of capital equipment) can produce large output by employing very
little labour (workers).

Value of output: larger firms are likely to produce more than smaller ones
Limitation: Output value is also unreliable because some different types of products
are valued differently, and the size of the firm doesn’t depend on this.

Value of capital employed: larger businesses are likely to employ much more capital
than smaller ones
Limitation: value of capital employed is not a reliable measure when comparing a
capital-intensive firm with a labour-intensive firm.

Business growth

Why do businesses want to grow?

Businesses want to grow because growth helps reduce their average costs in the
long-run, help develop increased market share, and helps them produce and sell to
new markets.

There are two ways in which a business can grow- internally and externally.

Internal growth

This occurs when a business expands its existing operations. For example, when a
fast food chain opens a new branch in another country. This is a slow means of
growth but easier to manage than external growth.

External growth

This is when a business takes over or merges with another business. It is sometimes
called integration as one firm is ‘integrated’ into the other.

Merger: It is when the owner of two businesses agree to join their firms together to
make one business.

Takeover: It occurs when one business buys out the owners of another business ,
which then becomes a part of the ‘predator’ business.

External growth can largely be classified into three types:

1) Horizontal merger/integration: This is when one firm merges with or takes

over another one in the same industry at the same stage of production. For
 example, when a firm that manufactures furniture merges with another firm
that also manufacturers furniture.

Benefits:
- Reduces the number of competitors in the market, since two firms become
one.
- Opportunities of economies of scale.
- Merging will allow the businesses to have a bigger share of the total market.

2) Vertical merger/integration: This is when one firm merges with or takes

over another firm in the same industry but at a different stage of production.

Therefore, vertical integration are of two types:

Backward vertical integration: When one firm merges with or takes over another
firm in the same industry but at a stage of production that is behind the ‘predator’
firm.
For example, when a firm that manufactures furniture merges with a firm that
supplies wood for manufacturing furniture.

Benefits:
- Merger gives assured supply of essential components.
- The profit margin of the supplying firm is now absorbed by the expanded
company .
- The supplying firm can be prevented from supplying to competitors.

Forward vertical integration:

When one firm merges with or takes over another firm in the same industry but at a
stage of production that is ahead of the ‘predator’ firm.

For example, when a firm that manufactures furniture merges with a furniture retail
store.

Benefits:

- Merger gives an assured outlet for their product.

 - The profit margin of the retailer is now absorbed by the expanded company .
- The retailer can be prevented from selling the goods of competitors.

Conglomerate merger/integration: This is when one firm merges with or takes over
a firm in a completely different industry. This is also known as ‘diversification’. For
example, when a firm that manufactures furniture merges with a firm that
produces clothing.

Benefits:

- Conglomerate integration allows businesses to have activities in more than

one country. This allows the firms to spread its risks.
- There could be a transfer of ideas between the two businesses even though
they are in different industries.
- This transfer of ideas could help improve the quality and demand for the two
products.

Drawbacks of growth

- Difficult to control staff: as a business grows, the business organisation in

terms of departments and divisions will grow, along with the number of
employees, making it harder to control, co-ordinate and communicate with
everyone

- Lack of funds: growth requires a lot of capital.

- Lack of expertise: growth is a long and difficult process that will require
people with expertise in the field to manage and coordinate activities

- Diseconomies of scale: this is the term used to describe how average costs of
a firm tends to increase as it grows beyond a point, reducing profitability. This
is explored more deeply in a later section.
Why businesses stay small

Not all businesses grow. Some stay small, employ a handful of workers and have
little output. Here are the reasons why.

Type of industry: some firms remain small due to the industry they operate in.
Examples of these are hairdressers, car repairs, catering, etc, which give personal
services and therefore cannot grow.

Market size: if the firm operates in areas where the total number of customers is
small, such as in rural areas, there is no need for the firm to grow and thus stays
small.

Owners’ objectives: not all owners want to increase the size of their firms and
profits. Some of them prefer keeping their businesses small and having a personal
contact with all of their employees and customers, having flexibility in controlling
and running the business, having more control over decision-making, and to keep it
less stressful.

Why businesses fail

Not all businesses are successful. The main reasons why they fail are:

Poor management: this is a common cause of business failure for new firms. The
main reason is lack of experience and planning which could lead to bad decision
making. New entrepreneurs could make mistakes when choosing the location of
the firm, the raw materials to be used for production, etc, all resulting in failure

Over-expansion: this could lead to diseconomies of scale and greatly increase costs,
if a firms expands too quickly or over their optimum level

Failure to plan for change: the demands of customers keep changing with change in
tastes and fashion. Due to this, firms must always be ready to change their products
to meet the demand of their customers. Failure to do so could result in losing
customers and loss. They also won’t be ready to quickly keep up with changes the
competitors are making, and changes in laws and regulations

Poor financial management: if the owner of the firm does not manage his finances
properly, it could result in cash shortages. This will mean that the employees cannot
be paid and enough goods cannot be produced. Poor cash flow can therefore also
cause businesses to fail
Why new businesses are at a greater risk of failure

Less experience: a lack of experience in the market or in business gets a lot of firms
easily pushed out of the market
New to the market: they may still not understand the nuances and trends of the
market, that existing competitors will have mastered

Don't have a lot of sales yet: only by increasing sales, can new firms grow and find
their foothold in the market. At a stage when they’re not selling much, they are at a
greater risk of failing

Don’t have a lot of money to support the business yet: financial issues can quickly
get the better of new firms if they aren’t very careful with their cash flows. It is only
after they make considerable sales and start making a profit, can they reinvest in the
business and support it

Chapter 4: Types of business organisations

Sole Trader: A business organisation owned and controlled by one person. Sole
traders can employ other workers, but only he/she invests and owns the business.

Advantages:

Easy to set up: there are very few legal formalities involved in starting and running a
sole proprietorship. A less amount of capital is enough by sole traders to start the
business. There is no need to publish annual financial accounts.
Full control: the sole trader has full control over the business. Decision-making is
quick and easy, since there are no other owners to discuss matters with.

Sole trader receives all profit: Since there is only one owner, he/she will receive all of
the profits the company generates.

Disadvantages:

Full responsibility: Since there is only one owner, the sole owner has to undertake all
running activities. He/she doesn’t have anyone to share his responsibilities with.
This workload and risks are fully concentrated on him/her.

Lack of capital: As only one owner/investor is there, the amount of capital invested in
the business will be very low. This can restrict growth and expansion of the business.
Their only sources of finance will be personal savings or borrowing or bank loans
(though banks will be reluctant to lend to sole traders since it is risky).

Lack of continuity: If the owner dies or retires, the business dies with him/her.

Partnership: It is a legal agreement between two or more (usually, up to

twenty)people to own, finance and run a business jointly and to share all profits.

Advantages:

Easy to set up: Similar to sole traders, very few legal formalities are required to start
a partnership business.

Partnership agreement/ partnership deed: It is a legal document that all partners

have to sign, which forms the partnership. There is no need to publish annual
financial accounts.

Partners can provide new skills and ideas: The partners may have some skills and
ideas that can be used by the business to improve business profits.
More capital investments: Partners can invest more capital than what a sole trade
only by himself could.

Disadvantages:

Conflicts: arguments may occur between partners while making decisions. This will
delay decision-making.

Unlimited liability: similar to sole traders, partners too have unlimited liability-
their personal items are at risk if business goes bankrupt

Lack of capital: smaller capital investments as compared to large companies.

No continuity: if an owner retires or dies, the business also dies with them.

Joint-stock companies

These companies can sell shares, unlike partnerships and sole traders, to raise capital. Other
people can buy these shares (stocks) and become a shareholder (owner) of the company.
Therefore they are jointly owned by the people who have bough it’s stocks. These
shareholders then receive dividends (part of the profit; a return on investment).

The shareholders in companies have limited liabilities. That is, only their individual
investments are at risk if the business fails or leaves debts. If the company owes money, it can
be sued and taken to court, but it’s shareholders cannot. The companies have a separate legal
identity from their owners, which is why the owners have a limited liability. These
companies are incorporated.

(When they’re unincorporated, shareholders have unlimited liability and don’t have a
separate legal identity from their business).

Companies also enjoy continuity, unlike partnerships and sole traders. That is, the business
will continue even if one of its owners retire or die.

Shareholders will elect a board of directors to manage and run the company in it’s
day-to-day activities. In small companies, the shareholders with the highest percentage of
shares invested are directors, but directors don’t have to be shareholders. The more shares a
shareholder has, the more their voting power.

These are two types of companies:

Private Limited Companies: One or more owners who can sell its’ shares to only the
people known by the existing shareholders (family and friends). Example: Ikea.

Public Limited Companies: Two or more owners who can sell its’ shares to any
individual/organisation in the general public through stock exchanges.
Example: Verizon Communications.

Advantages:

- Limited Liability: this is because the company and the shareholders have
separate legal identities.

- Raise huge amounts of capital: selling shares to other people (especially in

Public Ltd. Co.s), raises a huge amount of capital, which is why companies are
large.

- Public Ltd. Companies can advertise their shares, in the form of a prospectus,
which tells interested individuals about the business, it’s activities, profits,
board of directors, shares on sale, share prices etc. This will attract investors.

Disadvantages:

- Required to disclose financial information: Sometimes, private limited

companies are required by law to publish their financial statements annually,
while for public limited companies, it is legally compulsory to publish all
accounts and reports. All the writing, printing and publishing of such details
can prove to be very expensive, and other competing companies could use it
to learn the company secrets.

- Private Limited Companies cannot sell shares to the public. Their shares can
only be sold to people they know with the agreement of other shareholders.
 Transfer of shares is restricted here. This will raise less capital than Public Ltd.
Companies.

- Public Ltd: Companies require a lot of legal documents and investigations

before it can be listed on the stock exchange.

- Public and Private Limited Companies must also hold an Annual General
Meeting (AGM), where all shareholders are informed about the performance
of the company and company decisions, vote on strategic decisions and elect
board of directors. This is very expensive to set up, especially if there are
thousands of shareholders.

- Public Ltd. Companies may have managerial problems: since they are very
large, they become very difficult to manage. Communication problems may
occur which will slow down decision-making.

- In Public Ltd. Companies, there may be a divorce of ownership and control:

The shareholders can lose control of the company when other large
shareholders outvote them or when board of directors control company
decisions.

There are 2 main documents:

- Articles of association:Rules under which the company will be managed, the
rights and duties of directors and procedure for issuing shares.

- Memorandum of association:contains important information about the

company and directors. The official name and address of registered offices.
Franchises

Franchise: The owner of a business (the franchisor) grants a licence to another

person or business (the franchisee) to use their business idea – often in a specific
geographical area. Fast food companies such as McDonald’s and Subway operate
around the globe through lots of franchises in different countries.
Joint Ventures
Joint venture: It is an agreement between two or more businesses to work together
on a project. The foreign business will work with a domestic business in the same
industry.

Eg: Google Earth is a joint venture/project between Google and NASA.

Advantages

- Reduces risks and cuts costs

- Each business brings different expertise to the joint venture
- The market potential for all the businesses in the joint venture is increased
- Market and product knowledge can be shared to the benefit of the
businesses

Disadvantages

- Any mistakes made will reflect on all parties in the joint venture, which may
damage their reputations

- The decision-making process may be ineffective due to different business

culture or different styles of leadership

Public Sector Corporations

Public sector corporations: They are businesses owned by the government and run
by directors appointed by the government. They usually provide essential services
like water, electricity, health services etc. The government provides the capital to run
these corporations in the form of subsidies (grants).

The UK’s National Health Service (NHS) is an example. Public corporations aim to:
- to keep prices low so everybody can afford the service.
- to keep people employed.
- to offer a service to the public everywhere.

Advantages:
Some businesses are considered too important to be owned by an individual.
(electricity, water, airline)

Other businesses, considered natural monopolies, are controlled by the

government. (electricity, water)

Reduces waste in an industry. (e.g. two railway lines in one city)

Rescue important businesses when they are failing through nationalisation

Provide essential services to the people

Drawbacks:

Motivation might not be as high because profit is not an objective

Subsidies lead to inefficiency. It is also considered unfair for private businesses

There is normally no competition to public corporations, so there is no incentive to

improve

Chapter 5: Business and Stakeholder Objectives

Business Objectives:

Business objectives: They are the aims and targets that a business works towards to
help it run successfully. Although the setting of these objectives does not always
guarantee business success, it has its benefits.

Benefits:
- Setting objectives increases motivation as employees and managers now
have clear targets to work towards.

- Decision making will be easier and less time consuming as there are set
targets to base decisions on. i.e., decisions will be taken in order to achieve
business objectives.
 - Setting objectives reduces conflicts and helps unite the business towards
reaching the same goal.

- Managers can compare the business’ performance to its objectives and make
any changes in its activities if required.

Private Sector Objectives

Objectives vary with different businesses due to size, sector and many other factors.
However, many businesses in the private sector aim to achieve the following
objectives:

- Survival: new or small firms usually have survival as a primary objective.

Firms in a highly competitive market will also be more concerned with
survival rather than any other objective. To achieve this, firms could decide to
lower prices, which would mean forsaking other objectives such as profit
maximisation.

- Profit: this is the income of a business from its activities after deducting total
costs. Private sector firms usually have profit making as a primary objective.
This is because profits are required for further investment into the business
as well as for the payment of return to the shareholders/owners of the
business.

- Growth: once a business has passed its survival stage it will aim for growth
and expansion. This is usually measured by the value of sales or output.
Aiming for business growth can be very beneficial. A larger business can
ensure greater job security and salaries for employees. The business can also
benefit from higher market share and economies of scale.

- Market share: this can be defined as the proportion of total market sales
achieved by one business. Increased market share can bring about many
benefits to the business such as increased customer loyalty, setting up of
brand image, etc.
 - Service to the society: some operations in the private sectors such as social
enterprises do not aim for profits and prefer to set more economical
objectives. They aim to better the society by providing social, environmental
and financial aid. They help those in need, the underprivileged, the
unemployed, the economy and the government.

A business’ objectives do not remain the same forever. As market situations change
and as the business itself develops, its objectives will change to reflect its current
market and economic position. For example, a firm facing a serious economic
recession could change its objective from profit maximisation to short term survival.

Stakeholder Objectives:
Public- sector businesses: Government owned and controlled businesses do not
have the same objectives as those in the private sector.

Objectives:

Financial: although these businesses do not aim to maximise profits, they will have
to meet the profit target set by the government. This is so that it can be reinvested
into the business for meeting the needs of the society

Service: the main aim of this organisation is to provide a service to the community
that must meet the quality target set by the government

Social: most of these social enterprises are set up in order to aid the community. This
can be by providing employment to citizens, providing good quality goods and
services at an affordable rate, etc.

They help the economy by contributing to GDP, decreasing unemployment rate and
raising living standards. This is in total contrast to private sector aims like profit,
growth, survival, market share etc.

Conflicts of stakeholders’ objectives

As all stakeholders have their own aims they would like to achieve, it is natural that conflicts
of stakeholders’ interests could occur. Therefore, if a business tries to satisfy the objectives of
one stakeholder, it might mean that another stakeholders’ objectives could go unfulfilled.

For example, workers will aim towards earning higher salaries. Shareholders might
not want this to happen as paying higher salaries could mean that less profit will be
left over for payment of return to the shareholders.

Similarly, the business might want to grow by expanding operations to build new
factories. But this might conflict with the community’s want for clean and
pollution-free localities.

Chapter 10: Marketing, Competition and Customer

Market : It consists of all buyers and sellers of a particular good.

Marketing: marketing is the management process responsible for identifying,

anticipating and satisfying consumers’ requirements profitably.

The role of marketing in a business is as follows:

- Identifying customer needs through market research

- Satisfying customer needs by producing and selling goods and services

- Maintaining customer loyalty: building customer relationships through a

variety of methods that encourage customers to keep buying one firm’s
products instead of their rivals’. For example, loyalty card schemes, discounts
for continuous purchases, after-sales services, messages that inform past
customers of new products and offers etc.

- Gain information on customers: by understanding why customers buy their

products, a firm can develop and sell better products in the future

- Anticipate changes in customer needs: the business will need to keep looking
for any changes in customer spending patterns and see if they can produce
goods that customers want that are not currently available in the market.

Some objectives of the marketing department in a firm may have:

- Raise awareness of their product(s)

- Increase sales revenue and profits

- Increase or maintain market share (this is the proportion of sales a company

has in the overall market sales. For example, if in a market, $1 million worth of
toys were sold in a year and company A’s total sales was $30,000 in that year,
company A’s market share for the year is ($300,000/ $1000000) *100 = 30%)
 - Enter new markets at home or abroad

- Develop new products or improve existing products.

Why customer spending patterns may change:

- change in their tastes and preferences

- change in technology: as new technology becomes available, the old versions

of products become outdated and people want more sophisticated features
on products

- change in income: the higher the income, the more expensive goods
consumers will buy and vice versa

- ageing population: in many countries, the proportion of older people is

increasing and so demand for products for seniors are increasing (such as
anti-ageing creams, medical assistance etc.)

The power and importance of changing customer needs:

Firms need to always know what their consumers want (and they will need to
undertake lots of research and development to do so) in order to stay ahead of
competitors and stay profitable. If they don’t produce and sell what customers want,
they will buy competitors’ products and the firm will fail to survive.

Why some markets have become more competitive:

- Globalisation: products are being sold in markets all over the world, so there
are more competitors in the market

- Improvement in transportation infrastructures: better transport systems

means that it is easier and cheaper to distribute and sell products everywhere

- Internet/E-Commerce: customers can now buy products over the internet

form anywhere in the world, making the market more competitive
How business can respond to changing spending patterns and increased
competition:

A business has to ensure that it maintains its market share and remains competitive
in the market. It can ensure this by:

- maintaining good customer relationships: by ensuring that customers keep

buying from their business only, they can keep up their market share. By
doing so, they can also get information about their spending patterns and
respond to their wants and needs to increase market share

- keep improving its existing products, so that sales is maintained.

- introduce new products to keep customers coming back, and drive them
away from competitors’ products

- keep costs low to maintain profitability: low costs means the firm can afford
to charge low prices. And low prices generally means more demand and
sales, and thus market share.

Niche & Mass Marketing

Niche Marketing: identifying and exploiting a small segment of a larger market by

developing products to suit it. For example, Versace designs and Clique perfumes
have niche markets- the rich, high-status consumer group.

Advantages:

- Small firms can thrive in niche markets where large forms have not yet been
established

- If there are no or very few competitors, firms can sell products at a high price
and gain high profit margins because customers will be willing be willing to
pay more for exclusive products
 - Firms can focus on the needs of just one customer group, thereby giving them
an advantage over large firms who only sell to the mass market

Limitations:

- Lack of economies of scale (can’t benefit from the lower costs that arise from
a larger operations/market)

- Risk of over-dependence on a single product or market: if the demand for the

product falls, the firm won’t have a mass product they can fall back on

- Likely to attract competition if successful

Mass Marketing: selling the same product to the whole market with no attempt to
target groups within it. For example, the iPhone sold is the same everywhere, there
are no variations in design over location or income.

Advantages:

- Larger amount of sales when compared to a niche market

- Can benefit from economies of scale: a large volume of products are

produced and so the average costs will be low when compared to a niche
market

- Risks are spread, unlike in a niche market. If the product isn’t successful in
one market, it’s fine as there are several other markets

- More chances for the business to grow since there is a large market. In niche
markets, this is difficult as the product is only targeted towards a particular
group.

Limitations:

- They will have to face more competition

 - Can’t charge a higher price than competition because they’re all selling
similar products

Market Segmentation

A market segment is an identifiable subgroup of a larger market in which

consumers have similar characteristics and preferences

Market segmentation is the process of dividing a market of potential customers into

groups, or segments, based on different characteristics. For example, PepsiCo
identified the health-conscious market segment and targeted/marketed the Diet
Coke towards them.

Markets can be segmented on the basis of socio-economic groups (income), age,

location, gender, lifestyle, use of the product (home/ work/ leisure/ business) etc.
Each segment will require different methods of promotion and distribution. For
example, products aimed towards kids would be distributed through popular retail
stores and products for businessmen would be advertised in exclusive business
magazines.

Advantages:

- Makes marketing cost-effective, as it only targets a specific segment and

meets their needs.

- The above leads to higher sales and profitability

- Increased opportunities to increase sales

Chapter 11: Market Research

Product-oriented business: such firms produce the product first and then tries to
find a market for it. Their concentration is on the product – its quality and price.
Firms producing electrical and digital goods such as refrigerators and computers are
examples of product-oriented businesses.

Market-oriented businesses: such firms will conduct market research to see what
consumers want and then produce goods and services to satisfy them. They will set
a marketing budget and undertake the different methods of researching consumer
tastes and spending patterns, as well as market conditions. Example, mobile phone
markets.

Market research is the process of collecting, analysing and interpreting information

about a product.

Why is market research important/needed?

Firms need to conduct market research in order to ensure that they are producing
goods and services that will sell successfully in the market and generate profits. If
they don’t, they could lose a lot of money and fail to survive. Market research will
answer a lot of the business’s questions prior to product development such as ‘will
customers be willing to buy this product?’, ‘what is the biggest factor that influences
customers’ buying preferences- price or quality?’, ‘what is the competition in the
market like?’ and so on.

Market research data can be quantitative (numerical-what percentage of teenagers

in the city have internet access) or qualitative (opinion/ judgement- why do more
women buy the company’s product than men?)

Market research methods can be categorized into two: primary and secondary
market research.
Primary Market Research (Field Research)

The collection of original data. It involves directly collecting information from

existing or potential customers. First-hand data is collected by people who want to
use the data (i.e. the firm). Examples of primary market research methods include
questionnaires, focus groups, interviews, observation, and online surveys and so on.

The process of primary research:

1. Establish the purpose of the market research

2. Decide on the most suitable market research method
3. Decide the size of the sample (customers to conduct research on) and
identify the sample
4. Carry out the research
5. Collate and analyse the data
6. Produce a report of the findings

Sample is a subset of a population that is used to represent the entire group as a

whole. When doing research, it is often impractical to survey every member of a
particular population because the number of people is simply too large. Selecting a
sample is called sampling.

Random sampling: It occurs when people are selected at random for research

Quota sampling:It is when people are selected on the basis of certain

characteristics (age, gender, location etc.) for research.

Methods of primary research

● Questionnaires: Can be done face-to-face, through telephone, post or the

internet. Online surveys can also be conducted whereby researchers will
email the sample members to go onto a particular website and fill out a
questionnaire posted there. These questions need to be unbiased, clear and
easy to answer to ensure that reliable and accurate answers are logged in.
Advantages:

- Detailed information can be collected

- Customer’s opinions about the product can be obtained
- Online surveys will be cheaper and easier to collate and analyse
- Can be linked to prize draws and prize draw websites to encourage customers
to fill out surveys

Disadvantages:

- If questions are not clear or are misleading, then unreliable answers will be
given
- Time-consuming and expensive to carry out research, collate and analyse
them.
​

Interviews: interviewer will have ready-made questions for the interviewee.

Advantages:

- Interviewer is able to explain questions that the interviewee doesn’t

understand and can also ask follow-up questions
- Can gather detailed responses and interpret body-language, allowing
interviewers to come to accurate conclusions about the customer’s opinions.

Disadvantages:

- The interviewer could lead and influence the interviewee to answer a certain
way. For example, by rephrasing a question such as ‘Would you buy this
product’ to ‘But, you would definitely buy this product, right?’ to which the
customer in order to appear polite would say yes when in actuality they
wouldn’t buy the product.
- Time-consuming and expensive to interview everyone in the sample
Focus Groups: A group of people representative of the target market (a focus group)
agree to provide information about a particular product or general spending
patterns over time. They can also test the company’s products and give opinions on
them.

Advantage:

- They can provide detailed information about the consumer’s opinions

Disadvantages:

- Time-consuming
- Expensive
- Opinions could be influenced by others in the group.

● Observation: This can take the form of recording (eg: metres fitted to TV
screens to see what channels are being watched), watching (eg: counting how
many people enter a shop), auditing (e.g.: counting of stock in shops to see
which products sold well).

Advantage:

- Inexpensive

Disadvantage:

- Only gives basic figures. Does not tell the firm why the consumer buys them.
Secondary Market Research (Desk Research)

The collection of information that has already been made available by others.
Second-hand data about consumers and markets is collected from already
published sources.

Internal sources of information:

● Sales department’s sales records, pricing data, customer records, sales

reports
● Opinions of distributors and public relations officers
● Finance department
● Customer Services department

External sources of information:

● Government statistics: will have information about populations and age

structures in the economy.
● Newspapers: articles about economic conditions and forecast spending
patterns.
● Trade associations: if there is a trade association for a particular industry, it
will have several reports on that industry’s markets.
● Market research agencies: these agencies carry out market research on
behalf of the company and provide detailed reports.
● Internet: will have a wide range of articles about companies, government
statistics, newspapers and blogs.

Accuracy of Market Research Data

The reliability and accuracy of market research depends upon a large number of
factors:
 ● How carefully the sample was drawn up, its size, the types of people selected
etc.
● How questions were phrased in questionnaires and surveys
● Who carried out the research: secondary research is likely to be less reliable
since it was drawn up by others for different purpose at an earlier time.
● Bias: newspaper articles are often biased and may leave out crucial
information deliberately.
● Age of information: researched data shouldn’t be too outdated. Customer
tastes, fashions, economic conditions, technology all move fast and the old
data will be of no use now.

Presentation of Data from Market Research

Different data handling methods can be used to present data from market research.
This will include:

- Tally Tables: used to record data in its original form. The tally table below
shows the number and type of vehicles passing by a shop at different times of
the day:

- Charts: show the total figures for each piece of data (bar/ column charts) or
the proportion of each piece of data in terms of the total number (pie charts).
For example the above tally table data can be recorded in a bar chart as
shown below:
 The pie chart above could show a company’s market share in different
countries.

- Graphs: used to show the relationship between two sets of data. For example
how average temperature varied across the year.
Chapter 12 : Product
Product: It is the good or service being produced and sold in the market. This
includes all the features of the product as well as its final packaging.

Types of products include: consumer goods, consumer services, producer goods,

producer services.

What makes a successful product?

- It satisfies existing needs and wants of the customers

- It is able to stimulate new wants from the consumers
- Its design – performance, reliability, quality etc. should all be consistent with
the product’s brand image
- It is distinctive from its competitors and stands out
- It is not too expensive to produce, and the price will be able to cover the costs

New Product Development: development of a new product by a business. The

process:

1. Generate ideas: the firm brainstorms new product concepts, using customer
suggestions, competitors’ products, employees’ ideas, sales department data
and the information provided by the research and development department
2. Select the best ideas for further research: the firm decides which ideas to
abandon and which to research further. If the product is too costly or may not
sell well, it will be abandoned
3. Decide if the firm will be able to sell enough units for the product to be a
success: this research includes looking into forecast sales, size of market
share, cost-benefit analysis etc. for each product idea, undertaken by the
marketing department
 4. Develop a prototype: by making a prototype of the new product, the
operations department can see how the product can be manufactured, any
problems arising from it and how to fix them. Computer simulations are
usually used to produce 3D prototypes on screen
5. Test launch: the developed product is sold to one section of the market to see
how well it sells, before producing more, and to identify what changes need
to be made to increase sales. Today a lot of digital products like apps and
software run beta versions, which is basically a market test
6. Full launch of the product: the product is launched to the entire market

Advantages: Of new product development

- Can create a Unique Selling Point (USP) by developing a new innovative

product for the first time in the market. This USP can be used to charge a high
price for the product as well as be used in advertising.
- Charge higher prices for new products (price skimming as explained later)
- Increase potential sales, revenue and profit
- Helps spreads risks because having more products mean that even if one
fails, the other will keep generating a profit for the company

Disadvantages:

- Market research is expensive and time consuming

- Investment can be very expensive

Why is brand image important?

- Brand image is an identity given to a product that differentiates it from

competitors’ products.
- Brand loyalty is the tendency of customers to keep buying the same brand
continuously instead of switching over to competitors’ products.
 - Consumers recognize the firm’s product more easily when looking at similar
products- helps differentiate the company’s product from another.
- Their product can be charged higher than less well-known brands – if there is
an established high brand image, then it is easier to charge high prices
because customers will buy it nonetheless.
- Easier to launch new products into the market if the brand image is already
established. Apple is one such company- their brand image is so reputed that
new products that they launch now become an immediate success.

Why is packaging important?

- It protects the product

- It provides information about the product (its ingredients, price,
manufacturing and expiry dates etc.)
- To help consumers recognize the product (the brand name and logo on the
packaging will help identify what product it is)
- It keeps the product fresh

PLC:

The product life cycle refers to the stages a product goes through from it’s
introduction to it’s retirement in terms of sales.
At these different stages, the product will need different marketing
decisions/strategies in terms of the 4Ps.

Extension strategies: marketing techniques used to extend the maturity stage of a

product (to keep the product in the market):

- Finding new markets for the product

- Finding new uses for the product
- Redesigning the product or the packaging to improve its appeal to consumers
- Increasing advertising and other promotional activities

The effect on the PLC of a product of a successful extension strategy:

Chapter 13: Price

Price: It is the amount of money producers are willing to sell or consumer are willing
to buy the product for.

Different methods of pricing:

Market/ Price skimming: Setting a high price for a new product that is unique or
very different from other products on the market.

Advantages:

- Profit earned is very high

- Helps recover/compensate research and development costs

Disadvantages :

- It may backfire if competitors produce similar products at a lower pricE

Penetration pricing: Setting a very low price to attract customers to buy a new
product

Advantages:

- Attracts customers more quickly

- Can increase market share quickly
- Can increase short- term sales
Disadvantages:

- Low revenue due to lower prices

- Cannot recover development costs quickly

Competitive pricing: Setting a price similar to that of competitors’ products which

are already available in the market

Advantages :

- Business can compete on other matters such as service and quality

Disadvantage:

- Still need to find ways of competing to attract sales.

Cost plus pricing: Setting price by adding a fixed amount to the cost of making the
product

Advantages:

Quick and easy to work out the price

Makes sure that the price covers all of the costs
Disadvantage:

Price might be set higher than competitors or more than customers are willing to
pay, which reduces sales and profits
Loss leader pricing/Promotional pricing: Setting the price of a few products at below
cost to attract customers into the shop in the hope that they will buy other products
as well
Advantages:

Helps to sell off unwanted stock before it becomes out of date

A good way of increasing short term sales and market share
Disadvantage:
Revenue on each item is lower so profits may also be lower
Factors that affect what pricing method should be used:

Is it a new or existing product?

If it’s new, then price skimming or penetration pricing will be most suitable. If it’s an
existing product, competitive pricing or promotional pricing will be appropriate.
Is the product unique?
If yes, then price skimming will be beneficial, otherwise competitive or promotional
pricing.
Is there a lot of competition in the market?
If yes, competitive pricing will need to be used.
Does the business have a well-known brand image?
If yes, price skimming will be highly successful.
What are the costs of producing and supplying the product?
If there are high costs, costs plus pricing will be needed to cover the costs. If costs are
low, market penetration and promotional pricing will be appropriate.
What are the marketing objectives of the business?
If the business objective is to quickly gain a market share and customer base, then
penetration pricing could be used. If the objective is to simply maintain sales,
competitive pricing will be appropriate.
Price Elasticity

The PED of a product refers to the responsiveness of the quantity demanded for it to
changes in its price.

PED (of a product) = % change in quantity demanded / % change in price

When the PED is >1, that is there is a higher % change in demand in response to a
change in price, the PED is said to be elastic.
When the PED is <1, that is there is a lower % change in demand in response to a
change in price, the PED is said to be inelastic.

Producers can calculate the PED of their product and take suitable action to make
the product more profitable.
If the product is found to have an elastic demand, the producer can lower prices to
increase profitability. The law of demand states that a fall in price increases the
demand. And since it is an elastic product (change in demand is higher than change
in price), the demand of the product will increase highly. The producers get more
profit.
If the product is found to have an inelastic demand, the producer can raise prices to
increase profitability. Since quantity demanded wouldn’t fall much as it is inelastic,
the high prices will make way for higher revenue and thus higher profits.

Definitions:
● Need: a good or service essential for living. Examples include water and food
and shelter.

● Want: a good or service that people would like to have, but is not required for
living. Examples include cars and watching movies.

● Opportunity cost: It is the next best alternative for when choosing another
item.

● Factors of Production: These are resources required to produce goods or

services. They are land, labour, capital and enterprise.

● Specialisation: It occurs when a person or organisation concentrates on a

task at which they are best at.

● Business: It is any organisation that uses all the factors of production

(resources) to create goods and services to satisfy human wants and needs.

● Added value: It is the difference between the cost of materials bought in and
the selling price of the product.
● Primary sector: this involves the use/extraction of natural resources.
Examples include agricultural activities, mining, fishing, wood-cutting, oil
drilling etc.

● Secondary sector: this involves the manufacture of goods using the resources
from the primary sector. Examples include auto-mobile manufacturing, steel
industries, cloth production etc.

● Tertiary sector: this consists of all the services provided in an economy. This
includes hotels, travel agencies, hair salons, banks etc.

● De - Industrialisation: Occurs when there is a decline in the importance of

the secondary sector.

● Mixed Economy: Has both private and public sector

● Private sector: where private individuals own and run business ventures.
Their aim is to make a profit, and all costs and risks of the business are
undertaken by the individual.

● Public sector: where the government owns and runs business ventures. Their
aim is to provide essential public goods and services (schools, hospitals,
police etc.)They are not profit - oriented.
●