IGCSE Business Notes

CIE IGCSE BUSINESS STUDIES//0450
TABLE OF CONTENTS
2
CHAPTER 1
Business activity
7
CHAPTER 2
People in businesses
15
CHAPTER 3
Marketing
25
CHAPTER 4
Operations management
32
CHAPTER 5
Financial information and decisions
37 External influences on business activity

CHAPTER 6
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1. UNDERSTANDING BUSINESS ACTIVITY 1.1.3 Purpose of Business Activity:
• Businesses combine factors of production to produce
1.1 Business Activity goods or services to satisfy people’s wants
1.1.1 Nature of Business Activity • A business also employs people as worker and pays
• Needs: goods or services that we need in order to live them wages to allow them to consume products as well
• Wants: goods or services which people would like to 1.1.4 Added Value
have, but are not essential for living. • Added value is the difference between the selling price
• People’s wants are unlimited (you will always want and the cost of bought-in raw materials and
something) components.
• There are limited resources to produce them. Added Value = selling price – total cost
• This creates scarcity. • It is NOT the profit because added value does not
• Scarcity: there are not enough products to fulfil the include the price to pay for labour, transport etc.
wants of the population • To increase added value, a business can either:
• Resources (also known as factors of production) include: o Increase the selling price of product, while keeping the
Land, Labour, Capital & Enterprise total cost of material the same
o Land – any natural resource used in production ▪ Create a brand image
o Labour – mental and physical efforts of a human ▪ Improve packaging
o Capital – man-made goods used in production ▪ Make products more appealing by adding features
o Enterprise – the risk-taking ability of an entrepreneur ▪ Provide higher quality goods and services
• As there are limited resources, people are always forced o Decrease the total cost of materials, while keeping the
to make a choice. This means that we will be giving selling price of the product the same.
something up, this is known as opportunity cost
• Opportunity cost: it is the next best alternative that is 1.2 Classification of Businesses
given up by choosing another item. 1.2.1 Business activity in different sectors
1.1.2 Specialisation • Businesses can be put into three sectors:
• Specialisation: when people and businesses focus on o Primary sector – extraction of natural resources. Ex.
what they are best at. farming, fishing
• Division of labour is when production is split in different o Secondary sector – manufacturing and production of
tasks and each worker performs one of these tasks. A goods. Ex. car manufacturer
form of specialisation. o Tertiary sector – provides services. Ex. hairdressing,
ADVANTAGES DISADVANTAGES banking
Workers specialized in Workers become bored of • The relative importance of these sectors in an economy
certain task, increases doing the same job. depends on:
efficiency Efficiency might fall o Number of workers employed
Less time is wasted from If a worker is absent, no o Value of output produced
one workbench to other worker can do the • Deindustrialisation occurs when there is a decline in the
another, more efficiency job. Efficiency might fall importance of the secondary sector.
As the business is more Employees have to rely on • This can happen due to:
efficient, output increase each other to produce o Depletion of primary resources in home country
which may lead to products, leading to a fall in o Cheaper goods by developing countries
economies of scale productivity o Ability to spend more income on services
Workers become more 1.2.2 Mixed Economy
skilled and experience, • Has both a private sector and a public sector.
reducing the mistakes o Private Sector: Businesses NOT owned by
made government, will make own decisions on what and
how to produce. The main aim is to make profits.
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o Public Sector: Owned by the government. • Business plans assist entrepreneurs because:
Government will make decisions on what and how to o It helps gain finance. banks will ask for a business
produce (i.e. healthcare, education, defence, public plan before agreeing to a loan or overdraft for the
transport). The main aim is to provide a service to business
customers. o It forces the entrepreneur to plan ahead carefully,
• Privatization refers to the selling of a public sector which reduces risk of the business failing.
business to the private sector. • The main parts of a business plan include: name, type of
• Privatisation may occur as private sector is more organization, business aim and forecast profit
efficient, competitive and will be able to make good 1.3.3 Government Support for Start-Ups
quality goods leading to higher profits. • Governments encourage entrepreneurs to set up a
• But private sector does not have social objectives, business because start-ups:
making their products unaffordable. o Reduce unemployment, new businesses create jobs
o Increase competition, gives consumers more choice
1.3 Enterprise, Business Growth & Size o Increase output, economy benefits from increased
1.3.1 Enterprise and Entrepreneurship output of goods and services
• An entrepreneur is a person who organises, operates o Can grow further and become large and important
and takes risk of a new business venture. businesses which pay government more taxes
• Characteristics of entrepreneurs: • Governments may give support to entrepreneurs by:
o Hard Working o Optimistic o Business ideas & help, they set up support sessions
o Risk Taker o Self-Confident held by experienced business people
o Creative o Innovative o Finance, they may lend loans at low interest rates or
o Effective Communicator o Independent grants
o Governments provide grants for training employees
ADVANTAGES DISADVANTAGES to make them more efficient and productive
Independent, able to Entrepreneurs will have to o Governments allow entrepreneurs to use research
choose how to use time put their own money into facilities in universities
and money the business. 1.3.4 Business Size
Able to put own ideas Many entrepreneur’s • There are several different measurements of business
into practice businesses fail (risky) size and they all have limitations:
May become successful Lack of knowledge and MEASUREMENTS LIMITATIONS
and very profitable if experience in starting and The number of people Some businesses employ
business grows operating a business employed in the business few people but produce
Able to make use of Lost income from not being high output values
personal interests and employee for another The value of output of the high level of output does
skills business (Opportunity cost) business not mean business is big
Profits to themselves, Will have to invest their own The value of sales different businesses sell
no need to share them savings as well as find other different products
with anyone. sources of finance, which is (expensive and cheap)
time taking and expensive. The total value of capital some companies may use
• Who needs to know the size of a business? (money) invested into the cheap labor giving low
o Investors business (capital output with low-cost
o Government employed) equipment
o Competitors • No way of measuring the size is considered correct as
o Workers each method gives different answers. Businesses choose
o Bank the method they think is the best. Therefore, businesses
1.3.2 Business Plans may use more than one method.
• A business plan contains business objectives, important
details about the operations, finance, and the owners
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1.3.5 Reasons for Business Growth • Failure to plan for change – businesses need to adapt
• Some businesses want to grow because: everchanging business environment. Must take risks.
o Higher profits • Poor money management – lack of money to pay
o More status for owners and managers workers, suppliers, landlords, etc.
o can benefit from Economies of Scale (lower costs) • Over-expansion – (diseconomies of scale), management
o Larger share of its market, ‘big names' problems and finance
1.3.6 Ways of business growth • Competition with other businesses – new businesses
• Businesses can either grow by: are at more risk of failing than existing businesses.
o Internal Growth • This is because start-ups have lack of money, resources,
o External Growth poor planning & don’t have much research
• Internal Growth is when the business expands its
existing operations 1.4 Types of Business Organizations
• External Growth is when the business takes over or 1.4.1 Sole Trader
merges with another business. • A business owned by just one person. Can employ other
• There are three types of External Growth: people, however.
• Horizontal Integration – firm taking over/merging with o Useful for people who are setting up new business
another firm in the same industry o Do not need much capital to get business running
o Ex. a paper company taking over another paper ADVANTAGES DISADVANTAGES
company Easy to set up, do not Capital is usually provided
o Benefits include economies of scale and higher require a lot of money to by owner, hard to get
market share set up capital to expand firm
o Problems include diseconomies of scale and difficult (limited capital)
to control and manage the business They are their own boss, They have unlimited
• Vertical Integration – firm taking over/merging with has the freedom to choose liability (responsible for
another firm in same industry but different stage of their own holidays, work any debts of the business,
production (there is forwards and backwards) hours, prices, who to bank can take away
o Ex. paper manufacturing company taking over paper employ possessions to pay back)
selling company Close relationship with Business is likely to remain
o Benefits include profits by supplier/retailer are customers (personal small
absorbed and personal attention is given customer contact)
• Conglomerate Merger - firm merging/taking over Does not have to share No one to discuss business
another firm in a different industry. (also known as profits matters with
‘diversification’) Does not have to give They are unincorporated
o Ex. paper company taking over a food company information about the (business has same
o benefits include spread of risks and transfer of ideas. business (secrecy) identity as the owner). So,
1.3.7 Why small businesses are at greater risk business ends when
• Established by youngsters who lack managed experience owner dies
• Borrow money to begin so will have to repay whether or Lesser legal restrictions
not business is successful
• Start-ups have lesser experience and information about
1.4.2 Partnerships
the market in order to make informed decisions
• A business in which 2 to 20 people agree to own it.
• New entrepreneurs may not have a realistic picture of
• Industries such as medicine or law where you are not
the market
allowed to form a company
1.3.8 Why Businesses Fail
• Poor management – from lack of experience, poor ADVANTAGES DISADVANTAGES
choice of managers (family business), bad decisions Easy to set up, do not Profits are shared
require a lot of money
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More capital invested Partners have unlimited ADVANTAGES DISADVANTAGES
(more expansion) liability Shares can be sold. More Difficult to set up (legal
Partners are motivated Partners can disagree on capital to expand formalities).
because any losses are decisions. If one of the Owners are able to keep Shares are difficult
shared by the partners partners is inefficient, they control of company as transfer. Requires other
all lose money (conflicts) long as they don’t sell too shareholders to agree
Responsibilities are shared They are unincorporated. many shares
(focused on different parts If one of the partner dies, All shareholders have Accounts are less secret
of business) the partnership ends (no limited liability (bank can than other forms of
continuity) only take amount of business
• Requires a Partnership Agreement money invested)
• Contents of Partnership Agreement: Company continues after a Company cannot offer it
o Amount of capital invested by all partners shareholder die shares to the public
o Tasks to be done by each partner
o The way profits are shared out • Private Limited Companies are useful for family
o How long partnership will last businesses or businesses/partnerships where owners
o Arrangements for absence, retirement and how want to expand more (as you can sell shares)
partners could be let known
1.4.4 Public Limited Company (PLC)
o How any conflicts will be solved
• A PLC is similar to a private limited company, the only
1.4.3 Private Limited Company (LTD) difference is that shares can be sold to the public .
• A limited company is different from the soles traders and • Shareholders of PLCs may attend an Annual General
partnerships because it can sell shares and it is an Meeting where they may vote for the board directors
incorporated business. • AGM is a legal requirement for all PLC’s
• Company must be owned by at least 2 shareholders ADVANTAGES DISADVANTAGES
o A shareholder buys shares of an LTD company which
Opportunity to raise high Difficult to set up (legal
represent part ownership of the company
capital sums (ability to sell formalities) & accounts
o Dividend is the amount of profit each shareholder
shares to public) are even more public
gets
No restriction of buying, Danger of business being
• Shares are sold privately to friends and family
selling or transferring taken over due to public
• A private limited company has separate identity from shares shares
owners, incorporated, so company accounts are Selling shares to public is
separate from the owners’ Limited liability
expensive
• Must have: Articles of Association and Memorandum of Continuity (company
Association Difficult to control and
continues even if owner
• Article of Association – must contain the RULES in which dies)
manage the business
the company will be managed. Contains: Divorce between
o Rules for shareholder meetings Separate legal identity ownership and
o List of directors and their rights and duties management
o Procedure for issue of shares Higher status, easier to
o Voting rights of shareholders attract investors and
o Details of how accounts are recorded employees
• Memorandum of Association – must contain important High status makes it easier
information about the company: to get loans and credit
o Company name, address periods
o What the business does • DON’T GET CONFUSED, Public Limited Companies are
o Objectives and corporate aims NOT in the PUBLIC sector, they are in PRIVATE sector
o Number of shares to be sold
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1.4.5 Joint Venture Lesser decisions to be
• A joint venture is when two or more businesses start a made as the company is
project together sharing capital risks, and profits already established
ADVANTAGES DISADVANTAGES
Costs are shared, good for Profits have to be shared if Franchise agreements last 5 – 20 years, if franchisee
expensive projects project is successful cancels the agreement early there may be large fines
Shared knowledge of two Might have disagreements 1.4.7 Risk, Ownership & Limited Liability
businesses over important decisions • Risk - the uncertainty of profits or danger of loss, events
Risks are shared Different methods of that could cause business to fail
running business • Ownership – who owns the business (partnership =
1.4.6 Franchise partners, LTDs and PLCs = the shareholders)
• A franchise is an agreement of a business based upon an • The people with risk are usually the owners
existing brand/business • Liability – how much the shareholders of a company are
• The franchisor is the main business/brand liable for the debts in the business
• The franchisee is the individual to start up franchise o Limited Liability – liability of shareholders is limited
• In a franchise, the franchisor allows the franchisee to to the amount of money they invested (PLC & LTD)
trade under its name and see its products for a fee o Unlimited liability – owners of business are held
responsible for all the debts of the business (not just
ADVANTAGES TO THE DISADVANTAGES TO THE their investment) (Sole trader & partnerships)
FRANCHISOR FRANCHISOR 1.4.8 Public Sector
Poor management of one • The public sector includes every business owned by the
Earns money as franchisee outlet may lead to bad government. Also known as public corporations
buys a license reputation for the entire • Businesses in the public sector are public services, i.e.
business education, transport, hospitals, education and police
Profits retained by • Usually these businesses have been nationalized (used
Quicker brand expansion
franchisor to be private sector but government bought it)
Franchisee is responsible • Capital comes from taxes, by tax payer
for all management of the ADVANTAGES DISADVANTAGES
outlet Reduces wastage of Low efficiency due to lack
All products sold obtained resources (if a monopoly) of competition
from franchisor, lesser risk Allows access of essentials Easily manipulated by the
of damaging brand to everyone government to exploit
reputation citizens
Continued even if in losses Not flexible as profit is not
ADVANTAGES TO THE DISADVANTAGES TO THE a main aim
FRANCHISEE FRANCHISEE Keeps in mind social costs Will have to be subsidized
Franchisor pays for Less independence to of decisions (non- if in losses, opportunity
training employees make own decisions profitable) cost
Unable to meet local
Franchisor pays for
changes in demand of 1.5 Business Objectives and Stakeholder
advertising
customers Objectives
All supplies received by % of annual takeover 1.5.1 Importance of Business Objectives
franchisor given to franchisor • Business objectives are aims or targets a business works
Quick rise in sales as brand towards
Expensive license fee
is well-known • Benefits of having business objectives:
• Employees have a clear target to work towards
o Decisions made keeping in mind objectives
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o Clear & measurable objectives will make sure the • Each stakeholder group has different objectives for the
entire organization works towards the same goal performance of the business
o Managers will be able to compare performance • Owners – features are they invest capital, receive profits
• A business objective maybe changed if economic if business succeeds and bear risks and losses if it fails.
conditions change or one objective has already been Their objectives include increase in returns to
achieved. shareholders and growth
1.5.2 Business Objectives • Workers – features are they follow instructions by
• Private sector business objectives: managers, need to be trained and maybe made
o Business Survival - Adjust to business environment, redundant if not satisfied. Objectives include job
change price of products if necessary. Used by new satisfaction, job security, follow contract of employment
businesses or by existing companies during recession • Managers – their features include controlling other
or high competition workers to ensure efficient production, make decisions
regarding expansion. Objectives include higher pay,
o Generating profit – pay a return to owners or
growth, high status
provide finance to invest further in business
o Returns to shareholders - discourage shareholders • Whole community – features are they have a huge
from selling their shares. Also, encourage people to impact of any/all business decisions. Objectives include
buy more shares, increasing capital. Higher the share provide jobs, reduce environment damage and provide
price, better brand reputation. Can be increased by safe products
increasing profit or increasing the share price • Customers – features are very important and necessary
o Growth of business – increase salaries and make for business success. Objectives include provision of
jobs more secure, economies of scale, higher status reliable products, value for money, good quality, good
and prestige, open new possibilities and spread risks. design and good service
Only achieved if customers are satisfied with the • Government – features are they are responsible for the
product economy and pass laws to protect its citizens. Objectives
o Market Share – the proportion of the total market include provide the right taxes, employ more people,
sales by one business, gives good publicity, more increase country’s output
influence over suppliers and customers • Banks – features are to provide loans when needed.
Market share% = company sales/total sales * 100 Objectives are to get loan and interest repaid on time
o Service to community – provide jobs, support when due
disadvantaged groups in society, protect • Since different stakeholders have different objectives, it
environment may cause conflict, to try to please all the stakeholders
Social enterprises are privately operated businesses • For example: customers want cheap products but
whose main aim isn’t to make profits. workers want higher salaries.
Social – provide jobs and support vulnerable groups • Therefore, managers have to compromise to decide
Financial – make profit to reinvest back which objectives are best for the company
Environmental – protect environment 1.5.4 Public Sector objectives
1.5.3 Stakeholder objectives • Financial – meet government set targets
• A stakeholder is any person with a direct interest in the • Service – help the public
performance of a business • Social – reduce unemployment
• There are two types of stakeholder groups:
o Internal Stakeholders work/own the company 2. PEOPLE IN BUSINESS
o External Stakeholders are outside of the business 2.1 Motivating Workers
INTERNAL STAKEHOLDERS EXTERNAL STAKEHOLDERS 2.1.1 Importance of a well-motivated workforce
Owners Consumers • It is very important for a business to have a well-
Managers Government motivated workforce
Workers Banks • The main reasons why people work:
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o Money: to pay for the basic needs for life and some o Safe/security Needs – protection against danger &
wants poverty. Having fair treatment
o Security: to know that you are safe (financially) (fulfilled by having job security)
o Affiliation (Social needs): to feel part of a group, meet o Social Needs – friendship, belonging in a group
people, make friends (fulfilled by having colleagues at work)
o Self-importance (esteem): to feel that you are o Esteem Needs – having status and recognition
important and that the job you do is important (fulfilled by being recognised for good work)
o Job Satisfaction: to feel pleasure that you have done a o Self-actualisation – achieving your full potential,
good job feeling that you have done a good job
• Motivation – the feeling that makes employees want to (fulfilled by being promoted & being given more
work hard and effectively in a business responsibility)
• Well-motivated workers → high productivity → o Maslow’s theory also suggests that each level in the
increased output →higher profits hierarchy (starting from Physiological needs) needs to
• Unhappy workers → do not work effectively → low be achieved before moving on to the next
output →no/ lower profits • FEDRICK HERZBERG
2.1.1 Key Motivational Theories o Also known as “the 2-factor theory”
• F.W. TAYLOR o Humans have two sets of needs:
o “All individuals are motivated by personal gain” ▪ Basic animal needs (called ‘Hygiene’)
o Also known as “theory of an economic man” ▪ To be able to grow physiologically (called
o Had a mechanical approach rather than human. ‘Motivator’ needs)
o This means that if the workers are paid more, they will ‘Motivator’ Factors ‘Hygiene’ Factors
work more effectively
• Achievement • Status
o By breaking down worker’s jobs into simple tasks, you
could calculate how much output they could do in a • Recognition • Security
day • Personal Growth • Work Conditions
o Taylor’s idea was that if the workers produced more, • Advancement/ • Relationship with boss
they would receive a bonus Promotion & subordinates
o But the problem with this approach is that Taylor • Work itself • Salary
believed everyone is ONLY motivated by money, which o The presence of hygiene factors doesn’t motivate
doesn’t, always stand true employees, but their absence demotivates them.
• ABRAHAM MASLOW
2.1.3 Methods of Motivation
o Also known as “Hierarchy of Needs” – a pyramid
• There are 3 Factors that motivate employees:
showing the different types of needs and how some
o Financial Rewards
are more important than others
o Non-Financial Rewards
o Job Satisfaction
• Financial Rewards/Motivators include:
o Wages
▪ Wage is a payment given weekly
▪ Workers are paid quickly, so don’t have to wait too
long to receive money
▪ Given overtime for extra hours worked
▪ Thy must be calculated every week, which is
expensive
▪ Wages clerks need to be appointed
o Time Rate (payment per hour, i.e. 10$/hour)
o Physiological Needs – food, rest, shelter
(fulfilled by receiving wages) ▪ Paid according to number of hours worked
▪ Easy to calculate
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▪ Good and bad workers are paid the same ▪ Improves loyalty as there’s a greater sense of
(demotivating) belonging
▪ Supervisors may need to be appointed to keep a o Non – financial Rewards (fringe benefits) -
check on workers ▪ Company Car
▪ Clocking-in system may be required ▪ Discounts of products
o Piece Rate ▪ Health care
▪ Workers are paid depending on the quantity of ▪ Children’s school paid for
products made ▪ House is paid for
▪ Given above basic pay ▪ Free trips abroad (holidays)
▪ Encourages workers to work faster o Job satisfaction
▪ May only focus on quantity and ignore quality ▪ Enjoyment derived from feeling that you have done
▪ Workers focusing on quality may earn less a good job
(demotivating) ▪ Pay
o Salary ▪ Promotion
▪ Paid monthly ▪ Status
▪ No overtime ▪ Training
▪ Salary = annual income/12 ▪ If these things are kept in mind employees will be
▪ Payment needs to be calculated only once a well-motivated
month o Job rotation
o Commission ▪ Working, swapping around and doing a specific job
▪ Given to sales staff for a limited time period
▪ Higher sales, higher money ▪ Increases variety of work
▪ Encourages people to sell more ▪ Easier for managers to cover up if 1 employee is
▪ If too persuasive may have negative effects on absent
customers ▪ Makes the job more interesting
o Profit sharing ▪ Job enlargement
▪ It involves giving employees a share of profit, above ▪ Where extra tasks of similar level of work are added
basic pay to a person’s job description
▪ Increases motivation ▪ Extra tasks shouldn’t add extra work
▪ Other profits may be given to shareholders ▪ Increases variety
o Bonus ▪ Higher job satisfaction
▪ A lump sum amount of money is given to workers o Job enrichment
who have done a good job ▪ It involves adding tasks that require more skills
▪ Paid yearly ▪ Higher responsibility
▪ Performance related pay ▪ Higher job satisfaction
▪ Employee pay is related to the effectiveness of the ▪ Higher productivity
employee
▪ Mostly used in service sector, when output can’t be 2.2 Organisation and Management
easily measured • Organizational structure – the levels of management
▪ Often used as a method of appraisal and division of responsibilities within a company
▪ Appraisal is when an employee’s immediate 2.2.1 Organizational charts
supervisor observes their work and discusses their • Organisational Charts show a clear structure of the
training needs business and make it easy to see which part of the
o Share ownership company does what
▪ Shares of a company are given out to employees • Features –
▪ Encourages them to work harder o It is a hierarchy
▪ Share price and value may increase o Organised into departments
o Shows the chain of command and span of control
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• Benefits – o Communication is faster and more accurate
o The chart shows how everybody is linked in the o Top managers are more in touch with subordinates
organization because there are less levels
o Gives a sense of belonging o Wider span of control means employees feel trusted
o Employees know their position and take more decisions by themselves
o It shows how departments are linked o Higher job satisfaction
o All employees are aware from which communication • Disadvantages:
channel will they receive messages o Difficult to control
• Example of organizational Chart: o Inefficient supervisors
o Communication problems
o Difficult to motivate workers
o Sometimes there may be a conflict between
departments (i.e. marketing wants to buy something
but finance does not think it is necessary)
• The supervisors working in these departments are Line
managers – they have direct responsibility over people
below them in the organisational chart
• You also have Staff Managers – which are specialists in
certain areas to provide support and information to line
managers
2.2.2 Chain of command and span of control

• Chain of command - The structure in an organization
which allows instructions to be passed down from senior
management levels to lower levels of management
• Span of control - The no. of employees working directly
2.2.3 Role of Management
under a manager
• All organisations have managers. Leaders, director,
• There are two types of organizational structures of a executive are all different names, but they are all
business: managers
o You can have a ‘tall’ structure, with a long chain of
• The functions of managers include:
command
o Planning – setting aims or targets. It will give the
organisation a sense of direction.
o Organising – delegating tasks. Organising people and
resources effectively. Employees must have the
required resources on time to do such tasks effectively.
o Co-ordinating – making sure departments work well
with each other and have good communication. Ensure
o You can have a ‘wide’ structure, with a short chain of all senior managers work together to achieve the main
command business goals.
o Commanding – making sure the workers are keeping
to targets and deadlines by guiding and delegating
tasks
o Controlling – measuring and evaluating work of
• The advantages to have a short (and wide) structure is
employees and verify they are on target
that:
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• Without clear and effective management, a business will leaves them to make their own decisions.
lack: Communication becomes difficult.
o A sense of control and direction 2.2.6 Trade Unions
o Control of employees • Trade union is a group of workers that join together to
o Organization of resources protect their interests
o Coordination between departments • A trade union is like a pressure group
2.2.4 Delegation • Employees usually have the same interests (i.e., good
• Delegation involves giving a subordinate the authority to wages, pleasant work environment, etc)
perform particular task. • If an employee wants to join a trade union, they must
• However, if the employee does a bad job, the manager pay a yearly subscription for the benefits
must accept the responsibility for it 2.2.6 Trade Unions
• Delegation is important because: • Trade union – a group of workers that join together to
o Managers cannot do every job by themselves protect their interests
o Managers can then measure the success of the • A trade union is a pressure group
employees • Employees usually have the same interests (i.e., good
o Work becomes more interesting for subordinate, wages, pleasant work environment, etc.)
increases their motivation • If an employee wants to join a trade union, they must
o Makes employees feel trusted and important pay a yearly subscription for the benefits
o Gives workers greater career opportunities and • Benefits from a trade union usually include:
chances of promotion o Improved conditions of employment (such as wages,
• However, some managers do not delegate tasks holidays, hours of work)
because: o Improved work environment (health & safety,
o They might be afraid the subordinates will fail and heating, noise)
manager wants to control everything o Advice/support if member thinks they have been
o Manager might also feel threatened that subordinate unfairly fired, mistreated, etc.
o Employment in case of a closed ship union
will do a better job than them
• Disadvantages:
• Delegation means that once the task is completed, the
o Costs money
manager will have less direct control
o May required to take industrial action
• This means the trust for the workers is increased by the
manager 2.3 Recruitment, Selection and Training
• Therefore, there needs to be more trust in workers in
2.3.1 Recruitment and Selection
order to reduce control over them
• Recruitment – the process from identifying that a
2.2.5 Leadership Styles business needs to employ someone, to the point where
• Leadership styles are the different approaches to deal applications have arrived at the business
with people when with authority • Recruitment is one of the roles of the Human Resources
• There are THREE TYPES OF leadership styles: department
o Autocratic Leader: where the manager expects to • Recruiting usually happens when an employee leaves a
be in charge of the business and expects to have job, a business is starting up, or it wants to expand
their orders followed with no questions asked. One- • Recruitment process:
way communication is used. o A job analysis is done to identify the tasks and
o Democratic Leader: where the manager allows the
responsibilities to be carried out by the new employee
subordinates to be involved in the decision-making
o Once the details of the job are gathered, a job
process. Information is openly discussed and two-
way communication is used. description will be made, outlining these duties.
o Laissez-Faire Leader: Where the manager makes o Then a job specification is created, which outlines the
broad/general objectives for the employees and requirements, qualifications, and expertise for the job
o Then the job is advertised
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▪ Internal – when the vacancy is filled by someone o Employees are less likely to be trained because they
who is an existing employee of the business might see it as temporary and don’t want a
o It is cheaper, motivates other employees, promotion
potential of the employee is already known. o Takes longer to recruit many part-time workers than
The employee is aware of the working a couple full-time workers
conditions and other workers, lesser time o Communication problems may arise
taken for induction training o Might be less committed to the company
o But no new ideas come into the business and 2. Full-time workers
there may be jealousy and rivalry amongst • Workers working for more than 35 hours a week
employees • Advantages:
▪ External – when the vacancy is filled by someone o Higher training and chances of promotion
who is not an existing employee and will be new to o Lesser time taken in recruitment
the business. o Highly committed to the business
o New ideas come into the business. There’s o Lesser communication problems
wider choice of workers • Disadvantages:
o But it is expensive and time-taking and may o No flexible working hours
demotivate existing employees o Expensive
▪ Ads can be place in: o May demand higher pay as poor work-life balance
o Local newspapers: usually for unskilled and 2.3.3 Training
semi-skilled workers. • Training is needed when:
o National newspaper: usually for senior o New technology is employed
positions which requires high skills. o Less supervision is required
o Specialist magazines: used for technical people. o Need to increase efficiency
o Government job centers: usually for unskilled o Need to increase chances of internal promotion
and semi-skilled workers. o New skills needed
o Recruitment agencies: they keep details about o Need to lower accidents
qualified people and are approached by • There are three types of training:
companies o Induction Training – where the employee is given an
• Selection process: introduction on the company’s procedures and
o Candidates start by sending their application forms. customs, and is introduced to their co-workers
They send in their CV’s and resumes outlines why the ADVANTAGES DISADVANTAGES
applicant wants the job • Employees settle into • Time consuming
o Short-listed applicants are called for interviews. These their job quickly • Worker is being paid
may be done one-on-one, two-on-one talks, skill tests, • Workers make fewer while not doing work
aptitude tests, etc. mistakes • Delays the start of work
• May be a legal for the employee
2.3.2 Types of Workers requirement
1. Part-time workers o On-the-job Training – where the employee does the
• Workers working for less than 35 hours a week job while being supervised by a more experienced
• Advantages: worker, giving tips, suggestions, and help
o Work hours are flexible. ADVANTAGES DISADVANTAGES
o Business can extend the opening/closing hours • Employee does not need • Trainer won’t be as
o Employees can just work at busy times to be sent away so productive because they
o Cheaper for the employer than employing a full-time cheaper than off-the-job are teaching employee
worker training • Trainer might have bad
o May agree for a low salary as good work-life balance
• There is still production habits and pass on to
• Disadvantages: from worker while employee
training
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• Employee is trained • Not recognized training • This means that businesses need to be careful when
exactly how the qualifications outside the advertising a job.
company want business • Companies must treat all applicants for the job equally, if
• Individual attention is not, they will be fined and prosecuted
given • Employees of a business have legal right that must be
o Off-the-job training – where the employee is trained protected, which includes:
away from the workplace, normally by specialized o Unfair discrimination at work/when applying: i.e.
trainers. when employers discriminate unfairly against
ADVANTAGES DISADVANTAGES employees or applicants due to their race, gender,
• Lots of skills are taught • Expensive to send religion or color.
• Trainings may be off- employees off to expert o Health and safety: there are laws that make sure that
work hours, worker will trainings employees are protected from dangerous machinery,
still work • Professional training that they are provided safety equipment & clothing,
• Employees become gives employees hygiene conditions, suitable temperatures, provide
versatile additional qualifications, breaks.
• Taught by expert makes it easier for o Unfair dismissal: when the worker is dismissed
trainers, more efficient employee to find unfairly (i.e. from joining a trade union, being
another job pregnant, or when given no warnings before being
• Workers are being paid dismissed), the worker can take their case to an
but not doing any work industrial tribunal to see both sides of argument.
2.3.4 Situations where workforce needs to be o Wage protection: an employee in a business should
reduced have a contract of employment, containing wage rate,
• Workforce planning is establishing the workforce frequency of wages and deductions are made from
wages (from tax). In some countries, businesses pay
needed by the business for the foreseeable future in
whatever they want, because unemployment is high,
terms of no. of employees and skills required.
so they offer very low wages.
• Reducing the no. of employees might be important as:
o Governments take action by creating a legal minimum
o Decrease demand
wage.
o Automation
• Minimum wage
o Closure of shop
o The minimum amount businesses must pay its
o Mergers
o Relocation workers.
o Advantages –
• Reduction of employees:
▪ Prevents exploitation of workers
o Redundancy:
▪ Unskilled workers are paid well, lower poverty
▪ When an employee is no longer needed and so
▪ Decreases unemployment
loses their job. it is not due to any aspect of their
o Disadvantages –
work being unsatisfactory.
▪ Higher costs, higher prices
▪ The factors affecting which workers to make
▪ Redundancy
redundant include no. of skills available,
employment history, length of time employed in
2.4 Internal & External Communication
business.
• Effective communication is important so that the
o Dismissal:
information sent in the message is received, understood
▪ A worker is told to leave due to their behavior,
and acted upon as it should
work being unsatisfactory.
• It is important to businesses because if it is not
2.3.5 Legal Controls over employment issues understood, it can lead to serious consequences
• There are many laws in countries, that ensure that
2.4.1 Types of communication
everyone has equal employment opportunities
• There are two types of communication in businesses:
regardless of race, gender, religion, age etc.
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o Internal Communication – communication between • Quick and cheap • No body language to
employees of the same business emphasize message
o External Communication – communication between • Use of jargons/difficult
the business and other businesses and individuals language may not be
• External communication has to be especially efficient as understood
it establishes the image and the efficiency of a business • Visual methods – diagrams, charts, videos, PowerPoints
• Effective communication involves: ADVANTAGES DISADVANTAGES
o The transmitter/sender sending a message to pass on • Information presented • No feedback and needs
information in more appealing way; other methods of
o A medium of communication – the method for people will be more communication to go
sending message (i.e. e-mail, phone, etc.) interested to look at it with it
o The message being sent to the receiver • Can be used to make • Graphs and charts may
o The receiver confirming that the message has been written messages be difficult for people to
received and responds to it (feedback) clearer, to illustrate the understand, message
• There are two types of communication: point may be misunderstood
o One-way communication – where the receiver cannot • Factors influencing which communication method to
reply to the message (i.e. posters). The sender is not choose:
sure whether or not receiver understood as there is no o Speed
way to give a reply/feedback. o Cost
o Two-way communication – where the receiver can
o Message details
respond to the message, could be just confirmation
o Receiver
that message was received. Motivates workers when
used as sense of belonging increases. o Leadership style
• The methods of communication include: o Importance of feedback
• Verbal methods – meetings, telephone, video o Importance of written record
conference 2.4.2 Communication Barriers
ADVANTAGES DISADVANTAGES • Communication Barriers – things that prevent efficient
• Information given out • If talking to many people, communication
quickly & efficient way it’s hard to tell whether • Problems with the sender:
to communicate with everyone got the o Usage of difficult language (jargons)
many people message o Speaks too quickly/not clearly
• Opportunity for • Not good for accurate o Communicates wrong message
immediate feedback messages and if a • Overcome by: using understandable language, making
• Message is reinforced permanent record of the sure message is a clear as possible by asking questions to
by the speaker’s body message is needed make sure message was understood
language • Time taking if many • Problems with the medium:
people present o Message may be lost/not seen by receiver
• Written methods – sender creates e-mails, memos or o Wrong medium used
letters, including the use of Information Technology o Passes through a long chain of command – it might
ADVANTAGES DISADVANTAGES get distorted
• Message can be • Might lead to too many • Overcome by: sender asking for feedback/receiver
referred to in the future e-mails and ‘information always sending feedback that message is received,
“hard evidence” overload’ selecting the appropriate channel to send message
• Easy to explain and • Two-way communication • Problems with the receiver:
understand is difficult o Not listening/paying attention
complicated messages • Hard to check if message o Receiver doesn’t trust the sender/doesn’t want to do
• Can be copied and re- has been received it
sent to many people
Page 14 of 43
• Overcome by: emphasizing importance of message, ask • Gain information about customers –
for feedback to ensure it was understood, using direct o They need to gain information about the changing
communication needs of the customers.
o They need to understand why customers buy their
3. MARKETING products and how they use them.
• Anticipate changes in customer needs –
3.1. Marketing, Competition & Customer o Identify new trends in customer demands or gaps in
3.1.1 The marketing department the market.
1. Sales department:
3.1.3 Success of a marketing department
• Responsible for sales.
• Successful marketing department can lead to:
• Usually have separate sections of different
regions. o Increase customer awareness
2. Market research department: o Increase market share
• Responsible for finding out customer wants, o Improve the image of the brand
market changes and competitors’ actions. o Target a new market segment
• This information is used to decide pricing o Enter new markets
levels, sales strategies, and development of new o Develop new products/ improve existing ones
products. 3.1.4 Understanding market changes
3. Promotion department: • Markets change because consumer spending patterns
• Deals with organizing advertisements. change, this might be due to:
• Ads are made according to marketing budget. o Trends and fashions change – for a period of time it
• They have to decide which means of marketing might be fashionable to have a specific product (i.e.
would be useful and the amount of money
Fidget Spinner) but a month later no one buys them
spent.
o Advancement in technology – new products provide
4. Distribution department:
the latest technology so older versions (i.e. iPads or
• Responsible to transfer the products to the
market. computers) don’t have high sales
o Unemployment/Wages – Economies with high
3.1.2 The role of marketing
unemployment rates/low wages will not have high
• Identify customer needs –
o They find out what kinds of products or services do the sales of expensive products
customers want. o Ageing population – different ages are interested in
o Even try to find the price they are willing to pay and different products (i.e. anti-ageing creams)
what all after sales services do, they expect. • Businesses must identify these changes and respond in
order to stay successful
• To satisfy customer needs –
o In order to achieve sales, a company must try to fulfil • Some markets have become more competitive because:
o Globalization – products are sold all over the world
all the needs of a customer. customers want right
o Transportation – it is cheaper, quicker and easier to
products, right price.
send products around the world now
• Maintain customer loyalty –
o Internet – customers can now search for products or
o They need to build customer relationships.
services and buy from somewhere else around world
o They need to keep close links with their consumers
and identifying any changes in taste, expectation and 3.1.5 How can a business stay competitive
being able to respond to them. • For a business to stay competitive, it must:
o They need to keep their existing customers happy o Maintain good customer relations:
rather than concentrating on just attracting new ones. ▪ It has a key role in continuing to meet consumer
o Attracting new customers is also much more expensive needs.
than retaining the old ones. ▪ Also provides information to market research.
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▪ It is cheaper to retain existing customers that to • A market can be segmented by:
gain new customers. o SOCIO-ECONOMIC group – grouping people according
o Keep improving the existing product to their income levels
▪ Very important if competitors have done so o Location – where people live
▪ They must make people aware of the differences o Gender – products for men and women differ
between their products and its competitors o Lifestyle – how many children a person has, religion,
▪ The business maybe known for its differentiated habits, etc.
products. o Age – different age groups prefer different products
o Bring out new products to keep customers o Product usage – consumer products have a different
o Keep costs low to maintain competitiveness market than industrial-used products
3.1.6 Markets • Benefits of market segmentation:
• Market – the total number of customers, potential o Business aims all its marketing efforts to the specific
customers and other sellers of a product/service segment, making marketing costs efficient
• There are two types of market: o Since less money is spent on marketing, more profit
o Mass market – where there are many sales of a o Identify a market segment whose needs are not being
product type. Product is designed to appeal to the fully met and fill the gap (first in market)
entire marketing. All marketing campaigns are also o Helps in making products which closely meet
intended to appeal to all customers. consumer needs. Increases sales and profits
o Niche market – a SMALL (usually specialized) part of a
mass market. Small firms find it easier to sell in niche 3.2 Market Research
markets as they can identify gaps in the market. • Market Research – gathering information about
consumers' needs or preferences in a market
MASS Market:
ADVANTAGES DISADVANTAGES 3.2.1 Types of businesses
• There are 2 types of businesses:
• Sales are very high • Lots of competition
• Can benefit from • High costs of o Product-oriented business –
economies of scale advertisement ▪ They produce the product first and then try to
• Opportunities for growth • Many similar products so persuade the consumer to buy them.
(large sales) it may not meet specific ▪ They often produce daily necessities and may or
• There are many needs of all customers may not have their own brand name.
variations of products so ▪ They are mainly concerned with the price and the
risk is spread quality of the product.
NICHE Market: ▪ Sometimes when new technologies are developed,
ADVANTAGES DISADVANTAGES they make new products without investigating the
• Avoid competition with • Small – limited number of products.
big businesses sales (few opportunities o Market-oriented business –
• Specific needs of for growth) ▪ Businesses which cannot afford to produce a
customers are focused. • Usually specialize in just product and hope that they will sell, without
Advantage over mass one product, if product carrying out market research.
market has low demand, it will ▪ They conduct market research to find out the needs
fail (higher risks) and wants of the customers.
3.1.7 Market Segmentation ▪ Market orientated businesses better survive and are
• Market segments – a sub-group of a market in which the able to become successful as they are prepared for
consumers have similar characteristics or preferences changes in customer wants
▪ They are able to grow quickly.
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3.2.2 Need for market research o Disadvantages:
• Market research is important because a business needs ▪ If not filled properly, may mislead the business as
to know how many people would be willing to buy the there may not be accurate answers.
product; to see how profitable it would be. ▪ Lots of time and money needed.
▪ Collating and analyzing data also need a long time
3.2.3 Primary research
• Interviews
• PRIMARY RESEARCH (field research)
o Advantages:
o It is collection/ collation of data. ▪ The interviewer will be able to explain the
o Involves direct contact with customers. questions if not understood.
o It is planned and carried out by people who want to ▪ Detailed information about the interviewee can be
use the data is first hand. gathered.
o Expensive o Disadvantages:
o Used for a specific purpose ▪ The interviewer may lead the interviewee to
• Types of primary research: answer in a certain way.
o Questionnaires ▪ Time consuming
o Interviews ▪ Expensive
o Focus groups • Samples
o Observation o When deciding who to ask to fill a questionnaire or
who to interview, a sample would have to be
The process of primary research
selected. It can be
• Purpose of market research
o A random sample – It means that every member of
o What do they need to find out?
the population has a chance to be selected. They are
o What information is needed?
selected at random. Everyone has a chance to be
• Decide on the most suitable method of market research
picked.
o Will more than 1 method be needed?
o A quota sample – People are selected on the basis of
o The cost and time of conducting the research?
certain characteristics. They are able to find out views
• Decide the size of sample and who is going to be asked? of a specific group.
o How big the sample size needs to be to keep costs
• Focus groups
low?
o It is where groups of people agree to provide
o Different age n income groups
information about a specific product.
• Carry out the research o It will help sales and development.
• Analyze the data and results o These groups may even test a product explaining the
o Who does it need to be shown? likes and dislikes
o Produce a report of the finding o Can provide detailed information
• The summary of the research o Time consuming
o What actions are necessary o Expensive
Methods of primary research o May be biased
• Questionnaires • Observation
o They may be conducted face to face, by telephone, o Most inexpensive way of gathering information.
internet. o Gives only basic figures
o Online surveys may also be carried out. o Doesn’t include reasons for the choices
o Advantages: o It can be in the form of:
▪ Detailed qualitative information can be gathered. o Recording
▪ Customer’s opinion can be obtained. o Watching
▪ Online surveys may be cheaper and easier to o Audits
collate the results.
3.2.4 Secondary research
▪ They can be linked to prize draws and encourage
• Information that has already been collected and is
people to fill them.
available for others
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• This information can be obtained either from INTERNAL 3.3 Marketing Mix – Product
SOURCES or EXTERNAL SOURCES. • Marketing Mix – all of the activities that are involved
• Internal Sources – within the firm’s own records: sales when marketing a product or service
departments, customer records, finance department and • The marketing mix can be summed up as the 4 Ps:
CUSTOMER SERVICE department o Product
• External Sources – o Price
o Government statistics – a detailed source of general o Place
information. o Promotion
o Newspapers – useful articles about the general
You should always mention the 4 Ps when
economy state, etc.
answering question about Marketing Mix!
o Trade association – information about businesses in
the industry (competitors).
3.3.1 Product
o Market research agencies – specialist agencies who
• The product is the most important element in the 4 P’s
carry out the research on company’s behalf is
commission is paid. • Most companies are market oriented and spend most
o Internet- easily accessible source. Paper based lots of money in market research
• Some products are sold to consumers and some to other
sources can also be found.
businesses.
BENEFITS LIMITATIONS
• They are usually grouped:
• Cheaper than primary as • You do not get specific
o Consumer goods
research has already results for a certain
o Consumer services
been done by others product or service, you
o Producer goods
• There is some get broad results
o Producer services
information (i.e. • Data may be outdated
• Different types of goods are marketed, produced and
economic forecasts or or incorrect as it was
developed in different ways.
population size) that collected by others
• Promotion of a consumer goods will be much different
can’t be obtained by • Might not have the
than that of a producer good
primary research specific information
• Producing the right amount of product is an important
• Maybe biased
part of marketing mix:
3.2.5 Accuracy of market research o They need to satisfy customer needs and wants.
• Regardless on which type of research a business chooses o It must be of right quality and price
to use, the accuracy of the research data depends on: o Cost of production must enable a price that is
o How carefully the sample was drawn up suitable for customers as well makes a profit to the
o How the questions in questionnaires/interviews business.
were written to make sure honest answers were o Design of the product is very important. The quality
given of the product must match the price.
o The sample itself and its size. By using quota 3.3.2 Development of new products
sampling you might get more reliable results
• Benefits –
o The bias – some secondary research will be biased
o USP – unique selling point
(i.e. articles on newspapers) which means the
o Diversification
information might be unreliable
o Allows business to expand into new and existing
o Age of the data – older data might be inaccurate
markets
3.2.6 Representation of data from market research • Drawbacks –
• A table or tally chart o Costs of carrying out market research and analyzing
• Pie chart the findings
• Line graph o Cost of producing trail products including waste
• Bar graph materials
• Diagram o Lack of sales if target market is wrong
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o Loss of company image if the product fails to meet • Saturation - there are stable profits. No new
consumer wants competitors. Competitive pricing is used and prices are
3.3.3 Importance of brand image reduced. Profits begin to fall as sales reduce.
• Selling a product directly to a consumer is much easier • Decline – the product is removed out of the market as
and helps them inform customers the products quality. there are new products introduced and the business
• Nowadays, mostly manufacturers sell them to retailers might be in losses. Advertising is stopped.
who the pass it on to the end consumers.
• To make customers know about the product the
manufacturers give their product a unique name, brand
name, and advertise relating to the brand.
• Branded products are sold at high rates as they are
expected to be of high quality.
• Customers may have brand loyalty if they like the
product’s quality and price.
• Brand image is very important when attracting new How stages to plc influence marketing decisions
customers. • Introduction –
• A brand will have a whole image which will be reinforced o Product – newly launched product
by advertisements. o Price – price skimming or penetration pricing
o Place – limited range of exclusive shop (if price
3.3.4 Role of packaging
skimming is used)
• Having the right packaging is very important as it plays a
o Promotion – informative advertising
key role in attracting customers.
• Growth –
• Packaging gives production to the product and doesn’t
o Product – remains the same
allow it to get spoilt.
o Price – raise prices is penetration pricing was used
• It allows a product to be easily used.
o Place – increase the number of outlets, e-commerce
• It needs to be suitable for transportation.
o Promotion – establish a strong brand identity by
• It is also used for promotion.
promotional activities.
• The color and shape help attracting the customer. • Maturity/saturity –
• Labels on products carry vital information. o Product – plans for product changes begin
• It promotes the brand image. o Price – lower prices to competitive
3.3.5 Product life cycle o Place – full range of distribution channels used
• First the product is developed. The prototype will be o Promotion – sales promotion techniques to
tested in the market. Before its launch. There are no encourage repeat purchases
sales during this time. • Decline –
• Then it is introduced or launched in the market. Sales at o Product – changes made to extend the life cycle
first will grow slowly as not everyone is aware about the o Price – lower prices
product. Informative advertising will be used to promote o Place – sell through low-cost outlets
the product until it is well – known. o Promotion – re launch the product as an extension
• Sales will start to grow rapidly. The advertisements strategy
change to persuasive ads to encourage brand loyalty. 3.3.6 Extending product life cycle
Prices might be reduced at this time as there are • Introduce new variations into the original product
competitors. Profits are made and are used to cover • Sell into new markets
development costs. • Make small changes to the product’s design, cover, color
• Maturity – sales increase slowly. There is high • Sell through additional retail outlets
competition and lots of advertisements have to be done. • Introduce a new, improved version of the old product
Profits are the highest.
• Use a new advertising campaign
Page 19 of 43
3.4 The marketing mix – Pricing o May raise sale, if they were falling
3.4.1 Price o Low profits, low sales revenue
• It is important to select an appropriate price to • Psychological pricing
complement a brand image; a value for money brand o It is when price is set to match consumer
should have a low price. expectations and perceptions of a product
• The business must constantly monitor what its o It may involve charging high prices for high quality
competitors are charging for their products to make sure goods
its prices remain constant. o It may involve charging the price below a whole
number
• A business can adopt new pricing strategies for:
o Low prices for basic necessities may give a good
o To break into a new market
impression of being good value of money
o To increase market share
o Ensures sales are made
o To increase profits
o Sales revenue may be lost
o To make sure all costs are covered and a particular
o Competitors may follow, low effect
profit is earned
• Dynamic pricing
3.4.2 Pricing methods o It means charging different customer groups,
There are 5 main types of pricing methods:
different prices for the same product because they
• Cost-plus pricing: have different demand levels
o It involves estimating how many of the product will o Made it easier to adopt with the growth of online
be produced, then calculating the total cost of marketing
producing this output and adding a percentage mark o High revenue and profits
– up for profit. o Increased costs
o The method is easy to apply.
o You could lose sales if the selling price is a lot higher 3.4.3 Price elasticity of demand
than your competitors’ price. • Price Elasticity – It is a measure of responsiveness of
o Total cost /output+ % mark up. demand to a change in price
• Competitive pricing: • PED is affected by the no. of substitutes available
o High sales as prices are at a realistic level • Price-Elastic Demand is when the % change in demand is
o To decide prices, research needs to be done, it costs GREATER than the % change in price
time and money • There is falling revenue for the business.
• Penetration pricing • Price-Inelastic Demand is when the % change in demand
o It is when the price is set lower than the competitors’ is LESS than the % change in price
prices in order to enter a new market • This means you can increase the price of the product a
o It ensures sales are made lot without the demand changing
o It ensures the new product enters the market
o Low profits 3.5 The marketing mix: Place
• Price skimming 3.5.1 Role of place decisions in the marketing
o It is when a high price is set for a new product on the mix
market • Product should be available when and where customers
o Established a brand image need them
o Established the product of good quality • Wrong place, low sales and profits
o Costs of R&D maybe covered • Place must be convenient for consumers
o It may pull off some potential customers due to high 3.5.2 Distribution Channels
prices • Distribution Channel 1:
• Promotional pricing o Manufacturer sells products directly to consumer (i.e.
o It is when a product is sold at a very low price for a car components to car factory)
short period of time
o Help get rid of unwanted stock
Page 20 of 43
ADVANTAGES DISADVANTAGES o A manufacturer hires an agent (person or business)
• Very simple • Impractical because that will sell products on behalf or manufacturer
• Suitable for products consumers don’t usually o Only used when trading internationally
that are sold straight live near factories
out of factories • Not good for products
ADVANTAGES DISADVATANGES
• There is a lower price that can’t be sent easily
for consumer (cuts by post (may be • Agents know the most • Manufacturer loses lots
retailer) expensive to ship it) profitable places & of control on the way
• Direct contact with • Not cost effective prices to sell in other the product is sold to
customers markets that customers.
• Distribution Channel 2:
manufacturers may not • Higher costs for
know. consumers.
o Producer sells to retailers which sell to consumers:
(i.e. farms selling food to big supermarkets) • Agent will provide advice
on best ways to survive
new markets
3.5.3 E-commerce
• Selling of goods and services through the internet
ADVANTAGES DISADVANTAGES • Benefits to the business:
• Manufacturer sells lots • There is no direct contact o Cheaper
of stock to retailer with customers which o Customers encouraged to buy in bulk
• Cheaper transportation makes It hard to create o Business-2-Business e-commerce is cheaper
costs because all customer loyalty o Wider options for customers, brand image and loyalty
products go to one • Problems to business:
place o Website must be maintained
• Lower storage costs for o High distribution cots
the manufacturer o No direct contact
• Distribution Channel 3: o Returns – higher costs
o Producers sell to wholesalers – which buy in bulk and o Stock system will be needed
then divide their stock into smaller quantities and sell • Benefits to consumers:
them to retailers o No need to go out
o Wide options
o Easy comparison
ADVANTAGES DISADVANTAGES o Payment through net banking
• Reduces storage costs • More expensive to buy o Easy access to imported goods
for small retailers from wholesaler than o Low prices
because small quantities from manufacturer • Problems to consumers:
are sold • Wholesaler might not o Internet needed
• Small quantities so have all the products a o High chances of fraud and theft
transport costs are low retailer wants o Products can’t be physically examined
• Wholesaler can give • Takes longer to get to o No direct contact
feedback on what sells consumer 3.5.6 Selecting which distribution channel to use
well to producer • Huge gap between • Type of product
manufacturer and • Is it technical?
customer • How often is it purchased?
• May stock competing • How expensive is it?
products • How perishable is it?
• Distribution Channel 4: • Where are customers located
• Where do competitors sell
Page 21 of 43
3.6 The marketing mix: Promotion o Reaches millions of people
3.6.1 Role of promotion decisions in marketing o Can be shown attractively
mix o Can be targeted at a specific audience
o Very expensive
• Promotion gives info about the 4P’s
o No written record
• Essential when trying to increase/ create brand loyalty
o Works for food, clothing, technology
• Promotion includes:
• Radio –
o Advertisements –
o Cheaper than TV
▪ Above the line
o Reaches to many people
▪ TV, newspaper, internet
o Can use songs
o Sales promotion
o No visual support
▪ Below the line
o Expensive
▪ Free gifts, coupons, samples
o No written record
▪ Used for short periods
o Maybe unclear
3.6.2 Aims of promotion o Not a wide target audience
• To raise awareness about a firms’ products o Works for local services, events
• Encourage customers to make a purchase • Newspaper –
• Increase sales o Cost effective
• Inform people about particular issues, used by the govt o Hard copy available
• Introduce new products in the market o Detailed info can be provided
• Create brand image o Reaches out to millions
• Improve company’s image o Can be targeted at specific audience
• Compete with competitors o May not be attractive
o Works for banks, cars, etc.
3.6.3 Advertising • Magazines –
• There are 2 types of advertisements: o Attractive
o Informative Advertisement – where the promotion o High quality
of a product focuses on giving information about a o Can be targeted at a specific audience
product (i.e. the benefits of the product) o Expensive
o Persuasive Advertisement – where the promotion of o Published monthly/ weekly
a product focuses on persuading the consumer that o Works for expensive perfumes, medical equipment
they really need the product and they should buy it • Posters –
o The advertising process: o Permanent
Set objectives o Cheap
o Attractive
o Seen by everyone
Decide the advertising budget
o Prone to vandalism
o No detailed info
o Can be missed
Create an advertising campaign
o Works for local events, daily necessities
• Cinemas, DVDs –
Select the media to use o Visual image
o Cheap
o Effective
Evaluate the effectiveness of the campaign o Limited audience
• Leaflets –
3.6.3.1 Types of advertising media o Cheap
• Television – o Wide audience
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o Permanent • Encourages new customers
o May not be read and missed • Encourages customers to buy greater quantities
o Works for local events • Try new products
• Internet – • Choose your brand over competitors
o High info
o Instant orders 3.6.5 Marketing Budget
o Direct mail is cheap • Marketing budget is the financial plan for marketing
o May not highlight the website product/brand for a period of time
o Limited internet access • When deciding which type of promotion to use,
o High competition marketing budget is an important factor
o Security issues • Choose the most cost-effective method
o Works for clothes, books • This is where small business struggle compared to big
• Product placement – businesses, because their budget is so much smaller.
o Associated with image
o Specific target audience 3.6.6 Factors influencing type of promotion
o Expensive • Stage of PLC
o May have negative effects • Nature of product
o Works for expensive products • Cultural issues involved in international marketing
3.6.4 Sales Promotion • Media used must depend on:
• Sales Promotions – when incentives (i.e. special o Literacy rate
offers/sales) are used to increase sales (short term) o Poverty rate
3.6.4.1 Types of sales promotion o Availability of radio and cinema
• Price reductions – • Nature of target market
o Includes coupons 3.6.7 Public relations and sponsorship
o Linked to loyalty cards • It is concerned with promoting a good image of the
o Encourages consumers to try products and become brand
customers • Ways to increase public awareness:
• Gifts – o Sponsor events linked with good causes
o Small gifts to encourage purchases o Donate in charities
o Main aim to get customers to buy at regular intervals 3.6.8 Technology & Marketing Mix
• BOGOF – • New technology gives greater opportunities to market
o Multiple purchases are encouraged goods
• Competitions – • The 4 P’s might change
o Packaging can allow customers to enter competitions • Internet allows businesses to understand customer
o Encourages sales habits
o Expensive prices 3.6.9 Social media and website
• Point of sale display – • Advertising through social media:
o Place where the product is sold o Target specific demographic group
o Special display o Guarantee it reaches customers
• After sales services – o Cheap
o For expensive products, good after services o Reach people of all ages
encourages consumers to buy their product o Quick responses to market changes
• Free samples – o Have to pay for pop ups
o Can be handed out to shops to encourage sales o If advertising is annoying, reduce sales
o Maybe delivered at home o Lose control
3.6.4.2 Advantages of sales promotion o Maybe altered, reducing business reputation
• Can promote sales in losses • Advertising on own website
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o No extra costs o Producing and selling goods in an unhygienic
o Control adv place is illegal
o Change info quickly 4. Distance selling regulations
o Attractive o A consumer should have a minimum of 7 days
o High info cooling period (a consumer should have 7 days
o High costs to change their mind about purchase they made)
o May not be located 5. Trade descriptions
o High competition o Supplying a good/ service which is unsafe/ not fit
for the purpose is illegal
3.7 Marketing Strategy o Giving false info or misleading claims is illegal
• It is a plan to combine the right combination of the 4 6. Misleading consumers about the true price is
elements of the marketing mix for a product or service illegal
to achieve a particular marketing objective 7. Making false claims about special deals and
• Marketing strategy developed depends on: offers is illegal
o Size of market 8. Offensive or indecent ads are illegal
o Number and size of competitors • Complying with all legal controls can raise total costs of a
o Marketing objectives business by:
o Target market o Goods/ services may have to be redesigned to ensure
o Finance available quality and safety
• Marketing objectives may include: o Ads may have to be altered
o Increasing sales o Some promotion techniques may have to be changed
o Improve the existing product o May have to change packaging
o Increasing sales of a new product o Prices may have to be controlled and altered
o Maintaining/ increasing market share o Increase employment
o Increasing sales in a niche market 3.7.2 Entering New Markets Abroad
o Increase market share/maintain market share • The globalization of businesses has been increasing over
• For example: A product is made, priced reasonably, and the years, there are opportunities & problems to this:
meets the consumer needs, but there is no promotional OPPORTUNITIES PROBLEMS
element. No one will buy it because people don’t know • Growth potential in other • Lack of knowledge of
about its existence countries: countries are competitors or
• Or if a product is made that doesn’t meet consumer developing and consumer habits
needs, so it won’t sell regardless of the price set population incomes are • Cultural differences: for
• It is crucial to have all elements working together in increasing example, alcohol won’t
order to influence consumer decisions (buying the • Markets in original sell well in middle east
product) country might be • Exchange rates: in some
3.7.1 Legal Controls in Marketing saturated (sales are low) countries their currency
• There are many laws in different countries to protect • Can produce products in isn’t stable so price of
consumers from businesses taking advantage of their abroad and learn about importing goods
lack of knowledge or lack product information its market to increase increase
• These legal controls include (in the U.K.): sales • Transport costs are
1. Weights and measures • Trade barriers are more expensive
o Selling underweight items or using inaccurate lowered in most
equipment’s to weigh goods is illegal countries so it is cheaper
2. Sale of goods to enter markets
o Supplying goods of bad quality/ in an • However, there are many methods to reduce and
unsatisfactory condition is illegal overcome the problems of entering a new market:
3. Supply of goods and services act. PROBLEM METHOD TO OVERCOME
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LACK OF Joint-Ventures: by working • Operations manager is responsible for making sure raw
KNOWLEDGE together/merging with local businesses materials are available and are made into finished goods
(& CULTURAL in the same market, a business will gain • Most manufacturing businesses have
DIFFERENCES) a lot of important knowledge about the o Factory manager- responsible for quality and quantity
culture & market of products
Franchising: letting people from the o Purchasing manager – responsible for providing the
market abroad which have local required materials and equipment
knowledge to choose location of shop o Research and development manager – responsible
TRANSPORT Licensing: the business gives for design and training of new products
COSTS ARE permission for a local business to sell 4.1.2 Productivity
EXPENSIVE goods under its name, so they do not • Productivity – It is a way of measuring a business’s
have to physically import all the efficiency
products • Productivity = quantity of output/ quantity of input
CULTURAL Localizing Existing Brands: where a • Businesses often want to measure the productivity of
DIFFERENCES business still has the same brand image labor
but adapts it to the market it is in (i.e.
• Labour productivity = output / no. of employees
McDonalds cooking vegetarian meals in
• Increased productivity leads to lower inputs used to
India)
produce the same level of output or same number of
inputs used to create greater number of goods
4. OPERATIONS MANAGEMENT • As employees become productive, per employee output
rises, costs of production falls
4.1 Production of Goods and Services
• Many ways to increase productivity:
• Production – the making of a product or service to
o Improve factory layout to reduce time waste and
satisfy consumer wants and needs
raise efficiency
• It involves adding value to a business’s products
o Introduce automation
• A business combines the inputs/economic
o Improve labor skills by training
resources/factors of production to produce a more
o Improve quality control
valuable output (this could be a good or a service)
o Improve employee motivation
• The ‘inputs’ include:
o Improve inventory control
o Land – For factories or for materials
• Benefits of increasing efficiency:
o Labour – Employees
o More output compared to inputs
o Capital – Money/finance
o Lower costs per unit (AKA Average cost)
o Enterprise – Managers
o If there is more output, maybe less workers needed,
• Businesses want to combine all of these inputs efficiently
less people to pay wages
to keep costs low to increase profits o If there are less people working, raising their wages
• For a business to be competitive, it must combine its will increase motivation and so productivity
resources effectively, reduce disposal costs, total costs
and raise profits 4.1.3 Inventory
Why do businesses hold inventory?
• Labour-Intensive Production – where lots of workers are
• To ensure enough inventory is available to satisfy
used rather than machines to make goods. Usually done
demand, inventory levels must be controlled
in countries with low wages so that it is more efficient.
• Inventory includes:
• Capital-Intensive Production – where businesses use
o Raw materials
machines/robots rather than workers. Usually done in
o Work in progress
developed countries where the wages are high.
o Finished goods
4.1.1 Operations department • When inventory reaches a certain point, they must be
• Operations department’s role is to take inputs and reordered to bring the inventory to max level. Inventory
change them into outputs for consumers must be reordered before it gets too low
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• If inventory levels are high, costs of production will be 4.1.5.2 Just in time
high and opportunity costs will also be high • It involves eliminating the need to hold inventories
4.1.4 Lean production • Supplies arrive just at time they are needed
• Variety of techniques to cut down wastes and raise • Low storage costs
efficiency • Quick sales
• It tries to reduce production time • Quick money received
• Types of wastes: • To operate in JIT, businesses need to have reliable
o Transportation - when the goods are being moved suppliers and an efficient ordering system
unnecessarily → fuel price, may get damaged 4.1.5.3 Cell Production
o Overproduction - leads to high storage costs and • This is where the production process is divided into
possible damage to goods while in storage. separate units, each making an identifiable part of the
o Over processing - when sophisticated machines are good
being used to do simple tasks • High motivation
o Waiting • Less chance of strike
o Motion - any action made by an employee that does • High efficiency
not relate with the production of goods wastes time • High boredom
o Unnecessary inventory 4.1.6 Methods of Production
o Defects - when goods have faults/defects that require
• 3 main methods of production:
them being inspected/fixed wastes time
o Job Production – products made one at a time. They
Advantages of lean production
are specific to customer needs
• Less storage costs o Batch Production – a quantity (batch) of a product is
• Quick production made, then a batch of another product is made
• Better use of equipment o Flow Production (mass) – large quantity of products
• Less money tied up in inventory made in a continuous process
• No returns • Job Production:
• Greater health and safety FEATURES BENEFITS LIMITATIONS
• Cut some processes that aren’t important Products are Good for “one- Often labor
• Low costs lead to low prices due to higher competition made specifically off” products. intensive,
and high profits to order. Meets exact expensive
4.1.5 Types of Lean Production methods Each order is requirements of Production takes
• 3 Types of Lean Production: different. customer. longer.
o Kaizen i.e. bridges, Varied work. Any errors are
o Just-In-Time inventory (JIT) cakes, ships, Increases expensive to fix,
o Cell Production cinema films, employee (made to order).
4.1.5.1 Kaizen suits. motivation. Materials are
• Kaizen means continuous improvement in Japanese Ability to charge more expensive.
• Its main focus is to eliminate waste higher prices No possibility of
• The ideas are got by holding frequent meetings with purchasing
workers where they discuss about problems and their economies of
solutions scale
• Advantages –
o High productivity • Batch Production:
o Less space needed for production FEATURES BENEFITS LIMITATIONS
o Work in progress is low Similar products Flexible work; Machines must
o Improved layout of factory may lead to combine jobs. are made in can change be reset to do
This will reduce labor demand batches products easily. diff. batches.
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i.e. bakery: Gives some Semi-finished • Computer Aided Design (CAD) – software that helps
makes one type variety to products may design or re-style products quickly, allows technical
of bread, then worker’s jobs. need to be sketches to be very detailed
one type cake. More variety, transported • Computer Aided Manufacture (CAM) – when computers
Furniture, more consumer around (+ cost). monitor production and control machines/robots
clothing. choice. Need space for • Computer Integrated Manufacturing (CIM) – wen
stocks of raw software that designs the products is integrated with the
material. (high machines that produce (CAM + CAD)
storage costs) • Using technology keeps business ahead of competition,
High work in costs falling, prices falling and quality rising
progress 4.1.8 Electronic payments methods
inventory • EPOS (electronic point of sale) – it is used at checkouts
Expensive and where barcodes are scanned and displayed on the
time taking receipt. The inventory is automatically changed and
• Flow Production: reordered when the reorder level is reached
FEATURES BENEFITS LIMITATIONS • EFTPOS (electronic funds transfer point of sale) – it is
Large quantities High output, Very boring for where an electronic cash register is connected to the
of a product are capital intensive employees retailer’s bank accounts and the money is directly
produced more efficient High cost of transferred when the shopper’s bank info is entered
Ingredients start Costs are low inventory of 4.1.9 New technology
at one end & Benefits from output & raw Advantages of new technology
flow to the other economies of materials o High productivity
end, ready to be scale Costs of setting o Higher training given
sold Ability to up are very high o Motivation rises as the quality of work increases
specialize Low motivation o Higher job satisfaction
Cars, drinks, Works 24/7, no If machine o Better quality products
electronics, any need for labor breaks down, o Customer demand will be, high sales
mass-made No need for whole o High customer satisfaction
products are moving goods production stops o Brand loyalty
made this way around (all made o Quick communication
in the same o Low costs, high profits
place) Disadvantages of new technology
o High unemployment
4.1.7 Factors influencing which production o Expensive
method to choose o High risks
• Nature of product o Low motivation
• Size of market o Replacement and maintenance costs are high
• Nature of demand
4.1.8 Technological changes 4.2 Costs, Scale of Production and Break-
• Automation – when equipment in factory is controlled even analysis
by a computer to do mechanical processes (i.e., painting 4.2.1 Need to measure costs
car). Only workers are to ensure it runs smoothly • So that it is compared with revenue and can be used to
• Mechanization – when production is done by machines calculate profit/ loss
but operated by people. Used to do difficult, precise or • To decide the price
dangerous tasks. Work 24/7, quicker and more accurate. • Costs of buying raw materials, land can be compared
• Accurate cost info is very important to managers for
future planning and decision making
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4.2.2 Business Costs ▪ Large firms have opportunities to employ
• Fixed (overhead) Costs (FC) - specialists who will help reduce wastage, increase
o Costs which do not change with output in the short efficiency and productivity
run. o Technical economies –
o Also known as overheads or indirect costs ▪ Large firms can use latest technologies which are
o Fixed Cost = Total cost – Variable cost efficient
• Examples of Fixed Costs: 4.2.4 Diseconomies of scale (DEOS)
o Rent of factory: even if you produce lots of products, • As scale of production rises, LRAC rise
the rent price will be the same • They are factors that lead to an increase in average costs
o Insurance: you set the insurance cost before-hand as a business grows beyond a certain size
o Bank fees: bank fees are a set price; they don’t change • Types of diseconomies of scale:
depending on the products produced o Poor communication
o Management Salaries: they are set regardless of o Low morale –
production ▪ Large businesses have many employees and are
o Staff cost (Security) not everyone is connected to the top
• Variable Costs (VC) – management, reducing their motivation levels
o Costs which vary directly with output o Slow decision making –
o Also known as direct costs ▪ Large businesses have longer chains of command
o Variable cost = Total cost – Fixed cost due to which info and instructions take long to
• Examples of Variable Cost: reach the desired person, slowing communication,
o Raw materials: the more you produce, the more slow decision making
materials you need 4.2.4 Break-Even Charts
o Electricity & Gas: Energy is paid by use. if you are • Break even charts show how costs and revenues of a
producing more, more electricity is being used business change with sales. They show the level of sales
o Shipping cost: Making more products means you have the business must make in order to break even
to ship more items and shipping is paid by weight • Breakeven level of output indicates the minimum
• Total Cost – Fixed and variable costs combined amount of goods a business must produce in order to
• Average Cost (Per Unit) – total cost of production earn a profit
divided by the total output. Referred to as Unit Cost • The break-even point is where:
4.2.3 Economies of scale (EOS) total cost = sales revenue
• As scale of production rises, LRAC fall Where the revenue line intersects the total cost
• They are factors that lead to a reduction in average costs • Breakeven point (BEP) = no profit, no loss
as a business’s size increases • BEP = Total fixed cost / CONTRIBUTION PER UNIT
• Types of economies of scale: • Contribution per unit = Selling price per unit * variable
o Purchasing economies - cost per unit
▪ When a business buys in bulk, it tends to receive • Sales revenue is the income of a business from sales of
discounts decreasing the price of each good goods or services in a period of time.
o Marketing / selling economies – • To draw a break-even chart, you must include:
▪ When the company advertises for goods it will pay o Fixed Costs line
the same amount to advertise a greater number. o Variable Costs line
Therefore, when marketing for a higher output, unit o Total Costs line
costs fall decreasing ATC o Sales Revenue line
o Financial economies – • Anything before the break-even (BE) point is loss
▪ Banks tend to lend to larger companies with low • Anything after the break-even (BE) point is profit
rates of interest as they borrow high amounts and • ‘y’ axis measures money amounts (cost & revenue)
their collateral value is high • ‘x’ axis shows the number of units produced or sold
o Managerial economies –
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o It establishes brand image
o It builds brand loyalty
o It maintains a good reputation
o It will help to increase sales
o Attracts more and new customers
• If quality is not maintained, businesses will:
o Lose customers to other brands / competitors
o Have to replace faulty products or repeat poor service
which raises costs for business
• Total cost is variable cost line starting from fixed cost o Have a bad reputation because people who had bad
• If the total cost increases, then the BE point increases experiences will tell other people, etc. Leads to lower
and total cost’s line becomes steeper sales & revenue
• If revenue increases, then revenue line becomes steeper 4.3.1 Quality Control
and so the break-even point decreases • Checking for quality at the end of the production
• Benefits of break-even charts: process, whether it is a product or a service.
o Managers can read of the graph if the company • Quality control is a traditional way to make sure that
expects profit or loss, and can see how much products leave the factories with no defects
profit/loss they will have at any level of output • The jobs of people in quality control departments are to
o They can attempt different scenarios and see the take samples at regular intervals to check for errors.
impact it will have on the profit or loss of the business.
• If errors are found, the whole batch of production might
It lets managers try out different possibilities to find
have to be redone.
out which one is the best. (i.e. increasing the selling
• Their job is also to prevent any production errors before
price, increasing production)
they happen during production, which will lead to
o It can be used to show the SAFETY MARGIN – the
money loss
amount by which sales exceed the break-even point.
• Sometimes, businesses bring a mystery customer to test
Margin of safety = Current level of output – break
out the service to check if the quality is as expected
even point
• Advantages of Quality Control:
For example: if a business’ break-even point is at 400
o Eliminates faults/errors before customer receives
units and they’re producing 600 units, their safety
product or service
margin is 600 – 400 = 200.
o Less training is required for the workers
• Limitations of break-even charts:
• Drawbacks of Quality Control:
o Break-even charts assume that all products made will
o Expensive, as employees need to be paid to check the
be sold. It does not show the possibility that
product or service
inventories may build up if they are not sold
o Identifies the fault but not how and why it occurred so
o Fixed costs only stay the same if the scale of
it is difficult to remove the problem
production stays the same (doubling the output will
o Increased costs if products have to be scrapped or
also increase the fixed cost because they must need
reworked or service repeated
bigger factory, more machinery, Labour, etc.)
o Break even charts assume that costs and revenues 4.3.2 Quality assurance
can be drawn with straight lines, which doesn’t • Checking for the quality standards throughout the
happen in real life. production process
o It assumes costs and revenue increase at a constant • It will make sure quality standards are set and then it will
rate. apply these quality standards throughout the business
• Advantages of Quality Assurance:
4.3 Achieving Quality Production o Eliminates faults/errors before customer receives
• Quality – to produce a good or a service which meets product or service
customer expectations o Fewer customer complaints
• Quality is important for businesses because:
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o Reduced costs if products don’t have to be scrapped materials will be in a huge amount and
or reworked or service repeated transportation costs maybe high if supplier is too
• Drawbacks of Quality Assurance: far.
o Expensive to train employees to check products o Market
o Relies on employees following instructions of the ▪ When a product is heavier than its raw materials,
standards set by company then businesses decide to locate its factory near
4.3.3 Total Quality Management (TQM) the markets rather than the supplier as a business
• The continuous improvement of products and processes will find it much cheaper to do so.
by focusing on quality at each stage of production ▪ Due to advances in transportation facilities the
• Total quality management is used by many companies distances between factories and markets of heavy
• It tries to “get it right the first time” and have no defects products doesn’t play a vital role.
• It focuses on ensuring 100% that the customer is always ▪ Perishable products need to be delivered quickly.
o Raw materials/ components
satisfied. Customer is not just the final user; it also
includes other people and departments within the ▪ If goods and raw materials are very heavy then
business transportation costs will be high. Then a company
may want its factory to be located near the
• This means that quality needs to be maintained
supplier.
throughout the business and no faults should occur.
o External economies of scale
• Advantages of total quality management:
▪ When two firms support each other or work
o Quality is built into each part of the production. It
together, they will be able to respond quickly to
becomes a habit for the employees
any important decisions to be made or any
o Eliminates virtually all faults/errors before the
breakdowns.
customers receives.
o Availability of labour
o No customer complaints so brand image is improved
▪ Every manufacturing business requires labour.
o Waste is removed and efficiency increases which
▪ If a business requires only skilled labour then it
means less money is wasted (higher profits)
will try and locate near a place where people with
• Drawbacks of total quality management
various skills live.
o Very expensive to train employees to check the
▪ If a business requires unskilled labour then it will
product or service at every stage of production
be located in a place when wage rates are low and
o Relies on employees following the ideology of TQM
unemployment is high.
o Government influence
4.4 Location Decisions
▪ When a government wants to encourage
• Businesses look up for locations when:
businesses to locate in a particular area, it will
o New business
offer state – funded grants, to encourage firms to
o Present location is unsatisfactory
move there
o Change in business aims and objectives
▪ High unemployed area, it may provide grants to
o Expansion
businesses to locate there
• Factors that influence the choice of location of a
o Transport and communication
MANUFACTURING business:
▪ Businesses need to be closer to transport systems
o Production methods and location decisions
▪ Exported products, ability to reduce transport
▪ Production methods play a significant role in
costs
deciding the location of a business.
▪ Reduces time taken
▪ Job production – the business will be small and
o Power and water supply
won’t have much effect on competitors there.
▪ Availability of power is very important
Location of suppliers won’t have affect much on
▪ Some businesses need to have reliable power
the business. Ex. A bakery
sources to continue production
▪ If there is a large-scale production, then
▪ Some production processes require a reliable
competitors in that area will be highly affected
water source
and the business will prefer closer suppliers as raw
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o Climate ▪ Businesses try to find places near transport
• Factors that influence the choice of location of a businesses to gain easy access to delivery vehicles
SERVICE SECTOR business: o Rent/ taxes
o Customers ▪ Popular area, high demand, high rent
▪ Services which require direct contact, must be ▪ Less popular, low demand, low rent
located near the customers o Security
▪ Services where personal contact isn’t required, ▪ A place prone to theft may reduce a business’s
location doesn’t affect chances to locate there
o Technology ▪ Insurance companies may not insurance such
▪ Technology has allowed e commerce so location companies
doesn’t play a vital role o Legislation
o Personal preference of owners ▪ Some countries may have laws restricting trade in
▪ Owners often decide the business’s location some parts
o Availability of labour • Factors influencing decision of which country to locate
▪ If a business is labour intensive it must locate in operations in:
areas where labour is easily found like towns and o New market overseas - when a business sees an
cities increase in sales overseas, it may decide to
o Climate move/relocate there, instead of transporting products
o Near to other businesses there
▪ Some service/ businesses serve large companies o Cheaper Source of material – if the raw material runs
and so should be able to reach them immediately, out, the business must either bring in alternative
therefore they must locate closer to them supplies from somewhere else or relocate to new
o Rent/ taxes country with these raw materials, it also might be
▪ If services don’t require personal contact, they can cheaper than transporting it
locate in places with lower rents and tax rates o Difficulties with the labour force and wage costs – if
business is located in country where wages keep rising,
• Factors that influence the choice of location of a business may decide it is more profitable to relocate to
RETAILING business: country where wages are lower
o Shoppers o Rents/taxes considerations – if other costs such as
▪ Retailers want popular areas as they attract rent or taxes increase, this might cause business to
customers relocate to countries where it is lower
▪ It depends on the type of product o Availability of government grants and other
▪ Expensive – place where high income people live incentives - If governments want to increase foreign
or visit regularly investment and job opportunities, then they will
o Nearby shops provide grants, subsidies, lower taxes. They may do
▪ Being located near a shop which is frequently this to provide new skills and increase employment
visited means people may shop in between while o Trade and tariff barriers – If trade barriers are high,
visiting other shops the business’s chance of locating there would reduce
▪ A place with high competition attracts more costs
customers as they have greater choice
o Customer parking availability/ nearby 5. FINANCIAL INFORMATION AND DECISIONS
▪ Convenient and nearby parking lots will encourage
people to visit your shop 5.1. Business finance: needs and resources
o Availability of suitable vacant premises 5.1.1 What does a finance department do?
▪ If proper location isn’t available, a company can’t • Record financial transactions
locate there • Prepare final accounts
o Access of delivery vehicle • Cash flow forecast
• Make important decisions
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• Provide info to managers • Owner’s savings –
5.1.2 Why does a business need finance? o Quick availability
• Finance is money which is needed to meet the day – to – o No interest is paid
day expenses of a business. This is known as capital. o Savings may be low
• Capital is needed for: o Increases risks of owners
o Starting up a business 5.1.4 External sources of finance
▪ Capital which is needed to buy the factors of • Issue of shares –
production and inventories so that a firm can o Permanent source of capital
begin training. It is known as startup capital. o Doesn’t need to be paid back
o Expansion o No interest
▪ The amt needed to expand a firm. It can be done o Shareholders expect dividends
by: additional assets, takeover/ merger, new o Ownership of the company may get shared
products, new markets. • Bank loans -
o Increase working capital o A sum of money obtained from a bank which must be
▪ It is known as the life blood of the business. repaid with interest
▪ It is divided into: o Quick, easy to arrange
▪ Capital expenditure: money spent on non – o Available for varying length of time
current assets. o Large companies receive low interest rates if large
▪ Revenue expenditure: money spent on day to sums are taken
day, recurring expenses. o Must be repaid with interest
• There are 2 types of finance needs: o Collateral security must be given
o Short-Term Finance Needs: • Selling debentures –
Finance needs to pay things that last less than a year, o Debentures a certificate that is issued to a debenture
(working capital) - includes wages, rent holder for the money they lent which has to be
o Long-term Finance Needs: repaid within a span of 20 – 25 years.
long term investments (that last more than 1 year). o Long term finance
Money to buy Fixed Assets (i.e., buildings) o High interest
5.1.3 Internal sources of finance • Factoring of debts –
• Retained profits – o Debt factors are specialist agencies that buy the
o Profit left in the business after shares are distributed. claims on debtors of firms for immediate cash.
Also known as ploughed back profits. o Availability of immediate cash
o Doesn’t have to be repaid o The risk of collecting the debtors becomes the factors
o Doesn’t incur interest not the business’s
o New business can’t use it o Firm doesn’t receive 100% amount
o Small firms won’t be able to gain enough money • Grants and subsidies –
o Reduces owners’ payments o Don’t have to be repaid
• Sale of existing assets – o Given with strings attached
o Assets not needed can be sold to earn money. • Micro finance –
o Better use of unwanted capital o Mostly banks don’t give loans to poor people as:
o Doesn’t increase debts of a business o Special institutions have been set up which lend poor
o Takes time people
o Not available for new firms o High interest rates
o Could have been used during expansion o Greater risk for the lender
• Sale of inventories – 5.1.5 Short term VS long term sources
o Reduces opportunity cost Short term
o Reduces storage costs • Overdrafts –
o May disappoint customers if sudden change in
demand is not met
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o The bank gives the business the right to overdraw o Existing Loans (risk and gearing ratio): if a business
their bank account already took out lots of loans, banks will think it is too
o Flexible form of borrowing – varies each month risky to finance
o High interest
o Cheaper than loans in short run 5.2 Cash-Flow Forecasting & Working Capital
o Variable interest rates • Cash is a Liquid Asset – it can be immediately available
o Bank may ask the repayment with a short notice to spend on goods & services
• Trade credit – • Cash Flow – the cash inflows (money received by
o It is when businesses delay the payments to suppliers business) & outflows (money paid) over a period of time
o Interest free loan • Cash inflow – money coming in the business
o Reduces cash outflows in the short run o Sale of goods
o May not provide discounts o Sale of assets
o Factoring of debts o Payments to debtors
Long term o Borrowing money
• Bank loans – o Investors
o They are payable over a fixed time period
• Cash outflow – money going out of the business
• Hire purchase –
o Purchase of goods
o It allows a business to buy a fixed asset over a long
o Purchase of noncurrent assets
period of time with monthly payments which include
interest o Payments of salaries
o Doesn’t have to find a large cash sum to purchase the o Repaying loans
asset o Trade payables
o Cash deposit is paid at the start of the month 5.2.1 Cash flow cycle
o High interest rates • It shows the stages between paying out cash and
• Leasing – receiving cash
o It allows a firm to use an asset but doesn’t have to • Stages:
purchase it
o Cash needed to pay for
o Doesn’t have to find a large cash sum to purchase the
o Materials, wages
asset
o Maintenance is taken care by leasing company o Goods produced
o High costs o Goods sold
• Issue of shares – o Cash received
o Only available to limited companies
• Long term loans or debt finance • Larger it takes for the cash flow cycle to be completed
• Debentures the greater should be the working capital
5.1.6 Factors when choosing source of finance • Cash flow is not the same as profit
• The main factors considered in making financial choice: • Profit consists of goods sold on credit whereas cash flow
o Size of business & Legal Form (type of business): is the amount of cash sales a business made in a month.
Public limited companies have larger choice of • When profitable businesses run out of cash it is known
sources of finance because they pay less interest (less as insolvency.
risk) • Due to:
o Amount of capital required: if you need just a little o Overtrading
money you won’t issue new shares
o Long credit time
o Purpose of capital & time period: The general rule is
o Less credit time received
that the finance source should match the finance
need: o Many fixed assets purchased
▪ If use of capital is long-term, source should be long-
term (same with short term)
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5.2.2 Cash flow forecast • Delaying payments to suppliers will decrease cash
• Cash-Flow Forecast – an estimate of future cash inflows outflows in the short run but supplier may refuse to
and outflows. provide discounts or supply
• A cash-flow forecast shows the expected cash balance at • Reducing credit period may help a business increase
the end of each month: short term cash inflows but customers may switch to
• Cash flow forecasts are just little charts with values competitors
comparing 2 different time periods (months/years etc.) • Delaying purchase of fixed assets will reduce cash
• Net Cash Flow – The difference between the cash inflow outflows but in the long run a company may lack
and outflow (inflow – outflow)
efficiency as they don’t have up – to date technology
• To complete a cash-flow forecast, just rearrange and use
Long term solutions
the equation (net flow = inflow – outflow)
• Attracting new investors
• Short-term cash-flow problems can be solved by
gathering short-term sources of finance • Cutting costs and increasing efficiency using lean
production
• Develop new products
5.2.4 Working capital
• It is the capital available to a business in the short run to
pay for day – to – day expenses
• Working Capital = Current Assets – Current Liabilities
Uses of cash flow forecast
• Cash flow forecasts are useful because: • It is the life blood of the business
• Starting up a business • It assists in identifying the credit reputation of a business
o The first few months are very crucial to every • Working capital can be in the form of:
business as owners don’t realise the amount of cash o Cash
needed due to which they fail o Value of debtors
o Businesses need to spend to labour, land, and capital. o Value of inventory
They even have to advertise and promote extensively • Overall success depends on the working capital position
o Many owners don’t understand the importance of • Working capital should be handled properly because it
cash flow in a business due to which they fail. shows investors & banks how efficient a business is and
• Keeping the bank manager informed its financial strength
o A cash flow forecast will help a business receive a
5.3 Income Statements
loan • Accounts are the financial records of a firm’s
o The bank manager needs to be aware when the amt
transactions
is needed, for how long, when it will be repaid
• Accountants are professionally qualifying people who
• Managing an existing business
have responsibility of keeping accurate accounts and
o An overdraft is required, a business must inform the
producing final accounts
bank in advance to receive the lowest rate of interest
o If not, the bank may refuse or provide with high • Final accounts are produced at the end of financial year
interest rates and give details about the profit/ loss made over the
• Managing cash flow year and the worth of the business
o Businesses with high bank balance can use their cash • Profit is the money left over after total costs have been
effectively in other areas subtracted from the sales revenue.
• The simple equation for profit:
5.2.3 How to overcome cash flow problems?
Profit = Sales revenue – total costs
Short term solutions
• Profit can be made by:
• Increasing bank loans will inject more cash into the
business but both interest and loan will have to be paid
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o Increasing the sales revenue, so that it is higher than o Net Profit (AKA ‘Profit’) – the profit made after
the production costs taking away all expenses and overhead costs (other
o Reducing the production costs expenses)
5.3.1 Importance of profits o Retained Profit – the net profit after taking away
• Profit is very important, especially for the private sector taxes and payments to owners – which is reinvested
companies (not owned by government) back into the business
• Reward for enterprise PROFIT TYPE EQUATION
o Entrepreneurs have special qualities and they must GROSS PROFIT Sales Revenue – Costs of goods sold
earn reward for that NET PROFIT Gross Profit – Overhead Costs
(wages, electricity, rent, marketing)
• Reward for risk taking
RETAINED Net Profit – (tax + dividends)
o Shareholders and investors take risks when they PROFIT
provide capital, profits act as a reward for those risks • Income statements are very important in decision
o Payments act as incentives to invest more and make making in a business
the business profitable • If a business is thinking to relocate a factory, they will
• Source of finance make a forecast income statement in both locations and
o Profits after payments can be used to fund expansion compare
• Indicator of success
o Profits show that investing can be profitable but 5.4 Statement of Financial Position:
losses show that investment must not be made • Balance Sheet – a document that shows the value of the
Profit ≠ Cash business’ assets and liabilities in a point in time
• Profit can be in the form of cash, but it can also be in the • A balance sheets
form of credit (customers will pay later) • Assets – Items of value owned by a business
• If a company makes $40,000 in sales, but only $20,000 is • Liabilities – Debts owed by business
in cash and the other $20k is in credit. The business only • There are 2 types of assets:
has $20,000 in cash to pay costs. o Current Assets – (Short-term Assets) Items owned by
• Credits can vary from a week to a year, it is ‘promised’ business for less than 1 year. Ex. Raw material, Cash
cash but not physical, and can’t pay for costs. in hand, Cash at bank, Trade receivables, Inventories
• So, in this case, if the business makes $40,000, and the o Non-Current Assets – (Long-term Assets) Items
costs are $15,000 it will make $25,000 in gross profit owned by business for more than 1 year. Ex. Land,
(theoretical profit), but only $5,000 in net profit Premises, Building, Equipment, Vehicles
5.3.2 Understanding Income Statements • There are also 2 types of liabilities:
o Current Liabilities – (Short Term Liabilities) Debts
• A business account that records all the incomes of a
owed by business for less than 1 year. Ex. Bank
business and all the cost payed over a year – to see if it is
overdrafts, Short term loans, Trade payables
making profit.
o Non-Current Liabilities – (Long Term Liabilities)
• It will be used by managers, banks and other investors to
Debts owed by business for more than 1 year. Ex.
see if a business is making profit:
Long-term bank loans, Debentures
o to compare with previous years - if it is greater than
• the Total Equity (AKA Shareholders’ funds) is how much
the year before
a business is worth. (only for Limited companies)
o To see if it is higher than competitors
Shareholders’ Funds = Total Assets – Total Liabilities
• The main features of an income statement include:
• The shareholders’ funds are the total amount of money
o Revenue
invested in a business by the shareholders/owners
o Costs
o Gross Profit – the profit made after costs of goods • If the total equity of a business has increased/fallen, the
sold are taken away from sales revenue shareholder’s stake of the company will be worth
more/less, respectively
Format of SOFP
Fixed assets xxx
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Current assets xxx • Return on capital employed (%) – how profitable a
Total assets xxx company is compared to the amount of money used
RoCE (%) = 100 × Net Profit / Capital Employed
Noncurrent liabilities xxx • One profitability ratio isn’t useful by itself. You need to
Current liabilities xxx use all the profitability ratios and compare it with
Equity: previous years of the business.
Share capital xxx 5.5.2 Liquidity ratios
Profits/ loss account xxx • Liquid means that assets can easily be converted into
Total liabilities + equity xxx
cash
• Illiquid means that assets can’t be easily converted into
• From the statement of financial position, you can
calculate the Working Capital. cash
Working Capital = Current Assets - Current Liabilities • Current Ratio – how good a company is to pay off its
• You can also calculate the Capital Employed – the long- current liabilities with its current assets
term capital invested in a business Current Ratio = Current Assets / Current Liabilities
Capital Employed = Non-Current Assets + Total Equity • Acid Test Ratio – measures the ability of a company to
Total Equity = Shareholders’ funds pay off its liabilities without depending on the sales of
5.4.1 Interpreting balance sheets inventory.
Current Assets – Inventories (Stock)
• Shareholders can see the value of their stake Acid Test Ratio =
Current Liabilities
• They can analyze how expansion is paid for • The acid test ratio is used to measure if a business is
• Working capital can be calculated likely to survive in the future
• Working capital = current assets – current liabilities • The good and bad values of these ratios:
• Capital employed can be calculated Gross Profit Margin No exact value, you must
• Capital employed = shareholders’ funds + noncurrent (%) compare with:
liabilities Net Profit Margin • Competitor businesses
• Calculate ratios (%) • Previous years
5.5 Analysis of Accounts ROCE (%) • The targets set by the
• Using all of the documents and information from cash business
flow forecasts, balance sheets and income statements Current Ratio Should be above 1.5 to be safe
you can rate the performance of a business Acid Test Ratio Should be above 1, unless you
• Analysis of accounts is interpreting these are dealing with cash sales in
accounts/documents to see how a business is doing which it can be above 0.75 (cash
• To rate a company’s performance, you can use 5 ratios is liquid - pays of liabilities easily)
• There are 2 types of ratios: • Having lots of stock may mean that the company might
o Profitability Ratios – how profitable a business is be illiquid because inventories are hard to convert to
o Liquidity Ratios – how able a business is to pay its cash easily
short-term debts (current liabilities) 5.5.3 Importance of liquidity
5.5.1 Profitability ratios • Liquidity is very important for a business:
• Gross Profit Margin (%) – how good a company is at o If they can’t convert their assets into cash, they
won’t be able to pay their suppliers (current
converting sales into gross profit. A percentage
liabilities)
GPM (%) = 100 × Gross Profit / Sales Revenue
o Not paying suppliers will force them to stop trading
• Net Profit Margin (%) – how good a company is at to pay back their debts
converting sales into net profit. A percentage
5.5.4 Users of accounting information
NPM (%) = 100 × Net Profit / Sales Revenue
• Managers
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o They will have access to much detailed and frequent • Different companies may use different ways of
accounting information accounting
o They will help them keep control over the
performance of each product 6. EXTERNAL INFLUENCES ON BUSINESS ACTIVITY
o They will be able to identify which business aspect is
doing well and which has a poor performance 6.1 Government Economic Policies &
o Help decision making Objectives
o Ratios are a quick way for managers to compare their 6.1.1 Government objectives
ratios with other businesses and previous accounts • Low Inflation: Low prices of goods & services, so people
• Shareholders will buy more, more money in economy
o Shareholders and potential investors want to know • Low Unemployment: High % of people working so that
how big profit/ loss the company has made they don’t rely on government funds
o They will want to check the profitability and liquidity • Economic Growth: growth of the GDP (Gross Domestic
ratios and to decide whether shareholders have to Product) of a country – more goods and services being
buy more shares or not produced and sold
o They will want to know the worth of the business • Balance of payment (of Imports & Exports): the
• Creditors/ trade payables difference between the imports and the exports of a
o It will indicate the total value of debts the business country balance out (Bop = Exports – Imports)
has to pay back 6.1.1.1 Low Inflation
o The cash position of the business • Inflation – The increase of average prices of goods &
o Liquidity ratios indicate the ability of the company to services
pay back its debts • Rapid inflation may lead to:
• Banks o A fall in value of money, fall in real incomes
o Risk of illiquid, no lending o Wage price spiral
• Government o Fall in international competitiveness as prices will be
o To check the tax revenue, whether the firms are high
paying the right taxes o Businesses may not want to expand and create jobs
• Workers and trade unions o Living standards will fall
o They will have to want to access whether the future • Low inflation rates will act as an incentive for firms to
of the company is secure or not produce and encourage them to expand
o Access the profits to help unions improve wages and 6.1.1.2 Low Unemployment
working conditions of employees • When people want to and have the ability to work but
• Other businesses – competitors can’t work, then they are said to be unemployed
o The managers will compare their profitability and • Unemployed people don’t produce goods and services,
liquidity with other business
output of the country will be lower
• It involves an opportunity cost as government has to
5.5.5 Limitations of accounting records and ratio
pays greater unemployment benefits which could be
analysis
used improve education and reduce living standards
• Managers have access to all accounts data, external
users don’t have all information 6.1.1.3 Economic Growth
• Ratios are based on past accounting data, may not • If an economy’s total output rises, it is said to be
indicate future performance experiencing economic growth
• Accounting data over time will be affected by inflation • GDP is the total value of goods and services produced in
an economy
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• Economic growth may cause employment to rise, 6.1.3 Government Economic Policies
increasing living standards and reducing poverty • Governments influence economic activity through the
• A fall in GDP can lead to: implementation of –
o Unemployment o Fiscal policy
o Fall in average living standards, as poverty rises o Monetary policy
o Less investment o Supply side policies
• Economic growth makes a country richer and allows 6.1.3.1 Fiscal Policy
living standards to rise • Governments spends money on education, health care,
6.1.2 The business cycle etc.
• Economies go through the ‘Business Cycle’: • Governments receive money from taxes
• Taxes can be direct and indirect
• Direct taxes are charged on income
• Indirect taxes are charged on expenditure
Types of taxes
• Income tax:
o Tax on an individual’s income
o Higher income, higher tax paid
1. Growth: GDP is rising, unemployment falling, o Income tax is progressive that is it takes a greater
businesses succeeding & higher living standards proportion of income of the rich and a less
2. Boom: It occurs due to too much spending by proportion of income from the poor
consumers. Prices keep rise as there is a shortage of o If tax is high, disposable incomes will be low, low
skilled workers leading to increased costs of spending and saving
production. There is too much uncertainty about the o Fall in sales
future. o Unemployment may rise as employers may cut
3. Recession: people become uncertain about their jobs
production
so they don’t spend money. Many workers lose their
• Corporation tax
jobs because of lack of demand & profit in a business.
This causes a fall in the country’s GDP and o Tax on the profits of a company
employment rates o Increase in corporation tax means businesses will
4. Slump – A long-term, serious recession: have low profits left, lower retained earnings, fall in
Unemployment will be very high, prices are investment
continuously falling, GDP has decreased a lot and o Lower profits, low dividends, reduce expansion, fall in
many businesses will not survive and go bankrupt value of share prices
6.1.1.4 Balance of Payments • Indirect taxes
• Balance of payments is a record of one country’s o Indirect taxes are taxes on consumption
financial transactions internationally o Makes products more expensive
• Governments will aim for equality in balance of o Increase in indirect taxes can lead to rise in prices
payments that is exports equal imports leading to fall in demand of goods and services
• Higher imports than exports lead to budget deficit o Prices are high, workers real incomes fall, they press
• Higher exports than imports lead to budget surplus for higher wages, increasing production costs,
• Problems of budget deficit: - increasing prices
o Government can run out of foreign currency reserves • Import tariffs
and will have to borrow o Governments try to reduce imports by taxing them
o Exchange rate depreciates – the price of our currency o They are known as import tariffs
falls as compared to the other currency
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o If there are greater import tariffs then domestic firms • Privatisation –
will become cheaper as compared to imports, o Selling of public sector businesses to the private
decreasing their demand and increasing sales of sector
domestic goods o Aim to use profit motive to improve business
o If other countries also adopt this method, exports will efficiency
get expensive, lower exports • Improvement in education and training –
• Another method is an import quota o Governments plan to improve skills of workers
• It is a physical limit on the quantity of a product that can o Mostly for industries which short skilled labour
be bought • Increase competition in all industries –
• Changes in government spending o It is done by reducing government controls over
o When governments want to boost economic growth, industries
they will increase spending, increases demand o Acting against monopolies
leading to more jobs and higher GDP 6.1.4 How businesses might react to changes in
6.1.3.2 Monetary Policy economic policy
• It includes interest rates, money supply and currency Government Possible Problem with
fluctuations policy change business this decision
• The interest rate is the amount charged for borrowing decision
money from a bank. It is the cost of borrowing and Increase income Lower prices to Less profit
reward for saving tax – reduce the increase demand made
• The effects to business activity due to having higher amount Produce Brand image
interest rates include: consumers spend products at may get
o Less profit for companies that already took out a cheaper rates damaged as
loan - less/slower expansion of a business. cheaper
o Entrepreneurs thinking of starting business might not versions of it
be able to afford to take out a loan (delay Increase tariffs Focus on It might be still
expansion) on imports domestic market profitable to
o If consumer loans (i.e. mortgages) increase, people as local goods export
will have less disposable income – less demand for seem cheaper Foreign
goods Switch from materials might
o Consumers will not borrow money to buy expensive buying imported be of high
consumers which will reduce demand. This reduces materials to local quality
output and increases redundancy and ones
unemployment Increase interest Reduce If other
o Hot money flows (FDI). Higher interest rates in one rates investment, companies
country will encourage foreign individuals to invest in lower future grow, market
our country as returns will be high. They will have to growth share will be
convert it in our currency increasing its demand. This Develop cheaper lost
will cause the country’s exchange rate to appreciate products, Brand image
which is known as exchange rate appreciation consumers will may get
6.1.3.3 Supply side policy be able to afford damaged as
• Supply side policies are policies to increase the Sell assets to cheaper
competitiveness of industries in an economy against reduce existing versions of it
those from other countries. Policies to make the loans Assets might be
economy better needed for
future
• They allow businesses to expand, produce, and employ
expansion
more people.
The overall impact of business decisions depends on:
Page 39 of 43
• How big the changes are in the government policy? • Social costs = private + external costs
• What actions competitors take in response to these • Social benefits = private + external benefits
policies • The possible external costs and benefits of a business
decision might include:
6.2 Environmental & Ethical Issues EXTERNAL COSTS EXTERNAL BENEFITS
• Social responsibility is when a business decisions • Environment is harmed • Jobs are created,
benefits stakeholder other than shareholders from waste products economy is boosted
6.2.1 Why a business shouldn’t worry about the • Pollution may damage • Other companies might
environment the health of people move in, more services
• Protecting the environment is expensive, higher costs, • Less energy • Better infrastructure
lower profits • Traffic • Better quality of life
• Firms might have to increase prices to pay for • These externalities change depending on the decision.
environmentally friendly policies 6.2.4 Sustainable development
• This could make a firm uncompetitive and they could • Development that does not compromise the living
lose sales standards of future generations
• Businesses can contribute to sustainable development
• Consumers will buy less if they have to pay higher prices
by doing 4 main things:
• If pollution is a problem, govt should take care of it 1. Using renewable energy (wind, solar)
• Some owners claim that there is not enough proof that 2. Recycling & reusing their waste
the business activity is doing permanent damage to the 3. Using fewer natural resources (lean production)
environment 4. Developing environmentally friendly products &
packaging (i.e. biodegradable packaging)
6.2.2 Reasons for having social responsibility
• People & consumers pressure companies to think more
objectives environmentally. There are many reasons and ways
• Global warming and pollution affect everyone and businesses give the environment a higher priority:
businesses have social responsibility towards it • Pressure groups
• Using scare resources which are non-renewable, it o Pressure groups are made up of people who want to
leaves less for future generations and raises prices change business decisions
• Most people believe that business activity can damage o They are becoming increasingly powerful
the environment permanently o Most consumers are becoming concerned about
environment and firms want to sell their products
• Consumers are becoming socially aware and increasingly
profitability
demand for environmentally friendly products
o Pressure groups may organise consumer boycotts if
• Marketing advantage
they feel that a firm harms the environment
• If business damages the environment, pressure groups o Pressure group activity is likely to change business
can take actions reducing reputation and sales actions when:
▪ High media coverage
6.2.3 Costs
▪ Recognized and registered group
• Most business decisions lead to benefits and costs.
▪ Well organized and financed
There are private and external benefits and costs
▪ Consumers support
• Private costs & benefits are costs that a business pays
o Pressure group activity is unlikely to result in a
for, and the benefits the business gains
• External Costs – costs paid by society, rather than the change in business actions when:
business (as a result of business decision) ▪ If the firm is doing something unpopular but not
• External Benefits – gains to society, rather than the illegal
business (as a result of business decision) ▪ Cost of changing production is higher than the
cost of poor image and lost sales
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▪ If the firm doesn’t sell to consumers – less public • The reasons for globalization include:
pressure o More Free-Trade Agreements – imports/exports
• Laws passed by the govt between countries that pay no tariffs
o Govt can make business activity illegal o Easier, cheaper and faster transportation between
o Locating in environmentally sensitive areas is illegal countries
o Dumping wastes into seas is illegal o E-commerce allows products to be bought from all
over the world
o Making products which can’t be recycled is illegal
o Industrializing countries (i.e. India & China) can
o Manufactures believe that these laws increase their
produce products at very low prices
COP and therefore prices are raised • The opportunities and threats of globalization to a
o Therefore, govt don’t pass strict laws as these firms business include:
create jobs OPPORTUNITIES THREATS
• Financial penalties • Businesses can sell • Increasing foreign
o Pollution permits are licenses to pollute up to a abroad, increasing sales competitors importing
certain level and profits, increased their products, leading to
o Dirty firms can buy permits from clean firm potential for expansion less sales (& profit)
o This encourages firms to produce goods in less • Opening factories or • Workers in home
polluting ways offices abroad – can be country might leave for
o Govt even puts additional taxes on goods that create cheaper to produce, but higher wages in other
pollution it is expensive to set up countries
• Importing materials • More foreign companies
6.2.5 Ethical issues from abroad – can be set up operations in the
• They are decisions based on the businesses moral code cheaper but transport home country of the
• Possible benefits of ethical decisions costs can be too high business, more
o Consumers may choose to buy from firms that don’t • Importing goods from competition
employ children or pollute the environment abroad and selling it in • May lead to
o Good publicity home country diseconomies of scale
o Long term profits • Higher demand,
o Workers and investors might be interested in being economies of scale
linked to an ethical business • The opportunities and threats of globalization to a
o Less risk of legal action country include:
• Possible limitations of ethical decisions OPPORTUNITIES THREATS
o Higher costs • Higher employment as • Overexploitation of
o Higher prices more businesses may resources
open. • Pollution
o Low sales
• Higher GDP and tac • Higher imports, worsen
o Fall in short term profits
revenue balance of payments
o Not employing child workers may lead to fall in
• Access to improved • High unemployment if
incomes in those families technology and better businesses shift to other
communication countries
6.3.3 Business and the International • Higher exports, • May lead to formation of
Economy improving balance of monopolies causing
6.3.1Globalization payments exploitation of
• It is the increase in the worldwide trade and movement • Consumers have a wider consumers
of people and capital between countries variety and enjoy lower
• The world becoming more interconnected leading to prices
increasing worldwide trade & people moving
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6.3.2 Protectionism and high sales in
• It is when a govt protects the domestic firms from another)
foreign competition using tariffs and quotas 6.3.4 Exchange Rates
• When foreign firms are able to import without any • Exchange Rate – the price of one currency in terms of
restrictions, they will be able to produce cheaply and this another currency
• For example, 1 Euro is equivalent to 1.2 Dollars
may force local firms out of business. This can lead to
• Currency Appreciation – when the value of a currency
higher unemployment and lower incomes
increases (i.e. 1€ = 1.2$ → 1€ = 1.7$)
• They believe that by reducing the number of foreign • Currency Depreciation – when the value of a currency
competitors and goods (that would have much lower increases (i.e. 1€ = 1.2$ → 1€ = 1.1$) – it can buy less of
prices), there will be less unemployment and higher another currency
incomes • When one currency appreciates, exports of that country
• However, by doing this, it is harder for local businesses
fall as it gets expensive in the foreign market/ currency
to import materials and export their goods abroad
• When a currency depreciates, exports of that country
6.3.3 Multinational Companies (MNCs)
rise as it gets cheaper in the foreign market/ currency
• Multinational Company = Transnational Company
• A multinational company is a company that has factories • When a currency appreciates, imports of that country
or service operations in more than one country rise as it gets cheaper in the domestic market/ currency
• It is not just selling products abroad, it is having • When a currency depreciates, imports fall as it gets
operations abroad expensive in the domestic market/ currency
• Why do firms become MNC’S? • The exchange rate of a currency is influenced by 2
o Produce in countries with low costs things:
o Find cheaper raw materials o Demand for the currency: if many people want to
o Avid trade barriers like tariffs and quotas buy the currency the price will increase because
o Spread risks there is a ‘limited’ number of currency (appreciate)
o Expand o Supply of currency: if the central bank prints more
money, the supply increases but the demand is still
o Increase demand
the same so the value is lower (depreciation)
o Switch to other markets when home markets gets • Exchange rates can affect businesses by:
saturated IF IT APPRECIATES: IF IT DEPRECIATES:
o Remain competitive • Import prices fall: since • Import prices rise: your
o Be closer to markets your currency can buy currency is worth less so
• The benefits of a business becoming international: more of the other you need more to buy
BENEFITS TO THE BENEFITS TO THE currency other currencies
BUSINESS COUNTRY • Export prices rise: your • Export prices fall: it is
• Producing goods at • Jobs are created currency is worth more worth less so other
lower costs • Investments in so it is more expensive currencies can buy your
• Closer to resources (i.e. development of for other currencies to currency for les of theirs
oil) infrastructure in country buy it
• Closer to market • More exports • This means that if the currency appreciates:
• Avoid expensive taxes of • Tax – more money to o The product’s price in other countries will increase
import of goods (i.e. government o Business will make more profit
Korean cars (KIA) being • increased product choice o Business can lower the price and still make the same
produced in EU to for consumers amount of money as before – it is more competitive
benefit from free trade) • If the currency depreciates:
• Spread risks (if there are o The products price in other countries will decrease
low sales in one country o less profit will be made
Page 42 of 43
o Business needs to raise the price to make the same
amount of money as before – less competitive
Page 43 of 43

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CIE IGCSE BUSINESS STUDIES//0450

37 External influences on business activity

2.2.2 Chain of command and span of control

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