A Level

BUSINESS
(9609)
NOTES 2020

SYEDA ZAINAB
1
 Unit One ~

: Enterprise

: Business Structure

: Size Of Business

: Business Objectives

: Stakeholders In Business

: Business Structure (A )

: Size of Business (A )

: External In uences (A )

: External Economical In uences (A )

Unit Two ~

: Management & Leadership

: Motivation

: Human Resources Management

: Further Human Resource Management (A )

: Organization Structure (A )
: Business Communication (A )

Unit Three ~

: What Is Marketing?

: Market Research

: The Marketing Mix - Product & Price

: The Marketing Mix - Promotion & Place

: Marketing Planning (A )

: Globalization & International Marketing (A )

Unit Four ~

: The Nature of Operations

: Operations Planning

: Inventory Management

: Capacity Utilization (A )

: Lean Production & Quality Management (A )

: Project Management (A )

Unit Five ~

: Business Finance

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 : Costs

: Accounting Fundamentals

: Forecasting and Managing Cash Flows

: Costs (A )

: Budgets (A )

: Contents of Published Accounts (A )

: Analysis of Published Accounts (A )

: Investment Appraisal (A )

Unit ~

: What is Strategic Management? (A )

: Strategic Analysis (A )

: Strategic Choice (A )

: Strategic Implementation (A )

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UNIT ONE ~
1: ENTERPRISE
- Business: the allocation of resources to produce goods/services in order to meet demand.
- Consumer Goods: the physical and tangible goods sold to the general public.
- Consumer Services: the non-tangible products sold to the general public.
- Factors of Production: resources needed by the business in order to produce goods/services.
• Land: the land itself and the raw materials.
• Labor: the skilled labor which makes up the workforce of a business.
• Capital: the finance needed and the capital goods.
• Enterprise: the risk-taking individual who combines the factors of production and manages them.
- Capital Goods: the physical goods used to produce other goods.
- Creating Value: increasing the difference between the cost of raw materials and the price.
- Added Value: the difference between the cost of raw materials and the price.
- Opportunity Cost: the loss of the next best choice given up when making a decision.
• Between Choice A and Choice B, if Choice A is chosen, Choice B will the opportunity cost; and vice versa.
- Entrepreneur: someone who takes the financial risk of starting and managing a new venture.
• Skills and qualities required by an entrepreneur:
‣ Innovation
‣ Self-motivation
‣ Leadership Skills
‣ Self-confidence
‣ Risk Taking

★ Risks of a Start-up
• Identifying proper opportunities.
• Allocating finance.
• Choosing a location.
• Facing competition.
• Finding Consumers

★ The Impact of Businesses to the Economy

• Employment Creation
• Economic Growth
• Innovation
• Exports
- Social Enterprise: a firm which reinvests most of its
profits into benefiting society rather than the owners.
• Social enterprises are not charities.
• It’s a socially responsible firm.
• They have social objectives.
• They need to make a profit in order to operate.
• Triple Bottom Line: the three objectives of social
enterprises: economic, social and environmental.
‣ Economic: make a profit to reinvest.
‣ Social: provide jobs and support for local.
‣ Environmental: CSR & protect the environment.

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2: BUSINESS STRUCTURE
- Primary Sector Business: firms engaged in extracting natural resources.
• This can include oil extraction, fishing, mining, etc.
- Secondary Sector Business: firms that manufacture and process products from natural resources.
• For example, cloth manufacturing, jewelry making, software programming, etc.
- Tertiary Sector Business: firms that provide services to consumers and other businesses.
• This can be retail shops, restaurants, barber shops, etc.
- Public Sector: organizations are owned and controlled by the government.
- Private Sector: organizations are owned and controlled by private groups or individuals.
- Mixed Economy: economic resources are owned and controlled by both private and public sectors.
- Free-market Economy: economic resources are owned by the private sector with little state intervention.
- Command Economy: economic resources are owned, planned and controlled by the state.

★ Legal Organizations - Private Sector

• Sole Trader: a business owned and controlled by a single individual.

‣ Unlimited Liability: is when company members are personally liable for the company’s debts.
‣ Limited Liability: is when company members aren’t personally liable for the company’s debts.

• Partnership: a business formed with two or more people with shared capital investments.

• Private Limited Company: a business that is owned by shareholders but it can’t sell shares to the public.
‣ Share: a certificate confirming part ownership of a company and entitling shareholder rights.
‣ Shareholder: a person or institution owning shares in a limited company.

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 • Public Limited Company: a limited company with the legal right to sell shares to the general public.
‣ Memorandum of Association (MOA): document showing the constitution & scope of powers of a firm.
‣ Articles of Association: have written rules which set out how a company should be run and governed.

• Franchise: a business that uses the name, logo and trading systems of an existing successful business.

• Joint Venture: a firm undertaken jointly by two or more parties, but they retain their distinct identities.
‣ The costs and risks are shared.
‣ Different companies have different strengths and knowledge; together it can be very helpful.
‣ However, it can be hard for the teams to work together.
‣ Arguments can easily occur.
‣ And of course, the profit has to be shared.

• Holding Company: a business organization that owns and controls a number of separate businesses.
‣ The separate businesses can be operating in different sectors.
‣ All of them are kept separate and independent from each other.
‣ A holding company would have very diversified interests.
‣ However, there can be centralized control over critical issues.
‣ Holding companies can have access to more secure loan opportunities.
‣ But the company management isn’t very transparent.

• Co-operatives: are simply social enterprises, but they also aim for profit.
★ Legal Organizations - Public Sector
• Public Corporation: a business owned and controlled by state.

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3: SIZE OF BUSINESS
- Size of Business: this would refer to the size of the scale of operations of a business.
• This can be measured in several ways:
‣ Number of Employees: the workforce in a firm.
‣ Revenue: the income made from sales on a specific time period.
‣ Capital Employed: the total value of the long-term finance invested in the business.
‣ Market Capitalization: the total value of a company’s issued shares.
‣ Market Share: sales of the business as a proportion of total market sales.

★ The Significance of Small Firms

• They create jobs.
• New ideas are being implemented.
• They can create competition for large businesses.
• They can supply specialist goods.
• They can grow to become a great business.
• They can provide cheaper alternatives to the consumers.
★ Government Assistance for Small Firms
• Lower tax rates
• Loan Schemes
• Market Research Data
• Government Grants

- Internal/Organic Growth: is when a firm gets larger from expanding by using its own resources.
- Businesses would want to grow in order to achieve: higher profits, higher market shares & economies of
scale.
- It also allows a higher power status.
- External Growth: is when a firm gets larger
by taking over other businesses or merging
with another business.
• This allows very fast growth.
• However, the business can face
management & communication problems.

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★ Family Businesses at a Glance
• Family businesses are owned and managed by at least two members of the same family.
• In most cases, the family who found the business retains its ownership throughout the years.
• Family Businesses are part of Nepotism.
• The strengths and weaknesses of family businesses:

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4: BUSINESS OBJECTIVES
- Objectives: are the results the company hopes to achieve over time.
• Sole traders don’t usually write down objectives and aren’t required to.
• Partnerships usually write them down in order to prevent arguments in the future.
• However, limited companies are required to list their objectives in the Memorandum of Association.

★ The Importance of Objectives

• Objectives are required to measure the effectiveness of the business.
• If objectives are achieved, then the business has been successful.
• Effective objectives usually meet the “SMART” criteria:
‣ S - Specific: focuses specifically on what the business does (e.g. 60% occupancy objective for hotels).
‣ M - Measurable: quantitative objectives are to be more effective objectives (e.g. increase sales by 15%).
‣ A - Achievable: setting objectives which are achievable in the given time frame.
‣ R - Realistic & Relevant: objectives should be realistic when compared to the available resources.
๏ They should also be given to relevant people who would carry them out.

‣ T - Time Specific: a time limit should be set.

- Mission Statement: a formal summary of the aims and values of a company.

• The mission statement should quickly inform what the central aim and vision is.
• It basically helps to understand what the business is solely about.

★ Common Corporate Objectives

• Profit Maximization
• Profit Satisficing (enough but not maximum)
• Growth
• Increasing Market Share
• Survival
• Corporate Social Responsibility (CSR)
• Maximizing Sales Revenue
• Maximizing Shareholder Value
- Corporate Social Responsibility: when businesses consider the impact of their decisions on society.
- Management by Objectives: managing staff by dividing its aim into specific targets for each department.

- Ethical Code (Code of Conduct): company’s rules and guidelines on staff behavior that must be followed.
• Businesses should be ethical and moral; else, they can face legal actions against them.
• Ethical businesses attract ethical consumers.

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5: STAKEHOLDERS IN BUSINESS
- Stakeholders: individuals who have interest in the business or are affected by it.
- Stakeholder Concept: it indicates that the business is responsible for all stakeholders, not just shareholders.
• Traditionally, the needs of shareholders were always put first, and satisfied as fast as possible.
• But now, the responsibility has extended.
• Firms are responsible for the interests of employees, consumers, suppliers and even the community.

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★ Responsibilities to Stakeholders
• Responsibilities to Consumers: satisfy consumer demands.
‣ This will increase consumer loyalty, sales and develop a brand image.

• Responsibilities to Suppliers: find good, reliable suppliers and pay promptly.

‣ This will increase supplier loyalty and can grant special orders.

• Responsibilities to Employees: pay wages, provide job security and good working conditions.
‣ This will increase employee loyalty and reduce labor turnover.

• Responsibilities to the Local Community: be socially responsible and supply jobs.

‣ This will allow good publicity and the community will be very supportive of the business.

• Responsibilities to the Government: meet the legal responsibilities and pay taxes on time.
‣ This will make good relations with the government and allow subsidies, expansion permissions, etc.

★ Corporate Social Responsibility (CSR): An Evaluation

- CSR is a modern term to the stakeholder concept, and it sums it all up.
- There is a lot of debate to this concept.
- The supporters say that there is more to a business than simply maximizing the profits.
- And implementing CSR can help increase profitability since the community will be more supportive.
- The argument against it is that businesses are very keen to use resources as efficient as possible.
- And spending money on CSR equipment and projects isn’t the best way to be efficient.
- Overall, CSR will reduce profits in the short run.
- But it can possibly generate even higher profits in the longer run.

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6: BUSINESS STRUCTURE (A2)
★ International Trade
- International trade is when different countries import and export goods with each other.
- The cons of international trade:
‣ Loss of jobs and output from the domestic firms which can’t compete with imported goods.
‣ Importing important goods (e.g. oil) can put the country at risk; if conflicts occur, importing will stop.
‣ It can cause a trade deficit (imports larger than exports).
- The pros of international trade:
‣ A wider choice of goods is offered to the consumers.
‣ Importing raw materials allows countries to industrialize faster.
‣ Importing can encourage domestic businesses to keep costs low in order to compete.
‣ It gives countries an opportunity to specialize in items they’re good at and import the rest.
‣ Specialization can lead to economies of scale.
‣ This can allow the overall standard of living to increase in the country.
- Free Trade: no restrictions or trade barriers exist that might prevent or limit trade between countries.
- Tariffs: taxes imposed on imported goods.
- Quotas: limits on the physical quantity or value of goods that are imported.
- Voluntary Export Limits: an exporting country limits the quantity of certain goods sold to one country.
- Protectionism: using barriers to free trade to protect a country’s own domestic industries.
- Globalization: the increasing freedom of movement of goods, capital and people around the world.

★ Multinational Businesses
- Multinational Business: a business organization which operates in more than one country.
- The pros of being a multinational firm:
‣ Closer to main markets.
‣ Lower costs of production.
‣ Avoids import restrictions.
‣ Access to local natural resources.
- The cons of being a multinational firm:
‣ Communication links with headquarters can become poor.
‣ Cultural differences can be hard to handle for the management and employees.
‣ Different countries have totally different markets.
- The pros for being the host of the multinational firm:
‣ Foreign currency will come in the country.
‣ Employment will be created.
‣ Local firms can benefit from supplying services.
‣ Local firms will have competition, forcing them to increase their standards.
‣ Tax revenue will increase.
‣ The gross domestic product (GDP) will increase.
- The cons for being the host of the multinational firm:
‣ Local workforce can be exploited.
‣ Pollution from factories will increase.
‣ Local businesses can possibly close.
‣ Advertisements can influence different cultures.
‣ Profits can be sent back to headquarters.
‣ Limited natural resources can be used up by the multinationals.

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- Privatization: selling state-owned and controlled business organizations to investors in the private sector.
• Private sectors handle resources much more efficiently; thus, privatization is considered.

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7: SIZE OF BUSINESS (A2)
- External Growth/Integration: refers to growth of a company from using external resources (e.g. merger).
• Merger: when two businesses agree to become one.
• Takeover: when a company buys more than 50% of shares of another company and becomes its owner.
- Synergy: a view that two businesses together are more successful than separate businesses.
✦ Synergy says that two businesses together can pool together their knowledge and ideas.
✦ Two companies together can easily benefit from economies of scale.
✦ Using the same outlets and teams can save costs.
- However, integrated firms can be too big to manage.

- There won’t be a lot of benefit from pooled knowledge if the products are from different markets.

- The management cultures of the businesses will easily differ.

★ Joint Ventures & Strategic Alliances

- There are two types of external growth which don’t require complete integration or change in ownership.
• Joint ventures are one type (analyzed on page 6).
• Strategic Alliance: agreement between firms which gather resources to achieve a set number of objectives.
‣ For example, a firm finances a university to allow specialist training courses.

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 ‣ The students who finish those courses can be directly hired by the firm.
‣ This increases the supply of skilled and available workers.

★ Rapid Growth
- Growing too fast can be a problem for the firm.
- This is because managing the firm can get out of hand.
- There should be a proper plan to increase the workforce and allocate the required finance.

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8: EXTERNAL INFLUENCES (A2)
★ Government & Law Influence on Business Activity
- Most of the governments decide to introduce laws that constrain business decisions and activities.
• Employment Practices and Conditions of Work:
‣ Minimum wages
‣ Health and safety at work
‣ Employments contracts
‣ Prevent unfair dismissal

• Marketing Behavior and Consumer Rights:

‣ Power of advertising can be very influential.
‣ Accuracy of claims made by the business.
‣ Increasingly globalized marketplace.
‣ Competitive markets can take advantage of consumers.

• Business Competition:
‣ Controlling the making of monopolies.
‣ Limit uncompetitive advances of businesses in order to encourage competition.

• This can overall impact the business by:

‣ Higher costs due to minimum wages, paid holidays, more staff to prevent overworking, safety clothing.
‣ Higher costs for meeting consumer protection laws.
‣ Prevents mergers in order to expand and benefit from economies of scale.

- Monopoly: the exclusive possession or control of the supply or trade in a market.

• Monopolies are mostly created by mergers or takeovers.
• Or, if barriers to entry exist in the market, it will be hard for competitors to be developed.
• Barriers to entry can refer to high costs of equipment, facilities and advanced technical knowledge.
• Influence on consumers from monopolies:
‣ Lower prices if the monopoly benefits from economies of scale.
‣ Advanced products due to technical advances.
‣ However, there can be higher prices because of no competition.
‣ Limited choice of products.
‣ Less investment in new products due to no competition.
‣ No incentive for the firm to improve efficiency or lower costs.

- Innovation: creating new and more effective processes, products or ways of doing things.
- Information Technology (IT): the use of technology to gather, store, process and communicate information.
• The opportunities of potential technological application is increasing rapidly over time.
• Computer-aided Design (CAD): using computers and IT when designing products.
• Computer-aided Manufacturing (CAM): the use of technology to make the production process efficient.
• IT can help to reduce costs and increase efficiency.
• Data can easily be managed, accessed, shared and even analyzed.
• However, the IT equipment can be costly and workers might need to be dismissed.
• There is a possibility of equipment breakdowns and a security risk of the data.

- Environmental Audits: assess the impact of a business’s activities on the environment.

• This report identifies how much socially responsible the firm has been.
• Audits before were only for financial information; but now there is also a concept of auditing CSR.
• Environmental audits include wastage levels, pollution levels and possibly recycle rates.

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- Social Audit: a report on the overall impact a business has on society (e.g. pollution, services, satisfaction).
• Social audit includes environmental audit along with the impacts on society (e.g. health and safety).

- Pressure Groups: a group of people that pressurize businesses to change policies.

• One of the main reasons of firms implementing CSR is pressure groups.
• Pressure groups try to reach their goals via:
‣ Media Coverage
‣ Consumer Behavior (consumers stop purchasing)
‣ Lobbying of Government

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9: EXTERNAL ECONOMICAL INFLUENCES (A2)
★ Economical Influences: An Introduction
- The state of a country’s economy affects businesses directly.
- They can play an important role on business success and failure.
- Thus, all businesses should take the required decisions in order to protect themselves from negative policies.

★ Macro-economic Objectives
- The macro-economic objectives of the government can possibly conflict with each other.
- These objectives can include the following.
• Economic Growth
• Low Price Inflation
• Low Unemployment Rate
• Balance of Payments
• Exchange Rate Stability
• Reduction of Inequalities

★ Economic Growth
- Economic Growth: an increase in a country’s productive potential measured by the increase in GDP.
- Gross Domestic Product (GDP): the total value of goods and services produced in a country in one year.
• Economic growth basically indicates that the country is becoming richer.
• There are multiple benefits of a higher GDP.
‣ Higher living standards
‣ Higher employment rate
‣ More resources available
‣ Total poverty is reduced
‣ Rising demand of products

- Business Investment: capital, technology and research & development expenditure done by businesses.
• These are the factors which lead to economic growth.
‣ Increase in business outputs from technological changes and expansion in capacities.
‣ Discovery of natural resources or higher working population.
‣ Productivity increase by businesses.

- Business Cycle: the regular swings in economic activity, from booms to recession.
• Economic growth is unusually achieved in steady rates.
• It grows in different rates which leads us to the business cycle.
• There are 4 key stages.
‣ Economic Boom: a period of very fast economic growth.
‣ Recession: a period of six months or more of declining real GDP.
‣ Slump: a prolonged recession where GDP falls continuously.
‣ Recovery & Growth: recession recovers and GDP starts to increase again.

• Recession is when GDP falls and unemployment increases leading to fall in demand of goods/services.
• This can open opportunities for the businesses.
‣ Cheap capital assets can be invested in by businesses.
‣ Demand for inferior products will increase.
‣ Loss of employment encourages current employees to become more efficient.
‣ Businesses can take advantage of the GDP growth when recovery starts.

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★ Inflation & Deflation
- Inflation: increase in the average price of goods and services, resulting a fall in the value of money.
- Deflation: decrease in the average price of goods and services, increasing the value of money.
• Inflation will allow fewer goods to be bought from the same value of money.
• Whereas, deflation will allow more goods to be bought.
• Inflation can be calculated by measuring the price difference of products in different years.
• Products are then ‘weighed’ to reflect how important each item is for households.
• There are two causes of inflation: cost-push and demand-pull causes.

- Cost-push Causes: this is when costs of production increase, forcing businesses to raise prices.
• This can be caused due to the following:
‣ Lower exchange rates leading to higher prices of imported materials.
‣ World demand for raising material prices.
‣ Higher wage demands by workers.

- Demand-pull Causes: when demand rises, businesses can take advantage and increase prices.
• Not increasing the prices can sell out stocks too fast and lead to excess demand.
• Increasing prices helps he business to maximize its profits.

- Pros & Cons of Inflation to Businesses:

✦ Cost increases can be easily passed on to consumers due to general increase in prices.
✦ The value of debts owned by the company will fall.
✦ The value of assets can rise.
✦ Unsold inventory value can increase.
- Employees can demand higher wages.
- Consumers can find alternative, cheap products.
- Inflation can lead to higher rates of interest.
- Cash flow problems can occur due to increased costs.

- During rapid inflation periods, businesses can:

• Reduce investment spending.
• Reduce profit margins to stay competitive.
• Reduce borrowing levels to make interest payments manageable.
• Reducing payment period for trade receivables.
• Reducing labor costs.

- Cons of Deflation:
• Consumers can delay expensive purchases in hopes of further price fall.
• Repayment of loans will be of higher valued money than it initially was.
• Future profitability of projects will seem doubtful.
• Stocks held will fall in value.

★ Unemployment
- Working Population: the people in society who are of working age and are willing and able to work.
- Unemployment: when members of the working population don’t have a job.
• There are three main causes of unemployment: cynical, structural and frictional.

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 - Cyclical Unemployment: unemployment resulting from low demand for goods and services in the economy.
• The government tries to manage swings in the business cycle to prevent cyclical unemployment.
• They also try to keep inflation low.
- Structural Unemployment: unemployment caused by the decline in important industries.
• Governments can stand against economic changes to help prevent the decline in industries.
- Frictional Unemployment: unemployed people who are in the process of moving from one job to another.
• Job centers or employment agencies usually aid this process for faster results.

- Cons of Unemployment:
• Potential production of goods and services is lost.
• Costs of supporting unemployed workers can be high.
• High unemployment can lead to crimes.
• Unemployment reduces the demand for goods and services.
• There is loss of income and lower standards of living.

★ Balance of Payments
- Balance of Payments/Current Account: records the value of goods and services traded internationally.
- Exchange Rate: the price of one currency in terms of another currency.
- Trade Deficit: is when the value of imports exceed the value of exports.
- Trade Surplus: is when the value of exports exceed the value of imports.
• If there is a large trade deficit, then the exchange rate value can fall.
• There can also be a decline in the country’s reserves of foreign currency.
• These problems can affect firms if the exchange rate depreciation makes importing and exporting too risky.

★ Exchange Rates
- Imports: goods and services purchased from other countries.
- Exports: goods and services sold to consumers and business in other countries.
- Exchange Rate Appreciation: a rise in the external value of a currency as measured by its exchange rate.
• Exchange rate appreciation is when demand for currency exceeds its supply.
• This benefits businesses who import raw materials and manufactured goods.
• And it’s a drawback for firms exporting goods and firms who have foreign competitors.
- Exchange Rate Depreciation: a fall in the external value of a currency as measured by its exchange rate.
• Exchange rate depreciation is when the value of the currency falls in the terms of other currencies.
• The effects of this will be reversed from the exchange rate appreciation.

★ International Competitiveness
- There are many foreign companies in the local markets.
- And they compete with the local firms on a daily-basis.
- They can be quite successful due to their pricing strategies.
- However, the reason to their success is not only from low prices.
- There are many non-price factors involved.
• Product Design & Innovation: innovative products attract consumers’ attention (e.g. Apple iPad).
• Quality of Products: reliable products encourage consumers to pay hefty prices.
• Promotion & Distribution: widely available products are more likely to be successful (e.g. Coca Cola)
• After-sales Service: this refers to the extended guarantee services.
• Trained Staff & Modern Technology: flexibility of production allows more consumers to be targeted.

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★ Macro-economic Policies
- These policies are designed to impact the entire economy.
- They mainly operate by influencing the level of demand.
- The level of demand influences the GDP, leading to an influence to the level of employment.

- Fiscal Policy: the use of government spending and taxation to influence the economy.
• The governments are usually responsible for spending on major projects.
• These projects can include: health services, defense, education and law.
• In order to fund these services, governments raise finance through taxation.
• In order to increase revenue, the taxation charges can increase.
• Government Budget Deficit: the value of government spending exceeds revenue from taxation.
• Government Budget Surplus: taxation revenue exceeds the value of government spending.

- Monetary Policy: the actions taken by the central bank to control money supply to achieve economic growth.
• A review of the level of interest rates is taken along with the forecasted inflation.
• Interest rates are toggled with to influence inflation.
• High interest rates reduces profits for businesses and reduces consumer borrowing.

- Exchange Rate Policy: the policy of whether exchange rates should float or stay fixed.
• Floating exchange rates find their own value according to supply and demand.
• But fixed exchange rates are fixed to the value of a different currency.
• Pros & Cons for Float Rates:
✦ The central bank can set the interest rates.
✦ Independency is established.
- Fluctuating prices of imported goods and materials.

- Uncertainty of profits earned.

- Rapidly changing rates can be hard to keep track of.

- Currencies have to be converted for each country.

★ Policies & Business Competitiveness

- Government policies which target to increase competitiveness are named as supply-side policies.
- There are a couple of policies which can be implemented in order to achieve this.
• Low Rates of Income Tax: high rates of income tax discourage employees to work hard.
• Low Rates of Corporation Tax: high rates of corporate tax reduce profit, discouraging new investments.
• Increasing Labor Flexibility & Productivity: higher skills and flexibility will increase efficiency.
‣ Subsidize training programs.
‣ Increase funding of high-level education.
‣ Low rates of income tax can encourage workers to invest.
‣ Encourage immigration of skilled workers.
‣ Restrict welfare benefits to those in genuine need.

★ Economic Issues
- Governments can have policies which support both: small and big businesses.
• Subsidizing to keep prices low.
• Subsidizing to help loss-making businesses.
• Grants to locate to particular regions.
• Financial support for consumers to purchase assets (e.g. house).

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- Market Failure: when markets fail to allocate resources efficiently.
• Price of goods and costs of production help to determine the allocation of resources.
• However, there can be difficulties in allocating the costs.
• And when these difficulties arise, market failure occurs.
‣ External Costs:
๏ External costs are costs of an economic activity that are paid for by the society.

๏ External costs can be the pollution produced by factories.

๏ Pollution is usually cleared up by the governments, if not by the businesses.

๏ And the government tackles the task by increasing the tax rates in order to fund the clean-up.

๏ The market has failed to reflect the true cost of production.

‣ Labor Training:
๏ Companies can be reluctant in training employees since they can leave and benefit competitors.

๏ Low training levels means that there isn’t enough skilled labor available in the country.

๏ This will reduce economic growth and lead to market failure.

‣ Monopoly Producers:
๏ Monopolies are when the market is dominated by one firm.

๏ The monopoly will prevent new firms in entering the market.

๏ This will lead to an under-provision of goods and services.

๏ Therefore, it’s a form of market failure.

- Market failure can be corrected with government intervention.

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★Income Elasticity of Demand
- Income Elasticity of Demand: measures the responsiveness of demand after a change in price.
• During economic growth, all firms will have great opportunities to expand.
• Some firms will experience a high increase in demand and some won’t.
• These varied experiences can be analyzed with the income elasticity of demand concept.
• Inelastic demand means that there is no change in demand, vice versa.
• Income elasticity of demand can be calculated with the following formula.
‣ Income Elasticity of Demand = % Change in Demand / % Change in Consumer Incomes

• Income elasticity of demand can be described for three classes of goods.

‣ Normal Goods: elasticity would be positive between 0 and 1; this means it’s elastic.
‣ Luxury Goods: elasticity would be greater than 1; this means it’s very elastic.
๏ Rise in income will lead to a rise in demand of normal & luxury goods, vice versa.

‣ Inferior Goods: elasticity would be below 0; this means that the effect is reverse.
๏ Rise in income will lead to fall in demand for inferior goods, vice versa.

๏ This is because inferior goods are cheap alternatives to luxury products.

๏ Rise in consumer incomes allows them to purchase the luxury goods instead of the inferior goods.

๏ Thus, retailers of inferior goods gain more when recession occurs and gain less in economic growth.

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UNIT TWO ~
10: MANAGEMENT & LEADERSHIP
★ Management & Managers
- Management is key to business success.
- A poorly managed business will have poor staff motivation and resources will be inefficiently used.
- Manager: responsible for setting objectives, organizing resources and motivating staff.
• Managers can delegate tasks to other people.
• Not all managers use the same style of leadership.
• Functions of Management:
‣ Setting objectives and planning.
‣ Organizing resources to meet objectives.
‣ Directing and motivating staff.
‣ Coordinating activities.
‣ Controlling and measuring performance against targets.

- Leadership: the art of motivating a group of people towards achieving a common objective.
• Leadership is key for being a successful manager.
• A poor leader will often fail to win over staff.
• Managers that focus more on control and resources can fail to provide a sense of purpose.
• Mintzberg has listed a set of roles for managers which are listed on the following table.

★ Mintzberg’s Managerial Roles

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★ Important Leadership Positions
- Directors:
• They are senior managers elected by the shareholders of the limited company.
• They are usually the heads of major functional departments.
- Manager:
• Any individual responsible for people, resources or decision-making.
• They will have authority over staff below them.
- Supervisors:
• They are appointed by management to inspect other people’s work.
• They aren’t involved in any decision-making process.
- Workers’ Representatives:
• They are elected by workers to represent them as one.
• They are usually trade union officials and they discuss common concerns with the managers.

★ Leadership Styles
- Autocratic Leadership: when all decision-making processes are kept at the centre of the organization.
- Democratic Leadership: when employees also participate in the decision-making process.
- Paternalistic Leadership: where managers decide themselves and there’s almost no employee intervention.
- Laissez-faire Leadership: where the managers leave decision-making to the workforce.

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★ McGregor’s Theory X & Theory Y
- The leadership style can be determined by the attitude of managers towards their workers.
- McGregor identified two distinct management approaches
to the workforce.
- And he called them Theory X and Theory Y.
- Theory X managers view their workers as lazy and
unprepared to accept responsibility.
- They need to be controlled in order to work.
- Managers with this view will be most likely to adapt the
autocratic style of leadership.
- Theory Y managers believed that workers did enjoy work and they were prepared to accept responsibility.
- McGregor did not suggest that there were two types of workers, X and Y, but two types of managers.
- In practice, most managers will have views somewhere between these two extremes.
- The general view is that workers will behave in a particular way according to the treatment they receive.
- If a manager believes that all workers behave in a Theory X way, there will be extreme control.
- The staff will not enjoy their work and try to avoid it and fail to contribute in any meaningful way.
- The exact reverse could be the case for workers treated based on the Theory Y view.

★ Informal Leadership
- Informal Leader: a person with no formal authority but the respect of colleagues and little power over them.
• These informal leaders have the ability to lead without formal power.
• Perhaps because of their experiences, personality or special knowledge.
• They may have more influence over workers than formal leaders.
• Managers should attempt to work with the informal leaders to help achieve the aims of the business.
• This is best done by attempting to ensure that the aims of the informal leader and the group are common.

★ Emotional Intelligence
- Emotional Intelligence(EI): the ability of managers to understand their own and others emotions.
• When managers have emotional intelligence, they can become more effective as leaders.
• Business performance can possibly be improved by appointing people with high levels of EI.
• There are four main EI competencies from Goleman that managers should try to develop and improve on.
‣ Self-awareness: knowing what we feel is important and using that to guide decision-making.
‣ Self-management: able to recover quickly from stress, being trustworthy and showing self-control.
‣ Social awareness: sensing what others are feeling, being able to take their views into account.
‣ Social skills: handling emotions in relationships and understanding different social situations.

- A manager without or with low emotional intelligence can:

• Attempt projects beyond their abilities but lack self-confidence.
• Lack the trust and confidence of others.
• Fail to take the views of others into account when taking decisions.
• Perform poorly in social situations.
- This can lead to low levels of motivation, achievement and performance.
- This will make them poor managers and leaders.

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11: MOTIVATION
★ Importance of Motivation
- Motivation: the general desire or willingness of someone to do
something.
• Motivation results from the individual’s desire to achieve
objectives and to satisfy needs.
• Motivated workers will help an organization achieve its
objectives as cost-effectively as possible.
• Unmotivated staff will be reluctant to perform effectively.
• Motivation levels have a direct impact on the level of
productivity.
• Motivated staff will stay with the firm and reduce labour
turnover.

★ Taylor’s Motivation Theory

- Taylor’s Theory: employees are motivated to be productive by one thing: money.
• Taylor’s main aim was to reduce the level of inefficiency that existed in the manufacturing industry.
• His general suggestion is that wages should to be based on output levels of the worker.
• His approach has the following steps:
‣ Select workers for the task.
‣ Observe the task and note the key elements.
‣ Record the time taken to do the task.
‣ Identify the quickest method recorded.
‣ Train all workers with the quickest method.
‣ Supervise the workers and control the time taken to finish a task.
‣ Pay the workers according to the results.

• This shows that Taylor suggested the piece rate form of payment.
• This encouraged workers to work faster.

★ Mayo’s Motivation Theory

- Mayo’s Theory: motivation is caused mostly by relational factors than financial or environmental factors.
• Mayo is best known for the conclusions in the ‘Hawthorne Effect.’
• Those conclusions list the following:
‣ Changes in working conditions and financial rewards have little or no effect on productivity.
‣ When management consult with workers and take an interest, motivation is improved.
‣ Working in teams and developing a team spirit can improve productivity.
‣ When workers are given some control over their working life (e.g. break times), motivation increases.
‣ Groups can establish their own aims and they can be greatly influenced by the informal leaders.

★ Maslow’s Motivation Theory

- Maslow’s Theory: a hierarchy made of: physical, safety, social & esteem needs along with self-actualization.
• Self-actualization: the realization or fulfillment of one's talents and potentialities.
• The hierarchy represents the needs of workers.
• Once these are met, workers become productive & satisfied.
• The hierarchy can be interpreted as follows:
‣ Needs start on the lowest level.
‣ Once one level has been satisfied, humans will try to achieve the next level.

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 Self-
Actualization

Esteem Needs

Social Needs

Safety Needs

Physical Needs

‣ Self-actualization is not reached by many people, but everyone is capable of reaching their potential.
‣ Once a need has been satisfied, it will no longer motivate individuals to action.
‣ Reversion is possible if the need is lost.

• Cons to Maslow’s Approach:

‣ Everybody doesn’t have the same needs as is assumed by the hierarchy.
‣ It can be difficult to identify the degree to which each need has been met.
‣ Money is necessary to satisfy physical needs, but it might also play a role in satisfying status and esteem.
‣ Self-actualization is never permanently achieved.
‣ Jobs must continually offer challenges and opportunities, else regression will occur.

★ Herzberg’s Motivation Theory

- Herzberg’s Theory: consists of two factors: motivators and hygiene factors.
• Motivating Factors/Motivators: aspects of a worker’s job that can lead to positive job satisfaction.
• There are 5 main factors to this.
‣ Achievement
‣ Recognition for Achievement
‣ The Work Itself
‣ Responsibility
‣ Advancement

• Hygiene Factors: aspects of a worker’s job that have the potential to cause dissatisfaction.
• There are also 5 main factor to this.
‣ Company Policy & Administration
‣ Supervision
‣ Salary
‣ Relationships
‣ Working Conditions

• The Consequences of Herzberg’s Theory:

‣ Improving pay and work conditions don’t provide conditions for motivation to exist.
‣ Job enrichment can be provided to increase motivation.
‣ Improving conditions and reducing tasks will remove dissatisfaction, but it’ll soon be taken for granted.

• Job enrichment: to use the full capacity of workers and give them more challenging and fulfilling work.

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★McClelland’s Motivation Theory
- McClelland: based on developed achievement and improvements in employee assessment methods.
• He describes three types of motivational need.
• These 3 needs can be found in varying degrees in all workers and managers.
• McClelland believes that achievement motivated people usually get things done.
‣ Achievement Motivation:
๏ A person with achievement motivation will seek to reach challenging goals.

๏ There is a constant need for feedback in order to receive a sense of accomplishment.

‣ Authority Motivation:
๏ A person who wants to control others has authority motivation.

๏ Their need is to be powerful, effective and make an impact.

๏ It also brings personal status.

‣ Affiliation Motivation:
๏ A person with affiliation will be in need of friendly relationships.

๏ There is a need to be popular.

๏ These people will be quite good team members.

★Process Theories
- Process Theories: these motivation theories try to explain why certain behaviors are initiated.
- One of the process theorists is Victor Vroom.

★ Vroom
- Vroom: suggests that workers choose to behave in ways which they believe would lead to valuable outcomes.
• His expectancy theory states that individuals have different sets of goals and they can be motivated if:
‣ There is a positive link between effort and performance.
‣ Favorable performance will result in a desirable reward.
‣ The reward will satisfy an important need.
‣ The desire to satisfy the need is strong enough to make the work effort worthwhile.

• This theory is based on 3 beliefs:

‣ Valence:
๏ The depth of want within an employee for a reward, such as money or satisfaction.

‣ Expectancy:
๏ The degree to which people believe that putting effort into work will lead to good performance.

‣ Instrumentality:
๏ The confidence of employees that they will actually get what they desire.

• According to Vroom, if even one of these beliefs is missing, then the employee will not be motivated.
• Thus, managers should ensure that workers believe in putting effort in their work.
• Because then it’ll lead them towards valuable rewards.

★ Payment & Financial Reward Systems

- Time Based Wage Rate: payment to a worker made for each period of time worked.
• This is the easiest way to pay workers who aren’t involved in management.
• There is an hourly rate which is multiplied to the hors worked.
• This is also known as the hourly wage rate.
• Wages are often paid weekly.
• This method offers security, but it’s not directly related to the levels of output produced.

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- Piece Rate: a payment to a worker for each unit produced.
• A rate is fixed for the production of one unit.
• The amount of output made by each worker defines their total wages amount.
• Pros & Cons of Piece Rate:
✦ Encourages more effort and faster working.
✦ The labor cost determined for each unit helps to set a price.
- Different products make I hard to set a rate for each product.

- Quality can fall due to rushed production.

- Workers may stop after their required wage amount is reached.

- Little security of pay (in case of production breakdown).

- Workers are discouraged in accepting change, since it can reduce pay.

- Salary: annual income that is usually paid on a monthly basis.

• This is more widely used for paying professional, supervisory management.
• The salary is fixed and It doesn’t depend on the hours worked or problems solved.
• Salary bands are recognized in the levels of organization.
• Each band is paid accordingly.
• Pros & Cons of Salary:
✦ Security of income.
✦ Greater status than wages.
✦ Helps costing since salaries won’t vary in the year.
✦ Suitable for ops where output is not measurable.
- Income is not related to effort levels.

- It can lead to complacency.

- Commission: a payment to a sales person for each sale made.

• Commission can be the base salary; this will not provide security, since there is no payment if no sales.
• Or, it can be an addition to the base salary.
• It almost has the same pros & cons as piece rates.
• The cons can include lack of teamwork, since every worker will be willing to make sales by themselves.
• The sales staff can also pressure consumers too much to purchase, which leads to bad publicity.
- Bonus: a payment made in addition to the contracted wage or salary.
• A bonus payment is usually made to employees in addition to their contracted wage or salary.
• Bonus payments can be paid in addition based on criteria agreed between managers and workers.
• For example, the increase in output, productivity or even consumers.
- Performance-related Pay: a bonus scheme to reward staff for above-average work performance.
• It is usually payable in addition to the basic salary.
• It is widely used for those workers whose output is not measurable in quantitative terms.
• The main aim is to provide further financial incentives.

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★ Profit Sharing
- Profit Sharing: a bonus for staff based on the profits of the business.
• This is usually paid as a proportion of basic salary.
• This scheme shares some of the company profits not just with the shareholders but also with the workers.
• The essential idea behind profit-sharing arrangements is that staff will feel more committed.
• And they will strive to achieve higher performances and cost savings.

- Fringe Benefits: benefits given, other than pay, from an employer to the employee/s.
• These are non-cash forms of reward.
• They include company cars, free insurance, pension schemes, private health insurance, etc.
• Some of these fringe benefits are taxed, but others are not and that gives the employees an added benefit,
• These are sometimes classified as non-financial benefits, although they do have a financial value.

★ Non-financial Methods of Motivation

- Money alone doesn’t satisfy workers or create motivation.
- Thus, there are also non-financial motivators.
- The following are all non-financial motivators.

- Job Rotation: increasing the flexibility of employees by switching from one job to another.
• Job rotation should not be confused with job enrichment.
• Rotation may relieve the boredom of doing one task and it can increase flexibility.
- Job Enlargement: increasing the scope of a job by broadening or deepening the tasks undertaken.
• It can include both job rotation and job enrichment.
• It is unlikely to lead to long-term job satisfaction, unless the principles of job enrichment are adopted.
- Job Enrichment: to use the full capacity of workers and give them more challenging and fulfilling work.
• The process often involves a reduction of direct supervision.
• This is because workers take more responsibility.
• Herzberg’s findings formed the basis of the job-enrichment principle.
- Job Redesign: involves reconstructing the job in order to make work more interesting and challenging.
• Job redesign is closely linked to job enrichment.
• Many workers now need to be familiar with IT in order to operate.
• This shows how adding skills makes work more rewarding.
• These job changes can lead to improved recognition by management for the work undertaken by workers.
• It can also increase workers’ chances of gaining promotion.

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- Training: improving and developing the skills and knowledge of the employees.
• Training employees can be an important motivator.
• It increases the status of workers and gives them a better chance of promotion.
• However, training can lead to employees leaving a business to gain employment within other companies.
- Quality Circles: voluntary groups of workers who meet often to discuss work-related problems and issues.
• They are not just concerned with quality problems.
• The meetings are not formally led by managers or supervisors.
• They are informal and all workers are encouraged to contribute to discussions.
• Because workers have hands-on experience of the issues being discussed.
• Workers are usually paid for attending and the most successful circles may be rewarded with a team prize.
• Quality circles are a successful method of allowing the participation of all staff and they fit in well with
- Worker Participation: workers are actively encouraged to participate in decision-making within the firm.
• Worker participation can be introduced at different levels of a business operation.
• Pros & Cons of Worker Participation:
✦ Job enrichment
✦ Higher motivation
✦ Opportunity for workers to show responsibility
✦ Development of better decisions since workers have better knowledge and experience of operations
- Time consuming to involve all of the workers.

- Autocratic leadership style prevents this.

- Team-working: when groups of workers undertake a task together.

• Some argue that teamwork will result in lower productivity and time-wasting team meetings.
• Supporters of job enrichment believe that its more challenging and interesting work.
• Teamwork can possibly lead to lower labor turnover, more ideas and consistent high quality.

- Target Setting: when objectives are set for the employees.

• This is related to the technique of management by objectives (Chapter 13).
• It also makes work more interesting and rewarding.
• Target setting helps to enable feedback to workers on how their performance compares with targets.
• This helps to develop a sense of direction.
- Delegation & Empowerment: when a manager gives a worker the authority to carry out their task.
• They involve the passing down of authority to perform tasks to workers.
• Although empowerment goes further, by allowing workers a degree of control over the task.
• See Chapter 14.

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12: HUMAN RESOURCES MANAGEMENT
★ HRM: An Introduction
- Human Resources Management (HRM): the effective management of an organization’s workers.
• It aims to recruit capable, flexible and committed people.
• It’s also responsible for managing and rewarding their performance while developing their key skills.

★ Purpose of HRM
- The central purpose of HRM is to recruit, train and use the workers the most productive manner.
- The role of HRM wasn’t as broad as it is now.
- It focuses on various factors and techniques which are all discussed next.

★ Recruitment & Selection of Staff

- Recruitment: the process of identifying a job vacancy, defining the job and the type of applicant needed.
- Selection: the steps in which candidates are interviewed & tested, then the most suitable one is chosen.
• Organizations need to obtain the best workforce available in order to meet their objectives and compete.
• Recruitment and selection will be necessary when the business is expanding or an employees leaves.
• There are several steps involved in recruitment and selection:
‣ Identifying the Job Vacancy and Creating a Job Description:
๏ Job Description: a detailed list about the job to be filled with all of the key tasks and responsibilities.

๏ It can include: job site, staled tasks, responsibilities, working conditions and place in hierarchy.

๏ This helps to attract the right person for the job.

‣ Drawing up a Person Specification:

๏ Person Specification: a detailed list about the the education and qualities required from the applicant.

๏ This will help to eliminate the applicants who don’t suit the criteria provided.

‣ Preparing a Job Advertisement:

๏ Internal advertisement can be made for existing employees.

๏ Or externally, it can be advertised via newspapers, recruitment agencies or government job centers.

๏ Internet is also a wide-spread measure for advertising jobs.

๏ Extra care should be taken when drawing up person specifications to prevent discrimination.

‣ Drawing up a Shortlist of Applicants:

๏ A small number of applicants are chosen based on their application forms and personal details.

๏ References can be obtained in order to check on the character and previous work performance.

๏ Most of this information is now obtained online and not in paper format.

‣ Selecting Between Applicants:

๏ Interviews are the most common method of selection.

๏ Candidates can be assessed from: achievements, tests, intelligence, skills, or personal circumstances.

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★ Employment Contracts
- Employment Contract: a legal document that sets out the terms and conditions of the job.
• Employment contracts are legally binding documents.
• It should be ensured that they are fair and according to the current employment laws.
• A typical employment contract will contain the following features:
‣ Employee’s work responsibilities and the main tasks to be undertaken.
‣ If the contract is permanent or temporary.
‣ Working hours and the level of flexibility expected.
‣ The payment method to be used for the job.
‣ Holiday entitlement.
‣ The number of days’ notice that must be given by the worker or the employer.

• The contract responsibilities on both the employer and the employee to work to the standards expected.
• In most countries, it is illegal for an employer to employ workers without an employment contract.

★ Labor Turnover
- Labour Turnover: measures the rate at which employees are leaving an organization.
• Labor Turnover = Number of Employees Who Left / Average Number of Employees x 100
• If this result is high and increasing over time, then it is an
indicator of low morale.
• And possibly a bad recruitment policy that leads to the wrong
people being employed.
• Part-time workers and temporary employment in retail shops
leads to high rates of labor turnover.

★ Training & Developing Employees

- Training: work-related education to increase workforce skills
and efficiency.
• Having spent a great deal of time and effort on recruiting and
selecting the right staff, the HR department must ensure that
they are also well-trained.
• It will nearly always involve training in order to develop the
full abilities of the worker.
• There are three different types of training:
‣ Induction Training:
๏ This is an introductory training program to familiarize new recruits with the systems used.

๏ It also helps workers to identify the layout of the business.

๏ Important procedures can also be understood, such as fire emergencies.

‣ On-the-job Training:.
๏ This shows the instruction at the place of work on how a job should be carried out.

๏ Watching or working closely with existing workers is usually how this training is done.

๏ This is cheaper than sending workers to train externally.

‣ Off-the-job Training:
๏ This includes all of the training undertaken away from the business (e.g. work-related college courses).

๏ These courses can be organized by the business itself, or an outside body (e.g. university).

๏ These courses can be quite expensive.

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 • Pros & Cons of Training:
✦ Increases productivity.
✦ Increases flexibility.
✦ Satisfactory consumer service can be offered.
✦ Less risk of health and safety issues in dangerous workplaces (e.g. factories).
✦ Increases motivation.
- Trained employees can leave for a better-paid job once they have gained training.

- Training can be quite expensive.

★ Employee Appraisal & Development

- Employee Appraisal: assessing the effectiveness of an employee judged against pre-set objectives.
• This should be an annual process.
• Development can take the form of challenges, opportunities, training courses, promotion and delegation.
• This can help to develop a sense of fulfillment and achievement.
• The HR department should analyze the potential needs of the firm when establishing the workforce plan.
• Staff appraisal is an essential component for the staff-development program.
• This allows the future performance of the worker to be linked to the objectives of the business.

★ Discipline & Dismissal of Employees

- Dismissal: being dismissed from a job due to incompetence or breach of discipline.
- Unfair Dismissal: ending a worker’s employment contract for a reason that the law regards as being unfair.
• It will be necessary for an HR manager to discipline an employee for continued failure.
• Dismissing will withdraw a worker’s immediate means of financial support and social status.
• But if the conditions of dismissal are not in accordance with the law, then civil court action can be taken.
• This can lead to a damage of reputation of the firm.
• Dismissal can occur from the employee being unable to do the job to the required standard.
• It may also be that the employee has broken one of the crucial conditions of employment.
• Sometimes employees become involved in gross misconduct (e.g. stealing or other serious offense).
• If this happens, the organization can dismiss with immediate effect, without pay or notice.
• However, if an employee is late regularly, then the organization must give warnings.
• And then follow the agreed disciplinary procedure before dismissal can take place.
• It is the right of every employee to claim unfair dismissal.
• Fair dismissal can be due to:
‣ Inability to do the job even after sufficient training has been given.
‣ A continuous negative attitude at work.
‣ Continuous disregard of health and safety procedures.
‣ Deliberate destruction of an employer’s property.
‣ Bullying of other employees.

• Unfair dismissal can be due to:

‣ Pregnancy
‣ Discrimination
‣ Being a member of a union.
‣ A non-relevant criminal record.

★ Redundancy
- Redundancy: when a job is no longer required and the employee is made redundant.
• There is no fault of the employee.

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 • This is not the same as dismissal.
• Redundancy can occur due to a fall in demand or a change in technology.
• The way redundancy announcements are made can have a very serious effect on the remaining staff.
• They can have a loss of job security.
• If a firm is seen to be acting in an unethical manner, then external stakeholders may react negatively.
• Redundancy can also happen if, due to budget cuts, the firm needs to reduce its workforce.

★ Employee Morale & Welfare

- HR departments can offer advice, counseling and other services to employees who are in need of support.
- These support services can reflect well on the caring attitude of the business towards its workforce.
- When workers feel that the employer is concerned about their welfare, then it can lead to higher morale.
- It can also increase the loyalty and desire to do well for the business.

★ Work-life Balance
- Work–life Balance: when employees are able to give time and effort to their work and personal life.
• Timings for work keep on changing due to consumers expecting goods and services outside working hours.
• Globalization has led to greater levels of competition, thus efficiency and flexibility are quite important.
• The demands of working long and often unsociable hours can lead to stress and poor health.
• The following methods have been used to allow employees to take more control of their working lives:
‣ Flexible working
‣ Teleworking (working from home at some days)
‣ Job sharing (allowing two people to fill one full-time job)
‣ Sabbatical periods (extended period of leave from work)
๏ This can be for up to 12 months.

๏ Some businesses do not pay employees during this period, and some businesses do.

๏ But they all guarantee to keep the job open for them on return.

★ Diversity & Equality Policies

- Equality Policy: practices aimed at achieving a fair organization where everyone is treated in the same way.
- Diversity Policy: practices aimed at creating a mixed workforce and placing positive values on diversity.
• Most organizations have policies which try to ensure equality and diversity in the workforce.
• Countries can have strict laws that govern equality issues.
• Pros of Diversity & Equality:
✦ High employee morale.
✦ Good Reputation.
✦ Recruitment of best applicant.
✦ Capturing more consumers.
✦ Effectiveness of employees is measured by contribution, this can motivate them to willingly contribute.
✦ Diverse language skills.

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13: FURTHER HUMAN RESOURCE MANAGEMENT (A2)
- Hard HRM: an approach to managing staff that focuses on cutting costs, e.g. temporary and part-time
employment contracts, offering maximum flexibility but with minimum training costs.
- Soft HRM: anapproachtomanagingstaffthatfocuseson developing staff so that they reach self-fulfilment and
are motivated to work hard and stay with the business.
- Part-time Employment Contract: employmentcontract that is for less than the normal full working week of,
say, 40 hours, e.g. eight hours per week.
- Temporary Employment Contract: employmentcontract that lasts for a fixed time period, e.g. six months.
- Flexi-time Contract: employment contract that allows staff to be called in at times most convenient to
employers and employees, e.g. at busy times of day.
- Outsourcing: notemployingstaffdirectly,butusingan outside agency or organisation to carry out some
business functions.
- Teleworking: staffworkingfromhomebutkeeping contact with the office by means of modern IT
communications.
- Zero-hours Contract: no minimum hours of work are offered and workers are only called in – and paid –
when work is available.
- Labour Productivity: theoutputperworkerinagiven time period. It is calculated by: total output in time
period, e.g. one year total workers employed
- Absenteeism: measurestherateofworkforceabsenceas a proportion of the employee total. It is measured by:
absenteeism (%) = × 100
no. of employees absent total no. of employees
- Workforce Planning: analysingandforecastingthe numbers of workers and the skills of those workers that
will be required by the organisation to achieve its objectives.
- Workforce Audit: acheckontheskillsandqualifications of all existing workers/managers.
- Trade Union: anorganisationofworkingpeoplewiththe objective of improving the pay and working conditions
of their members and providing them with support and legal services.
- Trade Union Recognition: whenanemployerformally agrees to conduct negotiations on pay and working
conditions with a trade union rather than bargain individually with each worker.
- Collective Bargaining: theprocessofnegotiatingtheterms of employment between an employer and a group
of workers who are usually represented by a trade union official.
- Terms of Employment: includeworkingconditions,pay, work hours, shift length, holidays, sick leave,
retirement benefits and health care benefits.
- Single-union Agreement: anemployerrecognisesjust one union for purposes of collective bargaining.
- No-strike Agreement: unionsagreetosignano-strike agreement with employers in exchange for greater
involvement in decisions that affect the workforce.
- Industrial Action: measurestakenbytheworkforceor trade union to put pressure on management to settle an
industrial dispute in favour of employees.

14: ORGANIZATION STRUCTURE (A2)

- Organizational Structure: the internal, formal framework of a business that shows the way in which
management is organised and linked together and how authority is passed through the organisation.
- Matrix Structure: anorganisationalstructurethat creates project teams that cut across traditional functional
departments.
- Level of Hierarchy: astageoftheorganisationalstructure at which the personnel on it have equal status and
authority.
- Chain of Command: thisistheroutethroughwhich authority is passed down an organisation – from the chief
executive and the board of directors.

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 - Span of Control: thenumberofsubordinatesreporting directly to a manager.
- Delegation: passingauthoritydowntheorganisational hierarchy.
- Centralization: keepingalloftheimportantdecision- making powers within head office or the centre of the
organisation.
- Decentralization: decision-makingpowersarepassed down the organisation to empower subordinates and
regional/product managers.
- Delayering: removalofoneormoreofthelevelsof hierarchy from an organisational structure.
- Line Managers: managers who have direct authority over people, decisions and resources within the
hierarchy of an organisation.
- Staff Managers: managerswho,asspecialists,provide support, information and assistance to line managers.
- Informal Organization: thenetworkofpersonaland social relations that develop between people within an
organisation.

15: BUSINESS COMMUNICATION (A2)

- Effective Communication: theexchangeofinformation between people or groups, with feedback.
- Communication Media: themethodsusedto communicate a message.
- Information Overload: somuchinformationandso many messages are received that the most important ones
cannot be easily identified and quickly acted on – most likely to occur with electronic media.
- Communication Barriers: reasonswhycommunicationfails.
- Formal Communication Networks: the official communication channels and routes used within an
organisation.
- Informal Communication: unofficialchannelsof communication that exist between informal groups within
an organisation.

UNIT THREE ~
16: WHAT IS MARKETING?
★ The Marketing Concept
- Marketing: the management process through which goods and services move from concept to the customer.
• Marketing involves a number of management functions.
‣ Market Research
‣ Product Design
‣ Pricing
‣ Advertising
‣ Distribution
‣ Customer Service
‣ Packaging

• Market is where buyers and sellers meet to engage in exchange.

• The internet can also be used as a market place.
• This allows exchange without a physical meeting or location.
• A market can also refer to a group of willing consumers, interested in a good/service.
• A potential market is the total number of population interested in the product.
• The target market is a part of the market which the business aims to serve.

• The value of a product is defined by the costumer’s satisfaction.

• Even if the price is very low, if it satisfies the consumer, then it’s valuable.
• A high-priced good/service might not necessarily satisfy the consumer due to its price.

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★ Marketing and Corporate Objectives
- Marketing Objectives: are the objectives set to help the business achieve its overall goal.
• Marketing objectives can be an increase in sales or market share.
- Marketing Strategy: is a long-term plan established to achieve marketing objectives.
• The objectives should fit in the overall goal of the business.
• They should also be realistic, measurable and achievable.
• Objectives are important because they give a sense of direction.
• They also form the base of the marketing strategy.

★ Marketing and Other Departments

• The marketing department is also linked with other departments.
• Links are important in order to ensure that the marketing strategy is successful.
• This is because the budget, the capacity, the workforce is determined by other departments.
• Marketing is the sole foundation of the product, but to produce it, other departments are required.
• The relationship of marketing and other departments:
‣ Marketing & Finance:
๏ Sales forecast made by the marketing department is used by the finance to create budgets.

๏ The finance department needs to ensure that there is an available budget for marketing.

‣ Marketing & Human Resources:

๏ The sales forecast by the marketing department helps the HR to construct a workforce plan.

๏ HR will have to ensure that the recruited staff is eligible for managing the forecasted sales.

‣ Marketing & Operations:

๏ Market research data will be needed for product development.

๏ The sales forecast by marketing will be used by operations to identify the capacity required.

★ Marketing Approaches
- Market Orientation: is when product decisions are based on consumer demand.
• This is an ‘outward-looking’ approach.
• In this condition, consumers are put first and the business is consumer focused.
• There are a number of consequences for market orientation.
✦ The chances of product failure are reduced; however, they are not eliminated.
✦ The life of a product and its profitability is increased due to the customer satisfaction received.
✦ Constant feedback allows the product to be perfected before it’s too late.
- If a business responds to every market change, resources can be over-used.

- This can cause the business to not do anything particularly well.

- Product Orientation: is when product decisions are based on the product only.
• This is an ‘inward-looking’ approach.
• Businesses will try and develop products which fill in market gaps.
• However, most businesses don’t go with product orientation.
• This is because there is not always a market for a new product.
• And meeting every customer’s need can be expensive.
• The reason to why product orientated business exist is because:
‣ Product orientated businesses invent and develop new products.
‣ Consumers could not be aware of products which are required by them.
‣ For example, technology; nobody knew that they needed it until it was invented.
‣ These businesses focus on producing high-quality products.
‣ Quality can be a very important factor in specific products, for example safety helmets.

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 - Asset-led Marketing: is when the attributes of the product (the asset) are used to market it.
• This approach doesn’t aim to satisfy all consumer needs.
• Instead, it uses the asset’s strengths to promote the asset.
• A strength for example would be the brand image.
• A business which uses asset-led marketing will not try to enter new markets.
• It will focus on its existing markets and expand within.

- Societal Marketing: is when a business considers consumer, business and society interests.
• Products produced from these businesses can be expensive.
• But they promise to use or support environment-friendly methods.
• These businesses will still stride to meet consumer demands and compete with rivals.
• Using this concept can give the business a competitive advantage.
• This is because most consumers choose to purchase from eco-friendly firms.
• The higher prices of these products will most likely not be a bother to customers.
• Thus, it can still help the business to meet its financial aims.

★ Demand, Supply & Price

- Meeting consumer wants profitably is what marketing is meant to do.
- In order to do that, marketing managers need to know how to determine prices.
- Demand and supply analysis will help to find the equilibrium price.
- Demand: is the product quantity that consumers are willing and able to buy at a price, at a time.
• Usually, when price rises, the quantity demanded falls, vice versa.
• Other than price, demand can also change due to the following factors:
‣ Change in consumers’ incomes.Price change of substitute and complementary goods.
‣ Change in population size and structure.
‣ Fashion and taste changes.
‣ Promotion spending.

• All of these factors can cause a change on the demand curve.

• When demand increases, the demand curve moves upwards and vice versa.
Price

Price

D2
D D1

0 Quantity Demanded 0 Quantity

- Supply: is the product quantity that firms are prepared and able to supply at a price, at a time.
• Firms will be more willing to supply if price rises and the other way round.
• Supply can also change due to the following factors:
‣ Change in costs of production.
‣ Change in taxes imposed.
‣ Change in subsidies.
‣ Weather conditions and other natural factors.
‣ Technology advancement.

• These factors can cause a change on the supply curve.

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 • When supply decreases, the supply curve goes backward, vice versa.

S2
S

Price

Price
S1

0 Quantity Supplied 0 Quantity

- Equilibrium Price: is the market price that equals to the demand and supply for a product.
• If the price is higher than the equilibrium price, there will be remaining stocks.
• This is called excess supply.
• And if the price is lower than the equilibrium price, then the stocks will run out.
• This is called excess demand.
• The profit can be maximized when the price is set at the equilibrium price.
Price

Equilibrium
Price
D

0 Quantity Supplied/Demanded

★ Market Features
- Successful marketing requires firms to:
• Understand which markets they are going to undertake.
• Know who are the consumers and where they reside at.
• Know if the market is growing or shrinking.
• Know the firm’s market share along with the competitors’.
- Market Location: is where the business resides.
• Some firms operate locally and sell the goods/services to the consumers in the area.
• International markets offer the greatest sales potential.
• Expanding into foreign markets can be risky.
• This is because marketing aspects will have to change drastically due to culture & law contrasts.

- Market Size: is the total level of sales of all producers within a market.
• This can be measured in two ways: units sold or the total revenue.
• The market size is important due to several reasons:
‣ Marketing managers need to assess if the market is worth entering or not.
‣ Businesses need to calculate their own market share.
‣ Comparing market sizes can help develop market size forecasts.

- Market Growth: is the percentage change in the market size over a period of time.
• The business needs to identify if it’s safe to enter a growing market.
• This is due to the increase in the number of competitors.

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 • Factors which influence market growth could be:
‣ Economic growth
‣ Changes in consumer income
‣ Technological change

• The growth rate can also depend on market saturation.

• Market Saturation: is when no more of the product/service can be sold in the market.
• This is because the demand of the product has been fulfilled.
• For example, washing machines; if everyone bought one, there will be no more demand.

- Market share: is the portion of market which is controlled by one business.

• The part which a business has from the total market size is its share.
• Market share can be calculated with the following formula.
• Market Share = Firm’s Sales / Total Market Sales x 100
• The firm’s and total market sales can either be in units or sales value.
• If the market share is increasing, then the business’s marketing has been quite successful.
• The product which has the highest market share is called the brand leader.
• The following are advantages of having a high market share or being the brand leader.
‣ Sales are higher than competitors; this leads to higher profits.
‣ Retailers will be willing to stock best-selling brands.
‣ Since retailers are willing, the products can be sold to them with a lower discount rate.
‣ Brand leader items can be used to promote since consumers are keen to buy popular brands.

• However, market growth and share can be difficult to be calculated.

• Results may vary and be inaccurate.

- Almost all businesses are in a competitive environment.

- One of the main ways to compete is the pricing of the product/service.
- Other ways can be non-financial, also known as non-price competition.
- Non-price competition can include a better customer service or a more convenient location.
- Direct Competitor: are businesses which provide same or very similar goods/services.
• Most products in these businesses can be differentiated with small features.
• There can also be indirect competition.
• For example, a bus transport industry will face indirect competition from taxi services.

★Marketing Concepts
- Creating or/and adding value is an important concept.
- The added value is basically the difference between the selling price and cost of the product.
- This is not as the same as profit; profit is only a part of the added value.
- The manufacturer still needs to deduct the direct costs (e.g. rent) from it.
- In order to maximize profit, the firm can carry out these effective marketing strategies:
‣ Firms can create exclusive retail shops to provide a luxurious experience.
‣ This can encourage consumers to pay higher prices.
‣ High quality packaging can be used to create a lavish image.
‣ Promote and brand the product in order to make it a ‘must-have’ brand.
‣ Create a Unique Selling Point (USP).
‣ This is because product differentiation can lead to sales success.
- Unique Selling Point (USP): is a feature of a product which makes it unique.
- Product Differentiation: is to make a product contrast from the competitors’ products.

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 • To develop a USP can be very expensive; however, it’s very effective if successful.

- Mass Marketing: is to sell the same product to the whole market without a target audience.
- Niche Marketing: is to identify small markets and develop suitable products for it.
• Niche markets can be very small segments of a large market.
• They may have not been recognized and filled by competitors yet.
• Mass marketing is quite the opposite.
• It’s more of the ‘one product for the whole market’ type of deal.
• Though this is getting less common overtime, they still exist (e.g. tissues, fizzy drinks).
• Mass markets have turned into niche markets overtime as consumer choice increased.
• For example, home appliances now offer wide ranges of models, sizes and prices.

- Market Segment: is a sub-group of a market in which consumers share the same preferences.
- Market Segmentation: is to identify different segments in the market and target their needs.
• This is an example of the market orientation concept, since it’s consumer-focused.
• Market segmentation can also be referred to as ‘differentiated marketing.’
• Sometimes firm only focus on one market segment.

★ Market Segmentation: Identifying Different Consumer Groups

- Consumer Profile: is a quantitative description about consumers with similar attributes.
• Successful segmentation requires a clear image of the market.
• A lot of market research is required for this.
• There are three common ways to segment a market:
‣ Geographic Differences:
๏ Consumer tastes can vary between different areas.

๏ It can be appropriate to market products based on location.

๏ These differences can be in the culture, religion or language.

๏ For example, alcohol is not promoted in most Muslim countries.

๏ Accurate and detailed market research is required to expand to a different region.

‣ Demographic Differences:
๏ Demography is the study of population data and trends.

๏ This can include age, gender, income or family size.

๏ Income size is a main factor for market segmentation.

๏ High income groups will be willing to spend on luxuries unlike low income groups.

‣ Psychographic Factors:
๏ These factors are differences between people’s lifestyles, personalities, attitudes e.t.c.

๏ For example, the middle & lower class have different attitudes towards private education.

๏ The middle class will be more willing to spend on private education than the lower class.

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 ๏ Ethical businesses are also highly regarded by the society.
• The following table marks the pros & cons of market segmentation.

17: MARKET RESEARCH

- Market Research: thisistheprocessofcollecting, recording and analysing data about customers, competitors
and the market.
- Primary Research: thecollectionoffirst-handdatathat is directly related to a firm’s needs.
- Secondary Research: collectionofdatafromsecond- hand sources.
- Qualitative Research: researchintothein-depth motivations behind consumer buying behaviour or opinions.
- Quantitative Research: researchthatleadstonumerical results that can be statistically analysed.
- Focus Groups: agroupofpeoplewhoareaskedabout their attitude towards a product, service, advertisement or
new style of packaging.
- Sample: thegroupofpeopletakingpartinamarket research survey selected to be representative of the overall
target market.
- Random Sampling: every member of the target population has an equal chance of being selected.
- Systematic Sampling: everynthiteminthetarget population is selected.
- Stratified Sampling: thisdrawsasamplefromaspecified sub-group or segment of the population and uses
random sampling to select an appropriate number from each stratum.
- Quota Sampling: whenthepopulationhasbeenstratified and the interviewer selects an appropriate number of
respondents from each stratum.
- Cluster Sampling: usingoneoranumberofspecific groups to draw samples from and not selecting from the
whole population, e.g. using one town or region.
- Open Questions: those that invite a wide-ranging or imaginative response – the results will be difficult to
collate and present numerically.
- Closed Questions: questions to which a limited number of pre-set answers is offered.
- Arithmetic Mean: calculated by totalling all the results and dividing by the number of results.

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 - Mode: thevaluethatoccursmostfrequentlyinaset of data.
- Median: thevalueofthemiddleitemwhendatahavebeen ordered or ranked. It divides the data into two equal
parts.
- Range: thedifferencebetweenthehighestandlowest value.
- Inter-quartile Range: therangeofthemiddle50%of the data

18: THE MARKETING MIX - PRODUCT & PRICE

- Marketing Mix: thefourkeydecisionsthatmustbetaken in the effective marketing of a product.
- Customer Relationship Management (CRM): using marketing activities to establish successful customer
relationships so that existing customer loyalty can be maintained.
- Brand: an identifying symbol, name, image or trademark that distinguishes a product from its competitors.
- Intangible Attributes of a Product: subjectiveopinions of customers about a product that cannot be
measured or compared easily.
- Tangible Attributes of a Product: measurable features of a product that can be easily compared with other
products.
- Product: theendresultoftheproductionprocesssoldon the market to satisfy a customer need.
- Product Positioning: theconsumerperceptionofa product or service as compared to its competitors.
- Product Portfolio Analysis: analysingtherangeof existing products of a business to help allocate resources
effectively between them.
- Product Life Cycle: the pattern of sales recorded by a product from launch to withdrawal from the market
and is one of the main forms of product portfolio analysis.
- Consumer Durable: manufacturedproductthatcanbe reused and is expected to have a reasonably long life,
such as a car or washing machine.
- Extension Strategies: thesearemarketingplansto extend the maturity stage of the product before a brand
new one is needed.
- Price Elasticity of Demand: measurestheresponsiveness of demand following a change in price
- Mark-up Pricing: addingafixedmark-upforprofittothe unit price of a product.
- Target Pricing: settingapricethatwillgivearequiredrate of return at a certain level of output/sales.
- Full-cost Pricing: settingapricebycalculatingaunitcost for the product (allocated fixed and variable costs) and
then adding a fixed profit margin
- Contribution-cost Pricing: settingpricesbasedonthe variable costs of making a product in order to make a
contribution towards fixed costs and profit.
- Competition-based Pricing: a firm will base its price upon the price set by its competitors.
- Dynamic Pricing: offeringgoodsatapricethatchanges according to the level of demand and the customer’s
ability to pay.
- Penetration Pricing: settingarelativelylowpriceoften supported by strong promotion in order to achieve a
high volume of sales.
- Market Skimming: setting a high price for a new product when a firm has a unique or highly differentiated
product with low price elasticity of demand.

19: THE MARKETING MIX - PROMOTION & PLACE

- Promotion: theuseofadvertising,salespromotion, personal selling, direct mail, trade fairs, sponsorship and
public relations to inform consumers and persuade them to buy.
- Promotion Mix: thecombinationofpromotional techniques that a firm uses to sell a product.
- Above-the-line Promotion: aformofpromotionthatis undertaken by a business by paying for communication
with consumers.
- Advertising: paid-forcommunicationwithconsumersto inform and persuade, e.g. TV and cinema advertising.

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 - Below-the-line Promotion: promotionthatisnota directly paid-for means of communication, but based on
short-term incentives to purchase.
- Sales Promotion: incentivessuchasspecialoffersorspecial deals directed at consumers or retailers to achieve
short-term sales increases and repeat purchases by consumers.
- Personal Selling: a member of the sales staff communicates with one consumer with the aim of selling the
product and establishing a long-term relationship between company and consumer.
- Sponsorship: paymentbyacompanytotheorganisers of an event or team/individuals so that the company
name becomes associated with the event/team/individual.
- Public Relations: thedeliberateuseoffreepublicity provided by newspapers, TV and other media to
communicate with and achieve understanding by the public.
- Branding: thestrategyofdifferentiatingproductsfrom those of competitors by creating an identifiable image
and clear expectations about a product.
- Marketing/Promotion Budget: thefinancialamount made available by a business for spending on
marketing/ promotion during a certain time period.
- Channel of Distribution: thisreferstothechainof intermediaries a product passes through from producer to
final consumer.
- Online/Internet Marketing: referstoadvertisingand marketing activities that use the Internet, email and
mobile communications to encourage direct sales via electronic commerce.
- E-commerce: thebuyingandsellingofgoodsandservices by businesses and consumers through an electronic
medium.
- Viral Marketing: theuseofsocialmediasitesortext messages to increase brand awareness or sell products.
- Integrated Marketing Mix: thekeymarketingdecisions complement each other and work together to give
customers a consistent message about the product.

20: MARKETING PLANNING (A2)

- Marketing Plan: adetailed,fullyresearchedwritten report on marketing objectives and the marketing strategy
to be used to achieve them.
- Income Elasticity of Demand: measuresthe responsiveness of demand for a product following a change in
consumer incomes. Income elasticity of demand = % change in demand for the product % change in
consumer incomes
- Promotional Elasticity of Demand: measuresthe responsiveness of demand for a product following a change
in the amount spent on promoting it. Promotional elasticity of demand = % change in demand for the
product % change in promotional spending
- Cross Elasticity of Demand: measuresthe responsiveness of demand for a product following a change in the
price of another product.
- New Product Development (NPD): thedesign,creation and marketing of new goods and services.
- Test Marketing: thelaunchoftheproductonasmall- scale market to test consumers’ reactions to it.
- Research and Development: thescientificresearchand technical development of new products and processes.
Sales Forecasting: predictingfuturesaleslevelsandsales trends.
- Sales-force Composite: a method of sales forecasting that adds together all of the individual predictions of
future sales of all of the sales representatives working for a business.
- Delphi Method: along-rangequalitativeforecasting technique that obtains forecasts from a panel of experts.
- Jury of Experts: usesthespecialistswithinabusinessto make forecasts for the future.
-
- The Trend: theunderlyingmovementinatime series.
- Seasonal Fluctuations: theregularandrepeated variations that occur in sales data within a period of 12
months.

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 - Cyclical Fluctuations: thesevariationsinsalesoccur over periods of time of much more than a year and are
due to the business cycle.
- Random Fluctuations: thesecanoccuratanytime and will cause unusual and unpredictable sales figures –
examples include exceptionally poor weather or negative public image following a high-profile product
failure.

21: GLOBALIZATION & INTERNATIONAL MARKETING (A2)

- Globalization: thegrowingtrendtowardsworldwide markets in products, capital and labour, unrestricted by
barriers.
- Multinational Companies: businessesthathave operations in more than one country.
- Free International Trade: internationaltradethat is allowed to take place without restrictions such as
‘protectionist’ tariffs and quotas.
- Tariff: tax imposed on an imported product.
- Quota: aphysicallimitplacedonthequantityofimports of certain products.
- International Marketing: sellingproductsinmarkets other than the original domestic market.
- BRICS: theacronymforfiverapidlydevelopingeconomies with great market opportunities – Brazil, Russia,
India, China and South Africa.
- Pan-global Marketing: adopting a standardised product across the globe as if the entire world were a single
market – selling the same goods in the same way everywhere.
- Global Localisation: adaptingthemarketingmix, including differentiated products, to meet national and
regional tastes and cultures.

UNIT FOUR ~
22: THE NATURE OF OPERATIONS
★ The Transformation Process
- Operations is concerned with the inputs and outputs of a business.
- The resources are input and the output is in the form of goods & services.
- Added Value: the difference between the cost of purchasing raw materials and the price the finished goods.
- There are more operation processes which occur before the good/service is sold:
• Converting consumer needs to products/services.
• Organizing operations for efficient production.
• Deciding on a suitable production method.
• Setting and checking quality standards.
- Intellectual capital: the intangible capital of a business.
• There are 3 types:
‣ Human Capital: trained and knowledgable employees.
‣ Structural Capital: databases and information systems.
‣ Relation Capital: good links with suppliers or consumers.

★ Production & Productivity

- Production: converting inputs into outputs.
- Level of production: the number of units produced during a time period.
- Productivity: is the ratio of outputs to inputs during production.
• Ways to increase productivity:
‣ Train employees.

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 ‣ Motivate workers.
‣ Purchase advanced equipment.
‣ Reduce waste & save time.

• However, increased productivity doesn’t guarantee success.

• If the product has low demand, it won’t sell profitably.
• The cost of increasing productivity can be higher than the productivity gains.
• Two common methods to calculate productivity:
‣ Labor Productivity = Total Output/ Total Workers
‣ Capital Productivity = Output/ Capital Employed
- Efficiency: is to increase productivity.
- Effectiveness: is to meet objectives of the enterprise by handling productivity as needed.
- Labour Intensive: is when a business involves a higher level of labor input than capital.
• Labor intensive methods are appropriate for companies which are low on finance.
• Or, they specialize in handmade products.
• Pros & Cons:
‣ Labor costs can be cheaper than equipment costs.
‣ But workers can be demotivated and the process is slower.
- Capital Intensive: is when a business involves a higher level of capital input than labor.
• Capital intensive methods are used by businesses which can’t use labor intensive methods (e.g. electricity).
• Other companies use them in order to increase production and efficiency.
• Pros & Cons:
‣ Increases productivity and efficiency while reducing labor costs.
‣ But the fixed costs and maintenance costs are high and the equipment will need replacement over time.

23: OPERATIONS PLANNING

★ Operation Decisions
- Operations Planning is when inputs are prepared to supply products in order to meet demand.
• Production decisions can’t be made independently.
• The rest of the departments also have to know; else, problems can arise.
• There could be a financial shortage, an employee shortage and a sales shortage.
• This shows the importance of planning beforehand.
• The decisions made by the operations managers can have a significant impact on the business.
• These decisions are influenced by multiple factors:
‣ Marketing Factors: what is the quantity demanded?
‣ Availability of Resources: are there enough raw materials?
‣ Technology: is there a way to implement technology?

• Computer Aided Design (CAD): is the use of software to create 2D or 3D graphics.

‣ CAD allows increased productivity, improved quality and lower development costs.

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 ‣ It also reduces errors.
‣ However, it can be complex, require employee training and expensive equipment.

• Computer Aided Manufacturing (CAM): is the use of software to control the machinery.
‣ CAM allows precise manufacturing, higher quality and faster production.
‣ It can also integrate with CAD.
‣ However, initial costs can be high, equipment maintenance and failures can also be very expensive.

★ Flexibility and Innovation

- Operational Flexibility: the flexibility of a business to adapt new ways when consumer demand changes.
• The business can purchase more equipment in order to increase capacity.
• It can have a flexible and adaptable labor force.
• The flow line production can be flexible to changes.
- Process Innovation: the use of a new and much approved production or delivery method.
• Some examples include: manufacturing robots, tracking inventories, tracking shipments etc.

★ Production Methods
- Job Production: is to produce one item specifically designed for the customer.
- Batch Production: is to produce a number of identical products.
- Flow Production: is to produce items in a continuous stream — like a flow.
- Mass Customization: is to customize products for each consumer and then mass produce them.
• Customizing various products can be done via computer systems.
- In order to choose from the production methods, the business has to consider these factors:
• Size of Market: if the market is very small, then job or batch production will be used.
• Capital Availability: if a business has low capital then it’s least likely to use flow production.
• Other Resources: if labor is limited in supply, then a different method might be approached.
• Demand for Products: mass customization will be used if there is a high demand for customized products.
★ Factors Influencing Location Decisions
- Quantitative Factors: are in financial terms and have a direct impact on the costs or revenue.
• In location terms, these can be site costs, transport costs or the revenue potential.
- Qualitative Factors: are non-measurable factors which can influence business decisions.
• In location terms, these can be public safety, environmental concerns or extra room availability.
- Optimal Location: is a business location which gives the best quantitative & qualitative factors.
• This location should maximize long-term profits to the business.
• An optimal location is usually a compromise of conflicting benefits and drawbacks:
‣ It can balance high fixed costs with convenience for customers and higher revenue.
‣ It balances the low costs of a site with limited supply of suitable labor.
‣ It balances quantitative and qualitative factors.
‣ It balances grant opportunities with the risk of low sales.

- Multi-site Location: is a business that operates from more than one location.

- Offshoring: is when a process relocates to another country in the same/different company .

- Multinational: is a business with operations or productions in more than one country.
• Trade Barriers: are government-induced restrictions on international trade.
• Benefits of Multinationals:
‣ Costs Reduction

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 ‣ Benefits to Global Markets
‣ Avoiding Trade Barriers
‣ Government Support

• Drawbacks of Multinationals:
‣ Benefits Language and Communication Barriers
‣ Cultural Differences
‣ Service Concerns (e.g. call centers)
‣ Supply-chain Concerns
‣ Ethical Considerations (e.g. job losses for relocation)

★ Scale of Operations and Economies of Scale

- Scale of Operation: is the maximum production possible from using the available resources.
• The decision to expand the scale of operation can influence some factors.
• There will be more costs involved for the extra land, buildings, equipment or staff.
• There are also benefits of producing a larger scale of production — economies of scale.
• These are some factors which influence the scale of operation:
‣ Owner’s Objectives: they may wish to keep the business small.
‣ Capital Available: if this is limited, growth will be less likely.
‣ Size of Market: if the market is mall, a larger scale will not be needed.
‣ Number of Competitors: the market share may be small if there are many competitors.
‣ Substantial: if the company is substantial (water), then a larger scale operation is more likely.

- Economies of Scale: are cost reductions which occur when a firm’s scale of operation increases.
• There are five main reasons which causes economies of scale to arise.
‣ Purchasing Economies:
๏ These economies are also known as bulk-buying economies.

๏ Suppliers usually offer discounts for large orders.

๏ Large orders are cheaper because it’s cheaper to transport it than multiple small orders.

‣ Technical Economies:
๏ These are offered when the firm has a very large production scale.

๏ A large production scale reduces unit costs, which justifies usage of flow production.

๏ Computer systems are expensive, but the fixed cost is covered when it’s spread ‘thinly.’

‣ Financial Economies:

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 ๏ Banks and lenders show more interest in larger businesses.
๏ Interest rates can be lower.

๏ The average cost of raising finance will be lower for firms selling millions worth of shares.

‣ Marketing Economies:
๏ Marketing costs increase as a firm grows.

๏ These costs are easily spread over the high number of sales.

‣ Managerial Economies:
๏ An expanding firm attracts specialist functional managers.

๏ They can operate more efficiently than general managers.

๏ This reduces chances of mistakes.

- Diseconomies of Scale: increase costs when a firm’s scale of production increases.

• These costs are related with management problems.
‣ Communication Problems:
๏ Large firms have troubles with poor feedback from workers.

๏ Communication overload from a massive number of messages being sent.

๏ There can be a distortion of messages because of the long chain of command.

๏ This can cause poor decisions to be made.

๏ Workers can have lower incentives.

‣ Alienation of Workforce:
๏ A big firm has trouble in involving every single worker.

๏ This prevents to give a sense of purpose and achievement to the worker.

๏ Demotivated employees may not always do their best for the business.

‣ Poor Coordination:
๏ Coordination between departments and divisions can become hard.

๏ It’s difficult to know if everyone is working towards the same objective or not.

๏ Poor coordination can cause duplicates, for example, the same research department.

๏ This reduces efficiency and causes waste of time and costs.

• The impact of the diseconomies of scale can be reduces by these approaches.

‣ Management by Objectives: this will avoid coordination problems.
‣ Decentralization: this gives divisions independency.
‣ Reduce Diversification: to concentrate on ‘core’ activities may help to reduce coordination problems.

★ Enterprise Resources Planning (ERP)

- Enterprise Resource Planning: is a single software used to purchase and use resources.
• A single database is used by all of the departments.
• It coordinates and links together all of the systems — stock control, human resources, etc.
• Supply Chain Management (SCM): is all of the stages from production to selling the product.
• SCM is a significant application of the ERP software.
• Sustainability: are production systems that prevent wastage by using minimum resources.
• ERP supplies according to demand and allows JIT inventory systems.
• However the database costs can be high.
24: INVENTORY MANAGEMENT
★ Inventory: An Introduction
- Inventory/Stock: is the materials or goods which a business holds at a specific time period.
• Manufacturing businesses will hold three types of inventories:
‣ Raw Materials: these materials are purchased from the suppliers and are held until they are used.

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 ‣ Work in Progress: these goods are still undergoing the production process.
‣ Finished Goods: these goods have finished the production process.

• Inventory management is a crucial aspect of operations management.

• If inventories aren’t managed effectively, serious problems can arise.
‣ There can be insufficient inventories to meet the forecasted demand.
‣ Inventories which are out-of-date or expired may be held.
‣ Wastage can occur due to mishandling.
‣ High inventory levels can increase the storage costs.
‣ Poor management can result in late deliveries.

★ Holding Inventory Costs

• There can also be costs of holding inventories.
• There can be opportunity costs.
• For example, the working capital can be used to pay off loans instead of storage.
• Some inventories can also have special conditions, such as refrigeration.
• If goods aren’t sold as expected, the inventory can become outdated.

★ Not Holding Inventory Costs

• There are also costs of not holding inventories.
• These costs can be referred to as inventory-out costs.
• If the inventory is not enough, then the business can loose sales.
• Production resources can run out, causing to halt production.
• If special orders are given out, they can turn out to be expensive due to restocking.
• Small inventory levels can let the business miss out on economies of scale.

★ Order Sizes & Inventory Levels

- Economic Order Quantity: is the optimum or least cost reorder quantity of stock.
• The purchasing manager is required to ensure that the inventory levels are sufficient.

- Inventory control charts or graphs are used to monitor a firm’s inventory position.
- Buffer Inventories: is the minimum inventory level that is held for emergency purposes.
• Maximum inventory level can be calculated by adding EOQ to buffer inventory.
- Re-order Quantity: is the number of units ordered each time.
- Lead Time: is the time taken between ordering stocks and their delivery.
- Re-order Stock Level is the level of inventory in which a re-order is triggered.

★ Just-in-time (JIT) Inventory Control

- Just-in-time: inventory control is a method which avoids holding inventories.
• Supplies arrive just as they are needed and the products are produced for the order.
• No buffer inventories are held.
• There are certain requirements which are important to be met for JIT:
‣ Relationship with suppliers should be excellent, due to short notice orders being fulfilled.
‣ Production staff should be skilled and flexible in order to handle urgent tasks.
‣ The equipment must be flexible to make changes in the production line.
‣ Accurate demand forecasts will be required to handle JIT properly.
‣ Latest IT equipment will make the system much easier.
‣ In order to operate smoothly, a good employer and employee relation is required.

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 ‣ Quality of the product shouldn’t be altered, since there will be no extra materials to rely on.

25: CAPACITY UTILIZATION (A2)

★ Capacity Utilization and Impact on Fixed Costs
- Capacity Utilization: is a percentage of the maximum output capacity currently being achieved.
• It’s calculated with this formula:

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 ‣ Capacity Utilization = Current Output Level / Maximum Output Level x 100

• The degree of total capacity being used defines how efficient a business is.
• Capacity utilization data can be used to compare businesses together.
• The impact on average fixed costs is an important factor in capacity utilization.
• If the utilization rate is high, the fixed cost for each unit will decrease.
• This will be because the fixed costs can spread over a greater number of units.
• A lower utilization rate will make fixed costs spread over fewer units.
• This will increase the fixed cost per unit.
• To operate on full capacity can lift profit rates and decrease unit costs.
• However, there are also some drawbacks to operate in full capacity:
‣ The staff can feel under pressure with the work load.
‣ Long-term clients who wish to increase orders might be turned away.
‣ Machinery will be working for longer periods of time reducing time for maintenance.

★ Excess Capacity
- Excess/Spare Capacity: when levels of demand are lower than the firm’s full capacity.
• High levels of excess capacity lead to high unit fixed costs.
• If the excess capacity is for a short-term (seasonal problem), the business can:
‣ Maintain high outputs and keep them in stock; but, this is risky if sales don’t recover.
‣ Produce other items during the year; however, this can require other resources.
‣ Have flexible contracts with labor and discharge them when there is low demand.
๏ This can, however, cause a negative impact on worker motivation and morale.

• If the excess capacity is a long-term problem, then the business can:

‣ Promote the product more.
‣ Rationalize

• Rationalization: is to reduce overheads by cutting capacity in order to increase efficiency.

• There are two main drawbacks of rationalization:
‣ An unexpected increase in demand can leave the firm with little capacity.
‣ The workers made redundant will reduce job security and create bad publicity.

★ Full Capacity
- Full Capacity: is when a business produces its maximum output possible.
• There are some decisions which have to be taken when a firm operates in full capacity:
‣ Should the firm increase its scale of operation?
‣ Should it keep existing capacity and outsource work to other firms?
‣ Could the quality from other firms be assured?
‣ Should it keep the current capacity and not expand in fear of a fall in demand?

• The final decision will depend on cost and time factors:

‣ Would expanding capacity or outsourcing be faster?
‣ Which would be more expensive: expanding capacity or outsourcing?

★ Capacity Shortage
- Capacity Shortage: is when the demand for a product exceeds the business’s capacity.
• Capacity shortage can cause a shrinkage in the market share of the business.
- Outsourcing:. is to use another business to undertake part of the production process.

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 - Business-process Outsourcing (BPO): is when a 3rd party takes control of certain departments.
• These departments could be Human Resources (HR), Finance, etc.
• A firm operating in full capacity which has no sign of demand falling should consider the following factors.

• The Pros & Cons to Outsourcing:

✦ Reduction in operating costs, since outsourced firms can benefit from economies of scale.
✦ Increased flexibility since the contract with the outsource can be cancelled if demand falls.
✦ Improved company focus on main objectives and tasks.
✦ Access to quality services which the firm couldn’t afford to employ directly.
✦ Internal resources could be freed up if departments are being taken care of by outsources.
- Loss of jobs within the business because of the outsource could cause bad publicity.

- Loss of jobs can also cause low worker motivation and a lower job security.

- Quality can’t be monitored.

- Customer’s can doubt the reliability and quality of the product.

- Security risks of data lost.

- Re-establishing the process if outsourcing fails will be expensive.

- ‘Core’ activities of the business should be kept within the business.

26: LEAN PRODUCTION & QUALITY MANAGEMENT (A2)

- Lean Production: producinggoodsandserviceswiththe minimum of wasted resources while maintaining high
quality.

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 - Simultaneous Engineering: productdevelopmentis organised so that different stages are done at the same
time instead of in sequence.
- Cell Production: splitting flow production into self- contained groups that are responsible for whole work
units. Kaizen: Japanesetermmeaningcontinuousimprovement
- Quality Product: agoodorservicethatmeetscustomers’ expectations and is therefore ‘fit for purpose’.
- Quality Standards: theexpectationsofcustomers expressed in terms of the minimum acceptable production or
service standards.
- Quality Control: thisisbasedoninspectionoftheproduct or a sample of products.
- Quality Assurance: asystemofagreeingandmeeting quality standards at each stage of production to ensure
consumer satisfaction.
- ISO 9000: this is an internationally recognised certificate that acknowledges the existence of a quality
procedure that meets certain conditions.
- Total Quality Management: anapproachtoqualitythat aims to involve all employees in quality-improvement.
- Internal Customers: peoplewithintheorganisationwho depend upon the quality of work being done by
others.
- Zero Defects: achievingperfectproductseverytime.
- Benchmarking: involvesmanagementidentifying the best firms in the industry and then comparing the
performance standards – including quality – of these businesses with those of their own business.

27: PROJECT MANAGEMENT (A2)

★ Project Management & Failure
- Project: is a temporary activity with a start date, end date, defined responsibilities and a budget.

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 - Project Management: is to plan and execute a project while achieving the pre-set targets.
• The Key Elements of Project Management:
‣ The project should be divided into manageable tasks.
‣ It should be controlled at every stage to ensure that everything is on time.
‣ Every member should be given a clear role.
‣ The project should have control over quality issues and risks.

• Failure to manage the project can lead to the following consequences:

‣ Penalty Payments
‣ Bad Publicity
‣ Loss of Future Contracts.
‣ Money Loss.

• Project Failure usually occurs due to the following reasons:

‣ Customers weren’t involved in the planning and developing process.
‣ The project had inadequate or no resources.
‣ The senior management wasn’t interested.
‣ Project specification kept on changing during the project course.
‣ The planning was poor.
‣ The scope of the project became outdated due to a business environment change.
‣ The project team didn’t put in the required skills and effort.

★ Critical Path Analysis (CPA)

- Network Diagram: a diagram used to show the sequence of activities and dependencies between them.
- Critical Path: is the sequence of tasks that need to be on time in order to avoid project delays.
• Efficient firms will try to save wasted time and idle assets.
• They would aim to use their resources intensively.
• Projects can be very complex and hard to manage.
• Thus, a network diagram can be used to make the process planning easier and effective.
• This diagram helps to identify the critical path.
- Critical Path Analysis: a technique that identifies the critical path after sequencing the project’s tasks.
• A network diagram can be drawn to aid the critical path analysis.
• A network diagram uses the following notation.
‣ An arrow indicates each activity.
‣ An activity takes up time and resources.
‣ A node/circle indicates the end of an activity.

• There can be, sometimes, two activities going on at the same time.
• This is because they are not dependent on each other.
• Thus, they don’t need to occur in a sequence and can be done simultaneously.
• When durations are added to the diagram, the critical path and total duration can be revealed.

•The
total
duration of this project will be three weeks.

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 • The earliest start time (EST) of an activity is when its dependent activity is completed.
• The latest finish time (LFT) is when the project can finish without being delayed.
• The durations are important.
• They help us identify the critical path and the float time.
• Float Time: is the spare time which activities — that are not critical — can have.
• There are two types of float.
‣ Total Float:
๏ The amount of time an activity can be delayed without delaying the whole project.

๏ Total Float = LFT - Duration - EST

‣ Free Float:
๏ The length of time an activity can be delayed without delaying the next activities’ start.

๏ Free Float = EST (next activity) - Duration - EST (this activity)

• The critical path can be analyzed from calculating the float time.
• The activities which have 0 float time are critical.

• Total Float for Task D ~ 32 - 6 - 20 = 6 days

• Free Float for Task B ~ 20 - 6 - 0 = 14 days
• Total Float for Task J ~ 42 - 4 - 38 = 0 days
• This shows that Task J is part of the critical path.

★ Dummy Activities
- Dummy Activity: is not strictly an activity.
• It doesn’t consume either time or resources.
• It simply shows logical dependency between other activities.
• A dummy activity is represented in a diagram by a dotted line.

★ CPA Advantages
- The diagram helps calculate total durations and give accurate delivery dates.
- Calculating EST for activities helps order resources on time.
- The LFT can help the manager see if everything is on time.
- Knowing the critical path can help prevent delays on the project.
- In order to speed up a critical activity, resources from a non-critical activity can be taken.
- The sequential and logical structure of the diagram lends itself well to computer apps.
- The need to construct the diagram makes managers plan the project carefully.
- The need for rapid development can be tackled with diagrams by showing spare time.

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UNIT FIVE ~
28: BUSINESS FINANCE
★ Finance: An Introduction
- Business activity requires finance.
- This is because the assets and materials need to be purchased in order to start the production process.
- Workers will also need to be hired and premises may need to be rented out.

★ Requirement of Finance
- Start-up Capital: the finance needed by an entrepreneur to set up a business.
- Working Capital: the finance needed to pay for the day-to-day running costs.
• Working Capital Formula:
‣ Working Capital = Current Assets - Current Liabilities

• This is a list of the main situations in which businesses will require finance:
‣ Setting up a business will require finance from the owner(s).
๏ This will be to purchase or rent capital equipment and land.

๏ This is the start-up capital.

‣ All businesses will need to finance their working capital.

๏ This is the day-to-day finance needed to pay bills and expenses and to build up stocks.

‣ When businesses expand, further finance will be needed.

๏ This is to increase the capital assets held by the firm.

๏ Expansion will also involve higher working capital needs.

‣ Expansion can be achieved by taking over other businesses.

๏ Finance is needed to buy out the owners of the other firm.

‣ Special situations will often lead to a need for greater finance..

๏ For example, a decline in sales could lead to cash needs to keep the business stable.

๏ Or if consumers fail to pay for goods, finance will be quickly needed to pay for essential expenses.

‣ Finance is needed to pay for research and development.

๏ Research and development is required for developing new products or new marketing strategies.

• Some of these situations will need investment by the business for long terms.
• Other cases will need only short-term funding, which is under a year.
• Some finance requirements of the business are for medium terms, which is between 1 and 5 years.
• The business’s need finance is never complete.

★ Capital & Revenue Expenditure

- Capital Expenditure: purchasing assets that are expected to last for more than one year (e.g. machinery).
• This can usually require long or medium terms of financial sources.
• Or, the business can fund it themselves.
- Revenue Expenditure: spending on all costs and assets other than fixed assets.
• This includes wages, salaries and purchased materials for the inventory.

★ Working Capital: Meaning & Significance

- Liquidity: the ability of a firm to be able to pay its short-term debts.
- Liquidation: when a firm ceases trading and its assets are sold for cash to pay suppliers and other creditors.
• Without sufficient working capital a business will be illiquid – unable to pay its short-term debts.
• When a business becomes illiquid, it can raise finance quickly (e.g. bank loan).
• Else, it can be forced into liquidation by its creditors.

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 • Some small business don’t sell on credit at all, but this isn’t exactly possible for large businesses.
• Sufficient working capital is essential to prevent a business from becoming illiquid.
• A high level of working capital means that there is opportunity costs.
• This is because too much of the capital is tied up in the inventories.
• The working capital requirement for the business will depend on the length of this ‘working capital cycle’.
• The longer the time period, the greater will be the working capital needs of the business.

★ Internal Sources of Finance

- This type of finance has almost no direct cost to the business.
- There can only be leasing charges.
- Internal finance does not increase the liabilities or debts of the business.
- There is no risk of loss of control by the original owners as no shares are sold.
- However, it is not available for all companies.
- Solely depending on internal sources of finance for expansion can slow down business growth.
- Thus, rapidly expanding companies are often dependent on external sources for much of their finance.
- Sources of internal finance:
- Profits:
• When a company makes profit, part of it will be taken in tax by the government.
• And part of it is paid out to the owners or shareholders as dividends.
• If any profit remains, this is retained in the business and becomes a source of finance for future activities.
• A business trading at loss will not have access to this source of finance.
• Once retained, they represent a permanent source of finance.
- Sale of Assets:
• There are often assets in a business that are no longer fully employed.
• They could be sold to raise cash.
• Businesses can also sell assets that they still use, but they do not need to own.
• In these cases, the assets will be sold to a leasing specialist and leased back by the company.
• This will raise the capital.
• But there will be more fixed costs in the leasing and rental payment.
- Reduction in Working Capital:
• When businesses increase their inventory or sell goods on credit, they use a source of finance.
• When companies reduce these assets, there is more working capital available.
• This can act as a source of finance for other uses.
• However, cutting down on working capital will reduce the liquidity of the business.

★ External Sources of Finance - Short Term

- Overdraft:
• This is when the business takes out more cash than what is available in their account.
• A bank overdraft is the most flexible of all sources of finance.
• Overdrafts are made when payments to a greater value than the balance in the account are made.
• This overdrawn amount is always agreed in advance and always has a limit.
• It usually carries quite high interest charges.
• And if a bank becomes concerned about the stability of the firm, it can force the firm to pay it back.
- Trade Credit:
• By delaying the payment of bills for goods or services received, a business can obtain finance.
• Though, these periods of credit are not free.
• Discounts for quick payment and supplier confidence are often lost if the business takes too long to pay.

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 - Factoring:
• This means to sell claims over trade receivables to a debt factor in exchange for immediate liquidity.
• When a business sells goods on credit, it creates trade receivables.
• The longer the time allowed to pay up, the more finance the business has to find to carry on trading.
• If it sell these claims on trade receivables to a debt facto, immediate cash is obtained.
• But not for the full amount of the debt.
• This is because the debt-factoring company’s profits are made by discounting the debts.
• When full payment is received from the original customer, the debt factor makes a profit.

★ External Sources of Finance - Medium Term

- Hire Purchase: an asset is sold to a company that agrees to pay fixed payments over an agreed time period.
• The asset belongs to the company.
• These methods are often used to obtain fixed assets with a medium lifespan
• This is a form of credit for purchasing an asset over a period of time.
• This avoids making a large initial cash payment to buy the asset.
- Leasing: obtaining the use of equipment or vehicles and paying a rental or leasing charge over a fixed period.
• This avoids the need for the business to raise long-term capital to buy the asset.
• Though, the ownership remains with the leasing company.
• A periodic payment is made over the life of the agreement.
• The risk of using unreliable or outdated equipment is reduced.
• The leasing company will repair and update the asset as part of the agreement.
- Neither hire purchase or leasing is a cheap option.
- But they improve the short-term cashflow of a company since no asset is purchased with cash.

★ External Sources of Finance - Long Term

- There are two main choices: debt or equity finance.
- Debt increases the liabilities of the business.
- Debt finance can be raised via debentures or long-term bank loans.
- Equity Finance: permanent finance raised by companies through the sale of shares.
- Long-term Loans:
• These loans that don’t have to be repaid for at least one year.
• They may be offered at either a variable or a fixed interest rate.
• Fixed rates provide more certainty.
• But they can be expensive if the loan is agreed at a time of high interest rates.
• Companies borrowing from banks will often have to provide security for the loan.
• This means the right to sell an asset is given to the bank if the company cannot repay the debt.
• Businesses with few assets to act as security may find it difficult to obtain loans.
- Long-term Bonds/Debentures:
• These are bonds issued by companies to raise debt finance, often with a fixed rate of interest.
• A company wishing to raise funds will issue or sell such bonds to interested investors.
• The company agrees to pay a fixed rate of interest each year for the life of the bond.
• The buyers may resell to other investors if they do not wish to wait.
• Convertible debentures can be converted into shares after a certain period of time.
• This means that the company issuing them will never have to pay the debenture back.

★ Sale of Shares: Equity Finance

- Rights Issue: existing shareholders are given the right to buy additional shares at a discounted price.

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 • It All limited companies issue shares when they are first formed. The capital raised will be used to purchase
essential assets. Chapter 2 explained the essential differences between private and public limited
companies. Both of these organisations are able to sell further shares – up to the limit of their authorised
share capital – in order to raise additional permanent finance. This capital never has to be repaid unless
the company is completely wound up as a result of ceasing to trade. Private limited companies can sell
further shares to existing shareholders. This has the advantage of not changing the control or ownership of
the company – as long as all shareholders buy shares in the same proportion to those already owned.
Owners of a private limited company can also decide to ‘go public’ and obtain the necessary authority to
sell shares to the wider public. This would obviously have the potential to raise much more capital than
from just the existing shareholders – but with the risk of some loss of control to the new shareholders.
•
★ Debt or Equity Capital?
- interest
★ Other Sources of Long Term Finance
- Grants:
• It
- Venture Capital: riskcapitalinvestedinbusinessstart-ups or expanding small businesses that have good profit
potential but do not find it easy to gain finance from other sources.
• It
★ Finance for Unincorporated Businesses
- a
★ Microfinance
- Microfinance: providingfinancialservicesforpoorand low-income customers who do not have access to
banking services, such as loans and overdrafts offered by traditional commercial banks.
• It
★ Crowd Funding
- Crowdfunding: theuseofsmallamountsofcapitalfroma large number of individuals to finance a new business
venture.
• It
★ Finance & Stakeholders
- a
★ Raising External Finance: Importance of a Business Plan
- Business Plan: a detailed document giving evidence about a new or existing business, and that aims to
convince external lenders and investors to extend finance to the business.
• It

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29: COSTS
★ Costs Usage
- Costs are needed for a variety of reasons.
- These reasons include:
• The calculation of profits/losses.
• The calculation of prices.
• To make comparisons.
• To make budgets.
• To make decisions.

★ Costs of Production
- The costs of production occur when a product is produced.
- There are different types of costs which are allocated in different ways.
• Direct Costs: these costs are directly related to the product and they can be easily identified.
‣ The most common direct costs in a product are the labor and material costs.
‣ And for a retail business, it would be the cost of selling goods.

• Indirect Costs: these costs can’t be related directly to the unit of production.
‣ Indirect costs are usually referred to as the overheads.
‣ For example, the electricity or cleaning costs.

★ Production Levels and Costs

- There are costs which can be changed in the short-run according the levels of output.
- And then there are also costs which won’t be changed according to the level of output.
- Short run refers to the period in which no changes can be made to the production capacity.
- Fixed Costs: these costs don’t vary with the production level.
• They remain fixed no matter how much the output is.
• An example would be the rent of the premises.
- Variable Costs: costs that vary with output.
• These vary as output changes.
• For example, the electricity bill.
- Marginal Costs: the extra cost of producing one more unit of output.
• These are the additional costs of producing one more unit.

★ Break-even Analysis
- Break-even Point: when total costs equal to total revenue and no profit/loss is made.
- Contribution per unit: selling price less variable cost per unit.
• Break-even helps to make decisions and comparisons.
• However, it assumes all sales are made and the costs are estimated; this can make the analysis inaccurate.
• A graph can be used to determine the break-even units or revenue.
• Or, the formula can be used.
‣ Break-even (units) = Contribution Per Unit/Fixed Costs
‣ Break-even (revenue) = Break-even (units) x Selling Price Per Unit
- Margin of Safety: the extra amount of revenue which exceeds the break-even revenue.
• This helps to calculate the amount of sales needed in order to prevent a loss.

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• Thus, the margin of safety helps to ensure that the right amount of products are produced.
• This can be calculated using the following formula.
‣ Margin of Safety = Actual Sales - Break-even Sales

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30: ACCOUNTING FUNDAMENTALS
- Income Statement: records the revenue, costs and profit (or loss) of a business over a given period of time.
- Gross Profit: equaltosalesrevenuelesscostofsales.
- Revenue: thetotalvalue of sales made during the trading period = selling price × quantity sold.
- Cost of Sales(orcostofgoodssold): thisisthedirectcost of the goods that were sold during the financial year.
- Operating Profit(formerlyreferredtoasnetprofit): gross profit minus overhead expenses.
- Profit for the Year(profitaftertax): operatingprofitminus interest costs and corporation tax.
- Dividends: theshareoftheprofitspaidtoshareholdersas a return for investing in the company.
- Retained Earnings (profit): the profit left after all deductions, including dividends, have been made, this is
‘ploughed back’ into the company as a source of finance.
- Low-quality Profit: one-offprofitthatcannoteasilybe repeated or sustained.
- High-quality Profit: profitthatcanberepeatedand sustained.
- Statement of Financial Position/Balance Sheet: an accounting statement that records the values of a
business’s assets, liabilities and shareholders’ equity at one point in time.
- Shareholders’ Equity: totalvalueofassets–totalvalue of liabilities.
- Asset: an item of monetary value that is owned by a business.
- Liability: afinancialobligationofabusinessthatitis required to pay in the future.
- Share Capital: the total value of capital raised from shareholders by the issue of shares.
- Non-current Assets: assetstobekeptandusedbythe business for more than one year. Used to be referred to as
‘fixed assets’.
- Intangible Assets: itemsofvaluethatdonothavea physical presence, such as patents, trademarks and current
assets.
- Current Assets: assetsthatarelikelytobeturnedinto cash before the next balance-sheet date.
- Inventories: stocksheldbythebusinessintheformof materials, work in progress and finished goods.
- Trade Receivables (Debtors): thevalueofpaymentstobe received from customers who have bought goods on
credit.
- Current Liabilities: debtsofthebusinessthatwillusually have to be paid within one year.
- Accounts Payable (Creditors): valueofdebtsforgoods bought on credit payable to suppliers; also known as
‘trade payables’.
- Non-current Liabilities: valueofdebtsofthebusiness that will be payable after more than one year.
- Intellectual Capital/Property: theamountbywhich the market value of a firm exceeds its tangible assets less
liabilities – an intangible asset.
- Goodwill: ariseswhenabusinessisvaluedatorsoldfor more than the balance-sheet value of its assets.
- Cash-flow Statement: recordofthecashreceivedbya business over a period of time and the cash outflows from
the business.
- Gross Profit Margin: Thisratiocomparesgrossprofit (profit before deduction of overheads) with revenue.
gross profitgross profit margin % = × 100
revenue
- Operating Profit Margin: Thisratiocomparesoperating profit (formerly this ratio was referred to as the net
profit margin) revenue.operating profit margin % = × 100
revenue
- Liquidity: theabilityofafirmtopayitsshort termdebts. current assets
- Current Ratio= currentliabilities

- Acid-test Ratio: liquid assest current liabilities

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 - Liquid Assets: currentassets–inventories(stocks)=liquid assets.
- Window-dressing: presentingthecompanyaccountsina favourable light – to flatter the business performance.

31: FORECASTING AND MANAGING CASH FLOWS

- Cash flow: the sum of cash payments to a business (inflows) less the sum of cash payments (outflows).
- Liquidation: whenafirmceasestradinganditsassetsare sold for cash to pay suppliers and other creditors.
- Insolvent: when a business cannot meet its short-term debts.
- Cash Inflows: paymentsincashreceivedbyabusiness, such as those from customers (trade receivables) or from
the bank, e.g. receiving a loan.
- Cash Outflows: paymentsincashmadebyabusiness, such as those to suppliers and workers.
- Cash Flow Forecast: estimate of a firm’s future cash inflows and outflows.
- Net Monthly Cash Flow: estimateddifferencebetween monthly cash inflows and cash outflows.
- Opening Cash Balance: cashheldbythebusinessatthe start of the month.
- Closing Cash Balance: cashheldattheendofthemonth becomes next month’s opening balance.
- Credit Control: monitoringofdebtstoensurethatcredit periods are not exceeded.
- Bad debt: unpaid customers’ bills that are now very unlikely to ever be paid.
- Overtrading: expandingabusinessrapidlywithout obtaining all of the necessary finance so that a cash-flow
shortage develops.
- Creditors: suppliers who have agreed to supply products on credit and who have not yet been paid.

32: COSTS (A2)

★ Costing Methods : A Problem
- Calculating the cost of a product can be difficult.
- This is because even though the direct costs are verified easily, the indirect costs aren’t.
- The overheads usually need to be allocated to each cost center, and there are many methods to do that.
- Due to the different methods, there are also different total costs of the product.
- This makes it uncertain on which allocation method to use and how to price the product.

★ Costing Methods: Concepts

- There are four important concepts for costing methods.
• Cost Centers
‣ This is a section/department of the business to which costs can be allocated or charged.
‣ Different businesses will need different cost centers that are appropriate for their needs.

• Profit Centers

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 This is a section/department of the business to which costs and revenue can be allocated.
‣
‣ This will allow the calculation of profit.

• Overheads
‣ Production Overheads: factory rent, depreciation of machinery, etc.
‣ Selling & Distribution Overheads: packing costs, distribution costs, sales staff wages, etc.
‣ Administration Overheads: office rent, office equipment depreciation, executive salaries, etc.
‣ Finance Overheads: interest rates.

• Unit Cost
‣ This is the average cost of producing each unit.
‣ It’s important for pricing the products.
‣ Unit Cost = Total Costs of Production / Number of Units Produced
- Benefits of dividing into cost and profit centers:
• A target available to work towards.
• Allows comparison of business performance.
• Allows comparison of staff performance.
• Work can be monitored and decisions can be made.

★ Absorption Costing
- This is also known as Full Costing.
- Absorption Costing: a method of costing in which all manufacturing costs are allocated to the product.
• The total overheads are calculated and then allocated using an allocation method.
• Overheads can be apportioned to the products based on factory and office space ratios.

- Pros & Cons of Absorption Costing:

✦ Easy to calculate and understand.
✦ Relevant for one-product businesses.
✦ All costs are allocated.
✦ Good basis for pricing decisions.
- Allocating on the basis of spaces may not be the best way.
- Random allocation methods can lead to inconsistencies.
- Comparisons can’t be made if the allocation basis is changed.
- A fall in production level will increase the overheads per unit.
- A product with positive contribution can be halted due to high overheads.
- This can lead to potential profit loss.

★ Marginal Costing
- This is also known as Contribution Costing.

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 - Marginal Costing: a costing method that allocates only direct costs to cost/profit centers — not overheads.
• This method solves the problem of choosing the most appropriate way to allocate overheads.
• Marginal cost means the cost of producing one more unit; this cost will be the variable direct cost.
• The contribution of a product is calculated from deducting its direct variable costs from the selling price.
• This isn’t the profit since the overheads haven’t been yet accounted for.
- Pros & Cons of Marginal Costing:
✦ Overheads don’t need to be apportioned.
✦ Good for multi-product businesses.
✦ Allows to see which product makes the most or least contribution.
✦ Offers can be evaluated to be profitable or not using marginal costing.
✦ Low profit margins can be implemented to boost sales since contribution will increase, increasing profits.
✦ Excess capacity can be utilized effectively.
- If all products are sold in low profit margins, then earning profits can become unlikely.

- Offering low prices can damage the “high class” reputation.

- Contribution can be considered profit and overheads can be overlooked, leading to potential loss.

33: BUDGETS (A2)

★ Budgets: An Introduction
- Budget: a detailed financial plan for the future.
• Budgets aren’t forecasts — they are plans.
• These plans are aimed by the business to fulfill.
• Preparing budgets has a number of advantages.
‣ Aids planning
‣ Effective allocation of resources.
‣ Targets can be identified and set.
‣ Coordination between departments.
‣ Monitoring and controlling activity.
‣ Modifying the plan to make it work.
‣ Measuring and assessing business performance.

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 - Budget Holder: the person responsible for planning and
achieving the budget.
- Delegated Budgets: giving authority to junior
management for preparing budgets.
• This helps to increase motivation by giving employees a
‘sense of ownership.’
• And it also helps to set realistic targets, since they are
the ones who will carry the task out.

★ Setting Budgets
- There are several ways to set budgets.
• Incremental Budgeting: this method uses last year’s
budget as a basis and an adjustment is made for the
coming year.
‣ It doesn’t consider for unexpected events.
‣ It does’t require departments to justify their budgets.
‣ They only ‘increment’ for the year.

• Zero Budgeting: setting budgets to zero each year and

budget holders have to argue their case to receive any
finance.
‣ All of the departments have to justify their budgets.
‣ This is a time consuming process.
‣ However, the changing situations are accounted for

and it can increase motivation.

• Flexible Budgeting: cost budget for each expense is made to vary if actual results vary from the budgeted.
‣ When levels of output vary, then the budget also varies.
‣ Variances are then calculated; this allows accurate variance analysis.

★ Variance Analysis
- Variance Analysis: calculating and analyzing the difference between the budget and actual performance.
- Adverse Variance: when the profit is lower than expected.
- Favorable Variance: when the profit is higher than expected.
- This can help to analyze why the differences occurred; without this data, the business can’t evaluate itself.

★ Budgeting Limitations

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 - Lack of flexibility
- Focused on the short term
- Unnecessary spending
- Training for delegated responsibility
- Budgets for every new project

34: CONTENTS OF PUBLISHED ACCOUNTS (A2)

- Intellectual Property: theamountbywhichthemarket value of a firm exceeds its tangible assets less liabilities
an intangible asset.
- Market Value: theestimatedtotalvalueofacompanyifit were taken over.
- Capital Expenditure: anyitemboughtbyabusinessand retained for more than one year, that is the purchase of
fixed or non-current assets.
- Revenue Expenditure: anyexpenditureoncostsother than non-current asset expenditure.
- Depreciation: thedeclineintheestimatedvalueofanon- current asset over time Assets decline in value for two
main reasons: normal wear and tear through usage, technological change, making either the asset, or the
product it is used to make, obsolete.
- Net Book Value: the current Statement of financial position value of a non-current asset = original cost –
accumulated depreciation.

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 - Straight-line Depreciation: aconstantamountofdepreciation is subtracted from the value of the asset each
year. original cost of asset-expected residual value expected useful life of asset (years)
- Net Realizable Value: theamountforwhichanasset (usually an inventory) can be sold minus the cost of selling
it – it is only used on Statements of financial position when NRV is estimated to be below historical cost.

35: ANALYSIS OF PUBLISHED ACCOUNTS (A2)

- Return on Capital Employed (ROCE): operating profit × 100 capital employed
- Capital Employed: the total value of all long-term finance invested in the business: it is equal to (non-
current assets + current assets) − current liabilities or non-current liabilities + shareholders’ equity.
- Inventory Turnover Ratio= costofgoodssold value of inventories.
- Day’s Sales in Receivables Ratio = trade accounts receivable × 365 revenue
- Share Price: thequotedpriceofoneshareonthestock exchange.
- Dividend: theshareofthecompanyprofitspaidto shareholders. Dividend yield ratio (%) = dividend per share
× 100 current share price Dividend per share (%) = total annual dividends total number of issued shares
- Dividend Cover Ratio = profit for the year annual dividends
- Price/Earnings Ratio = current share price earnings per share
- Earnings Per Share = profit for the year annual dividends This is the amount of profit (after tax and
interest) earned per share.

36: INVESTMENT APPRAISAL (A2)

- Investment Appraisal: evaluatingtheprofitabilityor desirability of an investment project.
- Annual Forecasted Net Cash Flow: forecastcashinflows minus forecast cash outflows.
- Payback Period: lengthoftimeittakesforthenet cash inflows to pay back the original capital cost of the
investment.
- Accounting Rate of Return (ARR): measurestheannual profitability of an investment as a percentage of the
initial investment.
annual pro t (net cash ow) initial capital cost
ARR(%) = × 100

An alternative formula is:

annual pro t (net cash ow) average capital cost

ARR(%) = × 100

- Net Present Value (NPV): today’svalueoftheestimated cash flows resulting from an investment.
- Internal Rate of Return (IRR): therateofdiscountthat yields a net present value of zero – the higher the IRR,
the more profitable the investment project is.
- Criterion Rates/Levels: the minimum levels (maximum for payback period) set by management for
investment- appraisal results for a project to be accepted.

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UNIT 6 ~
37: WHAT IS STRATEGIC MANAGEMENT? (A2)
★ Corporate Strategy
- Corporate Strategy: is a long-term plan for the entire firm which helps to achieve a specific goal.
• Corporate Strategies can include: business expansion, market entries & product development.
• There are four factors influencing corporate strategies.
‣ Availability of Resources
‣ Business Strengths
‣ Competition
‣ Main Objectives

★ Strategy & Tactics

- Tactic: is a short-term plan for achieving small objectives in order to aid the corporate strategy.
- Strategic Management: the process of managing and making objectives and decisions to help achieve goals.
• Strategic management is the highest level of managerial activity.
• Tactics are concerned with the lower levels of managerial activity.
• Tactics aid strategic management objectives.
• Strategic management includes of three stages:
‣ Strategic Analysis
‣ Strategic Choice
‣ Strategic Implementation

★ Corporate Strategy & Organizational Structure

- Strategies can affect the organizational structure of the business.
- These are examples of strategic implementations and the changes in organizational structure.
• Increase in workers due to expansion.
• Established a departmental structure to improve specialization and efficiency.
• Developed divisional organizational structures that allowed geographical regions to be independent.

★ Corporate Strategy & Competitive Advantage

- Competitive Advantage: certain circumstances that give the business a superior position from it competitors.
• Competitive advantage is usually gained from lower costs or product differentiation.
• There are three ways to develop competitive advantages:
‣ Automation
‣ Rationalization
‣ Research and Development

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38: STRATEGIC ANALYSIS (A2)
- Strategic Analysis: theprocessofconducting research into the business environment within which an
organisation operates, and into the organisation itself, to help form future strategies.
- SWOT Analysis: aformofstrategicanalysisthatidentifies and analyses the main internal strengths and
weaknesses and external opportunities and threats that will influence the future direction and success of a
business.
- PEST Analysis: thestrategicanalysisofafirm’smacro- environment, including political, economic, social and
technological factors.
- Mission Statement: astatementofthebusiness’s core purpose and focus, phrased in a way to motivate
employees and to stimulate interest by outside groups.
- Vision Statement: astatementofwhatthe organisation would like to achieve or accomplish in the long term.
- Boston Matrix: amethodofanalysingtheproductportfolio of a business in terms of market share and market
growth.
- Core Competence: animportant businesscapabilitythat gives a firm competitive advantage.
- Core Product: productbasedonabusiness’score competences, but not necessarily for final consumer or end
user.

39: STRATEGIC CHOICE (A2)

- Ansoff’s Matrix: a model used to show the degree of risk associated with the four growth strategies of
market penetration, market development, product development and diversification.
- Market Penetration: achievinghighermarketsharesin existing markets with existing products.
- Product Development: thedevelopmentandsaleofnew products or new developments of existing products in
existing markets.
- Market Development: the strategy of selling existing products in new markets.
- Diversification: theprocessofsellingdifferent,unrelated goods or services in new markets.
- Force-field Analysis: techniqueforidentifyingand analysing the positive factors that support a decision
(‘driving forces’) and negative factors that constrain it (‘restraining forces’).
- Decision Tree: a diagram that sets out the options connected with a decision and the outcomes and
economic returns that may result.
- Expected Value: thelikelyfinancialresultofanoutcome obtained by multiplying the probability of an event
occurring by the forecast economic return if it does occur.

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40: STRATEGIC IMPLEMENTATION (A2)
- Strategic Implementation: planning, allocating and controlling resources to implement the strategy.
• Without successful implementation, the strategy won’t be effective.
• Adequate resources, motivated staff and reviewing systems are all part of implementing a new strategy.

- Business Plan: a document setting out a business's objectives and strategies for achieving them.
• A business plan helps a new business to obtain finance because it clearly details the firm’s operations.
• Potential investors and creditors won’t be willing to provide finance without a business plan.
• Other than that, business plans provide a sense of direction to the entrepreneurs.
• Planning a business out reduces the overall risk of failure.

- Corporate Plan: an in-detail plan of the main objectives and strategies of the business.
• A corporate plan can include: profit targets, market share target and sales growth.
• The details to achieving these objectives can be, for example, to develop new or existing products.
• Corporate plans help to give a sense of direction and ensure that everybody in the firm work towards it.

- Corporate Culture: an organization's values, attitudes, standards & work environment.

• The following are the most commonly used cultures.
• Power Culture: concentrating power among just a few people.
• Role Culture: each member of staff has a clearly defined job title and role.
• Task Culture: based on cooperation and teamwork.
• Person Culture: when individuals have the freedom to express and make decisions for themselves.
• Entrepreneurial Culture: motivates employees to take risks, experiment and to be innovative.

- Change Management: planning and implementing a change on the firm’s current state.
• Changes occur when internal pressure or external forces increase.
• In response to these changes, the business adapts different strategies and structures.
• Change can be feared by employees due to several reasons:
‣ Fear of Failure
‣ Lack of Trust
‣ Inertia (reluctant to change)
- Business Process Re-engineering: fundamentally redeveloping the processes of a business to adapt change.
• Re-engineering can help to improve the performance of the company
- Project Champion: a person who leads the project while assisting and motivating the project’s members.
- Project Groups: groups of specialists made by the firm in order to address a problem and solve it.
• Involving a team helps to breakthrough difficult situations.
• This is possible since multiple views and solutions are presented and analyzed, leading to the best decision.

- Contingency Plan: the course of action taken by the firm if an unexpected event or situation occurs.
• A contingency plan can also be referred to as “disaster-recovery planning.”

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• Events such as natural disasters, fire emergencies or even system failures can be included in this.
• Planning out a solution them can help solve them without wasting time.
• Or, it can prevent them from happening at all (e.g. accidents on construction sites).

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