Business Studies 0450

1. Understanding Business Activity

1.1 Business Activity

1.1.1 The purpose and Nature of Business Activity

• CONCEPTS OF NEEDS, WANTS, SCARCITY, AND OPPORTUNITY COST
• The purpose of business activity is to provide consumers with their needs and
wants.

• Business Activity: the process of producing goods and services to satisfy the
needs and wants of consumers.

• Needs: A good or service which is essential for living.

• Wants: A good or service which people would like, but is not essential for living.
• There are just not enough goods with the sellers, and money with the consumers to
satisfy their unlimited demand of wants. This is known as the economic problem.

• Economic Problem: Unlimited wants cannot be met because there are limited
factors of production. This creates scarcity.

• Factors of Production: The resources needed to produce goods and services -

land, labour, capital and Enterprise.

• Land: all the natural resources such as minerals, ores, fields, oil and forest.
• Labour: Is the number of people available to work.
• Capital: Is the machinery, equipment, and finance needed for the production
of goods and services.

• Enterprise: Is the people prepared to take the risk of setting up the business -
they are known as entrepreneurs.

• However there are not enough of these factors of production to make all the goods
and services needed or wanted by the world’s population. This is the problem of
scarcity.

• Scarcity: There are not enough goods and services to meet the wants of the
population.

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• Scarcity forces us to make choices. When making a choice, you need to make
sure the product or service you choose is worth more than the one you give up.
The next best choice is the opportunity cost.

• Opportunity Cost: The benefit that could have been gained from an alternative
use of the same resource OR the next best alternative forgone/given up.

• IMPORTANCE OF SPECIALIZATION
• Specialization: People and businesses concentrate on what they are best at.
• To make sure that there is minimal wastage of the factors of production,
specialization is introduced.

• Benefits of Specialisation (to business): Makes the business more efficient and
reduces costs.

• Benefits of Specialisation (to consumers): Goods and services have a higher

quality, larger supply is available, and goods are available at a lower price.

Pros of Specialization Cons of Specialization

Specialized workers are good at one task, and Boredom from doing the same task may result into
increase efficiency and productivity of labour lower efficiency
Less time is wasted for switching jobs by There is no flexibility as workers can do only one
individuals task, and not other tasks, if needed.

Machinery also helps all jobs and can operate 24/7 If one worker is absent no one can replace him, so
production process stops.
Products have a better quality High number of employees are to be hired who are
skilled, this increases costs.

• Division of Labour: Production is divided into separate tasks and each worker
does just one of those tasks.

• PURPOSE OF BUSINESS ACTIVITY

• Without the business activity, there would be no products and services. Businesses
produce different types of goods and services, these are:

• Consumer Goods: Products which are sold to the final consumer. They can
be seen (physical goods) and touched (tangible goods). They are divided into
durable (goods which can be used over and over again. ex. Computers) and
Non-durable (Can be used only once. ex. Food and drink.)

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• Consumer Services: Non-tangible products such as insurance services,

transport, hotel and restaurant services, salon and hairdressing.

• Capital Goods/ Producer goods: Physical goods such as machinery and

delivery vehicles, used by another businesses to help produce other goods
and services.

• THE CONCEPT OF ADDED VALUE AND HOW IT CAN BE INCREASED

• Added Value: It is the difference between the selling price and the cost of buying
the raw materials and components

• Businesses try to add value at every stage of the production process. This is done
by taking raw materials and turning them into a good or service and selling them to
a customer at a price greater than the cost of raw materials in the production
process.

• Other costs such as worker’s wages, and energy costs must be deducted from the
added value to calculate profit.

• It is one of the most important objectives of a business.

• How business increase added value:
• Branding: Branding increases added value because people want or feel
they should buy an item from a particular company. Ferrari, Iphone

• Excellent Service Quality: Industries providing high quality, personalized

service can charge higher prices. The cost of materials used will be very
similar, but personalized services increases profits. 1st Class travel…

• Product Features: Products that have more features and functions than
similar products in the markets, will allow the producer to charge a higher price.

• Convenience: Consumers are often ready to pay a higher price, for a product
they can have immediately or which can save them time, ex. ready meals,
home delivery.

• Reducing the cost of materials but keeping the price of the product same or
increasing selling price, but using the same raw materials with the old price. E.g
find cheaper suppliers..

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1. Understanding Business Activity

1.2 Classification of Businesses

Business Studies, CIE IGCSE (0450)

1.2.1 Business Classification in terms of Primary, Secondary

and Tertiary
• BASIS OF BUSINESS CLASSIFICATION:
• Primary Sector: Firms whose business activity involves the extraction of natural
resources from the land or sea for raw materials. Example. Farming, Fishing,
Forestry and Mining

• Secondary Sector: Firms that process and manufacture goods from natural
resources produced by primary sectors. Ex. Refining, Manufacturing, food
processing factory, and Construction.

• Tertiary Sector: Firms whose business activity involves providing services to the
final consumers or businesses. Ex. Shops, Restaurants, Banks, Cinemas, Airlines,
and Retailing.

• REASONS FOR THE CHANGING IMPORTANCE OF BUSINESS

CLASSIFICATION

• The different sectors are dependent on each other. This is known as the chain of
production

• Chain of Production: The production and supply of goods to the final consumers,
involves activities from primary, secondary and tertiary sector businesses.

• 2 Main reasons for the change in importance of Business Classification:

• Industrialization: The growing importance of secondary sector business
activity and the reduced importance of primary sector business activity. Ex.
Emerging economies of China and India.

• De-Industrialization: The growing importance of the tertiary sector and the

reduced importance of secondary sector businesses. Ex. UK and USA.

• Other Reasons behind the change in importance:

• A change in customer behaviour as a result of both industrialization and de-
industrialisation.

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• Consumers have a higher income, demand better quality and wider choice of
products.

• Better Education: Consumers expect better products; know they can order
goods by E-commerce from different regions and suppliers.

• More leisure Time: Consumers work fewer hours; demand for leisure activities
(tertiary sector) increases.

• Change in Business Behaviour resulting from:

• Need for finance to fund expansion (to combat global competition)
• Need to be able to communicate internally and externally quickly and cheaply
(to cater to wider markets and take their benefits)

• Need to provide better services for their customers (in turn increases demand
from other businesses)

1.2.2 Business enterprises between private sector and public

sector in a mixed economy
• Mixed Economy: An economy where the resources are owned and controlled by
both the private and the public sectors.

Private Sector Public Sector

The part of the economy that is owned and The part of the economy that is controlled by the
controlled by individuals and companies for profit. state or government.
Types Of Organisations: Sole Trader, Partnerships, Types of Organisations: Government
Limited Companies, Franchises, Joint Ventures Departments, Public Corporations, Nationalised
and Social Enterprise Industriese.e.g. Airports, seaports, railway
system.

• Decision Making of Production:

Private Sector Public Sector

What to produce Consumer Choices: Businesses Government decides: produce

only produce goods that goods which all people of the
consumers want, if they can population need.
make profit from doing so.
How to Produce Firms want to make profits: Government decides: decisions
Businesses decide the best way based on providing good quality
of production with the least costs. goods rather than profit making.

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Private Sector Public Sector

For whom to produce Customers buying power: Government decides: some

Products will be bought only products are free of cost, others
by customers who have may have a lower price so
enough money to pay the everyone can afford.
price.

Examples Retail Shops - Jet airways Government org. -

(Electricity production,
Government hospitals.

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1. Understanding Business Activity

1.3 Enterprise, Business Growth and Size

Business Studies, CIE IGCSE (0450)

1.3.1 Enterprise and Entrepreneurship

• CHARACTERISTICS OF SUCCESSFUL ENTREPRENEURS
• Entrepreneurs: An individual who has an idea for a business and takes the
financial risk of starting and managing a business.

• Entrepreneurs usually:
• Have an idea for a new business
• Are prepared to invest their own savings
• Accept risks of failure
• Want to make all decisions about the management of the business.
• Characteristics of successful entrepreneurs:
• Innovative: Think about new ideas for goods and services.
• Self motivated and determined: drive to keep going
• Self Confident: Strong belief of their ability and ideas
• Multi-skilled: Good understanding of functions like finance, marketing and
Human Resource

• Leadership Qualities: good communication skills, and motivate others

• Initiative: Able to develop a good plan to achieve business objectives
• Results driven: Focused on achieving results and sell products for profit.
• Risk-taker: prepared to take risks, knowing failure is a possibility.
• Good at Networking: Prepared to learn from others.

• CONTENT OF A BUSINESS PLAN AND HOW THEY ASSIST

ENTREPRENEURS

• Business Plan: A detailed written document outlining the purpose and aims of a
business which is often used to persuade lenders and investors to finance the
business proposal.
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• Contents of the Business Plan:
• The Business - Includes details of the entrepreneur, idea of the business, and
information of about skills and expertise of managers or workers who need to
be recruited.

• Business Opportunity - Information of product, Market research and why

customers will buy the product.

• The Market - Current size, Potential growth, and Product’s main competitors.
• Objectives of the Business - What Business hopes to achieve
• Financial Forecasts - A cash-flow forecast and projected sales, revenue and
profit for at least the first year of trading. (Revenue: The amount a business
earns from the sale of their products.)

• How Business Plans assist Entrepreneurs:

• Information can be used to persuade lenders and investors to provide finance
to the business.

• Plan gives business a sense of purpose and direction. Sets out resources
required by business such as finance, skills and number of workers etc.

• Financial forecasts provides business with targets to aim at and enables

business to monitor its progress.

WHY AND HOW GOVERNMENTS SUPPORT START-UPS

• Business Start-up: A newly formed business. They usually start small, but some
might grow to become much bigger.

• Why Governments support Start-ups:

• Job Creation: Together they employ a huge working population, reducing
unemployment.

• Increased Variety of Products: Bring ideas for goods and services that
increase the variety of products available creating a great consumer choice in
the market.

• Increased Competition: The more businesses there are in the market place,
the greater the competition resulting in lower prices and better quality of goods
and services.

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• Specialist Goods: Small businesses often provide with goods and services to
consumers which larger businesses are less interested in supplying (mass
market).

• Become Larger business: Some Start-up businesses often become larger

businesses in the future. The country will benefit from the advantages the
larger businesses bring to the economy.

• Lower Costs: Some startup businesses often have lower costs than larger
businesses, so they sell products at lower prices.

• How Government support Startups:

• Grants (financial help that start-up receive and do not have to pay back) and
interest free or low interest loans.

• Lower taxation rates on profits in early years or tax holidays.

• Rent free premises for certain period of time
• Free or subsidized training for workers
• Information, advice and support from specialist agencies
1.3.2 The methods and problems of measuring business size:
• METHODS OF MEASURING BUSINESS SIZE
• Capital Employed: Value of all long term finance invested in a business. Used to buy
things that a business needs before it can produce goods and services.

• A small business will invest less capital than a large business in the same
industry.

• Problem because: some industries such as car manufacturing need a very large
capital investment in factories and machinery others such as computers and
software design do not.

• Value of Output: The amount businesses earn from selling their products.
• A small business will have much lower revenue and earnings from sales than a
larger business.

• The larger the market a business serves the more revenue the business is likely
to earn.

• Problem because: Doesn’t fairly compare businesses in different industries.

• Number of Employees: Large businesses usually employ many different employees
than small business in the same industry.

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• Problem because: Two business can produce similar level of outputs, but Firm
with automated production will require far fewer workers than the one which is
using traditional methods.

• Market Share: The larger the share of the market, larger the business.
• Misleading as: if a market is a small one, some businesses may have a larger
market share, though value of output may be smaller than a firm which may have
a larger value of output with a smaller market share in a larger market.

1.3.3 Why some businesses grow and others remain small:

• WHY OWNERS MAY WANT TO EXPAND THEIR BUSINESS
• Increase in Profits: Growth results in increase in output. If output is sold, then sales
increase, which increases revenue, and therefore profit (if costs are kept in control)

• Increase in Market Share: Increase in market share results in business growth, so

products and brand name become more widely known. Launching products is less
risky. Sales may also increase.

• Economies of Scale: As businesses grow there is reduction in average costs due to

higher efficiency and production, this will lead to increase in profits.

• Greater power to control market: Larger businesses have greater control over their
own prices, and can also set price for other businesses. Sometimes they can also
influence government policy to their advantage.

• Protection from the risk of takeover: The larger the company the more expensive and
difficult a hostile and unwanted takeover becomes reducing chances of
takeovers for public limited companies.

• DIFFERENT WAYS BUSINESSES EXPAND

• Businesses grow in different ways either internally (organic growth) or externally
(inorganic growth)

• Internal Growth: Occurs when a business expands by: (it is often slow but avoids
problems of external growth.)

• Increasing the number of goods it can produce. Ex. Buying more machinery
• Developing new products
• Finding new markets for their products

• Growing a customer base through marketing

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• External Growth: Takes place when a business merges with or takes over other
another business in the same or different industry. This process is known as
integration.

• Horizontal Integration: Brings together two firms in the same industry, who are
also in same sector of business activity.

• Forward vertical Integration: Brings together two firms in the same industry, but
one is a customer of the other.

• Backward Vertical Integration: Brings together two firms in the same industry, but
one is a supplier to the other.

• Conglomerate Integration: Bringing together two firms which are in completely

different industries.
• PROBLEMS LINKED TO BUSINESS GROWTH

• Internal growth is usually slow, other businesses using external growth may grow
very fast. These larger firms may dominate market, and remove opportunity for
other businesses to expand.

• Due to mergers, managers and workers may fear loss of job; maybe complex to take
control, leading to poor decision making and inefficiency.

• If business becomes too large then diseconomies of scale may occur; increasing
average costs and decreasing profit margin.

• Businesses bought together may have different management styles, objectives, pay
and conditions of work, which may lead to conflicts between groups and workers.

• Integration will change control of business for original owners, there may be loss of
control.

• How to overcome these problems: Careful Planning is required. Senior managers

should make sure enough resources are available. Workers should be fully aware of
the plans to avoid conflicts

• WHY SOME BUSINESSES REMAIN SMALL

• Owner’s Choice:
• Doesn’t want increased responsibility and workload.
• Wants total control of business, fears growth will reduce level of control over day-
to-day decision making.

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• Wants to maintain close relationship with customers & provide personal service.
• Don’t want to take the risk of growth, as growth requires finance, and if growth is
slow, the business’s borrowing cannot be repaid on time.

• Market Size:
• Not all businesses have market share as a objective.
• Local market services, may not want to offer there services beyond the
neighbourhood.

• Consumers will not travel further distance, when a similar service is available
near to them.

• Access and Availability of Capital:

• Due to lack of capital and difficulty in getting bank loans and other sources of
finance, this is one of the biggest factors preventing expansion.

• Market domination:
• Very large companies in the market dominate the market and make it very hard
for small businesses to compete.

• Consumers have a brand loyalty to bigger firm as they can offer services at lower
prices due to economies of scale.

1.3.4 Why some (new or established) businesses fail and why

new businesses are at greater risk of failing:
• CAUSES OF BUSINESS FAILURE:
• Poor Planning and Lack of Objectives: Lack of detailed business plan, New business
owners often fail to set objectives; so business lacks focus and direction.

• Poor Cash Management: Businesses don't handle cash inflow and outflow effectively;
they do not have enough money for expenses and debts.

• Poor Choice of Location: If businesses aren’t located properly or closer to market/raw

materials then there is lack of demand and sales, resulting in failure.

• Poor Management: Lack of management skills and experience to run business,

results in conflicts and business failure.

• Failure to invest in new technologies: Unable to compete with others in terms of

Price, design, and quality; so business fails to survive.

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• Poor Marketing: Market research is essential to new businesses for identifying size of
potential market, level of competition and finding out what consumers want.

• Lack of Finance: Lack of finance doesn’t allow businesses to make the most of the
opportunities they receive, sometimes even failing.

• Competition: Globalization gives access to wider markets, increasing competition.

Businesses unable to compete on price and quality are unlikely to survive in the long
run.

• Economic Influences: Unemployment, High interest rates, and taxation may reduce
the amount of money consumers have to spend; reducing business earnings and
thereby causing failure.

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 Business Studies, CIE IGCSE (0450)

1.4 Types of Business Organization

1.4.1 Main Features of different types of Organization

• SOLE TRADERS, PARTNERSHIPS, PRIVATE AND PUBLIC
LIMITED COMPANIES, FRANCHISES AND JOINT VENTURES.

• Sole Trader: A business that is owned and controlled by just one person who takes
all risks and receives all the profits.

Advantages (Features) Disadvantages

 Easy to set up the business since no legal

documents required. Unlimited Liability for business debts hence
risk losing personal belongings.
 Makes all the decisions and has complete control of Difficult to raise funds and expand
business
 Set up with small amount of start-up Owners have lack of essential business skills Ex.
capital. (Startup Capital: The finance Financial Management causing business failure.
needed, when first setting up a
business.)

 Owner keeps all the profit Difficult to compete with larger firms in the industry
 Be their own boss, and make their own Sole traders have to work very long hours to make
decisions. Example. How many hours to a living.
work.
If sole trader retires or dies business no longer
exists.

• Partnerships: A business formed by two or more people who will usually share the
responsibility for the day-to-day running of the business. Partners usually invest
capital in the business and share the profits.

Advantages Disadvantages
Greater access to finance than sole traders. (More Unlimited Liability for debts of business; may have
than 1 person investing) to use personal wealth.
Decision-Making is shared leading to better Partners must share profits
decisions

Reduces workload for individual owners (shared) If one partner leaves, business ceases to exist
(has to be reformed if others want to continue)
Easy to set-up. (partners sign a ‘Deed of Business decisions bind all partners, even if they
Partnership’) don’t agree.
Are fairly small businesses; find it difficult to raise
additional finance to expand business.

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 Business Studies, CIE IGCSE (0450)

• Unincorporated Business: A business that does not have a separate legal identity
separate from its owners. The owners have unlimited liability for business debts, with
their personal belongings at stake.

• Unlimited Liability: If an unincorporated business fails, then the owners might have
to use their personal wealth to finance any business debts.

• Private and Public Limited Companies:

• Private Limited Company: Often a small to medium sized company; owned
by shareholders who have limited liability. The company cannot sell its shares
to the general public. e.g. are most family owned businesses and shares are
only sold/given to family members or friends.

• Public Limited Company: Often a large company; owned by shareholders who

have limited liability.
The company can sell its shares to the general public at the stock exchange.

• Same Features for Private and Public Limited Companies:

• Legal documents (Articles of Association, and Memorandum of Association) must
be completed when setting up business.

• Shareholders invest capital by purchasing shares.

• Ordinary shareholders are owners of company.
• Shareholders have limited liability (if company fails they risk losing value of
shares)

• Business continues even if one shareholder dies/retires.

• Company can raise finance by selling shares.
• Profits belong to ordinary shareholders and shared by dividends/share of profits.
• Shareholders vote on major decisions of company during the Annual General
Meeting.

• End of year financial statements should be submitted to correct authorities e.g the
income tax authorities. Company’s financial accounts are available for public.

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 Business Studies, CIE IGCSE (0450)

• Differences between Private and Public companies::

Feature Private Limited Public Limited

Owners Small no. of shareholders (family Large no. of shareholders

or friends) ( general public)

Size Fairly small Very large companies

Company title Name ends with LTD Name ends with PLC

Sale of Shares by company Sold privately often to friends & to general Public and other
family. organizations

Sale of Shares by Often difficult (to be sold to Quick and easy to sell (can be
Shareholders privately with agreement of other offered to general public).
shareholders)

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 Business Studies, CIE IGCSE (0450)

Feature Private Limited Public Limited

Control Only a few shareholders. One Thousands of shareholders.

shareholder has over 51% of Board of directors appointed by
shares, and has control over shareholders at AGM control
major decisions. major decisions.

Raising additional capital Though successful, difficult to If successful, then can raise very
through share issue raise capital as shares can’t be large sums, quite easily through
sold to public sale of additional shares.
Borrowing Finance Easier to raise finance than Can raise large sums at good
unincorporated businesses. rates of interest, due to good
reputation and valuable
collateral.

• Limited liability: The shareholders in a limited liability company which fails only risk
losing the amount they have invested in the company and not any of their personal
wealth.

• Ordinary Shareholders: The owners of a limited company.

• Dividend: A payment, out of profits, to shareholders as a reward for their investment.
• Collateral: Non-current assets( e.g. Land, buildings/premises, machinery, equipment,
furniture) offered as security against borrowing.

• Disadvantages of Public Limited Companies (NOT shared by Private limited):

• Legal formalities of setting it up are very costly.
• Director’s decisions are sometimes influenced by major investors to satisfy their
own objectives.

• Company is always at risk of takeover by another company, because its shares

can be easily bought and sold.

• Legal requirements for publication of information about company is much stricter

than it is for private limited companies.

• Franchise: A business system where entrepreneurs (franchisee) buy the right to use
the name, logo, and product (business idea) of an existing business (franchisor).

Advantages Disadvantages
Less chance of business failure, as product and Initial cost of buying franchise is very expensive
brand are already well established.

Franchisor provides with training and advice to Franchisor will take % of revenue or profits of
franchisee (part of Franchise agreement) franchisee every year
Franchisor will finance promotion of brand through Strict controls over what franchisee is allowed to
national advertising do with product, price and store layout

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 Business Studies, CIE IGCSE (0450)

Advantages Disadvantages
Franchisor will already have checked quality of Franchisee will still have to pay for any local
suppliers so franchisee is guaranteed quality promotion if they decide to do.
supplies.

• Joint Venture: two or more businesses agree to work together on a project and set
up a separate business for this purpose.

Advantages Disadvantages

Reduces risks for each business and cuts costs Any mistake will damage reputation of all firms in
joint venture (even if they didn’t cause any
mistake)
Each business brings different expertise Businesses may have different styles of leadership
and business cultures making decision making
difficult.
Market and product knowledge can be shared to
benefit of both.

• DIFFERENCES BETWEEN INCORPORATED AND

UNINCORPORATED BUSINESSES

Incorporated Unincorporated

Separate legal identity from its owners doesn’t have a separate legal identity from its
owners
The company not shareholders are legally Owners have unlimited liability - legally responsible
responsible for business activities. Limited liability for business’s activities.

Ex. Limited Company Ex. Sole traders and Partnerships

• RISK, OWNERSHIP AND LIMITED LIABILITY

• Owners/businesses of unincorporated businesses are at a greater legal and financial
risk than incorporated business as:

Unincorporated Business Incorporated Business

Have same legal identity Business and owners are separate legal entities.

Owners have unlimited liability Owners have limited liability

• CHOOSING TYPE OF BUSINESS ORGANISATION

• Depends on many different factors, mainly influenced by:
• Number of Owners
• The Owner’s role in management of the business
• The attitude towards financial risk
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 Business Studies, CIE IGCSE (0450)

• How quickly owners want to start operating their business

• The potential size of their business (based on market size or owner’s choice)

• BUSINESS ORGANISATIONS IN THE PUBLIC SECTOR EX. PUBLIC

CORPORATIONS

• Owned and controlled by the state

• Financed mainly through taxation
• Have social objectives rather than profit objectives
• Services are often provided for free or at low price
• Example. Air India, ONGC (Oil & Natural Gas Corporation - India), LIC (Life
Insurance
Company)

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1. Understanding Business Activity
1.5 Business Objectives and Stakeholder Objectives

Business Studies, CIE IGCSE (0450)

1.5.1 Businesses can have several objectives – and the

importance of these can change:
• NEED FOR BUSINESS OBJECTIVES AND THEIR IMPORTANCE
• Objective: A statement of a specific target to be achieved, they should be SMART.
• Specific: Refer to something specifically; shouldn’t be vague
• Measurable: Relate it with numbers, to measure progress.
• Achievable and Agreed: Should be agreed by everyone (including employees)
and not something that seems impossible.

• Realistic and Relevant: To fulfil the objective you need to have the required
resources in hand.

• Time-Specific: Set by deadlines which are believable, to track progress.

• Objectives give a sense of purpose and direction to business, and are vital for the
long term growth of a company.

• DIFFERENT BUSINESS OBJECTIVES

• Survival: To prevent failure in the first years (very short term objective) Once
established, businesses have long term objectives.

• Growth: Aim to produce and sell the output, which has the greatest difference
between revenue and costs.

• Growth: To expand the size of business in order to increase output benefitting

economies of scale.

• Market Share: Increased markets share gives increased brand image; increasing
sales.

• Corporate Social Responsibility (Business taking responsibility for the impact

their activities may have on the environment and society): Interest in social, ethical
and environmental issues. Businesses who ignore this run the risk of bad publicity
and legal action. Important because:

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 • Activity of pressure Groups (Organisations of like minded people who put
pressure on businesses and government to change their policies to reach a
predetermined objective.)

• Media: creates greater awareness amongst consumers

• Role of Trade Unions
• Role of Governments and Laws.

• OBJECTIVES OF SOCIAL ENTERPRISES

• Social enterprise: A business with social objectives that reinvests most of its
profits back into the business or benefiting society at large.

• Objectives :
• Profits to be reinvested in business
• Benefit the Employees
• Relates to the care of environment
• Relates the needs of the local community
1.5.2 Role of Stakeholder groups
• MAIN INTERNAL AND EXTERNAL STAKEHOLDER GROUPS
• Stakeholder: An individual or group which has an interest in a business because
they are affected by the company’s decisions and activities.

Internal Stakeholders External Stakeholders

Owners and Shareholders: Interested in Lenders Want to know, if they will be paid interests
performance of business. Will want to know profit on loans; check if amount of loan will be repaid.
of their business (as it is their reward for risk of • Existing: If business is making profit to repay
investment). Market Value of Shares is directly • Potential: Want to know long-term profitability
affected by profitability of businesses. of business; and value of non-current assets
of business.

Managers: Responsible for performance of Suppliers: Want to know if they will get paid on
business. If performance increases, they receive time for goods supplied on credit (enough to pay
bonuses, and promotion. short term debts.) If business expands and
succeeds, suppliers’ sales will also increase!

Employees: Interested in performance of Customers: Interested in activities of business;

business. If profitable it means they have job want to make sure business is going to continue to
security and chances of pay rise. Some exist in future. Also if business is earning good
businesses also have profit-sharing schemes. profits —> More retained profits +development and
expansion —> better quality goods and services.

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Internal Shareholders External Shareholders

Government: Higher the profits, higher tax

revenues paid to government. Tax revenues are
vital for government spendings (health, education
etc.) Also, if businesses are expanding
unemployment levels will decrease.
Local Community: Businesses offer local
employment opportunities. Chain effect caused as
more employment —> higher levels of spending
—> other businesses fostering. Also, it provides
financial support for local activities via sponsorship.
Though, may cause air & noise pollution.

• OBJECTIVES OF STAKEHOLDER GROUPS. THEY WANT TO:

Stakeholders Objectives
Owners/ • Receive higher returns/dividends for risk of investment
Shareholders • Benefit from increased share value.
Managers • Have job satisfaction and Status
• Receive salary increase and bonuses
Employees • To have job security
• Receive fair wage (which reflects their contribution in business’s success.
Lenders • Receive interest payments when due
• Have borrowing repaid by due date
Suppliers • Receive prompt payment for goods supplied on credit
• Be treated fairly (no forced to reduce prices, by businesses with strong buying power.
Customers • Receive quality goods and after sale’s service.
• To charged fair price; get value for money.
Government • to get the correct amount of taxes on time
• Have minimal spending on employment benefits
Local • Receive benefits: Local employment, Subsidizing community facilities
Community • Avoid negative impacts of business activities: like air and noise pollution.

1.5.3 Differences in the aims and objectives of private sector and public sector enterprises

• Public Sector businesses have very different objectives like:

• Accessible: goods/services can be used by everyone, regardless of
location/income

• Affordable: Must be cheaper than if service is in private sector eg. public

schools/hospitals are cheaper than private ones.

• Open to all : Must be available to everyone regardless of income, class,

ethnicity, religion, culture etc. e.g. ferry services, streetlighting, water and gas

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2. People in Business (pg 72 e-book)

2.1 Motivating Workers

2.1.1 Importance of well motivated workforce

• WHY PEOPLE WORK AND WHAT MOTIVATION MEANS
Motivation: The factors that influence the behaviour of workers towards achieving
the set business goals.

Labour Productivity: A measure of the efficiency of workers by calculating the

output per worker. = output
No. of worker

Absenteeism: Worker’s non-attendance at work without a good reason.

Labour Turnover: The rate at which workers leave the business. i.e leaving the job for
better opportunity in other businesses.

Benefits of Well-motivated Work force:

More competitive compared with workers in other businesses.

Improved Productivity i.e higher output per worker.

Low rate of absenteeism i.e always present at workplace.

Low rate of labour turnover i.e. Very few employees leaving employment

Better quality goods and services are produced.

Motivation theories

Maslow’s Hierarchy:

Abraham Maslow created what is known as the hierarchy of needs.

In this diagram, there are 5 different types of motivation:

 Physiological needs: basic requirements for survival.
 Security needs: Protection against danger and poverty (the need to be physically safe.)
 Social needs: the need to belong and have good relationships with co-workers.
 Esteem needs: the need for self-respect and to be respected by others.
 Self-actualization needs: the need to reach your full potential and be promoted.

Businesses realize that the more levels of motivation are available to workers, the harder
they will work. Maslow also suggest that each level of motivation must be achieved before

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going to the next level. Once one level of motivation is met, more of that will no longer
motivate the employee

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Diadvantages of the theory

Some levels are not present in some jobs.
 Some rewards belong to more than one level.
 Managers need to identify the levels of motivation in any job before using it to motivate
employees.

. The theory of economic man: (By: F.W. Taylor)

“All individuals are motivated by personal gain”
The view that humans are only motivated by money. (Relate to Piece Rate method of
payment to workers)
 Money is the main motivator.
 If employees are paid more, they work more.
 Work is broken down into simple processes, and more money is paid which will
increase the level of productivity an employee will achieve.
 The extra pay is less than the increased productivity.

Diadvantages of the theory

 Workers are seen rather like machines, and this theory does not take into account
nonfinancial motivators.
 Even if you pay more, there is no guarantee of a productivity rise.
 It is difficult to measure an employees output.

Frederick Herzberg Theory aka TWO FACTOR THEORY

Two Factor Theory: Motivational theory created by Frederick Herzberg. To
Herzberg, humans have hygiene factors, or basic animal needs of humans. We also
have motivational factors/motivators, that are required for the human to grow
psychologically.

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Hygiene Factors: The factors that must be present in the workplace to prevent
job dissatisfaction.

• Working Conditions: Includes things such as how clean and safe a

workplace is. Availability of facilities: washrooms, canteens, drink machines.

• Relationship with others: Worker having good relationship with other

workers —> need of friendship —> good relationship with managers
treated fairly with respect.

• Supervision: Factor considers the importance of the leadership style and

how closely workers are supervised in a good way.

• Company Policy and Administration: Rules and procedures which affect

the way the workers work. Rules that are worker friendly.

Motivators: The factors that influence a person to increase their efforts.

• Responsibility: Giving workers more responsibility, shows the how

managers trust their employees and value their contribution.

• Advancement: Workers have opportunity for promotion and move up the

ladder in terms of position.

• Achievement: Workers need to feel they have reached challenging goals.

• Recognition of Achievement: Workers motivated by their achievements
recognised by management and other people whose they work with e.g.
employee of the year/month awards.

To Herzberg, if the hygiene factors are not satisfied, they will act as
demotivators. They are not motivators, since the motivating effect quickly
wears off after they have been satisfied. True motivators are Herzberg's
motivational factors.

Job Dissatisfaction: How unhappy and discontent a person is with the job.

———————————————————————————————————————

10. Methods of Motivation:

Financial Rewards: Cash and non-cash rewards paid to workers which are often
used to motivate workers to increase their efforts.
- Hourly Wage Rate: Payment to workers based on fixed amount for each hour
worked.

a) Paid to production workers and non-managerial staff.

(+) Workers are only payed for the hours they work

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c) (-) Pay is not related to the production, or efficiency.

- Salary: Fixed Annual payment to certain grades and types of staff not based on
hours worked or output.

a) For workers whose work is directly not linked to production, ex.

supervisors, managers and professional staff.

b) (+) Workers do not receive more if they have worked longer hours to
complete a task.

c) (-) Salary is not linked to worker effort or production.

- Piece Rate: Payment to workers based on the number of units produced.
a) Only used to reward production workers

b) (+)Workers are only paid for the number of items they produce.

c) (-)Quality of goods produced may be poor.

- Commission: Payment to sale staff based on the value of the items they sell.
a) Used to reward sales staff.

b) (+)Pay is linked to the value of goods sold.

c) (-)#Workers: They never know how much they will get paid.

d) (-)#Business: Workers may start leaving, since there is no definite pay.

Thus business will have to invest more time and money in recruiting other
workers.

- Bonus: An additional reward paid to workers for achieving targets set by

managers.

a) Reward for any individual worker or group of workers where a

performance target set is achieved.
b) (+) The pay is related to performance target achievement ——>Increase in
productivity——> Reduction in average Costs.

c) (-) If targets are unrealistic then workers could become demotivated.

d) (-) if target is group based, some may receive bonus without any
contribution, could lead to conflicts between workers.
- Performance Related Pay: A bonus scheme used to reward staff for performing
to the required standard.

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- Fringe Benefits: Non-cash rewards often used to recruit or retain workers and to
recognise the status of certain employees. They may be having free
accommodation, free car, etc... However, when you look at it, it is just money in
different forms. Here is a list of these motivators:
 Children's education.
 Discounts on company products.
 Free Healthcare.
 Company vehicle.
 Free accommodation.
 Share options.
 Expense accounts.
 Pension.
 Free holidays

- Profit Sharing: An additional payment to workers based on the profits of the

business.
Non-financial Rewards: Methods used to motivate workers, that do not involve
giving any financial rewards.

- Job Rotation: Increasing variety in the workplace by allowing workers to switch

from one task to another.

- Job Enlargement: Increasing or widening tasks to increase variety for workers.

When more jobs are added to a worker's job description. This adds variety to the
worker's job with a similar level of actual work.

- Job Enrichment: Organising work so that workers are encouraged to use their full
abilities. When jobs are added to a worker's job description which require more
skills or responsibility to carry out. Additional training may be required in order for
workers to do these jobs, but workers will be more committed and there is scope for
fulfilling the higher levels of the Hierarchy of Needs.

- Job satisfaction: How happy and content a person is with their job.
- Job Redesign: Increasing variety, or difficulty of jobs, using any of the above
methods.

• Aim: To make work more interesting and more challenging for workers. Help
them learn new sills which can motivate them, and increase chances of
promotion.
- Quality Circles: Groups of workers who meet regularly to discuss work related
problems. Workers come up with solutions to problems or suggest improvements.
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- Team-Working: Organising production so that groups of workers complete the

whole unit of work, instead of individuals being assigned smaller tasks.
- Delegation: Passing responsibility to perform tasks to workers lower down in the
organisation. Often combined with empowerment, to allow lower level workers to
take decisions about performance of tasks.

Choosing Method of Motivation:

- Cost to business: Affordability of the method to the business. Ex. Job redesign
may reduce the absenteeism of the workers, reduce the number leaving the
business —> improve productivity and reduce recruitment costs.
The cost saving should be greater than the cost of job redesign.

- Types of Workers: Some motivators can only be used for certain types of workers.
Ex. Piece Rate only for Production workers.
- The same method of motivation would not work for all, some workers may be
attracted by higher pay, other’s may not.

ADDITIONAL EXPLANATION
Job satisfaction:
Employees will become more motivated by enjoying the job they do. Job
satisfaction can come in different ways. However, there are some factors that
demotivate employees if they are not satisfied, and must be satisfied before the
motivators can take effect. Here are some things that make workers' jobs
satisfying:
 Pay.
 Promotion.
 working conditions.
 Fringe benefits.
 Management
 Working hours.
 The nature of the work itself.
 Colleagues, etc...
Herzberg and Maslow stresses that things such as responsibility recognition is also
crucial to provide job satisfaction. Letting workers contribute to the job would also
help, making jobs less boring and more creative. Here are some policies to
increase job satisfaction:
Job rotation:
Workers in a production line can now change jobs with each other and making their
jobs not so boring. It helps train the employee in different aspects of their jobs so
that they can cover for other employees if they do not show up.
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Job enlargement:
Adding tasks of a similar level to a worker's job. Job enlargement simply gives more
variety to employees' work which makes it more enjoyable.
Job enrichment:
Adding tasks of a higher level to a worker's job. Workers may need training, but they
will be taking a step closer to their potential. Workers become more committed to
their job which gives them more satisfaction.
Autonomous work groups or teamworking:
This is when group of workers are given total responsibility to organise themselves
and perform a task. This makes the employees feel more important, as well as
giving them a sense of belonging when they are part of a team. If they organise
themselves differently every time, the team could get job enlargement and job
enrichment too!
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2. People in Business
2.2 Organisation and Management

Organisational Structure: The formal, internal framework of a business that

shows how it is managed and organised. (The levels of management and
division of responsibilities within a company )

Functional Departments: The main activities of a business: finance, marketing,

operations, human resources, and research & development.

Simple Organisation charts: Show simple hierarchical structures

Hierarchy: The number of levels in an organisational structure

• For large firms, as you go from top to bottom of the hierarchy there are
more people at each level.

Chain of Command: The route through which authority passes down through an
organisation.

• Each person in the chain of command is directly responsible to the person

immediately above and below them.

• Instructions are passed down the chain of command.

• Information and performance are passed up the chain of command.
Span of control: The number of subordinates reporting to each supervisor/
manager.

• Subordinate: An employee who is below another employee in the

organisation’s hierarchy.

• Factors affecting Span of Control:

A. Difficulty of Tasks: The more complex the task subordinates do, more
likely that a narrow span of control is used, simple repetitive tasks
involve wide span of control.

B. The experience and skills of workers: The span of control will often
be wider, when subordinates are more skilled and more experienced.

C. Size of business: Larger businesses often have a narrow span of

control compared to smaller businesses, as they can afford to employ
more managers.
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D. Levels of Hierarchy: Managers in tall organisation structures will

usually have narrower spans of control than managers in flat
organisation structures.
E. Management Style: Management style with a greater control over the
workforce than others have a narrow span of control.

Wider Span of Control Narrow Span of Control

Advantages Disadvantages Advantages Disadvantages

Less expensive as Fewer managers Effective communication Communication and
fewer managers are reduces promotion is easier. decision making is often
needed oppurtunities. slower.
Less supervision Less control over Better control and More expensive as
improves worker subordinates work. quality check over more manager are
motivation worker’s work needed.
Faster communication Effective communication More managers More supervision may
and decision making. may be difficult. increases promotion reduce worker
oppurtunities. motivation.

Tall and Flat:

• Tall: Higher number of levels, longer chain of command, and narrow span of
control.

• Flat: Lower number of levels, shorter chain of command, and wider span of
control.

Delayering: Reducing the size of the hierarchy by removing one or more layers-
most often middle management. (usually to save cost by cutting out middle
management).
Advantages Disadvantages

Reduces costs Increased workload for managers who remain

could mean that tasks are not completed on time
or the quality of decision- making is not as good.
Reduces chain of command, so communication The business may have to make redundancy
and decision making is quicker and more effective. payments to managers, who lose their jobs. This
increases costs.

Wider span of control increases opportunity of Workers who remain may fear redundancy and this
delegation. Develops worker’s skills and motivate reduces their job security.
workers.
Senior managers are more closer in touch with Wide span of control after redundancy may reduce
what is happening in business. the effective management of subordinates.
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Centralised Organisation: One where all the important decision- making power is
held at Head Office, or the centre

Decentralised Organisation: One where the decision- making powers are passed
down the organisation to lower levels

Centralised Organisation Decentralised Organisation

Advantages Disadvantages Advantages Disadvantages

Decision making is Slower communication Decisions are made Decisions taken might
often quicker. based on local needs. not interest the whole
business.

Decisions are taken for Unable to respond Can be used to train Poor decisions might be
the benefit of the quickly to changes in junior managers made as managers lack
business. local markets skills and experience.
Greater use of specialist May reduce worker Delegation helps to
staff improves decision- motivation. improve worker
making. motivation.

Roles Responsibilities and Inter-relationships:

Directors: Appointed or elected members of the Board Of Directors of a company.

They are most senior level of management in a limited company. E.g. Marketing
Director

• Responsibilities:
1. Setting Strategy (long term plans),
2. Making sure resources are available to achieve objectives,
3. reviewing performance of managers,
4. Protecting interests of shareholders and other stakeholders,
5. Providing leadership to ensure success of business.

Annual General meeting (AGM): A meeting for shareholders that limited

companies must hold once every year.

Chief Executive Officer (CEO): CEO is the most senior manager responsible for
the overall performance and success of the company.

Manager: Manager is an individual, who is in charge of a certain group of tasks.

E.g. Factory Manager
Responsibilities: Making sure that the decisions of the director are carried out,
Delegating tasks to members of the department,
Taking the necessary decisions to achieve the targets,
Motivating workers,
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Solving day- day problems.

Supervisors and other workers: An individual who checks and controls the work
of subordinates.

• Responsibilities: Complete their tasks efficiently and at the required quality

standard set by the manager, work towards achieving individual, group or
departmental targets.

Delegation is giving a subordinate the authority to perform some tasks.

Advantages to managers:
 managers cannot do all work by themselves
 managers can measure the efficiency and effectiveness of their subordinates’
work
However, managers may be reluctant to delegate as they may lose their
control over the work.
Advantages to subordinates:
 the work becomes more interesting and rewarding- increased job satisfaction
 employees feel more important and feel trusted– increasing loyalty to firm
 can act as a method of training and opportunities for promotions, if they do a
good job

The Role of the H.R. (Human Resource) Department

 Recruitment and selection: attracting and selecting the best candidates for job
posts
 Wages and salaries: set wages and salaries that attract and retain employees
as well as motivate them
 Industrial relations: there must be effective communication between
management and workforce to solve complaints and disputes as well as
discussing ideas and suggestions
 Training programmes: give employees training to increase their productivity
and efficiency
 Health and safety: all laws on health and safety conditions in the workplace
should be adhered to
 Redundancy and dismissal: the managers should dismiss any
unsatisfactory/misbehaving employees and make them redundant if they are no
longer needed by the business
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The Role of Management: It is responsible for: setting objectives, motivating

workers, Ensuring sufficient resources to the workers.

Functions of Management

Planning:
Where the business is ?
Where it needs to be in the future?
Setting the objectives
Based on the objectives setting the action plan
Organising: Preparing and organizing the resources at the lowest possible cost to achieve the goals.

Commanding:
Control and supervision of subordinates
Motivate the workers
Coordinating:
Ensuring all the different parts if the business work together
to achieve the goals.
Controlling:
Making sure that the plan is working.
Timely completion of the work
Other tasks apart from these 5 functions:
- Understand the people for whom they work
- Set a good example
- Treat subordinates fairly
- Delegate Tasks
- Communicate effectively

Leadership Styles
Leadership styles refer to the different approaches used when dealing with people when
in a position of authority.
There are mainly three styles you need to learn: the autocratic, democratic and laissez-
faire styles.

Autocratic style is where the managers expect to be in charge of the business and have
their orders followed.
They do all the decision-making, not involving employees at all. Communication is thus,
mainly one way- from top to bottom.
This is standard in police and armed forces organizations.

Democratic style is where managers involve employees in the decision-making and

communication is two-way from top to bottom as well as bottom to top.
Information about future plans is openly communicated and discussed with employees
and a final decision is made by the manager.

Laissez-faire style (French phrase for ‘leave to do’ ) makes the broad objectives of the
business known to employees and leaves them to do their own decision-making and
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organize tasks. Communication is rather difficult since a clear direction is not given. The
manger has a very limited role to play.

Autocratic Democratic Laissez Faire

Objectives Set by leader without Set by leader, but Usually get by leader
any input from workers workers are often with or without input
consulted from workers

Decision Making Taken by the leader Workers are Delegated to workers

without any input from encouraged to take part, who take the decisions
workers but leader still takes
final decision

Communication One-way, from leader Two-way feedback Communication is most

to worker encouraged. often upwards form
No opportunity for subordinates to leader,
feedback little feedback from
manager

Choosing a leadership style:

The Skills and Experience of Workforce: More skilled and experienced workers are
the lesser management is required. #democratic approach
Time available to take a decision: If decisions are tone taken faster with no time to
discuss requires #autocratic approach

Personality of Manager: Difficult to use a style different than manager’s personality.

Task to be completed: tasks which require innovation and creativity require a

laissez faire approach
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Trade Unions:
A trade union is a group of workers who have joined together to ensure their
interest are protected. They negotiate with the employer (firm) for better conditions
and treatment and can threaten to take industrial action if their requests are denied.
Industrial action can include overtime ban (refusing to work overtime), go slow
(working at the slowest speed as is required by the employment contract), strike
(refusing to work at all and protesting instead) etc. Trade unions can also seek to put
forward their views to the media and influence government decisions relating to
employment

Trade Unions help members carry out tasks like:

• Negotiating pay and working conditions with employers (collective bargaining)

• Resolving Conflicts (when a disagreement between employers and workers)
• Providing legal support and advice (ex. when workers are unfairly dismissed for
wrong reasons)

• Providing services for members: pension schemes, insurance schemes, holiday

schemes etc.
Benefits to workers of joining a trade union:
 strength in number- a sense of belonging and unity
 improved conditions of employment, for example, better pay, holidays, hours
of work etc
 improved working conditions, foe example, health and safety
 improved benefits for workers who are not working, because they’re sick, retired
or made redundant (dismissed not because of any fault of their own)
 financial support if a member thinks he/she has been unfairly dismissed or
treated
 benefits that have been negotiated for union member such as discounts on
firm’s products, provision of health services.
Disadvantages to workers of joining a trade unions:
 costs money to be member- a membership fee will be required
 may be asked to take industrial action even if they don’t agree with the union-
they may not get paid during a strike, for example.
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2. People in Business
2.3 Recruitment, Selection and Training of Workers

2.3.1 The methods of recruiting and selecting workers

• DIFFERENCE BETWEEN INTERNAL AND EXTERNAL RECRUITMENT
• Internal recruitment: Filling a vacant post with someone already employed in the
business.

Benefits Limitations

Vacancy can be filled more quickly and cheaply Better candidate could be available from outside
business
Applicants already know how business works Can cause conflicts within workplace, if other
internal candidates feel they could get the job.
Business already knows strengths and Doesn’t bring in new ideas
weaknesses of applicants

Workers can become more motivated, when they Still be vacancy to fill, unless worker’s previous job
see chance of promotion has become redundant.

• External Recruitment: Filling a vacant post with somebody not already employed in
business.

Benefits Limitations
External applicants bring in new ideas which It takes longer to fill the vacancy
improve effectiveness and efficiency of business

Wider choice of applicants

It is more expensive (advertising costs etc.)

Avoids risk of upsetting workers when someone Recruits will need induction training increasing
internal is recruited expenses.

• MAIN STAGES IN RECRUITMENT SELECTION OF STAFF

1. Job Analysis: Business identifies vacancy, and identifies the content of the job in terms of the
activities involved and the skills, experience, and other qualities needed to perform work.
2. Job Description: A list about a job, job title, key duties, responsibilities and accountability.
Usually prepared by the HR Dept. It will be passed on to anyone interested in the job. It includes:
• Job Title: Ex. Sales marketing Executive
• The main duties of the post: Ex. Plan and carry out marketing activities.
• Responsibilities: Who the job holder is responsible for supervising
• Accountability: Who the job holder reports to.

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3. Person Specification: A list of qualifications, skills, experience and personal qualities looked for in a
special candidate.
Usually produced by the HR Dept. who analyses the qualities, skills, and experience the business is
looking for in applicants.
4. Advertising a Job: The vacancy needs to be advertised.
• For Internal recruitment: Placed on staff notice board, emailed to staff, put in staff newsletter
• For external recruitment: Placed in local/national magazines
5. Sending out Application forms and job details: Sends job forms to candidates who are interested,
who return the an application form or CV (curriculum vitae).

6. Receiving Applications and shortlisting applicants: HR Dept. looks though all applications and
compares CVs, with Job description and Person specification to produce a shortlist of applicants for
interview.
Shortlist: A list of candidates who are chosen from all of the applicants to be interviewed for the job.
7. Interviewing short-listed candidates: Short listed candidates will be invited for interview.Candidates
asked to complete aptitude tests, team activities, do a Q&A session etc.
8. Selecting the right candidate: Interview panel will select who they think is best for the job. Applicant
will receive formal job offer in writing, and will be given contract of employment and induction training.

• BENEFITS AND LIMITATIONS OF PART-TIME AND FULL TIME WORKERS

Benefits of Part time workers/Limitations of Benefits of Full time workers /Limitations of
Full time workers Part time workers

• Attract well-qualified workers Ex. women who • Increase in induction and training costs for PT
want to return to work but want flexible hours. workers, while FT workers only trained once.
• Offering a full-time worker a part time job helps • could be communication problems with PT workers
keep experienced staff. • Quality of after-sales-service or complaints may
• Provides greater flexibility,Ex. incase someone decrease, as they work for lesser times, and
is sick, his duty can recovered by PT workers can’t answer, unless they’re back.
• Contract hours for PT workers allows flexibility for
change in demand Ex. long hours during busy
period; less during less busy
• PT workers are more productive
• Employing 2 PT workers instead of 1 FT worker
increases experience, skill force etc.
• PT workers don’t need to take time off for
medical appointments for FT workers this
reduces output

2.3.2 The Importance of training and methods

• IMPORTANCE OF TRAINING TO WORKERS AND BUSINESS
• Trained production workers are more efficient (improved productivity and quality)
• Management training improves quality of decision making; reduces risk of costly
mistakes.

• Helps workers develop their abilities to reach their potential; improves motivation
and morale.

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• Easier to recruit new workers and keep existing workers

• Improves customer service; improves customer relationships and brand loyalty.
• Health and safety training helps reduce accidents
• Improves business’s competitiveness

• METHODS OF TRAINING
• Induction training: A training programme to help new recruits become familiar with
their workplace, the people they work with, and the procedures they need to follow.

• It introduces the new worker to: work colleagues, Organisation structure (their
roles and responsibilities within them), Health and safety procedures, facilities
available.

Benefits Limitations
Workers quickly feel they are a part of Increases business costs
the business

Workers perform tasks more During induction period, workers

effectively aren’t adding to output, but receiving
salary
• On-the-job Training: Training at the work place, by watching or following an
experienced worker, completing the task under the guidance of the experienced
worker.
Benefits Limitations

Relatively cheap Workers might pick up bad habits of

experienced workers
Workers learn the way the business Might not learn the most up-to-date
wants job done methods

Workers are producing output while Workers make more mistakes while
training learning increasing wastage.
Slows down the production of the
experienced worker.
• Off-the-job Training: Training that takes place away from the workplace (can be
companies own training facility, or other specialist facility/courses)

Benefits Limitations
Workers learn the latest methods and Can be expensive (especially when
techniques provided by private firms)

doesn’t disrupt production of other Worker doesn’t produce any output

workers during training

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2.3.3 Why reducing the size of the workforce might be

necessary
• DIFFERENCE BETWEEN REDUNDANCY AND DISMISSAL
• Resignation: Termination of employment by the worker, perhaps because they have
found a job with a different employer.

• Retirement: Termination of employment due to the worker reaching an age

beyond which they do not need to work.

• Redundancy: Termination of the employment by the employer, because the job is

no longer needed. Situations which might bring redundancy:

• Owners no longer want to run business

• Business isn’t profitable
• Company is relocating in a different country
• Manufacturing businesses introduce machinery instead of workers.
• Dismissal: Termination by the employer because the worker has broken company
rules, or is not performing work to the required standards. Reasons for dismissal:

• Incompetence: Worker doesn’t perform their task to required standard.

• Poor Conduct: Worker breaks rules, Ex. often late for work.
• REASONS FOR DOWNSIZING WORKFORCE
• Fall in demand of product the worker produces; becomes costly to employ
workers who have nothing to do.

• Business may introduce machinery replacing workers job

• Businesses may relocate some distance from its current site.
• RECOMMEND AND JUSTIFY WHICH WORKERS TO RECRUIT/MAKE
REDUNDANT

• Last in-First out Method: Workers who have been employed for least amount
of time are made redundant first.

• How productive workers are: Keeping more productive workers as they are
better for future

• How often workers have been late/absent: Workers often late/absent are less
productive

• How old a worker is: Those closer to retirement should be made redundant first.
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• How experienced workers are: Workers less experienced, are more likely to
make mistakes; have more wastage and should be made redundant first.

2.3.3 Legal Controls over Employment issues

• Contract of Employment: Legal binding agreement between employer and
employee.

• Removes any misconceptions regarding hours of work, holidays etc.

• Worker can take legal action, if employer doesn’t follow contract
• Employer can dismiss worker if he breaks rules of agreement.
• Unfair Dismissal: Workers are dismissed by employer without any good reason.
• Worker can take legal action, if he thinks he/she is unfairly dismissed.
• If member of trade union, it will intervene and fight on worker’s behalf.
• If court confirms it is unfair, the employer will have to give worker back the job,
and compensate them for the loss of earnings.

• Discrimination: laws that prevent employers from discriminating while recruiting

workers.

• Any worker who feels has been discriminated against, has legal right to take
employer to court.

• Trade Unions provide employees with legal advice and support

• Health and Safety: Laws aim to protect workers from an injury or physical discomfort
Ex. being too hot/cold.

• Laws also require workers not to do anything that can harm/injure any
fellow workers.

• If done so, they could be dismissed for misconduct.

• If accidents are reduced, then fewer days will be lost due to worker injury and
less health bills will be paid.

• Legal Minimum Wage: Prevent employers from exploiting workers by paying lower
wages. They state that a workers cannot be paid less than a certain rate per hour.

• Often increase business costs. If fair wages are paid it can motivate workers and
improve their productivity.

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2. People in Business
2.4 Internal and External Communication

2.4.1Why effective communication is important and the methods

used to achieve it
• EFFECTIVE COMMUNICATION AND ITS IMPORTANCE IN BUSINESS
• Communication media: The methods used to communicate a message.
Internal External
• Employers and employees communicate • Communicating with people and organisations
with each other. outside the business.
• Includes giving and receiving information, • Includes selling goods and services, dealing with
instructions or discussing complaints, sending information about business
to shareholders, sending press releases etc.

• Effective communication cycle:

• Message is sent using correct communication method.
• Message is send to and received by the right person.
• Receiver understands the message.
• Receiver provides feedback (the receiver’s response to a message) to
sender confirming he received/understood the message.

• Effective Communication: Information passed between two or more people or

groups, with feedback confirmation that the message has been received and
understood. It brings benefits like:

• Reducing risk of mistakes: Receiver understands message and performs task

accordingly reducing mistakes.

• Enabling faster decision making: If number of people kept to receive

message is minimum, this speeds up decision making process.

• Enabling quicker responses to market changes: The longer it takes to

communicate changes in market, slower businesses will respond.

• Improving conditions between departments: Departments need to communicate

effectively to function collaboratively and avoid mistakes and misinterpretations.

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 • Improving Morale and Motivation of Workers: Workforce knows what is going on
in the workplace and is able to take part in decision making.

• Improving Customer relationships: Customers are informed about the progress

of their orders making them feel valued and improving brand image.

• BENEFITS AND LIMITATIONS OF COMMUNICATION METHODS

Method Benefits Limitations
• No permanent record
Oral/verbal • Personal contact between Sender • Receiver might not listen
and receiver • Receiver might not hear the message
• Allows immediate feedback correctly because of noise.
• Language can be altered to needs of
receiver
• Facial expressions/gestures can be
used for language difficulties

Written • Provides permanent record • No personal contact

• Can be used by receiver more than • Feedback is slower
once to check understanding • Might not be understood due to
• Can be sent to many receivers language is to complex or message is
• The message cannot be changed long.
• Time-consuming for both receiver and
sender.
Electronic • Very quick • Not everyone has access to
• Provide permanent records and can equipment.
be looked at more than once to check • Equipment/Software can be expensive
understanding • No personal Contact.
• Can be sent to as many receivers at • Risk of message being received by
same time people who aren’t supposed to: lose
• Can be used to create more confidentiality.
interesting messages
• Quick and easy to use
• Cheap

Visual • Can simplify complex data so more • Some detail might be lost
easily understood. • Different receivers might interpret
• Creates interests and grabs attention information differently.
• Receivers often remember visual
messages (ex. moving messages)

• CHOOSING BEST METHOD OF COMMUNICATION (depends on):

• How urgent the message is
• the length and complexity of the message
• How many people need to receive the message
• How far away the receiver is from the sender
• How important it is for all receivers to receive message at the same time.
• Cost of the media

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 • How important it is to have a written record of communication
• If the message requires discussion or not
• How confidential the message is.
• Types of Communication Medias
Communication Media Advantages Disadvantages
Letters Written Record Postage Costs
Confidential

Memorandum Written Record used only for internal communication

Email and Text Written Record cost of equipment
Messaging Free for messaging Might not be confidential

Telephone Can discuss message to make sure Cost

its understood Not face - to -face
Meetings Everyone gets the same message Time Consuming
Possibility for discussion and Costly if people have to travel from
feedback different locations
No written record (unless minutes
taken)

Interviews Confidential Time consuming

Allows for possibility for discussion No written record, if minutes aren’t
and feedback. taken

Video-Conferencing Reduces travel costs Cost of equipment

Less time consuming as there is no Problem with different world time zones
need to travel

Charts and Diagrams Information is easier to understand loses some of the detail

2.4.2 Awareness of communication barriers

• CAUSES OF BARRIERS TO EFFECTIVE COMMUNICATION
Barrier Causes
Problems with • Wrong medium, Ex. using telephone to communicate complex information
Communication • Language used is too complex or technical for receiver to understand
Channel • Channel of communication is long
Problems between • Lack of trust and respect
Senders and receivers • Demotivated workers don’t listen to the message properly
• Poorly disciplined workers do not pass on message.
Problems with • Too much noise between sender and receiver
physical environment • distance between sender and receiver

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• PROBLEMS OF INEFFECTIVE COMMUNICATION
• Tasks aren’t completed, or completed incorrectly. This reduces productivity
and increases wastage, decreasing profitability

• Reputation of business may be damaged leading to loss of customers

• Level of worker motivation and morale falls
• Higher risks of accidents in work place. This reduces output, and business must
be fined for compensation

• Poor Sales. If advertising and promotional messages aren’t effectively

communicated

• Recruitment and Selection Problems. If job descriptions and personal

specifications are poorly written, it won’t attract best candidates.

• HOW BARRIERS CAN BE REDUCED/REMOVED

• Make sure language used is appropriate. use simple words :)
• Keep channel of communication as short as possible
• Sender must always insist on feedback
• Sender must use appropriate medium of communication
• Physical barriers like noise should be removed
• Management must build a culture of respect and trust amongst the workforce.

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 Business Studies, CIE IGCSE (0450)

3. Marketing (Pg 140 e-book)

3.1 Marketing, Competition and Customer

3.1.1 The Role of Marketing

• IDENTIFYING AND SATISFYING CUSTOMER NEEDS
• Businesses often use advertising to persuade customers that what they want is a
need.

• Businesses identify customer needs by market research methods.

• After needs are identified the businesses must decide if they can produce goods and
services which they can sell to customers for profit

• Maintaining Customer loyalty: One of the most important roles of marketing is to

create a group of customers who the business can sell its products to #Customer
Base (The group of customers a business sells its products to. )

• Building Customer Relationships: Once customer base is established, Marketing

function then aims to keep these customers.

3.1.2 Market changes

• Market: All customers and consumers who are interested in buying a product and
have the financial resources to do so.

• Target market: Individuals or organisations identified by a business as the customers

or consumers of their products.

• Customer: An individual or business that buys goods and services from a business.
• Consumer: The final user of a product.
• Consumer markets: Markets for goods and services bought by the final consumer.
• Industrial Markets: Markets for goods and services bought by other businesses to
use in their production process.

• Business Environment: The combination of internal and external factors that

influence the operations of a business.

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 Business Studies, CIE IGCSE (0450)

• WHY CUSTOMER SPENDING PATTERNS MAY CHANGE:

• The price of the product: The higher its price the lower the quantity sold and vice
versa

• The price of competitor’s products: If products of businesses are very similar,

customers are likely to buy the one with a lower price.

• Changes in consumer income: If consumer income falls, they will have less money
to spend, this will reduce demand, and therefore sales of businesses.

• Changes in Population Size and structure: If country’s size and population grow in
size, this increases size of market; increasing business sales.

• Changes in tastes and fashion: New trends and influences (Ex. Healthy diet)
change demand for certain products.

• Spending on advertising and promotional activities: Businesses spend large

sums of money on promoting and advertising campaigns, which make customers
more aware about the brand, and increase brand loyalty.

• WHY SOME MARKETS BECOME MORE COMPETITIVE

• Government Intervention in Market
• Legal Controls prevent individual firms from dominating market.
• Selling off public sector organizations to private sector known as ~ Privatisation
• Deregulation: Removal of government control.
• Providing financial and other assistance to small and new businesses.
• Growth of free trade between countries: remove or reduce trade barriers between
countries.

• Development of E-commerce and social networks. Use of websites, social media

pages create more brand awareness and accessibility increasing levels of
competition.

• HOW BUSINESSES RESPOND TO CHANGING SPENDING PATTERNS

AND INCREASED COMPETITION

• Product development: Market research will identify how needs and wants of
consumers are changing. Developing new products will help a business remain
competitive.
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 Business Studies, CIE IGCSE (0450)

• Improve Efficiency: Efficient use of resources will decrease average costs, helping
to reduce product prices, so that sales can increase.

• Increased Promotion: Increasing advertising to persuade consumers to buy your

product and not your competitors.

• Look for new markets: consumer patterns change so much/competition increases

so much that businesses look for new markets for their products.

3.1.2 Concepts of Niche and Mass Marketing

• Niche Marketing: Developing specialized products for a small segment of a very
large market.

Benefits Limitations
Small firms are able to survive and earn profit even Opportunity to earn high profits may attract
in markets dominated by larger firms. competitors increasing competition.
Less competition in these markets. Firms don't Small size of market, means economies of scale
waste scarce resources responding to competitor’s are unlikely to achieve, increasing average costs.
actions.
Consumers will usually pay higher prices for high Small changes in consumer spending patterns
status and exclusive products giving high profit could have a very significant impact on the
margins. business

• Mass marketing: Selling the same product to the whole market.

Benefits Limitations
Requires large scale production, benefitting them Much more competition in market causing low
from economies of scale reducing costs. prices and profit margins.

Much larger market has higher scopes of sales and Not all markets are large enough to support mass
profits marketing approach
Changes in consumer spending patterns have less Consumers looking for something different from
effect on firms selling to a mass market. what mass market products offer.

3.1.3 Market Segmentation

• Market Segmentation: Dividing the whole market into segments by consumer
characteristics and then targeting different products to each segment.

• Market Segment: A part of the whole market, in which customers have specific
characteristics.

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 Business Studies, CIE IGCSE (0450)

• HOW MARKETS ARE SEGMENTED

• Geographic Segmentation: Dividing customers in the market based on their
geographic location. (cultural reasons, religious believes or different climates).

• Demographic Segmentation: Dividing consumers in the market by factors such

as age, gender, incomes, ethnic background, social class etc.

• BENEFITS OF MARKET SEGMENTATION:

• Goods and services designed to meet specific needs of consumers, increasing
sales.

• Small firms not able to compete in whole market, can operate in segments
• Presents an opportunity of niche marketing.
• Marketing strategies can be targeted at each segment reducing costs
• Possible to charge higher prices for the same product in one segment than in
other: Price discrimination: Ex. Business Class and First Class passengers
flying with Economy class in same Aeroplane.

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z
3.2 Market Research

3.2.1 Role of Market Research and Methods used:

• Market Research: The process of collecting, recording and analyzing the data about
the customers, competitors and market for a product.

• Gives information about: Market, Customers, and Competitors.

• Information obtained from research helps business to (role of market research):
• find out customer likes and dis-likes
• Identify customer tastes and preferences
• Decide on best promotion, packaging and distribution methods for its products.
• Identify main competitors and there USP (Unique Selling Point: The special
feature of a product that sets it apart from competitor’s products.)
 There are two types of businesses:

1. Market oriented businesses: these are businesses that focus on market

research and finds out what the customers want before a product is developed.
Products are developed based on the consumer demand as identified by market
research.
2. Product Oriented Businesses: these are businesses that focus mainly on the
product itself. Firm decides what to produce and then tries to find buyers for the
product.

Benefits of Market-Oriented Approach:

• Risk of new product failing is drastically reduced.

• Products are likely to last longer in market, as they are made by customer needs.
• USES OF MARKET RESEARCH INFORMATION
• Identify customer needs: Reduces risk when developing and launching new
products

• Discover current and future market sizes

• Provide information of business’s existing products and markets
• Identify strengths and weaknesses of competitors products
 • Decides how to price product, promote it, and best distribute the product
• Predict how trends in consumer tastes will affect future demand of products.

There are two main types of market research:

• primary research and
 secondary research

• Primary Research: The collection of first hand data for the specific needs of the firm
Benefits Limitations

Data is up to date Costly to collect

Data collected for specific purpose; directly Very time-consuming
relevant to business

Not available to other businesses providing Risk of data being inaccurate or containing bias
competitive advantage.
 3

• Secondary Research: The collection of data from second hand resources (Internet,
Government publications, Newspaper and Magazines, Libraries, Market research
agencies, Business Records)

Benefits Limitations

Fairly cheap to obtain May have been collected some time ago, so is not
up-to-date.

Easier and quicker to obtain than primary data Not been collected for a specific purpose by a
business, so may not be that reliable for business.

• METHODS OF PRIMARY RESEARCH

• Quantitative Research: The collection of numerical data that can be analysed using
statistical techniques

• Qualitative Research: The collection of information about consumer buying

behaviour and their opinions about products.

1. Focus Groups:
• group of customers is invited to discuss topics such as new products, packaging,
brand name and advertisements.

• Discussions are often filmed or recorded

• Often used by manufacturers of consumer products, for qualitative data.
• Results of focus groups are used to change one or more of these features
• Limitation: Can be time consuming to arrange, No numerical data making
statistical analysis impossible, could be expensive if experts are invited.

2. Observation:
• Behaviour of customers is secretly observed and recorded by market
researchers.

• Often used by large supermarkets who observe behaviour of customers as they

select products from things available.

• Can also be used to check quality of services that are provided.

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• (+) Far more accurate, than what customers say.

• (-) Very expensive as requires trained analysers, the reason behind customer’s
choice cannot be found.

3. Test Market:
• A limited quantity of product is produced and sold in a carefully selected area of a
market. (test market represents whole market)

• Feedback from customers is used to make changes to the product or other

elements of marketing mix, before launching to main market.

• (+) Cost of any problem is limited to smaller output, identifying and solving
problem increases chances of successful introduction to market.

• (-) Takes longer to get the product into the market; cost of producing products
increases due to no economies of scale, reducing profits; other companies may
copy ideas and launch similar products in this time.

4. Consumer Surveys: Surveys can collect both qualitative and quantitative data.
There are 3 different types of Surveys.

• Interviews: A trained interviewer asks questions to an interviewee and records the

answers

Benefits Limitations
Interviewer can explain questions if the interviewee Much more expensive to hire a trained interviewer
doesn’t understand.
They can often tell if interviewee is speaking If trained interviewers aren’t used there is higher
honestly, reducing risk of inaccurate data chance of data being biased: Interviewer asks
questions in certain way, that makes interviewee
answer which doesn’t represent their true feelings.
Takes time and money to collate results.
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5. Surveys
 Postal Surveys: Questionnaires are posted to people’s homes and they are
asked to complete and return to them.

Benefits Limitations

Can get views over a wide geographical area Often regarded as junk mail and thrown away;
produces low response rate.
Cheap and Economically affordable Also contain bias because only people with a real
interest in subject bother to reply.

• Online Surveys: Use internet and their own websites to carry out surveys.
Benefits Limitations
They cover a wide geographical area Often regarded as ‘electronic junk mail”

Results are typed online and thus can be easily Also contain bias because only people with a real
collected and analysed interest in subject bother to reply.
Cheap and quick to make a questionnaire and
distribute

• Need for Sampling: (Sample: A representative part or representative who represents

the target market selected to take part in market research. )

• Carrying Market research for all the customers in market is very expensive and
time taking.

• Can be overcome, by choosing a sample from the market.

• Random sample: A random number of people are selected.
• Quota sample: People are selected for some certain characteristics.

• INCREASING ACCURACY OF MARKET RESEARCH DATA (Reasons

for inaccuracy)

• Sample chosen may be too small to represent whole market

• Business may have chosen wrong type of method to collect data
• People interviewed may not truly answer the questions truthfully
• Interviewer may be biased, or may not be trained
• language of interview/survey may be difficult/unclear to understand
• Secondary data may be out of date
• Secondary data may have been collected for different purpose than needed.

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3.2.2 Presentation and use of Market Research Results

Presentation of data from market research Presentation of data is important because
it converts raw data into a form that is easier to understand. Information can be
displayed as:

Table/tally chart: It is the most suitable method of presenting data when raw data is
needed. However, it offers little more than that and the information should be
converted into other forms if it needs to be understood or analysed carefully. It is
sufficient for info that is brief or does not contain a lot of different things.

Bar chart: Charts are a more meaningful and attractive way to present data. They
are normally used to compare two or more sets of stats with each other.

Pictogram: It is similar to a bar chart but uses symbols instead of columns. It

becomes extremely effective if the data is short and simple.

Pie chart: Pie charts are ways to show the proportion that each components take up
compared to the total figure.

Line graph: Graphs show the relationship between two variables. It can be drawn in
a straight or curved line. It is usually to compare things with time and to identify
trends.

Alternative ways of presenting information for coursework

Tables: could also be used to present data in situations such as when people are
interviewed on why they like a product and they are given multiple choices.

Photographs can be used to help illustrate your points or support your work.
However, avoid adding them to your work just to make them more attractive.

Diagrams are used to simplify information. It can be used to show relationships of

things which all leads to the same root, which is usually at the centre of the diagram.
It can also be used to show variation, e.g. diagram for ways to save water with
different ways to do so branching out from the centre of the diagram.

Maps are usually used to present location or transport routes, etc… They aim to
make the information as clear as possible to the reader. This of course, only applies
to certain types of information where words and numbers cannot express them.

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 7

Method Advantages Disadvantages

Tables • Large amount of data can be • Lack visual impact
grouped/presented clearly • Too much data can make it difficult to
• Easy to extract numerical data understand
Bar Charts • Easily see importance of each • When datas are similar, difficult to
piece compare
• Can numerical values from axis
Pie Charts • Show how important each piece of • With too many slices difficult to
data is compared to others understand and compare
• easier to understand for people
who dislike numbers
Pictograms • Data is represented in pictures, • Difficult to show exact quantities with
making it more appealing and pictures
impactful

Line Graphs • Clearly show trends • Difficult to draw

• Values can be read from both axis • Accuracy depends on
• Data can be added in future time appropriateness of scale of axis
periods chosen.
 Business Studies, CIE IGCSE (0450)

3. Marketing
3.3 Marketing Mix
• Marketing Mix: Marketing Mix is defined as a combination of elements that
influence a customer’s decision whether or not to buy a product. It is also defined
as the combination of product, price, promotion and place that is used to make
sure that the customer’s requirements are met. It is a marketing tool that
combines a number of components in order to strengthen and solidify a product’s
brand and to help sell the product or service. The marketing mix is often
simplified and is commonly described as the 4 P’s. This approach identifies four
elements in the mix (all beginning with the letter P)

P- Product: Include the many different aspects of a product such as design,

quality, reliability as well as its features and functions. A product is an item that is
built or produced to satisfy the needs of a certain group of people. The product
can be intangible or tangible as it can be in the form of services or goods.

P–Price: Refers to how much the customers are charged for the product and
other terms of payment involved. This is what a business is asking consumers to
pay for a product or service. The price can be related to the cost of production or
sometimes related to the prices charged by competitors

P– Promotion: This is the way a firm communicates information about the

product to the customer. It may use advertising or a sales force to highlight its
strength. The promotion of a product will affect the image that customer have of it
and their awareness and understanding of the benefits of the product. Promotion
includes advertising, special offers, sponsorship and public relations activities

P– Place: Refers to the way the product is distributed. Is the product sold directly
to the customer or through retail outlets? Can you buy online or do you have to
travel some distance to get to a shop where it is sold. Place refers to the points of
sale such as store or websites as well as Lorries that distribute products.

Packaging is also part of promotion. Packaging refers to the technology of

enclosing or protecting product for distribution, storage, sale and use.
• Four Ps: The right product at the right price, with the right promotion in the right
place.

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 Business Studies, CIE IGCSE (0450)

3.3.1 Product(The goods and services produced to satisfy the consumer’s need or
want)

• THE COSTS AND BENEFITS OF DEVELOPING NEW PRODUCTS

Costs of New product development Benefits of New Product Development

Market Research to identify customer’s needs and In fast-changing markets, a business may not
wants can be expensive survive unless it meets the changing needs of the
customers.
Development of new product requires large capital Developing new product before competitors will
expenditure bring competitive advantage; business can charge
high prices and achieve higher sales, giving high
profits
No guarantee that new product will be a selling to new markets increase potential sales,
success. Some products never make it to market revenue and profits
If capital is borrowed, and product fails, then it can Producing new products spreads risk
threaten the survival of the business
Helps achieve growth and reach economies of
scale.

• BRAND IMAGE: IMPACT ON SALES AND CUSTOMER LOYALTY

• Brand Image: The general impression of a product held by consumers. Creating
a brand image increases business’s sales and revenue as:
• Consumers recognise their product more easily
• Product can be priced higher than less-well-known brands
• Easier to launch new products onto market, as there is a ready customer base
and have customer loyalty.

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• THE ROLE OF PACKAGING
• Packaging is usually used by business for: Protecting the Product, Providing
information about the product, Helping consumers to recognise the products,
Reusing the packaging for different purposes, Keeping products fresh
• Packaging is an additional cost to business, which shouldn’t be spent more on,
this may increase the price more than what consumers are willing to pay
• Consumers have become more aware about environmental issues, and
want recyclable packaging.

Compiled by: Mr.Edwin

 Business Studies, CIE IGCSE (0450)

• PRODUCT LIFE CYCLE

• Product Life Cycle: The pattern of sales of a product from introduction to its
withdrawal from market. It describes the stages a product goes through from
when it was first thought of until it finally is removed from the market. Not all
products reach this final stage. Some continue to grow and others rise and
fall.
Introduction • Product is introduced to Market
• Might be making loss in this stage due to heavy advertising/promotional costs
Growth Stage • Product is becoming better known to customers
• Sales are increasing
• Product starts to earn profit
Maturity • Sales are no longer growing but are not falling
• This is the most profitable stage in product’s life cycle.
Decline Stage • Sales are falling.
• Product eventually becomes unprofitable, and is withdrawn from market.

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 Business Studies, CIE IGCSE (0450)

!3
• Extension Strategies: Maturity stage is the most profitable stage, and businesses
will want to make it last the longest. They are: Market activities to extend the
maturity stage of a product, like:
• Finding New Markets for Products: Like entering new foreign markets, to increase
sales, and there for maturity stage
• Finding new uses for Products: R&D Team will look to find other uses to
promote the product Ex. Fizzy drink promoted as Sports Drink
• Adapting the Product or packaging to improve appeal: Packaging is redesigned to
give it a ‘fresh’ and more “more up to date’ appeal.
• Increased advertising and other promotional activities: Marketing function looks at
other ways to promote product, or remind product is still available.

Marketing Introduction Growth Maturity Decline

Product Only basic model of Changes might be Extension strategies Product and
product is available made, to the might be used to keep packaging is not
product as a result the product in most altered.
of feedback from profitable stage
consumers
Price Prices might be Brand image helps Price will remain same Price might be
lower than create consumer to that of competitor’s. If reduced to
competitor’s prices loyalty; price originally price was high maintain sales or
to attract customers originally low is due to uniqueness, then remove old stock
increased to it will decrease
competitor’s price.
Promotion high promotional Promotional activity Aimed at reminding Only promotional
activity such as is still high to consumers, how product advertising is to
advertising for persuade is different than of advertise lower
product awareness consumers customers. price of product.

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 Business Studies, CIE IGCSE (0450)

!4

Marketing Introduction Growth Maturity Decline

Place Product is offered for Product is more Product is now available Product is only
sale in specially widely available; for purchase through available in
selected outlets only. helps increase wide distribution profitable outlets.
often used as ‘test sales network.
market’.

3.3.2 Price Price is the amount of money that your customers have to pay in
exchange for your product or service. Determining the right price for your product can be
a bit tricky. A common strategy for beginning small businesses is creating a bargain
pricing impression by pricing their product lower than their competitors. Although this
may boost initial sales, low price usually equates to low quality and this may not be what
customers to see in your product.

• Product Quality: The product meets the needs and expectations of customers.
• PRICING METHODS:
1. Market Skimming: Setting a high price for a new product that is unique or very different from any
other product on the market.
• High price for a product which is unique/different from others in market
• Consumers want the status of owning the latest version.
• (+)Profit earned is very high helps recover high research and development costs
• (+)High price may help firm create quality image
• (-)High profits will eventually attract cheaper competitor products
• (-)Some customers who would like to buy the product aren’t able to, due to lack of financial resources.
2. Penetration Pricing: Setting a low price to attract customers to buy a new product.
• Used for new products competing already established products
• Low price to attract customers; encourages customers to try a product.
• Once, business has build customer loyalty, it increases price of upto competitors.
• (+) Attracts customers quickly and helps product become established faster
• (+) Can increase market share quickly
• (-) Possible loss of revenue due to lower prices
• (-)Can’t recover development costs quickly; if Product life Cycle is short then development costs will
never be recovered.
3. Competitive Pricing: Setting a price similar to that of competitors products which are already
established in market.
• When levels of competition are very high
• Products are often very similar with no particular brand advantage.
• If business has good brand image and loyal customers, it may use competitive pricing when launching
new products.
• Products introduced with market skimming, when gain more and more competitors have to be priced
with competitive pricing.
• Price leadership: Smaller firms set their prices according to the prices set by the dominant firm in the
industry.

• (+) Prices are similar to competitors; businesses can compete on quality, customer service etc.
• (-)If market has price leader, then that price would have to be followed; or else loss of market share.
• (-) Still needs to find ways of competing in order to attract sales

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 Business Studies, CIE IGCSE (0450)

!5
4. Promotional pricing: Involve pricing product as low as possible for a limited period to get customers
to buy. There are many methods of doing so.
• Loss leader pricing: Setting the price of a small number of products at a low cost to attract
customers into the outlet
• BOGOF (Buy One Get One Free): Used to create product awareness. and develop customer loyalty
• Discounting Normal Price: Used to create product awareness and build up customer loyalty.
• (+)Good way to sell unwanted inventory about to go out-of-date.
• (+)Increases sales and market share instantly
• (-)Revenue on each item is lower so profits will also lower
5. Cost-Plus Pricing: Setting price by adding a fixed amount to the cost of making or buying the
product.
• The price is set by adding a fixed amount usually a percentage to the cost of making or buying a
product.
• 2 types: Mark-up Pricing and Full-cost pricing
• (+) Quick and easy to work out price
• (+)Makes sure that price covers all costs
• (-)Price might be set higher than competitors or more than customers are willing to pay; reduces sales
and profits.

• PRICE ELASTICITY OF DEMAND:

• Demand: The quantity of goods and services consumers are willing and able to pay.
• Price Elasticity of Demand: Measures by how much demand for a product
will change when there is a change in its prices.

• Price Inelastic Demand: The percentage change in demand is less, than

the percentage change in price.

• Price Elastic Demand: The percentage change in demand is greater than

the percentage change in price.
• Effect on Pricing Decisions:

Price Change Price Elasticity of Demand Effect on Revenue

Increase Price Price Inelastic Demand Increase in Revenue

Decrease Price Price Inelastic Demand Decrease in Revenue

Increase Price Price Elastic Demand Decrease in Revenue

Decrease Price Price Elastic Demand Increase in Revenue

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3.3.3 Place
• Distribution Channels: How a product gets from the producer to the customer.

• Wholesaler: A business that buys products in bulk from producers and then
sells them to retailers.
• Retailers: Shops and other outlets that sell goods and services to the final customer.
• Middlemen: These are the intermediates in the channels of distribution
• Direct Selling: The product is sold by the producer directly to the final customer
without the need of middlemen.

Channel Advantages Disadvantages

Producer —> • All profit is earned to producer • Consumers are not always able to see
Consumer • Producer controls all parts of or try before buying Ex. Online
marketing mix • Delivery costs high if lot of customers
• Quickest method of getting product to over wider area
consumer, for products that need to • Storage costs paid by producer
be fresh Ex. Vegetables • All promotional activities must be
• Producer has direct contact with carried out and financed by the
consumers and could use this for producer.
market research.
Producer —> • Customers can see and try product • Retailer takes away some profit from
Retailer —> before buying producer
Consumer • Cost of holding inventories is held • Producers lose some control over
partial by retailer marketing mix
• Retailer will pay for advertising and • Producer must pay delivery costs to
promotional activities retailers
• Retailers are more conveniently • Retailers usually sell competitors
located for consumers products as well.

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Channel Advantages Disadvantages

Producer—> • Wholesaler buys in bulk from • Another middle-men wholesaler takes
Wholesaler—> producer; breaks it into parts to profit.
Retailer —> retailers • Producer looses even more control
Consumer • Wholesalers will advertise and over marketing mix.
promote products to retailers
• Transport cost to retailer is paid by
wholesaler
• Wholesaler will pay for storage costs
of products from producer
• Distribution of goods through
wholesaler creates wider network,
and serve a bigger market.
Producer—> • Agent has specialist knowledge of • Another middleman is added to
Agent—> foreign market; find wholesalers and channel of distribution, reducing profit
Wholesaler —> retailers prepared to buy items to producer.
Retailer—>
Consumer

• CHOOSING PLACE (depends on):

• Cost: Cost of transporting goods
• Required Time and Condition: of Delivery
• Nature of Product: Some goods need special conditions
• Distance and Size of Market.

3.3.4 Promotion
• Promotion: Marketing activities used to communicate with customers and
potential customers to inform and persuade them to buy a business’s product.
• AIMS OF PROMOTION
• Attracting attention of customers, by making them aware of product/reminding
• Persuading consumers to buy the product
• Explaining how a product is better than competitor’s products
• Creating and developing a brand image.
• Encouraging Wholesalers and retailers to stock the product.
• Reassuring consumers, following a problem with the product.

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• ADVERTISING: Paid-for communication with consumers which uses printed and
visual media. The aim is to inform and persuade consumers to buy a product.
• Informative Advertising: Information about the product, is communicated
to consumers to create product awareness and attract their interest.
• Persuasive Advertising: Communication with consumers aimed at getting
them to buy a firm’s product rather than a competitor’s product.
• Usually done via advertising in newspapers, magazines, radios, Television
and billboards.
• SALES PROMOTION: Incentives used to encourage short-term increases in sales or
repeat purchases. (Also called: Below the line promotion: Promotion that is not
paid for communication but uses incentives to encourage consumers to buy.
• These can include: money-off coupons or vouchers, point of sale displays in
shops, loyalty reward schemes, competitions and games with cash or other
prizes.
• Advantage: Specific to the activities of the business (ex. loyalty points only
given when customer returns.
• PERSONAL SELLING: Sales staff communicates directly with the consumer to achieve
a sale and form a long-term relationship between the firm and the consumer.

• Most often used when selling highly expensive items, which have high profit
per unit. Ex. Cars
• Advantage: Enables seller to build a relationship with the customer that can last
after the completion of the sale, and result in future sales.
• Disadvantage: Can be an expensive form as many employees will be hired;
business may also give commissions to sale staff for motivation, resulting in low
overall profit per unit.
• DIRECT MAIL: AKA Mailshots, printed materials which are sent directly to
the customer’s address.
• These potential customers have been identified through market research.
• Advantages: Can communicate with a large market over a wide
geographical area.
• Disadvantage: However it is so widely used that it may be considered as junk
mail. Also, can be expensive with printing, designing and posting charges
associated with it.

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• SPONSORSHIP:Payment by a business to have its name or products associated
with a particular event.
• MARKETING BUDGET & PROMOTION DECISIONS:
• Marketing Budget: The amount of money made available by a business for its
marketing activities during a particular period of time.
• TV Advertising may require large sums of money and is often expensive,
afforded only by large firms
• Though, local newspaper ads and radio advertisements may be cheaper
making them economical for smaller firms.

3.3.5 Technology and Marketing Mix

• E-commerce: The use of internet and other technologies used by the business
to market and sell its goods and services to the consumers.

Opportunities of E-commerce to Businesses Threats of E-commerce to Businesses

Increased market: Business is able to sell around Increased Competition: Competitors can now be
the world from any part of the world
Reduced Costs: Staffing and other costs of shops Unfamiliarity: Consumers are less likely to buy
are saved. products from new businesses that they don't
know.
Better Information: Website can provide potential
customers with all information they need about
goods and services.

Opportunities of E-commerce to Consumers Threats of E-commerce to Consumers

Convenience: Consumers can order their products Fraud: Website might take away customer’s money
from comfort of their own homes and not deliver the goods.
Wider Choice: There is a wide variety of choices Hacking: Consumer’s personal details or bank
available, not there in local shops details might be ‘stolen’.
Lower Prices: Competition worldwide reduces No Personal Service: There is no face-to-face
prices contact between customers and seller.
Better Information: Consumers are able to read Returning Items: Can be inconvenient and
about goods and services on websites and reviews expensive to return items and goods which do not
from other customers. meet consumer’s needs.

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3. Marketing
3.4 Marketing Strategy

3.4.1 Choosing market Strategies

• Market Strategy: A plan to achieve the marketing objectives using a given level
of resources.
• Marketing decisions about price, place, promotion and product should be linked.
• Importance of each element is influenced by consumers varying on situations

3.4.2 Legal Controls related to Marketing

• Legal Controls: Laws that control the activity of a business.
• Common legal controls which affect market functions are:
• Protect consumers from faulty and dangerous goods
• Prevent businesses from using advertising to mislead consumers
• Protect consumers from being exploited in industries where there is little or no
competition.

• IMPACT OF LEGAL CONTROLS ON MARKETING STRATEGY

• They will increase costs
• Products may need to be changed to meet quality standards, or prevent health
and safety issues
• Large companies may face: anti-competitive laws, anti-trust laws etc. if they are
exploiting consumers with high prices, or low quality services
• Advertisements will have to be withdrawn and redesigned if they are containing
misleading or inaccurate information.
• May also be asked to issue an apology in the newspaper/or fined for misleading
consumers deliberately.

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3.4.3 Opportunities and Problems of entering New Markets
abroad
• GROWTH POTENTIAL OF NEW MARKETS IN OTHER COUNTRIES:
• Businesses expand into new countries as:
• Market in their country has reached maturity and declining
• Other countries offer huge marketing opportunities for increased sales,
revenue and profits.
• Increase in international marketing has been possible due to developments in
technology Ex. Internet, which have reduced Barriers of trade.
• Barriers of Trade: Usually taxes, quotas or bans that one country places on
other country to prevent or increase the cost of them entering the country.
• PROBLEMS OF ENTERING FOREIGN MARKETS:
• Differences in Language and Culture: It would be inappropriate to use different
images, symbols and colours in advertisements in different countries due to
cultural believes which could cause problems
• Economic Difference: Average income of consumers may vary widely. Cost of
selling good abroad is often higher due to transport and exporting costs
• Social Differences: Social factors like age structure, importance of family, and role of
women have an impact on country’s business activity.
• Difference in legal controls to protect consumers: Countries have their own laws and
regulations to protect consumers from unfair or dangerous activity. Business should
make sure its products satisfy these new laws before entering the foreign market.
• This may mean changing its product, packaging or advertisements which may
increase costs.
• Lack of Market Knowledge: The business may not know the market, and consumers/
market may not know the business.
• Knowledge about market size, competitors, brand image, consumer tastes and
preferences, sources of media and promotion should be known prior to
entering new market.

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SOLUTIONS TO OVERCOME THESE PROBLEMS:

• International franchising: Opening new franchises in foreign countries.

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• Licensing: Business in one country permits firm in other company to produce its
branded product under a licence.
• Advantages: Goods are produced in the country by a firm who understands the
local market.
• Disadvantage: Risk of poor quality goods which can damage brand reputation.
• Joint Ventures: 2 businesses work closely together on a particular
business opportunity.

Advantages Disadvantages
Reduces risks and cuts costs Mistakes made will reflect on all parties of joint
venture

Each business brings different ideas and expertise Decision making process can be ineffective.
Market Potential is increased, especially if they
operate in different geographical areas.

Market and Product knowledge can be shared

Revision question
Sublime is a well-known chocolate manufacturer in South Sudan. The company
has developed a new chocolate bar. It wants to launch this product on the market
in two months’ time. The marketing director has set a marketing objective for the
new product of 2,000,000 units of sales in the first year.
a) Define marketing objectives (2)
These are goals /targets that have been set by the marketing department
that are measurable and to be achieved within a set period of time.
b) Identify two methods of promotion Sublime could use for the launch of the
new chocolate bar (2)
Advertising- paid up communication with consumers either print or
electronic media.
Sales promotion- such as money-off coupons, loyalty cards schemes.
c) Outline two methods of pricing Sublime could use when launching its new
chocolate bar (4)
i. Penetration pricing since Sublime has developed a new chocolate bar
hence has to set the price low to attract customers from the competition.
ii. Competitive pricing – sublime needs to charge a price similar to that of
competitors cause of the development of the new chocolate bar
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d) Explain two reasons why it is important for Sublime to develop new

products (6)
Sublime needs to develop up to date products so that it can compete in the
market with other chocolate manufacturers to increase the revenue stream
for the business. To give variety to the customers who wish to get different
flavors of chocolate. To also spread the risk such that if one chocolate brand
fails then the business has other chocolate brands to depend on for
revenue/sales.
e) The marketing director believes that product and price are the two most
important elements of the marketing mix. Do you agree? Justify your
answer (6)

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4. Organisation and Management

4.1 Production of goods and Services

4.1.1 Production
• Production: The process of converting inputs such as land, labour and capital
into saleable goods and services.

• MANAGING RESOURCES EFFECTIVELY FOR PRODUCTION:

• Operation Management involves managing business resources - inputs. It must:
• use resources in the most cost-effective way
• Produce the required output to meet consumer demands
• Meet the quality standards expected by consumers

• DIFFERENCES BETWEEN PRODUCTIVITY AND PRODUCTION

• Productivity: A measure of efficiency of inputs used in the production process,
especially labour and capital.

• Production: Can be measured by: Number of units produced in a given period of

time.

• Labour Productivity: Total Output/Number of Production Workers

• HOW TO IMPROVE PRODUCTIVITY AND BENEFITS

• Can be increased by:
• Increasing output with same number of workers: (By improving
worker productivity)

• Improving skill level of workers

• Improving motivation of workers
• Introducing more automation and better technology
• Improving quality of management decisions
• Keeping output at same level with fewer workers.

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• Benefit: A decrease in per unit cost of products.

• All ways of improving productivity of workers is linked to increase in costs, but
reduction in costs due to productivity should be higher than these costs.

• Ex. Cost of training programmes, Introducing schemes to motivate workers,

Purchase new machinery

• WHY BUSINESSES HOLD INVENTORIES

• Almost all businesses hold inventories
• Inventories:The stock of raw materials, work in progress goods, and finished goods
held by a business. They are:

• Raw materials and Components - needed as inputs for production.

• Work-In-Progress Goods - Partly finished goods in process of production.
• Finished Goods - ready to be sold or sent out to customers

• Holding Inventories adds to business’s costs as:

• Warehousing Costs: Business rents or purchases warehouse to store inventories
• Handling Costs: Inventories need to be moved in and out of Warehouse
• Shrinkage Costs: Damaged, stolen, lost inventories need to be replaced.
• Insurance costs: Will cover the losses of shrinkage, fire, floods.
• Obsolescence: Business won’t be able to sell out-of-date goods.
• Opportunity Cost: Working Capital is ‘tied up’ in inventories.

• Reasons for holding Inventories:

• Production needs raw materials/components, if not available, production process
may stop. (Workers and machinery will stand idle —> loss of output)

• If business does not have finished goods in stock, then customer’s orders cannot
be met; loss of current and future sales, decrease in short-term and long term
profitability

• Businesses benefit from economies of scale, when inventories are bought in

bulks they receive discounts.

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• LEAN PRODUCTION: The production of goods and services with the minimum
waste of resources.

• Aims to lower the costs of production by reducing waste to minimum while

maintaining, or even improving the quality of finished products.

• Main Sources of Waste: Production Defects, High Inventories, Over Production,

Idle Resources, Transporting Goods.

• All of these increase business costs which in turn will reduce its
competitiveness and profitability

• Benefits of using Lean Production, Just in Time, and Kaizen:

• New products can be brought to market more quickly.
• Quality is improved
• Wastage of time and other resources is reduced or eliminated.
• Cost of holding inventories is eliminated.
• Unit costs are reduced, increasing profit.
• JUST IN TIME INVENTORY CONTROL:No inventories are held by business.
• Raw materials and components arrive from suppliers just as they are needed in
the production process.

• As soon as finished goods leave the production process they are delivered to
customers.

• Removes business costs by removing costs of inventories.

• To achieve this businesses need to have an excellent relationship and good
communication with suppliers and customers.

• Both the workers and machinery used should be flexible, change in a short
notice; switch from one product to other.

• KAIZEN: Japanese term meaning ‘Continuous Improvement.’

• Gives all the workers the opportunity to make suggestions about how to improve
quality or productivity.

• Workers are doing tasks everyday, so they know better than managers to change
the production process, to make it more efficient.

• Changes suggested would be small, but all of them can bring very big
improvements.

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4.1.2 Main Methods of Production

• JOB PRODUCTION: The production of items one by one by workers.
• An individual item is completed before new is started.
• Normally used for single/unique items
• Usually needs high skilled workers and specialized equipment.
Benefits Limitations

Unique High Quality Products

Workers are often more motivated and take pride Production can take long time, and can be
in their work expensive; Special tools/materials required
High prices can be charged due to high quality.
Uses skilled labour rather than machinery, so Economies of Scale aren't possible, resulting in
selling price is usually high expensive product.

• BATCH PRODUCTION: The production of goods in groups/batches, where each

batch passes through one stage of production before moving to other, then followed
by another batch.

• Used for products which are to be manufactured in groups and some features are
to be changed with every batch

• Ex. Baker baking bread followed by doughnuts.

Benefits Limitations

Large numbers allow lowered unit costs Workers are often less motivated, because of
repetitive work.

Offers customer variety and choice Goods have to be stored until they are sold, which
is expensive.
Materials bought in bulk so cheaper

• FLOW PRODUCTION: The production of very large quantities of identical goods

using a continuously moving process.

• At each stage of production additional features are added until the product
reaches its finished state.

• Used where large, identical, standardized products are required to meet high
consumer demand.

• Features: Large quantities produced, standardized product, Workers are

relatively unskilled, High degree of automation, Large inventories of raw materials
and work in progress goods

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Benefits Limitations
More Capital intensive than job/flow production, Requires large capital investment, in production
lowers labour cost. line and technology.
Materials can be purchased in bulk so lowers unit Workers are not very motivated; work is repetitive.
costs

large number of goods are produced. Not very flexible, as product lines are difficult to
change.
If one part of production line changes then, whole
process will stop until the part is repaired.

High levels of raw material, work in progress

goods, finished good inventories held increasing
costs.

• CHOOSING METHOD OF PRODUCTION: (factors which influence:)

• Amounts they are likely to sell
• Products they are making/type of good
• Costs of production
• Variety of goods expected by customer
• Size of Market.
4.1.3 How Technology has changed production methods
Advantages Disadvantages
Business • Reduces costs and time taken to • Can be very expensive
design new products • Will need to be changed often if
• Increases productivity business is to remain competitive
• Reduces costs of production • Costs of training workers for operating
• Improves quality reduces waste machinery

Consumers • Better quality products • Products become out of date quickly

• Lower prices • When product develops fault, can be
• Products with more features expensive to repair
• No personalised services.
Workers • Technology completes simple and • Often reduces need of workers,
repetitive tasks that may be boring. resulting in redundancy
• Work is easier with technology • Could make work less interesting.
• Business using technology is likely to • Smaller workforce reduces
be successful increasing job security opportunities of promotion
• Development and manufacture of new • Job security can decrease, as workers
technology provide employment may fear losing job due to
opportunities. redundancy.

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4. Organisation and Management

4.2 Cost, Scale of Production and Break Even Analysis

4.2.1 Identify and Classify Costs

Fixed Costs: are costs that do not vary with output produced or sold in the short run. They are incurred
even when the output is 0 and will remain the same in the short run. In the long-run they may change. Also
known as overhead costs e,g: rent, even if production has not started, the firm still has to pay the rent.

Variable Costs: are costs that directly vary with the output produced or sold. Eg: material costs and
wage rates that are only paid according to the output produced.

Total Costs: All the variable and fixed costs of producing the total output. Ex.
Total Cost = Fixed Cost + Variable Costs

Average Costs: The cost of producing a single unit of output.

USES OF COSTS DATA: A business can use these cost data to make different
decisions. Some examples are: setting prices (if the average cost of one unit is $3,
then the price would be set at $4 to make a profit of $1 on each unit), deciding
whether to stop production (if the total cost exceeds the total revenue, a loss is being
made, and so the production might be stopped), deciding on the best
location (locations with the cheaper costs will be chosen), for break-even analysis etc.

4.2.2 Economies and Diseconomies of Scale

• ECONOMIES OF SCALE: are the factors that lead to a reduction in average costs as a
business increases in size. The five economies of scale are:

Financial Economies of Scale: Lenders like banks prefer to lend to large business, as they have lesser
risk than smaller businesses.
• Large businesses easily get loans and often at a lower interest rates cutting costs.
Managerial Economies of Scale:Business employs specialists managers for different functional areas
of business, like: marketing, finance, operations and human resources.
• They improve quality of decisions and make fewer mistakes than non-specialist managers.
Marketing Economies of Scale: Total marketing costs rise with business growth, but at smaller rate
than business output.
• So, average costs of marketing will fall as output increases.
Purchasing Economies of Scale: Large businesses buy greater quantities of raw materials and goods
than smaller businesses getting discounts on bulk purchases.
• The discounts reduce average costs. AKA ‘buying-bulk economies’
Technical Economies of Scale: Large businesses usually use flow production to produce their output.
This often uses latest technology.
• Requires high investment but highly reduces unit costs, giving low average costs.

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DISECONOMIES OF SCALE: are the factors that lead to an increase the average
costs of a business as it grows beyond a certain size.
Sometimes business grows so large that it loses benefits of economies of scale and
starts facing diseconomies of scale.

Poor Communication: If business become too large, managers can’t communicate with workers. This
leads to slower and poor decision making and an increase in mistakes.
Demotivation of Workers: Managers no longer have daily contact with workers. Leads to demotivation
of workers. Workers feel, they are no longer a valued part of business.
• Causes: high labour turnover, poor quality and fall in productivity
Poor Control: As business grows, No. of departments, Products and Production units increase.
• Control and co-ordination of these can present managers with problems. Business's average costs
may rise, greater risk that work will be duplicated, causing waste of resources and increases in costs
unnecessarily.

• IMPORTANCE OF ECONOMIES AND DISECONOMIES OF SCALE

• The ‘best’ scale of production is where unit costs are lowest. (bottom of curve-Q*)
• Fact that businesses with economies of scale will also experience diseconomies
explains why most industries aren’t dominated by a firm.

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4.2.3 Simple break Even Charts

• Breakeven: The level of output, where revenue equals to total costs; the business is
making neither profits nor loss.
Break-even level of output is the output that needs to be produced and sold in order
to start making a profit. So, the break-even output is the output at which total
revenue equals total costs (neither a profit nor loss is made, all costs are covered).
THE CONCEPT OF BREAK EVEN:

• Uses of Break Even Analysis:

• Calculate how many units it needs to sell before it starts to make a profit.
• Calculate effect on profit of increasing or decreasing the price of product.
• Calculate effect on profit of an increase or decrease in business costs.
• SIMPLE BREAK EVEN CHARTS: show the relationship between a business’s
revenue and cost at different levels of output. Chart can be used to work out level of
required output that must be produced and sold to earn profit.

• To produce a simple break-even Chart one needs to know:

• Revenue at zero output and its maximum output (capacity)
• Total costs at zero output and at capacity output
• Fixed costs at zero output and capacity output.

• Margin of Safety: The amount by which actual sales exceed the break-even level of
output. It is a measure of amount by which sales can fall before losses are made.

• Margin of Safety = Actual Sales - Break Even Output

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Example:
In the chart below, costs and revenues are being calculated over the output of 2000 units.
The fixed costs is 5000 across all output (since it is fixed!).
The variable cost is $3 per unit so will be $0 at output is 0 and $6000 at output 2000- so
you just draw a straight line from $0 to $6000.
The total costs will then start from the point where fixed cost starts and be parallel to the
variable costs (since T.C.=F.C.+V.C. You can manually calculate the total cost at output
2000: ($6000+$5000=$11000).
The price per unit is $8 so the total revenue is $16000 at output 2000.
Now the break even point can be calculated at the point where total revenue and total
cost equals– at an output of 1000. (In order to find the sales revenue at output 1000, just
do $8*1000= $8000. The business needs to make $8000 in sales revenue to start making
a profit).

Break-even can also be calculated without drawing a chart. A formula can be used:

Break-even level of production =Total fixed costs/ contribution per unit

Contribution = Selling price – variable cost per unit (this is the value added/contributed to the
product when sold)
In the above example, the contribution is $8 -$3 =$5, so the break-even level is:
$5000/$5 = 1000 units!

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Benefits Limitations

Easy to construct and interpret Assumes all costs and revenues can be
represented by straight lines
Provide business with useful information about Not easy to separate costs into fixed and variable
output that must be sold to cover all costs/margin
of safety etc.
Can show effect of a decision to change costs or Assumes all output is sold - do not allow for
revenues inventory and holding costs.
Help businesses with important decisions such a s
location/relocation of business.

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4. Operations Management
4.3 Achieving Quality Production

4.3.1 Quality Importance and Achieving Quality Production

• Quality: means to produce a good or service which meets customer
expectations. The products should be free of faults or defects

• Quality Standards: The minimum acceptable standard of production or service

available to consumers.

• Design Standards: Help business create the best possible product, which
consumers find more valuable than other products in the market.

• Process Quality Standards: Help business produce goods at the lowest cost.

• IMPORTANCE OF QUALITY TO ALL BUSINESSES

• Develop a Strong Brand Image: Customers will know the reputation a business has
for quality products, and will assume that any new product is of same quality.

• Keep Customers and attract new customers: Customer Loyalty, When a business
has quality production reputation it is easier to attract new customers, and keep their
existing customers.

• Reduce Costs, Customer Complaints, and Returns: If quality products are only sold,
more customers will be satisfied and there will be less returns, in the long run, it will
build healthy customer relationships and attract new customers.

• Charge a Premium Price: Many consumers are prepared to pay a higher price for
product that is seen of better quality, than similar products on market, this may
increase profitability.

• Encourage Wholesalers and Retailers to stock product: They will know that high
quality products won’t get spoilt, and they know customers will want to buy it. They will
stock more of this product and increase their revenue and profits.

• Lengthen Product Lifecycle: Products with good quality, will be continuously sold to
consumers, increasing its lifecycle, so it will stay in the most profitable stage of
maturity for longer.

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If there is no quality, the firm will
 lose customers to other brands
 have to replace faulty products and repeat poor service, increasing costs
 bad reputation leading to low sales and profits

There are three methods a business can implement to achieve quality: quality control,
quality assurance and total quality management.

QUALITY CONTROL: is the checking for quality at the end of the production
process, whether a good or a service.

• Businesses employ trained quality inspectors to check products usually at the

end of the production process.

• Rarely possible to check every item produced as it is time taking and expensive.
• Inspectors may also have to dismantle product, or break it by force, this may be
expensive if every product is checked.

• Uses Sampling: Not every product is checked for quality; always a chance that
poor quality product reaches customer.
Problems of Quality Control

Work can be repetitive and boring this may demotivate inspectors, resulting in not performing tasks
efficiently.

Inspection only takes place at end of process,; problems of quality at beginning aren’t found soon
enough. Resources are wasted completing product which could have been rejected much earlier.
Quality inspectors, takes away responsibility of quality from workers, may not try to maintain quality
through whole process.

• QUALITY ASSURANCE: System of setting agreed quality standards for every stage
of production.

• Problems of Quality Control have forced many businesses to adopt quality

assurance. It makes sure that:

• Raw Materials and components are of required standard before they enter
production process.

• Quality standards are agreed for every stage.

• Products are designed by machines to minimise quality issues.
• Workers know they have responsibility for ensuring quality work.

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 Benefits of Quality Assurance:

• Encourages teamwork; can act as a motivator.

• Reduces cost of wastage and faulty products
• Quality issues are found when they occur, not at end of production; resources
aren’t wasted unnecessarily

• Business’s inspection costs will be less; less time consuming.

• Find it easier towards obtaining industry quality awards like ISO 9000; awards
can bring marketing benefits.

How can customers be assured of the quality of a product or service?

They can look for a quality mark on the product like ISO (International
Organization for Standardization). The business with these quality marks
would have followed certain quality procedures to keep the quality mark. For
services, a good reputation and positive customer reviews are good indicators
of the service’s quality

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 Business Studies, CIE IGCSE (0450)

4. Operations Management
4.4 Locations Decisions

Owners need to decide a location for their firm to operate in, at the time of setting up,
when it needs to expand operations, and when the current location proves unsatisfactory
for some reason. Location is important because it can affect the firm’s costs, profits,
efficiency and the market base it reaches out to.

Main factors influencing location and relocation business decisions

• Qualitative Factors:
Qualitative Factor Explanation
Size of Available • Site needs to be large enough for current and future needs of business.
Site • Scope of Expansion in future
Legal Restrictions • Should consider planning restrictions/legal restrictions that prevent location in
certain areas, or close to community amenities.
• Unlikely factory would be located near high class residential.
Quality of local • The basic facilities, services and installations needed for business to function,
Infrastructure Ex. Water/Power are suitably provided by site

Ethical Issues and • If relocating from one country to other, how will it affect existing workforce:
Concerns Redundancy, could damage business reputation —> lower sales/profits

• Quantitative Factors:
Quantitative Factor Explanation

Cost of Site • How expensive land/buildings are to rent/buy

Labour Costs/ • Average wage paid to workers in a particular site
Availability of • Skill level required is present
Labour • Unemployment rates in country

Transport Cost • How close to supplies/raw materials is proposed site

• Cost of transporting goods
• How easily accessible is it to customers/market.
Government Usually finance such as interest free loans, or grants provided to a business to
Incentives help when locating in a specific zone or country.
• Both local and national governments may provide incentives
• Can significantly reduce set-up costs.

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 Business Studies, CIE IGCSE (0450)

Factors that affect the location decisions of a manufacturing firm:

Production Method: when job production is used, the business will operate on a small scale, so the
nearness to components/raw materials won’t be that important. For flow production, on the other hand,
production will be on a large scale- there will be a huge amount of components and transport costs will be
high- so components need to be close by.
Market: if the product is a consumer good and perishable, the factories need to be close to the markets to
sell out quickly before it perishes.
Raw Materials/Components: the factories may need to be located close to where raw materials can be
acquired, especially if the raw material is to be processed while still fresh, like fruits for fruit juice.
External economies: the business may locate near other firms that support the business by provide
services- eg: business that install and maintain factory equipment.
Availability of labour: Businesses will need to locate near areas where they can get workers of the skills
they need in the factory. If lots of unskilled workers are needed in the factories firms locate in areas of high
unemployment. Wage rates also vary by location and firms will want to set up in locations where wage rates
are low.
Government Influence: the government sometimes gives incentives and grants to firms that set up in low-
development, rural and high-unemployment areas. There may also be govt. rules and restrictions in setting
up ,eg: in some areas of great natural beauty. The business needs to consider these.
Transport & Communication infrastructure: the factories need to be located near areas where there are
good road/rail/port/air transport systems. If goods are to be exported, it needs to be set up near ports.
Power and water supply: factories need water and power to operate and a reliable and steady supply of
both should be ensured by setting up in areas where they are available.
Climate: not the most important factor but can influence certain sectors. Eg: the dry climate in Silicon Valley
aids the manufacturing of silicon chips.
Owner’s personal preferences

Factors that affect the location decisions of a service-sector firm:

Customers: service-sector businesses that have direct contact with customers need to locate in customer-
accessible and convenient places. Eg; restaurants, hairdressers, post offices etc.
Technology: today, with increasing use of IT to shop and make payments, customers do not need direct
access to services and proximity to the market/customer is not a very important factor in location decisions.
They locate away from customers in places where there are low rent and wage rates. Eg: banks
Availability of labour: if large number of workers are required in the firm, then it will need to locate close to
residential areas. If they want certain types of worker skills, they will need to locate in places where such
skilled workers can be found. However, with work-from-home and technology, this is not that big of a factor
nowadays.
Climate: tourism services need to be located in places of good climate.
Nearness to other business: some services serve the needs of large companies, such as firm equipment
servicing and so they need to be very close to such businesses. Businesses may also set up where close
competitors are to watch them and snatch away their customers.
Rent/taxes
Owner’s personal preferences

Factors that affect the location decisions of a retailing firm:

Shoppers: retailers need to be located in areas where shoppers frequent, like malls, to attract as many
customers as possible.
Nearby shops: being located to other shops that are visited regularly will also attract attention of customers
into the your shop. Being near competitors also helps keep an eye on competition and snatch away
customers.
Customer parking availability: when parking is available nearby, more people will find it convenient to
shop in that area.
Availability of suitable vacant premises: Obviously, there needs to be a vacant premise available to set up
the business. Vacant premises can also help the business expand their premises in the future.
Rent/taxes: rents and taxes on the locations need to be affordable.
Access to delivery vehicles: if the retailer has home delivery services, then delivery vehicles will be
required.
Security: high rates of crime and theft can happen in shops. Shopping complexes with security guards will
thus be preferred by firms.

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 Business Studies, CIE IGCSE (0450)

• WHY BUSINESSES LOCATE OPERATIONS IN ANOTHER COUNTRY

To achieve growth
• Best way of achieving growth if domestic market has reached maturity and there is a falling demand
Reduce production Costs
• Labour costs in developing nations are lower than in developed nations.

To locate production closer to market:

• Reduces delivery time to customers
• Reduces transportation costs.
INTERNATIONAL RELOCATION BENEFITS

Lower Labour costs

• Developing countries like India, Brazil, China have lower labour costs which will reduce final average
costs of products.

Access to global markets:

• development of economies of some countries are a big opportunity for businesses whose country
have reached maturity stage of life cycle.
To avoid Legal barriers and Import Tariffs
• They are still trade barriers between countries, though they have been reduced.
• To overcome these, companies may relocate
• They won’t have to pay import tariffs, and there won’t be legal restrictions.
Government Incentives
• Governments see benefits of attracting large companies in their countries.
• This allows subsidies and grants benefitting business.

LIMITATIONS OF RELOCATING IN A FOREIGN COUNTRY

Cultural Differences
• Products popular in one country may not be in other depending on religious/social/cultural believes.
Communication Problems:
• Language differences from one country to other, may be barrier between workers, managers, and
suppliers.
• Also arise due to long distance between head office and operation unit based in other country.
Ethical Concerns:
• Decision to relocate may affect workforce in country —> Redundancy —> Spoiled reputation—>
Decreased motivation of employees
Quality Issues
• More difficult to control quality of supplies and finished products in international markets.

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5.1 Business finance: needs and sources

Finance is the money required in the business. Finance is needed to set up the
business, expand it and increase working capital (the day-to-day running expenses).

Why do businesses need finance?

 To startup the business (Start-up capital) – is the initial capital used in the business to buy
fixed and current assets before it can start trading. Businesses need money to buy land and
equipment
 Expanding the business – Businesses need money to expand (e.g. buying more land to expand
factory, upgrading machines)
 Money required to pay for day to day expenses (working capital) – Businesses need money to
pay for day to day expenses such as employee wages and salaries, purchasing raw material etc..

Difference between Capital and Revenue Expenditure

 Capital expenditure – Money spent on purchasing fixed assets that lasts for over a year, (e.g.
office buildings, transport vehicles)
 Revenue expenditure – similar to working capital, is the money spent on day-to-day expenses
which does not involve the purchase of long-term assets (e.g. salaries, maintenance of office
building)

Sources of Finance
Internal finance is obtained from within the business itself.

 Retained Profit: profit kept in the business after owners have been given their share of the
profit. Firms can invest this profit back in the businesses.
Advantages:
 – Does not have to be repaid, unlike a loan.
– No interest has to be paid

- Easy and fast to obtain.

Disadvantages:
– A new business will not have retained profit
– Profits may be too low to finance
– Keeping more profits to be used as capital will reduce owner’s share of profit and they may
resist the decision.

 Sale of existing assets: assets that the business doesn’t need any more /idle assets, for example,
unused buildings or spare equipment can be sold to raise finance
Advantages:
– Makes better use of capital tied up in the business
– Does not become debt for the business, unlike a loan.
Disadvantages:
– Surplus assets will not be available with new businesses
– Takes time to sell the asset and the expected amount may not be gained for the asset

 Sale of inventories: sell of finished goods or unwanted components in inventory.

Advantage:
– Reduces costs of inventory holding

- Not paid back

- No interest to be paid
Disadvantage:
– If not enough inventory is kept, unexpected increase demand form customers cannot
be fulfilled.
- May not raise enough capital as needed.

 Owner’s savings: For a sole trader and partnership, since they’re unincorporated (owners and
business is not separate), any finance the owner directly invests from his-her own saving will be
internal finance.
Advantages:
– Will be available to the firm quickly
– No interest has to be paid.
Disadvantages:
– Increases the risk taken by the owners.

--Owner may not have enough savings.

External finance is obtained from sources outside of the business.

 Issue of share: only for limited companies.
Advantages:
– A permanent source of capital, no need to repay the money to shareholders
--no interest has to be paid.
Disadvantages:
– Dividends have to be paid to the shareholders
– If many shares are bought, the ownership of the business will change hands/loss of control.
(The ownership is decided by who has the highest percentage of shares in the company).

 Bank loans: money borrowed from banks

Advantages:
– Quick to arrange a loan
– – Can be for varying lengths of time
Large companies can get very low rates of interest on their loans

Disadvantages:
– Need to pay interest on the loan periodically
– It has to be repaid after a specified length of time
– Need to give the bank a collateral security (the bank will ask for some valued asset, usually
some part of the business, as a security they can use if at all the business cannot repay the loan
in the future. For a sole trader, his house might be collateral. So there is a risk of losing highly
valuable assets)

 Debenture issues: debentures are long-term loan certificates issued by companies. Like shares,
debentures will be issued, people will buy them and the business can raise money. But this
finance acts as a loan- it will have to be repaid after a specified period of time and interest will
have to be paid for it as well.
Advantages:
– Can be used to raise very long-term finance, for example, 25 years
Disadvantage:
– Interest has to be paid and it has to be repaid

 Debt factoring: a debtor is a person who owes the business money for the goods they have
bought from the business. Debt factors are specialist agents that can collect all the business’
debts from debtors.
Advantages:
– Immediate cash is available to the business
– Business doesn’t have to handle the debt collecting
Disadvantage:
– The debt factor will get a percent of the debts collected as reward. Thus, the business doesn’t
get all of their debts
  Grants and subsidies: government agencies and other external sources can give the business a
grant or subsidy
Advantage:
– Do not have to be repaid, is free
Disadvantage:
– There are usually certain conditions to fulfill to get a grant. Example, to locate in a particular
under-developed area.

 Micro-finance: special institutes are set up in poorly-developed countries where financially-

lacking people looking to start or expand small businesses can get small sums of money. They
provide all sorts of financial services.

 Crowd funding: financing a business idea by obtaining small amounts of capital from a large
number of people , most often using the internet and social media networks

Short-term finance provides the working capital a business needs for its day-to-day operations.

 Overdrafts: similar to loans, the bank can arrange overdrafts by allowing businesses to spend
more than what is in their bank account. The overdraft will vary with each month, based on how
much extra money the business needs.
Advantages:
– Flexible form of borrowing since overdrawn amounts can be varied each month
– Interest has to be paid only on the amount overdrawn
– Overdrafts are generally cheaper than loans in the long-term
Disadvantages:
– Interest rates can vary periodically, unlike loans which have a fixed interest rate.
– The bank can ask for the overdraft to be repaid at a short-notice.

 Trade Credits: this is when a business delays paying suppliers for some time, improving their
cash position
Advantage:
– No interests, repayments involved
Disadvantage:
– If the payments are not made quickly, suppliers may refuse to give discounts in the future or
refuse to supply at all.

 Debt Factoring: (see above)

Long-term finance is the finance that is available for more than a year.

 Loans: from banks or private individuals.

  Debentures

 Issue of Shares

 Hire Purchase: allows the business to buy a fixed asset and pay for it in monthly installments
that include interest charges. This is not a method to raise capital but gives the business time to
raise the capital.
Advantage:
– The firms doesn’t need a large sum of cash to acquire the asset
Disadvantage:
– A cash deposit has to be paid in the beginning
– Can carry large interest charges.

 Leasing: this allows a business to use an asset without purchasing it. Monthly leasing payments
are instead made to the owner of the asset. The business can decide to buy the asset at the end
of the leasing period. Some firms sell their assets for cash and then lease them back from a
leasing company. This is called sale and leaseback.
Advantages:
– The firm doesn’t need a large sum of money to use the asset
– The care and maintenance of the asset is done by the leasing company

 Disadvantage:
The total costs of leasing the asset could finally end up being more than the cost of purchasing
the asset!

Factors that affect choice of source of finance

 Purpose: if a fixed asset is to be bought, hire purchase or leasing will be appropriate, but if
finance is needed to pay off rents and wages, debt factoring, overdrafts will be used.

 Time-period: for long-term uses of finance, loans, debenture and share issues are used, but for
a short period, overdrafts are more suitable.

 Amount needed: for large amounts, loans and share issues can be used. For smaller amounts,
overdrafts, sale of assets, debt factoring will be used.

 Legal form and size: only a limited company can issue shares and debentures. Small firms have
limited sourced of finances available to choose from

 Control: if limited companies issue too many shares, the current owners may lose control of the
business. They need to decide whether they would risk losing control for business expansion.

 Risk- gearing: if business has existing loans, borrowing more capital can increase gearing- risk of
the business- as high interests have to be paid even when there is no profit, loans and
 debentures need to be repaid etc. Banks and shareholders will be reluctant to invest in risky
businesses.

Finance from banks and shareholders

Chances of a bank willing to lend a business finance is higher when:

 A cash flow forecast is presented detailing why finance is needed and how it will be used

 An income statement from the last trading year and the forecast income statement for the next
year, to see how much profit the business makes and will make.

 Details of existing loans and sources of finance being used

 Evidence that a security/collateral is available with the business to reduce the bank’s risk of
lending

 A business plan is presented to explain clearly what the business hopes to achieve in the future
and why finance is important to these plans.

Chances of a shareholder willing to invest in a business is higher when:

 the company’s share prices are increasing- this is a good indicator of improving performance

 dividends and profits are high

 the company has a good reputations and future growth plans

 Cambridge IGCSE Business Studies

5.2 – Cash Flow Forecasting and Working Capital

Cash Flow

Why is cash important?

If it doesn’t have any cash to pay it’s workers, suppliers, landlord and government, the business
could go into liquidation– selling up everything it owns to pay it’s debts. The business needs to have
an adequate amount of cash to be able to pay all it’s short-term payments.
The cash flow of a businesses is its cash inflows and cash outflows over a period of time.

Cash inflows are the sums of money received by the business over a period of time. Eg:
 sales revenue from sale of products
 payment from debtors– debtors are customers who have already purchased goods from the
business but didn’t pay for them at that time
 money borrowed from external sources, like loans
 the money from the sale of business assets
 investors putting more money into the business

Cash outflows are the sums of money paid out by the business over a period of time. Eg:
 purchasing goods and materials for cash
 paying wages, salaries and other expenses in cash
 purchasing fixed assets
 repaying loans (cash is going out of the business)
 by paying creditors of the business- creditors are suppliers who supplied items to the business but
were not paid at the time of supply.

The cash flow cycle:

Cash flow is not the same as profit! Profit is the surplus amount after total costs have been
deducted from sales. It includes all income and payments incurred in the year, whether already
received or paid or to not yet received or paid respectfully. In a cash flow, only those elements paid
by cash are considered.
 Cambridge IGCSE Business Studies

Cash Flow Forecasts

A cash flow forecast is an estimate of future cash inflows and outflows of a business, usually on a
month-by-month basis. This then shows the expected cash balance at the end of each month. It can
help tell the manager:

 how much cash is available for paying bills, purchasing fixed assets or repaying loans
 how much cash the bank will need to lend to the business to avoid insolvency (running out of
liquid cash)
 whether the business has too much cash that can be put to a profitable use in the business

Example of a cash flow forecast for the five months:

The cash inflows are listed first and then the cash outflows. The total inflows and outflows have to be
calculated after each section.

The opening cash balance is the amount of cash held by the business at the start of the month
 Cambridge IGCSE Business Studies

Net Cash Flow =

Total Cash Inflow – Total Cash Outflow
The net cash flow is added to opening cash balance to find the closing cash balance– the amount of
cash held by the business at the end of the month
Uses of cash flow forecasts:

 when setting up the business the manager needs to know how much cash is required to set up the
business. The cash flow forecast helps calculate the cash outflows such as rent, purchase of assets,
advertising etc.
 A statement of cash flow forecast is required by bank managers when the business applies for
a loan. The bank manager will need to know how much to lend to the business for its operations,
when the loan is needed, for how long it is needed and when it can be repaid.
 Managing cash flow– if the cash flow forecast gives a negative cash flow for a month(s), then the
business will need to plan ahead and apply for an overdraft so that the negative balance is avoided
(as cash come in and the inflow exceeds the outflow). If there is too much cash, the business may
decide to repay loans (so that interest payment in the future will be low) or pay off
creditors/suppliers (to maintain healthy relationship with suppliers).

How can cash flow problems be overcome?

When a negative cash flow is forecast (lack of cash) the following methods can be used to correct it:
 Cambridge IGCSE Business Studies

In the long-term, to improve cash flow, the business will need to attract more investors, cut
costs by increasing efficiency, develop more products to attract customers and increase inflows.

Working Capital

Working capital is the capital required by the business to pay its short-term day-to-day expenses.
Working capital is all of the liquid assets of the business– the assets that can be quickly converted
to cash to pay off the business’ debts. Working capital can be in the form of:
 cash needed to pay expenses
 cash due from debtors – debtors/credit customers can be asked to quickly pay off what they owe to
the business in order for the business to raise cash
cash in the form of inventory – Inventory of finished goods can be quickly sold off to build cash
inflows. Too much inventory results in high costs, too low inventory may cause production to stop
 5.5 – Analysis of Accounts

The data contained in the financial statements are used to make some useful observations
about the performance and financial strength of the business. This is the analysis of accounts
of a business. To do so, ratio analysis is employed.
Ratio Analysis

 Profitability Ratios: these ratios are used to see how profitable the business has been in the
year ended.
 Return on Capital Employed (ROCE): this calculates the return (net profit) in terms of the
capital invested in the business (shareholder’s equity+non-current liabilities) i.e. the % of
net profit earned on each unit of capital employed. The higher the ROCE the better the
profitability is. The formula is:

 Gross Profit Margin: this calculates the gross profit (sales – cost of production) in terms
of the sales, or in other words, the % of gross profit made on each unit of sales revenue.
The higher the GPM, the better. The formula is:

 Net profit Margin: this calculates the net profit (gross profit-expenses) in terms of the
sales, i.e. the % of net profit generated on each unit of sales revenue. The higher the NPM,
the better. The formual is:

 Liquidity Ratios: liquidity is the ability of the company to pay back it’s short-term debts. It if
it doesn’t have the necessary working capital to do so, it will go illiquid (forced to pay off it’s
debts by selling assets). In the previous topic, we said that,
working capital = current assets – current liabilities. So a business needs current assets to be
able to pay off it’s current liabilities. The two liquidity ratios shown below, use this concept.
 Current Ratio: this is the basic liquidity ratio that calculates how many current assets are
there in proportion to every current liability, so the higher the current ratio the better (a
value above 1 is favourable). the formula is:

 Liquid Ratio/ Acid Test Ratio: this is very similar to current ratio but this ratio doesn’t
consider inventory to be a liquid asset, since it will take time for it to be sold and made
into cash. A high level of inventory in a business can thus cause a big difference between
 it’s current and liquidity ratios. So there is a slight difference in the formula:

Uses and users of accounts

 Managers: they will use the accounts to help them keep control over the performance of each
product or each division since they can see which products are profitably performing and
which are not.
 This will allow them to take better decisions. If for example, product A has a good gross
profit margin of 35% but it’s net profit margin is only 5%, this means that the business
has very high expenses that is causing the huge difference between the two ratios. They
will try to reduce expenses in the coming year. In the case of liquidity, if both ratios are
very low, they will try to pay off current liabilities to improve the ratios.
 Ratios can be compared with other firms in the industry/competitors and also with
previous years to see how they’re doing. Businesses will definitely want to perform better
than their rivals to attract shareholders to invest in their business and to stay competitive
in the market. Businesses will also try to improve their profitability and liquidity positions
each year.
 Shareholders: since they are the owners of a limited company, it is a legal requirement that
they be presented with the financial accounts of the company. From the income statements and
the profitability ratios, especially the ROCE, existing shareholders and potential investors can
see whether they should invest in the business by buying shares. A higher profitability, the
higher the chance of getting dividends. They will also compare the ratios with other
companies and with previous years to take the most profitable decision. The balance sheet
will tell shareholders whether the business was worth more at the end of the year than at the
beginning of the year, and the liquidity ratios will be used to ascertain how risky it will be to
invest in the company- they won’t want to invest in businesses with serious liquidity
problems.
 Creditors: The balance sheet and liquidity ratios will tell creditors (suppliers) the cash
position and debts of the business. They will only be ready to supply to the business if they
will be able to pay them If there are liquidity problems, they won’t supply the business as
it is risky for them.
 Banks: Similar to how suppliers use accounts, they will look at how risky it is to lend to the
business. They will only lend to profitable and liquid firms.
 Government: the government and tax officials will look at the profits of the company to fix a
tax rate and to see if the business is profitable and liquid enough to continue operations and
thus if the worker’s jobs will be protected.
 Workers and trade unions: they will want to see if the business’ future is secure or not. If
the business is continuously running a loss and is in risk of insolvency (not being liquid), it
may shut down operations and workers will lose their jobs!
 Other businesses: managers of competing companies may want to compare their performance
too or may want to take over the business and wants to see if the takeover will be beneficial.
 Limitations of using accounts and ratio analysis

 Ratios are based on past accounting data and will not indicate how the business will perform
in the future
 Managers will have all accounts, but the external users will only have those published
accounts that contain only the data required by law- they may not get the ‘full-picture’ about
the business’ performance.
 Comparing accounting data over the years can lead to misleading assumptions since the data
will be affected by inflation (rising prices)
 Different companies may use different accounting methods and so will have different ratio
results, making comparisons between companies unreliable.
 6.1 – Government Economic Policies and Objectives

This topic is detailed in our Economics section. Please do refer to it for a better
understanding.
Economic Objectives
Here, we’ll look at the different economic objectives a government might have and how their
absence/negligence will affect the economy as well as businesses.

 Maintain low inflation: inflation is the increase in average prices of goods and services over
time. (Note that, inflation, in the real world, always exists. It is natural for prices to increase as
the years go by. In the case there is a fall in the price level, it is called a deflation) Maintaining
a low inflation will help the economy to develop and grow better.
Effects of high inflation:
 As cost of living will have risen and peoples’ real incomes (the value of income) will
have fallen (when prices increase and incomes haven’t, the income will buy lesser goods
and services- the purchasing power will fall).
 Prices of domestic goods will rise as opposed to foreign goods in the market. The
country’s exports will become less competitive in the international market. Domestic
workers may lose their jobs if their products and firms don’t do well.
 When prices rise, demand will fall and all costs will rise (as wages, material costs,
overheads will all rise)- causing profits to fall. Thus, they will be unwilling to expand and
produce more in the future.
 The living standards (quality of life) in the country may fall when costs of living rise.
 Low unemployment levels: unemployment exists when people who are willing and able to
work cannot find a job. A low unemployment means high output, incomes, living standards
etc.

Effects of high unemployment:

 Unemployed people do not produce anything and so, the total output/GDP in the country
will fall. This will in turn, lead to a fall in economic growth.
 Unemployed people receive no incomes, thus income inequality can rise in the economy
and living standards will fall. It also means that businesses will face low demand due to
low incomes.
 The government pays out unemployment benefits to the unemployed and this will rise
during high unemployment and government will not enough money left over to spend on
other services like education and health.
 Economic growth: economic growth occurs when a country’s Gross Domestic Product (GDP)
increase i.e. more goods and services are produced than in the previous year. This will
increase the country’s incomes and achieve greater living standards.
Effects of reducing GDP (recession):

 As output falls, fewer workers will be needed by firms, so unemployment will rise
 As goods and services that can be consumed by the people falls, the standard of living in
the economy will also fall
 Balance of Payments: this records the difference between a country’s exports (goods and
services sold from the country to another) and imports (goods and services bought in by the
 country from another country). The exports and imports needs to equal each other,
thus balanced.

Effect of a disequilibrium in the balance of payments:

 If the imports of a country exceed its exports, it will cause depreciation in the exchange
rate– the value of the country’s currency will fall against other foreign currencies (this
will be explained in detail here).
 If the exports exceed the imports it indicates that the country is selling more goods than it
is consuming- the country itself doesn’t benefit from any high output consumption.

 Income equality: the difference/gap between the incomes of rich and poor people should
narrow down for income equality to improve. Improved income equality will ensure better
living standards and help the economy to grow faster and become more developed.
Effects of poor income equality:
 Inequal distribution of goods and services- the poor cannot buy as many goods as the rich-
poor living standards will arise.

The Business/ Trade Cycle

An economy will not always go through an economic growth; there is usually a cycle, as shown
below.

Growth– when GDP is rising, unemployment is falling and there are higher living standards in
the country. Businesses will look to expand and produce more and will earn high profits.
Boom– when GDP is at its highest and there is too much spending, causing inflation to rapidly
rise. Business costs will rise and firms will become worried about how they are going to stay
profitable in the near future.
Recession– when GDP starts to fall due of high prices, as demand and spending falls. Firms will
cut back production to stay profitable and unemployment may rise as a result.
 Slump– when GDP is so low that prices start to fall (deflation) and unemployment will reach
very high levels. Many businesses will close down as they cannot survive the very low demand
level. The economy will suffer.
(When the government takes measures to increase demand and spending in the economy to take
it from a slump to growth, it is called as the ‘recovery’ period). The cycle repeats.

Government Economic Policies

Government can influence the economic conditions in a country by taking a variety of policies.

FISCAL POLICY
Using taxes and government spending to influence the demand conditions in the economy.
 GOVERNMENT SPENDING
Governments can change their spending on education, health, defense, law and order, transport
and communications infrastructure etc. to influence demand. Higher spending on these
services can boost demand in the economy as jobs and GDP increase. Reducing government
spending will reduce demand.
 TAXES
 Direct Taxes are paid directly from incomes. There are different types of direct taxes.
 Income tax: paid from an individual’s income. Disposable income is the income left
after deducting income tax from it. When income tax rise, there is little disposable
income to spend on goods and services, firms will face lower demand and sales and
will cut production, increasing unemployment. Lower income taxes will encourage
more spending and thus higher production.
 Corporation Tax: tax paid on a company’s profits. When the corporation tax rate is
increased, businesses will have lower profits left over to put back into the business
and will thus find it hard to expand and produce more. It will also cause
shareholders/owners to receive lower dividends/returns for their investments. This
will discourage people from investing in businesses and economic growth could slow
down. Reducing corporation tax will encourage more production and investment.
 Indirect Taxes are added to the prices of goods and services and it is paid while
purchasing the good or service. Some examples are:
 GST/VAT: these are included in the price of goods and services. Increasing these
indirect taxes will increase the prices of goods and services and reduce demand and in
turn profits. Reducing these taxes will increase demand.
 Import tariffs and quotas: an import tariff is a tax on imported goods and services;
an import quota is the physical limit to the quantity of a product that can be imported
into a country. Increasing tariffs will reduce demand for foreign products and
imposing quotas will mean there are lesser foreign goods in the market to be sold and
so demand is reduced.

MONETARY POLICY
Using interest rates (as well as money supply and the exchange rate) to influence the demand
conditions in the economy.
 The interest rate is the cost of borrowing money. When a person borrows money from a bank,
he has to pay an interest (monthly or annually) calculated on the amount he borrowed. Interest
can also be earned by depositing money in the bank.
A higher interest rate will thus discourage borrowing (as more interest will have to be paid to the
bank) and encourage saving (people will get more interest from saving) – thus, investing and
spending will fall respectively- demand in the economy will fall. A lower interest rate will
increase demand.
From a business’ point of view, a higher interest rate means more interest has to be paid on
existing loans, reducing profits; as well as suffer low demand levels. They may have to delay
expansion plans that involve borrowing from the bank. A lower interest rate will be more
favourable to a business.

SUPPLY-SIDE POLICIES
Both the fiscal and monetary policies directly affect demand, but the policies that influence
supply are very different. It can include:
 Privatisation: selling government organizations to private individuals- this will increase
efficiency and productivity that increase supply as well encourage competitors to enter and
further increase supply.
 Improve training and education: governments can spend more on schools, colleges and
training centres so that people in the economy can become better skilled and knowledgeable,
helping increasing productivity.
 Increased competition: by acting against monopolies (firms that restrict competitors to enter
that industry/having full dominance in the market- refer xxx for more details) and reducing
government rules and regulations (often termed ‘deregulation’), the competitive environment
can be improved and thus become more productive.

*EXAM TIP: Remember that economic conditions and policies are all interconnected; one
change will lead to an effect which will lead to another effect and so on, like a chain reaction in
many different ways. In your exams, you should take care to explain those effects that are
relevant and appropriate to the business or economy in the question*

How might businesses react to policy changes? It will depend varying on how much impact the
policy change will have on the particular business/industry/economy.

Here are a few examples:

 6.2 – Environmental and Ethical Issues

Business’ Impact on the Environment

Social responsibility is when a business decision benefits stakeholders other than shareholders
i.e. workers, community, suppliers, banks etc.
This is very important when coming to environmental issues. Businesses can pollute the air by
releasing smoke and poisonous gases, pollute water bodies around it by releasing waste and
chemicals into them, damage the natural beauty of a place and so on.
WHY BUSINESSES WANT TO BE WHY BUSINESSES DO NOT WANT TO BE
ENVIRONMENT- FRIENDLY ENVIRONMENT-FRIENDLY
It is expensive to reduce and recycle waste for
Sense of social responsibility that comes from the business. It means that expensive machinery
the fact that their activities are contributing to and skilled labour will be required by the
global warming and pollution business – reducing profits.
Using up scarce non-renewable resources (such Firms will have to increase prices to compensate
as rainforest wood and coal) will raise their for the expensive environment-friendly methods
prices in the future, so businesses won’t use them used in production- higher prices mean lower
now demand.
Consumers are becoming socially-aware and are
willing to buy only environment friendly High prices can make firms less competitive in
products. the market and they could lose sales
Governments, environmental organisations, even
the community could take action against the
business if they do serious damage to the Businesses claim that it is the government’s duty
environment to clean up pollution

Externalities

A business’ decisions and actions can have significant effects on its stakeholders. These effects
are termed ‘externalities’. Externalities can be categorized into six groups given below and we’ll
take examples from a scenario where a business builds a new production factory.

Private Costs: costs paid for by the business for an activity.

Examples: costs of building the factory , hiring extra employees, purchasing new machinery,
running a production unit etc.
Private Benefits: gains for the business resulting from an activity.
Example: the extra money made from the sale of the produced goods etc.
External Costs: costs paid for by the rest of the society (other than the business) as a result of
the business’ activity.
Examples: machinery noise, air pollution that leads to health problems among near residents,
loss of land (it could have been a farm land before) etc.
 External Benefits: gains enjoyed by the rest of the society as a result of a business activity.
Example: new jobs created for residents, government will get more tax from the business, other
firms may move into the area to support the firm-helping develop the region, new roads might be
built that can be enjoyed by residents etc.
Social Costs = Private Costs + External Costs
Social Benefits = Private Benefits + External Benefits
Governments use the cost-benefit-analysis (CBA) to decide whether to proceed with a scheme
or not and businesses have also adopted it. In CBA, the government weighs up all the social
costs and benefits that will arise if the scheme is put into effect and give them all monetary
values (this is not easy- what is the value of losing natural beauty?). They will only allow the
scheme to proceed if the social benefits exceed the social costs, if the costs exceed the benefits, it
is not allowed to proceed.

Sustainable Development

Sustainable development is development that does not put at risk the living standards of
future generations. It means trying to achieve economic growth in a way that does not harm
future generations. Few examples of a sustainable development are:
 using renewable energy- so that resources are conserved for the future
 recycle waste
 use fewer resources
 develop new environment-friendly products and processes- reduce health and climatic
problems for future generations

Environmental Pressures

Pressure groups are organisations/groups of people who change business (and government)
decisions. If a business is seen to behave in a socially irresponsible way, they can conduct
consumer boycotts (encourage consumers to stop buying their products) and take other actions.
They are often very powerful because they have public support and media coverage and are well-
financed and equipped by the public. If a pressure group is powerful it can result in a bad
reputation for the business that can affect it in future endeavors, so the business will give in to
the pressure groups’ demands. Example: Greenpeace
The government can also pass laws that can restrict business decisions such as not permitting
factories to locate in places of natural beauty.
There can also be penalties set in place that will penalize firms that excessively
pollute. Pollution permits are licenses to pollute up to a certain limit. These are very expensive
to acquire, so firms will try to avoid buying the pollution permit and will have to reduce
pollution levels to do so. Firms that pollute less can sell their pollution permits to more polluting
firms to earn money. Taxes can also be levied on polluting goods and services.
Ethical Decisions

Ethical decisions are based on a moral code. It means ‘doing the right thing’. Businesses could
be faced with decisions regarding, for example, employment of children, taking or offering
bribes, associate with people/organisations with a bad reputation etc. In these cases, even if they
are legal, they need to take a decision that they feel is right.
Taking ethical/’right’ decisions can make the business’ products popular among customers,
encourage the government to favour them in any future disputes/demands and avoid pressure
group threats. However, these can end up being expensive as the business will lose out on using
cheaper unethical opportunities.

 Should businesses always ‘do the right thing’? Should businesses always take decisions that are
fair and moral?

 Should businesses ever:

• Take or offer bribes to government officials or people working for other firms, e.g. to gain secret
information?

• Employ child workers, even though it might not be illegal in other countries?

• Buy in supplies that have led to damage to the environment, e.g. wood obtained from cutting
down rain forests?

• Agree to ‘fix high prices’ with competitors?

• Pay directors large bonuses and owners of businesses large profit payouts at the same time as
reducing the workforce?

 These are all examples of ‘ethical decisions’ that many businesses have to face up to very
frequently. People can have very different answers to the questions above. This is because
people have very different moral codes and therefore different ethical standards. The most
common extreme views are:

1. “As long as a business does not deliberately break the law then any decision it makes is
acceptable. Businesses want to make profit after all.”

2. Even if certain activities are not illegal, it is unethical and therefore wrong to do them despite
any increase in profits that might occur.
Impact of business of ethical decisions

 Assume a large multinational clothing business – ‘Company X’ – bought clothes from a factory in
a low income country. The managers of Company X know that the factory employs child labour
– it is not illegal to employ workers as young as 12 years old in the country it is based in.

 Another Business – Company Y – only buys clothes from suppliers who guarantee not to employ
children and pay reasonable wages and offer good working conditions. Company Y managers
check that suppliers keep to these standards. What is the potential impact on Company Y of this
ethical decision.
 6.3 – Business and the International Economy

Globalization

Globalization is a term used to describe the increases in worldwide trade and movement of
people and capital between countries. The same goods and services are sold across the globe;
workers are finding it easier to find work by going abroad for work; money is sent from and to
countries everywhere.

Some reasons how globalization has occurred are:

 Increasing number of free trade agreements– these are agreements between countries that
allows them to import and export goods and services with no tariffs or quotas.
 Improved and cheaper transport (water, land, air) and communications (internet)
infrastructure
 Developing and emerging countries such as China and India are becoming rapidly
industrialized and so can export large volumes of goods and services. This has caused an
increase in the output and opportunities in international trade, allowing for globalisation

Advantages of globalisation

 Allows businesses to start selling in new foreign markets, increasing sales and profits
 Can open factories and production units in other countries, possibly at a cheaper rate (cheaper
materials and labour can be available in other countries)
 Import products from other countries and sell it to customers in the domestic market- this
could be more profitable than producing and selling the good themselves
 Import materials and components for production from foreign countries at a cheaper rate.

Disadvantages of globalisation

 Increasing imports into country from foreign competitors- now that foreign firms can compete
in other countries, it puts up much competition for domestic firms. If these domestic firms
cannot compete with the foreign goods’ cheap prices and high quality, they may be forced
to close down operations.
 Increasing investment by multinationals in home country- this could further add to
competition in the domestic market (although small local firms can become suppliers to the
large multinational firms)
 Employees may leave domestic firms if they don’t pay as well as the foreign
multinationals in the country- businesses will have to increase pay and conditions to recruit
and retain employees.

When looking at an economy’s point of view, globalisation brings consumers more choice
and lower prices and forces domestic firms to be more efficient (in order to remain
competitive). However, competition from foreign producers can force domestic firms to close
down and jobs will be lost.
 Protectionism

Protectionism refers to when governments protect domestic firms from foreign

competition using trade barriers such as tariffs and quotas; i.e. the opposite of free trade.
Import quota is a restriction on the quantity of goods that can be imported into the country.
Tariffs are taxes on imports.
Imposing these two measures will reduce the number of foreign goods in the domestic
market and make them expensive to buy, respectively. This will reduce the competitiveness of
the foreign goods and make it easy for domestic firms to produce and sell their goods. However,
it reduces free trade and globalization.
Free trade supporters say that it is better to allow consumers to buy imported goods and domestic
firms should produce and export goods and services that they have a competitive advantage in. In
this way, living standards across the globe will improve.

Multinationals

Multinational businesses are firms with operations (involved in production/service) in more

than one country. Also known as transnational businesses. Examples: Shell, McDonald’s,
Nissan etc.

Why do firms become multinationals?

 To produce goods with lower costs– cheaper material and labour may be available in other
countries
 To extract raw materials for production, available in a few other countries. For example:
crude oil in the Middle East
 To produce goods nearer to the markets to avoid transport costs.
 To avoid trade barriers on imports. If they produce the goods in foreign countries, the firms
will not have to pay import tariffs or be faced with a quota restriction
 To expand into different markets and spread their risks
 To remain competitive with rival firms which may also be expanding abroad

Advantages to a country of a multinational setting up in their country:

 More jobs created by multinationals

 Increases GDP of the country
 The technology that the multinational brings in can bring in new ideas and methods into the
country
 As more goods are being produced in the country, the imports will be reduced and some
output can even be exported.
 Multinationals will also pay taxes/corporation tax, thereby increasing the government’s tax
revenue
 More product choice for consumers
 Disadvantages to a country of a multinational setting up in their country:

 The jobs created are often for unskilled tasks. The more skilled jobs will be done by workers
that come from the firm’s home country. The unskilled workers may also be exploited with
very low wages and unhygienic working conditions.
 Since multinationals benefit from economies of scale, local firms may be forced out of
business, unable to survive the competition
 Multinationals can use up the scarce, non-renewable resources in the country.
 Repatriation of profit can occur. The profits earned by the multinational could be sent back
to their home country and the government will not be able to levy tax on it.
 As multinationals are large, they can influence the government and economy. They could
threaten the government that they will close down and make workers unemployed if they are
not given financial grants and so on.

Exchange Rates

The exchange rate is the price of one currency in terms of another currency.
For example, €1=$1.2. To buy one euro, you’ll need 1.2 dollars. The demand and supply of the
currencies determine their exchange rate. In the above example, if the €’s demand was greater
than the $’s, or if the supply of € reduced more than the $, then the €’s price in terms of $ will
increase. It could now be €1= $1.5. Each € now buys more $.
A currency appreciates when its value rises. The example above is an appreciation of the
Euro. A European exporting firm will find an appreciation disadvantageous as their American
consumers will now have to pay more $ to buy a €1 good (exports become expensive). Their
competitiveness has reduced. A European importing firm will find an appreciation of benefit.
They can buy American products for lesser Euros (imports become cheaper).
A currency depreciates when its value falls. In the example above, the Dollar depreciated. An
American exporting firm will find a depreciation advantageous as their European consumers will
now have to pay less € to buy a $1 good (exports become cheaper). Their competitiveness has
increased. An American importing firm will find an depreciation disadvantageous. They will
have to buy European products for more dollars (imports become expensive).
In summary, an appreciations is good for importers, bad for exporters; a depreciation is
good for exporters, bad for importers; given that the goods are price inelastic (if the price
didn’t matter much to consumers, sales and revenue would not be affected by price- so no
worries for producers).

Exchange Rates

The exchange rate is the value of a currency in terms of another currency. For example 60
Indian Rupees= $1. This exchange rate will be used when these countries trade to convert
money. So if a person were to convert $100 into Indian rupees, he would get (100*60) 6000
rupees.
The exchange rate of each currency is determined by the market demand and supply of the
currency.
Demand for the a currency, say the US dollar, exists as foreign consumers want to buy and
import goods and services from the US, when overseas companies buy US dollars to invest in
the US etc. Here, the US is gaining in demand and dollars, so the currency is in high demand.
Supply of a currency, say the US dollar, exists as US consumers want to buy and import goods
and services from other countries, when US companies buy foreign currencies to invest abroad.
Here the US is losing in demand and dollars, so the currency is in high supply.