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AS Level Business Notes 9609

Unit 1 Business and its Environment

Chapter 1- Enterprise
1.1 The nature of business activity

Business: an organisation that uses resources to meet the needs of customers by providing a product or
service they demand.
Entrepreneur: an individual who has an idea for a new business, starts it up and carries most of the risks
but benefits from the rewards.
Customer: an individual consumer or organisation that purchases goods or services from a business.
(anyone who buys something from a business and have the intention of reselling)
Consumer: an individual who purchases goods and services for personal use. (they will actually use the
product or service and don’t resell it)
Consumer goods: the physical and tangible goods sold to consumers that are not intended for resale.
These include durable (lasting) consumer goods, such as cars and washing machines, and non-durable
(used once) consumer goods, such as foods, and drinks, that can only be used once.
Consumer services: the non-tangible products sold to consumers that are not intended for resale. These
include hotel accommodation, insurance services, and train journeys.
Factors of production: the resources needed by a business to produce goods or services. (land labour
capital enterprise)
Capital goods: the physical goods used by an industry to aid in the production of other
goods or services, such as machines, computers, fans (hairdressing).
Enterprise: the action of showing initiative to take the risk to set up a business.
Adding value: increasing the difference between the cost of materials bought and the
selling price of the finished goods.
Added value: the difference between the cost of the materials and the selling price of the
finished goods.
Branding: the process of differentiating a product by developing a symbol, name, image or trademark for
it.
Opportunity cost: the next most desired option that is given up (you buy a phone so you
cannot buy the shoes - shoes become the opportunity cost).

What do businesses do?

● Identify customer needs.
● Acquire resources for production.
● Produce goods/services to satisfy needs and usually aim for profit.
Business activity exists to produce goods or services that meet the needs of customers. Many of these
customers will be consumers who purchase consumer goods and consumer services.
There are 4 factors of production:
• land – all the renewable and non-renewable natural resources (e.g., coal, oil).
• labour – manual and skilled work
• capital – finance and capital goods
• enterprise – managing, decision-making and coordinating roles
The Concept of Adding Value
Adding value means selling products for more than the cost of materials. This value is not profit but helps
cover other costs and provide returns to investors. For example:
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-Jewellery Shop: Enhances value through display, packaging, and customer service.
-Sweet Manufacturer: Adds value with branding and attractive packaging.
Economic Activity and Choice
Scarcity means we can’t satisfy all wants, leading to choices. Opportunity cost is the next best alternative
for when making a decision.
The Dynamic Business Environment
Businesses face risks from changes such as
● new competitors
● legal updates
● economic shifts
● technological advancements
Adapting to these changes is crucial for success.
Why Businesses Succeed
- good understanding of customer needs.
- Efficient management of operations.
- Flexible decision-making to adapt to new situations.
- Appropriate and sufficient sources of finance.
Why Businesses Fail
-Poor Record-Keeping: Lack of accurate records can lead to issues with suppliers, payments, and taxes.
-Lack of Cash: Insufficient cash flow can halt operations and lead to failure.
-Poor Management Skills: Inadequate leadership, planning, and marketing skills can jeopardise success.
Local, National, and International Businesses
- Local Businesses: Operate in specific areas, e.g., small shops.
- National Businesses: Operate across a country, e.g., large retail chains.
- International Businesses: Sell in multiple countries. (eg, a shop based in india but ships their products
worldwide)
- Multinational Businesses: Operate in multiple countries with production or sales bases abroad.
(eg, a chain restaurant like mcdonald’s being found globally)

1.2 The Role of Entrepreneurs and Intrapreneurs

Intrapreneur: an employee within a business who comes up with new innovative products that will turn a
profit.

Role of Entrepreneurs:
● Purpose: Entrepreneurs start new businesses by innovating, investing capital, and managing the
operations.
● Functions:
1. Have a business idea
2. Create a business plan
3. Invest personal capital
4. Manage the business
5. Take on risks
Qualities of Successful Entrepreneurs:
● Innovation: Filling market gaps with unique products/services.
● Commitment & Self-Motivation: Willingness to work hard and remain focused.
● Multi-Skilled: Managing production, promotion, sales, and finances.
● Leadership: Motivating employees.
● Self-Confidence & Resilience: Bouncing back from setbacks.
● Risk-Taking: Willingness to invest and face uncertainties.
Barriers to Entrepreneurship:
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1. Lack of Business Opportunity: Need for identifying market gaps or skills-based ventures (e.g.,
dressmaking, gardening, etc.).
2. Obtaining Capital: Issues with insufficient savings, lack of financial knowledge, or no trading history.
3. High Cost of Locations: Limited budget for prime locations, often leading to starting businesses from
home.
4. Competition: New businesses must differentiate themselves from established players.
5. Building a Customer Base: Success depends on returning customers through good service.
Business Risk vs. Uncertainty:
● Risk: Known risks (e.g., 30% failure rate for clothing stores).
● Uncertainty: Unpredictable events like the 2020 COVID-19 pandemic.
Role of Enterprise in Economic Development:
● Employment Creation: New businesses generate jobs.
● Economic Growth: Start-ups increase GDP and raise living standards.
● Innovation: Creativity in start-ups drives technological advancement and competitiveness.
● Exports: Expanding into foreign markets improves national trade.
● Social Cohesion: Job creation helps reduce unemployment-related social issues.
Role of Intrapreneurs:
Employees within a company who act like entrepreneurs, driving innovation and taking risks.
● Benefits:
1. Infuse creativity into the business.
2. Develop new business practices.
3. Encourage innovation, boosting competitive advantage.
4. Retain innovative employees by offering entrepreneurial opportunities within the company.

Differences Between Entrepreneurs and Intrapreneurs:

Entrepreneur Intrapreneur

Main Activity Starting a new business Innovating within a company

Risk Taken by the entrepreneur Taken by the business

Rewards To the entrepreneur To the business

1.3 The Purpose and key elements of business plans

Business plan: a written document that describes a business, its objectives, its strategies,
the market it is in and its financial forecasts.

Main Elements of a Business Plan:

1. Executive Summary: Overview of the business and its strategies.
2. Business Opportunity: Details on the entrepreneur’s skills, product, and target market.
3. Marketing and Sales Strategy: Why customers will buy and how the product will be sold.
4. Management Team and Personnel: Skills and experience of the entrepreneur and recruitment plans.
5. Operations: Production facilities, premises, and IT systems.
6. Financial Forecasts: Sales, profit, and cash flow projections for at least one year.
Benefits of a Business Plan:
- Essential for securing finance from investors or lenders.
- Encourages the entrepreneur to think critically about the business.
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- Provides a clear action plan for the business’s early stages.
Limitations of a Business Plan:
- Doesn't guarantee success; plans are based on uncertain forecasts.
- Must be supported by evidence, such as market research.
- May cause inflexibility if new opportunities arise that aren’t included in the plan. Plans should allow for
adaptability as market conditions change.

Chapter 2- Business Structure

Private limited company (ltd.): a business that is owned by shareholders who are often
members of the same family; this company cannot sell shares to the general public.
Public limited company (plc.): a company whose shares are traded on the stock exchange
market and can be bought and sold by the public.
Initial public offering (IPO): an offer to the public to buy shares in a public limited company.

2.1 Economic sectors

Economic Sectors:
Business activity can be classified into four economic sectors based on the stages of production:

Primary sector business activity: industries that extract natural resources so that they can
be used and processed, ex. fishing, mining, farming.
Secondary sector business activity: firms which manufacture and process products from
natural resources, ex. baking, construction, clothes-making.
Tertiary sector business activity: firms that provide services to consumers and other
businesses, ex. retailing, hotels, catering.
Quaternary sector business activity: businesses providing information services, ex. science
research and development, computing, web design.
Public sector: organisations controlled and owned by the government (the state).
Private sector: businesses owned and controlled by individuals/groups of individuals.
Mixed economy: economic resources owned and controlled by both public and private
sectors.
Free-market economy: economic resources owned largely by the private sector, with very
little state intervention.
Command economy: economic resources owned, planned and controlled by the public.
Public corporation: business enterprise owned and controlled by the state - also known as
a nationalised industry.
Sole trader: a business in which one person provides the permanent finance, and in return,
has full control of the business and is able to keep all of the profits.

Changes in Sector Importance:

● Industrialisation: In developing countries, the secondary sector grows, improving GDP and
living standards, but may lead to urban migration and reliance on imports.
● Deindustrialisation: In developed countries, the secondary sector declines as the tertiary sector
grows due to higher consumer demand for services.
Consequences of Industrialisation:
● Benefits: Increased GDP, job creation, reduced imports.
● Problems: Urban migration, import reliance, challenges from multinational corporations.
Consequences of Deindustrialisation:
● Job losses in primary and secondary sectors.
● Growth in service sector jobs.
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● Need for retraining programs for displaced workers.
Public vs. Private Sector:
● Private Sector: Predominantly in mixed economies, varies by country. Types of legal structures
are primarily found here.
● Public Sector: Government-owned enterprises providing essential services (e.g., health,
education, public transport) to ensure access to public goods.
Public Corporations:
● Focus on social objectives rather than profit.
● Advantages: Operate essential services regardless of profitability.
● Disadvantages: Potential inefficiency and political interference.
Summary of Public Corporations:
Advantages Disadvantages

Managed with social objectives Potential inefficiency

Maintain loss-making services for social benefit Government interference

Funded by government Profit motives may shift if privatised

2.2 Business ownership

Sole trader: a business in which one person provides the permanent finance, and in return,
has full control of the business and is able to keep all of the profits.
Unlimited liability: business owners have full legal responsibility for the debts of the business.
Partnership: a business formed by 2/more people to carry on a business together, with
shared capital investment and, usually, shared responsibilities.
Limited liability: a type of legal structure for an organisation where a corporate loss will not
exceed the amount invested/owners are not fully responsible for debts.
Share: a certificate confirming part-ownership of a company and entitling the shareholder
owner to dividends and shareholder rights.
Shareholder: a person/institution owning shares in a limited company.
Dividend: the distribution of a company's earnings to its shareholders which is determined
by the company's board of directors.
Memorandum of Association: this states the name of the company, the address of the
head office through which it can be contacted, the maximum share capital for which the
company seeks authorisation and the declared aims of the business.
Articles of Association: this document covers the internal workings and control of the
business, the names of directors and the procedures to be followed at meetings.
Cooperative: a jointly owned business operated by members for their mutual benefit, to
produce or distribute goods or services. Common examples of cooperatives
include agricultural cooperatives, electric cooperatives, retail cooperatives, and housing cooperatives.
Franchise: the legal right to use the name, logo and trading systems of an existing, successful business.
Franchiser: a person/business that sells the right to open stores and sell products/services, using the
brand name and brand identity.
Franchisee: a person/business that buys the right from the franchiser to operate the franchise.
Joint venture: two/more businesses agree to work closely together on a particular project
and create a separate business division to do so.
Social enterprise: a business with mainly social objectives that re-invests most of its profits
into benefiting society. Social enterprises pursue to maximise profits while maximising
benefits to society and the environment.

Sole Trader
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● Liability: Unlimited liability; personal assets can be used to pay off business debts.
● Advantages:
○ Easy to set up; no legal formalities.
○ Complete control over the business.
○ Keeps all profits.
○ Flexible working hours.
○ Close relationships with staff and customers.
● Disadvantages:
○ Unlimited liability poses a risk.
○ Intense competition from larger firms.
○ Difficult to raise additional capital.
○ Long working hours.
○ Lack of continuity upon the owner's death.
Partnership
● Liability: Unlimited liability for all partners.
● Advantages:
○ Partners can specialise in different areas.
○ Shared decision-making and losses.
○ More capital available from multiple partners.
○ Greater privacy and fewer legal formalities than corporations.
● Disadvantages:
○ Unlimited liability can deter potential partners.
○ Profits are shared.
○ Lack of continuity if a partner dies.
○ Decisions can be slow due to the need for consensus.
Limited Companies
● Key Features:
○ Limited Liability: Shareholders are not personally liable for company debts.
○ Legal Personality: Companies can be sued or sue in their own name.
○ Continuity: Company remains in existence despite changes in ownership.
Private Limited Companies (Ltd):
● Advantages:
○ Limited liability for shareholders.
○ Separate legal identity.
○ Continuity of existence.
○ Can raise capital from private shareholders.
● Disadvantages:
○ Legal formalities and restrictions on share sales.
○ Less privacy in financial matters.
Public Limited Companies (plc):
● Advantages:
○ Access to large capital through public share sales.
○ Easy share trading encourages investment.
● Disadvantages:
○ High costs and legal requirements.
○ Vulnerable to takeover due to publicly traded shares.
○ Potential for conflicts between management and shareholders.
Cooperatives
● Features:
○ Equal voting rights for members.
○ Profits shared equally.
○ Members involved in decision-making.
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● Advantages:
○ Economies of scale in purchasing.
○ Motivation through shared profits.
● Disadvantages:
○ Potential for poor management.
○ Limited capital raising capabilities.
Franchises
● Advantages:
○ Established brands reduce failure risk.
○ Training and support from franchiser.
● Disadvantages:
○ Initial fees and profit sharing with franchisers.
○ Limited control over operations and suppliers.
Joint Ventures
● Advantages:
○ Shared costs and risks.
○ Combining different strengths and experiences.
● Disadvantages:
○ Possible management and cultural clashes.
○ Risk of blame for failures.
Social Enterprise
● Features:
○ Focus on social aims.
○ Use ethical practices for profit generation.
Advantages:
● a professional working with a social enterprise might be able to shape business strategies to create
an impact
● liability for members is limited
● an organisation that's passionate about supporting and minimising certain social or environmental
issues may involve people with similar beliefs, values and goals, which can lead to strong professional
relationships
● when a customer builds a strong professional relationship with a certain brand, they're often likely to
continue purchasing products and services from that brand
Disadvantages:
● given the type of employees you may have, you might not always be able to recruit for a
defined technical requirement development
● the need to constantly monitor your market
● communities and audiences are always changing, so you have to adapt to your market.

Changing Business Ownership

● Advantages of Changing Ownership:
○ Access to more finance.
○ Legal identity.
○ Protection of owners' capital through limited liability.
● Disadvantages:
○ Legal costs and formalities.
○ Loss of control for original owners.
○ Shared profits.

Chapter 3- Size of Business

3.1 Measurements of a Business Size
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Revenue: the total value of sales made during the trading time.
revenue = selling price x quantity sold
Capital employed: the total value of all long-term finance invested into the business.
Market capitalisation: the total value of a company’s issued shares.
Market share: sales of the business as a proportion of total market sales.
market share = total sales of business / total sales of industry x 100

Why Measure Business Size?

● Governments may need to assist small businesses.
● Investors compare business size and growth with competitors.
● Customers might trust larger businesses for security.
● Some workers prefer smaller workplaces.
Problems with Measuring Business Size:
1. Different measures can give varying results.
2. No internationally agreed definition of small, medium, or large businesses, but the number of
employees is often used.
Different Measures of Business Size
1. Number of Employees:
○ Simple and easy to understand.
○ Problems: Some businesses may need fewer employees but still generate high revenue
(e.g., automated industries).
2. Revenue (Sales Turnover):
○ Useful for comparing businesses in the same industry.
○ Problematic when comparing different industries due to differences in product value (e.g.,
jewellers vs. cleaning services).
3. Capital Employed:
○ Larger businesses generally need more capital.
○ Comparisons can be misleading across industries with different equipment needs (e.g.,
hairdresser vs. optician).
4. Market Capitalisation (only for public companies):
○ Formula:
Market Capitalisation = Current Share Price × Total Number of Shares Issued
○ Share prices fluctuate, so this measure isn't stable.
5. Market Share:
○ Formula:
Market Share = (Firm’s Revenue ÷ Total Market Revenue) × 100
○ Indicates relative size in the industry but doesn’t always mean the firm is large in absolute
terms.
Other Industry-Specific Measures:
● Hotels: Number of guest beds or rooms.
● Retailers: Number of shops or total floor space.
● Manufacturers: Number of units sold.
Best Measure?
● There is no single best measure.
● Multiple criteria should be used depending on the purpose (e.g., absolute size or industry
comparison).
● Note: Profit measures performance, not size.

3.2 Significance of small businesses

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Small business: a privately owned corporation, partnership, or sole proprietorship that has
fewer employees and less annual revenue than a corporation or regular-sized business.
Family business: firms owned and managed by at least 2 members of the same family.

What is a Small Business?

Small businesses employ few people and have low annual revenue. Micro-enterprises are very small
businesses. The EU classifies businesses based on size.
Importance of Small Businesses:
● Job Creation: While individually small, collectively they employ a large part of the population.
● Innovation: Run by dynamic entrepreneurs, small businesses foster variety and choice.
● Competition: They challenge larger firms, helping to lower prices and improve services.
● Suppliers to Large Firms: Small businesses provide specialised goods and services to larger
firms.
● Growth Potential: Many large companies started small.
● Cost Benefits: Small businesses can have lower average costs due to lower wages and
administrative expenses.
Advantages of Small Businesses:
● Owner control, adaptability, personal service, and low capital requirements.
● Close relationships with employees and informal culture (especially in family-owned businesses).
Disadvantages of Small Businesses:
● Limited access to finance, owner responsibility, reliance on key personnel, lack of diversification,
and higher costs due to fewer economies of scale.
Family Businesses
Strengths:
● Commitment, reliability, pride, and knowledge continuity.
Weaknesses:
● Succession problems, informality, resistance to change, and internal conflicts.
Importance of small businesses in the Economy:
● Small businesses are critical for economic growth, especially in areas without large companies.
● Globally, they account for 90% of employers and create the majority of new jobs in developing
countries.
Role of small businesses in some Industries:
● In some industries, like personal care and gardening, small businesses dominate.
● They also provide specialist services and outsourcing opportunities to large firms.

3.3 Business Growth

Organic growth (internal): expansion of a business by opening new branches, shops, and
factories.
External growth: business expansion achieved by integrating with another business by
either merger/takeover.
Merger: an agreement by owners and managers of 2 businesses to bring them together in a
new combined business. This is often referred to as a friendly merger.
Acquisitions/takeover: when a company buys more than 50% of the shares of another
company and becomes its controlling owner.
Integration: the process of one company acquiring another company and merging the
operations.
Horizontal integration: integration with a business in the same industry and at the same
stage of production.
Vertical integration: integration with a business in the same industry.
Forward vertical integration: vertical integration with a customer business.
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Backward vertical integration: vertical integration with a supplier business.
Conglomerate integration: integration with a business in a different industry.
Synergy: literally means that ‘the whole is greater than the sum of parts’ – it is often
assumed that the new business (merger/takeover) will be more successful than the original
separate businesses.

Some business owners and directors aim for growth to achieve various goals, such as:
● Increased Profits: Higher sales can boost profitability.
● Increased Market Share: Greater market presence strengthens bargaining power with suppliers
and retailers.
● Economies of Scale: Growth helps reduce costs per unit.
● Power and Status: A larger business provides more influence and recognition.
● Reduced Takeover Risk: A larger business is harder to acquire.

Organic (Internal) Growth

This involves gradual expansion, such as opening new branches. It avoids risks of over-expansion but can be
slow.
External Growth (Integration)
External growth occurs through mergers or takeovers, allowing rapid expansion but often leading to
management and cultural conflicts. Types include:
● Horizontal Integration: Eliminates competitors, but can lead to monopolies and job losses.
● Vertical Integration (Forward/Backward): Increases control over supply chain but may lead to
management issues.
● Conglomerate Integration: Diversifies risk, but may create a lack of focus.
Why Mergers/Takeovers Fail
● Management Challenges: Too large to control effectively.
● Cultural Clashes: Differences in work culture can hinder cooperation.
● Lack of Synergy: Often, the combined businesses don't achieve expected benefits.
Problems with Rapid Growth
● Financial: High costs and debt from takeovers.
● Managerial: Difficulty in managing the larger entity.
Joint ventures and strategic alliances
Joint ventures and strategic alliances are forms of external growth. A joint venture creates a new entity, while
a strategic alliance allows businesses to collaborate without merging, maintaining their independence.
Strategic alliances can occur between various organisations. For example:
● With a university: A business might fund specialised training courses to create a skilled workforce.
● With a supplier: Collaborating to design new components can speed up product development and
enhance competitive advantage.
● With a competitor: Alliances can help mitigate risks when entering new markets, provided they don't
violate competition laws.
Effective strategic alliances benefit both parties and typically conclude once their goals are achieved. The
best alliances combine different skills and strengths to meet shared objectives.

Chapter 4- Business Objectives

4.1 The Importance of Business Objectives

Business objective: a stated measurable target that a business plans to achieve.

Corporate social responsibility: when businesses consider the interests of society by taking
responsibility for the impact of their decisions and activities on customers, employees,
communities, and the environment.
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Pressure group: organisations created by people with a common interest or aim, who put
pressure on businesses and governments to change policies so that an objective is reached.
Triple bottom line: the three objectives of social enterprises: economic, social and
environmental.
Business aim: a long-term goal that a business hopes to achieve.
Mission statement: a brief statement of the business’s core aims, phrased in a way to
motivate employees and to stimulate interest from outside groups.
Annual (company) report: a document that gives details of a company’s activities over the
year, including its financial accounts.
Business strategy: a long-term plan of action for a business, designed to achieve a
particular objective.
Tactic: a short-term action as part of an overall strategy.

Setting clear business objectives is crucial for a company's survival and success. Objectives provide:
● Direction: They create a sense of purpose, increasing employee motivation.
● Focus: They set specific targets for business strategies.
● Assessment: They offer a means to evaluate performance against set goals.

Objectives of Private-Sector Businesses

1. Profit Maximisation: The goal is to produce at a level where the difference between total revenue
and total costs is greatest. However, this focus can lead to challenges, such as attracting
competitors or neglecting stakeholder concerns.
2. Profit Satisficing: This means achieving enough profit to satisfy the owners, allowing for a balance
between work and leisure. Common among small business owners.
3. Growth: Growth can offer benefits like economies of scale but may also lead to cash flow issues
or loss of focus if not managed carefully.
4. Increasing Market Share: Higher market share can enhance a company’s power and profitability,
making it attractive to retailers.
5. Survival: For new businesses, surviving the first few years is often the primary objective due to
high failure rates.
6. Corporate Social Responsibility (CSR): Businesses are increasingly expected to consider social
and environmental impacts, responding to stakeholder pressures and consumer preferences.
7. Maximising Short-Term Revenue: While boosting sales can benefit employees, it may hurt overall
profits if achieved through price reductions.
8. Increasing Shareholder Value: Focusing on profit growth and dividends for shareholders may
sometimes conflict with other stakeholders’ interests.
Objectives of Social Enterprises
Social enterprises aim for a triple bottom line:
1. Economic: Generating profits for reinvestment.
2. Social: Supporting local communities.
3. Environmental: Promoting sustainability.
Objectives of Public-Sector Businesses
Public-sector objectives differ and often include:
● Providing efficient services.
● Encouraging economic development.
● Creating jobs.
● Meeting government financial targets.
SMART Objectives
-Effective objectives should be:
● Specific: Clearly define what is to be achieved.
● Measurable: Quantifiable targets.
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● Achievable: Realistic goals.
● Relevant: Appropriate for the stakeholders involved.
● Time-limited: Set within a specific timeframe.
Factors Determining Business Objectives
1. Business Culture: Influences decision-making based on whether profit or social responsibility is
prioritised.
2. Size and Legal Form: Small businesses often focus on satisfying, while larger firms may pursue
growth.
3. Sector: Private-sector businesses prioritise profit, while public-sector ones focus on service
quality.
4. Business Age: New firms prioritise survival; established firms may pursue growth and profit.
Relationship Between Mission, Aims, and Objectives
Business Aims:
● Core purpose of a business, expressed broadly.
● Not in SMART terms but need to be converted into specific, measurable objectives.
Mission Statements:
● Condensed summaries of a business's purpose.
● Aim to motivate and communicate vision but lack quantifiable goals.
Examples:
● Samsung: Creating superior products for a better society.
● Microsoft: Empowering people and organisations globally.
Businesses communicate their mission statements in a number of ways.
Communication:
● Found in business plans, annual reports, and marketing materials.
Evaluation of Mission Statements
Benefits:
● Inform external groups of the business's vision.
● Motivate employees.
● Establish moral values to guide behaviour.
Limitations:
● Can be vague and general.
● May serve as public relations tools without specific targets.
● Often lack distinctiveness between different organisations.
While mission statements provide a vision and enhance public relations, they do not guide strategic
decisions effectively. They need to be translated into SMART objectives for operational clarity.
Objectives, Strategies, and Tactics
● Aims and mission statements require transformation into SMART objectives for actionable
strategies.
● Clear objectives are crucial for making strategic decisions, such as market entry.
● After determining a strategy, tactical decisions on promotion and pricing must follow.
Effective business management relies on specific objectives to guide strategy and tactics.

4.2 Objectives and Business Decisions

Target: a short-term goal that must be reached before an overall objective can be achieved.
Usually, these targets form part of a department's budget or financial plan.
Budget: a detailed financial plan for the future.
Ethical code (code of conduct): a document detailing a company’s rules and guidelines on staff
behaviour that must be followed by all employees.
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Importance of Objectives:
Setting objectives is essential for effective business decision-making. Clear objectives provide direction
for future plans and strategies. Without them, decision-making becomes uncertain.
Stages of Business Decision-Making:
1. Set Objectives: Establish focus for strategic decisions.
2. Assess Problems: Clarify issues needing strategic action.
3. Gather Data: Identify potential strategic solutions.
4. Analyse Impacts: Evaluate how options affect objectives.
5. Make Decisions: Choose the best strategic option.
6. Implement: Plan and execute the decision.
7. Review Success: Assess if objectives were achieved.
Without relevant objectives, effective decision-making is impossible.
Changing Objectives
Objectives can evolve due to various factors:
● Business Growth: A new business may shift from survival to growth after establishing itself.
● Market Changes: New competitors or economic shifts may force a focus on survival.
● Long-term Goals: Short-term sales growth may transform into long-term profit maximisation.
Translating Objectives into Targets or Budgets
Senior management must convert overall business objectives into specific targets for
departments and individuals. These targets are often tied to budgets and must be met within set
timeframes, ensuring the overall objectives are achieved.
Communicating Objectives
Clear communication of objectives is vital. They should be shared with employees,
stakeholders, and included in annual reports. When employees understand objectives and their
individual targets, it enhances motivation and accountability.
Benefits of Effective Communication:
● Improved understanding of company goals.
● Greater alignment of individual and organisational objectives.
● Enhanced monitoring of progress and performance.
Failure to communicate can lead to uncertainty and resistance among employees.
Ethical Influences on Business Objectives
Corporate social responsibility is increasingly influencing business decisions. Ethical dilemmas
arise in many scenarios, such as advertising to children, accepting bribes, or using child labour.
A company’s ethical code guides decision-making in these areas.
Dilemmas:
● Advertising to children.
● Paying low wages in weak regulatory environments.
● Closing factories for cost savings despite job losses.
While some argue that profit-driven decisions are acceptable if legal, many companies now
consider the ethical implications of their actions.
Evaluating Ethical Decisions
Following ethical practices can increase short-term costs but may yield long-term benefits:
● Short-term Costs: Using ethical suppliers and fair wages can raise expenses.
● Long-term Benefits:
○ Avoiding legal issues can save costs.
○ Ethical behaviour enhances reputation and consumer loyalty.
○ Attracts ethical customers and better employees.
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In conclusion, while ethical considerations may impose initial costs, they can lead to significant
long-term advantages for businesses.

Chapter 5- Stakeholders in a Business

5.1 Business Stakeholders

Stakeholders: individuals/groups who can be affected by, and have an interest in, any
action taken by an organisation.
External stakeholders: individuals/groups who are separate from the business but are
affected by/interested in its operations.
Internal stakeholders: individuals/groups who work within the business, or own it, and are
affected by the operations of the business
Trade union: an organisation of working people with the objective of improving the pay and
working conditions of its members and providing them with support and legal services.

Main Stakeholders:
● Internal Stakeholders: Owners (shareholders), managers, employees.
● External Stakeholders: Customers, suppliers, local communities, government, lenders, and
special interest groups (ex. pressure groups).
Stakeholders: Roles, Rights, and Responsibilities
Customers:
● Roles: Purchase goods/services, provide revenue.
● Rights: Receive safe, legal goods, and replacements/repairs if needed.
● Responsibilities: Pay honestly, avoid theft and false claims.
Suppliers:
● Roles: Supply goods/services to support business operations.
● Rights: Be paid on time, treated fairly.
● Responsibilities: Supply goods as agreed in the contract.
Employees:
● Roles: Provide labour as per contract.
● Rights: Fair pay, employment contracts, trade union participation.
● Responsibilities: Meet contract terms, cooperate with management.
Local Community:
● Roles: Provide labour and services.
● Rights: Be consulted on major changes.
● Responsibilities: Cooperate with businesses on reasonable plans.
Local Government:
● Roles: Provide infrastructure and services.
● Rights: Expect businesses to not harm the community.
● Responsibilities: Meet reasonable service requests from businesses.
Government:
● Roles: Enforce laws, ensure economic stability.
● Rights: Expect businesses to follow laws and pay taxes.
● Responsibilities: Treat businesses fairly, prevent unfair competition.
Lenders:
● Roles: Provide finance.
● Rights: Repayment and interest as agreed.
● Responsibilities: Provide finance as per the agreement.
Managers:
 15
● Roles: Control resources.
● Rights: Authority to fulfil their roles.
● Responsibilities: Act ethically and report to stakeholders.
Owners/Shareholders:
● Roles: Provide finance.
● Rights: Receive profits and accurate reports.
● Responsibilities: Set targets and provide resources to managers.

5.2 Importance and influence of stakeholders on business activities

Stakeholder concept: the view that businesses and their managers have responsibilities to
a wide range of groups, not just shareholders.

Business activities impact various stakeholder groups, some of which have the power to influence
business decisions. Traditionally, businesses followed the shareholder concept, prioritising shareholder
interests. However, the stakeholder concept expands this view to include other groups like local
communities, customers, and government. Failing to consider these stakeholders can result in negative
reactions that harm the business.

Impact of Business Decisions on Stakeholders and Their Reactions

Business Employees Local Community Customers
Decision
Build a new More jobs but may More jobs, but increased Greater efficiency, potentially lower
factory require new skills. pollution and traffic. prices.
Reaction: Trade Reaction: Local opposition Reaction: Increased purchases if
unions may demand via petitions or planning quality remains.
higher pay. refusal.
Horizontal Career growth but Jobs and income may rise, Economies of scale may reduce
integration possible job cuts. but possible closures. prices, but less competition might
(takeover) Reaction: Industrial Reaction: Pressure to increase them.
action. block takeover. Reaction: Boycott if prices rise.
Purchase of Training opportunities Local IT suppliers benefit, More efficient production, but IT
automated but potential fewer unskilled jobs. issues could delay supply.
machines redundancies. Reaction: Demand for Reaction: Higher demand if quality
Reaction: Industrial retraining programs. improves.
action.

Business Accountability to Stakeholders

Increasing corporate social responsibility (CSR) shows businesses are becoming more accountable to
stakeholders. Recognizing stakeholder aims in decision-making brings benefits like loyalty, better
relations, and long-term success.
● Responsibilities to customers: Focus on quality, service, and legal compliance to build loyalty
and attract repeat business.
● Responsibilities to suppliers: Ensure reliable supply chains through fair contracts and prompt
payments.
● Responsibilities to employees: Offer training, job security, and fair wages to boost loyalty and
motivation.
● Responsibilities to the local community: Support local employment, reduce environmental
impact, and engage with local stakeholders.
● Responsibilities to government: Meet legal obligations, pay taxes, and contribute to national
interests like exports.
Conflicts and Changing Business Objectives
 16
Stakeholder conflicts arise when business aims differ, requiring compromises. Management must
balance priorities, considering long-term benefits for shareholders while addressing stakeholder
concerns.
Examples:
● Volkswagen shifted from diesel to electric cars post-Dieselgate, requiring factory closures.
● The Body Shop focused on cost-cutting, leading to shop closures, to maintain profitability.
Changes in business objectives significantly affect different stakeholder groups, with the need to balance
short-term impacts with long-term goals.

Unit 2 Human resource management

Chapter 10- HRM
Human resource management (HRM): the strategic approach to the effective management
of employees so that they help the business gain a competitive advantage.

10.1 Human Resource Management (HRM): Purpose and Role

HRM focuses on recruiting capable, flexible, and committed employees, managing their performance,
and developing skills to benefit the organisation. Effective HRM contributes to achieving business
objectives and competitiveness. Key HRM functions include:
● Workforce planning for future staffing needs
● Recruitment and selection of employees
● Employee development through appraisal and training
● Employment contracts, dismissal, and redundancy
● Workforce relations, morale, and welfare
● Payment and incentive systems
● Performance monitoring

10.2 Workforce Planning

Workforce planning: forecasting the numbers of workers and the skills that will be required
by the organisation to achieve its objectives.
Workforce audit: a check on the skills and qualifications of all existing workers/managers.
Labour turnover: measures the rate at which employees are leaving an organisation.

The first stage of workforce planning is workforce audit.

Workforce planning ensures the right number of employees with appropriate skills are available to meet
future business objectives. A workforce audit assesses current staff, followed by planning for future
needs based on factors such as:
● Forecast product demand (affected by market conditions and competitors)
● Productivity levels (improved efficiency may reduce employee needs)
● Business objectives (e.g., expansion may require more staff)
● Labour laws (shorter workweeks or minimum wage changes can impact planning)
● Labour turnover and absenteeism (high rates increase recruitment needs.

Labour Turnover
Labour turnover = (Number of employees leaving in 1 year ÷ Average number employed) × 100

High labour turnover can indicate employee dissatisfaction, but it also has potential benefits:
 17
Costs of High Labour Turnover Potential Benefits

Recruitment and training costs Replacing less-skilled workers with better

talent

Gaps in customer service and New ideas and practices introduced by new
team spirit employees

Difficulty in establishing customer Opportunity to reduce workforce without

loyalty redundancies

High turnover is common in low-unemployment areas and industries like fast food, where it can exceed
100% annually. Conversely, turnover is typically low in sectors like law and scientific research.

10.3 Recruiting and Selecting Employees

Recruitment: the process of identifying the need for a new employee, defining the job to be
filled and the type of person needed to fill it, and attracting suitable candidates for the job.
Recruitment requires a careful analysis of the job itself and the people required to do it
well.
Selection: the series of steps by which candidates are interviewed, tested and screened to
choose the most suitable person for a vacant post.
Recruitment agency: a business that offers the service of recruiting applicants for vacant
posts.Job description: a detailed list of the key points about the job to be filled, stating all its key
tasks and responsibilities.
Person specification: a detailed list of the qualities, skills and qualifications that a successful
applicants will need to have. The person specification helps eliminate applicants who do not have the
necessary
requirements.
Application form: a set of questions answered by a job applicant to give a potential employer information
about the applicant, such as educational background and work experience.
Curriculum vitae (CV): a detailed document highlighting all of a person’s professional and academic
achievements, work experience and awards.
Résumé: a less detailed document than a CV, which itemises work experience, educational background and
special skills relevant to the job being applied for.
Reference: comment from a trusted person about an applicant’s character or previous work performance.
Assessment centre: a place where a range of tests is used to judge job applicants on their potential ability to
perform a particular role.
Internal recruitment: when a business aims to fill a vacancy from within its existing workforce.
External recruitment: when a business aims to fill a vacancy with a suitable applicant from outside of the
business, such as an employee of another organisation.
Employment contract: a legal document that sets out terms and conditions governing a worker’s job.

Effective recruitment and selection are crucial to meeting a business’s needs and long-term objectives.
Recruitment is required when the business is expanding or replacing employees. Many businesses
outsource recruitment to agencies.
Recruitment Process
1. Job Analysis and Description: Provides a detailed picture of the vacant job, including job title,
tasks, responsibilities, and working conditions, helping attract suitable applicants.
2. Person Specification: Outlines the skills, qualifications, and qualities needed, aiding in selection
by eliminating unsuitable applicants.
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3. Job Advertisement: Reflects job and person requirements, often posted online, internally, or
through agencies. It must avoid discrimination.
4. Application Forms: Designed by HR, typically online, saving time for both applicants and
employers.
5. Shortlisting: Based on application forms, CVs, and references, aided increasingly by artificial
intelligence.
6. Selection: Often through interviews, testing for skills, experience, and fit. Other methods include
aptitude tests, psychometric tests, and assessment centres, which are particularly useful for
high-profile positions.
Internal vs. External Recruitment
● Internal Recruitment: Quicker, cheaper, and promotes career progression, but limits fresh ideas.
● External Recruitment: Brings new ideas and a wider choice of candidates but can cause
resentment among internal staff.
Advantages of Internal Recruitment Advantages of External Recruitment

Familiarity with the business and its Brings new ideas and wider choice of
methods candidates

Quicker and cheaper Avoids internal resentment

Supports career progression Potential for higher standard of applicants

Employment Contracts
Legally binding documents outlining job responsibilities, contract type (permanent or temporary), working
hours, pay, benefits, and notice periods. Both employer and employee have obligations under the
contract, which varies slightly by country. A typical employment contract will contain the following features:
• the employee’s work responsibilities and the main tasks to be undertaken
• whether the contract is permanent or temporary
• working hours and the level of flexibility expected, including whether the job is part-time
or full-time, whether it includes working weekends or not, the payment method and the
pay level
• holiday entitlement and other benefits such as pensions
• the number of days’ notice that must be given by the worker (if they wish to leave) or
the employer (if they want to fire the worker)

10.4 Redundancy and Dismissal of Employees

Redundancy: when a job is no longer required the employee doing this job becomes
unnecessary through no fault of their own.
Dismissal: being dismissed/fired from a job due to incompetence or breach of discipline.
Unfair dismissal: ending a worker’s employment contract for a reason that the law regards
as being unfair.

Redundancy and dismissal are distinct aspects of HRM.

Redundancy
Redundancy occurs when jobs are no longer needed due to factors like decreased demand,
technological changes, or cost-cutting measures. For example, state-owned banks in China recently
made 19,000 jobs redundant as automated services reduced the need for cashiers. Companies often
aim to manage redundancies through:
● Natural Wastage: Not replacing employees who leave.
● Voluntary Redundancy: Inviting employees to leave, though this risks losing valuable staff.
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Dismissal
Dismissal involves terminating an employee's contract, usually due to failure to meet job obligations. It
must be approached cautiously since it affects an employee's financial stability and can lead to legal
repercussions if not handled correctly. The HR department should provide support and training before
considering dismissal to avoid claims of unfair dismissal.
Immediate dismissal can occur in cases of gross misconduct, such as theft. For less severe issues,
organisations must follow a disciplinary process that includes warnings before proceeding to dismissal.
To justify a fair dismissal, employers must demonstrate one of the following:
● Inability to perform the job despite training
● Persistent negative attitude
● Violation of health and safety rules
● Willful destruction of property
● Bullying behaviour
Unfair dismissal reasons typically include:
● Pregnancy
● Discrimination based on race, gender, or religion
● Union membership

10.5 Employee Morale and Welfare

Employee morale: overall outlook, attitude and level of satisfaction of employees when at
work.
Employee welfare: employees’ health, safety and level of morale when at work.
Work-life balance: a situation in which employees are able to allocate the right amount of time and effort to
work and to their personal life outside work.
Equality policy: practices and processes aimed at achieving a fair organisation where everyone is treated in
the same way without prejudice (bias) and has the opportunity to fulfil their potential.
Diversity policy: practices and processes aimed at creating a mixed workforce and placing a
positive value on diversity in the workplace.
HR managers should prioritise employee morale and welfare alongside workforce management. High
morale and satisfaction lead to increased productivity and loyalty. Key strategies include:

Support Services
HR departments often provide advice, counselling, and support for employees facing personal issues.
This demonstrates a caring approach, contributing to higher morale and reduced turnover.
Improving Working Conditions
Enhancing workplace hygiene and safety fosters employee welfare. When employees feel valued, they
tend to be more loyal and productive.
Work–Life Balance
To address changing work demands, businesses can implement strategies that promote work–life
balance, reducing stress and improving efficiency. Common methods include:
● Flexible Working: Adjusting hours to fit employee needs.
● Teleworking: Allowing employees to work from home part of the week.
● Job Sharing: Two individuals share one full-time position.
● Sabbaticals: Extended leave (up to 12 months) with job security upon return.
Diversity and Equality
Most organisations strive for equality and diversity, guided by laws governing these issues. Promoting a
diverse workplace has several benefits:
● Higher Morale and Motivation: Fair treatment boosts employee satisfaction.
● Enhanced Reputation: A commitment to equality attracts top talent.
 20
● Performance Measurement: Evaluating employees based on merit rather than discriminatory
factors.
Conversely, discriminatory practices can demotivate affected employees. A diverse workforce,
characterised by varied backgrounds, fosters creativity and cultural awareness, leading to improved
market reach and service offerings.

10.6 Training and Developing Employees

Training: work-related education to increase workforce skills and efficiency.

Induction training: introductory training programme to familiarise new recruits with the
systems used in the business and the layout of the business site.
On-the-job training: instruction at the place of work on how a job should be carried out.
Off-the-job training: training undertaken away from the place of work.
Multi-skilling: the training of an employee in several skills to allow for greater flexibility within business.
Employee appraisal: the process of assessing the effectiveness of an employee judged against pre-set
objectives.

Effective HR management involves not only recruiting the right staff but also ensuring they are
well-equipped to perform their roles. This typically requires various training initiatives to develop
employee capabilities.
Types of Training
● Induction Training: Provided to new recruits, this training introduces them to colleagues, explains
the organisational structure, and covers essential health and safety procedures.
● On-the-Job Training: Conducted at the workplace, often by experienced staff or HR managers.
This method is cost-effective and allows direct application of skills.
● Off-the-Job Training: Takes place away from the workplace, such as in specialised training
centres or external courses. Although more expensive, it can provide valuable new ideas and
expertise.
Impact of Training on Business and Employees
While training can be costly and may result in employees leaving for better opportunities (a practice
known as "poaching"), not investing in training can have significant drawbacks:
● Productivity Issues: Untrained employees are less productive and adaptable, leading to poor
customer service and higher accident rates, especially in hazardous industries.
● Employee Satisfaction: There is a strong correlation between training investment and employee
motivation. Continuous training prevents boredom and fosters a sense of achievement.
Employee Development and Appraisal
Employee development is an ongoing process, encompassing challenges, additional training,
promotions, and job enrichment. The HR department should collaborate with functional departments to
create relevant career plans.
Appraisals are typically conducted annually, linking employee performance to business objectives. This
analysis helps set new targets and enhances motivation, in line with Herzberg’s motivators.
Encouraging Intrapreneurship
To foster intrapreneurship, businesses can implement training programs that encourage:
● Independent Thinking: Employees should feel empowered to be creative and innovative.
● Collaboration: Opportunities to work with diverse teams enhance skill development.
● Empowerment: Employees need authority and resources to implement new ideas.
● Accepting Failure: A culture that tolerates risk-taking supports innovation.
● Starting Small: Encouraging incremental innovations builds confidence for larger projects.

10.7 Management and Workforce Relations

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Industrial action: measures taken by the workforce or trade union to put pressure on
management to settle an industrial dispute in favour of employees.
Collective bargaining: the process of negotiating terms of employment between an employer and a group of
workers who are usually represented by a trade union official.
Trade union recognition: when an employer formally agrees to conduct negotiations on pay and working
conditions with a trade union rather than bargain individually with each worker.
The relationship between management and the workforce significantly impacts a business's success.
Trade unions play a key role in facilitating communication and negotiations between managers and
employees.

Benefits of Cooperation
Cooperative relationships, seen in countries like Germany and Japan, yield several advantages:
● Reduced Industrial Action: Fewer strikes and disruptions lead to consistent productivity.
● Easier Change Implementation: Changes, such as automation, can be introduced more smoothly
with employee buy-in.
● Recognition of Workforce Contributions: Acknowledging employee input can lead to improved
pay and benefits.
● Increased Competitiveness: Collaboration can enhance operational efficiency.
● Valuable Employee Insights: Workers can provide practical suggestions that improve
decision-making.
Impact of Trade Union Involvement
Workers may join trade unions for various reasons:
● Collective Bargaining Power: Unions negotiate for better pay and conditions on behalf of all
members, strengthening their position.
● Effective Industrial Action: Collective action is generally more impactful than individual efforts.
● Legal Support: Unions assist members facing unfair dismissal or poor working conditions.
● Pressure for Compliance: Unions help ensure that employers meet legal obligations, such as
health and safety regulations.
Employers may choose to recognize trade unions for collective bargaining or prefer individual
negotiations, often to avoid pressures for higher wages.
Benefits of Collective Bargaining
● Efficiency: Negotiating with union officials saves time and prevents perceived inequalities among
workers.
● Communication Channel: Unions facilitate two-way communication, allowing worker concerns to
be raised effectively.
● Disciplined Action: Unions can help manage and mitigate rash decisions for industrial action.
● Partnership Opportunities: Responsible unionism fosters discussions that enhance productivity
and job security.
Disputes Between Trade Unions and Management
When cooperation breaks down, industrial action may occur. Unions can initiate various actions:
● Continued Negotiations: Engage in talks, possibly with an independent arbitrator.
● Go Slow: Workers deliberately reduce their pace of work.
● Work-to-Rule: Employees adhere strictly to contract terms, refusing extra duties.
● Overtime Bans: Workers decline to work beyond their contracted hours, potentially affecting
productivity.
● Strike Action: The most drastic measure, involving a complete withdrawal of labour.
Employer Responses to Disputes
Employers may employ several strategies to resolve disputes:
● Negotiation for Compromise: Aim for solutions that avoid industrial action.
● Public Relations Campaigns: Garner public support to pressure unions.
● Threats of Redundancies: Use potential job losses to influence negotiations.
 22
● Contract Changes: Implement new requirements for overtime or flexibility.
● Lock-Outs: Temporarily prevent employees from working.
● Business Closure: An extreme measure leading to employee redundancies.
Conclusion
Disputes and industrial action can damage long-term relations between management and employees.
Effective cooperation is essential for the sustained success of both the workforce and the business.

Chapter 11- Motivation

Motivation: the internal and external factors that stimulate the desire in workers to be
continually interested in, and committed to, doing a job well.

11.1 What is Motivation and Why Does it Matter?

Motivation drives workers to complete tasks efficiently. It stems from the satisfaction of personal needs,
which aligns with the goals of the business. A highly motivated workforce benefits a business in several
ways:
● Increased productivity, boosting competitiveness.
● Lower labour turnover, saving recruitment costs.
● Enhanced problem-solving, as motivated workers offer valuable suggestions.
● Willingness to take on responsibility, improving overall performance.
These benefits improve business efficiency, customer service, and reduce unit costs.
Businesses that prioritise motivation gain a loyal, productive workforce, giving them a competitive edge.
Key Benefits:
● Low labour turnover
● Low absenteeism
● High productivity
● Suggestions for improvements
● Willingness to accept responsibility

11.2 Human Needs

People work to satisfy various needs beyond just earning money. Employment can fulfil several human
needs:
- Social connection: Through teamwork and collaboration.
- Challenge: Offering varied tasks and promotion opportunities.
- Significance: Recognition and praise for performance.
- Certainty: Providing job security and employment contracts.
If these needs aren't met, workers may become demotivated.

11.3 Motivation Theories

Piece rate: payment to a worker for each unit produced.

Self-actualisation: a sense of self-fulfilment reached by feeling enriched and developed by
what one has learned & achieved.
Motivators (motivating factors): aspects of a worker’s job that can lead to positive job
satisfaction, such as achievement, recognition, meaningful & interesting work,
responsibility, and advancement at work.
Hygiene factors: aspects of a worker’s job that have the potential to cause dissatisfaction,
such as pay, working conditions, status & over-supervision by managers.
 23
Job enrichment: aims to use the full capabilities of workers by giving them the opportunity
to do more challenging and fulfilling work.

Motivation theories explore how managers can meet workers' needs to boost motivation and
productivity.
Content Theories of motivation are theories which focus on the assumption that individuals
are motivated by the desire to fulfil their inner needs. These approaches focus on:
1. those human needs that energise and direct human behaviour
2. how managers could create conditions that allow workers to satisfy these needs
These focus on fulfilling inner needs to drive behaviour.
● Taylor and Scientific Management:
○ Workers motivated by money (economic man theory).
○ Introduced time and motion studies, selected the fastest methods, and paid workers by
piece rate.
○ Criticised for neglecting workers' other needs beyond financial reward.
● Mayo and Human Relations:
○ Hawthorne effect: Consultation, teamwork, and giving workers control improve
motivation.
○ Led to modern practices like worker participation and team-based work.
● Maslow’s Hierarchy of Needs:
○ Physical needs: Basic survival needs (salary).
○ Safety needs: Job security, health and safety.
○ Social needs: Teamwork and communication.
○ Esteem needs: Recognition, status, advancement.
○ Self-actualization: Reaching full potential through challenging work.
○ Criticised for assuming everyone’s needs follow the same pattern.
● Herzberg’s Two-Factor Theory:
○ Motivators: Achievement, recognition, responsibility, advancement.
○ Hygiene factors: Company policy, salary, supervision prevent dissatisfaction but don't
motivate.
○ Advocated for job enrichment through complete tasks, feedback, and diverse
challenges.
● McClelland’s Motivational Needs:
○ Achievement: Desire for challenging goals.
○ Authority: Need for control and influence.
○ Affiliation: Need for friendly relationships.
Process Theories
Focus on how people choose behaviours to meet their goals.
● Vroom’s Expectancy Theory:
○ Motivation occurs when workers believe effort leads to performance, performance leads to
rewards, and rewards satisfy needs.
○ Three factors: Valence (desire for rewards), Expectancy (belief effort leads to
performance), and Instrumentality (confidence in receiving rewards).

11.4 Motivation Methods in Practice

​Time-based wage rate: payment to a worker made for each period of time worked (ex. 1hr). This is the most
common way of paying manual, clerical, and non-management workers.
Piece rate: payment to a worker for each unit produced. The piece rate can be adjusted to
reflect the difficulty of the job and the standard time needed to complete it.
Salary: annual income that is usually paid on a monthly basis. A salary is the most common
 24
form of payment for professional, supervisory and management staff. It is not dependent
on the number of hours worked/the number of units produced.
Commission: a payment to a salesperson for each sale made. Commission payments can
make up to 100% of the total income/they can be in addition to a base salary.
Bonus: a payment made in addition to the contracted wage/salary. While the base salary is
usually a fixed amount per month, bonus payments may be based on criteria agreed
between managers & workers, such as an increase in output, productivity/sales.
Performance-related pay (PRP): a bonus scheme to reward employees for above-average
work performance. It is widely used for those workers whose output is not measurable in
quantitative terms, such as management, supervisory and clerical posts.
Profit sharing: a bonus for employees based on the profits of the business, usually paid as a
proportion of basic salary. The essential idea behind profit-sharing arrangements is that
employees will feel more committed to the success of the business and will strive to
achieve higher performances & cost savings.
Share-ownership scheme: a scheme that gives employees shares in the company they work
for/allows them to buy those shares at a discount. It is claimed that share-ownership
schemes reduce the division between business owners & workers. This helps to make
workers more involved in the success of the organisation that employs them. As
shareholders, employees will be able to participate at the company’s annual general
meeting.
Fringe benefits (perks): benefits given, separate from pay, by an employer to some/all
employees. They are non-cash forms of rewards and there are many alternatives that can
be used. These include company cars, free insurance and pension schemes, private health
insurance, discounts on company products, and low interest rate loans. They are used by
businesses in addition to normal payment systems in order to give status to higher-level
employees and to recruit & retain the best staff.
Job rotation: a scheme that allows employees to switch from one job to another.

Motivation Methods in practice

Benefits:
1. Reduces Boredom
2. Develops Skills
3. Improves Flexibility
4. Enhanced Understanding
Limitations
1. Limited Scope
2. Potential Confusion
3. Lack of Empowerment
4. Fragmented Experience(Employees work on separate tasks rather than completing a unit of
work)
Motivation methods can be divided into financial and non-financial incentives. Financial rewards often
address basic needs but may not fully motivate employees. Non-financial methods focus on improving
motivation without increasing costs, enhancing competitiveness.

Financial Motivators:
1. Time-based Wage Rate: Pay per hour worked.
○ Advantages: Security in pay, suitable for non-managerial roles.
○ Disadvantages: No direct link to output, no incentive to improve productivity.
2. Piece Rate: Pay based on the number of units produced.
○ Advantages: Encourages high output.
○ Disadvantages: Quality may drop, no security in income, not suitable for all jobs.
3. Salary: Fixed annual payment.
 25
○ Advantages: Offers pay security, suitable for non-quantifiable jobs.
○ Disadvantages: Can lead to complacency, not linked to performance.
4. Commission: Pay based on sales.
○ Advantages: Incentivizes higher sales.
○ Disadvantages: Can reduce teamwork and pressurise workers.
5. Bonus Payment: Extra payment for meeting targets.
○ Advantages: Encourages high performance.
○ Disadvantages: Can cause resentment if unevenly distributed.
6. Performance-Related Pay (PRP): Bonus for exceeding targets.
○ Advantages: Encourages target achievement.
○ Disadvantages: Favours subjective appraisals, not always motivational.
7. Profit Sharing: Employees receive a share of business profits.
○ Advantages: Increases commitment to business success.
○ Disadvantages: May reduce shareholder profits and not significantly motivate workers.
8. Share-Ownership Schemes: Employees are given or can buy shares.
○ Advantages: Aligns employees’ goals with business success.
○ Disadvantages: Small shares may not motivate, possible resentment if managers receive
more shares.
9. Fringe Benefits: Non-cash rewards (e.g., cars, insurance).
○ Advantages: Helps retain skilled employees.
○ Disadvantages: May not motivate everyone.
Non-Financial Motivators:
1. Job Rotation: Workers switch between tasks.
○ Advantages: Reduces boredom, increases skills.
○ Disadvantages: Limited scope, no empowerment.
2. Job Enlargement: More tasks added to a role.
○ Advantage: Short-term productivity boost.
○ Disadvantage: May not satisfy workers long-term.
3. Job Enrichment: Workers gain more responsibility and autonomy.
○ Advantages: More challenging tasks, personal growth, and motivation.
○ Disadvantages: May overwhelm employees or reduce productivity.
4. Job Redesign: Tasks are altered to make jobs more engaging.
○ Advantage: Increased recognition and promotion potential.
○ Disadvantage: Requires training and adjustment.
5. Training and Development: Improves employee skills.
○ Advantages: Increases productivity, opportunities for advancement.
○ Disadvantages: Costly, trained workers may leave.
6. Promotion: Advancing to a higher-level job.
○ Advantage: Motivates by increasing status.
○ Disadvantage: Lack of promotion opportunities may demotivate.
7. Employee Participation: Workers are involved in decision-making.
○ Advantages: Increases motivation and quality of decisions.
○ Disadvantages: Time-consuming, not suitable for all managers.
8. Teamworking: Employees work in empowered teams.
○ Advantages: Higher motivation, productivity, lower absenteeism.
○ Disadvantages: Requires training, can lead to conflicts or team issues.
9. Empowerment: Giving workers control over their tasks.
○ Advantages: Faster problem-solving, higher morale.
○ Disadvantages: Risk of poor decisions, reluctance from employees.
10. Quality Circles: Small groups discuss work improvements.
○ Advantages: Employees offer solutions, improve quality.
 26
○ Disadvantages: Time-consuming, not all employees want to participate.
Effective motivation strategies require a balance of financial and non-financial methods, tailored to
specific business contexts.

Chapter 12- Management

12.1 Management and Managers

Manager: the person responsible for setting objectives, organising resources and
motivating workers so that the objectives of the business are met
Management: the organisation and coordination of activities in order to achieve the
defined objectives of the business.
Autocratic management: a management style where one manager takes all decisions with
very little, if any, input from others.
Democratic management: a management style that encourages the active participation of
workers in taking decisions.
Paternalistic management: a management style based on the view that the manager is in a
better position than the workers to know what is best for an organisation.
Laissez-faire management: a management style that leaves much of the business decision-making to the
workforce.

Traditional Functions of Managers:

1. Planning: Setting future direction and objectives.
2. Organising: Arranging people and resources.
3. Directing: Leading and motivating the workforce.
4. Controlling: Monitoring performance and ensuring the plan is followed.
Fayol's Five Functions of Management:
1. Planning: Establish objectives and plan for resources.
2. Organising: Structuring and delegating tasks.
3. Commanding: Leading and motivating employees.
4. Coordinating: Ensuring activities align and reduce duplication.
5. Controlling: Evaluating and comparing performance against targets.
Mintzberg's Managerial Roles:
● Interpersonal:
○ Figurehead: Symbolic leader duties.
○ Leader: Motivating and managing employees.
○ Liaison: Networking with external entities.
● Informational:
○ Monitor: Collecting relevant information.
○ Disseminator: Communicating information internally.
○ Spokesperson: Representing the business externally.
● Decisional:
○ Entrepreneur: Seeking new opportunities.
○ Disturbance Handler: Solving crises.
○ Resource Allocator: Managing resource distribution.
○ Negotiator: Engaging in key negotiations.
Differences Between Fayol and Mintzberg:
● Fayol: Focuses on structured managerial functions.
● Mintzberg: Emphasises the varied roles and interpersonal nature of management.
Management Styles:
 27
1. Autocratic: Manager makes all decisions, little employee input.
2. Democratic: Encourages worker participation in decision-making.
3. Paternalistic: Manager consults workers but makes decisions in their best interest.
4. Laissez-faire: Workers are given freedom to make decisions with minimal managerial
intervention.
Key Management Positions:
● CEO: Top executive responsible for major decisions and managing operations.
● Director: Member of the board, involved in policy implementation.
● Manager: Responsible for people, resources, and decision-making within departments.
● Supervisor: Oversees and leads a team but with limited decision-making authority.
Contribution of Managers to Business Performance:
● Achievement of objectives
● High customer satisfaction and employee motivation
● Positive brand image and stakeholder relationships
● Effective communication across the organisation

12.2 McGregor’s Theory X and Theory Y

Theory X: the view that some managers believe that employees are lazy, fear-motivated
and in need of constant direction.
Theory Y: the view that some managers believe that employees are internally motivated,
enjoy their work and are prepared to take on additional responsibilities.

Theory X:
● Managers view workers as lazy and disliking work.
● Workers avoid responsibility and require close supervision.
● Assumed that workers need to be controlled and motivated through rewards or penalties.
● Likely to lead to autocratic leadership styles.
Theory Y:
● Managers believe workers enjoy work and find it natural.
● Workers are seen as responsible, creative, and capable of self-direction.
● Encourages managers to delegate responsibility and involve workers in decision-making.
● Supports democratic leadership styles.
Key Insight from McGregor’s Theory:
● Managerial attitude toward workers influences their behaviour.
● A Theory X approach may lead workers to act as unmotivated and avoid responsibility because
of the way they are treated.
● A Theory Y approach is more likely to foster creativity, responsibility, and job satisfaction.
Factors Influencing Management Style:
● Workforce skill and experience: More skilled workers may prefer responsibility, favouring
democratic or laissez-faire styles.
● Time available: Tight deadlines may require an autocratic style for quick decision-making.
● Managerial attitude: Managers' personal experiences and work culture affect their style.
● Nature of the situation: In times of crisis, autocratic decision-making may be necessary, while
routine tasks may benefit from a more democratic approach.
Increasing Use of Democratic Leadership:
● Workers are better educated and have higher expectations, requiring more involvement in
decision-making.
● Rapid workplace changes, such as technological advancements, necessitate worker consultation
for smooth adaptation to change.
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Summary of Theory X vs. Theory Y:
Theory X Managers Believe Theory Y Managers Believe

Workers dislike work. Workers enjoy work.

Workers avoid responsibility. Workers will accept responsibility.

Workers are not creative. Workers are creative and capable of

problem-solving.

Conclusion:
There is no single best management style; the right approach depends on the specific circumstances,
including the task at hand, the workforce, and the managerial culture. Managers must adapt their styles
to suit the situation.

Unit 3 Marketing
Chapter 17- The Nature of Marketing
17.1 Role of Marketing

Marketing: the management task of identifying and meeting the needs of customers
profitably by getting the right product at the right price to the right place at the right time.
Marketing objectives: the goals set for the marketing department to help the business
achieve its overall (corporate) objectives.
Corporate objectives: well-defined and realistic goals that are set for the whole company.
Marketing strategy: a plan of action giving details of how a business intends to achieve its
marketing objectives by creating competitive advantage.

Marketing involves more than just advertising and selling. It includes identifying, anticipating, and
satisfying customer needs profitably. Marketing encompasses activities such as:
● Market research
● Product design and packaging
● Pricing, advertising, and distribution
● Customer service
Marketing links the business to the customer and is crucial for identifying customer needs and making
strategic decisions about product design, pricing, promotion, and distribution.
Marketing Objectives:
Examples include increasing market share, total sales, customer loyalty, and satisfaction. Objectives
must be linked to corporate goals, realistic, measurable, and clearly communicated.
Importance of Marketing Objectives:
● Provide direction and measure business success.
● Serve as the foundation for marketing strategies, such as market penetration, entering new
markets, or product development.
Coordination with Other Departments:
● Finance: Uses sales forecasts for budgeting and securing marketing funds.
● Human Resources: Adjusts workforce plans based on sales forecasts.
● Operations: Plans production based on market research and sales predictions.

17.2 Demand and Supply

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Demand: the quantity of a product that consumers are willing and able to buy at a given
price in a specific time period.
Supply: the quantity of a product that firms are prepared to supply at a given price in a
specific time period.
Equilibrium price: the price level at which demand is equal to supply.

Demand:
Demand for a product usually rises as prices fall and falls as prices rise. Non-price factors that affect
demand include:
● Consumer income
● Prices of substitute/complementary goods
● Population changes
● Fashion and advertising
Supply:
Supply increases when prices rise and decreases when prices fall. Non-price factors affecting supply
include:
● Production costs
● Taxes and subsidies
● Weather and technology
Equilibrium Price:
The point where demand equals supply is the equilibrium price. Prices above equilibrium lead to excess
supply; prices below it lead to excess demand. Adjustments in price bring the market back to equilibrium.

17.3 Markets

Market segment: a subgroup of a whole market in which consumers have similar

characteristics.
Industrial market: the selling of products by businesses to other businesses, also known as
business to business (B2B).
Consumer market: the selling of products by businesses to the final end user, also known as
business to consumer (B2C).
Customer (or market) orientation: an outward-looking approach that bases product
decisions on consumer demand, as established by market research.
Product orientation: an inward-looking approach that focuses on making products that can
be made – or have been made for a long time – and then try to sell them.
Market size: the total value (or quantity) of sales of all producers within a market in a given
time frame.
Market growth: the percentage of change in the total size of a market (volume/value) over
a period of time.
Market share: sales of a business as a proportion of the total market sales.
Brand leader: the brand with the highest share of the market.

Markets are places (physical or online) where buyers and sellers exchange goods. The term also refers
to the group of customers interested in a product, which can be divided into:
● Potential market: Total population interested in the product.
● Target market: Specific segment chosen for marketing efforts.
Types of Markets:
● Industrial markets: Products bought by businesses (e.g., machinery).
● Consumer markets: Products bought by individuals (e.g., mobile phones).
● Local, national, and international markets: Vary in scope and complexity, with international
markets offering the highest sales potential but requiring significant adaptation.
 30
Market Orientation:
● Customer orientation: Focuses on meeting consumer needs through market research, reducing
product failures and increasing product lifespan.
● Product orientation: Focuses on developing innovative products, assuming quality will drive
sales. Examples include pharmaceutical and tech industries.
Market Share and Market Growth:
● Market share: Percentage of total market sales captured by a business.
● Market growth: Rate at which the market expands or contracts.
Formula for market share:
Market share=(Sales of business/Total market sales)×100
Implications:
● Increasing market share: Higher sales, profitability, and stronger retailer relationships.
● Falling market share: Potential for declining sales, reduced retailer interest, and need for larger
discounts.
Market size can be measured by volume (units sold) or value (revenue).

17.4 Consumer Marketing (B2C) vs. Industrial Marketing (B2B)

Consumer products: goods/services sold to end users.

Industrial products: goods/services sold to businesses.

Classification of Products:
1. Consumer Products:
○ Convenience products: Frequently bought, impulsive purchases (e.g., sweets, drinks).
○ Shopping products: Require planning and research, bought less often (e.g., washing
machines).
○ Speciality products: Infrequent, expensive, with strong brand loyalty (e.g., cars, designer
clothing).
2. Industrial Products:
○ Materials and components: Essential for production (e.g., steel, motors).
○ Capital items: Equipment and machinery (e.g., lathes, IT systems).
○ Services and supplies: Business services (e.g., power supply, IT support).
Key Differences (B2B vs. B2C):
● Product complexity: Industrial products are more complex, requiring specialist sales staff.
● Informed buyers: Industrial buyers are knowledgeable, requiring well-trained sales teams.
● Purchasing process: Industrial buyers rarely make impulse purchases; decisions are
research-driven.
● Sales channels: Industrial marketing relies on direct contact, trade fairs, and websites, rather than
mass media.
● Market size: B2B markets have fewer buyers, and products may be customised for specific
clients.

17.5 Mass Marketing vs. Niche Marketing

Mass marketing: selling standardised products/ranges of products in the same way to the
whole market.
Niche marketing: identifying and exploiting a small segment of a larger market by
developing differentiated products to suit that segment.
Mass Market:
● Large customer base purchasing standardised products.
● High sales and production levels.
 31
● Focus on low prices for broad appeal.
● Example: cola drinks, toothpaste.
Niche Market:
● Smaller customer base seeking differentiated products.
● Focused on specialised needs.
● Often high-status or unique products (e.g., Versace, extreme sportswear).
Advantages of Mass Marketing:
● Economies of scale reduce production costs.
● Lower prices reinforce market position.
● Extensive publicity creates strong brand identity.
Disadvantages of Mass Marketing:
● Lack of product differentiation may not appeal to all.
● Focus on low prices limits premium brand potential.
● Reliance on one product is risky if demand changes.
Advantages of Niche Marketing:
● Small firms can thrive in niche markets.
● Higher prices and profit margins due to exclusivity.
● Niche strategies can boost status and image for larger firms.
Disadvantages of Niche Marketing:
● Limited economies of scale.
● Growth potential is restricted by niche size.
● High risk if over-reliant on one niche market.

17.6 Market Segmentation

Market segmentation: the identification of different groups of customers with common

needs within a market and the marketing of different products/services to those customer
groups.
Consumer profile: a quantified picture of a business’s consumers, showing data about their
age groups, income levels, location, gender and social class.

Market segmentation focuses on targeting different products to specific consumer groups instead of
selling a single product to the entire market. This approach requires careful market research to identify
distinct segments.
Examples:
● Hewlett-Packard: Produces PCs for both home and office use, along with travel-friendly laptops.
● Coca-Cola: Offers standard cola, Diet Coke for health-conscious consumers, and flavoured
options.
● Tata Motors: Markets vehicles for various segments, from mini-trucks for farmers to luxury cars
for high-income consumers.
Segmentation Methods:
1. Geographic: Adapting products to different regions based on cultural and climatic preferences
(e.g., marketing different heating products in Malaysia vs. Finland).
2. Demographic: Using factors like age, gender, income, and social class to target specific market
segments. For example, construction firms may target young singles or retirees based on these
factors.
3. Psychographic: Considering lifestyle, values, and personality traits. For instance, middle-class
families may prioritise private education, while consumers with specific interests may be targeted
for niche products (e.g., organic foods).
Advantages of Market Segmentation:
● Precise targeting can lead to increased sales.
 32
● Identifies untapped market gaps.
● Focused marketing strategies prevent wasteful spending.
● Small firms can specialise effectively.
● Enables price discrimination to boost revenue.
Disadvantages of Market Segmentation:
● High costs for research, development, and marketing multiple product variations.
● Promotional expenses can increase due to different campaigns for each segment.
● Higher production and inventory costs compared to a single product.
● Risk of over-specialization if consumer preferences change.
● Extensive research is needed to understand market segments.

17.7 Customer Relationship Marketing (CRM)

Customer relationship marketing (CRM): using marketing activities to build and establish
good customer relationships so that the loyalty of existing customers can be maintained.

Objective: The goal of CRM is to foster customer loyalty, ensuring repeat purchases from existing
customers rather than incurring the higher costs associated with acquiring new ones.
Key Aspects:
● Cost Efficiency: Retaining existing customers is significantly cheaper than gaining new ones, with
acquisition costs estimated to be four to ten times higher.
● Customer Data: Effective CRM relies on gathering detailed information about customers, such as
income, product preferences, and buying habits, allowing for tailored marketing efforts.
Strategies for Effective CRM:
● Targeted Marketing: Provide customers with products and services based on their previous
purchases.
● Customer Service and Support: Implement after-sales services and responsive call centres to
enhance loyalty.
● Regular Communication: Keep customers informed about new products, promotions, and support
options.
● Social Media Integration: Use social media platforms to gather customer feedback and inform
product offerings.

Costs and Benefits of CRM:

Costs of CRM Benefits of CRM

IT systems and training for staff are Proven cost-effectiveness for businesses with an
required. existing customer base.

High costs may arise from external Creates sustainable long-term customer
marketing consultancies. relationships.

An established customer base is needed Loyal customers often provide free

before investing. word-of-mouth marketing.

Responding to individual customer Lower costs per customer compared to acquiring

feedback can be costly. new customers.

Conclusion: CRM is an innovative marketing strategy that enhances customer loyalty and drives sales,
making it particularly effective for businesses like Zara.
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Chapter 18- Market Research

Market research: the process of collecting, recording and analysing data about customers,
competitors and the market.

18.1 Market Research

Overview: Market research is a comprehensive process that informs a wide range of business decisions
beyond simply determining whether consumers will buy a product. It helps identify customer
characteristics, purchasing behaviour, and the factors influencing their choices.
Uses of Market Research:
● Measure customer reactions to new products, price levels, promotional methods, packaging, and
distribution channels.
Purposes of Market Research:
1. Identify Market Features:
○ Overall Size: Assess the viability of entering a new market.
○ Growth Trends: Determine whether the market is expanding or contracting.
○ Competitors: Analyse the competitive landscape and their market power.
2. Reduce Risks of New Product Launches:
○ Market research helps gauge potential demand, minimising the risks associated with
launching new products. While no research guarantees success, it aids in evaluating
sales prospects.
3. Identify Consumer Characteristics:
○ Understand the profile of potential consumers based on age, income, and social class,
allowing targeted marketing.
4. Explain Sales Patterns and Trends:
○ Analyse sales data of existing products to identify trends. For instance, Gap used market
research to understand a sales decline despite overall market growth.
5. Predict Future Demand Changes:
○ Anticipate shifts in demand to avoid overproduction or underproduction, especially in
response to social and economic changes.
6. Assess Designs, Promotions, and Packaging:
○ Conduct consumer testing on product variations and promotional strategies to incorporate
feedback into final decisions.

NPD Process and Market Research:

NPD Process Market Research

Identify consumer needs and tastes Conduct primary and secondary research

Product idea and packaging design Test products and packaging with consumer
groups

Brand positioning and advertising Pre-test product image and advertisements

testing

Product launch and after-launch Monitor sales and consumer response

monitoring
 34
Market research is crucial for developing marketing strategies, and it is equally important for new
enterprises in forming a solid business plan.

18.2 Primary and Secondary Research

Choosing the right sources and methods for market data collection involves understanding the
differences between primary and secondary research.

Primary research: the collection of first-hand data that is directly related to the needs of the business.
Secondary research: the use of existing data that was originally collected for another purpose.
Qualitative data: non-numerical data, which provides insight into the detailed motivations
of consumers and helps to explain their buying behaviour/options.
Quantitative data: numerical results from research that can be statistically analysed.

Differences Between Primary and Secondary Research

● Primary Research: First-hand data collected by an organisation specifically for its needs.
● Secondary Research: Analysis of existing data collected by other organisations for different
purposes.
Reasons for Conducting Secondary Research First:
● Lower cost and quicker to obtain than primary data.
● Useful for assessing market features; positive results can lead to more detailed primary research.
Usefulness of Secondary Research Data
● Provides insights into the population, economy, and market conditions.
● Helps identify focus areas for primary research.
● Serves as a baseline for comparison with primary research data.
● Large sample sizes enhance accuracy and reliability.
● Accessible through various online sources.
● Useful when time or finances are limited.
● Opens new business opportunities through careful analysis of "big data."
Main Sources of Secondary Data:
● Government: Censuses, registrations, social trends.
● Local Government: Household data, occupations, demographics.
● Trade Organisations: Industry-specific publications.
● Market Research Agencies: Detailed reports.
● Internal Company Records: Sales data, customer feedback.
Limitations of Secondary Research Data
● Data may be outdated or irrelevant to specific needs.
● Access can be restricted and costly.
● General market potential indicated, but specific consumer profiles require primary research.
● Analysing "big data" can be complex and expensive.
Usefulness of Primary Research Data
● Ideal for exploring new markets with no existing data.
● Collects data tailored to specific business needs.
● Gather qualitative data that explains quantitative trends.
● Focuses on consumer reactions to changes (e.g., pricing).
● Provides up-to-date information in fast-changing markets.
● Allows cross-verification through various data collection methods.

Primary Data Collection Methods:

Method Details
 35
Questionnaire Can gather both qualitative and quantitative data.

Interview Allows follow-up questions for deeper insights.

Observation Insight into consumer behaviour, though, may alter

behaviour.

Test Marketing Validates potential success in specific locations.

Focus Groups Generates qualitative feedback through consumer

discussions.

Limitations of Primary Research Data

● Sample selection impacts accuracy.
● Start-ups may lack funds for extensive primary research.
● Time-consuming data collection and analysis.
Market Research Developments
● Electronic methods simplify data gathering, including mobile surveys and loyalty card schemes.
● Social media analytics enable advanced understanding of consumer emotions and behaviours.
● Online research projects have become cost-effective, increasing response rates through mobile
access.
Overall, effective market research, whether primary or secondary, is crucial for making informed
business decisions and can lead to increased sales and profits. In 2019, global spending on market
research rose by over 5% to $82 billion, highlighting its significance in business strategy.

18.3 Sampling

Sampling: the process of selecting a group of respondents from a larger population.

Sample: a group of people taking part in a market research survey selected to be
representative of the overall target market.
Sampling bias: when a sample is not a good representation of the whole population,
because it is chosen in ways which give some people a greater chance of being selected.

The Need for Sampling:

● Sampling is essential for market research because reaching the entire target population is often
too expensive or time-consuming.
● A sample is a subset of the total market, and the larger the sample, the more representative it is
of the entire population. This increases the reliability of the results.
Limitations of Sampling:
1. Sample Size:
○ A very small sample can lead to inaccurate results. For example, a sample of 10 might
show varying opinions compared to a sample of 1,000.
○ Small samples can lead to chance variations that do not reflect the broader population. A
larger sample reduces the risk of distorted results.
2. Cost and Time Constraints:
○ Large samples are more expensive and time-consuming to gather. Managers often
balance cost-effectiveness with accuracy when determining sample size.
3. Sampling Bias:
○ Results from a sample may differ from results from the entire population. This sampling
bias affects accuracy. A larger sample generally reduces bias, aiming for a 95%
confidence level, meaning results are reliable in 19 out of 20 cases.
 36
4. Incorrect Sampling Methods:
○ Using inappropriate sampling methods, like convenience sampling (asking those who are
easily contactable), reduces accuracy. Proper statistical methods should be used for
reliable data.

18.4 Market Research Data

Arithmetic mean: the value calculated by totalling all the results and dividing by the
number of results.
Mode: the value that occurs most frequently in a set of data.
Median: the value of the middle item when data has been ordered or ranked. It divides the
data into two equal parts.
Range: the difference between the highest and lowest value.
Coding: the process of labelling and organising qualitative data to identify the main themes
and the links between them.

Reliability of Data Collected

● Primary and secondary data can be unreliable.
○ Primary data issues:
■ Sampling bias: (Section 18.3).
■ Questionnaire bias: Leading questions influence responses.
■ Other biases: Respondents may not answer truthfully.
○ Secondary data issues: May be outdated, incomplete, or irrelevant.
Analysis of Quantitative Data
● Data needs to be analysed using statistical techniques to extract useful insights.
Averages (Measures of Central Tendency)
1. Arithmetic Mean:
○ Formula: Mean = (Sum of data values) / (Number of data values)
○ E.g., Last year: 173/20 = 8.65 hours, This year: 192/20 = 9.6 hours.
○ Advantages: Uses all data, widely recognized.
○ Disadvantages: Affected by extreme values, not always a whole number.
2. Mode:
○ Most frequently occurring value.
○ E.g., Last year: 10 hours, This year: 12 hours.
○ Advantages: Simple, easily observed, useful for inventory decisions.
○ Disadvantages: Limited use when values don’t repeat, cannot be used for further analysis.
3. Median:
○ Middle value when data is ordered.
○ Odd number of values: Median = (n+1)/2
○ Even number of values: Mean of two middle values.
○ Advantages: Less affected by extremes.
○ Disadvantages: Doesn't use all data, approximation for even data.
Measures of Dispersion (Spread of Data)
Range:
● Formula: Range = Highest value - Lowest value
● E.g., Paper 1: 83% - 14% = 69%, Paper 2: 60% - 43% = 17%.
● Advantage: Simple to calculate.
● Disadvantage: Affected by extreme values.
Analysis of Qualitative Data
● Qualitative research captures opinions, attitudes, and beliefs. Cannot be analysed statistically.
 37
● Coding: Categorising responses (e.g., "good value," "branding") and linking them to other
variables (e.g., age, income).
Data Presentation Tools
1. Tables: Present large data clearly.
2. Pie Charts: Show proportions.
○ Formula: Angle = (Value of section/Total value) × 360°
3. Line Graphs: Display trends over time (time series analysis).

Chapter 19- The marketing mix: product and price

19.1 The elements of the marketing mix

Marketing mix: the 4 key decisions on product, price, promotion and place that must be
taken to enable the effective marketing of a product.
Product: goods/services that are the end result of the production process and are sold on
the market to satisfy customer needs.

The marketing mix consists of tactical decisions to effectively market a product, influencing its
profitability. It traditionally includes four interrelated decisions, known as the 4Ps:
1. Product: Offering the right product, whether it’s an existing one, an update, or a new
development.
2. Price: Setting the right price is crucial; too low may signal poor quality, and too high may deter
customers.
3. Promotion: Communicating effectively to inform consumers and persuade them to choose the
product.
4. Place: Ensuring the product is available at the right time and location through proper distribution.

The elements must fit together into a consistent plan. Some argue for additional Ps, like people (staff)
and process (how customers access services), particularly in service marketing. The key is coordinating
these decisions to avoid sending conflicting messages.

19.2 Product: why is this a key part of the marketing mix?

Goods: products which have a physical existence, such as washing machines and chocolate
bars.
Services: products which have no physical existence, but satisfy consumer needs in other
ways, such as hairdressing, car repairs, childminding and banking.
Brand: an identifying symbol, name, image or trademark that distinguishes a product from
its competitors.
Intangible attributes: the subjective opinions of customers about a product, which cannot
be measured or compared easily.
Tangible attributes: the measurable features of a product, which can be easily compared
with other products.
New product development (NPD): the design, creation and marketing of new goods and
services.
Unique selling point (USP): the special feature of a product that makes it different from
competitors' products.
Product differentiation: the unique qualities of a product that lead to a difference between
the product and competitors’ products.
Product positioning: consumers’ view of a product/service as compared to its competitors.
It is done using techniques such as market mapping.
 38
A key part of the marketing mix is the product, which needs to meet customer expectations in quality,
durability, and performance. Even with the right price or promotion, a poor product will fail in the long
term.
What is a product?
A product includes both consumer and industrial goods/services with tangible and intangible attributes.
Customers often pay more for well-known brands due to intangible features like prestige or luxury.
Effective branding helps meet these expectations.
Importance of Product Development (NPD)
New product development is crucial in industries where consumer preferences, competition, and
technology change rapidly. NPD allows businesses to:
1. Adapt to changing consumer tastes
2. Stay competitive
3. Leverage technological advances
4. Enter new markets
5. Diversify risk
6. Improve brand image
7. Use excess capacity
For success, new products must have desirable features, be unique, and be effectively marketed.
Differentiation and a unique selling point (USP) are key for standing out in competitive markets.
Examples include Dyson’s bagless technology and Domino’s “30-minute delivery or free” promise.
Product Differentiation and Branding
Differentiation offers competitive advantages, allowing businesses to charge premium prices and gain
free publicity. The product is the physical offering, while the brand creates a unique identity in the minds
of consumers. Brands, such as Huawei, distinguish one manufacturer’s products from another, creating
loyalty and higher sales.
Product Positioning
Positioning a product in consumers' minds involves market mapping based on factors like price, quality,
and target audience. Companies like Coca-Cola and Pepsi use positioning to target specific consumer
segments. Pepsi NEXT, for example, targets mid-calorie cola drinkers.

19.3 Product Portfolio Analysis

Product portfolio analysis: analysing the range of existing products of a business to help
allocate resources effectively between them.
Product life cycle: the pattern of sales for a product from launch to withdrawal from the
market.
Consumer durable: a manufactured product that can be reused and is expected to have a
reasonably long life, such as a car or washing machine.
Extension strategy: a marketing plan to extend the maturity stage of the product before a
a completely new one is launched.
Boston Matrix: a method of analysing the product portfolio of a business in terms of
market share and market growth.

Product Portfolio Analysis

Product portfolio analysis helps businesses make informed decisions on product development, launch
timing, and updates to maintain competitiveness. Two key tools used in this analysis are the product life
cycle and Boston Matrix analysis.
Product Life Cycle
The product life cycle tracks the sales performance of a product over time and helps in shaping
marketing strategies at each stage. The main stages are:
1. Introduction:
 39
○ The product is launched after development and testing.
○ Sales are initially low, and growth can be slow unless it’s a highly anticipated product like
a popular music download.
○ Marketing focus: Informative advertising is crucial to raise consumer awareness.
○ Pricing strategies: May vary between price skimming (high prices to recover R&D costs)
or penetration pricing (low prices to capture market share quickly).
2. Growth:
○ If the product is well received, sales increase rapidly.
○ Marketing focus: Brand development and customer loyalty become priorities. Promotional
costs remain high to compete with emerging rivals.
○ Pricing strategies: Companies may increase prices if they start low (penetration) or keep
prices competitive due to rising competition.
○ The growth phase is time-sensitive as sales growth will eventually slow, leading to the
next stage.
3. Maturity/Saturation:
○ Sales stabilise but do not grow significantly. The market may be saturated, with fewer new
buyers.
○ Marketing focus: Companies emphasise brand loyalty and product differentiation to
maintain market share.
○ Product adjustments: New models, features, or versions may be introduced to stimulate
sales.
○ Pricing strategies: Prices are adjusted to maintain competitiveness, and distribution
channels are maximised to cover the largest market possible.
4. Decline:
○ Sales and profitability fall due to market saturation, outdated technology, or newer
competitor products.
○ Marketing focus: Advertising may be minimal and often used to inform about discounts or
clearances.
○ Options include introducing extension strategies (e.g., repackaging, selling in new
markets) or phasing out the product if it becomes obsolete.
Extension Strategies: To delay the decline, companies can:
● Sell the product in new markets (e.g., exporting to new countries).
● Update or refresh the product with new packaging or minor upgrades.
● Reposition the product to attract a new customer segment.
Impact on Marketing Decisions: The product life cycle helps guide marketing mix (the 4Ps)
adjustments:
● Price: Lower prices may be necessary in maturity or decline.
● Promotion: More aggressive promotional efforts are needed in the introduction and growth
stages.
● Product: New features or updates can help extend the product's life during maturity.
● Place: Distribution channels need to be expanded during growth and maturity stages.
However, the life cycle model has limitations. It is based on historical data and cannot predict sudden
changes like technological advancements, shifts in consumer preferences, or competitor actions.
Boston Matrix
The Boston Matrix, developed by the Boston Consulting Group, analyses a firm's product portfolio by
considering two dimensions: market share and market growth. It categorises products into four types:
1. Cash Cows (Low market growth, high market share):
○ These are established, profitable products in mature markets.
○ They generate strong cash flow with low promotional costs due to high consumer
awareness.
○ Companies use cash flow from cash cows to fund other products or investments.
 40
○ Strategy: Continue to "milk" cash cows by maintaining market share as long as possible.
2. Stars (High market growth, high market share):
○ Stars are leading products in fast-growing markets, often generating high revenue.
○ However, they require significant investment in promotion and product development to
maintain their market position.
○ Strategy: Continue to invest in stars to ensure sustained growth and eventual transition
into cash cows as market growth slows.
3. Question Marks (High market growth, low market share):
○ These are new or underperforming products in growing markets.
○ They consume resources but generate little revenue, often needing heavy investment to
establish themselves.
○ Strategy: Businesses must decide whether to invest heavily to turn question marks into
stars or withdraw them if growth potential is low.
4. Dogs (Low market growth, low market share):
○ These are products with weak sales in stagnant or declining markets.
○ They often generate little profit and may tie up resources that could be used elsewhere.
○ Strategy: Consider withdrawing the product or finding niche markets where it could be
profitable.
Marketing Strategies Based on Boston Matrix
1. Building: Invest in question marks to increase market share and turn them into stars. Resources
may come from cash cows.
2. Holding: Maintain strong market positions for stars through continued promotion and product
innovation.
3. Milking: Use profits from cash cows to fund the development of other products.
4. Divesting: Discontinue or sell off dogs, freeing up resources for more profitable ventures.
Limitations of the Boston Matrix
● The matrix oversimplifies complex product and market dynamics, assuming that high market
share always leads to high profitability, which may not always be the case, especially if sales are
driven by price cuts.
● It does not predict future performance or consider other important factors like competitor actions
or economic changes.
● The Boston Matrix is only a planning tool and should be used alongside other analyses (e.g.,
product life cycle, sales forecasts) to make informed strategic decisions.
In conclusion, both the product life cycle and Boston Matrix are essential tools in product portfolio
management. They help businesses analyse their current products and make decisions regarding
investments, product development, or discontinuation. However, they should be used with caution as
they rely on past data and do not guarantee future success.

19.4 Price as a Key Part of the Marketing Mix

Mark-up pricing: adding a fixed mark-up for profit to the unit cost of buying in a product.
Cost-plus price: setting a price by calculating a total unit cost for the product and then
adding a fixed profit mark-up.
Contribution-cost pricing: setting prices based on the variable costs of making a product, in
in order to make a contribution towards fixed costs and profit.
Competitive pricing: making pricing decisions based on the price set by competitors.
Price discrimination: charging different groups of consumers different prices for the same
good or service.
Dynamic pricing: offering products at a price that changes according to the level of demand
and the customer's ability to pay.
Penetration pricing: setting a relatively low price to achieve a high volume of sales.
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Market skimming: setting a high price for a new product when a firm has a unique or highly
differentiated product with low price elasticity of demand.
Psychological pricing: setting a price at a level which matches consumers' views about a
product's perceived value.

Price is the amount paid by customers for a product, and it is crucial in determining consumer demand. It
also affects business revenue, profits, and product brand image. Pricing decisions are among the most
significant challenges for marketing managers.
Determinants of Pricing Decisions:
1. Costs of production: Prices must cover production costs to ensure profitability.
2. Competitive conditions: Businesses with little competition (e.g., monopolists) have more freedom
in setting prices.
3. Competitors’ prices: Prices must be competitive unless strong product differentiation exists.
4. Business objectives: Objectives like mass marketing or premium branding influence price
strategies.
5. Price elasticity of demand: The sensitivity of demand to price changes (explained in Section
21.1).
6. Product status: For new products, strategies like skimming or penetration pricing are key.
Pricing Methods
1. Cost-Based Methods:
○ Mark-up pricing: A percentage is added to the unit cost.
○ Cost-plus pricing: A fixed profit margin is added to the total cost.
○ Contribution-cost pricing: Sets price based on variable costs, with an additional
contribution to cover fixed costs and profit.
2. Competition-Based Methods:
○ Loss leaders: Set low prices to attract customers, expecting them to buy higher-margin
items.
○ Competitor pricing: Prices are set close to competitors’ to avoid price wars.
○ Price discrimination: Charge different prices to different consumer groups (e.g., children,
elderly).
○ Dynamic pricing: Prices vary based on demand or customer data (e.g., airlines).
Pricing Strategies for New Products
● Penetration pricing: Low prices to gain market share quickly.
● Market skimming: High prices to maximise short-term profits before competition increases.
Psychological Pricing
● Setting prices just below key price points (e.g., $1.99 instead of $2.00) to make them appear
lower.
Pricing Decisions Evaluation
● Businesses use different pricing methods for different products, depending on market conditions.
● Price is only one part of perceived value; consumers consider the entire brand image and
marketing mix.
In conclusion, price decisions are complex and must balance costs, competition, consumer behaviour,
and business objectives. Different methods and strategies ensure products are priced appropriately for
their market and goals.

Chapter 20- The marketing mix: promotion and place

20.1 Promotion Methods

Promotion: the use of advertising, sales promotion, personal selling, direct mail, trade fairs,
 42
sponsorship and public relations to inform consumers and persuade them to buy.
Advertising: paid-for communication to inform and persuade consumers, using media such
as TV, newspapers and cinema.
Direct promotion: a range of promotional activities aimed directly at target customers. It is
also known as direct marketing.
Sales promotion: incentives such as special offers or special deals directed at consumers or
retailers to achieve short-term sales increases and repeat purchases by consumers.
Promotion mix: the combination of promotional techniques that a firm uses to sell a product.
Digital promotion: the promotion of products using digital technologies, mainly on the
internet but also including mobile (cell) phones.
E-commerce: the buying and selling of goods and services by businesses and consumers
through an electronic medium.

Promotion involves communicating with actual or potential customers. It increases awareness of

products, creates brand identities, and boosts sales. Promotion includes advertising, direct promotion,
and sales promotion. The combination of all these methods is called the promotion mix. The promotion
budget is a crucial decision, focusing not only on how much is spent but how it is allocated.
Promotion Objectives
● Increase sales and consumer awareness, particularly for new products.
● Increase consumer recall and purchases.
● Demonstrate superior product qualities.
● Create or reinforce brand image.
● Correct misleading information about products.
● Improve the business's public image.
Promotion Mix
Several tools are used to communicate with consumers, including advertising, sales promotion, and
direct marketing.
Advertising
Communicating information about a product via media like radio, TV, and print. Advertising can be:
● Informative: Provides product details such as price or features.
● Persuasive: Creates a brand identity or emotional connection.
● Trade advertising: Encourages retailers to stock and promote products.
Advertising Agencies
These specialise in creating promotional campaigns, from researching consumer preferences to
designing and filming advertisements.
Advertising Methods
1. Print Advertising: Ads in newspapers or magazines, effective for niche markets but less so with
younger consumers.
2. Broadcast Advertising: TV, radio, and cinema ads that have strong visual appeal but are
expensive.
3. Outdoor Advertising: Billboards and posters offer low-cost, high-exposure options but may go
unnoticed by many.
4. Product Placement: Products featured in films or TV shows, creating subtle, positive
associations.
5. Guerrilla Advertising: Creative, unconventional methods like flash mobs or graffiti, appealing to
younger consumers but potentially controversial.
6. Sponsorship: Associating a brand with events or individuals, offering extensive exposure but
carrying the risk of negative associations.
7. Digital Advertising: A rapidly growing method evaluated in detail later in the chapter.
Choosing the Right Advertising Method
Factors to consider include:
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● Cost: Compare costs per consumer or click.
● Target audience: Consider age, income, and interests.
● Message: Match the message to the medium (e.g., TV ads for image creation, print for detailed
info).
● Other marketing elements: Ensure consistency with the product, price, and place.
● Legal constraints: Adhere to legal restrictions (e.g., tobacco advertising bans).
Sales Promotion Overview
● Sales Promotion aims for short-term sales increases, while Advertising focuses on long-term
brand awareness and customer confidence. Key methods include:
○ Price Offers: Temporary price reductions to attract customers.
○ Loyalty Programs: Incentives like points for repeat purchases.
○ Money-off Coupons: Discounts redeemed at purchase.
○ Point-of-Sale Displays: Attractive displays in stores.
○ BOGOF: "Buy one, get one free" promotions.
○ Competitions: Engaging consumers through contests.
● Sales promotions can target consumers (pull strategy) or distribution channels (push strategy).

Sales Promotion Methods and Limitations

Method Description Possible Limitations

Price Offers Temporary price Reduces gross profit; may harm brand reputation.
discounts.

Money-off Versatile price Might only shift existing purchases; low consumer
Coupons discounts via various use if discounts are small.
media.

Customer Rewards for repeat Cuts gross profit; administration costs may outweigh
Loyalty purchases. benefits; many consumers have multiple loyalty
Schemes cards.

Money Refunds via Completion and submission may deter participation;

Refunds submitted receipts. delays can be frustrating.

BOGOF Encourages multiple Reduces profit margin; may devalue normal pricing;
purchases. could lead to stockpiling.

Point-of-Sale Strategic product Best locations usually go to market leaders; new

Displays positioning in stores. products may struggle without discounts.

Direct Promotion Methods

● Direct Mail: Low-cost targeted mailings. Limitations include preferences for digital communication
and potential for being seen as junk mail.
● Telemarketing: Cost-effective but can face objections from consumers and easy rejection.
● Personal Selling: High success with complex products but can be costly and perceived as
pressuring.
Digital Promotion Methods
● Social Media Marketing: Utilising platforms like Facebook and Instagram to reach targeted
consumers.
● Email Marketing: Engaging customers directly through various email campaigns.
● Online Advertising: Pop-up ads and Google AdSense targeting specific niches.
● Smartphone Marketing: Using apps and messaging platforms to reach younger consumers.
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● Search Engine Optimization (SEO): Enhancing website visibility in search results.
● Viral Marketing: Creating shareable content across multiple platforms.
Benefits of Digital Promotion
● Global Reach: Access to international markets.
● Cost-Effective: Lower costs than traditional advertising.
● Measurable Results: Easy tracking of campaign effectiveness.
● Personalization: Customised offers based on customer data.
● Building Loyalty: Quick engagement on social media fosters customer loyalty.
● Content Marketing: Engaging content can lead to viral sharing.
● Convenience: Higher conversion rates through online platforms.
Limitations of Digital Promotion
● Time-Consuming: Requires significant effort for content creation and campaign management.
● Skill Requirements: Employees need ongoing training in evolving digital tools.
● Global Competition: Easy access for competitors can dilute market presence.
● Negative Feedback: Social media can amplify negative customer experiences.
Measuring Success of Promotions
● Sales Analysis: Compare pre- and post-campaign sales.
● Consumer Awareness Surveys: Monitor recall and recognition of advertisements.
● Consumer Panels: Provide qualitative feedback on promotions.
● Ad Response Rates: Track interactions with advertisements.
● Social Media Engagement: Assess feedback and engagement levels.
The Role of Packaging in Promotion
● Functions: Protects products, provides information, supports brand image, and aids recognition.
● Impact: Quality packaging influences consumer perception; sustainable practices enhance brand
reputation.
The Role of Branding in Promotion
● Branding Objectives: Enhance recognition, distinguish from competitors, and create product
identity.
● Benefits: Improves brand recall, fosters loyalty, allows for premium pricing, and differentiates
products.
● Own-Label Brands: Retailers create their own brands, often in competition with established
brands, leading to a complex market landscape.

20.2 Place: An Important Part of the Marketing Mix

Channel of distribution: the chain of intermediaries a product passes through from

producer to final consumer.
Online marketing (e-commerce): selling and marketing activities that use the internet,
email and mobile communications to encourage direct sales via electronic commerce.
Digital distribution: the delivery or distribution of digital media content such as audio,
video, TV programmes, films, software and video games.
Physical distribution: the activities that combine to achieve the efficient movement of
finished products from the end of the production operation to the consumer.
Integrated marketing mix: the key marketing decisions complement each other and work
together to give customers a consistent message about the product.

Place, the final 'P' in the marketing mix, refers to how products pass from manufacturer to final
consumer, known as distribution. Effective distribution ensures the right product reaches the right
consumer at the right time.
Channels of Distribution
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Businesses must establish a distribution strategy, detailing how products move from creation to
consumption. Common channels include:
1. Direct Selling: Manufacturer sells directly to consumers, often used for infrequent, bulky, or
custom products (e.g., airline tickets, farmers’ markets).
○ Advantages: No intermediary costs, complete control over the marketing mix, faster
delivery.
○ Disadvantages: Higher delivery costs, no retail experience for consumers.
2. Single-Intermediary Channel: Involves one intermediary (e.g., a retailer), commonly used for
consumer goods.
○ Advantages: Retailers handle inventory and offer customer service.
○ Disadvantages: Added costs for consumers and loss of control for producers.
3. Two-Intermediary Channel: Traditional channel involving wholesalers who sell to retailers.
○ Advantages: Reduced inventory costs for producers, bulk buying by wholesalers.
○ Disadvantages: Increased costs for consumers and reduced control for producers.
E-commerce
Online selling is rapidly growing, offering various benefits and limitations:
● Benefits: Cost-effective reach, global audience, consumer data collection, lower fixed costs.
● Limitations: Inability to physically experience products, potential for higher return rates, security
concerns.
Factors Influencing Channel Choice
When choosing a distribution channel, businesses should consider:
● Direct vs. indirect selling
● Length of the distribution channel
● Geographic coverage and market research
● Inventory costs
● Desired control over the marketing mix
● Integration with other marketing components
Importance of Distribution Choice
● Consumers benefit from easy access and the ability to see products before purchase.
● Manufacturers need geographical coverage and a suitable product image.
● Retailers add mark-ups, making fewer intermediaries advantageous for pricing.
Digital vs. Physical Distribution
Digital distribution, such as streaming and downloading, bypasses traditional formats, allowing for global
reach and reduced costs.
Integrated Marketing Mix
A coherent marketing mix is essential for consumer trust. Inconsistencies can confuse consumers and
hurt sales. Effective marketing decisions should align with objectives, budget constraints, and target
audience, ensuring all elements work together seamlessly.

Unit 4 Operations Management

Chapter 23: The Nature Of Operations
23.1 The Production (Transformational) Process

Intellectual capital: the tangible capital of a business that includes human capital (well-
trained & skilled employees), structural capital (databases & information systems) and
relation capital (good links with suppliers and customers).
Transformational process: an activity/group of activities that transforms one/more inputs,
 46
adds value to them, and produces outputs for customers.

Operations Management involves utilising resources, known as inputs (factors of production), such as
land, labour, and capital, to create outputs in the form of goods and services.
Factors of Production
Land: The physical space required for business operations, which can range from small home offices to
large industrial sites.
Labour: The human effort involved in production, encompassing both manual and intellectual skills. The
quality of labour significantly affects operational success, and training can enhance effectiveness,
although it may lead to workforce turnover.
Capital: Tools, machinery, computers, and equipment used in production. In knowledge-based
economies, intellectual capital is increasingly vital. Advanced capital enhances productivity and
competitive success.
Enterprise: The entrepreneurial skills, decision-making abilities, and risk-taking qualities essential for
starting and managing a business.
The Transformational Process
The transformational process converts inputs into finished goods and services, aiming to achieve added
value by selling products for more than the cost of inputs. This process applies to both manufacturing
and service industries.
Contribution of Operations to Added Value
● Operations managers enhance added value through:
● Efficiency: Keeping production costs low for a competitive edge.
● Quality: Ensuring goods and services meet intended purposes.
● Flexibility and Innovation: Adapting to new processes and products to stay competitive.
Factors Influencing Added Value
● Product Design: Facilitating cost-effective production while ensuring high-quality features that
support a premium price.
● Operational Efficiency: Reducing waste and increasing productivity to lower costs per unit,
enhancing added value.
● Branding: Effective branding can lead consumers to pay more than input costs, exemplified by
luxury ice creams.
Operations add value by:
● Reducing production costs through improved efficiency.
● Producing quality goods that meet customer expectations.
● Ensuring flexibility in production to adapt to changing consumer preferences.

23.2 Efficiency, Effectiveness, Productivity, and Sustainability

Productivity: the ratio of outputs to inputs during production (ex. output per worker per
time interval).
Level of production: it is an absolute measure of the quantity of output that a firm
produces in a given time frame.
Production: the process that transforms inputs into outputs.
Efficiency: producing output at the highest ratio of output to input.
Effectiveness: meeting the objectives of the business by using inputs productively to meet
customers’ needs.
Sustainability of operations: business operations that can be maintained in the long term,
for example, protecting the environment and not damaging the quality of life for future
generations.
 47
Operations management focuses on converting inputs into outputs while minimising undesirable
impacts, such as pollution, and ensuring the best use of resources for future generations.
Importance of Productivity
● Productivity is distinct from production levels; it measures how efficiently inputs are transformed
into outputs.
● Higher productivity reduces the average cost per unit, enhancing competitiveness and enabling
potential price reductions for customers.
Measuring Labour Productivity
Labour productivity can be measured as follows:
Labour Productivity=Total Output in a Given Time Period/Total Workers Employed
Example: If Company A produces 1,000 cupboards with 20 workers, its productivity is 50 units per
worker.
Raising Productivity
Productivity can be increased through:
1. Employee Training: Enhancing skills leads to higher productivity, though training is costly and
time-consuming.
2. Worker Motivation: Financial and non-financial incentives can boost efficiency without increasing
costs.
3. Technological Investment: Advanced machinery can increase output, but requires initial
investment and may necessitate retraining.
4. Effective Management: Improved management practices can enhance productivity by ensuring
optimal resource use.
Challenges of Increasing Productivity
● Increased productivity does not guarantee profitability if products are unpopular.
● Higher productivity may lead to demands for higher wages, negating cost savings.
● Workers may resist productivity measures if they threaten job security.
● Management quality significantly affects productivity improvement acceptance.
Efficiency vs. Effectiveness
● Efficiency relates to productivity, while effectiveness means meeting customer needs profitably.
Example: A business may achieve high productivity in producing an old bicycle model while facing
declining sales, indicating ineffective operations.
Importance of Sustainability in Operations
Sustainability is a crucial business issue. Companies are focusing on:
● Reducing energy use and carbon emissions.
● Minimising plastic and non-biodegradable materials.
● Using recycled materials.
● Manufacturing recyclable products.
Focusing on sustainability is essential for addressing environmental concerns and ensuring long-term
operational viability.

23.3 Labour-Intensive and Capital-Intensive Operations

Labour intensive: involving a high level of labour input compared with capital equipment.
Capital intensive: involving a high quantity of capital equipment compared with labour
input.

Operations managers must choose between two main approaches for using factors of production:
labour-intensive and capital-intensive operations.

Labour-Intensive Production
 48
Labour-intensive production is common in small businesses that create specialised or
customised products.
Advantages:
● Engaging and varied work for employees
● Lower machine costs
● Ability to create one-off designs that meet specific customer needs (e.g., exclusive furniture)
Limitations:
● Lower output levels
● Requires skilled, often high-paid workers
● Product quality is heavily dependent on the individual worker’s skill and experience
Capital-Intensive Production
In contrast, capital-intensive production is prevalent in industries that mass-produce goods, such as
electricity generation or aluminium smelting, which require large, expensive plants.
Advantages:
● Economies of scale
● Consistent product quality
● Lower unit production costs
● Capability to supply mass markets
Limitations:
● High fixed costs
● Significant financing and maintenance costs for equipment
● Need for skilled workers for repairs
● Rapid technological advancements can render equipment obsolete quickly
Despite these limitations, the trend toward capital-intensive production continues, as long as consumers
value traditional, craft-made goods, allowing labour-intensive methods to remain viable in certain
markets.
Key Factors in Choosing an Approach
The decision between labour-intensive and capital-intensive production depends on:
● The nature of the product and its brand image
● The relative costs of labour and capital
● Business size and access to financing

23.4 Operations (Production) Methods

Job production: the production of a one-off (a happening that occurs only once & is not
repeated) item specially designed for the customer.
Batch production: the production of a limited number of identical products in groups– each
item in the batch passes through 1 stage of production before passing on to the next stage.
Flow production: the production of items in a continually moving process.
Mass customisation: the use of flexible computer-aided technology on production line to
make products that meet individual customers’ requirements for customised products.

Operations methods are typically classified into four categories:

1. Job Production
2. Batch Production
3. Flow Production
4. Mass Customisation
Job Production
Job production focuses on creating unique, one-off products, such as custom wedding rings or tailored
suits. Each product is completed before starting the next, allowing for specialised craftsmanship and high
 49
worker motivation. However, this method is often time-consuming and expensive, requiring a highly
skilled workforce. For example, Aston Martin cars are produced individually with hand-built engines.
Batch Production
Batch production involves making identical products in groups, where each batch goes through the entire
production process together. An example is a bakery producing rolls, where the dough is mixed, shaped,
and baked in batches. This method allows for some economies of scale and flexibility in product design.
However, it can result in high levels of work-in-progress inventory and may be boring for workers. Small
batches can lead to higher unit costs, and machinery may need adjustments after each batch.
Flow Production
In flow production, individual products move continuously through production stages without waiting for
others. This method is efficient for high-demand, standardised products, often referred to as mass
production. For instance, Coca-Cola plants use flow production to produce soft drinks efficiently. Flow
production reduces labour costs and maintains consistent quality, but it requires high initial setup costs
and can be repetitive and demotivating for workers.
Mass Customisation
Mass customisation combines flexible technology and skilled workers to produce varied products at high
volumes. It allows businesses to meet specific customer needs while maintaining cost advantages.
Companies like Dell and BMW exemplify this method, offering customizable products without sacrificing
efficiency. Mass customisation requires advanced equipment, skilled workers, and a supply chain
capable of providing variations.
Choosing Between Operations Methods
The selection of a production method depends on:
● Market Size: Job production suits small markets; flow production works best for large, consistent
demand. Batch production is effective for seasonal demand.
● Available Capital: Flow production requires significant investment, making it less viable for small
firms.
● Resource Availability: Flow production needs unskilled workers and large spaces, while job
production demands skilled labour.
● Customer Demand: Mass customisation is ideal for businesses wanting to offer a variety of
products.
Summary of Operations Methods
Method Requirements Advantages Disadvantages

Job Production Single, one-off items; Specialist projects High unit costs;
highly skilled with high added value; time-consuming; diverse
workforce high worker motivation tools needed

Batch Groups of identical Some economies of High work-in-progress

Production products; flexible scale; faster inventory; potentially higher
labour and machines production than job unit costs than flow
production production

Flow Mass production of Low unit costs; high Expensive setup; inflexible;
Production standardised productivity; repetitive tasks
products; expensive consistent quality
equipment

Mass Flexible production Low unit costs with Costly product redesign;
Customisation with standardised product variety; meets expensive flexible
and custom individual equipment
components requirements
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Challenges of Changing Operations Methods
Businesses may need to shift their production methods due to increased demand or rising labour costs.
Changing from job to batch production can lead to high equipment costs and potential worker
demotivation. Transitioning to flow production requires significant capital investment, flexible worker
training, and accurate demand forecasting.
Evaluation of Operations Methods
The lines between these production methods are blurring due to technology's flexibility, allowing larger
businesses to adapt products for diverse consumer needs. However, there will always be a demand for
unique, specialised products from small firms that cater to niche markets.

Chapter 24- Inventory Management

Inventory: materials and goods held by a business and required to allow for the production
of products and their supply to customers.

23.1 Managing Inventory

Inventory management: the process of ordering, storing and using a company’s inventory.
Economic order quantity: the optimum/least-cost quantity of stock to re-order taking into
account delivery costs and stock-holding costs.
Buffer inventory(ies): minimum inventory level that should be held to ensure that
continuous production is possible should delivery delays occur/output increase.
Re-order quantity: number of units ordered each time. This will be influenced by the
economic order quantity.
Lead time: the time between ordering new supplies and their delivery.
Re-order level: the level of inventory that triggers a new order to be sent to suppliers.
Supply chain: the network of all the businesses and activities involved in creating a product
for sale, starting with the delivery of raw materials and finishing with the delivery of the
finished product.
Supply chain management: handling the entire production flow of a product (from raw
materials to finished product) to minimise costs but improve customer service.

Effective inventory management balances holding costs against the risk of running out of essential
supplies, improving operational efficiency.
Reasons for Holding Inventory
Businesses maintain inventory in various forms:
● Raw Materials and Components: Purchased from suppliers and stored until used in production,
allowing quick responses to demand increases.
● Work in Progress (WIP): Inventory during the production process, significant for industries like
construction where production takes longer.
● Finished Goods: Completed products held until sold, enabling businesses to meet sudden demand
increases and enhance sales opportunities.
Importance of Effective Inventory Management
Ineffective inventory management can lead to:
● Insufficient stock to meet demand fluctuations.
● Obsolete inventory due to poor rotation (e.g., perishable goods).
● Wastage from mishandling or inadequate storage.
● High storage costs and opportunity costs.
● Issues with supply purchasing, leading to late or excessive deliveries.
Costs of Holding Inventory
1. Opportunity Cost: Capital tied up in inventory could be used elsewhere (e.g., paying loans, buying
equipment).
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2. Storage Costs: Expenses related to secure storage, special conditions (e.g., refrigeration), employee
wages, and insurance.
3. Wastage and Obsolescence: Goods may spoil or become outdated, reducing their value.
Benefits of Holding Inventory
1. Reduced Risk of Lost Sales: High inventory levels allow businesses to meet customer demand
promptly.
2. Continuous Production: Prevents production halts due to shortages of raw materials.
3. Avoid Special Orders: Reduces extra costs associated with urgent orders.
4. Bulk Order Cost Savings: Larger orders can lead to discounts and lower transport costs.
The optimum inventory level is where total inventory costs are minimised.
Optimum Order Size
Determining the right inventory level involves balancing costs and needs. While ordering large quantities can
reduce administrative costs and ensure continuous production, it also increases inventory-holding costs and
risks of obsolescence.
The Economic Order Quantity (EOQ) can be calculated, providing a specific optimal order size, though it
varies by business and product.
Inventory Control Charts
These charts help monitor inventory levels, deliveries, and maximum inventory, aiding in decision-making
regarding order timing and quantities. Key features include:
● Buffer Inventories: Higher buffer levels are needed for uncertain delivery times or high costs of
production downtime.
● Maximum Inventory Level: Limited by space or financial capacity.
● Re-order Quantity: Influenced by EOQ.
● Lead Time: Longer lead times require higher re-order levels.
● Re-order Level: Based on supplier delivery times and inventory usage rates.
Importance of Supply Chain Management
Effective supply chain management minimises costs and enhances customer service. Key practices include:
● Strong Supplier Communication: Ensures timely receipt of quality goods.
● Improved Transport Systems: Reduces delivery times.
● Faster Product Development: Enhances competitiveness.
● Technology Utilisation: Speeds up production processes.
● Waste Minimization: Cuts costs across production stages.
Benefits of Effective Supply Chain Management
1. Improved Customer Service: Faster delivery and quality products increase customer satisfaction.
2. Reduced Operating Costs: Lowers purchasing and inventory costs, enhancing overall efficiency.
3. Increased Profitability: Streamlined processes and effective management boost profits.
Inventory and supply chain management is vital for maintaining a competitive edge in today’s market.

24.2 Just-in-Time (JIT) Inventory Management

Just-in-time (JIT) inventory management: aims to avoid holding inventories by requiring

supplies to arrive just as they are needed in production and completed products are
produced to order.
Just-in-case (JIC) inventory management: aims to reduce the risk of running out of
inventory to the minimum by holding high buffer inventory levels.

Just-in-Time (JIT) inventory management focuses on eliminating buffer inventories, with components
arriving precisely when needed in the production process, and finished goods delivered to customers
immediately after completion.
Comparison: JIT vs. Just-in-Case (JIC) Inventory Management
● JIC: Holds excess inventory to prepare for supply delays or demand spikes.
 52
● JIT: Aims for minimal inventory, which has become more prevalent due to the push for cost
reduction and efficiency. However, disruptions (like those caused by COVID-19) can lead to
significant supply chain issues.

Advantages and Disadvantages of JIT

Advantages Disadvantages

- Reduces capital tied up in inventory, lowering - Any supply delays can lead to costly
opportunity costs. production stoppages.

- Decreases storage costs, freeing up space for - Increased delivery costs due to frequent
productive use. small shipments.

- Minimises risks of goods becoming outdated - Higher order administration costs due to
or damaged. numerous small orders.

- Enhances flexibility and quicker responses to - Reduced bulk discount opportunities

consumer demand changes. from suppliers.

- Potentially boosts employee motivation - Business reputation relies heavily on

through multi-skilled roles. supplier reliability.

Advantages and Disadvantages of JIC

Advantages Disadvantages

- Very low risk of running out of inventory, - High capital costs associated with holding
allowing steady production. large inventories.

- Less reliance on precise sales forecasts. - Increased storage and insurance costs.

- Potential economies of scale from bulk - Risk of inventory depreciation due to

purchasing. changes in fashion or technology.

Conditions for Successful JIT Implementation

1. Excellent Supplier Relationships: Reliable suppliers are essential for quick deliveries.
2. Multi-skilled Employees: Workers must be adaptable to switch tasks based on demand
fluctuations.
3. Flexible Equipment: Modern machinery can quickly adjust to produce various products without
excessive downtime.
4. Accurate Demand Forecasting: Reliable sales forecasts enable effective production scheduling.
5. Advanced IT Systems: Automated tracking and ordering systems are vital for managing low
inventory levels.
6. Strong Employee Relations: Good relationships can prevent disruptions caused by labour
disputes.
7. Quality Focus: High product quality is critical as there are no buffer stocks to absorb defects.
JIT Evaluation
JIT promotes a culture of efficiency, accountability, and minimal waste. However, it is not suitable for all
businesses or situations:
● Businesses may incur higher costs from halted production due to supply delays.
● Small companies might struggle with the investment required for IT systems.
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● Economic factors, such as inflation or rising transportation costs, may favour holding larger
inventories.
● Service-oriented businesses might need buffer stocks to maintain customer satisfaction.
Overall, JIT is a significant component of lean production and has transformed inventory management
practices in many industries.

Chapter 25: Capacity Utilisation And Outsourcing

25.1 Measurement and Significance of Capacity Utilisation

Capacity utilisation: the proportion (%) of maximum output capacity currently being
achieved.
Maximum (full) capacity: the highest level of sustained output that can be achieved.
Outsourcing: using another business (a third party) to undertake a part of the production
process rather than doing it within the business using the firm’s own employees.
Excess capacity: this exists when the current levels of output are less than the full-capacity
output of a business; also known as spare capacity.
Rationalisation: reducing capacity by closing factories/production units.
Capacity shortage: when demand for a business’s products exceeds production capacity.

Maximum Capacity: The total output a business can achieve sustainably over a specific period.
Capacity Utilisation: The proportion of maximum capacity currently being used, calculated as:
Rate of Capacity Utilisation=(Current Output Level/Max. Output Level)×100
Significance: Capacity utilisation is key to assessing a business's operational efficiency. For instance, a
hotel’s maximum capacity is determined by available room nights, while a factory’s capacity is based on
its resources (land, machinery, labour).
Impact on Average Fixed Costs
Higher capacity utilisation spreads fixed costs (e.g., rent, machinery depreciation) over more units,
reducing average fixed costs. Conversely, low utilisation leads to higher average fixed costs due to fewer
units absorbing those costs (see Table 25.1).
Scenario Fixed Costs per Average Fixed Costs per
Day Unit

100% Capacity $2,500 $25

50% Capacity $2,500 $50

Implications of Full Capacity
While 100% capacity utilisation suggests efficiency and job security for employees, it also presents
challenges:
● Employee Pressure: Increased workloads can raise stress levels.
● Customer Impact: Businesses may need to turn away orders, risking customer loss.
● Equipment Strain: Continuous operation can hinder necessary maintenance.
Most businesses strive for high utilisation while maintaining some spare capacity for unexpected events.
Operating Beyond Capacity
Operating above maximum capacity temporarily is feasible but unsustainable. It risks equipment
breakdown and employee burnout.
Operating Below Capacity
Low capacity utilisation indicates excess capacity, resulting in high fixed costs. Businesses can pursue
short-term or long-term strategies to improve utilisation:
Short-term Solutions for Excess Capacity
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● Maintain High Output: Risks increased inventory costs.
● Flexible Production: Allows for the production of varied products but requires adaptable
resources.
● Flexible Employment Contracts: Reduces costs but may impact morale.
Long-term Solutions for Excess Capacity
● Rationalisation: Closing facilities reduces costs but may lead to job loss and public criticism.
● Research & Development: New products can boost competitiveness but may require significant
investment and time.
Managing Capacity Shortages
When demand exceeds capacity, businesses face a capacity shortage. Options include:
● Scale Up: Acquiring more resources to increase output.
● Outsourcing: Subcontracting to manage demand without expanding facilities.
● Maintain Current Capacity: Risking missed opportunities if demand continues to rise.
Decisions regarding capacity management are crucial, as they can significantly affect future profitability
and market share.
Summary of Options
Options Advantages Disadvantages

Subcontractin - Quick, no major investment - Less control over quality, potential

g required. higher costs.

Investing in - Long-term capacity increase, - High capital costs, time-consuming,

Expansion control over quality. risk if demand falls.
Effective capacity management is essential for operational efficiency and long-term success.

25.2 Outsourcing

Business Process Outsourcing (BPO): a form of outsourcing that uses specialist contractors to take
responsibility for certain business functions, such as human resources and finance.

Reasons for Outsourcing:

1. Reduction of Operating Costs: Outsourcing specialist services can be cheaper than
maintaining in-house experts. Outsourcing firms may benefit from economies of scale, and
offshoring to low-wage economies can further reduce costs.
2. Increased Flexibility: Outsourcing allows businesses to convert fixed costs into variable costs.
Capacity can be increased or decreased quickly by adjusting contracts.
3. Improved Focus: By outsourcing non-core activities, management can focus on the core
business functions. For example, a small hotel can outsource accounting to focus on customer
service.
4. Access to Quality Services: Outsourcing gives access to skilled specialists that smaller firms
may not afford to employ directly.
5. Freeing Up Internal Resources: Outsourcing certain functions can free up resources, such as
space and equipment, for more critical tasks.
Drawbacks of Outsourcing:
1. Job Losses: Outsourcing may lead to redundancies, affecting employee morale and public
image. It can also raise ethical concerns, especially if outsourcing is done to low-wage
economies.
2. Quality Control Issues: Ensuring quality in outsourced services can be challenging. Clear
contracts with service level agreements (SLAs) are essential.
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3. Customer Resistance: Outsourcing to overseas centres can result in customer dissatisfaction,
especially if communication is difficult or product quality is questioned.
4. Security Risks: Outsourcing IT functions can lead to data security risks, with unclear
responsibility in case of data loss.
5. Corporate Social Responsibility (CSR): Outsourcing may reduce the business’s ability to
uphold its CSR policies, particularly in low-wage economies.
Evaluation: Outsourcing helps improve operational efficiency, but risks exist. Businesses must conduct
thorough cost-benefit analyses before outsourcing major functions, and core activities should remain
under the company’s control.

Unit 5 Finance and Accounting

Chapter 29- Business Finance
29.1 The Need for Business Finance

Start-up capital: the capital needed by an entrepreneur to set up a business.

Working capital: the capital needed to pay for raw materials, day-to-day running costs and
credit offered to customers. Working capital= current assets – current liabilities
Expenditure: the action of spending funds.
Short-term finance: money required for short amounts of time of up to 1 year.
Long-term finance: money required for more than one year.
Profit: the value of goods sold (revenue) minus costs/expenses.
Liquidity: the ability of a business to pay its short-term debts.
Administration: when administrations manage a business that is unable to pay its debts
with the intention of selling it as a going concern.
Bankruptcy: the legal procedure for liquidating a business (or property owned by a sole
trader) which cannot fully pay its debts out of its current assets.
Liquidation: when a business ceases trading and its assets are sold for cash to pay suppliers
and other creditors.
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Importance of Business Finance: All business activities require finance, and inadequate finance can
lead to failure. Choosing the right sources of finance is crucial for managers.
Reasons for Needing Finance:
1. Start-up Capital: Cash injections are necessary for purchasing essential capital equipment and
premises when starting a business.
2. Working Capital: Day-to-day operations require funds to pay bills, expenses, and build inventory.
Working capital is defined as current assets minus current liabilities.
3. Growth: Expansion, whether through new product development or acquiring other businesses,
requires additional financing.
4. Survival Situations: Economic downturns or loss of significant customers may necessitate
additional finance to cover expenses and debts.
Short-Term vs. Long-Term Finance:
● Some situations require long-term finance (e.g., purchasing buildings or equipment), while others
need short-term funding (e.g., seasonal demand in retail).
● Short-term loans are beneficial for businesses with fluctuating demands, while long-term
financing is needed for sustained investments.
Difference Between Cash and Profit: Understanding the distinction between cash and profit is critical
for business success. Many profitable businesses can experience cash shortages, while loss-making
businesses may still generate cash inflows.
● Example 1: Jhumpa buys fish, sells them for a profit, and has equal cash inflow and profit.
● Example 2: Shula buys goods on credit, sells them for less than their cost, resulting in a cash
inflow but a loss.
● Example 3: Sanjit sells rings on credit, generating profit but experiencing a negative cash flow
until payments are received.
Administration, Bankruptcy, and Liquidation
A lack of finance is the most common cause of business failure. If a business fails, it may enter
administration, where accountants try to keep it operational and find a buyer. If unsuccessful, bankruptcy
occurs, leading to liquidation to raise funds to pay creditors.

29.2 Working Capital

Current Assets: Assets that either are cash or likely to be turned into cash within 12 months (inventory
and trade receivables or debtors).
Current Liabilities: Debts that usually have to be paid within 1 year.
Capital Expenditure: The purchase of non-current assets that are expected to last for more than one
year, such as buildings and machinery.
Revenue Expenditure: Spending on all costs and assets other than non-current assets, which includes
wages, salaries and inventory of materials.

Definition and Importance of Working Capital:

● Working Capital refers to the finance required for a business to cover its day-to-day expenses,
such as paying wages and purchasing inventory.
● Insufficient working capital can lead to illiquidity, making it difficult for a business to meet its
immediate short-term debts, potentially resulting in liquidation or administration.
Advantages and Disadvantages:
● High Working Capital: While a high level of working capital can ensure smooth operations, it also
has opportunity costs. Excess capital tied up in inventory or accounts receivable could be
invested elsewhere for better returns.
● Working Capital Cycle: The amount of working capital needed depends on the length of the
working capital cycle—the time between purchasing materials and receiving payment from
customers.
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Calculation:
● Working Capital = Current Assets - Current Liabilities
Sources of Working Capital:
● Businesses often rely on current liabilities, such as overdrafts and trade payables, to finance
current assets. However, relying solely on these short-term debts can create liquidity issues if
repayment is needed quickly.
Permanent Increase in Working Capital:
● As businesses grow, they typically require higher inventory levels and increased credit sales. This
necessitates a permanent increase in working capital, usually funded through long-term sources
such as bank loans or share capital.
Managing Working Capital:
1. Managing Inventory:
○ Maintain lower inventory levels.
○ Utilise computer systems for sales tracking and inventory management.
○ Implement efficient inventory control to minimise losses.
○ Adopt just-in-time (JIT) inventory practices to reduce excess stock.
○ Expedite delivery to customers to accelerate payment collection.
2. Managing Trade Payables:
○ Delay payments to suppliers to extend credit periods.
○ Purchase only from suppliers who offer favourable credit terms.
3. Managing Trade Receivables:
○ Focus on cash sales rather than credit sales.
○ Shorten the credit period offered to customers.
Capital Expenditure vs. Revenue Expenditure:
● Capital expenditure (long-term investments) and revenue expenditure (day-to-day operational
costs) are generally financed differently, primarily influenced by the duration each type of
expenditure is required.

29.3 Sources of Finance

Internal sources: Raising finance from the business’s own assets/from profits left in the
business (retained earnings).
External sources: Raising finance from sources outside the business.
Retained Earnings: Profit after tax retained in a company rather than paid out to shareholders as dividends.
Non- Current Assets: Assets kept and used by the business for more than one year.
Overdraft: A credit that a bank agrees can be borrowed by a business up to an agreed limit as and when
required.
Factoring: Selling of claims over trade receivables (debtors) to a specialist organisation (debt factor) in
exchange for immediate liquidity.
Hire Purchase: A company purchases an asset and agrees to pay fixed repayments over an agreed time
period. The asset belongs to the purchasing company once the final purchase has been made.
Leasing: Obtaining the use of an asset and paying a leasing charge over a fixed period, avoiding the need to
raise long-term capital to buy the asset. The asset is loaned by the leasing company.
Long-term Loans: Loans that do not have to be repaid for at least one year.
Debentures: Long-term bonds issued by companies to raise debt finance, often with a fixed rate of interest.
Share (or equity) Capital: Permanent finance raised by companies through the sale of shares.
Business Mortgages: Long-term loans to companies purchasing a property for business premises, with the
property acting as collateral security on the loan.
Venture Capital: Risk capital invested in business start-ups or expanding small businesses that have good
profit potential but do not find it easy to gain finance from other sources.
Collateral security: An asset which a business pledges to a lender and which must be sold
off to pay a debt if the loan is not repaid.
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Rights issue: Existing shareholders are given the right to buy additional shares at a
discounted price.
Microfinance: Providing financial services for poor and low-income customers who do not
have access to banking services, such as loans and overdrafts, offered by traditional
commercial banks.
Crowdfunding: The use of small amounts of capital from a large number of individuals to
finance a new business venture.

Factors Influencing Finance Sources:

● Business ownership significantly affects available financing options.
Finance for Limited Companies
1. Internal Sources:
○ Retained Earnings: Profits reinvested in the business, a key source for expansion.
○ Sale of Unwanted Assets: Selling non-essential assets for cash.
○ Sale and Leaseback: Selling and leasing back non-current assets for immediate capital.
○ Working Capital Management: Reducing inventory or receivables to free up cash.
2. External Sources:
● Short-Term
○ Bank Overdrafts: Flexible borrowing against a bank account, but can incur high interest
and liquidity risks.
○ Trade Credit: Delaying supplier payments acts as short-term financing.
○ Debt Factoring: Selling receivables to receive immediate cash, but at a discounted rate.
● Long-term External Sources:
○ Hire Purchase and Leasing: Acquire assets over time without large upfront payments.
○ Bank Loans: Fixed or variable interest loans for long-term investment.
○ Debentures: Fixed-interest bonds issued to investors.
○ Share Capital: Raising funds through equity, though it can dilute ownership.
○ Business Mortgages: Loans secured against property for purchasing premises.
○ Government Grants: Non-repayable funds, typically for small businesses or specific
projects.
○ Venture Capital: Investment from specialist firms in exchange for equity, especially in
high-risk startups.
Evaluation of Loan (Debt) Capital vs. Share Capital:
Advantages of Loans Advantages of Share Capital

Ownership remains unchanged Permanent capital; no repayment

needed

Repayment scheduled, limiting liabilities Dividends not obligatory

Interest payments reduce taxable profits Reduces indebtedness

Higher potential returns for

shareholders
Finance for Unincorporated Businesses:
● Sole traders and partnerships mainly rely on:
○ Bank overdrafts and loans.
○ Trade credit.
○ Personal investment.
○ Loans from family/friends.
○ Crowdfunding and microfinance options.
Microfinance:
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● Small loans to entrepreneurs in low-income countries, often fostering local economic growth.
Crowdfunding:
● Platforms for entrepreneurs to solicit small investments from many individuals, providing capital
without traditional financing barriers, though it comes with risks of business failure and potential
intellectual property theft.

29.4 Factors Affecting the Source of Finance

Choosing the appropriate finance source is vital for business success. The selection should consider
several factors:
1. Purpose and Time Frame:
○ Match finance type to the duration needed. Long-term finance should not fund short-term
needs.
2. Cost:
○ Finance incurs costs. Loans can be expensive in rising interest environments, and issuing
equity does not provide tax deductions like interest.
3. Amount Required:
○ Large capital sums often require share or debenture issues; small amounts can be
covered by bank overdrafts or retained profits.
4. Ownership Structure and Control:
○ Limited companies can issue shares; however, doing so may dilute existing owners’
control.
5. Existing Borrowing Level:
○ High debt levels raise borrowing risks; lenders may be hesitant to extend additional credit.
6. Flexibility:
○ Firms with fluctuating finance needs should prefer flexible financing options rather than
rigid, long-term commitments.

29.5 Selecting the Appropriate Source of Finance

Carefully matching each financial need with suitable sources is crucial. Factors influencing the
appropriateness of finance sources are summarised in 29.4.

Chapter 30- Forecasting and Managing Cash Flows

30.1 Cash Flow Forecasts: Meaning and Purpose

Cash flow: the sum of cash payments to a business less the sum of cash payments from the
business.
Insolvent: when a business cannot meet its short-term debts.
Cash flow forecast: an estimate of the future cash inflows & outflows of a business (usually
on a month-by-month basis).
Cash inflow: cash payments into a business.
Cash outflow: cash payments out of a business.
Net cash flow: estimated difference between cash inflows and cash outflows for the period
(for example one month).
Opening cash balance: cash held by the business at the start of the month.
Closing cash balance: cash held by the business at the end of the month, which becomes
next month's opening balance.
Credit control: monitoring of debts to ensure that credit periods are not exceeded.
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Bad debt: unpaid customers’ bills that are now very unlikely to ever be paid.
Overtrading: expanding a business rapidly without obtaining all of the necessary finance,
resulting in a cash flow shortage.

Sufficient cash flow is critical for any business to pay suppliers, banks, and employees. A company can
have high revenue but may still face bankruptcy without effective cash management. Cash flow
forecasting is especially vital for new businesses for several reasons:
● New startups often receive shorter credit terms from suppliers compared to established firms.
● Lenders typically require cash flow forecasts to provide financing.
● Startups face tighter finances, making accurate planning crucial.
Forecasting Cash Flow
Forecasting involves estimating future cash inflows and outflows on a month-by-month basis. For
example, Mohammed, an entrepreneur starting a car valeting service, uses cash flow forecasts to predict
his business's financial health.
Cash Flow Forecast Components
● Cash Inflows:
○ Owner’s capital injection
○ Bank loan payments
○ Customer cash purchases (hard to predict)
○ Payments from trade receivables (also hard to predict)
● Cash Outflows:
○ Lease and rent payments (easy to predict)
○ Utility bills (variable)
○ Wage payments (based on demand)
○ Supplier payments (related to output/sales)
Structure of a Cash Flow Forecast
Typically constructed monthly for up to 12 months, a cash flow forecast consists of:
1. Cash Inflows: Records cash payments into the business.
2. Cash Outflows: Records cash payments made by the business.
3. Net Cash Flow and Balances: Displays net cash flow for the period and cash balances at the
beginning and end.
Benefits of Cash Flow Forecasting
● Identifies potential negative cash flows, allowing proactive financing solutions.
● Highlights periods of excessive negative net cash flow, enabling planning for improvements.
● Essential for securing funding from investors and banks.
Limitations of Cash Flow Forecasting
● Forecasts can be inaccurate due to mistakes or lack of experience.
● Unexpected cost increases can distort predictions.
● Incorrect sales estimates lead to inaccurate inflow forecasts.
Causes of Cash Flow Problems
1. Lack of Planning: Inadequate cash flow management can lead to problems.
2. Poor Credit Control: Failing to monitor customer payments can increase bad debts.
3. Extended Payment Terms: Offering long credit terms to customers reduces short-term inflows.
4. Rapid Expansion: Expanding too quickly can strain cash reserves.
5. Unexpected Events: Unforeseen expenses can negatively impact cash flow.
Methods of Improving Cash Flow
To enhance cash flow, businesses can either increase inflows or reduce outflows.
Increasing Cash Inflows
● Overdrafts: Flexible bank credit but may incur high interest.
● Short-term Loans: Fixed borrowing amount for a set period.
● Asset Sales: Quick cash from selling redundant assets.
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● Sale and Leaseback: Selling assets while retaining use through leasing.
● Manage Trade Receivables: Ensure timely payments from customers.
Reducing Cash Outflows
● Delay Capital Expenditures: Postpone large purchases to conserve cash.
● Leasing Equipment: Avoid large initial payments.
● Cut Overhead Costs: Reduce non-essential expenses without affecting production.
● Manage Trade Payables: Extend payment periods to suppliers, improving cash flow but risking
supplier relationships.
Overall, effective cash flow forecasting and management are essential for business sustainability and
growth.

Chapter 31- Costs

31.1 The Need for Accurate Cost Information

Break-even point: the level of output in which total costs equal total revenue, when neither a profit nor
loss is made.
Cost Centre: the section of a business, such as a department or a product, that incurs the costs.
Direct Costs: these costs can be clearly identified with each unit of production and can be allocated to a
cost centre.
Indirect Costs: these costs CANNOT be clearly identified with each unit of production and or allocated
accurately to a cost centre.
Fixed Costs: Costs that do not vary with output in the short run.
Variable Costs: Costs that vary with output.
Total Cost: Variable cost plus fixed cost.

Accurate cost information is essential for effective business decisions, influencing various aspects of
operations:
● Profit Calculation: Costs are crucial for determining profits or losses. Without accurate cost
records, businesses cannot make informed decisions, such as optimal locations.
● Pricing Decisions: Marketing managers rely on cost data to set prices for new and existing
products.
● Performance Measurement: Cost information enables comparisons with past performance,
assessing departmental efficiency and product profitability.
● Budget Setting: Costs inform budget creation and planning, providing targets for departments
and allowing actual performance comparisons.
● Resource Utilisation: Cost data aids decisions on resource allocation, such as opting for
labour-intensive production methods in low-wage areas.
● Decision-Making: Comparing costs of various options helps managers choose the most
profitable alternatives, like production machinery or locations.
Types of Costs
Understanding cost classifications is vital for effective decision-making, as they can be categorised as
follows:
Direct Costs
● Definition: Easily identifiable costs associated with a specific cost centre.
● Examples:
○ Fast-food business: Cost of meat for hamburgers.
○ Garage: Mechanic's labour cost for repairs.
○ School: Salary of the Business teacher.
● Common Types: Labour and materials in manufacturing; cost of goods sold in retail.
Indirect Costs
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● Definition: Often referred to as overheads; these costs cannot be easily allocated to specific cost
centres.
● Examples:
○ Farm: Tractor purchase.
○ Supermarket: Promotional expenditures.
○ Garage: Rent.
○ School: Cleaning costs.
Fixed and Variable Costs
Cost behaviour relative to output is critical for management:
● Fixed Costs: Do not change with output levels (e.g., factory or shop rent).
● Variable Costs: Vary with output (e.g., materials for washing machines).
● Semi-Variable Costs: Contain both fixed and variable components (e.g., fixed electricity charge
plus usage).
Understanding the fixed and variable costs helps in calculating total costs over time.
Problems in Classifying Costs
Classifying costs is not always straightforward, and challenges may arise:
1. Labour Costs: While often variable and direct, if labour remains unoccupied, wages can become
fixed costs and overheads, not directly linked to specific outputs. For instance, salaries for
administrative or non-production roles are typically indirect and fixed in the short term.
2. Electricity Costs: Although direct allocation to products may be possible with detailed records,
this may not be practical. Thus, electricity costs are typically classified as indirect overhead
expenses.
Conclusion
Accurate cost information is essential for effective decision-making in businesses, impacting profit
calculations, pricing, budgeting, and overall efficiency. Understanding cost classifications—direct,
indirect, fixed, variable, and semi-variable—is crucial for proper management and resource allocation.
However, complexities in classifying costs can pose challenges, requiring careful consideration to ensure
informed business strategies.

31.2 Approaches to Costing

Profit Centre: a section of a business to which both costs and revenues can be allocated, so profit can be
calculated.
Average Cost: total cost divided by the number of units produced.
Full Costing: a method of costing in which all indirect and direct costs are allocated to the products,
services or divisions of a business.
Contribution Costing: costing method that allocates only direct costs to cost centres and profit centres
and not overhead costs.
Marginal Cost: the additional cost of producing one more unit of output.

Calculating the cost of products, departments, processes, or locations can be complex. Managers
typically utilise two primary costing methods: full costing and contribution costing.
Costing Methods: Key Challenges
In determining product costs, direct labour and materials are straightforward to identify. For example, the
materials used to make a coat can be directly allocated. However, overheads (indirect costs) pose
challenges as they cannot be directly assigned to specific products and must be shared among all items
produced. This leads to variability in how costs are calculated, creating difficulties in pricing, production
continuity, and order acceptance.
Important Concepts
Before exploring costing methods, it's essential to understand four key concepts:
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● Cost Centres: Areas or departments within a business where costs are incurred. Examples
include:
○ Manufacturing: Products, departments, factories.
○ Hospitality: Restaurant, reception, bar.
○ Education: Subject departments in a school.
● Profit Centres: Divisions within a business responsible for generating profits. Examples include:
○ Each branch of a retail chain.
○ Departments in a department store.
○ Individual products in a multi-product firm.
● Overheads: Indirect expenses categorised into:
○ Production overheads (e.g., factory rent, depreciation).
○ Selling and distribution overheads (e.g., warehousing, sales salaries).
○ Administration overheads (e.g., office rent, clerical salaries).
○ Finance overheads (e.g., loan interest).
● Average Cost: The total cost of producing a product divided by the number of units produced,
calculated as:
Average Cost=Total Cost of producing this product/Number of Units Produced
Full Costing Technique
Full costing allocates all costs to each product. When only one product is produced, this method is
straightforward:
1. Identify total direct costs.
2. Calculate total overheads for a time period.
3. Add direct costs to overheads.
4. Calculate the average cost per unit.
Example: A pump manufacturer produces 5,000 pumps at:
● Total direct costs: $100,000
● Total overhead costs: $50,000
● Full cost = $150,000; Average full cost per pump = $30.
Problem with Multiple Products
When a business produces multiple products, allocating indirect costs becomes challenging. A simple
method of dividing overheads equally can lead to inaccurate product costs.
Example:
● Product A: Direct costs = $45,000; Allocated overheads = $10,000; Total cost = $55,000; Annual
output = 10,000; Average full cost = $5.50.
● Product B: Direct costs = $5,000; Allocated overheads = $10,000; Total cost = $15,000; Annual
output = 500; Average full cost = $30.
This approach can misrepresent the true costs and lead to poor pricing decisions.
Alternative Allocation Method: Allocating overheads based on the proportion of direct costs.
Example:
● Total overheads = $20,000; Product A (90% of direct costs) = $18,000; Product B (10% of direct
costs) = $2,000.
● New costs: Product A = $63,000; Product B = $7,000; Average full costs = $6.30 and $14,
respectively.
Limitations of Full Costing
● Overhead allocation methods may not reflect actual costs incurred.
● Inconsistent methods can lead to misalignment across departments.
● Decision-making based on inaccurate cost figures can be risky.
● The method must remain consistent over time for valid comparisons.
● Actual output must align with calculated levels for accurate costs.
Contribution or Marginal Costing
Contribution costing addresses overhead allocation by focusing on:
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● Marginal Cost: The cost of producing an additional unit (e.g., if producing 100 units costs
$400,000 and 101 units costs $400,050, the marginal cost is $50).
● Contribution: Revenue from selling a product minus its marginal costs. It reflects how much each
unit contributes to covering overheads and generating profit.
Example Contribution Costing Statement:
Novel Textbook

Revenue 50 100

Direct Materials 15 35

Direct Labour 20 50

Other Direct Costs 10 5

Total Direct Costs 90 90

Contribution 10 5
Total contribution = $15,000; Total indirect costs = $12,000; Profit = Contribution - Overheads = $3,000.
Conclusion
Full costing provides a comprehensive view of total costs for single-product businesses but can be
misleading for multi-product firms. Contribution costing offers a more focused approach, emphasising
direct costs and their contribution to overheads, aiding in more accurate decision-making. Understanding
both methods is crucial for effective financial management and strategic planning in any business.

31.3 Uses of Cost Information

Cost information is vital for businesses for various reasons, including:

● Average Cost: Helps in setting prices (see Section 23.2).
● Total Cost: Essential for calculating profit or loss and for the budgetary process, which monitors
and improves business performance (see Section 31.1).
● Marginal Cost: Useful in decision-making when applying contribution costing (see Section 31.2).
Contribution Costing Applications
1. Decision to Stop Selling a Product:
○ Contribution costing helps managers identify which products contribute most or least to
overheads and profit.
○ A product that appears unprofitable in full costing may still yield a positive contribution.
Stopping production could reduce overall profits because fixed overheads remain, but
contributions decrease.
2. Special Order Decisions:
○ Contribution costing aids in evaluating whether to accept orders at prices below full costs,
especially when there’s spare capacity.
○ For example, hotels might offer low rates during off-peak seasons, maximising
contributions rather than leaving rooms empty.
○ Accepting special orders can boost total profits since fixed overheads are already
covered.
Risks of Offering Lower Prices:
● Existing customers might demand similar low prices, affecting overall profit.
● Lower prices could harm brand exclusivity.
● Without excess capacity, accepting lower-priced orders might reduce sales of full-cost products.
● Customers may resell lower-priced goods in higher-priced markets.
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When to Use Contribution Costing
● Avoids Inaccuracies: It prevents arbitrary allocations of indirect costs and focuses on direct costs
for pricing decisions.
● Decision-Making: It helps evaluate a product's contribution to indirect costs rather than relying on
potentially inaccurate profit calculations.
● Utilising Capacity: Encourages acceptance of special orders that make a positive contribution.
When Not to Use Contribution Costing
● Ignoring Indirect Costs: It doesn't account for products with higher indirect costs; single-product
firms must cover fixed costs.
● Expansion Decisions: All costs, including indirect, should be considered for new products or
expansions.
● Over-Reliance on Contribution: Managers might prioritise maintaining production based on
positive contributions rather than exploring new, potentially more profitable products.
● Qualitative Factors: Non-financial considerations, like product image, may also impact
decision-making.

31.4 Break-even Analysis

Break-even Analysis: uses cost and revenue data to determine the break-even point in production.
Margin of Safety: the amount by which the current output level exceeds the break-even level of output.
Contribution Per Unit: the price of a product - the direct (variable) costs of producing it.

Break-even analysis is crucial for decision-making in business, helping entrepreneurs determine how
many customers are needed to cover costs and ensuring existing businesses are not operating at a loss.
Methods of Break-even Analysis
1. Graphical Method (Break-even Chart):
○ The break-even chart includes:
■ Fixed Costs: Constant regardless of output.
■ Total Costs: The sum of fixed and variable costs, assuming variable costs vary
directly with output.
■ Revenue: Calculated by multiplying the selling price by output level.
○ Break-even Point (BEP): The point where total costs and sales revenue intersect. Below
this point, the business incurs a loss; above it, the business makes a profit.
2. Margin of Safety:
○ Indicates how much sales can decrease before the business incurs a loss.
○ For instance, if the break-even output is 400 units and current production is 600 units, the
margin of safety is 200 units (or 50%).
○ If production is below break-even, the margin of safety can be negative (e.g., a
break-even of 400 units and production of 350 results in a margin of safety of -50).
Break-even Equation
The formula for calculating break-even output is:
Break-even Level of Output=Fixed Costs/Contribution per Unit
● Example: If fixed costs are $200,000 and contribution per unit is $50, then the break-even output
is:
200,000/50=4,000 units
To calculate output for a target profit:
Break-even Level of Output=Fixed Costs+Target Profit/Contribution per Unit
● Example: For a target profit of $25,000:
200,000 + 25,000/50 = 225,000 ​= 4,500 units
Further Uses of Break-even Analysis
● Marketing Decisions: Assessing the impact of a price increase on revenue.
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● Operations Management: Evaluating the effects of purchasing new equipment on costs.
● Location Decisions: Utilising break-even data to choose optimal business locations.
Benefits of Break-even Analysis
● Easy to construct and interpret.
● Provides guidelines on break-even points, safety margins, and profit/loss levels.
● Enables comparisons between different scenarios by creating updated charts.
● The equation yields precise break-even results.
● Assists managers in critical decision-making (e.g., location, equipment purchases).
Limitations of Break-even Analysis
● Assumes linear cost and revenue relationships, which may not reflect reality (e.g., variable costs
may change at different output levels).
● Revenue may be affected by necessary price reductions for higher output levels, possibly leading
to multiple break-even points.
● Classifying costs into fixed and variable can be challenging, especially with semi-variable costs.
● Assumes all produced units are sold, neglecting inventory levels.
● Fixed costs may vary at different output levels, especially beyond maximum capacity.
● For new businesses, break-even data relies on forecasts, which can be inaccurate.

Chapter 32- Budgets

32.1 The Meaning and Purpose of Budgets

Budgeting: planning future activities by establishing performance targets, especially financial ones.
Budget holder: the individual responsible for the initial setting and achievement of a budget. variance
analysis: calculation of the differences between budgets and actual figures, and analysis of the reasons
for such differences.
delegated budgets: budgets for which junior managers have been given some authority for setting and
achieving.
Incremental budgeting: uses last year's budget as a basis, and an adjustment is made for the coming
year.
Zero budgeting: sets budgets to zero each year and budget holders have to argue their case for target
levels and to receive any finance.
Favourable variance: a change from the budget that leads to higher than planned profit.
Flexible budgeting: cost budgets for each expense are allowed to vary if sales or output vary from
budgeted levels.
Adverse Variance: a change from the budget that leads to lower than planned profit.

Budgeting involves planning and managing income and expenditures, essential for both personal and
business financial health. A well-structured budgeting process enables businesses to set financial
targets, allocate resources efficiently, and measure performance.
Importance of Budgeting
● Direction and Purpose:
-Establishes clear goals for the organisation.
-Facilitates effective resource allocation.
● Employee Motivation:
-Employees benefit from having defined targets to strive towards.
● Performance Measurement:
-Budgets enable businesses to compare actual performance against planned targets, helping to
identify strengths and weaknesses.
● Comprehensive Planning:
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-Budgets encompass sales, revenue, and costs, typically projected over a 12-month period with
monthly breakdowns.
Benefits of Using Budgets
● Planning: Encourages careful consideration of future plans to set realistic targets.
● Resource Allocation: Helps prevent overspending by ensuring resource availability.
● Target Setting: Increases motivation by providing clear, realistic targets for budget holders.
● Coordination: Requires collaboration among departments to meet budget goals.
● Control and Monitoring: Facilitates regular checks on performance to ensure adherence to
budgets.
● Performance Assessment: Enables variance analysis post-budget period to evaluate manager
effectiveness.
Potential Drawbacks of Using Budgets
● Lack of Flexibility: Rigid budgets may not adapt to unexpected changes, leading to demotivation.
● Short-term Focus: Budgets often emphasize immediate results, potentially hindering long-term
growth.
● Unnecessary Spending: Budget holders may spend surplus funds at the end of the period to
justify future budgets.
● Training Needs: Managers require training to effectively set and manage budgets.
● Difficulty with New Projects: Budgeting for new initiatives can be challenging and prone to
inaccuracies.
Key Features of Effective Budgeting
● Budget vs. Forecast: A budget is a planned target; a forecast predicts potential future outcomes.
● Measurable Outcomes: Budgets can be set for various organizational parts, provided their
performance can be measured.
● Coordination: Departments must work together to avoid conflicting plans during budget setting.
● Participatory Approach: Involves managers in budget setting to foster ownership and motivation,
leading to more realistic targets (delegated budgets).
● Performance Review: Budgets serve as benchmarks for evaluating manager effectiveness in
achieving targets.
Setting and Using Budgets
● Incremental Budgeting: Adjusts last year's budget for current market conditions, allowing for
easier budget creation without comprehensive justification for the entire budget.
● Zero-Based Budgeting: Requires a full justification of each department's budget annually,
promoting accountability but being time-consuming.
● Flexible Budgeting: Adjusts budget figures based on actual output levels to provide a more
accurate measure of performance and efficiency, accommodating fluctuations in production.
Effective budgeting is critical for businesses to plan, allocate resources, motivate employees, and assess
performance. Despite its drawbacks, a structured budgeting process helps ensure financial stability and
guide strategic decision-making.

32.2 Variance Analysis

A variance is the difference between the budgeted figure and the actual performance. It helps
businesses understand performance deviations and set more realistic future budgets. Variances are
classified as:
Favourable variance: Profit is higher than budgeted.
Adverse (unfavourable) variance: Profit is lower than budgeted.
Importance of Variance Analysis:
● Measures departmental performance against plans.
● Identifies reasons for discrepancies, aiding in future budgeting.
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● Helps businesses make informed decisions, such as adjusting pricing during economic
downturns.
Causes of Variances:
Adverse Variances:
● Lower-than-expected revenue due to reduced sales or price cuts.
● Higher raw material, labour, or overhead costs.
Favourable Variances:
● Higher-than-budgeted revenue due to increased sales or competitor exit.
● Lower costs for materials, labour, or overheads.
Example of Variance Analysis:
A business with a monthly revenue budget of $15,000 achieved $12,000 (a $3,000 adverse variance).
Direct costs were lower than budgeted, resulting in a $1,000 favourable variance. However, overheads
exceeded the budget by $500, resulting in a net adverse variance in profit of $2,500.
Benefits of Regular Variance Analysis:
● Early identification of issues, enabling timely corrective actions.
● Allows managers to focus on major problem areas, following the principle of management by
exception.