-Need Want

To need a product is to not be able to live To want a product is to desire it, but you can live
without it without it.
Scarcity Opportunity cost
A situation caused by a lack of a good or The benefit lost from the next (second) best alternative
service. We have scarcity because our wants given up when making a decision.
are unlimited but the resources to provide for
our wants are limited.
Specialisation definition: Specialisation when applied to labour (division of
Specialisation is when a business, region or labour)
country focuses on producing a limited range When a job is broken down into a series of small tasks
(small number) of goods or services in which and each task is undertaken by one person who does it
they have an advantage. repetitively.

Benefits of specialisation for employees Drawbacks of specialisation for employees

✓ 1. Employees may be paid more if their
skills are in short supply 1. Workers may become bored. Doing repetitive tasks
increases the chances of boredom which will lead to
de-motivation.
✓ 2. The skills they have may mean they can
choose the job they want. 2. Workers may eventually be replaced by machinery.
Benefits of specialisation for businesses Drawbacks of specialisation for businesses
✓ 1. By specialising efficiency increases and ✗ 1. Workers may become bored. Doing repetitive
this can lead to larger profits tasks increases the chances of boredom which will
lead to de-motivation, which may lead to mistakes.
✓ 2. Businesses may develop a positive
reputation for a particular product or ✗ 2. Specialisation in one product puts ‘all your eggs
service. For example, a wedding dress in one basket’. If demand declines for the good then
shop may become well known because of a business may become bankrupt.
its specialist products.

✓ 3. The employees become faster at

producing the goods as they specialise in
one task and therefore they can do it better
(quality may improve)
Benefits of specialisation for the world Drawbacks of specialisation for the world
✓ Scarce resources are used more effectively ✗ Some countries struggle to produce a product or
(products produced more efficiently) service that is required globally.

✓ A country that specialises can trade ✗ Countries can suddenly become beaten on price,
(exchange) with other countries for goods meaning that their entire workforce is no longer in
and services that they don’t or can’t demand – linked to ‘all your eggs in one basket’
produce.
Objectives of a business:
 ● Maximise profit
● Maximise sales revenue
● Create new products
● Create large brands across the world

Value added How businesses add value:

Added value is the amount added to the value By increasing price or decreasing unit costs therefore
of a product by a production process. This is increasing the profit margin. If the following are
calculated by subtracting the unit cost of done well it allows a firm to increase its price.
production from the selling price. 1. Through transforming raw materials into a finished
product
2. Design
3. Quality and efficiency
4. Marketing
5. Convenience
Primary sector Secondary sector
Involved in the extracting and growth of raw Involves manufacturing of products and construction
materials e.g. mining and farming.
Tertiary sector De-industrialisation
Involves the production of services e.g. The decline of manufacturing in a country is called
banking and communication. de-industrialisation.
Why the tertiary sector is more important Why the secondary sector is less important in
in developed economies developed economies
a) As economies develop, wages increase and As a country develops wages rise. Therefore, developed
people have more income. This extra income is countries are uncompetitive in the production of
spent on services, therefore tertiary sector manufacturing goods compared to countries such as
grows. India and China. Therefore, developed countries’
b) Over time the prices of services have risen manufacturing sectors declines.
much faster than the price of manufactured
goods. Therefore, developed economies have
tended to specialise in services.
Why the primary sector becomes less 3 types of economies:
important as an economy develops 1. Planned. Production decisions made mostly by
As an economy develops wages rise. Rising government, little private sector production.
wages causes developed countries to become 2. Free market. Production decisions made mostly by
uncompetitive in the extraction of primary private sector producers, little public sector production.
resources and therefore they have to import 3. Mixed economy. Government planning (public
them. This decreases the size of the primary sector) is combined with free markets (private sector) to
sector in the developed country. produce goods and services in an economy. The
government may produce products such as defence
whilst the markets produce products such as ipods.
Public sector Private sector
Public sector organisations are run by the
government on behalf of the general public. Private sector firms are owned and run by individuals.
Examples: Example:
● Hospitals (non private) ● BIS
● Schools (local schools) ● SNAP Cafe
● Defence
Summary:
Public Sector Private Sector

Ownership Public Private individuals (through business or share ownership)

Control Government Owner-managers (small firms) or Boards of directors (companies)

Aims Public welfare Profit-maximisation (usually)

Nationalisation Privatisation
Transfer of privately owned businesses to the Sale of public owned organisations into the private
public sector. sector.
Occurs when:
1. Important businesses start to fail
2. Welfare issues are present (industry is not
serving the population well)

Entrepreneur Characteristics of an entrepreneur

An entrepreneur takes the other three factors of 1. Risk seeking (willing to take a chance)
production (land, labour and capital) and starts 2. Innovative (come up with new product/service)
a business. They are risk takers. 3. Organised
4. Hard working
5. Creative (come up with new ideas)
6. Focused and determined

Rewards for being an entrepreneur Business plan

1. You get to be your own boss A detailed description of a new or existing business,
2. Profit including the company’s objectives, marketing and
financial plans.

Reasons for drawing up a business plan: Typical contents of a business plan

1. Forces the entrepreneur to think very hard 1. Business summary
about their business before they start to set it 2. Business details
up. 3. Market research
2.Sets out the Vision and Aims of the business, 4. Marketing
thus giving the business focus. 5. Day-to-day running of the business
3. Sets out the finances of the business 6. Finance
(revenue, costs, profits) and therefore make it
easier for the entrepreneur to attract finance
from banks
4. Forces the entrepreneur to set out how the
business is going to develop and in what time
(a timeline).

Reason why governments support Types of help that government give to start up
entrepreneurs to start businesses. businesses/entrepreneurs:
1. They create employment (provide jobs) 1. Grants (money given to business in order to help
2. They and their employees pay tax it start up)
3. They produce goods and services and 2. Loans
therefore increase GDP
3. Tax relief (reduced tax on company’s profit)
4. Advice (government agencies advise
entrepreneurs seeking to start a business)
5. Mentors (government may provide access to
people who have successfully started their own
business)
6. Training

Ways to measure the size Benefits Drawbacks

of a business

Capital employed The value of all the business assets It is difficult to value assets
added up shows how much the accurately.
(The amount of money business could be worth. This gives a
invested in the business value for the business that reflects
i.e. machinery) what it has invested and what it would
be worth if sold.

Market share This provides useful comparison You cannot compare one business’s
against businesses in the same market share with that of a business
(The total amount of sales industry. It shows how much of the in another industry.
a business has as a money being spent in the market is
percentage of the total coming to the business.
sales in that market)

Number of employees Shows the scale (extent) on which the You cannot compare different
business operates. industries. For example, a factory
(Total number of people may only employ a few people,
who work for the whereas a supermarket employs a
business) lot.

Even if a business only has a few

employees, their skills and their
knowledge could be worth millions
of dollars. On the other hand,
clothing businesses, for example,
may require lots of staff, but still
hold little value

Value of business on This can be a good reflection of a This measure can be inaccurate, as
balance sheet businesses true worth in the market sometimes a business will be bought
place, as many businesses are bought for more than it is worth. For
(The price another because of their potential to be worth example, Instagram was bought for
business is willing to pay a lot in the future. $1 billion when it had yet to make a
to own the business) profit!

Sales revenue This shows how much the business is Revenue alone does not take into
producing and how much people are account the costs of the business.
willing to pay for these products. It Revenues can vary depending on
can be easily compared with how well the economy is doing.
competitors.

Reason why businesses grow: Ways in which businesses can grow

1. Additional revenue and profit
2. Increase market share 1. Internal growth (organic). When a business grows due
3. Increased economies of scale to increased demand for its product/service. New
4. Increased reputation and prestige factories need to be built and more people employed
5. Attract more customers 2. External growth (mergers or takeovers)
- mergers occur when two companies merge together to
form one bigger company
- Takeovers happens when one business buys another
business. The bought business no longer exists.

Advantages of mergers and takers Problems that growth can cause:

- They allow a business to grow quickly 1. Communication problems. As businesses grow and
(much quicker than internal growth there are more people employed effective
which relies on increasing sales year communication becomes more difficult.
2. Morale. The bigger a firm becomes and the more
after year)
people that are employed then the less valued each
- By merging or taking over another worker may feel and this can lead to demotivation.
business you may remove a competitor 3. Clash of cultures. Mergers and takeovers involve two
(if the acquired firm was in the same separate companies coming together. They may have
market) different ways of doing things (culture) and this might
- Financial economies of scale lead to a decrease in productivity.
- Bulk buying economies of scale
- Managerial economies of scale
- Diversification
- Rationalisation

Techniques to overcome the problems

associated with mergers/takeovers/growth
1. Training (helps people to adjust to new role
quickly)
2. Management changes – to ensure the larger
business works well together and communicate
effectively
3. Incentives for staff – reward staff who have
to work harder due to the business becoming
larger
4. Set realistic targets
5. Invest in the business i.e. machinery etc to
ensure business can cope with increased
demand
6. Effective IT
7. Communication
Why do some firms stay small Why some (new or established) businesses fail
1. Objectives of owner (may not want business ● Lack of long term funding
to become unmanageable) ● Initial errors (choosing wrong location for
2. Size of the market (small market – small business etc)
firm)
● Lack of management skills (poorly skilled
3. Lack of availability of finance (sole trade =
limited finance for growth = small firm) manager = poor decision making)
4. Optimum efficiency has been achieved ● No reputation (less likely to attract customers)
(MES reached with small amount of output) ● Market conditions /The economy is in recession
(in a recession when demand is low, businesses
often fail)
● Large competitors present in market

Why are new businesses more likely to fail? 6 different types of business organisations in the
1. No business plan private sector:
2. Under estimated costs (inexperienced ● Sole trader
entrepreneur often don’t plan costs well) ● Partnership
3. Over estimated revenue ● Private Limited Company (Ltd)
4. Lack of economies of scale (unit costs don’t
● Public Limited Company (Plc)
fall by mush as more is produced)
5. Established brands already exist in the ● Franchises
market (makes it difficult for new business to ● Joint ventures
achieve high sales)

Unlimited liability (Unincorporated) Limited liability (Incorporated)

If the business goes bankrupt owing money the If the business goes bankrupt owing money, the
owner will have to pay all the debts of the shareholders will only lose the amount they have
company even if it means having to sell their invested in the company. They will not have to sell
personal possessions such as their house or car. their personal possessions to pay for the debts of the
company.

Important 1. Sole trader (unincorporated)

People are more likely to invest in Ltds and
PLCs because they have limited liability and There is one owner of the business, although that owner
therefore their personal processions are can employ other people. Sole trader businesses are easy
protected. This makes it easier for Ltds and to set up and require little start up finance.
PLCs to raise capital for expansions and
therefore they are usually bigger companies.

Advantages of being a sole trader Disadvantages of being a sole trader

1. Make all the decisions- Sole traders can 1. Unlimited liability- If the business goes bankrupt
make all of the business decisions themselves. owing money the owner will have to pay all the debts
This means that decisions can be made quickly even if it means having to sell their personal possessions
and without any conflict of interest. such as their house or car.

2. Sole trader keeps all of the profit 2. Difficult to raise finance- Sole traders find it
difficult to raise finance. This is because they are small
3. Easy to set up- Sole traders are often very and have little collateral so banks are unwilling to lend
small operations and therefore require very to them.
little paperwork to set up.
3. Long working hours- Sole traders do not earn
4. Requires little capital- As they are small money when they are not working; therefore they often
operations, sole traders often require little have to work long hours.
capital to start their business.
4. No holiday pay or paid time off- When sole traders
do not work they do not get paid; they do not receive
benefits such as holiday pay or sick pay.

2. Partnership (unincorporated) Deed of Partnership:

A legally binding document that lays out the terms of
Partnerships are usually formed by between 2 the partnership and which can be referred to when
and 20 people (although there can be more) conflict arises. It includes details of:
using a Deed of Partnership. ● Finance provided by each partner
● Salary entitlement of each partner
● Percentage of profit received by each partner
● Holiday entitlements

Advantages of being a partnership (rather Disadvantages being a partnership

than a sole trader)
1. Lack of capital- Despite having more access to
1. More expertise- Partnerships have more capital than a sole trader, partnerships still find it
owners (partners) than a sole trader, so can difficult to raise large amounts of money.
normally call upon more expertise (2 heads are
better than 1 etc)
2. Sharing the profit- As a partnership has more than
one owner, therefore profits are usually shared out
2. Less financial risk- Liability or risk is between the different partners.
shared among all the partners.

3. Unlimited liability- All partners, with the exception

3. More access to capital- There are more of sleeping partners, are jointly liable for the
partners to invest in the business. partnership’s debts.

4. Can attract investment- Partnerships can 4. Conflict of interest- Partners may have
attract investments from sleeping partners disagreements over business decisions.
(people who invest in the business but take no
active role in the running of the organisation).

3. Private limited company (Ltd)

(incorporated)

Owned by shareholders who can invite other

people to buy shares so they can raise
additional finance in order to grow. Limited
liability.

Advantages of being a private limited Disadvantages of being a private limited company

company
1. Releasing financial information- All private limited
1. Shares- Private limited companies (Ltd) can companies have to register their accounts. The accounts
select/choose shareholders which help them have to be audited (checked and agreed) by external
raise more capital to finance the business. accountants, adding to the running costs of Ltds.

2. More expertise- Private limited companies 2. Legal restrictions- Private limited companies have
are often large enough to have directors who more legal restrictions than unincorporated businesses.
specialise in a particular area (they are often
shareholders).

3. Maintain control- Because a private limited

company selects it shareholders, it is able to
keep control of the business more easily than a
Plc.

4. Limited liability- Shareholders (owners) are

protected by limited liability. This means they
only risk what they have invested in the
company.
 4. Public limited company (Plc)
(incorporated)

Can sell their shares to anyone on the stock

exchange and therefore can raise large amounts
of finance and grow very large. Limited
liability.

Advantages of being a public limited Disadvantages of being a public limited company

company
1. Releasing financial information- Plcs have to
1. Sell shares to the general public through publish an annual report, which details their financial
the stock exchange and thereby gain access position. Competitors can use this information to try to
to large amounts of capital in order to grow. out maneuver the company.

2. Limited liability- Shareholders of Plcs have 2. Dividends- Plcs are obliged to pay their shareholders
limited liability, which limits the risk involved dividends. Finding the right balance between retaining
with a potential investment. profit to reinvest and satisfying shareholders with
dividends is difficult.
3. Managerial economics of scale- Plcs are
normally very large organisations that can 3. Losing control- As shares are available to anyone in
afford to employ specialist directors to run the the general public, existing shareholders can be subject
business on behalf of the shareholders. These to hostile takeover bids and can lose control of the
specialists improve the efficiency of the business if an individual or business purchases 50% or
company. more of the available shares.

4. Legal issues- Public limited companies are bound by

more legal constraints than a private limited company,
and this can make them more complicated to run.

Type of Ownership Liability Risk/risk of failure

business/s
ize

Sole One owner Unlimited Liability High. Unlimited liability and

Trader limited finances of one owner
to overcome obstacles

Very small

Partnersh 2 or more (but usually less than 20) Unlimited Liability Medium. Unlimited liability,
 ip but can have many owners so
may be finance available to
deal with obstacles. Also,
partnerships tend to be in
areas that are ‘safe’ i.e.
Accountancy firms etc

Small to
medium

Ltd Shareholders. Unlimited – but have to Limited Liability Medium to low. Limited
be invited to buy shares therefore liability. Many owners.
usually limited to acquaintance and Ability to invite extra
family of exist shareholders shareholders into company to
gain extra finance. However,
area of business may be risky.

Medium
to large

Plc Shareholders. Unlimited – shares are Limited Liability Low. Limited liability. Many
sold on the stock exchange so anyone owners. Ability to access
can buy them finance by share issues on
stock exchange.

Large

5. Franchise

A business is a franchise when a person (the

franchisee) pays a company (the franchisor e.g.
McDonalds, Pizza Hut etc.) money so that they
can use its name to trade under (initial start up
fee and yearly royalties). The franchisee will
be given help and advice to set up the business
by the franchisor. The franchisee is responsible
for the day to day running of the business, e.g.
they are responsible for recruitment and
training.
Advantages of being a franchisee Disadvantages of being a franchisee
1. Operating under a well known name which 1. Some of the profits have to be paid to the franchisor.
should increase the chances that the business
will be successful. 2. The franchisee is not free to make all their own
Which is more likely to be successful; a decisions as the franchisor will want things done in a
McDonald’s or a burger joint called Turner’s certain way. For example, it may be difficult to be able
Taste Bar? to sell items that would be very popular locally but not
2. Advice and guidance is provided by the globally.
franchisor to the franchisee. This helps the
business to set up and be successful. For
example: menus, décor, uniforms, accounting
procedures, marketing, purchasing raw
materials, presentation of goods etc

Advantages of being a franchisor Disadvantages of being a franchisor

1. Franchisees give them (franchisors) money 1. If an outlet is run badly the whole chain can get a bad
so that they can trade under their name. name.
Franchisors have to do relatively little but
collect a certain amount of money from each 2. Difficult to control a large organisation which can
franchisee each year. have outlets across the world.

2. When franchisees start up businesses under

the franchisors name it means that the
franchisor is expanding faster than it otherwise
would be able to. Think of how Burger King,
KFC or McDonald's have expanded so quickly.

6. Joint venture Common situations where joint ventures occur:

1. When a business wants to expand into a new market
A joint venture is an agreement between two (such as a new country) and it has little knowledge of
existing organisations to start a jointly owned that market.
third company.
2. A business might decide to form a joint venture to
share resources and expertise.

Advantages of a joint venture Disadvantages of a joint venture

1. Risks are shared by both organisations. 1. There can often be a conflict of interest between the
two organisations involved

2. Expertise can be offered by both

organisations. 2. Decisions have to be made by both parties, which
slows down the decision-making process

3. Capital is normally invested by both

organisations. 3. Profits are split between both of the parties involved
in the joint venture

Choosing the right ownership type depends Objectives definition:

upon a number of different factors, which
include: Targets which a business sets itself so that it can
● Risk (small business – sole measure how successful it has been in reaching its
trader/partnership have limited liability targets e.g. to increase sales in market B by 12% in 6
therefore greater risk) months. Departmental objectives help to achieve the
● Control (the more owners a business firm’s objectives.
has the less control an individual owner
 has)
● Size (business to want to become large
usually have to become plcs)
● Ambition of owner

The importance of clear objectives SMART objectives

* Employees need something to work towards.
Objectives help motivate people. Specific
* Provides a benchmark to assess performance
against. Is the objective met?... Yes = success. Measurable
* Objectives help to decide the direction a
business should take and what steps are Agreed
necessary to get there
Realistic

Timed

Types of business objectives: Social enterprise definition:

1. Survival
2. Increase market share A social enterprise is a business created to further a
3. Profit maximisation social purpose (something that is good for the
4. Expansion of the product range community) in a financially sustainable way. The
5. Customer satisfaction business will aim to make a profit and some of this will
6. Improve company image
be reinvested into the business.
7. Increase employee satisfaction

Stakeholders
A stakeholder is a person or group with an
interest in the operations of a business.

A stakeholders can either be internal (eg

employees) or external (eg suppliers)

Internal stakeholders and their interests in a External stakeholders and their interests in a
business business
1. Owners 1. Customers
Increased profit. Reasonable price.

Increased sales. Quality product/service.

2. Employees Increased customer service.

Higher wages. 2. Suppliers

Reasonable price.
Increased benefits.
Secure long term contract.
 Secure employment. Growth (may increase supply order)
3. Government
Promotion. Expansion (increased employment).

Employee welfare.

4. Local community
Expansion (increased employment).

Environmental concerns.

5. Trade unions
Employee welfare i.e:

- Higher wages

- Better working conditions

- More benefits (holidays etc)

6. Pressure groups
Environmental concerns.
Conflict between stakeholders Private sector enterprises
One of the major problems a business has is The private sector is made up of businesses run by
keeping all stakeholders happy. This is because private individuals and groups, often with the aim of
each stakeholder has a different interest in the making a profit e.g. McDonalds
business and would like the business to pursue
different objectives. Sometime the interests of
the stakeholders opposed and this causes
conflict.

Public sector enterprise

The public sector is made up of public funded
and government run organisations that often
offer services to the public e.g. railroads

Motivation Benefits of well motivated employees to firms:

The desire to achieve a certain result or outcome. ● Lower absenteeism
The more a person desires the outcome the more ● Lower staff turnover
they will work to achieve it. ● Higher productivity
● More innovation
● Pleasant working environment

The three theories of motivation: 1. Maslow’s hierarchy of needs

1. Maslow’s hierarchy of needs
Work fulfils an important role in satisfying human
 2. Taylor’s scientific management needs. Maslow’s Hierarchy:
3. Herzberg’s two factor theory 5. Self actualisation – higher order
4. Self esteem – higher order
3. Love and belonging – higher order
2. Safety and security – lower order
1. Physiological – lower order

Explanation of the Need Maslow’s hierarchy Example of how the need is

satisfied at work
Reaching full potential and Self actualiation (Higher Opportunities to be challenged,
fulfilled in what you do. order) creative, solve problems and make
decisions.
Recognised and respected for Esteem needs (Higher order) Praise for doing a job well. Awards
what they have achieved. and rewards for achievement.
Praised.
Friendship and trust. Sense of Love and belonging (Lower Teamworking, good communication
acceptance order) and social facilities.
Protection from physical and Safety and security (Lower Safe working conditions and job
psychological harm. Financial order) security
well being
Food, air, water, shelter etc. Physiological needs (Lower Wage
What you need to survive order)

Important: Practical implications of Maslow’s hierarchy for

- Maslow argued that if people had their needs businesses:
met at work then they would be motivated to ● Satisfying workers needs is not just about
work money – other things are important
- Each of the needs have to be met in order ● Firms need to satisfy employees’ needs at
beginning with ‘Physiological Needs’
work if they hope to motivate them
- When a need is met it no longer satisfies; the
need further up the order now motivates (except ● Work is important. It gives purpose and
Self Actualisation which continues to motivate meaning to peoples’ lives.
even when met)

Limitations of Maslow’s hierarchy:

- In reality workers are motivated to meet more
than one need at a time.
- Workers may not seek to have all levels of the
hierarchy met in the work place i.e. they may
wish to have their love and belonging needs met
within their family.
2. Taylor and scientific management Advantages of Taylor’s scientific approach
● Increased productivity and output which
Taylor’s approach: benefited employers
- Study a task and identify the quickest way of
doing it – this is now the new norm
- Match the employee with the most appropriate ● High wages were offered which benefited
skills to the task (strong man shovels coal) employees
- All workers should be supervised and
controlled. Those not working efficiently are
punished.
- Pay scheme should be designed to pay more to
those that produce more (piece rate)
Problems with Taylor’s approach: 3. Herzberg’s Two factor theory
- Workers jobs were repetitive which can lead to
demotivation (work not interesting) and mistakes Hygiene factors (much like Maslow’s lower order
can increase needs)
- Managers control workers. This creates conflict ● Company policy and administration
between workers and managers ● Positive relationship with supervisors and
- Money is not the only motivator, nor is it the colleagues
most important one for most people. ● Working conditions
- Theory can only really work in a manufacturing
● Salary
setting where jobs are done repetitively. Little
role in service sector industries such as banking. Hygiene factors have to be met in order for workers
not to be dissatisfied (demotivated), however, they do
not have the ability to motivate. If hygiene factors are
met an employee is merely not demotivated, but
neither are they motivated.

Motivators (much like Maslow’s higher order

needs)
● Achievement
● Recognition
● Responsibility
● Interest in work
● Personal growth
These factors have the ability to motivate if they
are met at work, however, only if the hygiene
factors are met first.

Advantages of Herzberg’s two factor theory Limitation of Herzberg’s two factor theory
* Make employers aware that to motivate * Not applicable to all sorts of jobs. Manual workers
workers a business must first make sure that all on hourly pay may not be interested in job enrichment
the hygiene factors are met – fair wage, safe
working conditions * Employees must be want and be ready for the
motivators. Giving people responsibility who are not
ready for it can have harmful effects
* Made employers aware that to motivate
workers their jobs must be designed to be
meaningful and interesting. Businesses should
allow employees the opportunity to grow and
progress in order to motivate them.
 Financial rewards is money given to employees in a variety of ways, which include:
Method of financial reward Advantages Disadvantages
Piece rate – worker is paid a Increases speed of work and Workers do not concentrate on
sum of money for each item of therefore increases productivity quality of work as emphasis is on
work they complete. The more speed of work
the complete the more money Often workers not entitled to
they get (Taylorite). Used for sick pay or holiday pay which Workers may ignore company rules,
shop floor workers. reduces costs for firm such as Health and Safety issues, as
they try to speed up output
Wages – a worker is paid a set Flexible as the firm can increase Workers have no incentive to
sum of money for each hour the workers hours by offering complete tasks quickly. Better for
worked up to a set amount of overtime in times when demand them to take it easy and then do
hours – say 40 hours. If the is high overtime to complete the work as
persons works longer than 40 they will receive more pay i.e. wage
hours they receive overtime pay not tied to amount produced.
(an hourly pay at a higher rate) Simple and easy to use for Some workers may resent being
businesses paid the same as a colleague who
they feel is not as productive
Salaries – salaried employees Flexible for firms because Little incentive to work hard as
are paid an agreed sum of employees will work longer employee will receive the same
money for a year’s work – they hours to complete the job amount of salary no matter how
receive payment monthly. without having to be paid more. long they spend at work or how
Salaries are not linked to hours much output they produce i.e. salary
worked so no matter how long not tied to amount produced.
an employee spends at work
their salary remains the same.

The problem with wages and salaries is that they don’t provide an incentive to work hard and be
more productive. Firms have come up with ways to add financial incentives to wages and salaries to
overcome this disadvantage, such as:

Incentive Advantages Disadvantages

Bonuses – an extra lump sum of Incentivises employees to be - May be de-motivational if
money that may be paid to an more productive as it will employee misses their bonus
individual or a group of workers increase their monetary reward. payment. They may see it as unfair
when they reach a target level of - May incentivise employee to only
production or sales. concentrate on the part of the job
which produces the bonus and not
the overall job.
Performance related pay – Easier for managers to monitor It can be difficult to measure the
provides financial rewards to and control their staff as they are performance of employees in
employees who meet agreed dealing with them individually service based industries
individual targets. Used for and have the power to increase
managers and executives. their pay by different amounts It does not promote teamwork and
can lead to workers feeling they are
Reduces the amount of time treated unfairly if other colleagues
spent on industrial relations are awarded more
 (negotiations with trade unions)
as negotiation are with the
individual only

Profit sharing – a certain Workers are more likely to The share given to employees is
amount of the company’s profit accept changes to their working often too small to provide a
(say 10%) is divided up between practices if they can see that it worthwhile incentive
each employee may decrease costs and so
increase profit, therefore Workers may feel that however hard
benefiting them. they work it will not have a
noticeable effect on the company’s
Should improve loyalty to the profit level, so therefore it provides
company and break down the no incentive
“them and us” barrier if all staff
given same amount
Share ownership – shares in - Reduces labour turnover as Often only available to senior
the company are given to employees are incentivised to managers so can cause resentment
employees usually at some stay in order to collect their among other staff.
future date (if they stay with the shares
company) - Provides an incentive to work
harder as a good performing
company will have an increasing
share price

Non financial rewards (fringe benefits): Benefits of fringe benefits to a business

● Company car - It may be cheaper for a business to pay for fringe
● Free medical care benefits rather than increase pay as increases in pay
● Free private schooling are subject to tax.
- Productivity is likely to be improved as workers feel
● Free gym membership
more committed to the company
● Pension - Some benefits help retain better qualified staff
(free schooling) who are highly valuable to a firm

Benefits for the employees Job design for motivation:

- Employees pay no tax if they take the fringe ● Job rotation
benefits rather than pay increases ● Job enlargement
- Workers may get to enjoy private health care ● Job enrichment
or sports facilities which means that they are
● Empowerment
likely to be healthier
- Consider Maslow – free car meets esteem ● Teamwork
needs, health club membership meets love and
belonging and safety needs etc.. Fringe benefits
are motivational

Type of job design Advantages Disadvantages

Job rotation – involves Stops the employees becoming Productivity may suffer as worker
switching an employee between bored from doing the same job will not be equally good at all tasks
tasks of the same skill level i.e. all the time.
2 hours on till, 2 hours stacking May increase the training needs of
shelves etc If a person is absent then employees
 someone else will have the
knowledge to cover their job
(useful in production processes)

Job enlargement – allowing Worker may gain greater job Productivity may suffer as worker
worker to perform more tasks of satisfaction from seeing how the will not be equally good at all tasks
the same level in a production whole product is made – seeing
process to enable them to see the end result of their efforts. May increase the training needs of
how the complete product is employees
made.

Job enrichment – asking Allows a worker to take on Workers may resent being asked to
employees to perform tasks that greater responsibility do more complex task as they may
are above the complexity of the (motivational according to see it as doing tasks that their
task they currently do (some of Maslow and Herzberg). manager should do.
their managers tasks for
example) Allows workers to develop their
skills and readies them for
promotion

Empowerment – involves Allows a worker to take on Workers may resent being asked to
giving an employee the greater responsibility do more complex tasks as they may
authority to make decisions to (motivational according to see it as doing tasks that their
carry out a task. The Maslow and Herzberg). manager should do.
responsibility for the successful
completion of the task remains Allows workers to develop their Managers may be unwilling to give
with the manager however. skills and readies them for up decision making power
promotion

Teamwork –organising Meets social needs according to May be disputes within the team as
production into teams rather Maslow so therefore to how tasks should be carried out.
than isolating workers. Team is motivational.
given objectives to achieve and
they receive rewards when these Workers may work harder and
objectives are met. ensure quality because they
“don’t want to let the team
down”

Organisational chart What an organisational chart shows:

An organisational chart highlights the key roles 1. Departments. A business is divided into department,
and responsibilities of a businesses’ employees. each of which is responsible for an area of the
It should show the different departments within business.
the business and which employees and job roles 2. Hierarchy. The level of the organisation that an
are included within each department. individual is on.
3. Chain of command. This shows how
communication and tasks are passed down the
organisation.
4. Delegation. This means who can delegate authority
 for a task to who (the person directly below them).
5. Span of control. Shows how many subordinates are
under the control of a manager.

Benefits of organisational charts Types of organisational structures

- Shows who is responsible for which functions 1. Flat structure
and tasks
- Aids clear communication as people understand A flat structure has a wide span of control and
how a message is to be communicated therefore fewer layers in the organisation.
- Shows what a person is accountable for 2. Tall (hierarchical structure).
- Shows to whom a worker is responsible to and
from whom they must take orders from A tall structure has a narrow span of control and
therefore many layers of management

Benefits of having a flat structure Problems of having a flat structure

1. Easier communication as the chain of 1. Fewer management positions, so workers have little
command is shorter. There are fewer levels of chance of promotion
hierarchy for communication to be passed down.

2. As managers have such a wide span of control, it is

2. Fewer management roles, which reduces the more difficult to monitor the performance of their
need for the business to pay costly management subordinates, who may make costly mistakes.
salaries

3. Easier for managers to delegate tasks as they

have a wide span of control

4. More delegation to subordinates, which gives

employees more responsibility, therefore
workers’ motivation might increase (according to
Maslow and Herzberg)

Benefits of having a tall structure Problems of having a tall structure

1. More managerial positions makes it easier to 1. Communication takes longer as chains of command
monitor subordinates’ performance are longer – communication more likely to be
distorted

2. More chance of promotion for subordinates,

which can be motivating 2. More management positions, which can mean the
business has to pay higher salaries, increasing their
costs. Businesses can sometimes change this by
removing a level of management. This process is
called de-layering.
 The functions/roles of management Delegation
1. Organising (delegate tasks, people and When a manager gives a subordinate decision making
resources. Ensures everyone is working power (authority) to complete a specific task. The
effectively. No duplicated tasks) responsibility for the successful completion of the task
is still held by the manager.
2. Planning (sets aim/targets; plans for
necessary resources,)
3. Coordinating (ensure effective team
work, holds regular meetings,
aims/objectives linked together)
4. Commanding (guiding employees,
leading/supervising. Ensures employees
keep to task)
5. Controlling (measure/evaluate work of
employees; identify poor performance ad
provide remedy)

Benefits of delegation for the manager Benefits of delegation for the subordinate

1. Delegating jobs to somebody else allows the 1. It empowers the subordinate; having more
manager more time to focus on more important responsibility may increase their motivation (Maslow
tasks and to keep an overview of what is and Herzberg).
happening in the business or department.

2. It gives managers the chance to assess their 2. Taking on more responsibility allows employees to
subordinates’ abilities in respect to promotion, prove their abilities, which could help them gain
helping them to make better decisions in the promotion in the future.
future.

Successful delegation depends upon: Leaders have:

● A vision of the direction in which the
● The manager picking the right task for organisation should move
the subordinate (not too easy, not too ● Innovative ideas as to how the vision might be
hard) achieved
● The commitment and dedication needed to
● The manager choosing the right
follow their ideas through
subordinate to delegate to

● The manager giving the subordinate

time to complete the task successfully

● The manager giving the subordinate the

resources to complete the task
successfully
 There are 3 different styles that a leader can 1. Autocratic leadership style
adopt:
● Autocratic The leader makes all the decisions.
● Democratic The leader tells others what to do and controls them
closely in the way they do it.
● Laissez faire
The leader does not consult their subordinates, they
know what they want to achieve and how.

Advantages of autocratic leadership Disadvantages of autocratic leadership

1. Useful when quick decision making is 1. No two-way communication so can be
required. de-motivating
2. Effective when employing many low skilled 2. Creates “them and us” attitude between managers
workers and workers
2. Democratic leadership style

Workers play a full part in the decision making

wherever possible – their opinions are sought and
acted upon.
Democratic leaders delegate decision making
power to subordinates and teams of workers.

Advantages of democratic leadership Disadvantages of democratic leadership

- Meets Maslow’s higher order need of Self - Decision making takes longer so may not be
Esteem (opinion sought and acted upon) appropriate when quick decisions are necessary.
- Useful when complex decisions are required
that need specialist skills
- Authority is delegated to workers which is
motivating

- More two-way communication so motivating

3. Laissez faire leadership style

Laissez faire (let it be). Workers are left to get on

with their work with little or no interference – the
leader may set broad aims and guidelines, but
there is little day to day input from the leader.
Advantages of laissez faire leadership Disadvantages of laissez faire leadership
- Positive only in the case when the employees - Employees may lose a sense of direction without the
are very responsible and in cases of creative jobs input of the manager.
where a person is guided by his own aspirations.
In these cases, less direction is required so this - Employees may use the freedom to do very little and
style can be good. be non productive.

- Suitable where staff are highly trained and

where the production of the product is a major
motivator.
Factors effecting leadership styles Trade Unions:
1. The leader’s personality (string willed = A Trade Union is an organisation that workers join,
autocratic etc) which represents the workers in negotiations with
2. The type of workforce (unskilled = company managers. The idea is that the Trade Union
 autocratic, skilled = democratic, skilled speaks for everybody (collective bargaining) and
and creative = laissez faire) therefore the workers have strength in numbers and
3. Culture are more likely to have their demands met by
managers.
4. Context. A workforce is more likely to
accept autocratic leadership when there is
a crisis and decisions have to be made
quickly.

Benefits to employees of joining a trade Disadvantages of trade unions for workers

union
Increased wages may mean increased costs for firms
- Collective bargaining through a Trade Union and therefore firms can not afford to employ all the
means that employees have a greater chance of workers they used to and therefore some workers may
their demand being met than if they bargained be made unemployed
individually (strength in numbers).

- Trade Unions’ strive to improve workers’ pay

and working conditions.

- Trade Unions provide legal advice (if an

employee wants to sue the employer for
example) and support for their members.

What workers are interested in getting Industrial actions available to Trade Unions
form a company ● Striking
● Working to rule
● Higher wages ● G o slows

● Better working conditions

Advantages of trade unions for firms Disadvantages of trade unions for firms
1. It is easier to negotiate with trade unions than 1. Trade unions increase costs for firms. This means
every single worker. It saves time. that the price of firms’ goods rise and demand falls.
2. If workers have their needs met it is likely they
will be more motivated and therefore more
productive. This increase in productivity may
offset the increased cost incurred by having a
union.
Process of recruitment, selection and training
1. Defining the job role (job analysis)
2. Job description
3. Person specification
4. Internal/external
5. Selection
6. Induction training
 Job description: Person specification:
A Job Description states the title of the job and A person specification provides details of the
outlines the tasks, duties and responsibilities qualification, experience, skills and attitudes that
associated with the job. would be expected of a person appointed to do a
Purpose/advantages of producing a Job particular job.
Description: Purpose of a Person Specification
- Provides a clear idea of what the job involves, - Allows employer to ‘profile’ the most desirable
which is helpful when trying to identify the best match for the job offered
candidate - It can be used to ‘screen’ applicants to decide who
- Provides details that will be used to draw up the gets an interview and who doesn’t
job’s advertisement and contract of employment
- Saves times/money and makes selection easier
as it is unlikely than application will be received
from people who do not fit the job description

Advantages of part time employees to firms Disadvantages of part time employees to firms
1. The average cost of a part-time employee is 1. The cost of training large numbers of part time staff
lower than the cost of a full-time employee (per may be high
hour worked)

2. Part time staff may be less loyal (increasing labour

2. Part time employees can be used flexibly to turnover)
ensure that staffing numbers meet demand (e.g.
when demand increases a firm can get part time
employees to work longer hours as they are not 3. Part time staff may be less committed to provide a
working many hours) good service/produce quality products

Advantages of full time employees to firms Disadvantages of full time employees to firms
1. The employee becomes more familiar with the 1. Full-time staff are entitled to many benefits in
business and, in theory, more productive addition to their wages/salary (sick pay, holiday pay
etc) therefore they are more costly

2. Full time staff may not want to adjust their hours to

2. The employee is likely to be more loyal to the suit demand as they are already working a lot of hours
firm (lower labour turnover) (e.g. working weekends)
 External recruitment might include placing The method of external recruitment chosen will
advertisement in: depend upon:
Placing advertisement in:
* Job Centres – run by government, these are 1. The size of the firm (small firm – local area job
offices that provide details of job vacancies to centre, large firms may advertise nationally)
those who seek work. This is free of change for
firms to use.
Useful when for: 2. Type of position needed to be filled (low
- recruiting large amounts of workers skilled – job centre/local paper, high skilled –
- recruiting unskilled workers internet, specialist magazine etc)

* Media advertising – local, regional, national 3. Number of positions

newspapers,
- Local newspaper useful for finding
unskilled workers
- Regional/national newspaper useful for
finding skilled workers

* Specialist magazines
- Useful for finding skilled/qualified
workers who the magazine is aimed at
(TES)

* The internet
- Useful for finding skilled/qualified
workers who the website is aimed at

* Using recruitment agencies (head hunters) –

specialist firms that will find workers that suit the
firm’s needs. The charge a fee for the service.
- Useful when a highly specialised
employee is required e.g. to be the
chairperson of a company

Advantages of internal recruitment Disadvantages of internal recruitment

1. Offers current employees opportunities for 1. Another vacancy is created elsewhere in the firm
promotion and development (motivational – that must be filled
Maslow/Herzberg)

2. Promotes loyalty by providing opportunities

within the business – lower labour turnover 2. No new (external) ideas are brought into the firm
3. A business will have greater knowledge of the
qualities of an internal applicant and so there is
more chance they will select the right person
3. The person recruited may not be the best person for
4. Less need for induction training
the job, just the most familiar
 Advantages of external recruitment Disadvantages of external recruitment
1. Can attract a larger selection of candidates 1. Can be expensive and time consuming
compared to internal recruitment.
2. The new recruit will need induction training and
2. Can bring new ideas into the business may take some time to become familiar with the firm’s
(valuable knowledge and experience from the operations, so their initial productivity may be low
competition)
3. There is more risk of recruiting somebody who is
3. The successful recruit is likely to be motivated not successful in the job
by the freshness of a new job and will therefore
work harder in the short term

Ways in which candidates are selected by firms:

Type of assessment Advantages Disadvantages
Interview – A face to face Employer has the opportunity to 1. Some people are good at
discussion between interviewer assess the candidate’s: interviews – it’s a skill you can
and interviewee to assess the - Communication skills practise – but might not be good
applicants personality and - Personal qualities (how they employees
personal qualities. are likely to get on with others) 2. Interviewer biased toward
- Verify job relevant knowledge personality types such as their own
Aptitude tests – tests of IQ or 1. Skills tests good for judging 1. Doesn’t consider a person’s
specific job based skills e.g. how efficient and effective a personality which is often the most
applicant for secretary job asked person will be important aspect of whether a
to type at speed person is successful in a job.
Psychometric tests – tests, 1. Psychometric tests produce a 1. Not and exact science. Many
usually multiple choice, to description of the personality of people don’t believe in it.
assess candidates’ personality the candidate which can be
and preferences. Investment matched against the Person 2. Candidates do their best to
banks often test their candidates Specification to find the most portray a personality that suits the
for their attitude to risk. Used suitable candidate. job during the test and therefore the
for medium to high level jobs. test may not find the best candidate.
Assessment centres – 1. Extensive process and 1. An expensive process.
Candidates attend an assessment therefore more likely to reveal
centre for between one and three the candidates true personality
days to undergo a series of and attributes.
interviews, test and activities
(individual and group). Used for
high level jobs.

Training seeks to:

1. Reduce costs
2. Improve motivation
3. Reduce labour turnover
4. Increase revenues
5. Improve innovation and flexibility

Benefit of training to employer Benefit of training to employee

 ✓ Motivational – Maslow, Herzberg ✓ Better job performance

✓ Lower labour turnover ✓ Better career prospects (higher chance of

promotion)
✓ Increased efficiency, leading to lower costs
✓ Higher productivity (and possibility higher pay)
✓ Improved health and safety (and fewer
workplace accidents, lowering the costs of ✓ Higher job satisfaction
compensation claims)
✓ Less chance of workplace accidents
✓ Increased revenues and higher profitability

✓ Improved innovation and flexibility

There are three types of training: 1. Induction training

● Induction training
● On the job training Induction training is a type of training given to a
person when they get a job in a company. It includes a
● Off the job training
tour of the premises and introductions to key members
of staff.

Benefits of induction training Drawbacks of induction training

- Help employees to be productive very quickly - Employees will not start work straight away as they
have to complete their induction training.
- Reduces the amount of mistakes an employee
may make - It is possible the new staff learn bad habits from
experienced staff during induction training
- Helps a new employee fit in and feel
comfortable

2. On the job training. 3. Off the job training (internal and external)

Training that takes place whilst an employees is Training that takes place away from where the
actually working e.g. chef being trained whilst employees work (can be in another part of the
they prepare meals. Coaching and mentoring are company or off site). Conferences and college courses
examples. are examples.

Advantages of on the job training Disadvantages of on the job training

✓ Cheaper than off-the-job-training ✗ Quality of training depends on ability of the trainer
available in firm and time given
✓ Employees remain productive – they are
working whilst they’re being trained ✗ Learning environment may not be ideal – noisy,
rushed as staff still have to be productive
✓ Training is specific to the job
✗ Bad habits might be passed on
✓ Opportunity to learn from experienced, expert
staff

Advantages of off the job training Disadvantages of off the job training

✓ A wider range of skills can be obtained from ✗ More expensive than on-the-job training
experts outside of the firm
✗ Productivity may suffer as the member of staff is
✓ Developmental – motivational according to away from the place of work
Maslow/Herzberg
✗ Risk of employees using new skills/qualifications
✓ May lead to formal qualifications, benefiting to seek jobs with other firms
both the individual (in career terms) and the
business (in marketing terms) ✗ May not be specific to the individual’s or firm’s
needs

Advantages of using skilled workers:

- Greater efficiency/productivity – leads to

lower unit costs

- Increased reputation and brand image

which can allow a firm to increase price

- Less supervision needed, freeing

managers for more important tasks

Reducing the workforce (downsizing) – Dismissal and redundancy

reasons:
 ● Automation (machines doing jobs once Dismissal
done by humans) Being asked to leave a firm because of poor
● Declining sales performance or behaviour.
● Merger or takeover (rationalisation)
Redundancy (surplus to requirement)
● Firm/factory moves Being asked to leave a firm where the skills or
experience of the member of staff are no longer
required.

Advantages of making an employee redundant Disadvantages of making an employee redundant

1. Reduces the wage bill in the long term. Less 1. The firm will need to give a redundancy payment to
workers to pay will reduce costs. the person who is leaving. This can be expensive in
the short term (commonly 2 weeks for every year the
person has worked at the firm).
2. Skills and experience are lost from the firm.
3. It is usually the most experienced employees
(people with the most years – bigger redundancy
payment) that choose to be made redundant.

Workforce planning Downsizing definition

Businesses usually make decisions to increase or To reduce in number of personnel in a company in
decrease (downsize) the number of staff they response to falling demand, automation (becoming
have on the basis of a workforce plan. The stages capital intensive), merger/takeover etc
involved in a workforce plan are:

1. Assessing the current workforce

2. Analysing future workforce needs
3. Identifying gaps
4. Developing strategies to address needs

Legal controls over employment 1. Health and safety law:

1. Health and safety laws
2. Employment contract law (including Impact of H&S laws on firms
unfair dismissal) A. Cost (ensuring a safe working environment
3. Discrimination law (age, gender, age etc) requires spending money on equipment etc)
4. Minimum wage law
B. Decreased injuries therefore less working days
lost.

C. Motivational (safety needs – Maslow, hygiene

needs – Herzberg)

Impact of H&S laws on employees

 A. Decreased injuries

2. Employment contract 3. Discrimination and unfair dismissal

Impact of Employment Contract laws on firms Impact of discrimination laws on firms

A. Increases costs A. Increases costs

B. Motivational B. Motivational

Impact of Employment Contract laws on Impact of discrimination laws on employees

employees A. Motivational (safety needs – Maslow, hygiene
A. Motivational (safety needs – Maslow, needs – Herzberg).
hygiene needs – Herzberg)

B. Reduces labour turnover

B. Reduces labour turnover

4. Minimum wage Communication

The passing on or exchanging of information from a
Definition: An amount of pay set by the sender to receiver. For communication to be effective,
government below which an employer cannot the message must be transferred quickly and without
pay an employee. any misinterpretations.

Impact of a minimum wage on firms

A. Increases costs

B. Motivational

Impact of minimum wage laws on employees

A. Motivational (physiological – Maslow,
hygiene – Herzberg).
B. Reduces labour turnover as employees
may feel that their wages are adequate.

For communication to be effective, the One way communication.

business must consider the following: Information is transferred in one direction only, from
- Which communication method best suits the the sender to the receiver. There isn't any opportunity
situation for the receiver to give feedback to the sender.
- The needs of the receiver
- External influences may alter or slow down the Examples:
processing of a message (a phone call may be ● E-mails
interrupted, or you may reach someone whilst ● Letters
they’re driving)
- The communication may need to be duplicated
(phone conversation followed by an e-mail to
ensure that the main points of the conversation
are recorded)
Two way communication Benefits of effective communication for a firm:
● Employees understand what is expected of
When the sender sends a message to the receiver them and this allows then to feel comfortable
and he/she (receiver) sends his/her response to in their jobs
the sender after understanding the message.
● Staff will work more effectively if they do not
Examples: have to wait too long for agreement and
● Phone feedback
● Face to face ● Customers will receive constant
communication from the firm, aiding sales
growth
● Minimises risk of diseconomies of scale
occurring

Written method of internal Benefits Drawbacks

communication

Memorandum (memo) is
✓ Memos can be sent to all ✗ One way communication – no
usually a short message that
contains key information. It is staff or can be sent to feedback
often used to remind staff of an specific people or
upcoming event or change in the departments without being
normal routine. This form of altered.
✗ Paper memos can easily be lost.
communication is now usually
done via email.
✓ Memos are very easy and
quick to write. ✗ Emailed memos may not be
read by the receiver.

Facsimile (Fax) allows written

✓ Fax is a quick way to send a ✗ One way communication – no
documents, images and notes to
be sent via a phone line. The hard copy (paper copy) of a feedback
receiver’s machine will print out document to another person.
the document out. This is still ✗ Faxes can often be unreliable as
used in offices but email they may not arrive or may not
attachments are replacing it. be read if the receiver doesn’t
✓ It is quick and easy to send,
know they have been sent the
and it can be delivered to fax.
offices all over the world in a
few seconds
✗ Not all business have a fax
machine
Letters are written
✓ They are a formal ✗ One way communication – no
communications that may
contain vital information. A communication that staff can feedback
staff member may receive one to keep and show to others.
signal a pay rise, or one may be ✗ Letter can be used as evidence
sent to a supplier to signal an of errors: employees may use
end to a contract. them as evidence that they are
✓ A letter can be sent to more
being bullied or that they were
than one person, saving the promised a pay rise.
business time.

Newsletter – a summary of
✓ This can be very quick to ✗ One way communication – no
news articles and updates that
are of interest to staff. A read but contain lots of feedback
business may use a newsletter to information.
keep staff up to date with any ✗ Some employees may not read
changes, upcoming events or the newsletter and therefore not
awards they have won. know the latest news.
✓ They can boost morale by
highlighting employee
✗ They can be quite expensive to
success
produce

Poster – this is a visual method

✓ These are very quick and ✗ One way communication – no
that shows key information in a
clear and simple way. The easy to produce feedback
poster should have very few
words on it and plenty of ✗ Businesses cannot guarantee
images. Businesses often use that all staff has seen the poster.
✓ Posters can be seen by lots of
them to highlight events such as
parties. people at once, for a very
✗ A poster can be confusing if
small amount of money.
someone doesn’t read it
properly or if it doesn’t contain
enough detail

Email - these are electronic

✓ These are quick and easy to ✗ One way communication – no
messages sent via the internet.
They are sent within the write and send feedback
business by mangers and other
employees
✗ Some people may not check

✓ The sender can add a their emails on a regular basis,

so they may not respond to a
‘receipt’ to the email so they query or question quickly
know when the receiver has enough
read it
✗ Email can be used too
frequently, causing staff to
spend too much time answering
emails rather completing other
important tasks

Verbal method of internal Benefits Drawbacks

communication

Meetings. A meeting allows a

✓ Face-to-face meetings allow ✗ A few people who want their
group of people to communicate
with each other and make people to voice concerns and opinion to be heard can
decisions quickly and show emotions, giving dominate meetings. This means
efficiently. Often an agenda (list quicker decisions and that not all employees get the
of topics to cover) will be allowing employees to chance to speak.
handed out and minutes discuss their opinions and
(summary of decisions) ideas ✗ Meetings can be
produced at the end time-consuming for businesses
and do not always produce an
✓ Two way communication outcome.

Telephones are used a lot in

✓ Two way communication ✗ The telephone isn’t always
many businesses on a
day-to-day basis. They allow the answered, which means the
business to communicate both ✓ The telephone is quick and message may not be transferred.
internally (with other workers) For example, if the supplier
direct and can be used to
and externally (with customers). doesn’t answer the phone, they
complete a range of tasks
won’t get the message to
such as consumer queries,
change the order.
orders or speaking to a
colleague.
 ✓ The phone allows a business
to talk to people, who are
away, for example customers
in different countries.

Method of external Benefits Drawbacks

communication

Email can now be sent as

✓ Businesses often send an ✗ One way communication – no
formal documents to speed up
the communication process. For email instead of a letter as it feedback
example, a business may attach is cheaper but can include
a letter to an email, or write the the same layout and image as
email as a formal reply. a letter
✗ Emails are not always written as
✓ Emails allow a business to carefully as letters.
communicate quickly with
external stakeholders.
✗ They can be sent to the wrong
✓ Emails can be saved for
person
future references

Letters are important for the

✓ Letters give a professional ✗ Letters are time consuming to
business’s image. A poorly
written letter with spelling image of the business and write
mistakes can damage the show it values its
business’s image. Letters are stakeholders. For example, if
used to communicate with a customer writes to a
business complaining about ✗ They are expensive to send
customers, suppliers and other
businesses. Larger businesses its product quality, they may
often have a customer relations be impressed if they receive
department that uses letters to a letter, as it shows time and
effort has been spent on their ✗ One way communication – no
answer complaints and praise
complaint feedback

Newsletters. Many stakeholders

✓ It is a cheap, cost effective ✗ Not all external stakeholders
look at the company’s
newsletter. This often used to method to communicate key may read the newsletter, so they
show off new projects, staff information to a large could miss important
achievement or other number of people. information; for example,
business-related news. shareholders may miss the
details of the next AGM
(Annual General Meeting).
✓ The newsletter can be used
to boost the image of a ✗ One way communication – no
business. feedback

Advertisements: businesses
✓ They can be very creative ✗ Adverts can be expensive and
may place adverts in a range of
media (e.g. newspapers, and fun, allowing the may not be seen by the target
televisions) to inform their business to improve its market: a 30 second advert
stakeholders of important image during the NFL Superbowl
information, new products or would cost $3.5 million,
offers whereas an advert in the local
newspaper will cost a few
✓ Placing adverts in the correct dollars
places means that businesses
can target customers very ✗ One way communication – no
accurately feedback

Websites: many companies

✓ These can be quite cheap to ✗ Only around 35% of the world
have their own website. Even
sole traders may have a small develop and allow people to uses the Internet and so some
website for their stakeholders to see products, news and businesses may miss out on
see. contact details. custom.

✓ Businesses can use websites ✗ Websites can ‘crash’ (stop

to communicate with their working) if not updated or there
stakeholders and offer them a are technical problems, which
variety of ways to contact the can cause a loss of custom and
business. poor image

Telephone: businesses still use

✓ The phone can be a quick ✗ A phone line can have a poor
the telephone to contact
stakeholders. Many larger and cheap way to talk connection, making it hard to
businesses have call centres for directly to someone when hear the person on the other
customers to ring, whereas face-to-face is not an option. end.
smaller firms may have a direct
line to the shop or factory. ✓ The phone can allow a
business to speak to ✗ It can often take a long time to
suppliers and customers
 anywhere in the world. speak to someone unless they
are available and near the phone
✓ Two way communication at a specific time.

Video conferencing is often

✓ It is direct and nearly as ✗ It can be quite difficult to get a
used to communicate with
groups in other countries. good as face to face as it time that suits both parties.
Skype, for example, gives allows the sender and
people and businesses the ability receiver to see each other.
to talk over the internet.
✗ Video often requires technology
Businesses now operate all over ✓ It is cheaper for two offices
the world, and have offices in in different countries to to be available: for example, the
multiple cities. Video communicate via video internet and some expensive
conferencing allows them to conferencing rather than to equipment.
connect and keep the same send employees to the other
company ethos and image. office.

✓ Two way communication

Text messages are used by

✓ This is a cheap way of ✗ Like any text message, these
many organisations to contact
stakeholders with small updates communicating with can be misinterpreted and
or important messages. This stakeholders. misunderstood.
means the businesses can
contact its stakeholders while ✓ Text messages can include
they are on the go. This is a key information, offers and ✗ One way communication – no
direct way of communicating special content, such as prize
and can target specific people. winners. feedback

✓ The majority of people have

access to a mobile phone and
can be contacted even when
away from a computer.

Social media is the

✓ Quick, efficient and specific, ✗ Some of the more elderly
fastest-growing communication
method, and businesses use it to allowing businesses to be stakeholders do not access
inform stakeholders in many very accurate with their social media and prefer other
different ways. Social networks, communication. forms of communication such
online advertising and mobile as a letter.
internet access have made social
networking a new
✓ Many younger customers
communication channel. have access to social media
✗ Not all customers will use the
on their phones.
Many younger customers use internet on a regular basis and
their mobile phone to access so websites, emails and social
social media and this allows media may not communicate
businesses instant ✓ Social media can be creative the message to them.
communication channels.
and fun, which keeps the
business image positive.

Formal communication Ways in which information technology can improve

When the official, recognised methods of internal communication
communication are used. - E-mails are quick and easy to send. They have
a ‘received’ function so the sender knows they
Informal communication have been received. They can also be stored.
When information is passed though
non-approved, or unofficial methods of
communication are used such as gossip and - Skyping/video conferencing can save time and
rumours. Although informal communication can money by allowing people from different
be frustrating for organisations, as it can be locations to communicate effectively.
misleading or changed, it can also be valuable
and helpful.
Barrier to communication Explanation Example

Method Some methods do not suit the A business makes an employee

situation and the incorrect redundant by email. The email may
method may upset or annoy not get to the receiver.
people. If a business uses an
informal method to pass on a
formal message, stakeholders are
likely to react badly.

Language/Jargon (technical If the wrong vocabulary is used, A UK company uses technical

terms) the receiver won’t understand terms when speaking to a customer
key words. in another country. The customer
has only basic English and doesn’t
understand the technical terms.

Culture Messages can be misunderstood In China, it is considered impolite

as different cultures perceive to reject a suggestion or opinion, so
(understand) things in many questions such as ‘Do we have a
ways. deal?’ can cause misunderstandings.

Distractions Noise or bad reception can mean A business telephones its supplier to
a message is not fully increase an order. The supplier
understood by the receiver. doesn’t hear the message correctly
 There may also be other and delivers the wrong order.
distractions that stop the receiver
understanding the message, such
as work pressures or being late
for an appointment.

Enthusiasm and emotion These could distort (alter) the An employee who is verbally asked
original message. Someone who to do something they dislike may
is angry, upset or tired may stop listening and then make a
misunderstand or incorrectly mistake.
send the message.

Amount Too much information may A waiter forgets a customer’s meal

cause the receiver to stop as they received too much
listening or misunderstand. information at once.

Length of chain of If a message is passed through A manager passes on a message for

communication various people before finally all staff. This may be changed
ending up with the receiver, it slightly as it goes through each level
may change slightly as each in a business, as managers
person puts their own summarise the message or alter it
interpretation on the message. slightly.
Words may be changed or the
meaning altered.

Losing message Some messages may be lost in Some email systems do not deliver
the process. For example, faxes, messages that contain rude words or
emails and memos are all lost by large attachments. This means they
employees as they can be could be lost.
accidentally deleted, misread or
the fax machine not turned on.
Technical problems Some office equipment may not If there is a power cut, computers
be working, stopping a message will not be able to work, meaning
being sent. Machines are also some methods of communication
likely to break or wear out over won’t be available.
time, meaning messages could
be lost or slowed down.

Overcoming the barriers to communication Problems of poor communication

through:
-Training – can be given to help with Examples:
communication difficulties or up-skilling
employees. ● Employees are unhappy with their manager as
-Recruitment – when businesses are hiring they feel they are not listened to
people they can use this process to assess the
communication skills of the applicant.
-Technology – if communication barriers occur
due to faulty or broken down technology, ● Customers do not get a quick enough reply and
businesses either have to get it replaced or the business develops a poor reputation
repaired.
Chain of Command – sometimes if the chain of
command is too long businesses may remove
● Orders are missed or are incorrect
some layers (delayering)
Social events – internal communication may
improve if there are social events organised for
the staff as it provides them with opportunities to
interact with people from other departments.

Marketing definition: Marketing involves:

Marketing is identifying customers’ needs and ● Identifying customers’ needs and wants
satisfying them profitably. ● Designing products or services that meet those
needs
● Understanding the threats from competitors
● Informing customers about products
● Charging the right price
● Persuading customers to buy their product
● Making products available in the right
location
Product orientation definition: Market orientated definition:
Focuses on making a quality product and then Focuses on finding out what the customer wants
trying to find customers to buy it. through market research and then trying to make a
product to meet customers’ wants.
Satisfying customers’ needs involves 3 things:
1. Adding value
2. Unique selling point (USP)
3. First mover advantage
1. Adding value through marketing: 2. Unique selling point (USP)
The amount of value added to a good through the A feature of a product; its image, price, promotion or
process of marketing (unit cost minus selling price). distribution (place) that is superior to the competition.
This can be done through branding etc What makes the product stand out.
3. First mover advantage: Maintaining customer loyalty - building customer
The advantage gained by being first into a market relationships
etc – for example, extra sales as there are no other To promote customer loyalty (customers who buy
competitors your product and service repeatedly) building a
relationship with the customer is necessary.
Relationship marketing involves communicating with
customers regularly and encouraging repeat
purchases. Firms need to engage their customers with
their brand regularly.
Why customers spending patterns change: Customer loyalty definition:
● The economy (boom = spending increases, When a customer buys the same product again and
recession = spending decreases – for most again.
goods)
● Technology (new technology = people will
want to buy it)
● Fashion (when things are in fashion they are
more often purchased)
Factors that affect individuals’ consumption: How firms respond to customers’ changing
● Income (people with higher incomes buy spending patterns:
more luxury goods) ● Adopting (improving) their product to meet
● Age (as we age the products we buy customers changing needs
changes) ● Launching new products that suit customers
● Lifestyle (single people purchase different changing needs
products to married people with children) ● Selling its current products in new markets
● Discontinuing selling a product for which
demand has declined
Competition within a market might increase How businesses can respond to increased
because: competition:
- Changes in technology making it easier for - Using pricing strategies (e.g. lower prices) to
new firms to enter a market (internet in the increase competitiveness
newspaper market) - Improve quality of service/product by increasing
- Changes in technology making it easy for training for staff
customers to compare prices of products - Improving operations management to speed up
(compare.com) delivery times
- Changes in government regulation that - Conducting research to develop new products
allows more firms to enter a market - Launching a promotional campaign to increase sales
(breaking up monopolies etc) - Using relationship marketing to develop brand
- Fall in the number of customers in market loyalty

Advantages to consumers of greater Niche marketing definition:

competition: Highly specialised sub part of a larger market.
● Lower prices (when there’s more companies Niche marketing occurs when a firm competes in a
they will compete on price) small segment of a market with which the major
● Greater choice (more firms = more choice) competitors are not concerned with e.g. Classic FM
● Better quality (firms will compete on operates in a niche market.
quality)
 Characteristics of a Niche market:
- Premium (high) prices (no economies of
scale possible)
- Small sales volume
- Highly differentiated products
- A high skills base
Advantages of operating in a Niche market: Disadvantages of operating in a Niche market:
- product designed to meet the needs of the - does not allow for economies of scale to be
customer exactly and therefore it should sell achieved, therefore high unit cost
well in its market - if a large firm enters the market it will make it
- a premium price can be charged – therefore difficult for the niche market firm to survive
each unit sold should have a high profit as they cannot compete on price
margin - small number of customers and therefore if
some customers are lost if will have a major
detrimental impact on the firm
- firm is likely to remain small even if product
is successful because market is small
Mass marketing definition: Characteristics of a Mass market:
Mass marketing aims for high sales volume at - Low prices (economies of scale possible)
low/lower prices. It is an attempt to appeal to the - Undifferentiated products
entire market. - A wide range of sales outlets
- Extensive promotion
- High sales volume
Advantages of operating in a Mass market: Disadvantages of operating in a Mass market:
- less risk as there are larger numbers of - heavy capital investment in equipment etc is
consumers and therefore a loss of some required
consumers will still leave a lot of consumers - before entering a firm must be sure that
- due to economies of scale producers can enough demand exists for their
enjoy lower average costs and therefore product/service because a lot of money has
charge lower prices already been invested
- good/service not designed especially for the
customers and therefore it may not sell well
outside its original market (internationally)
Market segmentation definition:
Market segmentation is a process of dividing up a
market through identifying groups of consumers
with common needs and wants. This helps establish
a target market (customers a firm want to aim their
goods/services at)
Market share definition: How markets are segmented:
Percentage of total market sales held by one brand 1. Geographic Segmentation (different products
or business. are targeted at different customers depending
on where they live in a city or country)
2. Demographic Segmentation (age, gender,
income, social class or ethnicity or religion)
3. Socio-demographic segmentation (different
products are targeted at customers depending
on how well off they are – A = Upper middle
class, B = Middle class etc
Benefits of segmentation to businesses: Marketing orientated business definition:
 ● Allows businesses to target marketing A business that focuses on finding out the needs of
campaigns accurately – targets the segments the customer (by using marketing research) and then
they are interested in designs and builds a product that meet the needs of
● Allows businesses to identify gaps in the the customer. Market research is key.
market for new products/services – identify
segments whose needs are not being met
● Allows businesses to differentiate their
product from those of their competitors
A market orientated approach will attempt to: Market research definition:
- Create products based on what customers want The process of finding out what consumers want or
- Identify changes in the market and changes in the need from a product before a product is made. The
needs of customers, allowing the business to be the process of collecting and interpreting data about
first to react to change customers and competitors.
- Develop brand loyalty by ensuring customers’
needs and wants are satisfied
If a firm implements market research effectively Both new and existing firms use market research
it can: to investigate:
● Identify the needs and wants of customers - customers’ preferences (what customers want
● Identify what is the best price to charge for from a product, what they are prepared to pay
a product etc)
● Identify how much competition is in the - competition (who they are, their market share
market and their strengths and weaknesses)
● Spot a gap in the market that it can - market segments (needs, habits and lifestyles
profitably fill of different groups of customers)
● Design its marketing mix (price, product, - market size and trends (how many customers
place and promotion) to target the needs of are in the market and whether it is growing or
different market segments. shrinking)
● Allow the business to respond quickly to
changes in customers’ needs
There are two types of data that market research
can generate:
1. Quantitative data
2. Qualitative data
1. Quantitative data 2. Qualitative data
Quantitative market research is based on relatively Qualitative market research is based on the opinions
large samples and is, therefore, statistically valid. It of a small focus group or in-depth one-to-one
can be expressed in numerical terms, e.g. sales have interviews. It aims to understand why customers
increased by 45%; the market for soft drinks is behave in certain ways or what they think of a
worth over $4billion. product or service. It examines why customers do
what they do. As the groups are small, the findings
are not statistically reliable.
Secondary research definition: Types of secondary data:
Secondary research is the process of gathering data - Sales records (yours or competitors)
that has already been collected or published. - Government data (statistics, social
Secondary data may exist within the business or be demographics etc)
gathered from elsewhere. - Customer information (spending habits etc)
- Information about competitors (Their
websites, company reports etc)
- Commercial data (Mintel reports etc)
Advantages of secondary research: Disadvantages of secondary research:
● Cost – much of it is available free of charge and ● Reliability – depending on the source, secondary
is easy to access. data may or may not be reliable. Government
● Access – for small firms, secondary research data, for example, may be very reliable; data from
offers access to professionally collected data other sources may, by contrast, be unreliable and
that they would not otherwise be able to afford. potentially misleading.
● Time – because it is easily available, using ● Specificity – secondary data may not be specific
secondary data can save a business a significant (directly related) to a firm’s needs. If a firm has
amount of time – rather than gathering the data particular questions it needs answering, it is
themselves unlikely to find answers in generally published
secondary data.
● Amount of data – the large amount of secondary
data available is often a problem in itself. A firm
would need to sort through the data carefully in
order to extract the useful information that it
needs.
Primary research definition: Primary research methods:
Primary research is the gathering of new and ● Questionnaires
original, first-hand information. It can be done ● Interviews
through observation, experimentation, ● Focus groups
questionnaires and interviews. ● Observations
● Experimentation
Advantages and disadvantages of Advantages and disadvantages of interviews:
questionnaires: Advantages
Advantages: • Qualitative data can be produced (descriptive, in
● Quantitative data can be produced depth answers about the way people think and feel)
● Customers views can be obtained • Interviewer can explain questions if there is any
Disadvantages: misunderstanding
● Costly if done in person Disadvantages:
● Poor questions lead to inaccurate results ● Time consuming, costly
• Interviewer bias can be a problem causing them to
not record the interviewee’s answer correctly
(recording what they think the answer should be
rather than what the interviewee is saying to them)
Focus group definition:
A selection of people who have similar characteristics
to target market who feedback their opinions on a
company’s product or service.
Advantages and disadvantages of focus groups: Observations:
Advantages: Watching customers as they shop. Firms try to draw
● Qualitative data can be obtained conclusions about their customers from observing
● Detailed information is obtained their behaviour.
Disadvantages:
● Expensive – group needs to be paid
● Limited data collected
Experimenting
Launching a product into a test market (a very
small market) in order to gain customer feedback so
that the product can be altered before it is launch
into a large market (movies have test screening for
example)
 Advantages of primary research: Disadvantages of primary research:
● Timely – Primary research is up to date. ● Time – While online surveys might be fast, other
● Fast – Some types of primary research (online methods, such as interviews, can be very
surveys, for example) can give very quick time-consuming.
responses. ● Cost – Primary research can be very expensive to
● Unique – Collects data which no other business collect.
has access to (and the results are confidential). ● Expertise – Good primary research relies on the
● Specific – Primary research focuses on the people doing it. Choosing the most appropriate
particular topic the business is interested in. method and carrying out the research effectively
is not easy. Mistakes and poorly conducted
research are common.
Sampling definition: Types of sampling:
Researching a small percentage of a population to 1. Random sampling – involves selecting
draw conclusions about the whole population. individuals randomly from a population.
2. Quota sampling – building a sample group so
that it reflects the proportion of the
population.
3. Stratified sampling – sampling from a
particular segment of the population.
4. Cluster sampling – gathers a sample from a
specific geographical area.
Factors influencing the accuracy of market 1. Time
research data: Secondary data is often out of date when company
1. Time searches for it. Primary data is up to date when it is
2. Research design collected.
3. Sample size 2. Research design
4. Interviewer and interviewee quality Using the wrong research method can result in weak
5. The human factor data. For example, a postal survey used to research
teenage online gaming habits is likely to yield a very
low response rate.
3. Sample size 5. The human factor
A smaller sample size may be easier and cheaper, Careful market research is behind almost all product
but with fewer people actually surveyed, the results launches and yet 90% of all new products end in
will be less statistically accurate than if a larger failure. Human behaviour is unpredictable and no
sample was used. amount of research can allow for this.
4. Interviewer and interviewee quality
The skill of the interviewer will determine the
quality of the answers. People may give responses
that they think will please the interviewer, or they
may not understand the questions.
Methods of market research result presentation: Advantages and disadvantages of each method:
1. Table/tally chart 1. Table/tally chart
2. Bar chart Allows presentation of data in a simple form.
3. Line graph However, unable to display complex analysis
4. Pie chart 2. Bar charts
5. Pictogram Useful when comparing two or more sets of data.
However, limited in how much information they can
present.
Advantages and disadvantages of each method: How important is market research to the
3. Line graph successful introduction of a new product?
Can show the relationship between 2 variables e.g. ● Help find out customers’ needs so able to adopt
price and demand. However, unable to show products to suit customers
relationship between 3 or more variables. ● Able to determine possible demand so able to
4. Pie chart establish if the product is worth producing, and if
Can show proportion compared to total (i.e. it is to be produced, the correct quantity of good
amount of market share held by firm). Quick and to produce
easy to understand. However, can be complicated ● Able to determine the effectiveness of
to draw. promotion/pricing strategies
5. Pictogram However:
Similar to a bar chart (uses symbols instead of ● Market research cannot predict how competitors
columns). Useful when data is simple. will react when a business launches a product e.g.
the competition could lower their price
● Customers’ needs can change rapidly and
therefore market research can become out of date
very quickly
Marketing strategy definition:
How the 4 ps are used/combined in order to sell a
product.
A marketing strategy is one that meets Marketing mix (4 ps):
customers’ needs, therefore businesses must:
● Design and produce high quality products ● Price (price strategy, price elasticity)
● Charge a price that is acceptable to ● Product (quality, packaging, branding)
customers ● Place (market coverage, distribution channel)
● Inform customers about the product through ● Promotion (advertising, public relations,
promotion relationship marketing)
● Make the products available in the right ●
place at the right time Combined to make a product attractive to consumers.
A successful marketing mix is one that: Costs of developing and launching a new product:
● Meets customers’ needs ● Research and development
● Where the 4Ps are consistent with one ● Marketing – advertising
another
● Provides a USP
Benefits of developing and launching a new Brand definition:
product: Name, symbol or feature given to a product that help
● New source of sales revenue it stand out from competitors e.g the Nike swoosh
● New source of profit
Diversification – if product is in different market to
ones a company already has
Benefits of branding a product: Packaging:
● Differentiates the product form What the product comes wrapped in.
competitors’
● Helps creates customer loyalty (repeat
purchasing)
● Helps recognition by potential customers
● Develops an image
Raises the prices when the brand and image
become strong
Uses of packaging: Product Life Cycle definition:
● Promote the product The level of sales at the different stages through
● Differentiate the product on shelve which a product passes over time. Consists of:
● Protect the product from damage - Development (product researched, designed
● Communicate information (e.g. about and tested – high costs and no sales revenue)
ingredients or usage) - Introduction
● Makes the product convenient to use (such - Growth
as easy pour caps) - Maturity
● Makes the product easy to store and display - Saturation
- Decline

Features of different stage PLC:

Features of stage Introduction Growth Maturity Decline
Sales Low but growing Growing quickly High but Declining
growing slowly
Profits None/low Growing High but Low
declining
Cash flow Negative/slightly Positive Positive Positive, but
positive falling
Competitors Few Growing Many Falling
Marketing strategy at different stages of the PLC:

Marketing Introduction Growth Maturity Decline

strategy
Marketing High High (cost per Falling Low
expenditure unit sold falling)
Price Skimming or Price cut/ Competitive Low
penetration increase pricing strategy
strategy used depending on
introduction
strategy
Product Basic Improved Differentiated Basic
Promotion Focus on Generate brand Retain brand Targeted
awareness preference loyalty promotions
Place Few outlets Increasing High number of Falling
(distribution) outlets

Extension strategy definition: Criticisms of the PLC:

Strategies used by firms in order to extend the - In reality, very few products follow the classic life
maturity stage of the PLC (when sales are high). cycle
Examples include: - The length of each stage varies enormously between
- finding new markets/segments for a product products
(Vietnam for western products) - It is difficult to identify exactly where a product is
- Finding new uses for the product on the PLC
- Modifying the product (Mar bar ice cream) - It is almost impossible for a firm to know when a
- Develop the product range product will enter the next stage of the PLC, therefore
- Change the appearance/packaging (Coca it doesn’t help the firm predict the change it is merely
Cola) a guide as to how marketing strategies should change
- Encourage more frequent use (Kellogg’s – when a product moves to another stage of its life
not just for breakfast) cycle.
Pricing methods Factors that will influence the price of a product:
● Cost plus pricing ● the cost of production
● Competitive pricing ● the type of customer being targeted (market
● Psychological pricing segment). Upper middle class = premium
● Penetration pricing price
● Premium pricing ● the amount of competition in the market –
● Price skimming more competition = lower price
● Promotional pricing ● the objectives of the business – profit
● Dynamic pricing maximisation = premium price
● where the product is in the product life cycle

Method Benefits Limitations

Cost plus pricing: The ✗ Simple - set percentage for all ✗ If the same percentage is used for all
unit cost of a product is products products; customer expectations or
calculated and then a ✗ Easy to set price according to geographic differences are ignored
percentage is added to profit targets ✗ Does not take into account competitor’s
 set the price. The % price, therefore company’s product may
added is the profit not be price competitive.
margin.
Competitive pricing: ✗ Price matches customer ✗ The firm gains no advantage in terms
Charging the same expectations of price – their price is the same as
price as other firms in competitors’
the market.
Psychological pricing: ✗ Encourages higher-priced sales ✗ Modern customers are not easily
Setting a price that (a customer may think $100 is convinced by this tactic
seems cheaper when it too expensive but, ✗ Simple, whole-unit pricing ($100) is
actually isn’t. (no psychologically, sees $99.99 as more convenient for both the customer
longer on spec) acceptable) and the firm
Penetration pricing: ✗ Helps a firm to gain sales in ✗ Once a low price is set, customers may
Charging a low price competitive markets expect it to remain low
when entering an ✗ The low price may not fit with the
established market. overall brand image and may therefore
Aim is to gain market damage sales
share.
Price skimming: ✗ Helps the firm to gain maximum ✗ The price may be too high for some
Charging a high price profit early in the product’s life customers
when a product is first ✗ Can help to establish a ✗ A price reduction early in the product
launched on to a market premium/high-quality image life cycle because of low sales can
e.g. new games damage brand image
console. Price is
reduced later.
Promotional pricing: ✗ Can increase sales in the short ✗ Reduces profit margins for the period
Reducing the price to term of the promotion
attract customers, ✗ Can increase brand awareness ✗ Customers may not want to buy the
BOGOF, money off ✗ Can stop consumers buying product when it returns to “full price”
coupons competing products if they have as they are used of getting it cheaper.
already ‘stocked up’ on a firm’s ✗ May harm brand image
products
Dynamic pricing: ✗ Helps to maximise revenue ✗ Customers may resent paying different
Price is altered ✗ Can ensure, by lowering prices, prices at different times, and may not
daily/hourly/each that a firm’s capacity is make a purchase if they do not feel they
minute to reflect effectively utilised are getting the ‘best deal’
demand. Used by
airlines. (no longer on
spec)

Others (not on spec but useful to know): Others (not on spec but useful to know):
Premium pricing: Geographical pricing:
Charging a high price for a product with a significant Prices vary according to the location of the sales
competitive advantage i.e. hotel on the beach. outlet e.g. petrol is cheap in the city than it is in the
Discriminatory pricing: country.
Different prices are charged to different groups of
people in a market e.g. cinemas charge adults full
price and children half price.
Factors that need to be considered when setting Is price the most important part of the MM?
the price for a product: Yes:
● Production cost. - Price helps attract customers
These must be covered or a loss will be made - Price helps reinforce brand image
● Level of competition.
The greater the level of competition the lower the No:
price is likely to be set at - If other elements of the marketing mix aren’t correct
● Product/what is being sold. then price will not attract customers
Luxury good = high price. Basic good = low price. - If the product/service is located in the wrong place
● Stage of the product life cycle (see PLC then price is less important, for example if a cheap
notes) restaurant is far outside town it is unlikely you’ll
make the effort to visit.
Price elasticity of demand Inelastic demand definition:
Measure the responsiveness of demand to a change in A percentage change in price leads to a smaller
price. Formula: change in quantity demanded
% change in Quantity Demanded
% change in Price
Elastic demand definition: Price elasticity of demand and sales revenue
A percentage in price leads to a greater percentage in Good with price inelastic demand:
quantity demand - an increase in price will increase sales revenue
- a decrease in price will decrease sales revenue
Good with price elastic demand:
- an increase in price will decrease sales revenue
- a decrease in price will increase sales revenue
While PED is important for decision making for a
firm other factors affect decision making eg
competition, state of economy etc

What affects the price elasticity of demand? Types of distribution channels:

1. Number of substitutes; if many substitutes good 1. Direct distribution (producer sells directly to
likely to be elastic in demand; if few substitutes or customer)
none good likely to be inelastic 2. Retail distribution (producer to
2. Necessity or luxury; if good is necessity then supermarket/shop to customer)
likely to be inelastic in demand; if luxury then likely 3. Wholesale distribution (producer to
to be elastic wholesaler to shop to customer)
3. Proportion of income: if good takes low 4. Agents (used for selling into markets which a
proportion of income then more likely to be inelastic firm has little knowledge of – i.e. foreign
(change in price hardly noticed), if good takes high markets)
proportion of income then more likely to be elastic in
demand
Advantages of direct selling: Disadvantages of direct selling:
✓ By cutting out intermediaries (who add their own ✗ The factory store outlet may not be close to
mark-ups), the product can be sold at a lower potential customers; when products are sold at a
price, aiding competitiveness. physical location, the extent of the distribution is
✓ Producers benefit from direct customer feedback limited to customers within a reasonable distance
and can respond to changing customer needs of the factory store.
quickly. ✗ It may be impractical, or difficult, to send items
✓ A direct relationship with the customer can lead ordered over the internet by post (for example,
to increased customer loyalty. household furniture).
✗ The firm does not share the cost of distribution
with retailers.
 Advantages of retail distribution Disadvantages of retail distribution
✓ Wide distribution is possible ✗ Retail stores often sell more than one brand of the
✓ Selling through specialist retailers can ensure that same product. The wide choice attracts customers
customers receive product advice e.g. laptops to retailers, but at the same time exposes them to
✓ Selling through premium retailers can helps a competition; brands have to fight against the
product’s brand image competition for customers’ attention.
✗ Retailers add their own mark-up, making the
product more expensive when sold.
✗ There can be loss of control of product (quality,
presentation, environment etc) at point of sale.
Advantages of wholesale distribution Disadvantages of wholesale distribution
✓ Wholesalers ensure that products are available to ✗ Wholesalers add their own mark-up to the
both large and small retailers. product’s price. This may make the product
✓ Wholesalers hold stock, thus reducing uncompetitive.
stockholding costs for the retailer. ✗ The additional stage in distribution increases the
✓ Retailers have access to a wide variety of time a product takes to reach consumers.
products from many producers from a wholesaler ✗ Increased handling as products are processed by
✓ Wholesalers reduce the cost of distributing wholesaler increases the chance of product
products to a large number of retailers. damage.
✗ The producer loses control over product storage
(potentially leading to mishandling and damage).
Advantages of distribution through agents: Disadvantages of distribution through agents:
✓ Agents know and understand the best methods of ✗ The producer loses a degree of control over how
distribution/transport within their own country and where the product is sold so there is a risk of
and can ensure that products get to customers damage to brand image.
quickly and easily. ✗ Agents add their own mark-ups, so the price
✓ Agents understand the language, culture and charged to customers may be high and
tastes of the local market. uncompetitive.
✓ Agents understand the laws and regulations
involved with importing and selling goods within
a particular country.
What determines how a product is distributed?: Promotion definition:
● Marketing aims. Promotion is communicating to customers/potential
Large sales = retail distribution. customers about a product using a variety of methods
Export = Agent. e.g. advertising in a paper.
● Product characteristics.
Perishable = quick distribution. The aims of promotion:
● Market coverage. ● Increase demand for products
The number of outlets a producer wants their product ● Increase customer loyalty (repeat purchasing)
sold in will also affect the distribution method. ● Create, enhance or maintain a brand image
● Cost consideration. ● Raise awareness, emotion or concern for an
The longer the distribution, the costlier it is. issue or product
● Customer consideration/brand image. ● Maintain, protect or increase market share
Customer perceptions about retail outlets and the ● Establish a price for a product that the
desire to create/maintain brand image may affect consumer is willing to pay
distribution.
● Product life cycle
How important is promotion depends upon: Choice of promotion method will depend upon:
● The degree of competition in the market. The - Whether the market is local, national or
greater the competition to more important international
 promotion is – (standing out from crowd). - Does the method compliment the other 3 Ps
● The market segment (a niche market will need - The size of the advertising budget
little promotion) - The type of product being promoted
● The marketing emphasis (if the product is - Who is the target market
physically different – it contains a physical - Legal constraints
advantage – it may need little promotion. If - Where the product is on the PLC
the product is not physically different and it is
differentiated through branding then this
branding will require heavy promotion)
● Stage in the product life cycle (introduction –
heavy promotion, maturity – little promotion
etc)
Types of above the line promotion and the
advantages and disadvantages:
Advantages of television: Disadvantages of television:
- Large audience can be reached - Very expensive
- Product can be demonstrated – shopping tv - Message is short lived
- Ability to target certain groups (certain people - Viewers tend to avoid TV adverts
watch certain programmes
Advantages of newspapers and magazines: Disadvantages of newspapers and magazines:
- Can have local or national coverage - No movement or sound
- Readers can refer back to ad - Advert can get lost amongst a large number of
- Ability to target certain groups (certain people other adverts
read certain publications)
- Can be relatively cheap
Advantages of cinema: Disadvantages of cinema:
- Can have local or national coverage - Limited audience (not many people go to the
- Ability to target certain groups (certain people cinema regularly)
watch certain movies) - Message may only be seen once
- Sound and movement can be used - Message is short lived
Advantages of radio: Disadvantages of radio:
- Sound can be used - No visuals
- Ability to target certain groups (certain people - Can be ignored by listeners (switch channels)
listen to certain radio shows)
- Cheap to make adverts for radio
Advantages of posters and billboards: Disadvantages of posters and billboards:
- Can have local or national coverage - Posters can be damaged and/or vandalised
- Seen repeatedly - Only limited information can be shown
- Good for short sharp messages
Advantages of internet: Disadvantages of internet:
- Can be updated regularly - Some adverts, such as pop up adverts, are
- Ability to target certain groups (certain people irritating and may damage the company’s
visit certain sites) rather than enhance it.
- Visits to site and therefore views of adverts
can be measured
- Cheap and easy to set up
Advantages of social media Disadvantages of social media
- Can target specific market - Sponsored links may be expensive
- Cheap method of advertising
 The aims of advertisement is to: Types of below the line promotion and the
- Introduce new products to the market advantages and disadvantages:
- Persuade people to buy the advertised product
- Create a brand image for a product
Advantages of public relations (using press Disadvantages of public relations:
releases or press conferences to communicate with - Company does not have full control over what
stakeholders): is communicated by the media
- Cheap as media carry story for free
Advantages of sponsorship (when business pay to Disadvantages of sponsorship:
be associated with a particular event or star): - The behaviour of the star may reflect badly on
- If event or star is successful it can guarantee the brand that sponsors them (Tiger Woods
wide coverage for a company. and Nike)
Advantages of direct mailing/e-mailing: Disadvantages of direct mailing/e-mailing:
- E-mailing is very cheap and can reach a large - Tends to be ignored by the receiver.
number of people
Advantages of merchandising (point of sale Disadvantages of merchandising (point of sale
displays/free samples): displays/free samples):
- Attracts customers to buy product as it makes - Providing free samples can be expensive.
it more prominent/allows for free try - Getting point of sale displays in supermarkets
can be expensive (firm has to pay supermarket)
Advantages of free samples Disadvantages of free samples
- Allows the customer to try the product and - May be expensive to give away product (and
therefore encourages purchase also pay staff to do it)
- Increases awareness of the product amongst
potential consumers
Advantages of BOGOF/money off deals: Disadvantages of BOGOF/money off deals:
- Will encourage purchases - If customers are used of getting the product “2
for 1” or at a reduced price, they may not want
to pay full price for the product when the
promotion ends.
Types of customer loyalty schemes:
- Money off next purchase coupon
- Loyalty card that collect points (used by
supermarket, airlines etc)
Advantages of money of next purchase coupon Disadvantages of money of next purchase coupon
- Encourages repeat purchasing (customer - Decreases the revenue the firm gets from the
loyalty) sale of the good
- Encourages people to try the product - When offer ends the customer may no longer
purchase the good
Advantages of loyalty cards Marketing budget definition
- Encourages customer loyalty as customers are A financial plan or forecast for the marketing of a
rewarded for repeat purchasing product for a specified period of time.
- Allows firm to collect information on their
customers which may help improve their
marketing
The size of a marketing budget will be determined E-commerce definition:
by: Process of buying and selling over the internet.
● The firm’s marketing objective (sales growth Includes business to business buying and selling
= bigger budget needed) (B2B) and business to customer selling (B2C).
 ● How much competitors spend (may want to
match them)
● The market conditions (lots of competition =
bigger budget needed)
● How much money the firm has (more money
= easier to have a bigger budget)
● The cost of different promotion methods (if
using TV then big budget required)
● Where a product is in its life cycle
(introduction = big budget)
Opportunities of e-commerce to businesses: Threats of e-commerce to businesses:
✓ Businesses can access customers all over the ✗ There is increased competition, as businesses with
world, allowing sales to increase for relatively lower costs can charge even lower prices. For
low costs. example, a business in Thailand may have lower
✓ Costs are much lower for a business as they have running costs and lower taxes to pay.
no shops to run. ✗ Websites may cost large amounts to design and set
✓ The business can provide in-depth information on up, and it may take months to start earning the
each product that it sells, giving reviews, links to money back.
other related products and showing the product in ✗ If a website breaks or needs updating, the website
action. may need to be temporarily closed.
✓ With internet usage increasing, the business can ✗ It may be costly to distribute the goods sold online
now use mobile, tablet and computer technology and they may become damaged whilst been
to sell their products. distributed.
Advantages of e-commerce to consumers: Disadvantages of e-commerce to consumers:
✓ Consumers can now search the internet for the ✗ Consumers may lose money through fraudulent
lowest prices. (fake) payment. Illegal companies may set up fake
✓ The internet is a fiercely competitive market websites that appear to sell products.
place, so businesses have to offer acceptable ✗ Consumers cannot try on or touch the products or
prices and quality. This means customers can services that they are buying, which increase the
access higher quality for less money chance that they will not fit or will not satisfy the
✓ The internet allows customers to access reviews customer.
and feedback about businesses. ✗ The time it takes for a product to be delivered can
✓ Consumers can buy products from all over the be very frustrating.
world without having to actually visit that country ✗ If there is a fault or issues with a product, it can
or business. often be very hard to speak to someone. Many
e-commerce businesses try to reduce costs by
having minimal staff allocated to customer
service.
Ways in which a business can use the internet Advantages of internet promotion:
to promote their products: - It’s cheap to set up and use (usually)
- Websites - It can reach target audiences (online
- Adverts promotions can target the correct people)
- E-mails (direct mailing) - It’s use can be accurately measured (a
- Social media business can measure the amount of times
- Reviews customers click on their advertisement)
- Blog

Marketing objectives may include: The firm’s marketing objectives will then
- Increase sales revenue determine which elements of the marketing mix
 - Expand into new market segments (price, product, place or promotion) are most
- Increase market share important and thus will determine marketing
- Increase product usage strategy.
- Develop new products Marketing objective determines the marketing
- Increase product awareness/brand recognition strategy, which determines how each of the 4ps will
be used.

Marketing strategy definition: Factors that influence the marketing strategy

Marketing strategy is how the business uses its 4 ps chosen:
(and which it prioritises) in order to influence ● Corporate objectives (expansion = market
customers to buy their product. strategy – increase sales)
● Marketing objectives (increase sales – market
strategy = decrease price)
● Stage of the product life cycle
● Level of competition
● Type of product
● The market
● Finance available

Consumer protection laws: The benefits of going into new markets are:
Designed to stop businesses making false claims and ● Spreading risk (if one market fails the
promises about their product. company has other markets to fall back on).
● Increased sales
Consumer protection laws are centred around the ● Culture-specific products (can be altered to
following areas: suit new market)
1. Misleading the customer through promotion ● Increased customer base

2. Faulty and dangerous goods

Goods sold must be ‘fit for purpose’
Problems of going into new markets: Benefits and limitations of methods to overcome
● Market decline (new market may not be problems of entering foreign markets
growing due to economic recession)
● Different laws – health and safety laws may
mean that your product needs to be altered
● Cultural differences (may affect sales of
product – brand name might sound strange in
new market’s country)
● Language (difficult to do business if can’t
speak language)
● Lack of knowledge of new market decreases
likelihood of success.

Method and Benefits Limitations

description
Joint ventures - This spreads the risk across two - The potential revenues and profit will
(entering a new businesses. Often, the costs will be split as have to be split with the other business.
foreign market well so if the entry into a new market fails,
with another each individual business will have lost less - The two businesses may have different
company, money. ideas about certain situations and
possibly one - One business may have expertise and decision making may take longer.
from that experience that the other business will
country) benefit from, which means the venture is
more likely to succeed
- Each individual business does not have to
commit as many resources.
Investment - The business may invest in staff training so - Expensive - may be difficult for the
(investing in staff are more comfortable in, and business to fund, especially if they have
training, new knowledgeable of, the new market. This invested a lot in expansion already.
equipment and improves staff morale and the skills
advertising to available for expansion. - Investment does not guarantee
overcome success.
problems of - This type of investment keeps the business
entering a new ahead of competitors and makes sure they
foreign market) have the most up-to-date equipment and
skills
Testing (having a - By testing the product, the business can see - Testing may waste time, meaning
test period in the how the new market responds to it. If the competitors release their product or
new market to product is not popular, then the business can service in the new market first.
see if customers choose not to go ahead with the expansion.
like the product)
- The business can use initial comments and
feedback to improve the product or service
before its full launch
Sell in many - By selling in many different markets, a - A business may try to expand into too
different business can reduce the risk of potential many new markets. This may cause
markets (when failures in one foreign market (provided cash flow problems and put the future of
businesses sell sales in other foreign markets are strong). the business at risk
their product or Spreads risk.
service in many
different
markets)
 The role of the production department is to: The Production Department:
● Provide the service the business sells, or The production department works with the marketing,
● Produce the product the business sells human resources and finance departments to support
to production or provision of products or services.
Productivity Production
The amount of outputs (goods or services) that can be Production is the amount of goods and services made
produced from a given amount of inputs (factors of that people want
production)
Measuring productivity Increasing productivity
Productivity can be measured per unit of input, per Either:
worker, per machine or per shift. Formula: 1. producing more outputs with the same amount
of inputs, or
Total output 2. producing the same amount of outputs with
Whatever you are measuring the productivity of less inputs
How to increase productivity/efficiency Production and productivity
1. Labour skills: Increased education and training Increasing production does not necessarily increase
(allows workers to get more done) productivity if the ratio of outputs to inputs remain the
2. Automation and technology: Increased use of same. For example, if a firm initially uses 20 inputs to
capital equipment (give workers better machinery to produce 10 outputs and the then increases production
work with) to 40 inputs to produce 20 outputs, productivity has
3. Improve workers motivation not increased because the ratio of inputs to outputs is
still 2:1

Advantages of increasing productivity

Increasing productivity will lower a firm’s unit cost of production. This leads to them being able to lower their
price. Therefore, this is useful if they are in a competitive market. Moreover, if their product is price elastic in
demand, lowering the price will increase sales revenue
Benefits of using technology to improve Drawbacks of using technology to improve
productivity productivity
● Unlike people, technology does need to be ● Although technology requires low running
paid a wage costs. It normally requires a large initial cost to
● Unlike people, machinery can run 24 hours a purchase the equipment.
day, seven days a week ● A more automated repetitive approach is often
● Having a more automated process can mean de-motivational for workers
that fewer people are needed, which ● Technology can become out of date very
significantly reduces a business’s wage costs quickly, so it may have to be updated to meet
the changing needs of customers

3 types of stock: What factors influence the amount of buffer stock

- Raw materials (to be used in production we should hold?
process) 1. How fast the stock is used up – the faster it is
- Work in progress (semi finished goods) used up the more stock that is needed
- Finished goods (service sector will only have 2. Storage space available. More space = more
this one) stock can be held
3. Nature of the product. Perishable stock = hold
little stock
4. Reliability of suppliers. Less reliable suppliers
= hold more stock
 5. Suppliers lead time = hold more

Reasons why a firm might hold a lot of stock: What is the problem with too much stock?
● To be able to supply customers straight away 1. Opportunity cost – money tied up in stock could be
from their finished goods. used elsewhere
● To ensure that production doesn’t have to stop 2. Stock wastage -loss in value due to theft, damage or
due to lack of raw materials going out of date (more likely when too much stock
is held)
3. Storage costs – cost of warehouse, security,
refrigeration etc
Lean production definition. Just in Time definition:
A philosophy that emphasises the reduction of Aims to ensure that inputs into the production process
resources in production to their minimum (people, only arrive when they are needed. Implemented
time, materials etc). Techniques include successfully, stock levels of raw materials,
● JIT components, work in progress and finished goods can
● Kaizen be kept to a minimum.
Advantages of JIT Disadvantages of JIT
- Cash flow is improved (less money tied up in stock) - Advantages of bulk buying are lost as only small
- No wasted or damaged stock amounts are purchased more often
- Stronger links with suppliers - If supplies are late then the production process may
have to stop
- Higher ordering and administration costs
Kaizen definition: Features of Kaizen:
Continuous improvement in the production process, 1. Continuous improvement (small changes very
no matter how small, rather than large one off often)
changes. 2. Elimination of waste
3. Right first time production (right quality first time
every time)

Advantages of Lean Production: Disadvantages of Lean Production:

- improved labour and capital productivity The attempt to achieve lean production is expensive in
- requires less stock, less factory space and less many ways; e.g. training of staff, purchase of new
capital equipment so costs are reduced machinery etc
- significant marketing advantages from fewer defects Conclusion:
– Quality can be USP For lean production to work employees must try to
- asking workers to suggest improvements can constantly improve the way the business works. This
empower the workers and increase their motivation requires a good deal of employee involvement and
empowerment. This is unlikely to work with an
authoritarian approach to management.

Types of production: Job production definition

- Job One product is produced at a time as a result of a
- Batch customer’s order. Skilled labour usually required e.g.
- Flow tailored suit

Benefits of using job production Limitations of using job production

● The product meets the exact requirements of the ● Job production is often labour intensive, which
customer; this can give the business a competitive makes the process very costly.
advantage. ● As products are made to order, they can often
● Tasks are varied for the employees, which can give take a long time to produce.
 them more motivation. ● No economies of scale e.g. materials bought in
● Businesses that use job production can often small quantities therefore no bulk buying
charge far higher prices than for mass produced economies of scale
goods.
Batch production definition Benefits of using batch production
When many similar items are produced together in a ● Batch production is flexible and allows a
batch, this is then followed by another different type business to offer a range of different products
of batch. Each batch goes through one stage of the on the same production line.
production process before moving onto next stage e.g. ● Offers workers a variety of tasks, which can
T shirts improve motivation.
Limitations of using batch production Flow production definition
● Changing from producing one batch to another Involves a continuous movement of items through the
wastes time. production process.
● Requires a range of machinery (costly) to
allow the different products to be produced.
● Businesses are required to hold a wide range
of raw materials (stock).

Benefits of using flow production Limitations of using flow production

● Capital intensive therefore this increases the ● Flow production is mainly done via automation
business’s productivity. and machinery, which can lead to repetitive
● Businesses can order large quantities of raw and boring tasks for workers, resulting in poor
materials therefore bulk buying economies of motivation.
scale possible ● The machinery required to produce the goods
● Higher productivity and cheaper costs for raw is often very expensive and requires a
materials enables business to have low costs significant capital investment.
and higher profit margins. ● Machinery can break down, which means all
● Businesses can lower their selling price if they production has to stop.
need to increase sales and maintain a good ● The production process is fixed (inflexible): all
profit margin. products are standardized (the same), which
makes it difficult to meet any changes in
consumer demand.

Choosing the most appropriate method of 1. The nature of the product

production depends upon: - Custom made one off products = job production
1. The nature of the product (highly individual = job - Products with some variation produced in medium
production etc) amounts = batch production
2. The type of market the business operates in (mass - Identical products produced in large amounts = flow
market = flow production if possible) production
3. The business’s resources (little resources – unlikely
to be able to afford the investment necessary for flow
production)
4. The skill level of the employees (highly skilled =
job production possible)
2. The type of market the business operates in. The three main technologies that are used in
Mass market – flow production because it is production are:
important that the good is:
- Produced in large numbers ● Computer aided design (CAD)
- Unit cost is low so therefore price can be low ● Computer aided manufacture (CAM)
- Quality can be standardised (identical ● Robotics
 products)
Niche market – job or batch production because it is
important that a good:
- Stands out from competitors (variation of
product possible)
- Can be produced in small amounts
1. Computer aided design (CAD) Benefits of CAD:
Instead of hand drawing designs, CAD allows - Increases design productivity i.e. easier and quicker
designers, architects and engineers to electronically to produce designs. Designers can change the size and
produce images. features of a design on screen quickly.

- The design can be tested before it is produced. For

example the aero dynamics can be checked before a
prototype is made. This saves time and money.
2. Computer aided manufacture (CAM) 3.Robotics
CAM uses computers to control and manage the Benefits:
production process. - Highly accurate production possible
Benefits: - Cheap to run – no need to pay them and they
- It allows consistent output (size, quality etc) don’t get tired
on a large scale - Can do dangerous production jobs that humans
- It increases productivity as products can be can’t
made without human involvement
Benefits of using new technology Drawbacks of using new technology
-Increased productivity as technology is faster, more -The cost of purchasing, implementing, maintaining
precise and convenient and upgrading can be extremely high
-Technology helps to enhance product quality, -It can require a lot of time and money spent on
-thereby meeting the needs of customers. Customer training staff to use the new technology
may be willing to pay more for it -Breakdowns will cause huge disruptions
-Reduced waste for businesses as technology is more
accurate
Fixed costs Variable costs
Costs that do not change as output changes e.g. rent, Costs that change as output changes e.g. raw materials,
salaries wages
Average costs Wages are a variable cost
Wages are paid by the hour. Therefore the more hours
Average costs = Total costs a person works the more wages they receive = variable
Number of item produced cost.
Salaries are a fixed cost
The cost of producing one unit Salaries are fixed amount of pay a person receives
each month regardless of how many hours they work =
fixed cost.

Economies of scale
The factors that lead to a decrease in unit cost as more is produced. Managerial, Marketing, Purchasing,
Financial, Technical and Diversification are the factors that lead to a reduction in unit costs.

Managerial: When firms grow they can hire Purchasing: bigger firms can buy in bulk and
specialised workers who will do there job more therefore reduce the costs of their inputs which will
efficiently therefore reducing unit costs reduce their unit cost
Marketing: the cost of advertising is divided by the Financial: Bigger firms have more collateral,
amount of units produced, therefore the more units therefore banks see them as less of a risk to lend
produced the lower the marketing cost per unit money to. Therefore they charge them a lower interest
rate which reduces their cost of borrowing.
Technical: Bigger firms can use their capital Diversification: Bigger firms will have a wider range
equipment all the time because they produce more. of products in more markets than smaller firms.
Therefore the cost of the capital equipment is divided Therefore if one product/market fails bigger firms
by a larger amount of output therefore reducing the always have other successful products/markets to help
cost of machinery per unit of output. the business survive.
Diseconomies of scale Labour relations:
The factors that lead to an increase in the unit cost of Larger firms have greater division of labour which
production as output increases past a certain point. usually leads to a lower unit cost. However, if taken
Examples: bureaucracy, labour relations and control too far it can alienate and demotivate workers,
& coordination. therefore their productivity decreases and unit cost
increases.
Control & coordination
The larger the business the more difficult it is to Communication problems
coordinate the activities of all employees efficiently The larger an organisation is the harder it is to
(i.e. ensuring that they’re all doing what they’re communicate effectively as there are more layers of
supposed to do) management for communication to pass through
(Chinese whispers). The can be detrimental to a firm’s
performance.
Break even output How to calculate the break-even point.
The amount of units that need to be sold in order for a Formula:
firm not to make a loss. At breakeven a firm neither Fixed costs
makes a profit or a loss. Sales revenue = total costs. Selling price – variable costs = Break-even
level of output.

Business decisions break even can inform: Steps to draw a break even chart:
● How much should be produced? 1. Calculate break even output using the formula
● How much should be spend on marketing? 2. Multiply the break even output by the selling
● What price to set for a product? price to find break even revenue
3. Plot break even output vs break even revenue
(point A)
4. Draw FC line (horizontal)
5. Draw TR (from (0,0) through Point A
6. Draw TC from (0, FC) through Point A
7. Label the graph with break even point, break
even revenue, and break even point
 Price increase effect on break even
Break-even point will move to the left if all other
things remain constant (fewer units required to
break-even)

Price decrease effect on break even

Break-even point will move to the right if all other
things remain constant (more units will be required to
break-even)

Fixed cost increase effect on break even Variable cost increase effect on break even
Break-even point will move to the right if all other Break-even point moves to the right if all other things
things remain constant (more units will be required to remain constant (more units required to break-even)
break-even)
Variable cost decrease effect on break even
Fixed cost decrease effect on break even Break-even point moves to the left if all other things
Break-even point will move to the left if all other remain constant (fewer units required to break-even)
things remain constant (less units will be required to
break-even)
Margin of safety
The margin of safety is the amount of sales over a
company's break-even point. In other words, the
margin of safety is the amount of sales a company
can lose before it actually starts to lose money or
stops making a profit

Advantages of break even analysis Disadvantages of break even analysis

- Shows the expected level of profit/loss at different - Assumes that variable cost stays the same (straight
levels of output. This helps managers decide whether line on graph).
a good should be produced. However, the concept of economies of scaled shows
- It helps managers spot potential problems at an early that variable costs do not stay the same. This makes
stage and enables them to plan and make changes as the results from break-even analysis unreliable.
required in order to meet targets i.e. break-even - Assumes that selling price is the same for all the
analysis shows a product will not break-even, so, goods sold (straight line on graph).
managers can cut costs or increase price to decrease However, the same good can be sold at a variety of
the break-even level of output different prices due to sales promotions etc. This
- Shows the margin of safety the expected sales of a makes the results from break-even analysis unreliable.
product has so even if sales fall short of this target a - If is only a forecast and will only be as reliable as the
profit can still be made. data upon which the analysis is based
 How to lower a firm’s breakeven level of output: How to lower a firm’s breakeven level of output:
Increase price: Decrease costs:
Uses: Uses:
- Increases revenue (if inelastic demand) - Decreasing costs lowers break even level of output
- Increases profit margin - Decreasing costs is something that a firm has
Limitations: control over
- Decreases revenue (if elastic demand) and Limitations:
therefore break even level of output increases - Decreasing costs may decrease the quality of a
product and therefore decreases sales.
Quality definition: 1. Quality control
A quality product is one that meets customers’ Involves checking the product randomly at different
requirements stages of the production process to assess quality.

Methods used by businesses to ensure high quality in

a production process:
● Quality control
● Quality assurance
Advantage of using quality control Disadvantage of using quality control
- Can help ensure that products meet the requirements ● Can be expensive as it requires people and time and
of customers, helping to generate more sales and a can lead to waste of raw materials
better reputation ● Does not improve quality; instead quality control
- Can identify poor quality products before they reduces the chance of selling poor quality products
become finished goods, which reduces the chance of ● Does not check all products, so there is still a
selling poor quality products to customers chance of poor quality products reaching the
customers
2. Quality assurance Advantage of quality assurance
Checks are carried out within the production process - Making quality a key aspect of everyone’s job rather
to prevent mistakes from happening. e.g. all than the role of an individual or department should
production staff must self check to ensure that what ensure that quality improves
they produce is of the correct quality. Quality control - Quality assurance does not require employing
is not needed. additional quality checkers, so it is cheaper than
quality control

Disadvantage of using quality assurance Factors other than quality that helps a product be
- The whole workforce must support the system, successful:
otherwise it will not work - Lower prices
- Staff may require additional training to ensure they - Product innovation (new improved) (PS4 etc)
produce the highest quality products - Provide good after sales service
Why is quality important? How can a firm improve quality:
● Allows a business to charge a higher price and 1. Introduce Quality Control
therefore increase profit 2. Introduce Quality Assurances
● Builds brand image and customer loyalty, 3. Train employees – less errors
therefore increases sales revenue 4. Update machinery – makes better quality products
● No need to replace faulty products, therefore with less mistakes
reducing costs and improving brand image
● Easy to market and establish in the market.
● Quality can add value
Factors affecting the location of manufacturing Factors affecting the location of service businesses:
businesses: - Cost of site
- Proximity to raw materials (particularly when raw - Proximity to customers
materials are heavy – coal etc) - Accessibility for customers
- Cost of site (business have to be able to afford their - Availability of skilled labour (tech firms locate in
location) Silicon Valley etc)
- Infrastructure (access to raw materials and markets - Government influence
important)
- Availability of labour
- Scale of production
- Government influence (grants for setting up in an
area of high unemployment etc)
Relocating to a different country. The role of legal controls on location decisions
Factors that influence a business’s decision to relocate The following will influence the country a business
include: chooses to locate in:
1. Growth potential ● Legislation
Their domestic market may be saturated and moving Different countries have different laws concerning
abroad may be the best strategy for increasing sales. health and safety, protection of the environment etc.
2. Cheaper labour Therefore some firms will choose to locate in
3. Cheaper rents countries where these laws are more relaxed (it’ll
4. Proximity to raw material reduce their costs).
Especially for manufacturing businesses that use large ● Trade barriers
quantities of raw materials such as steel, coal etc. Some countries are subject to trade barriers such as
tariffs and quotas etc. This would make if difficult for
a company in that country to export and as a result
they may choose not to locate in such countries.
When making location decisions for a business you must consider the following:
1. Service or manufacturing firm?
2. How much financial resources is available for move?
3. Are sales in the domestic market healthy? If ‘no’, then the firm might consider locating overseas.

Why do businesses need finance? Use of finance can be split into 2 categories:
● To start up (buy machinery etc) ● Capital expenditure
● To expand (e.g. moving to a larger factory) Money spent on purchasing fixed assets (premises,
● For takeovers (must pay to buy firm) machinery etc) that will be used in the business for a
● For new premises/technology period of more than 1 year.
● For research and development ● Revenue expenditure
● To manage daily operations Money used to cover short term day to day expenses
and to help generate sales (stock purchases, wages,
advertising expenses etc).
Short term sources of finance are used to purchase Short term internal sources of finance
items that last for less than 1 year e.g. stock, salaries - Working capital
Long term sources of finance are used for growth - Sale of assets
and expansion, for research and development, to
purchase items that last for longer than 5 years e.g.
machinery, factory etc, or for mergers/takeovers
Long term internal sources of finance Short term external sources of finance
- Owner’s funds - Debt factoring
- Retained profits - Trade credit
- Sale of assets - Overdrafts
Long term external sources of finance Debt and equity
 - Share issues - Debt – this involves using money that must
- Bank loans be repaid with interest e.g. bank loans
- Grants
- Debentures - Equity – this most commonly refers to
- Venture capital raising money by selling shares in the
- Hire purchase company. It can also refer to owners’ funds
- Leasing
- Sale and leaseback
Whether a firm uses debt or equity to finance a Advantages of debt compared to equity
business depends upon: ● Owner/s retain full control of the firm
- owners’ willingness to sell shares (may fear ● Profits are not shared with a lender (no
loss of control) dividends)
- the availability of debt (whether it is possible ● Relatively easy for most firms to get a bank
to get a bank loan etc) loan (if they have collateral)
- the cost of debt i.e. the rate of interest.
Disadvantages of debt compared to equity Advantages of equity compared to debt
● Unlike equity, debt must at some point be ● Benefits from shared ownership and shared
repaid risk
● High interest costs means that much more ● No monthly repayments compared to bank
will have to be repaid than borrowed loan
● Security (collateral) required to receive loan ● Payment often only necessary once a firm
starts to make a profit
Disadvantages of equity compared to debt Revenue definition
● Owners must give up some control of the Money received by a business for the sale of its
business products or services. Formula: quantity sold * price
● Owner must share profits per unit
● Usually only available to Ltds and Plcs
INTERNAL SOURCES OF FINANCE
Owners’ funds: Retained profit:
Money put into the business by the owner themselves Some/all of the profit made by a business can be
e.g. to start up a sole trader or partnership. re-invested into the business (rather than returned to
the owners/shareholders).
Advantages: Advantages:
-Provides a quick, interest-free source of finance. ● Provides an interest-free source of funds
Disadvantages: Disadvantages:
- There is financial risk for the owners. ● Not always available. A firm needs to make
Business owners must be willing to face considerable profits to reinvest them.
risks – some even use their personal credit cards to ● Owners receive less reward for their risk (profit
pay for business expenses. goes back into business rather than returned
given to owners/shareholders as dividends).
Working Capital: Sales of Assets:
The money available to businesses for the day to day A business can sell its building, vehicles etc to raise
running of a firm i.e. to pay for raw materials etc. finance.
Advantages:
● Efficient management of cash is good business Advantages:
practice ● It can enable a business to release large sums of
Disadvantages: money.
● Money is not always available. (A firm may need Disadvantages:
its working capital to cover immediate expenses.) ● The firm loses the use of the asset
● A firm must ensure it still has sufficient stock to ● Finance is only available if an asset can be sold
 meet customer demand. (which may take time).
SHORT TERM EXTERNAL FINANCE
Overdraft:
A firm can have an arrangement with a bank to allow it to withdraw more from its bank account than it has
in the bank account – the bank account will go negative.
Advantages:
● Cheaper than a bank loan (if overdraft is repaid quickly)
● A flexible way for businesses to borrow small amounts for very short periods of time.
Disadvantages:
● Interest rates charged as very high - • Interest is charged on a daily basis so therefore if an overdraft
is ran for a number of months it is very expensive
Trade credit: Debt factoring:
Time taken for buyer to pay for their goods after they Selling debt to debt collectors from customers who
have been delivered. will not pay (bad debtors) for about 80% of the
Advantages: amount owed.
● Interest-free and easily available Advantages:
Disadvantages: ● Provides businesses with quick access to funds.
● Start-ups and young firms may not be offered ● The firm gets most of their money when they
credit as they have not proven their ability to pay. might not have got any if they didn’t sell the
● Trade credit needs to be carefully managed to debt.
avoid overtrading and cash flow crisis. Disadvantages:
● Early payment discounts if accounts are settled ● The firm may not receive 100% of the debt.
(paid) before the deadline is lost if a firm takes its ● The riskier a debt is, the lower the percentage
time paying their supplier. received.

LONG TERM EXTERNAL FINANCE

Bank Loans: Share issue:
Money borrowed from a bank that has to be repaid When Ltds and Plcs sell shares in their business.
each month over a period of years with at an interest
rate. Advantages:
● Provides ability to raise a large amount of
Advantages: money
● Quick and easy to arrange (if a firm has ● No interest rate has to be paid
collateral) Disadvantages:
● Can be arranged for different amounts and ● May lead to loss of ownership by present
timeframes (periods). majority shareholders
Disadvantages: ● Dividends have to be paid to shareholders.
● Depending on the interest rate and amount
loaned, bank loans can be expensive.
● Banks usually require some form of security on
the loan (a business building or, in the case of a
sole trader a personal asset such as a house).
● If the business is unable to repay the loan, the
bank will repossess (claim) the asset.
Leasing: Hire purchase:
By leasing (hiring) an asset (machine, vehicle etc) Similar to leasing, but it gives the firm the option of
instead of purchasing it a business reduces the owning the asset when the lease period is up.
amount of finance they need to raise.
Advantages:
Advantages: ● The firm owns the asset once all payments are
● There is lower initial capital requirement (less made.
money needed) to gain use of an asset. Disadvantages:
● It spreads the impact on cash flow. (Instead of ● The firm is usually responsible for maintenance
one large purchase payment, the business makes (and replacement) of the asset.
smaller payments over time.) ● The total cost of hire purchase is usually higher
● The firm does not have to worry about care and than the cost of purchasing the asset.
maintenance of the asset.
● The firm can replace the asset regularly.
Disadvantages:
● The total cost of leasing is usually higher than
purchasing the asset.
Venture Capital: Sale and leaseback:
Venture capitalists are specialist financial providers Businesses sell an asset (such as a building) and
to start up or young businesses that are short of then lease it back from whom it sold it to in order to
funds. raise short term cash if it has a cash flow crisis.

Advantages: Advantages:
● It may be one of the few sources of finance ● The firm gains a large injection of capital.
available to a start-up business. ● The firm retains use of the asset.
● Venture capitalists often offer management Disadvantages:
advice and consultancy as part of the loan. ● The cost of leasing the asset back will be high.
Disadvantages: ● The leasing arrangement may not include
● Firms have to share ownership and profit with the maintenance.
venture capitalists.
● Venture capital is usually only available to
high-potential businesses with strong growth
prospects.
Grants: Debentures:
Grants are money given to a business by the Long term loans to Ltds or Plcs (not by banks)
government usually to set up in a economically which have a fixed interest rate and are repaid over
deprived area which has high unemployment. a specified period of time (15 – 25 years).

Advantages: Advantages:
● Grants provide a free source of funds. ● Provide a source of very long-term finance.
Disadvantages: ● Interest rates may be cheaper than bank loans.
● Often only available for specific types of Disadvantages:
businesses or specific areas of a country. ● Only available to a large Ltd and Plc companies.

OTHER SOURCES OF FINANCE

Joint ventures: Change in business status:
When two or more businesses joint together to Changing from a sole trader to a partnership or from
finance a new venture or product. Usually happens a partnership to an Ltd to increase the amount of
when one firm wants to expand into a new market additional funding from more owners/shareholders
where the other firm has expertise. that the business will have access to.
Advantages: Advantages:
It spreads the risk across two businesses. Often, the ● Can be a way of raising funds and spreading the
costs will be split as well so if the entry into a new risk of ownership.
market fails, each individual business will have lost ● Original owners can benefit from new ideas and
less money. input.
- One business may have expertise and experience Disadvantages:
that the other business will benefit from, which ● Original owners risk losing control of the
means the venture is more likely to succeed business.
Disadvantages: ● Converting to a private or public limited
- The potential revenues and profit will have to be company takes time and can be expensive.
split between two business.
- The two businesses may have different ideas about
certain situations and decision making may take
longer. This may make it difficult for a business to
run the expansion in the way they would like.
Franchising: Micro financing:
A business can franchise its idea whereby individuals Used in developing countries, micro finance allows
can pay the business for the right to set up a franchise people on very low incomes (who would not
using the businesses name and products (the normally be able to borrow from banks) to borrow
franchisee will be closely controlled by the small amounts of money to start up a small
franchisor). business.
Crowd sourced finance:
The franchisor is therefore able to grow their Often used to generate money for micro finance
business without significant capital investment. projects, crowd sourced financing utilises the
internet to help small businesses launch creative or
environmentally friendly projects.
Factors affecting the choice of finance used by Cash flow definition:
firms: Cash flow is the money businesses have available to
1. Availability of internal funds (using profit reduces pay for their day to day expenses i.e. paying for raw
dividends) materials and wages. It is not the same as profit.
2. Time Cash flows into and out of a business.
Purchase of long term asset should be done by long Cash inflows:
term source of finance Money coming into a business from sales, bank
3. Cost of borrowing (higher cost = less likely to loans or share capital
borrow) Cash outflow:
4. Type of business (sole trader has limited range of Cash outflow is money leaving a business to pay
options, Plc – many options) wages, bills, loan repayments etc. It is important
5. Control (how much control does the shareholders that a business forecasts its outflows to ensure that
of ltds and plcs want to give up if using equity for they have enough cash in place to cover its expected
finance) costs.
6. Current level of gearing 7. Collateral available

Type of inflow Where it comes from What it might be used for

This is the money that the business receives Businesses normally use revenue
Sales revenue from its customers for the product or service to cover the costs of running the
that it sells to them. business, such as paying suppliers
and bills.

This is a one-off inflow borrowed from a Businesses normally use loans to

Loan bank. pay for a one-off item such as
upgrading machinery.

This is normally a one-off inflow from Businesses normally use share

Share capital selling more shares. capital to pay for business growth
and investments.
 Types of cash outflows: Cash flow forecasts definition
1. Payments to suppliers Cash flow forecasts are financial statements that
2. Loan repayments predict the movement of money into and out of the
3. Payment of overheads business over a specified period of time.
4. Wages/salaries etc
The benefits of preparing a cash flow forecast: Why adequate cash flow is important to a
*By forecasting the timing of its cash flow (inflows business:
and outflows) a business can ensure it has enough
money to pay its bills when they fall due. ● Needed to pay day to day suppliers bills,
without which production would stop
*Forecasting can help a business plan for the future
and predict when it might have enough cash to afford ● Needed to pay employees, without which
growth and investment opportunities. production would stop

● If cash flow is negative a firm may be forced

into liquidation, even if it is making a profit

Dealing with cash flow problems (short term Dealing with cash flow problems (long term
methods): methods):
1. Securing a bank overdraft (brings money into the
business). This will allow the business to run a 1. Emphasis cost management (decreases amount of
negative cash balance on their bank account. money leaving the business)
However, interest charges are high.
2. Leasing rather than buying a fixed asset/renting
2. Extending trade credit from suppliers rather than buying a building
A business can ask for more time in which to pay its
suppliers (creditors) (stops money going out of the 3. Sell off unwanted fixed assets (brings money into
business as quickly). the business)
However, it may lose discounts for paying on time.

3. A business can ask its customers/debtors (firms

that owe it money) to pay more quickly (brings
money into the business more quickly).
However, customers may not like paying early and
may not buy from the business again.
4. A bank loan (brings money into the business)
However, it has to repaid with interest.

Working capital definition: Working capital cycle:

Working capital is money a business has for use in
the short term. It is effectively the businesses’ cash
flow. Working capital is used to pay for day to day
expenses.

Liquidity definition: Consequences of liquidity problems for a

Liquidity is the extent to which a business can meet business/why having working capital is
its short-term debts (liabilities) i.e. bills it has to pay. important:
A liquid business will have enough cash to pay its 1 .Suppliers are not paid on time.
bills on time. Firm will not receive a discount for early payment.
2. Bank loans repayments may not be paid on time.
This will incur extra charges from the bank or
repossession of the asset which acted as collateral
for the loan.
3. A business may be forced to use long term
sources of finance to pay off short term cash flow
problems.

How to improve poor liquidity: Definition of profit

1. Extending trade credit from suppliers Sales revenue – costs (revenue expenditure) =
However, it may lose discounts for not paying on time. profit. The money a business keeps after all costs
2. A business can ask its customers/debtors (firms have been paid over a particular period of time
that owe it money) to pay more quickly. (usually one year). It is the main objective of private
However, customers may not like paying early and sector businesses. Profit is the reward to the
may not buy from the business again. entrepreneur for taking a risk when starting a
3. Emphasis cost management (decreases amount of business
money leaving the business)
4. Avoid further investment as it drains cash from a
business

Why profit is important to a business: Sales revenue/turnover definition

● It is the reward to the owner/shareholder for Money coming in to the business from sales
taking the risk of investing in the business
● It can be used to reinvest in the business Selling Price X Quantity Sold = Sales Revenue
● Its presence will help attract additional
investors
 Gross profit = sales revenue – cost of sales.
The profit made by the business once the cost of the goods have been
deducted from revenue

Cost of sales are costs that are directly linked to the production of a
good or service e.g. raw materials, labour

Net profit = gross profit – overheads (it’s the more important

figure)

Overheads are expenses/costs not directly linked to the production of a

good or service e.g. salaries, rent, marketing costs, electricity, loan
repayments etc

Net profit is either:

● Retained within the business for investment after all business costs are deducted from revenue

● Distributed to shareholder as dividends

Profit vs Cash - what is the difference? Income statement definition:

Cash: An income statement details the Gross and Net
● Money that flows into and out of a business Profit a firm makes over a particular period of time.
● Is shown by the bank balance or cash in hand It is calculated by subtracting a business’ revenue
● Is recorded in the Balance Sheet as a Current expenditure (both cost of sales – for Gross Profit
Asset and overheads – for Net Profit) from its sales
revenue.
Profit:
● Calculated: sales revenue less total costs =
profit (at the end of a period of time)
● Is recorded in the income statement
Businesses usually have ‘increasing profit’ as an Balance sheet definition:
objective. Therefore, it will target things that will A balance sheet shows how much a company is
decrease costs or increases sales revenue as a way worth (its assets) and it should always equal/balance
of increasing profit, such as: with its liabilities (what it owes). It shows what a
● Increasing the amount of sales revenue. company owns and how it has paid for it (sources of
- Selling a greater quantity of goods finance). It is a snapshot of one moment in time i.e.
- Changing the price of the good (impact on on the 2th of July 2015.
sales revenue depends upon elasticities of
demand)

● Improving productive efficiency

This means producing at a lower unit cost

● Cutting down on overheads

Choose a cheaper electricity supplier, reduce the size
of the salaried workforce

● Ordering raw materials in bulk (or try to gain

other economies of scale)
● Use cheaper raw material
Decreases cost of sales, however may affect the
quality of the finished product.
Assets Non current assets
Things a business owns. Can be either: Large, one off purchases that are expected to last for
longer than one year e.g. machinery, property,
● Non current assets vehicles, fixtures and fittings
 ● Current assets Current assets
Items a business owns that it will use with a year
e.b. Inventory, trade receivables (debtors), bank
balance, cash in hand

Trade receivables (debtors) definition:

Individuals or businesses which owe a firm money for goods or services received and not paid for yet.
Liabilities Non current liabilities
A debt – something that is owed by a business. Can Amount of money borrowed that will take longer
be either: than one year to repay e.g. mortgage, long term
● Non current liabilities loan, debentures

● Current liabilities Current liability

Short term debt that will have to be repaid within
one year e.g. Overdraft, trade payables (creditors)

Equitable funds definition. Capital employed

Equitable funds are made up of: How much money has been invested into the
- Share capital or shareholders’ funds (money business from equity (shareholders’ funds, reserves)
put into the business by the owner) and non-current liabilities (long term loans).
- Retained profit (profit made by the business
that should normally be returned to the
shareholders in the form of dividends,
however it has been retained by the firm for
investment).

Income statement shows profit (a measurement of Measuring profitability: Income Statement

profitability and performance) Two ratios are used:
 Gross profit margin (how much as a percentage a
Balance sheet shows liquidity (a measure of the firm keeps as Gross profit)
ability to pay short term day to day debts of running
the business)

Net profit margin (how much as a percentage a firm

keeps as Net profit)

Evaluation of profitability ratios Measuring liquidity: Balance Sheet

● The higher the figures are the better The two ratios for measuring liquidity are:
● The gross profit ratio figure is useful, but the ● Current ratio
net profit ratio figure is far more important.
● Better if they are compared to previous years
to see if the figures are improving or not.
● Need to be compared to similar firms in the A current ratio figure of 2:1 is considered good.
same industry to judge performance This means that for every $1 of current liabilities a
firm has it has $2 of current assets to cover them.
● Acid test ratio

An acid test ratio figure of 1.2:1 is considered good.

This means that for every $1 of current liabilities a
firm has it has $1.2 of current assets - inventory to
cover them.
Evaluation of liquidity ratios Return on Capital Employed (ROCE)
● Although the current ratio is useful, the acid Capital employed = the amount of money that has
test ratio is far more important. been invested in the business and includes non
● Anything less than 1:1 for either ratio current liabilities and equity. A measurement of the
suggests that the business has liquidity performance of the business in using capital to gain
problems that require immediate attention. net profit
● The type of business is very important when
judging the ratios. A supermarket will have The ‘return’ is the profit made by the business.
lots of inventory therefore its acid test ratio
may be quite low (the inventory will be ROCE = Net Profit x 100%
minused) Capital Employed
● A high figure (say 3:1) is not good either as it
means that a firm has a lot of current assets
which is usually inefficient.
Evaluation of ROCE Overall evaluation of a business’s performance:
● The higher the figure the better
● Must be compared to previous years to see if All the ratios are important. However, poor liquidity
the figures are improving or not. ratios threaten the very existence of the business,
● Needs to be compared to similar firms in the therefore particular attention should be paid to these
same industry to judge performance (particularly the Acid Test).
Who uses an income statement? Who uses the balance sheet?
- Lenders - Lenders
To access if a firm can repay any loan it has applied Assess whether the business has enough assets that
for the bank can use as collateral (security) on any loan.
- Current shareholders Also, it would want to assess the firm’s gearing.
Assess if enough profit has been made. See how
much profit has been returned as dividends. - Investors/shareholders
- Potential shareholders View the firm’s assets, and how they have been
Assess if enough profit has been made. See how financed.
much profit has been returned as dividends.
- Other companies’ managers - Creditors (suppliers)
Compare profit ratios as a measure of performance Assess whether the firm has enough working capital
- Government to pay them
Assess whether enough corporation tax has been paid
Can the success of a business be assessed by using a balance sheet?
Answer – partially:
A Balance Sheet:
- Measures the assets of the business and shows its value
- Measures its liquidity and therefore its ability to pay its debts when they are due
However, an Income Statement is needed to measure profitability:
- GPM measure the proportion of SR a firms keeps after variable costs are paid for
- NPM measure the proportion of SR a firm keeps after its variable and fixed costs (expenses) are paid
for
These are both important when measuring the performance of a business.
Conclusion:
A Balance Sheet and an Income Statement are needed to truly measure the performance of a business. They
are both needed to produce a ROCE ratio

Problems that a fall in profits might cause for a Inventory

company: The amount of raw materials, work in progress and
- Lack of profit for reinvesting in the company finished goods held by a business that are intended
(money may have to be borrowed instead) for sale.
- Less dividends for shareholders. May lead to
them selling their shares and share price fall.
- Lenders unwilling to lend money to company
whose profit is low (non existent).

Government economic objectives How falling unemployment affects a business

- Sustainable, steady economic growth (2-3% a - Customers may have more income so sales
year) revenue may grow
- Low unemployment (5-6%) - May be more difficult to recruit more
- Low inflation (general price rises of 2-3% a year) workers as there are not many available and
- Balance of payment equilibrium (Exports equal those available may demand high wages
imports)
Economic growth definition: GDP definition:
The percentage increase in the value of goods and The value of all goods and services produced by an
services produced in a year. economy in a year.
Factors affecting economic growth Advantages of economic growth:
● Labour ● Improvement in living standards
Increases in the size of the labour force will mean Citizens have more goods and services
that more can be produced. Increases in the ● Increased employment
education and training of the labour force will mean More goods produced = more jobs for people to
 that more can be produced produce them
● Improved health and life expectancy
● Natural resources In times of rising incomes, people spend more on
The discovery of natural resources such as oil will their healthcare and therefore life expectancy
obviously help economic growth. increases
● International trade ● More leisure time
Increased exports = economic growth When people have enough goods and services they
● Technology concentrate on their leisure time.
New, improved technology increases a businesses Disadvantages of economic growth:
ability to produce goods (Nestle factory). 1. Pollution: Increased economic activity will often
lead to increased levels of pollution
● Government impact 2. Congestion: As incomes increase pressure on a
- Decreasing income tax (so individuals have country’s infrastructure will rise.
more money to spend) 3. Inflation: Economic growth can cause demand
- Increasing government spending i.e. build pull inflation.
roads etc (creating employment – people 4. Exploiting scarce resources: Economic growth
have more money to spend) means that we use up scarce resources more
- Decreasing regulations on businesses quickly.
(therefore decreasing businesses costs and
therefore more is produced)
Whether economic growth is good depends Business/Trade cycle definition:
upon: Economic growth usually takes place is
- The type of products that are produced (guns or semi-regular patterns – the trade cycle. It stages are:
bread) 1. Boom (peak): Economic growth increasing,
- Distribution of income (who receives the benefit unemployment low.
of the extra goods produced? – few or many). 2. Recession: Definition: A fall in GDP in 2
- Whether the extra goods produced was because of consecutive quarters (6 months). Negative
an increase in the amount of working hours economic growth. Unemployment increases.
(therefore loss of leisure time) or an increase in 3. Slump (trough): Economic growth negative,
productivity (no loss of leisure time) unemployment high.
- Whether pollution has increased. 4. Recovery (expansion): Economic growth
increases, unemployment decreases.

Stage of Positive impacts Negative impacts

business cycle
* Businesses selling cheaper goods may * Luxury goods producers may find demand
Recession benefit from an increase in demand falls as peoples’ income decrease

* Wage demand by employees will be less * Construction businesses may suffer as

as there will be more unemployment demand for new buildings falls

* Difficult to raise price as peoples’

incomes as falling
* Businesses selling cheaper goods may * Luxury goods producers may find demand
Slump/ benefit from an increase in demand falls as peoples’ income decrease
downturn
* Wage demand by employees will be less * Construction businesses may suffer as
as there will be more unemployment demand for new buildings falls

* Difficult to raise price as peoples’

 incomes as falling
* Demand for a wide range of normal * Businesses selling cheaper goods may
Recovery products will increase as incomes increase experience a decrease in demand

* It will be easier for firms to raise price as * Wage demand by employees will increase
peoples’ incomes are rising as there will be less unemployment
* Demand for a wide range of normal * Businesses selling cheaper goods may
Boom products will increase as incomes increase experience a decrease in demand

* It will be easier for firms to raise price as * Wage demand by employees will increase
peoples’ incomes are rising as there will be less unemployment

Business responses to recession

Stimulate demand Minimise costs Production Investment
Cut prices Find cheaper raw Reduce spare capacity Cancel planned
materials (sell assets) investment
Increase promotion
Reduce staffing levels Cancel overtime/ reduce
Introduce special offers the working week
Introduce flexible
working practises Find cheaper production
methods
Increase productivity

Stop unnecessary
expenditure

Stop hiring new staff

Interest rates definition Firms with low gearing (low level of loans compared
The cost of borrowing money or the reward for to equity) will not be affected too much by changes in
saving money. interest rates as they have few debts to repay with
interest

Interest Impact on business Impact on consumer

rate
- Reduces cost of borrowing/loans, - Mortgage repayments costs decrease, increasing
therefore borrowing to expand easier consumers the ability to spend
Down - Exchange rate depreciates, therefore
exports cheaper, therefore exports - Borrowing cheaper therefore consumers borrow
increase more to spend (and save less)
- Consumers borrow more (and save
less) to spend, therefore demand
increases
- Increases cost of borrowing/loans, - Mortgage repayments costs rise, reducing
therefore borrowing to expand harder consumers ability to spend
Up - Exchange rate appreciates, therefore
exports more expensive, therefore - Borrowing more expensive therefore consumers
exports decrease borrow less to spend (and save more)
 - Consumers borrow less (and save
more) to spend, therefore demand
decreases

If interest rates increase, the cost of borrowing for consumers goes up and therefore consumers borrow less to
spend. This decreases demand for businesses in the economy and this decreases economic growth (and vice
versa).

If interest rates increase, the cost of borrowing for business to Invest goes up and therefore businesses borrow
less to spend (greater return needed from an investment to make it worthwhile) (and vice versa).

If interest rates increase the reward for savings increase and therefore people save instead of borrowing and
therefore there is less demand in the economy and this decreases economic growth (and vice versa).
There are 2 types of taxes that government can The use of government spending and taxation is
impose: called fiscal policy.
● Direct Tax
- Income Tax (tax on peoples income) Government spend money on:
- Corporation Tax (tax on companies’ profits) - Healthcare
● Indirect Tax - Education
- Tax on expenditure (i.e. a percentage of taxation - Defence etc
added to the sales price of goods and services).

Type of tax Item Impact on business Possible business responses

taxed
Higher income taxes reduces consumer Reduce price of goods; focus
spending power promotion on ‘value’; increase
Income Tax Income price inelasticity
Higher income taxes reduce the
incentive to work Increase fringe/non financial
Employees receive less pay for benefits
additional work and therefore, may be
less willing to do overtime (see Methods of motivation)
An increase in indirect tax lowers Maintain prices (absorbing
consumer spending (as goods are more indirect tax increase – this will
Indirect tax Spending expensive) decrease the profit margin)

Higher rates of indirect tax force firms Focus promotion on branding;

into price wars or require non-price differentiate product; find new
competition (i.e branding) markets for product
A decrease in corporation tax may Open new branches; pursue
encourage firms to invest (to achieve expansion (decrease the amount of
Corporation Business and retain larger profits) profit that can be taxed)
tax profits
Higher corporation tax reduces Cancel expansion plans; move
(retained) profits and therefore the operations overseas to a country
ability of business to invest in with lower corporation tax.
expansion/growth

Reasons why a government might want to increase taxation:

* To decrease economic growth and ensure that the economy doesn’t go into a recession
* To discourage the consumption of some goods (indirect tax on cigarettes and alcohol)
* To generate revenue for the government to spend on healthcare and education etc
Externalities definition: 1. The shareholder view.
The effect a business has on the wider environment is This view states that the most important priority for a
called externalities. The externalities can be positive or business is to make a profit for its shareholders, who
negative. have taken the risk to invest in the company. The right
Positive externalities: course of action is to maximise profit (within the law).
These are actions a firm undertakes that benefit those
outside the firm. The positive results from a business’ 2. The stakeholder view.
activities felt by those outside the business. For This view states that a company has a responsibility to
example training, balance of payments improvement all its stakeholders (those with an interest in or
due to exports etc influence on a business, including the local
Negative externalities: community, government, workers, suppliers,
These are costs generated by a business which are felt shareholders etc). The right course of action is one
and paid for in some way by the wider community or which balances the needs of the different groups.
environment and not by the business. For example
pollution, congestion etc
Acting in an environmentally and socially responsible How businesses can impact the environment:
way may be more expensive. However, it may be ● Pollution
more preferable to the: ● Congestion
● Bad publicity ● Land use
● Lost sales ● Waste
● Government fines ● Energy use
that may come from acting irresponsibly toward
society or the environment.
Legal controls
Many governments use laws to constrain businesses’ harmful activities. These laws might restrict a business by:
- Setting limits on the amount and type of pollution a firm can produce
- Insist that a percentage of business’ energy comes from renewable sources
However, all these constraints on a business add to their costs and therefore their price. This can make them
price uncompetitive internationally.
Pressure groups definition: Pressure groups attempt to bring about change by, for
A pressure group is any group which seeks to example:
influence the behaviour of a business or influence ● Drawing media attention to an issue.
government policy. Environmental pressure groups are ● Encouraging the boycotting (stop buying) of a
the most common (Friends of the Earth, Green Peace firm’s product.
etc). ● Petitioning/lobbying (encouraging)
government to change a law to stop a particular
activity

Pressure group aims: Advantages of acting environmentally friendly

● Force a business to change its plans (due to ● A firm can emphasise environmental care in
falling sales) their marketing to be more appealing to
● Force the government to change laws to make customers
the activity in focus illegal ● Recycling and reusing reduces costs
● Firm will not attract the negative attention of a
pressure group

Opportunities offered by doing business in an Sustainable development definition

environmentally friendly way include: Using the resources of the earth to provide for the
● New business opportunities earth’s current population whilst not decreasing the
i.e. provide environmental services (recyclers etc) or ability of the earth’s future population to provide for
gives the opportunity for firms who act in a highly themselves.
environmentally friendly way to gain a competitive
advantage Sustainable development actions a firm can take:
● Lower cost ● Replacing trees for the ones chopped down to
Reduce, recycle, reuse = lower costs for businesses clear space for a factory
● Customer loyalty ● Only using energy from renewable sources
● Employee loyalty ● Rotating crop growth between different fields
to avoid using chemical fertilisers
● Minimising water use in the production process
Ethical concerns Ethical decisions businesses have to make:
Ethics are moral guidelines which govern good - Paying staff higher wages vs earning increased
behaviour. Behaving ethically is doing what is morally profits for shareholders
right
In a business sense this means considering all - Paying suppliers a higher price vs charging
stakeholders when making a decision. It goes beyond customers a lower price
what is legally required of a firm.
- Providing or protecting employment vs increased
profits for shareholders

- Shareholder vs stakeholder approach

Advantages to a firm of acting in an ethical way:
-Better employee retention/recruitment

-Improved brand image/reputation

-Long term profit increase due to firm having greater

appeal to customers

Globalisation definition Reasons for globalisation:

Where the production, sale and consumption of goods ● Improved communication (internet etc)
and services is spread beyond national borders This has made international trade easier
“Companies in one nation build factories in another ● Economic trading blocs (EU etc)
country, and consumers in other countries purchase This has made cross border trade easier within trade
their products” blocs due to reduced/no tariffs or quotas
● Lower labour costs that attract MNCs to Asia
etc
Western firms often move production to areas of the
world where labour costs are cheaper and export the
finished goods back to the West – fueling globalisation
● Increasing labour migration

Advantages of globalisation Disadvantages of globalisation

- Globalisation allows countries to specialise and - The benefits of globalisation favour rich
therefore increase GDP. countries. It is argued that developed countries’
- Consumers get a much wider variety of products to MNCs benefit from lower labour costs while the
choose from. developing countries get little benefit. However,
- It promotes understanding and goodwill among globalisation is also blamed for causing
different countries unemployment in developed countries, as many
- Inward investment by MNCs helps countries by businesses have moved their factories to countries
providing employment for the local people. with cheap labour.

- Globalisation does not benefit everyone. Western

MNCs and their shareholders benefit most. MNCs
may drive small local firms in developing countries
out of business.
- There are no guarantees that the wealth from
MNC investment will benefit the local community.
MNCs often send profits back to their home countries
and the global brands often force small, local firms out
of business.
- It can be argued that globalisation has led to an
increase in environmental and ethical problems. A
company may, for example, want to build factories in
other countries because environmental laws are not as
strict. MNCs may also impose poor working
conditions and low wages on local workers who have
little power to resist.
Opportunities of globalisation for businesses. Threats of globalisation for businesses.
● Increased sales due to more accessible markets ● Increased competition from overseas firms
(less tariffs and quotas). This can bring about which have easier access to your home market
economies of scale (McDonald’s have forced many local
● Lower labour cost of production if firm moves restaurants out of business around the world).
production to a developing country
● Diversification (products in more than one
country). Therefore if demand for a firm’s
goods decrease in one country they always
have other countries to fall back on (not all
eggs in one basket)
Techniques to reduce impact of globalisation: Advantages to a country of using tariffs, quotas
Tariffs (definition) and embargos:
This is a tax on imports. This increases the price of ● Protects domestic jobs
imports and therefore decreases their demand.
Quotas (definition) ● Prevent the importation of undesirable goods
This is a physical limit on the amount of a certain (poor quality standards etc)
good that can be imported e.g. a quota of 10,000 cars
from Japan means that only 10,000 cars from Japan ● Prevent countries ‘dumping’ their goods on
can be imported in a year your market (selling at below cost price)
Embargo (definition)
A ban on the importation of a certain good.
MNC definition:
Multinational companies are firms that produce (not just sell) goods in more than one country i.e. builds a
factory abroad.
Advantages to a firm from being a multinational Disadvantages to a firm from being a multinational
1. Higher sales 1. Diseconomies of scale
MNCs operate in many countries so they have a very
large number of potential customers 2. Cultural and language barriers that make
2. Avoid tariffs and quotas. operating internationally challenging
By setting up in a country or trading bloc an MNC
avoids protectionist barriers. 3. May be difficult to compete against established
3. Access to raw materials local firms.
4. Access to cheap labour.
By locating in developing countries, MNCs can take 4. Building a factory abroad requires large
advantage of lower wage rates. amounts of capital
5. Multinationals can achieve great economies of
scale e.g. bulk buying 5. Exchange rates may affect the business’s
6.Diversification profits
Advantages to a country of an MNC entering Disadvantages to a country of an MNC entering
✓ Increased job opportunities ✗ MNCs may offer low wages and poor working
conditions for staff
✓ Increased exports from a country (helping to
strengthen its currency) ✗ The jobs created are often low skilled manual jobs
that offer little opportunity for long term
✓ Increased consumer choice
development and future economic growth
✗ Profits from MNCs often go back to the MNCs’
✓ Investment by the MNCs in infrastructure
own countries (repatriation of profits) and may
(roads, rail link, etc.) and in training/education not be spent in the host’s country
✓ Increased funds available to the government ✗ Increased competition for local businesses often
from taxes paid by the MNCs forces local firms to close
✗ MNCs use up a country’s resources and may
contribute to environmental issues
✗ MNCS often use complex accounting rules to
avoid paying tax in the host’s country
Exchange rates definition: Factors affecting exchange rates
An exchange rate is the price of one country’s -Demand for imports and exports
currency expressed in terms of another country’s ● If the demand for exports increase then the
currency. For example: £1 = 1.5 euros. demand for that currency increases
(appreciation)
Appreciation – when a currency becomes stronger
● If the demand for imports increases then the
Depreciation – when a currency becomes weaker supply of that currency increases (depreciation)

Appreciation Depreciation
A rise in the exchange rate of a currency against A fall in the exchange rate of a currency against
another currency (a currency can buy more of another another currency (a currency can buy less of another
currency) currency)
Factors affecting exchange rates Factors affecting exchange rates
1. Interest rates 1. Interest rates
2. Imports and exports of goods and services
● ↑ interest rates in a country increases demand for
its currency (more foreigners wish to deposit funds
in the country) (appreciation)
* ↓ interest rates in a country increases the supply
 for its currency (foreigners will move their deposited
funds out of that currency) (depreciation)
Factors affecting exchange rates How do exchange rates affect businesses?
2. Import and export of goods and services Changes in exchange rates affect:

● When goods are exported then foreigners must ● The price of a firms goods exported overseas
demand your currency to pay for the goods. ● The price of foreign firms goods imported into
This increases the demand for the currency and home markets (foreign competition)
therefore appreciates the currency. ● ……. and therefore how profitable a firm is
● When goods are imported then you must sell
your currency to buy foreign currency to pay
for the goods. This increases the supply of the
currency and therefore depreciates the
currency.
Currency depreciates – exports cheaper, imports Effect of exchange rates on competitiveness.
more expensive – good for domestic business Evaluation:
● Exchange rates affect the price of an exporters
Currency appreciates – exports more expensive, goods abroad. However, some businesses
imports cheaper – bad for domestic businesses compete on one of the other 3 Ps and will
therefore not be affected greatly be a change in
price.
● Firms who find that the cost of their imported
raw materials increase because their currency
has depreciated against the currency of the
supplier can change supplier to a firm from
another country and therefore decrease the
impact.