Business Note 0450

CIE IGCSE BUSINESS STUDIES//0450
TABLE OF CONTENTS
2
CHAPTER 1
Understanding business activity
7
CHAPTER 2
People in business
13
CHAPTER 3
Marketing
20
CHAPTER 4
Operations management
24
CHAPTER 5
Financial information and decisions
27
CHAPTER 6
External influences on business activity
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1. UNDERSTANDING BUSINESS ACTIVITY • Enterprise – the skill of the person who brings other
factors of production together to make goods
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
have. But are not essential for living. 1.4 Added Value
• People’s wants are unlimited (you will always want • Added value is how much more a business sells a
something) product for than the total cost of materials
• There are unlimited wants but there are limited Added Value = selling price – total cost
resources to produce them • It is NOT the profit because added value does not
• Resources include: Land, Labour, Capital & Enterprise include the price to pay for labour, transport etc.
• This creates scarcity. • To increase added value, a business can either:
• Scarcity: there are not enough products to fulfil the o Increase the selling price of product, while keeping the
wants of the population total cost of material the same
• Since there are limited resources, we have to make o Decrease the total cost of materials, while keeping the
choices on what we want. This means that we will be selling price of the product the same.
giving something up, this is the opportunity cost
1.5 Classification of Businesses
• Opportunity cost: the thing we give up by choosing
• Businesses can be put into three sectors:
another item. The next best alternative.
• In developing countries, the primary sector employs
1.2 Specialisation most of the work-force. This is because most people live
• Specialisation: when people and businesses focus on in rural areas and there is low demand for services
what they are best at. • In more developed countries, the secondary and tertiary
• Using specialised machinery, work is more efficient sector employ more workers
• Being efficient keeps costs low, good for competition • In economically developed countries, the tertiary
• A specialised worker has higher living standards (service) sector employs most people as they import
• Division of labour is when production is split in different manufactured goods from other countries (tourism)
tasks and each worker performs one of these tasks
1.6 Mixed Economy
Advantages Disadvantages
• Has both a private sector and a public sector.
Workers specialized in Workers become bored of
certain task, increases doing the same job. Stage What it does Example
efficiency Efficiency might fall Extracts and uses the
Farming,
Less time is wasted from If a worker is absent, no Primary natural resources to
mining, forestry
one workbench to other worker can do the produce raw materials
another, more efficiency job. Efficiency might fall Takes the raw materials
Manufacturing
Secondary and converts them into
(car, food, etc.)
manufactured goods
1.3 Purpose of Business Activity:
Providing services to
• Businesses combine scarce factors of production to Retail shops,
Tertiary consumers and other
produce goods or services to satisfy people’s wants hotels, hospitals
sectors
• Factors of production: • Private Sector: Businesses NOT owned by government,
o Land – all resources provided by nature (oil, metal) will make own decisions on what and how to produce.
o Labour – the no. of people to make the products
• Public Sector: Owned by the government. Government
o Capital – the finance and equipment (machinery) will make decisions on what and how to produce (i.e.
needed to make products healthcare, education, defence, public transport)
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1.7 Enterprise, Business Growth & Size o Business ideas & help, they set up support sessions
• An entrepreneur is a person who organises, operates held by experienced business people
and takes risk to make the business better o Finance, they may lend loans at low interest rates or
• Characteristics of entrepreneurs: grants if business starts up in places with high
o Hard Working o Optimistic unemployment rates.
o Risk Takers o Self-Confident o Governments provide grants for training employees to
o Creative o Innovative make them more efficient and productive
o Effective Communicators o Independent o Governments allow entrepreneurs to use research
facilities in universities
1.10 Business Size
Independent, able to entrepreneurs will have to
• There are several different measurements of business
choose how to use time put their own money into
size and they all have limitations:
and money the business.
Measurements Limitations
Able to put own ideas many entrepreneur’s
into practice businesses fail (risky) Some businesses employ
The number of people
few people but produce
May become successful Lack of knowledge and employed in the business
high output values
and very profitable if experience in starting and
The value of output of the high level of output does
business grows operating a business
business not mean business is big
Able to make use of Lost income from not being
different businesses sell
personal interests and employee for another
skills business (Opportunity cost) The value of sales different products
(expensive and cheap)
1.8 Business Plans The total value of capital some companies may use
• A business plan contains business objectives, important (money) invested into the cheap labor giving low
details about the operations, finance, and the owners business (capital output with low-cost
• Business plans assist entrepreneurs because: employed) equipment
o It helps gain finance. banks will ask for a business plan
before agreeing to a loan or overdraft for the business
1.11 Business Growth
• Some businesses want to grow because:
o It forces the entrepreneur to plan ahead carefully,
o Higher profits
which reduces risk of the business failing.
o More status for owners and managers
• The main parts of a business plan include: name, type of
o can benefit from Economies of Scale (lower costs)
organization, business aim and forecast profit
o Larger share of its market, ‘big names'
1.9 Government Support for Start-Ups
1.12 Economies of Scale
• Governments encourage entrepreneurs to set up a
• Economies of scale are the factors that lead to a
business because start-ups:
reduction in average costs as a business grows.
o Reduce unemployment, new businesses create jobs
• Purchasing - when businesses buy in ‘bulk’ so they get
o Increase competition, gives consumers more choice
cheaper prices
o Increase output, economy benefits from increased
output of goods and services • Marketing - targeting a larger audience, business
o Can grow further and become large and important advertises its own product rather than having another
businesses which pay government more taxes company doing it
• Governments may give support to entrepreneurs by: • Financial - bigger businesses get better interest rates
from banks as they are less risk
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• Managerial: Big businesses can afford specialist 1.14 Why Businesses Fail
managers • Poor management – from lack of experience, poor
• Technical - Big businesses can afford specialist machines choice of managers (family business), bad decisions
to do more efficient work with less staff • Failure to plan for change – businesses need to adapt
• Businesses can either grow by: everchanging business environment. Must take risks.
o Internal Growth • Poor money management – lack of money to pay
o External Growth workers, suppliers, landlords, etc.
• Internal Growth is when the business expands its • Over-expansion – (diseconomies of scale), management
existing operations problems and finance
• External Growth is when the business takes over or • Competition with other businesses – new businesses
merges with another business. are at more risk of failing than existing businesses.
• There are three types of External Growth: • This is because start-ups have lack of money, resources,
• Horizontal Integration – firm taking over/merging with poor planning & don’t have much research
another firm in the same industry
o i.e. a paper company taking over another paper 1.15 Sole Trader
company • A business owned by just one person. It’s the smallest
• Vertical Integration – firm taking over/merging with type of business. Can employ other people however.
another firm in same industry but different stage of o Useful for people who are setting up new business
production (there is forwards and backwards) o Do not need much capital to get business running
o i.e. paper manufacturing company taking over paper o Will be dealing mainly with the public
selling company Advantages Disadvantages
• Conglomerate Merger - firm merging/taking over Easy to set up, do not Capital is usually provided
another firm in a different industry. (also known as require a lot of money to by owner, hard to get
‘diversification’) set up capital to expand firm
o i.e. paper company taking over a food company They are their own boss, They have unlimited
has the freedom to choose liability (responsible for
1.13 Problems with business growth their own holidays, work any debts of the business,
(Diseconomies of Scale) hours, prices, who to bank can take away
employ possessions to pay back)
• Diseconomies of scale are factors that lead to increase of
Close relationship with Business is likely to remain
average costs as a business grows above a point.
customers small
• Poor communication - Bigger businesses are hard to
Does not have to share No one to discuss business
send and receive messages.
profits matters with
• Low Morale - Big businesses employ many people, some
Does not have to give They are unincorporated
workers feel unimportant as they cannot grow in
information about the (business has same
business, efficiency lowers. business identity as the owner). So,
• Slow decision making - Bigger businesses take longer to
business ends when
make decisions to satisfy all of the audience
owner dies
• Some businesses stay small because:
o Market size is small
o Owner’s objectives
o Type of industry
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1.16 Partnerships o Rules for shareholder meetings
• A business in which 2 to 20 people agree to own it. o List of directors and their jobs
Usually small businesses but bigger than sole traders. o Voting rights of shareholders
o Useful for people who want to form a business but o Details of how accounts are recorded
don’t want the legal complications • Memorandum of Association – must contain important
o Industries such as medicine or law where you are not information about the company:
allowed to form a company o Company name, address
o Partners that know each other very well o What the business does
• Requires a Partnership Agreement o Number of shares to be sold
Advantages Disadvantages Advantages Disadvantages
Easy to set up, do not Capital is usually provided Shares can be sold to lots Difficult to set up (legal
require a lot of money by partners of people. More capital to formalities).
More capital invested Partners have unlimited expand
(more expansion) liability Owners are able to keep Shares are difficult
Partners are motivated Partners can disagree on control of company as transfer. Requires other
because any losses are decisions. If one of the long as they don’t sell too shareholders to agree
shared by the partners partners is inefficient, they many shares
all lose money All shareholders have Accounts are less secret
Responsibilities are shared They are unincorporated. limited liability (bank can than other forms of
(focused on different parts If one of the partner dies, only take amount of business
of business) money invested)
the partnership ends
Company continues after Company cannot offer it
a shareholder dies shares to the public
• Contents of Partnership Agreement:
• Private Limited Companies are useful for family
o Amount of capital invested by all partners
businesses or businesses/partnerships where owners
o Tasks to be done by each partner
want to expand more (as you can sell shares)
o The way profits are shared out
o How long partnership will last 1.18 Public Limited Company (PLC)
o Arrangements for absence, retirement and how • A PLC is similar to LTD only the shares can be sold to the
partners could be let known public. It is the biggest type of business.
• Shareholders of PLCs may attend an Annual General
1.17 Private Limited Company (LTD)
Meeting where they may vote for the board directors
• An LTD is different from the other because it can sell
Advantages (in addition
shares and it is an incorporated business. Disadvantages
to those in LTDs)
• Company must be owned by at least 2 shareholders
Opportunity to raise high Difficult to set up (legal
o A shareholder buys shares of an LTD company which
capital sums formalities) & accounts
represent part ownership of the company are even more public
o Dividend is the amount of profit each shareholder 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
• Has separate identity from owners, incorporated, so shares shares
company accounts are separate from the owners’ Selling shares to public is
• Must have: Articles of Association and Memorandum of expensive
Association • DON’T GET CONFUSED, Public Limited Companies are
• Article of Association – must contain the RULES in which NOT in the PUBLIC sector, they are in PRIVATE sector
the company will be managed. Contains:
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1.19 Joint Venture • Usually these businesses have been nationalized (used
• A joint venture is when two or more businesses start a to be private sector but government bought it)
project together sharing capital risks, and profits • Capital comes from taxes, by tax payer
Costs are shared, good for Profits have to be shared if
1.23 Business Objectives
expensive projects project is successful • Business objectives are aims or targets a business works
Shared knowledge of two Might have disagreements towards
businesses over important decisions • Business objectives give clear target to managers and
Risks are shared Different methods of employees and boosts the workers’ motivation
running business • Private sector business objectives:
o Business Survival - Adjust to business environment,
1.20 Franchise change price of products if necessary
• A franchise is an agreement of a business based upon an o Generating profit – pay a return to owners or provide
existing brand/business finance to invest further in business
• The franchisor is the main business/brand o Returns to shareholders - discourage shareholders
• The franchisee is the individual to start up franchise from selling their shares. Can be increased by
• In a franchise, the franchisor allows the franchisee to increasing profit or increasing the share price
trade under its name and see its products for a fee o Growth of business – increase salaries, economies of
• The franchisee pays an original fee to franchisor and a scale. only achieved if customers are satisfied with the
percentage of its profit for the privilege product
• Franchisor provides support, such as: o Market Share – the proportion of the total market
o Advertising o Employee training sales by one business, gives good publicity, more
o Legal advice o Financial advice influence over suppliers and customers
• Franchise agreements last 5 – 20 years, if franchisee o Service to community – provide jobs, support
cancels the agreement early there may be large fines disadvantaged groups in society, protect environment
1.21 Risk, Ownership & Limited Liability 1.24 Stakeholder objectives

• Risk - the uncertainty of profits or danger of loss, events • A stakeholder is any person with a direct interest in the
that could cause business to fail performance of a business
• Ownership – who owns the business (partnership = • There are two types of stakeholder groups:
partners, LTDs and PLCs = the shareholders) o Internal Stakeholders work/own the company
• The people with risk are usually the owners o External Stakeholders are outside of the business
• Liability – how much the shareholders of a company are Internal Stakeholders External Stakeholders
liable for the debts in the business Owners Consumers
o Limited Liability – liability of shareholders is limited to Managers Government
the amount of money they invested (PLC & LTD) Workers Banks
o Unlimited liability – owners of business are held • Each stakeholder group has different objectives for the
responsible for all the debts of the business (not just performance of the business
their investment) (Sole trader & partnerships) • Internal Stakeholder’s objectives are payments or
profits, they want business growth so value of
1.22 Public Sector investment increases or they get higher status/power
• The public sector includes every business owned by the • Customers objectives are reliable products, value for
government. money, good quality, good design and good service
• Businesses in the public sector are public services, i.e.
education, transport, hospitals, education and police
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• Government objectives include: money from taxes, will • Safe/security Needs – protection against danger &
employ more people, increase country’s output poverty. Having fair treatment
• Banks objectives are to make profit out of loans (fulfilled by having job security)
• Since different stakeholders have different objectives, it • Social Needs – friendship, belonging in a group
may cause conflict, to try to please all the stakeholders (fulfilled by having colleagues at work)
• For example: customers want cheap products but • Esteem Needs – having status and recognition
workers want higher salaries. (fulfilled by being recognised for good work)
• Therefore, managers have to compromise to decide • Self-actualisation – achieving your full potential,
which objectives are best for the company feeling that you have done a good job
(fulfilled by being promoted & being given more
2. PEOPLE IN BUSINESS responsibility)
• Maslow’s theory also suggests that each level in the
2.1 Motivating Workers hierarchy (starting from Physiological needs) needs to
• It is very important for a business to have a well- be achieved before moving on to the next
motivated workforce
• The main reasons why people work: • F.W Taylor’s theory - “All individuals are motivated
o Money: to pay for the basic needs for life and by personal gain”
some wants
o Security: to know that you are safe (financially) • This means that if the workers are paid more, they will
o Affiliation (Social needs): to feel part of a work more effectively
group, meet people, make friends • By breaking down worker’s jobs into simple tasks, you
o Self-importance (esteem): to feel that you are could calculate how much output they could do in a
important and that the job you do is important day
o Job Satisfaction: to feel pleasure that you have • Taylor’s theory focused mainly on factory workers,
done a good job since it is easy to work out their output done
• Motivation – the feeling that makes employees • Taylor’s idea was that if the workers produced this
want to work hard and effectively in a business target output, they would be paid more money
• This idea led to big productivity gains in companies
2.1.1 Key Motivational Theories that adopted this theory
• ‘Maslow’s Hierarchy of Needs’ – a pyramid showing • Herzberg’s theory – humans have two sets of needs:
the different types of needs and how some are more o Basic animal needs (called ‘Hygiene’)
important than others o To be able to grow physiologically (called
‘Motivator’ needs)
‘Motivator’ Factors ‘Hygiene’ Factors
• Achievement • Status
• Recognition • Security
• Personal Growth • Work Conditions
• Advancement/ • Relationship with boss
Promotion & subordinates
• Work itself • Salary
• Physiological Needs – food, rest, shelter • Herzberg’s theory claims that the ‘Hygiene’ factors
(fulfilled by receiving wages) must be satisfied, if not, it will demotivate workers
• Only after they are satisfied, can the ‘Motivator’
factors can act as motivators for employees
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2.1.2 Methods of Motivation • The benefits of an organisational chart are that it
• There are 3 Factors that motivate employees: shows how everybody is linked together in the
o Financial Rewards organisation, they know who to reach and how.
o Non-Financial Rewards • Each employee can also see their own position, who’s
o Job Satisfaction authority they are under and who they have authority
• Financial Rewards/Motivators include: over
o Wages (payment for work, usually weekly) • It gives everyone a sense of belonging, motivates
o Time Rate (payment per hour, i.e. 10$/hour) them to move up the chain of command
o Piece Rate (where workers are paid depending on • There are two types of organisational structures of a
the quantity of products made). Has also BONUS business:
system for employees who produce more than the o You can have a ‘tall’ structure, with a long chain of
set target. command:
o Salaries (payment for work, usually monthly)
• Financial Rewards/Motivators include:
o Company Car
o Discounts of products
o Health care
o Children’s school paid for
o House is paid for
o Free trips abroad (holidays) o You can have a ‘wide’ structure, with a short chain
of command:
2.2 Organisation and Management
• Organisational structure – the levels of management
and division of responsibilities within a company
• Organisational structures show the chain of command
in a company • Chain of command – the structure in a business that
allows instructions to be passed down from a person
• this is usually in the form of an Organisational Chart
to another, below them in the command.
• Organisational Charts show a clear structure of the
• Subordinate – someone who is lower in rank, under
business and make it easy to see which part of the
authority of a superior (manager)
company does what
• Span of control – how many subordinates work
• Example of Organisational Chart:
directly under a manager
• Authority – someone that has recognised power to
make decisions and to delegate tasks
• Delegation – the process of giving authority to a
subordinate to perform a task (instructions)
• The advantages to have a short (and wide) structure
is that:
o Communication is faster and more accurate
o Top managers are more in touch with
subordinates because there are less levels
o wider span of control means employees feel
trusted and take more decisions by themselves
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• In organisational charts, it is usually arranged in o makes employees feel trusted and important
department (finance, operations, etc) • However, some managers do not delegate tasks
• Sometimes there is conflict between departments (i.e. • They might be afraid the subordinates will fail and
marketing wants to buy something but finance does manager wants to control everything
not think it is necessary) • Manager might also feel threatened that subordinate
• The supervisors working in these departments are will do a better job than them
Line managers – they have direct responsibility over • Delegation means that once the task is completed, the
people below them in the organisational chart manager will have less direct control
• You also have Staff Managers – which are specialists • This means the trust for the workers is increased by
in certain areas to provide support and information to the manager
line managers • Therefore, there needs to be more trust in workers in
order to reduce control over them
2.2.3 Leadership Styles

• Leadership styles are the different approaches to deal
with people when with authority
• There are THREE TYPES OF leadership styles:
o Autocratic Leader: where the manager expects to
2.2.2 Role of Management be in charge of the business and expects to have
• All organisations have managers. Leaders, director, their orders followed with no questions asked
executive are all different names, but they are all o Democratic Leader: where the manager allows
managers the subordinates to be involved in the decision-
• The functions of managers include: making process
o Planning – setting aims or targets o Laissez-Faire Leader: Where the manager makes
o Organising – delegating tasks. organising people broad/general objectives for the employees and
and resources effectively leaves them to make their own decisions.
o Co-ordinating – making sure departments work
well with each other and have good
communication
o Commanding – making sure the workers are
keeping to targets and deadlines. By guiding and
delegating tasks
o Controlling – measuring and evaluating work of
employees and verify they are on target
• Managers often delegate tasks to employees, giving
them authority to complete that task. 2.2.4 Trade Unions
• However, if the employee does a bad job, the • Trade union – a group of workers that join together to
manager must accept the responsibility for it protect their interests
• Delegation is important because: • A trade union is a pressure group
o Managers cannot do every job by themselves • Employees usually have the same interests (i.e. good
o managers can then measure the success of the wages, pleasant work environment, etc)
employees • If an employee wants to join a trade union, they must
o work becomes more interesting for subordinate, pay a yearly subscription for the benefits
increases their motivation
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• Benefits from a trade union usually include: • There are also two types of employment:
o Improved conditions of employment (such as o Part-time employment
wages, holidays, hours of work) o Full-time employment
o Improved work environment (health & safety, • Part time employment is normally between 1 and 35
heating, noise) hours a week
o Advice/support if member thinks they have been • Advantages:
unfairly fired, mistreated, etc o Work hours are flexible. Fits with employees that
have kids to take care of
2.3 Recruitment o Business can extend the opening/closing hours
• Recruitment – the process from identifying that a o Employees can just work at busy times
business needs to employ someone, to the point o Cheaper for the employer than employing a full-
where applications have arrived at the business time worker
• Recruitment is one of the roles of the Human • Disadvantages:
Resources department o Employees are less likely to be trained because
• Recruiting usually happens when an employee leaves they might see it as temporary and don’t want a
a job, a business is starting up, or it wants to expand promotion
• Recruitment process (for external recruitment): o Takes longer to recruit many part-time workers
1. A job analysis is done to identify the tasks and than a couple full-time workers
responsibilities to be carried out by the new o Might be less committed to the company
employee
2. Once the details of the job are gathered, a job 2.3.2 Training
description will be made, outlining these duties. • Training is important for a business because:
3. From the job description, a job specification is o It helps employees become more comfortable
created, which outlines the requirements, with new processes or equipment
qualifications and expertise for the job o Improves the efficiency of the workers
4. Then the job is advertised in the appropriate o Makes employees more valuable to the company
media (i.e. if it is a finance related job, it might be because they become more skilled
advertised in finance magazine) o Reduces the amount of supervision needed by
5. Candidates start sending their application forms the workers
and the company does a short-list for interviews o Reduces the amount of accidents
(because they cannot interview all)
6. The candidate is chosen after the interviews by • There are three types of training:
the company, job is filled 1. Induction Training – where the employee is given
• There are two types of recruitment: an introduction on the company’s procedures and
o External Recruitment – job is filled by someone customs, and is introduced to their co-workers
who is not an existing employee
o Internal Recruitment – job is filled by an existing
employee of the company. • Employees settle into • Time consuming
• Internal recruitment is good because it saves money
their job quickly • Worker is being paid
for business. The person already has knowledge about • Workers make fewer while not doing work
the business & position and it motivates other mistakes • Delays the start of work
workers to get a promotion. • May be a legal for the employee
however, it doesn’t bring in new ideas & experience. requirement
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2. On-the-job Training – where the employee does • Dismissal – when the worker is told to leave the job
the job while being supervised by a more due to poor work or poor behaviour (i.e. if employee
experienced worker, giving tips, suggestions and is always late for work after being given warnings,
help when employee is caught stealing, etc)
Advantages Disadvantages It is more commonly known as being ‘fired’
• Employee does not need • Trainer won’t be as • Redundancy – when a business no longer needs an
to be sent away productive because employee. Even though the employee did nothing
So cheaper than off-the- they are teaching wrong.
job training employee Usually happens during period of falling sales or due
• There is still production • Trainer might have bad to an economic recession (when no one is buying
from worker while habits and pass on to anything)
training employee
2.3.4 Legal Controls over employment issues
• Employee is trained • Not recognised training
• There are many laws in countries, that ensure that
exactly how the qualifications outside
everyone has equal employment opportunities
company want the business
regardless of race, gender, religion, age etc.
3. Off-the-job training – where the employee is • This means that businesses need to be careful when
trained away from the workplace, normally by advertising a job. They cannot advertise for just a
specialised trainers. single type of person.
Advantages Disadvantages • Companies must treat all applicants for the job
• Lots of skills are taught • Expensive to send equally, if not, they will be fined and prosecuted
• trainings are sometimes employees off to expert • Employees of a business have legal right that must be
off-work hours, worker trainings protected, which includes:
will still work • Workers are being paid o Unfair discrimination at work/when applying: i.e.
• Employees become but not doing any work when employers discriminate unfairly against
versatile (can be moved • Professional training employees or applicants due to their race, gender,
around company and gives employees religion or colour.
know what to do) additional o Health and safety: there are laws that make sure
• Employees are taught by qualifications, makes it that employees are protected from dangerous
expert trainers. Up-to- easier for employee to machinery, that they are provided safety
date knowledge find another job equipment & clothing, hygiene conditions,
suitable temperatures, provide breaks.
• Sometimes, a company might need to reduce the size o Unfair dismissal: when the worker is dismissed
of the workforce, possibly because of: unfairly (i.e. from joining a trade union, being
o Automation (robots replacing human jobs) pregnant, or when given no warnings before being
o Less demand for products or services dismissed), the worker can take their case to an
o Business might have relocated abroad industrial tribunal to see both sides of argument.
o Business being taken over/merged and now there o Wage protection: an employee in a business
are too many workers doing same job should have a contract of employment, where it
• Companies need to think ahead on the future and should contain the wage rate, frequency of wages
establish how many employees they will need and and what deductions are made from the wages
their skills, this is called workforce planning (from tax). In some countries businesses pay
• When a business needs to reduce the number of whatever they want because unemployment is
employees, they can either dismiss the employee or high, so they offer very low wages.
make them redundant
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Governments take action by creating a legal • Message is reinforced permanent record of the
minimum wage. by the speaker’s body message is needed
language
2.4 Internal & External Communication
• Effective communication is important so that the • Written methods – sender creates e-mails, memos or
information sent in the message is received, letters, including the use of Information Technology
understood and acted upon as it should Advantages Disadvantages
• It is important to businesses because if it is not • Message can be • Might lead to too many
understood, it can lead to serious consequences referred to in the future e-mails and ‘information
• There are two types of communication in businesses: “hard evidence” overload’
• Internal Communication – communication between • Easy to explain • Two-way communication
employees of the same business complicated messages is difficult
• External Communication – communication between • Can be copied and re- • Hard to check if message
the business and other businesses and individuals sent to many people has been received
• External communication has to be especially efficient • Quick and cheap • No body language to
because it establishes the image and the efficiency of emphasize message
a business • Visual methods – sender uses diagrams, charts,
• i.e. if a company communicates inefficiently with their videos, PowerPoints
suppliers, they might receive the incorrect materials Advantages Disadvantages
• Effective communication involves: • Information presented • No feedback and needs
1. The transmitter/sender sending a message to pass in more appealing way, other methods of
on information people will be more communication to go
2. A medium of communication – the method for interested to look at it with it
sending message (i.e. e-mail, phone, etc) • Can be used to make • Graphs and charts may
3. The message being sent to the receiver written messages be difficult for people to
4. The receiver confirming that the message has clearer, to illustrate the understand, message
been received and responds to it (feedback) point may be misunderstood
• There are two types of communication:
o One-way communication – where the receiver 2.4.2 Communication Barriers
cannot reply to the message (i.e. posters) • Communication Barriers – things that prevent
o Two-way communication – where the receiver efficient communication
can respond to the message, could be just • Problems with the sender: when language is too
confirmation that message was received (e-mail) difficult, speaks too quickly/not clearly, communicates
• The methods of communication include: wrong message
• Verbal methods – sender speaks to the receiver (i.e. • Overcome by: using understandable language, making
meetings, telephone, video conference) sure message is a clear as possible by asking questions
Advantages Disadvantages to make sure message was understood
• Information given out • If talking to many people, • Problems with the medium: message may be lost/not
quickly &Efficient way it’s hard to tell whether seen by receiver, wrong medium used (i.e. important
to communicate with everyone got the message on noticeboard), if message is being passed
many people message along – it might get distorted
• Opportunity for • Not good for accurate • Overcome by: sender asking for feedback/receiver
immediate feedback messages and if a always sending feedback that message is received,
selecting the appropriate channel to send message
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• Problems with the receiver: not listening/paying o Unemployment/Wages – Economies with high
attention, receiver doesn’t trust the sender/doesn’t unemployment rates/low wages will not have high
want to do it sales of expensive products
• Overcome by: emphasizing importance of message, o Ageing population – different ages are interested in
ask for feedback to ensure it was understood, using different products (i.e. anti-ageing creams)
direct communication • Changing customer needs are important to businesses.
They must identify these changes and respond in order
3. MARKETING to stay successful
• Market Share – the percentage of the total sales of a
3.1. Marketing, Competition & Customer market held by a single business (i.e. if Company A has
• Marketing – Identifying customer needs and satisfying $50 Million in sales out of a $200 Million market, then
them Company A has (50/200 =) 25% market share
• There are many departments within the Marketing • Some markets have become more competitive because:
sector of a business o Globalization – products are sold all over the world
• The role of the marketing is to: o Transportation – it is cheaper, quicker and easier to
o Identify customer needs – this will be done via send products around the world now
‘Market Research’. It will influence the development o Internet – customers can now search for products or
of a product, its price, and the sales technique services and buy from somewhere else around world
▪ A good marketing department should also be • For a business to stay competitive, it must:
able to anticipate (predict before happening) o Maintain good customer relationships
changes of customer needs (i.e. due to o Keep improving its existing products
advancement in technology) o Bring out new products to keep customer’s interest
▪ Find new trends or gaps in market with potential o Keep costs low
o Satisfy customer needs – selling the exact product
customers want, for a price they are willing to pay 3.1.3 Market
o Maintaining customer loyalty – building customer • Market – the total number of customers, potential
relationships and make sure that existing customers customers and other sellers of a product/service
will continue to buy from them and to attract new • There are two types of market:
customers o Mass market – where there is a very large number of
▪ Maintaining customer loyalty will be achieved by sales of a product type
always satisfying customer needs o Niche market – a SMALL (usually specialized)
• Markets don’t stay the same forever, businesses need to segment (part) of a mass market
adapt to market changes in order to stay competitive • For example, the tie industry is a mass market, but a
• Some markets change very often (i.e. phones) while business that makes ties out of crocodile skin is a niche
some don’t change quickly (i.e. jewelry or cereals) market
• Markets change because consumer spending patterns MASS Market:
change, this might be due to: Advantages Disadvantages
o Trends and fashions change – for a period of time it • Sales are very high • Lots of competition
might be fashionable to have a specific product (i.e. • Can benefit from • High costs of
Fidget Spinner) but a month later no one buys them economies of scale advertisement
o Advancement in technology – new products provide • Opportunities for growth • Many similar products
the latest technology so older versions (i.e. iPads or (large sales) so it may not meet
computers) don’t have high sales • There are many specific needs of all
variations of products customers
so risk is spread
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NICHE Market: • Primary Research - Gathering of ORIGINAL data by
Advantages Disadvantages talking directly with customers/potential customers
• Avoid competition with • Small – limited number • Primary research includes:
big businesses of sales o Questionnaires/surveys
• Specific needs of • Usually specialize in just o Interviews – person will interview other person and
customers are focused. one product, if product ask questions
Advantage over mass has low demand, it will o Samples – A group of people who are selected
market fail
(randomly) to answer (i.e. questionnaire)
o Quota Sample – when people are selected based on
3.1.4 Market Segmentation certain characteristics (age, income)
• Market segments – a sub-group of a market in which the o Focus Groups – a group of people who represent the
consumers have similar characteristics or preferences target market. They test out product/service and
• A market can be segmented by: explain what they like or don’t like about it
o According to age o Observations – many methods, i.e. Seeing which
o SOCIO-ECONOMIC group – grouping people television channels are being watched or watching
according to how much they are paid people and their habits or seeing which products have
o Location – where people live (people that live in wet sold well in a store
areas will buy more waterproof clothing than those Benefits Limitations
who live in dry areas) • Detailed information • If questions in
o Gender – men and women products differ can be gathered about questionnaires aren’t
o Lifestyle – how many children a person has, religion, the product (can even thought out answers
habits, etc. be carried online won’t be useful to the
• Benefits of market segmentation: • Customer/potential business
o Business aims all of its marketing efforts to the customer’s opinions • Can take lots of time
specific segment, making marketing costs efficient can be gathered and it and therefore,
o Since less money is spent on marketing, more profit is detailed expensive
o Identify a market segment whose needs are not • Most of these ways are • Interviewer may lead
being fully met and fill the gap (first in market) inexpensive and gather the interviewee to
lots of useful data answer in a certain way
3.2 Market Research (inaccurate)
• There are 2 types of businesses:
o Product-oriented business – a business that focuses • Secondary Research – information that has already been
mainly on the product itself collected and is available for others
o Market-oriented business – a business that focuses • This information can be obtained either from INTERNAL
on market research and find out what the customer SOURCES or EXTERNAL SOURCES.
wants BEFORE a product is developed • Internal Sources – within the firm’s own records: sales
• Market research is important because a business needs departments, customer records, finance department and
to know how many people would be willing to buy the CUSTOMER SERVICE department
product, this is to see how profitable it would be
• Market Research – gathering information about
consumers' needs or preferences in a market
• There are 2 main types of market research:
o PRIMARY RESEARCH (field research)
o SECONDARY RESEARCH (desk research)
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• External Sources – outside the business: government 3.3.1 Product
statistics (i.e. population, ages), Newspapers, Market • The product itself is part of the marketing mix, it has to
research agencies, INTERNET
Benefits Limitations
• cheaper than primary as • You do not get specific
research has already results for a certain
been done by others product or service, you
• There is some get broad results
information (i.e. • data may be outdated ensure it is the right product for the market.
economic forecasts or or incorrect as it was • This includes the quality and the design of the product
population size) that collected by others (including its packaging)
can’t be obtained by • Might not have the • Marketers must ask themselves “what can I do to make
primary research specific information this product better than my competitors’ products”
• Regardless on which type of research a business chooses • Unique Selling Point (USP) – the special feature of a
to use, the accuracy of the research data depends on: product that makes it different from other products
o How carefully the sample was drawn up • When businesses are developing new products there are
o How the questions in questionnaires/interviews several benefits, but also many costs/implications:
were written to make sure honest answers were Benefits Costs
given • Since the product has • Carrying out new market
o The sample itself and its size. By using quota its USP, the business research & analysis is
will be the first into the expensive
sampling you might get more reliable results
market with the new • Producing prototypes &
o The bias – some secondary research will be biased product cost of wasted materials
(i.e. articles on newspapers) which means the • Diversification for the • Lack of sales if the target
information might be unreliable business – more range market is wrong
o Age of the data – older data might be inaccurate of products to sell, • Deterioration of brand
more customers image if the new product
3.3 Marketing Mix • Allows business to fails to meet consumer
• Marketing Mix – all of the activities that are involved expand into new (or needs.
when marketing a product or service existing) markets
• The marketing mix can be summed up as the 4 Ps: • Now-a-days products are sent straight to a retail store.
o Product There is no seller to persuade the potential customer to
o Price buy the brand’s product over competitors
o Place • This has to be done through brand image of the product
o Promotion • Brand image – the identity of a product which separates
it from competitor products
You should always mention the 4 Ps when
• The product brand is advertised to inform all the
answering question about Marketing Mix!
qualities about the product and encourage consumers
• Businesses want to encourage existing and
new/potential customers to buy from them and create
Brand Loyalty
• If a business has a bad brand image due to poor quality
or bad service, then consumers will not buy from them
and there won’t be brand loyalty.
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• The other very important aspect of the product is the o Promotional – priced very low for a short period of
packaging. It has 2 functions: time to increase sales. when there is lots of stock but
o To be easy to put the product in, protect it, allow it to no one is buying. don’t make much (if any) profit
be used easily, and to be easily transported from Method Benefits Limitations
factory • It is easy to • You could lose
o To promote the product: it must appeal to the create and apply sales if price is
customer (colour & shape) and must emphasize the Cost Plus too high
brand image (i.e. a luxury product’s packaging might be compared to
gold colour) competitors
• Lots of sales • You have to do
• Product Life-Cycle – the stages a product will go through because the research to see
all the way from development until decline (stop selling) price is what
1. Development of product – market research carried reasonable competitors’
Competitive
out and product is tested, before launching (no • Product is not prices are. Time &
sales) under- or over- Money
2. Product introduced to market – Sales growing priced • Prices are low so
slowly because customers don’t know it exists yet not much profit
(no profit) • Sales are • Product is sold at
guaranteed and low price so profit
3. Growth - Sales grow quickly – advertising is changed Penetration
the new product will be low
to encourage customer loyalty
enters a market
4. Maturity - Sales still increase, but slowly,
• Establishes • Price is so high
competition is high so prices are changed (profits product as good that may put off
are at highest) Price
quality potential
5. Saturation – competition is very high, profits start Skimming
• Make quite a lot customers off
to fall as sales reached maximum point. Price of profit
reduced • Gets rid of • there will not be
6. Sales decline – new products are made or trend is unwanted stock much/if any
gone. Prices are so low it is unprofitable to make it. that won’t sell profit made –
Advertisement is stopped • renews because sales
Promotional
• As you can see different stages can influence marketing consumer’s revenue is lower
decisions (i.e. pricing & promotion) interest in
business if sales
3.3.2 Pricing: are falling
• There are 5 main types of pricing methods: • Price Elasticity – a measurement of how responsive the
o Cost Plus – the cost of manufacturing plus a profit. market is when there is a change in price of a product
it will cover costs and make sure profit will be made • In other words, how much you can increase the price
o Competitive – priced just below the competitors’ before sales fall enough that you make less money
prices to get more market share and increase sales • A product either has price-elastic demand or price
o Penetration – priced lower than competitors’ prices to inelastic demand.
enter new market (consumers will try out cheaper • Price-Elastic Demand is when the % of the loss in
product and see if they like it) demand is GREATER than the % of the increase in price
o Price Skimming – a high price is set for a new product • i.e. prices increase by 5% but then sales decrease by
on the market. (used for new inventions or 10%. Therefore, there is falling revenue for the business
development of an old product) high profits to cover • Price-Inelastic Demand is when the % of the loss in
the research demand is LESS than the % of the change in price
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• This means you can increase the price of the product a Advantages Disadvantages
lot without the demand changing (i.e. oil & petrol • Reduces storage costs for • More expensive to
because people have to buy it) small retailers because buy from wholesaler
small quantities are sold than from
3.3.3 Place – Distribution Channels • Small quantities so manufacturer
• Where a product is sold will affect how well it will sell transport costs are low • Wholesaler might not
• Distribution Channel - the method a business will use to • Wholesaler can give have all the products
send a product from the factory to customer/retailer feedback on what sells a retailer wants
well to producer • Takes longer to get to
There are 4 main distribution channels: consumer
1. Manufacturer sells products directly to consumer
(i.e. car components to car factory) 2. a manufacturer hires an agent (person or business)
that will sell products on behalf or manufacturer
• Very simple • Impractical because
• Suitable for products that consumers don’t usually
live near factories • Agents know the most • Manufacturer loses
are sold straight out of
profitable places & prices lots of control on
factories • Not good for products that
to sell in other markets the way the product
• There is a lower price for can’t be sent easily by post
that manufacturers may is sold to customers
consumer (cuts retailer) (may be expensive to ship
not know
it)
• Producer sells to retailers which sell to consumers: 3.3.4 Promotion
(i.e. farms selling food to big supermarkets)
• Promotion – publicizing a product/brand to increase
• Advantages • Disadvantages
customer awareness or increase sales
• Manufacturer sells lots • There is no direct • The aims of promotion include:
of stock to retailer contact with o To create a brand image for a product
• Cheaper transportation customers which o To introduce a new product into a market
costs because all makes It hard to o To increase competition in a market
products go to one create customer o To improve the company’s image
place loyalty o To increase the sales of a product
• There are many types of promotion methods a business
may choose to use.
• There are 2 types of advertisements:
o Informative Advertisement – where the promotion of
• Producers sell to wholesalers – which buy in bulk and a product focuses on giving information about a
then divide their stock into smaller quantities and sell product (i.e. the benefits of the product)
them to retailers o Persuasive Advertisement – where the promotion of a
product focuses on persuading the consumer that they
really need the product and they should buy it
• A business must also choose the most suitable
advertising media to use to promote a product/brand
• Advertising media include:
Page 17 of 30
o Television – suitable for products sold to most people 3.3.5 Technology & Marketing Mix
(food, cars, household products). it is very expensive • Now-a-days most things are sold on the internet, when
but millions of people will see it you buy or sell goods/services on the internet it is called
o Radio – cheaper than TV but there’s no visual message E-Commerce
o Newspapers – suitable for local products. Cheap to
• Not every product/service is suitable for e-commerce,
advertise and can be select to target specific group
products that are handmade (i.e. suits) or businesses
o Magazines – niche/specialist products can be
that like a personal approach with customers
promoted in specific magazines (bike magazines,
• The opportunities and threats of e-commerce to a
technology)
BUSINESS include:
o Billboards – suitable for mass products/local events.
Opportunities Threats
Reasonably cheap and are seen by many people. But
• Low-cost promotion: • Competition is very high
many people miss it. And no detailed info can be put
websites are cheap to run because competitors also
o Internet (social media) – suitable for products people and can promote world- have websites to sell
already know (clothes, books, electronics). Quite cheap wide • Website design must be
and through algorithms, websites can direct ads to a • Everything can be easy to use and attractive,
target audience, and orders can be made online. automated (orders are this costs money
However, there is lots of competition (i.e. top on received and sent to • Transport costs per
google) warehouse to dispatch) product sold are higher
• Another way a business can promote a product/brand is • Businesses can buy from than sending all to retailer
through Sales Promotions – when incentives (i.e. special other businesses • No direct contact with
offers/sales) are used to increase sales (short term) (materials/supplies) customers – less feedback
• The main sales production methods include:
o Sales (price reductions) • Opportunities & threats of e-commerce to consumers:
o Gifts (i.e. little toys in cereals) Opportunities Threats
o “Buy one get one free” • Don’t need to leave house • Need access to internet
o Competitions (I.e. raffles, a chance to win something) to buy products, shipped (poorer countries don’t
straight home have good access to web)
o Free samples
• Easy to compare different • slow servers or websites
• When a marketing department of a business is deciding
prices from different or computer failures can
which type of promotion it should use, it must take into stores and buy cheapest frustrate customers
account the marketing budget – the financial plan for • Payment is very easy • products cannot be
marketing product/brand for a period of time through credit/debit card seen/touched/tried on
• i.e. if the budget is small, a business cannot afford to • Can view and buy (i.e. shoes) and returning
advertise on television products from abroad, products is inconvenient
• It must plan out perfectly in order to have cost would be impossible • Some people are worried
effectiveness, while reaching target audience without about identity theft or
• This is where small business struggle compared to big • Competition of e- credit card fraud by
businesses, because their budget is so much smaller. commerce makes prices entering their details onto
much cheaper for a website
consumers
Page 18 of 30
3.4 Marketing Strategy o A business is responsible for any damage/harm that
• Marketing Strategy is the plan of action to promote and a faulty (or dangerous) product might do to a
sell a product or service consumer
• This includes combining the 4 elements of the marketing o Customers have 7 days in which they can change
mix (Product, Place, Price, Promotion) to achieve a their minds about purchasing a good or service. This
marketing objective, which could include: applies to any transaction made over distance (i.e.
o Increasing the sales: online)
▪ Of existing products (i.e. by selling in new
market)
3.4.3 Entering New Markets Abroad
▪ Of a new product • The globalization of businesses has been increasing over
o Increase market share/maintain market share the years, there are opportunities & problems to this:
Opportunities Problems
• The different elements of the marketing mix are very
important to influence customer decisions. • Growth potential in other • Lack of knowledge of
countries: countries are competitors or consumer
• For example: A product is made, priced reasonably, and
developing and population habits
meets the consumer needs, but there is no promotional
incomes are increasing • Cultural differences: for
element. No one will buy it because people don’t know
• Markets in original country example, alcohol won’t
about its existence might be saturated (sales sell well in middle east
• Or if a product is made that doesn’t meet consumer are low) • Exchange rates: in some
needs, so it won’t sell regardless of the price set • Can produce products in countries their currency
• It is crucial to have all elements working together in abroad and learn about its isn’t stable so price of
order to influence consumer decisions (buying the market to increase sales importing goods increase
product) • Trade barriers are lowered • Transport costs are more
in most countries so it is expensive
3.4.2 Legal Controls in Marketing cheaper to enter markets
• There are many laws in different countries to protect
consumers from businesses taking advantage of their • However, there are many methods to reduce and
lack of knowledge or lack product information overcome the problems of entering a new market:
• These legal controls include (in the U.K.): Problem Method to overcome
o Businesses are not allowed to sell products that Joint-Ventures: by working
weigh less than they should, or if weighing together/merging with local businesses
equipment is inaccurate Lack of in the same market, a business will gain
o ‘Trade Descriptions’ - Businesses are not allowed to knowledge a lot of important knowledge about the
give consumers misleading information on purpose (& Cultural culture & market
(i.e. saying that a shirt is made out of silk when it is Differences) Franchising: letting people from the
made out of cotton) market abroad which have local
o ‘Sale of Goods’ - Businesses are not allowed to sell knowledge to choose location of shop
products that have less-than-satisfactory quality – Licensing: the business gives permission
Transport
that don’t fit for the purpose intended (i.e. for a local business to sell goods under
costs are
waterproof shoes that aren’t waterproof) its name, so they do not have to
expensive
o A service must be provided with at-least physically import all the products
satisfactory skill and care Localizing Existing Brands: where a
o Businesses cannot have misleading pricing claims business still has the same brand image
Cultural
(i.e. 50% off today, when yesterday it was the same but adapts it to the market it is in (i.e.
Differences
price) McDonalds cooking vegetarian meals in
India)
Page 19 of 30
4. OPERATIONS MANAGEMENT o More output compared to inputs
o Lower costs per unit (AKA Average cost)
4.1 Production of Goods and Services o If there is more output, maybe less workers needed,
• Production – the making of a product or service to less people to pay wages
satisfy consumer wants and needs o If there are less people working, raising their wages
• A business combines the inputs/economic will increase motivation and so productivity
resources/factors of production to produce a more • Businesses hold inventories/Stock to ensure that there
valuable output (this could be a good or a service) are always enough products to satisfy demand of
• The ‘inputs’ include: customers
o Land – For factories or for materials • If a business doesn’t have enough stock of a product it
o Labour – Employees might lead to lower sales
o Capital – Money/finance • When the inventories get to the ‘reorder point’, they will
o Enterprise – Managers be reordered to get stock back up to maximum point.
• Businesses want to combine all of these inputs efficiently • Types of waste that occur in production:
to keep costs low to increase profits o Overproduction → leads to high storage costs and
• Labour-Intensive Production – where lots of workers are possible damage to goods while in storage
used rather than machines to make goods. Usually done o When nothing is happening to the goods (not being
in countries with low wages so that it is more efficient. processed or moving) this is Waste
• Capital-Intensive Production – where businesses use o Transportation – when the goods are being moved
machines/robots rather than workers. Usually done in unnecessarily → fuel price, may get damaged
developed countries where the wages are high. o Motion – any action made by an employee that does
• Productivity – the output (goods) measured against the not relate with the production of goods wastes time
inputs (resources) to create it o Over-processing – when sophisticated machines are
Productivity = Quantity of Output / Quantity of Inputs being used to do simple tasks
• The difference between Production and Productivity is o Defects – when goods have faults/defects that
that Production is the process of creating the require them being inspected/fixed wastes time
product/service from inputs. And the Productivity • Lean Production – the techniques used by businesses to
measures the efficiency of the Production reduce waste, therefore increasing efficiency.
• Businesses usually measure the productivity by • 3 Types of Lean Production:
measuring one of the factors of production against the o Kaizen
outputs (usually Labour) o Just-In-Time inventory (JIT)
Labour Productivity = Output / No. of employees o Cell Production
• Efficiency is increased by either: • Kaizen – Japanese Term. Means “continuous
o Using fewer input to produce the same output improvement” by focusing on constantly reducing waste
o Using the same inputs to produce higher output • The Kaizen technique involves workers meeting regularly
• How to increase productivity/efficiency: to discuss problems and to find solutions
o Improving the layout of machines to reduce wasted • Just-In-Time – a production method that virtually
time moving from one workspace to another eliminated the need of having inventories of raw
o Improving the labour skills of workers so they use materials for production and of finished products
more productive techniques (more efficient) • JIT method involves an efficient system to time
o improving employee motivation specifically when the raw materials should arrive at a
o Introducing new technology (i.e. automation) factory, for production, and when a truck should arrive
o Improved quality control (check if product is not to carry the finished products to the next stage of
faulty) to reduce wasted time checking production. (used by Volkswagen)
• Benefits of increasing efficiency:
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• Just-in-time system reduces costs by not holding any • Flow Production:
inventory. Because components and materials arrive Features Benefits Limitations
just-in-time when needed. Large quantities High output, Very boring for
• Cell Production – where production is divided into of a product are capital intensive employees
separate units (cells) each making a part of the finished produced more efficient High cost of
product. Rather than having a flow or mass production. Ingredients start Costs are low inventory of
at one end & Benefits from output & raw
• Cell Production improves employee morale so they work flow to the materials
economies of
harder and more efficient. other end, scale Costs of setting
ready to be sold Works 24/7, no up are very high
4.1.2 Methods of Production Cars, drinks, need for labor If machine
• 3 main methods of production: electronics, any No need for breaks down,
o Job Production – products made one at a time mass-made moving goods whole
products are around (all production
o Batch Production – a quantity (batch) of a product is
made this way made in the stops
made, then a batch of another product is made
same place)
o Flow Production (mass) –large quantity of products
made in a continuous process • Automation – when equipment in factory is controlled
by a computer to do mechanical processes (i.e. painting
• Job Production: car). Only workers are to ensure it runs smoothly
Features Benefits Limitations • Mechanisation – when production is done by machines
Products are good for “one- Often labor but operated by people. Used to do difficult, precise or
made specifically off” products intensive, + cost dangerous tasks. Work 24/7.
to order meets exact Production • Computer Aided Design (CAD) – software that helps
Each order is requirements takes longer
different of customer design or re-style products quickly, allows technical
Any errors are
i.e. bridges, ships, varied work expensive to fix, sketches to be very detailed
cinema films, increases (made to order) • Computer Aided Manufacture (CAM) – when computers
suits employee Materials are monitor production and control machines/robots
motivation more expensive • Computer Integrated Manufacturing (CIM) – wen
software that designs the products is integrated with the
machines that produce (CAM + CAD)
• Batch Production:
Features Benefits Limitations 4.2 Costs and Scale of Production
Similar products Flexible work, Machines must • Fixed (overhead) Costs – Costs that do not change with
are made in can change be reset to do the number of items sold/produced.
batches products easily diff. batches • Fixed costs must be paid regardless if the business is
i.e. bakery: Gives some Semi-finished making a profit or not.
makes one type variety to products may • Examples of Fixed Costs:
of bread, then worker’s jobs need to be
one type cake. transported o Rent of factory: even if you produce lots of products,
More variety =
Furniture, more consumer around (+ cost) the rent price will be the same
clothing choice Need space for o Insurance: you set the insurance cost before-hand
stocks of raw o Bank fees: bank fees are a set price, they don’t
material change depending on the products produced
o Management Salaries: they are set regardless of
production
o Staff cost (Security)
Page 21 of 30
• Variable Costs – costs that are directly proportional with • If the total cost increases, then the BE point increases
the number of items sold/produced. and total cost’s line becomes steeper
• The more items produced, the higher the variable cost • If revenue increases, then revenue line becomes steeper
and so the break-even point decreases
• Examples of Variable Cost: • Benefits of break-even charts:
o Raw materials: the more you produce, the more o Managers can read of the graph if the company
materials you need expects profit or loss, and can see how much
o Electricity & Gas: Energy is paid by use. if you are profit/loss the will have at any level of output
producing more, more electricity is being used o They can attempt different scenarios and see the
o Shipping cost: Making more products means you have impact it will have on the profit or loss of the
to ship more items and shipping is paid by weight business. It lets managers try out different
• Total Cost – Fixed and variable costs combined possibilities to find out which one is the best. (i.e.
• Average Cost (Per Unit) – total cost of production increasing the selling price, increasing production)
divided by the total output. Referred to as Unit Cost o It can be used to show the SAFETY MARGIN – the
• Large businesses can benefit from Economies of scale amount by which sales exceed the break-even
and therefore getting lower average costs. point.
For example: if a business’ break-even point is at
4.2.3 Break-Even Charts 400 units and they’re producing 600 units, their
• Break even charts show how costs and revenues of a safety margin is 600 – 400 = 200.
business change with sales. They show the level of sales • Limitations of break-even charts:
the business must make in order to break even o Break-even charts assume that all products made
• The break-even point is where: will be sold. It does not show the possibility that
total cost = sales revenue inventories may build up if they are not sold
o Fixed costs only stay the same if the scale of
production stays the same (doubling the output will
also increase the fixed cost because they must need
bigger factory, more machinery, labour, etc)
o Break even charts assume that costs and revenues
can be drawn with straight lines, which doesn’t
happen in real life.
• To calculate the break-even point:
Break Even = Fixed cost / contribution (per unit)
Where the revenue line intersects the total cost
• Contribution – the selling price of a product (unit cost)
• Sales revenue is the income of a business from sales of
subtracted by the variable cost (per unit):
goods or services in a period of time. Contribution = unit cost – variable cost (per unit)
• To draw a break-even chart, you must include:
o Fixed Costs line Variable cost (per unit) = Variable cost / units produced
o Variable Costs line
o Total Costs line
o Sales Revenue line
• Anything before the break-even (BE) point is loss
• Anything after the break-even (BE) point is profit
• ‘y’ axis measures money amounts (cost & revenue)
• ‘x’ axis shows the number of units produced or sold
• Total cost is variable cost line starting from fixed cost
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4.3 Achieving Quality Production o Fewer customer complaints
• Quality – to produce a good or a service which meets o Reduced costs if products don’t have to be scrapped
customer expectations or reworked or service repeated
• Quality is important for businesses because: • Drawbacks of Quality Assurance:
o It establishes brand image o Expensive to train employees to check products
o It builds brand loyalty o Relies on employees following instructions of the
o It maintains a good reputation standards set by company
o It will help to increase sales • Total Quality Management (TQM) – the continuous
o Attracts more and new customers improvement of products and processes by focusing on
• If quality is not maintained, businesses will: quality at each stage of production
o Lose customers to other brands / competitors • Total quality management is used by many companies
o Have to replace faulty products or repeat poor • It tries to “get it right the first time” and have no defects
service which raises costs for business • It focuses on ensuring 100% that the customer is always
o Have a bad reputation because people who had bad satisfied. Customer is not just the final user, it also
experiences will tell other people, etc. Leads to lower includes other people and departments within the
sales & revenue business
• Quality Control – Checking for quality at the end of the • This means that quality needs to be maintained
production process, whether it is a product or a service. throughout the business and no faults should occur.
• Quality control is a traditional way to make sure that • Advantages of total quality management:
products leave the factories with no defects o Quality is built into each part of the production. It
• The jobs of people in quality control departments are to becomes a habit for the employees
take samples at regular intervals to check for errors. o Eliminates virtually all faults/errors before the
• If errors are found, the whole batch of production might customers receives.
have to be redone. o No customer complaints so brand image is
• Their job is also to prevent any production errors before improved
they happen during production, which will lead to money o Waste is removed and efficiency increases which
loss means less money is wasted (higher profits)
• Sometimes, businesses bring a mystery customer to test • Drawbacks of total quality management
out the service to check if the quality is as expected o very expensive to train employees to check the
• Advantages of Quality Control: product or service at every stage of production
o Eliminates faults/errors before customer receives o relies on employees following the ideology of TQM
product or service
o Less training is required for the workers
4.4 Location Decisions
• Drawbacks of Quality Control: • Factors that influence the choice of location of a
o Expensive, as employees need to be paid to check business:
o Labour (cost & skills) – how many employees and if
the product or service
o Identifies the fault but not how and why it occurred they rely on special labour skills
so it is difficult to remove the problem o Cost of land/premises –big manufacturing
o Increased costs if products have to be scrapped or companies need lots of cheap land to build
reworked or service repeated o Transport links (supplies & distribution) – being
close to transport links (i.e. rail road) means that
• Quality Assurance –checking for the quality standards
products can be easily and quickly transported
throughout the production process
which reduces time wasted. and if business imports
• Advantages of Quality Assurance:
lots of components it will be cheaper if they easy
o Eliminates faults/errors before customer receives
transported
product or service
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o Sales technique – if a company does online or • Working capital - money needed to pay day-to-day costs
phone sales, then the company doesn’t need to be • There are 2 types of finance needs:
in the centre of the city. If it relies on personal visits o Short-Term Finance Needs:
buy customers, like retail, it should. Finance needs to pay things that last less than a year,
o What the business does – manufacturing (working capital) - includes wages, rent
businesses are usually in the outskirts of a city o Long-term Finance Needs:
where land is cheaper because they don’t rely on long term investments (that last more than 1 year).
customer visits. A retail company would be near Money to buy Fixed Assets (i.e. buildings)
customers
o Number / location of competitors – having 5.1.2 Sources of capital
competitors nearby is not always a bad thing. If • The main sources of capital include:
there are many clothes shops right next to each o Internal Sources – Obtained by business itself
other, it encourages people to visit area because o External Sources – Obtained from outside business
there is lots of choice, increases business. Examples:
• Some businesses may decide to locate their operations Internal sources External sources
in another country, to expand operations. the business Retained profit Issue of shares (if it’s LTD/PLC)
then becomes a TNC – Trans National Company. Sales of assets Bank loans/Micro-finance
• Factors influencing decision of which country to locate Grants
operations in: • Micro-Finance - providing smaller loans to poorer people
o New market overseas - when a business sees an to start up their own business.
increase in sales overseas, it may decide to • Micro finance is very important in developing countries
move/relocate there, instead of transporting • There are also short-Term and long-term sources (don’t
products there get confused with short/long term finance needs)
o Cheaper Source of material – if the raw material o Short Term Sources – money that must be paid back in
runs out, the business must either bring in less than a year
alternative supplies from somewhere else or o Long Term Sources – money that can be paid back in
relocate to new country with these raw materials, it
longer than one year
also might be cheaper than transporting it
Short-Term Sources Long-Term Sources
o Difficulties with the labour force and wage costs –
Overdrafts – when the Bank loans
if business is located in country where wages keep
bank allows a business to Issuing shares
rising, business may decide it is more profitable to
spend more money than Owner’s savings
relocate to country where wages are lower
they have in their account Hire Purchase – When a
o Rents/taxes considerations – if other costs such as
(i.e. to pay employees) business buys a fixed
rent or taxes increase, this might cause business to
Trade Credit – delay paying asset in monthly
relocate to countries where it is lower
suppliers to be in better payments (which
cash position include interest)
5. FINANCIAL INFORMATION AND DECISIONS
• The main factors considered in making financial choice:
5.1. Needs of Capital o Size of business & Legal Form (type of business):
Finance = Capital = Money Public limited companies have larger choice of sources
• Main reasons why businesses need finance: of finance because they pay less interest (less risk)
o To start up a business: the money needed to buy the o Amount of capital required: if you need just a little
essential assets to start trading is the start-up capital money you won’t issue new shares
o To expand the business o Purpose of capital & time period: The general rule is
o To increase working capital that the finance source should match the finance need:
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5.3 Income Statements
• For most business, profit is the main objective
• Profit is the money left over after total costs have been
subtracted from the sales revenue.
▪ If use of capital is long-term, source The simple equation for profit:
should be long-term (same with Profit = Sales revenue – total costs
short term) • Profit can be made by:
o Existing Loans: if a business already took out lots of o Increasing the sales revenue, so that it is higher than
loans, banks will think it is too risky to finance the production costs
o Reducing the production costs
5.2 Cash-Flow Forecasting & Working Capital • Profit is very important, especially for the private sector
• Cash is a Liquid Asset – it can be immediately available companies (not owned by government)
to spend on goods & services o Profit is a reward for risk taking: investors &
• Cash Flow – the cash inflows (money received by entrepreneurs take lots of risks when investing money
business) & outflows (money paid) over a period of time o Profit is a reward for enterprise: entrepreneurs and
• Cash-Flow Forecast – an estimate of future cash inflows workers put lots of effort to make business succeed
and outflows. o Profit can be re-invested back into business: the
• A cash-flow forecast shows the expected cash balance at retained profits can be put onto business to expand
the end of each month: o Profit indicates that the market might be successful: a
• Cash flow forecasts are just little charts with values market where most businesses are making profit would
comparing 2 different time periods (months/years etc.) be a good market for an entrepreneur to start their
• Net Cash Flow – The difference between the cash inflow own
and outflow (inflow – outflow) Profit ≠ Cash
• Cash flow forecasts are useful because: • Profit can be in the form of cash, but it can also be in the
o They show how much cash is available to pay liabilities form of credit (customers will pay later)
of to buy assets • If a company makes $40,000 in sales, but only $20,000 is
o They show how much money a business might need to in cash and the other $20k is in credit. The business only
borrow from a bank has $20,000 in cash to pay costs.
o They show whether the business is holding too much • Credits can vary from a week to a year, it is ‘promised’
cash which could be reinvested back into business cash but not physical, and can’t pay for costs.
• To complete a cash-flow forecast, just rearrange and use • So, in this case, if the business makes $40,000, and the
the equation (net flow = inflow – outflow) costs are $15,000 it will make $25,000 in gross profit
• Short-term cash-flow problems can be solved by (theoretical profit), but only $5,000 in net profit
gathering short-term sources of finance • Income Statement – A business account that records all
Working Capital the incomes of a business and all the cost payed over a
year – to see if it is making profit.
• Working capital is the money needed to pay day-to-day
costs • It will be used by managers, banks and other investors to
Working Capital = Current Assets – Current Liabilities see if a business is making profit:
o to compare with previous years - if it is greater than
• A business cannot run without enough working capital
the year before
• You can measure the success of a business by seeing
o To see if it is higher than competitors
how much working capital it has
• The main features of an income statement include:
• Working capital should be handled properly because it
o Revenue
shows investors & banks how efficient a business is and
o Costs
its financial strength
Page 25 of 30
o Gross Profit – the profit made after costs of goods • The shareholders’ funds is the total amount of money
sold are taken away from sales revenue invested in a business by the shareholders/owners
o Net Profit (AKA ‘Profit’) – the profit made after • If the total equity of a business has increased/fallen, the
taking away all expenses and overhead costs (other shareholder’s stake of the company will be worth
expenses) more/less, respectively
o Retained Profit – the net profit after taking away From a balance sheet, you can calculate the
taxes and payments to owners – which is reinvested Working Capital = Current Assets - Current Liabilities
back into the business You can also calculate the Capital Employed – the long-
Profit Type Equation term capital invested in a business
Gross Profit Sales Revenue - Costs of goods sold Capital Employed = Non-Current Assets + Total Equity
Gross Profit – Overhead Costs Total Equity = Shareholders’ funds
Net Profit
(wages, electricity, rent, marketing)
Retained 5.5 Analysis of Accounts
Net Profit – (tax + dividends) • Using all of the documents and information from cash
Profit
• Income statements are very important in decision flow forecasts, balance sheets and income statements
making in a business you can rate the performance of a business
• If a business is thinking to relocate a factory, they will • Analysis of accounts is interpreting these
make a forecast income statement in both locations and accounts/documents to see how a business is doing
compare • To rate a company’s performance, you can use 5 ratios
• There are 2 types of ratios:
5.4 Balance Sheets: o Profitability Ratios – how profitable a business is
• Balance Sheet – a document that shows the value of the o Liquidity Ratios – how able a business is to pay its
business’ assets and liabilities in a point in time short-term debts (current liabilities)
• A balance sheet • Profitability Ratios:
• Assets – Items of value owned by a business o Gross Profit Margin (%) – how good a company is at
• Liabilities – Debts owed by business converting sales into gross profit. A percentage
• There are 2 types of assets: GPM (%) = 100 × Gross Profit / Sales Revenue
o Current Assets – (Short-term Assets) Items owned by o Net Profit Margin (%) – how good a company is at
business for less than 1 year converting sales into net profit. A percentage
i.e. Raw material, cash NPM (%) = 100 × Net Profit / Sales Revenue
o Non-Current Assets – (Long-term Assets) Items owned o Return on capital employed – how profitable a
by business for more than 1 year company is compared to the amount of money used
i.e. Buildings, land, company cars RoCE (%) = 100 × Net Profit / Capital Employed
• There are also 2 types of liabilities: • One profitability ratio isn’t useful by itself. You need to
o Current Liabilities – (Short Term Liabilities) Debts use all the profitability ratios and compare it with
owed by business for less than 1 year previous years of the business.
i.e. Bank overdrafts, wages • Liquidity Ratios:
o Non-Current Liabilities – (Long Term Liabilities) Debts o Current Ratio – how good a company is to pay off its
owed by business for more than 1 year current liabilities with its current assets
i.e. Long-term bank loans, creditors (money that Current Ratio = Current Assets / Current Liabilities
business owes to suppliers)
• the Total Equity (AKA Shareholders’ funds) is how much
a business is worth. (only for Limited companies)
Shareholders’ Funds = Total Assets – Total Liabilities
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o Acid Test Ratio – measures the ability of a company to o Banks: see if business is performing well to calculate
pay off its liabilities without depending on the sales of the risk on whether to give out a loan or not.
inventory o Employees: to see how safe the business (and their
Acid Test Ratio = Current Assets – Inventories (Stock) jobs) are.
Current Liabilities
• The acid test ratio is used to measure if a business is 6. EXTERNAL INFLUENCES ON BUSINESS ACTIVITY
likely to survive in the future
• The good and bad values of these ratios: 6.1 Government Economic Policies &
Gross Profit Margin No exact value, you must Objectives
(%) compare with: • Inflation – The increase of average prices of goods &
Net Profit Margin • Competitor businesses services
(%) • Previous years • Governments want 3 main economic objectives:
• The targets set by the o Low Inflation: Low prices of goods & services, so
ROCE (%) business people will buy more, more money in economy
Current Ratio Should be above 1.5 to be safe o Low Unemployment: High % of people working so that
Should be above 1, unless you they don’t rely on government funds
are dealing with cash sales in o Economic Growth: growth of the GDP (Gross Domestic
Acid Test Ratio Product) of a country – more goods and services being
which it can be above 0.75 (cash
is liquid - pays of liabilities easily) produced and sold
• Liquidity – Ability for a business to pay off it short term o Balance of payment (of Imports & Exports): the
debts difference between the imports and the exports of a
• If a business’ assets can’t be easily converted to cash, country balance out (BoP = Exports – Imports)
then they are Illiquid • Exports are goods/services sold from one country to
• Current Assets are liquid. another – and they bring money into a country
• Having lots of stock may mean that the company might • Imports are the opposite
be illiquid because inventories are hard to convert to • An economy does not grow steadily, there are bumps
cash easily where the economy does not grow at all
• Liquidity is very important for a business: • Recession – A period of falling GDP
o If they can’t convert their assets into cash, they won’t • Economies go through the ‘Business Cycle’:
be able to pay their suppliers (current liabilities) 1. Growth: GDP is rising,
o Not paying suppliers will force them to stop trading to unemployment
pay back their debts falling, businesses
succeeding & higher
5.5.3 Why and how accounts are used: living standards
• Limited companies must publish their accounts for the 2. Boom: Higher living
public to see. IT is used for ratio analysis. standards so people
• All types of stakeholders will be interest in seeing these start spending more
accounts to see how well the business is doing. i.e.: money, so prices increase – business costs will also rise
o Managers: to keep an eye on the performance of the 3. Recession: people become uncertain about their jobs
business. Compare ratios with competitors & previous so they don’t spend money. Many workers lose their
years to make decisions. jobs because of lack of demand & profit in a business
o Shareholders & potential investors: They will see how 4. Slump – A long-term, serious recession: Unemployment
profitable a business is using the ratios to see if it is will be very high, GDP has decreased a lot and many
worth investing in it. See how much business is worth businesses will not survive and go bankrupt
Page 27 of 30
6.1.1 Government Economic Policies Interest Rates
• There are 3 main ways governments can influence the • The interest rate is the amount charged for borrowing
economy (AKA economic policies): money from a bank
o Government expenditure • In most countries, the interest rates are fixed by the
o Changing tax rates Fiscal Policy
government
o Interest Rates • the % of the interest rate is called the monetary policy
• Government Expenditure is how the government spends • The effects to business activity due to having higher
the money made from taxes. It is usually spent on interest rates include:
education, defense, healthcare, public transport, etc.… o Less profit for companies that already took out a loan -
• Companies that are involved in these markets/sectors less/slower expansion of a business.
above will benefit. i.e. a bus manufacturing company will o Entrepreneurs thinking of starting business might not
benefit if government spends more on public transport be able to afford to take out a loan
• Spending more on these markets will boost economy in o If consumer loans (i.e. mortgages) increase, people will
a country (more jobs created, more demand) have less disposable income – less demand for goods
• There are 2 types of taxes: o Higher exchange rates of currency
o Direct Taxes – taxes paid directly from incomes (of
• Businesses might respond to all of these policies by:
individuals as wages or as business as revenue)
Policy Business Response
o Indirect Taxes – VAT, taxes added to prices of goods
Higher • Lowering production costs to be able to
• Out of these 2 types, there are 4 common taxes that income tax sell goods for lower prices
affect business activity:
How it affects business
Higher • Focusing on the domestic market
Tax What it is tariffs (on • Buying materials from local companies
activity
Tax on people’s incomes – People have less disposable imports) rather than from companies abroad
Income You can either have a set income (money after tax).
Higher • Reduce investment for business growth
tax tax (i.e. 20% of income) or They would have less
(direct Progressive income tax, money to spend on goods interest • Lower prices of goods for consumers
tax) where richer people pay or services. Businesses rates • Sell assets for cash to reduce loans
higher taxes. have less revenue.
Tax on profits made by If tax rates increase: 6.2 Environmental & Ethical Issues
businesses (a set • Harder for a business to
Profits • Business activity can impact the environment in many
percentage) expand (less profit) less
Tax different ways, including:
money to reinvest back
(direct o Air pollution made by factories & transportation
into business.
tax)
• Fewer people will start o Water & land pollution from improper waste disposal
their own business o Increase carbon emissions – global warming
Tax added to prices of Prices of goods will
Indirect • Most business decisions lead to benefits and costs.
goods & services (varies increase so less people will
Tax There are private and external benefits and costs
within types of products) buy them – Less demand
(VAT)
for a business • Private costs & benefits are costs that a business pays
Tax on imported goods • Local businesses will have for, and the benefits the business gains
from other countries. more demand because
• External Costs – costs paid by society, rather than the
Import Import Quota is a physical there less imported goods
Tariffs & limit to the amount of • Importing raw materials
business (as a result of business decision)
Quotas products that can be from abroad will be much • External Benefits – gains to society, rather than the
(indirect) imported. more expensive – products business (as a result of business decision)
will be more expensive –
sell less
Page 28 of 30
• The possible external costs and benefits of a business • Governments sell ‘permits’ to companies that allow it to
decision might include: pollute the environment up to a certain level
External Costs External Benefits • Firms that pollute less than the government allows, can
• Environment is harmed • Jobs are created, sell their permit to companies that pollute more
from waste products economy is boosted • This motivates businesses to pollute less, to earn money
• pollution may damage • Other companies might
the health of people move in, more services • Ethics – “doing the right thing” - the moral principles
• less energy • better infrastructure • Most businesses have to face many ethical decisions,
• traffic • better quality of life they have to decide whether to act ethically or have
higher profits
• these externalities change depending on the decision. • Ethical decisions include:
• Sustainable development – development that does not o Employing child workers, even though it might not be
compromise the living standards of future generations illegal in some countries
• Businesses can contribute to sustainable development o Buying supplies that lead to damage of the
by doing 4 main things: environment
1. Using renewable energy (wind, solar) o Paying managers large bonuses while having their
2. Recycling & reusing their waste workers in minimum wage & poor conditions
3. Using less natural resources (lean production) o Offering bribes to people to gain information
4. Developing environmentally friendly products & • Different companies have different ethical standards
packaging (i.e. biodegradable packaging) because people have different moral codes
• People & consumers pressure companies to think more • Businesses may respond to ethical issues by following
environmentally. There are many reasons and ways their moral code and “doing the right thing”
businesses give the environment a higher priority: • These decisions have benefits and disadvantages:
• Pressure groups - a group of people who want to change Benefits Disadvantages
policies/decisions of businesses or the government. • Consumers appreciate • Higher costs of
• Pressure groups acting on unethical decisions made by a the efforts made by the production
business will lead to a consumer boycott - consumers company and so they • Higher prices – might
not buying their products buy more from them lead to less demand
• Environmentally friendly businesses can use the fact that • Creates good publicity • In some places families
they are environmental as a marketing advantage • Less risk of lawsuits depend on their children
Type of How and why it • Easier to find workers to earn money
What it is
pressure responds
a group of people who • Lots of public 6.3 Business and the International Economy
want to change policies / support • Globalization –the world becoming more interconnected
Pressure decisions of businesses • Very bad brand leading to increasing worldwide trade & people moving
image &
group They lead to consumer • The reasons for globalization include:
boycotts - consumers not reputation
• Loss in sales o More Free-Trade Agreements – imports/exports
buying their products
between countries that pay no tariffs
Laws passed Government making • It is more
certain activities illegal (i.e.
o Easier, cheaper and faster transportation between
by expensive to
dumping waste) manufacture countries
Government
o E-commerce allows products to be bought from all
If a business produces more • Costs of over the world
pollution than the business
Fines o Industrializing countries (i.e. India & China) can
government allows, they increase
pay heavy fines. produce products at very low prices
Page 29 of 30
• The opportunities and threats of globalization to a • However, there are potential drawbacks to the country:
business include: o Less sales for local businesses, might go bankrupt
Opportunities Threats o ‘Repatriation of profits’ – profits are sent back to
• Businesses can sell abroad, • Increasing foreign competitors home country and doesn’t benefit country located
increasing sales importing their products,
o Business has lots of influence on government – they
• Opening factories or offices leading to less sales (& profit)
abroad – can be cheaper to • Workers in home country can threaten to leave the country
produce, but it is expensive to might leave for higher wages in o They can use up scarce resources in the country
set up other countries
• Importing materials from • More foreign companies set 6.3.3 Exchange Rates
abroad – can be cheaper but up operations in the home
• Exchange Rate – the price of one currency in terms of
transport costs can be too country of the business, more
high competition
another currency
• Importing goods from abroad • For example, 1 Euro is equivalent to 1.2 Dollars
and selling it in home country • Currency Appreciation – when the value of a currency
• Sometimes governments introduce import tariffs and increases (i.e. 1€ = 1.2$ → 1€ = 1.7$)
quotas to protect local businesses – this is called • Currency Depreciation – when the value of a currency
Protectionism increases (i.e. 1€ = 1.2$ → 1€ = 1.1$) – it can buy less of
• They believe that by reducing the number of foreign another currency
competitors and goods (that would have much lower • The exchange rate of a currency is influenced by 2
prices), there will be less unemployment and higher things:
incomes o Demand for the currency: if many people want to buy
• However, by doing this, it is harder for local businesses the currency the price will increase because there is a
to import materials and export their goods abroad ‘limited’ number of currency (appreciate)
o Supply of currency: if the central bank prints more
6.3.2 Multinational Companies (MNCs) money, the supply increases but the demand is still the
• Multinational Company = Transnational Company same so the value is lower (depreciation)
• A multinational company is a company that has factories • Exchange rates can affect businesses by:
or service operations in more than one country If it Appreciates: If it Depreciates:
• It is not just selling products abroad, it is having • Import prices fall: since • Import prices rise: your
your currency can buy currency is worth less so
operations abroad
more of the other you need more to buy other
• The benefits of a business becoming international:
currency currencies
Benefits to the business Benefits to the country
• Export prices rise: your • Export prices fall: it is worth
• Producing goods at lower costs • Jobs are created
currency is worth more so less so other currencies can
• Closer to resources (i.e. oil) • Investments in
• Closer to market development of it is more expensive for buy your currency for les of
• Avoid expensive taxes of import of infrastructure in other currencies to buy it theirs
goods (i.e. Korean cars (KIA) being country • This means that if the currency Appreciates:
produced in EU to benefit from free • More exports o The product’s price in other countries will increase
trade) • Tax – more money to o Business will make more profit
• Spread risks (if there are low sales in government
one country and high sales in • increased product
o Business can lower the price and still make the same
another) choice for consumers amount of money as before – it is more competitive
• If the currency depreciates:
o The products price in other countries will decrease
o less profit will be made
o Business needs to raise the price to make the same
amount of money as before – less competitive
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CIE IGCSE BUSINESS STUDIES//0450

Understanding business activity

Financial information and decisions

External influences on business activity

1.21 Risk, Ownership & Limited Liability 1.24 Stakeholder objectives

2.2.3 Leadership Styles

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