Revision Guide

Business Studies

GCSE O LEVEL

Hassan Khalil
0322-7892189 1

Hassan Khalil
0322-7892189
 Table of Contents
Revision Guide 1
Chapter 1: The purpose of Business Activity 3
Chapter 2: Types of businessactivity 7
Chapter 3: Forms of business organization 12
Chapter4:Government and economic influences on business 19
Chapter 5: Other influences on business 30
Chapter 6: Business costs and revenue 35
Chapter7:BusinessAccounting 38
Chapter8:Cashflowplanning 43
Chapter10:OrganisationalStructure 51
Chapter 11: Managing a business 56
Chapter12: Communication in business 61
Chapter 13: Motivation at work 69
Chapter14:Recruitment,Training, andhuman resources 78
Chapter 15: Employee and employer associations 88
Chapter16: Themarketandmarketing 96
Chapter 17: Marketresearch 101
Chapter18:Presentationofinformation 109
Chapter19:Themarketingmix:productand packaging 112
Chapter 20: The marketing mix: price 116
Chapter21:Themarketingmix:promotion 122
Chapter 22: The marketing mix: place 130
Chapter23:Factorsaffectingproduction 134
Chapter24:Factorsaffectinglocation 142
Chapter25:Businessintheinternational community 148

Hassan Khalil
0322-7892189
 Chapter 1: The purpose of Business Activity

The economics problem: needs and wants.

All humans have needs and want. Needs are things we can't live without, while wants are simply our
desires that we can live without. We all have unlimited wants, which is true since all of us want a new
PC, a car, a new graphics card, etc. that we do not need to live. Businesses produce goods and services to
satisfy needs and wants.

Although we have unlimited wants, there are not enough resources for everyone. Resources can be split into 4
factors of production, which are:

- Land: All-natural resources used to make a product or service.

- Labour: The effort of workers required to make a product or service.

- Capital: Finance, machinery, and equipment required to make a product or service.

- Enterprise: Skill and risk-taking ability of the entrepreneur.

Entrepreneurs are people who combine these factors of production to make a product.

With these discussed, let us move on to the economic problem. The economic problem results from
limited resources and unlimited wants. This situation causes scarcity when there are not enough goods
to satisfy the wants of everybody. Because of this, we will have to choose which wants we will satisfy
(that will be of more benefit to us) and which we will not when buying things. For any choice, you will
have to would have obtained if you didn't spend that money. For example, you would have got a book if
you didn't buy the pen, or you would have a burger if you didn't buy the chips. The item that you didn't
buy is the opportunity cost. Make sure that the opportunity cost isn't higher than what you bought!

"Opportunity cost: the next best alternative given up by choosing

another item." Here is a diagram showing the whole economic

problem:

Hassan Khalil
0322-7892189
 Division of labor/Specialization

Because there are limited resources, we need to use them in the most efficient way possible. Therefore, we now use
production methods that are as fast as possible and as efficient (costs less, earns more) as possible. The main
production method that we are using nowadays is known as specialization or division of labor.

"Division of Labor/Specialization is when the production process is split up into different tasks and each
specialized worker/ machine performs one of these tasks."

Advantages:

• Specialized workers are good at one task and increase efficiency and output.
• Less time is wasted switching jobs by the individual.
• Machinery also helps all jobs and can be operated 24/7.

Disadvantages

• Boredom from doing the same job lowers efficiency.

• No flexibility because workers can only do one job and cannot do others well if needed.
• If one worker is absent and no one can replace him, the production process stops.

Why is business activity needed? (summary)

- Provides goods and services from limited resources to satisfy unlimited wants.

- Scarcity results from limited resources and unlimited wants.

- The choice is necessary for scarce resources. This leads to opportunity costs.

- Specialization is required to make the most out of resources.

3
Business activity:

1. Combine factors of production to create goods and services.

2. Goods and services satisfy people's wants.
Hassan Khalil
0322-7892189
3. Employs people and pays them wages so they can consume other products.

Business Objectives:

All businesses have aims or objectives to achieve. Their aims can vary depending on their type of business or these
can change depending on the situation. The most common objectives are:

1. Profit: Profit is what keeps a company going and is the main aim of most businesses. Normally a business will try to
obtain a satisfactory level of profits so they do not have to work long hours or pay too much tax.
2. Increase added value: Value added is the difference between the price and material costs of a product.
E.g. If the price when selling a pen is $3 and it costs $1 in material, the value-added would be $2. However, this does
not take into account overheads and taxes. Added value could be increased by working on products so that they
become more expensive finished products. One easy example of this is a mobile phone with a camera would sell for
much more than one without it. Of course, you will need to pay for the extra camera but as long as prices rise more
than costs, you get more profit.
3. Growth: Growth can only be achieved when customers are satisfied with a business. When businesses grow, they
create more jobs and make them more secure when a business is larger. The status and salary of managers are
increased. Growth also means that a business can spread risks by moving to other markets, or it is gaining a larger
market share. Bigger businesses also gain cost advantages, called economies of scale.
4. Survival: If a business does not survive, its owners lose everything. Therefore, businesses need to focus on this
objective the most when they are: starting up, competing with other businesses, or in an economic recession.
5. Service to the community: This is the primary goal for most government-owned businesses. They plan to produce
essential products for everybody who needs them.

These business objectives can conflict because different people in a business want different things at different times.

Stakeholders:

Stakeholders are a person or a group which has an interest in a business for various reasons and will be directly
affected by its decisions. Stakeholders also have different objectives and these also conflict over time. 4

There are two 6 types of stakeholders, and these types can be classified into two groups with similar interests.

Hassan Khalil
0322-7892189
 Group 1: Profit/Money

• Owners:

1. Profit, return on capital.

2. Growth, increase in value of the business.

• Workers

1. High salaries.
2. Job security.
3. Job satisfaction.

• Managers

1. High salaries.
2. Job security.
3. Growth of business so they get more power, status, and salary.

Group 2: Value

• Customers

1. Safe products.
2. High quality.
3. Value for money.
4. Reliability of service and maintenance.

• Government

1. Employment.
2. Taxes.
3. National output/GDP increase.

• Community

1. Employment.
2. Security.
3. Business does not pollute the environment.
4. Safe products that are socially responsible.

Hassan Khalil
0322-7892189
 Chapter 2: Types of business activity
Levels of economic activity

For products to be made and sold to the people, they must undergo 3 different production processes. Each process is
done by a different business sector and they are:

• Primary sector: The natural resources extraction sector. E.g. farming, forestry, mining... (earns the least money)
• Secondary sector: The manufacturing sector. E.g. construction, car manufacturing, baking... (earns a medium
amount of money)
• Tertiary sector: The service sector. E.g banks, transport, insurance... (earns the most money)

Importance of a sector in a country:

• no. of workers employed.

• value of output and sales.

Industrialization: a country is moving from the primary sector to the secondary sector.
De-industrialization: a country is moving from the secondary sector to the tertiary sector. In

both cases, these processes both earn the country more revenue.

Types of economies

Free market

economy:

All businesses are owned by the private sector. No government intervention.

Advantages:

• Consumers have a lot of choices

• High motivation for workers
• Competition keeps prices low
• The incentive for other businesses to set up and make

profits Disadvantages:

• Not all products will be available for everybody, especially the poor
• No government intervention means uncontrollable economic booms or recessions
• Monopolies could be set up limiting consumer choice and exploiting them
6
Command/Planned economy:
All businesses are owned by the public sector. Total government intervention. Fixed wages for everyone.
Hassan Khalil
0322-7892189
 Private property is not allowed.

Hassan Khalil
0322-7892189
 Advantages:

• Eliminates any waste from competition between businesses (e.g. advertising the same product)
• Employment for everybody
• All needs are met (although no luxury goods)

Disadvantages:

• Little motivation for workers

• The government might produce things people don't want to buy
• A low incentive for firms (no profit) leads to low efficiency

Mixed economy:
Businesses belong to both the private and public sectors. The government controls part of the economy.

Industries under government ownership:

• health
• education
• defense
• public transport
• water & electricity

Privatization
Privatization involves the government selling national businesses to the private sector to increase output and
efficiency.

Advantages:

• New incentive (profit) encourages the business to be more efficient

• Competition lowers prices
• Individuals have more capital than the government
• Business decisions are for efficiency, not government popularity
• Privatization raises money for the government

Disadvantages:

• Essential businesses making losses will be closed

• Workers could be made redundant for the sake of profit
• Businesses could become monopolies, leading to higher price

Comparing the size of businesses

7
Businesses vary in size, and there are some ways to measure them. For some people, this information could be
very useful:

• Investors - how safe it is to invest in businesses

Hassan Khalil
0322-7892189
• Government - tax
• Competitors - compare their firm with other firms
• Workers - job security, how many people they will be working with
• Banks - can they get a loan back from a business.

Ways of measuring the size of a business:

• Several employees. Does not work on capital-intensive firms that use machinery.
• Value of output. Does not take into account people employed. Does not take into account sales revenue.
• Value of sales. Does not take into account people employed.
• Capital employed. Does not work in labor-intensive firms. High capital but low output means low efficiency.

You cannot measure a business's size by its profit, because profit depends on too many factors not just the size of
the firm.

Business Growth

All owners want their businesses to expand. They reap these benefits:

• Higher profits
• More status, power, and salary for managers
• Low average costs (economies of scale)
• Higher market share

Types of expansion:

• Internal Growth: Organic growth. Growth is paid for by owners' capital or retained profits.
• External Growth: Growth by taking over or merging with another business.

Types of Mergers (and main benefits):

- Horizontal Merger: merging with a business in the same business sector.

• Reduces no. of competitors in the industry

• Economies of scale
• Increase market share

- Vertical merger:
Forward vertical merger:

• An assured outlet for products

• Profit made by the retailer is absorbed by manufacturer 8
• Prevent retailers from selling products of other businesses
• Market research on customers transferred directly to the manufacturer

Backward vertical merger:

Hassan Khalil
0322-7892189
• Constant supply of raw materials
• Profit from primary sector business is absorbed by the manufacturer
• Prevent suppliers from supplying other businesses
• Controlled cost of raw materials

Conglomerate merger:

• Spreads risks
• Transfer of new ideas from one section of the business to another

Why some businesses stay small:

There are some reasons why some businesses stay small. They are:

• Type of industry the business is in Industries offering personal service or specialized products. They cannot grow
bigger because they will lose the personal service demanded by customers. E.g. hairdressers, cleaning, convenience
store, etc.
• Market size: If the size of the market a business is selling to is too small, the business
cannot expand. E.g. luxury cars (Lamborghini), expensive fashion clothing, etc.
• Owners' objectives: Owners might want to keep a personal touch with staff and customers. They do not want the
increased stress and worry of running a bigger business.

Hassan Khalil
0322-7892189
 Chapter 3: Forms of business organization
Almost every country consists of two business sectors, the private sector, and the public sector. Private sector
businesses are operated and run by individuals, while public sector businesses are operated by the government. The
types of businesses present in a sector can vary, so let's take a look at them.

Private Sector

Sole Traders

Sole traders are the most common form of business in the world, and take up as much as 90% of all businesses in a
country. The business is owned and run by one person only. Even though he can employ people, he is still the sole
proprietor of the business. These businesses are so common since there are so few legal requirements to set up:

• The owner must register with and send annual accounts to the government Tax Office.
• They must register their business names with the Registrar of Business Names.
• They must obey all basic laws for trading and commerce.

There are advantages and disadvantages to everything, and here are ones for sold traders:

Advantages:

• There are so few legal formalities are required to operate the business.
• The owner is his boss and has total control over the business.
• The owner gets 100% of the profits.
• Motivation because he gets all the profits.
• The owner has the freedom to change working hours or whom to employ, etc.
• He has personal contact with customers.
• He does not have to share information with anyone but the tax office, thus he enjoys complete secrecy.

Disadvantages:

• Nobody to discuss problems with.

• Unlimited liability.
• Limited finance/capital, the business will remain small.
• The owner normally spends long hours working.
• Some parts of the business can be inefficient because of a lack of specialists.
• Does not benefit from economies of scale.
• No continuity, no legal identity.

Sole traders are recommended for people who:

10
• Are setting up a new business.
• Do not require a lot of capital for their business.
• Require direct contact for customer service.

Hassan Khalil
0322-7892189
 Partnership

A partnership is a group consisting of 2 to 20 people who run and own a business together. They require a Deed of
Partnership or Partnership Agreement, which is a document that states that all partners agree to work with each
other, and issues such as who put the most capital into the business or who is entitled to the most profit.
Other legal regulations are similar to that of a sole trader.

Advantages:

• More capital than a sole trader.

• Responsibilities are split.
• Any losses are shared between partners.

Disadvantages:

• Unlimited liability.
• No continuity, no legal identity.
• Partners can disagree on decisions, slowing down decision-making.
• If one partner is inefficient or dishonest, everybody loses.
• Limited capital, there is a limit of 20 people for any partnership.

Recommended to people who:

• Want to make a bigger business but does not want legal complications.
• Professionals, such as doctors or lawyers, cannot form a company, and can only form a partnership.
• Family, when they want a simple means of getting everybody into a business (Warning: Nepotism is usually not
recommended).

Note: In some countries including the UK there can be Limited Partnerships. This business has limited liability but
shares cannot be bought or sold. It is abbreviated as LLP.

Private Limited Companies

Private Limited Companies have separate legal identities to their owners, and thus their owners have limited
liability. The company has continuity and can sell shares to friends or family, although with the consent of all
shareholders. This business can now make legal contracts. Abbreviated as Ltd (UK), or Proprietary Limited, (Pty)
Ltd.

Advantages:
11
• The sale of shares makes raising finance a lot easier.
• Shareholders have limited liability, therefore it is safer for people to invest but creditors must be cautious
because if the business fails they will not get their money back.

Hassan Khalil
0322-7892189
• Original owners are still able to keep control of the business by restricting share distribution.

Disadvantages:

• Owners need to deal with many legal formalities before forming a private limited
company:
o The Articles of Association: This contains the rules on how the company will be managed. It states the rights and
duties of directors, the rules on the election of directors and holding an official meeting, as well as the issuing of shares.
o The Memorandum of Association: This contains very important information about the company and its directors.
The official name and addresses of the registered offices of the company must be stated. The objectives of the
company must be given and also the amount of share capital the owners intend to raise. The number of shares to be
bought b each of the directors must also be made clear.
o Certificate of Incorporation: the document issued by the Registrar of Companies that will allow the Company to
start trading.
• Shares cannot be freely sold without the consent of all shareholders.
• The accounts of the company are less secret than that of sole traders and partnerships. Public information
must be provided to the Registrar of Companies.
• Capital is still limited as the company cannot sell shares to the public.

Public Limited Companies

Public limited companies are similar to private limited companies, but they can sell shares to the public. A private
limited company can be converted into a public limited company by:

1. A statement in the Memorandum of Association must be made so that it says this company is a public limited
company.
2. All accounts must be made public.
3. The company has to apply for a listing on the Stock Exchange.

A prospectus must be issued to advertise to customers to buy shares, and it has to state how the capital raised from
shares will be spent.

Advantages:

• Limited liability.
• Continuity.
• Potential to raise limitless capital.
• No restrictions on the transfer of shares.
• The high status will attract investors and customers.
12
Disadvantages:

• Many legal formalities are required to form the business.

Hassan Khalil
0322-7892189
• Many rules and regulations protect shareholders, including the publishing of annual accounts.
• Selling shares is expensive, because of the commission paid to banks to aid in selling shares and the costs of printing
the prospectus.
• Difficult to control since it is so large.
• Owners lose control when the original owners hold less than 51% of shares.

Control and ownership in a public limited company:

The Annual General Meeting (AGM) is held every year and all shareholders are invited to attend so that they can
elect their Board of Directors. Normally, Director is majority shareholders who have the power to do whatever
they want. However, this is not the case for public limited companies since there can be millions of shareholders.
Anyway, when directors are elected, they have to power to make important decisions. However, they must hire
managers to attend to day-to-day decisions. Therefore:

• Shareholders own the company

• Directors and managers control the company

This is called the divorce between ownership and control.

Because shareholders invested in the company, they expect dividends. The directors could do things other than giving
shareholders dividends, such as trying to expand the company. However, they might lose their status in the next AGM if
shareholders are not happy with what they are doing. All in all, both directors and shareholders have their objectives.

Co-operatives

Cooperatives are a group of people who agree to work together and pool their money together to buy "bulk". Their
features are:

• All members have equal rights, no matter how much capital they invested.
• All workload and decision making is equally shared, a manager may be appointed for bigger cooperatives
• Profits are shared equally.

The most common cooperatives are:

• producer co-operatives: just like any other business, but run by workers.
• retail co-operatives: provides members with high-quality goods or services for a reasonable price.

Other notable business organizations:

Close Corporations: 13

Hassan Khalil
0322-7892189
 This type of business is present in countries such as South Africa. It is like a private limited company but it is
much quicker to set up:

• Maximum limit of 10 people.

• You only need a simple founding statement that is sent to the Registrar of Companies to start the business.
• All members are managers (no divorce of ownership and control).
• A separate legal unit has both limited liability and continuity.

Disadvantages:

• The size limit is not suitable for a large business.

• Members may disagree just like in a partnership.

Joint ventures

Two businesses agree to start a new project together, sharing capital, risks, and profits.

Advantages:

• Shared costs are good for tackling expensive projects. (e.g aircraft)
• Pooled knowledge. (e.g foreign and local business)
• Risks are shared.

Disadvantages:

• Profits have to be shared.

• Disagreements might occur.
• The two partners might run the joint venture differently.

Franchising

The franchisor is a business with a successful brand name that recruits franchisees (individual businesses) to sell for
them. (e.g. McDonald, Burger King)

Advantages for the franchisor:

• The franchisee has to pay to use the brand name.

• Expansion is much faster because the franchisor does not have to finance all new outlets.
• The franchisee manages outlets
• All products sold must be bought from the franchisor. 14

Disadvantages for the franchisor:

Hassan Khalil
0322-7892189
• The failure of one franchise could lead to a bad reputation of the whole business.
• The franchisee keeps the profits.

Advantages for the franchisee:

• The chance of failure is much reduced due to the well know the brand image.
• The franchisor pays for advertising.
• All supplies can be obtained from the franchisor.
• Many business decisions will be made by the franchisor (prices, store layout, products).
• Training for staff and management is provided by the franchisor.
• Banks are more willing to lend to franchisees because of lower risks.

Disadvantages for the franchisee:

• Less independence
• May be unable to make decisions that would suit the local area.
• The license fee must be paid annually and a percentage of the turnover must be paid.

Public Sector

Public corporations:

A business owned by the government and run by Directors appointed by the government. These businesses usually
include the water supply, electricity supply, etc. The government gives the directors a set of objectives that they will
have to follow:

• to keep prices low so everybody can afford the service.

• to keep people employed.
• to offer a service to the public everywhere.

These objectives are expensive to follow and are paid for by government subsidies. However, at one point the
government would realize they cannot keep doing this, so they will set different objectives:

• to reduce costs, even if it means making a few people redundant.

• to increase efficiency like a private company.
• to close loss-making services, even if this means some consumers are no longer provided with the service.

Advantages:

• Some businesses are considered too important to be owned by an individual. (electricity, water, airline)
• Other businesses, considered natural monopolies, are controlled by the government. (electricity, water)
• Reduces waste in the industry. (e.g. two railway lines in one city) 15
• Rescue important businesses when they are failing.
• Provide essential services to the people (e.g. the BBC)

Disadvantages:

Hassan Khalil
0322-7892189
• Motivation might not be as high because profit is not an objective.
• Subsidies lead to inefficiency. It is also considered unfair for private businesses.
• There is normally no competition to public corporations, so there is no incentive to improve.
• Businesses could be run for government popularity.

Municipal enterprises

These businesses are run by local government authorities which might be free to the user and financed by local
taxes. (e.g, street lighting, schools, local library, rubbish collection). If these businesses make a loss, usually a
government subsidy is provided. However, to reduce the burden on taxpayers, many municipal enterprises are being
privatized.

16

Hassan Khalil
0322-7892189
 Chapter 4: Government and economic influences on business
The impact of business activity on society

All business activity has benefits and undesirable effects on society. These reasons are why governments want to have
some control over business activity:

Possible benefits:

• Production of useful goods to satisfy customer wants.

• Create employment/increases workers' living standards.
• Introduction of new products or processes that reduces costs and widen product range.
• Taxes help finance public services.
Businesses earn foreign currency in exports and this could be spent on imports.

Possible undesirable effects:

• The business might ruin cheap but beautiful areas.

• Low wages and unsafe working conditions for workers because businesses want to lower costs.
• Pollution
• Production of dangerous goods.
• Monopolies
• Advertising can mislead customers.

Governments tend to pass laws that restrict undesirable activities while supporting desirable activities.

Governments and the economy

Government economic objectives:

Governments all have aimed for their country, and this is what they are:

• Low inflation.
• Low unemployment.
17
• Economic growth.
• Balance of payments.

Low inflation:

Hassan Khalil
0322-7892189
 Inflation occurs when prices rise. When prices rise rapidly many bad things could happen:

• Worker's wages buy less than before. Therefore their real income (how much you can buy with so much money) falls.
Workers will be unhappy and demand higher wages.
• Prices of local goods will rise more than that of other countries with lower inflation. People may start
buying foreign goods instead.
• It would cost more for businesses to start or expand and therefore it does not employ as many people.
• Some people might be made redundant so that the business can cut costs.
• Standards of living will fall.

This is obviously why governments want to keep inflation as low as possible.

Low levels of unemployment:

When people are unemployed, they want to work but cannot find a job. This causes many problems:

• Unemployed people do not work. Therefore national output will be lower than it should be.
• The government will have to pay for unemployment benefits. This is expensive and money cannot be used for other
purposes.

If the level of unemployment is low, it will increase national output and improve the standards of living for workers.

Economic growth

A country is said to grow when its GDP (Gross Domestic Product) is increasing. This is the total value of goods
produced in one year. The standards of living tend to increase with economic growth. Problems arise when a
country's GDP fall:

• The country's output is falling, fewer workers are needed and unemployment occurs.
• Standards of living will fall.
• Businesses will not expand because they have less money to invest.

Economic growth is not achieved every year. There are years where the GDP falls and the trade cycle explains the
pattern of rises and falls in national GDP.

18

Hassan Khalil
0322-7892189
 The trade cycle has 4 main stages:

• Growth: This is when GDP is rising, unemployment is falling, and the country has higher standards of living.
Businesses tend to do well in this period.
• Boom: Caused by overspending. Prices rise rapidly and there is a shortage of skilled workers. Business costs will be
rising and they are uncertain about the future.
• Recession: Because overspending caused the boom, people now spend too little. GDP will fall and businesses
will lose demand and profits. Workers may lose their jobs.
• Slump: A long-drawn-out recession. Unemployment will peak and prices will fall. Many firms will go out of business.

After all of this happens the economy recovers and begins to grow again. Governments want to avoid a boom so that
it will not lead to a recession and a slump. Currently, the government of China is spending a lot of money so that their
economy would continue to grow and avoid a boom.

Balance of payments

Exports earn foreign currency, while imports are paid for by foreign currency (or vice versa). The difference
between the value of exports and imports of a country is called a balance of payments. Governments try to achieve
a balance in imports and exports to avoid a trade deficit when exports are higher than imports. Of course, the
government will lose money and their reservoir of foreign currency will fall. This results in:

• If the country wants to import more, it will have to borrow foreign currency to buy goods.
• The country's currency will now be worth less compared to others and can buy fewer goods. This is called
exchange rate depreciation.

Government economic policies 19

Hassan Khalil
0322-7892189
 Governments want to influence the national economy so that it would achieve its aforementioned objectives. They
have a lot of power over business activity and can pass laws to try to achieve their goals. The main ways in which
governments can influence business activity are called economic policies. They are:

• Fiscal Policy: taxes and public spending.

• Monetary policy: controlling the amount of money in the economy through interest rates.
• Supply-side policies: aimed at increasing efficiency.

Fiscal policy

Government spending could benefit some firms such as:

• Construction firms (road building)

• Defense industries (Iraq war)
• Bus manufacturers (public transport)

Governments raise money from taxes. There are Direct taxes on income and Indirect taxes on spending. There
are four common taxes:

• Income tax
Profits tax
• VAT (Value Added Tax)
• Import tariffs

Income tax

Income tax is based on a percentage of your income. Income tax is usually progressive, meaning that the percentage
of tax you have to pay rises with your income. Effects on business and individuals if there was a rise of income tax:

• People will have less disposable income.

• Sales fall because people have less money to spend.
• Managers will cut costs for more profit. Workers might be made redundant.
• Businesses producing luxury goods will lose the most, while others producing everyday needs will get less affected.

Profits tax or corporation tax

This is a percentage of the profit a business makes. A rise in it would mean:

• Managers will have less retained profit, making it harder for the business to expand.
• Owners will get less return on capital employed. Potential owners will be reluctant to start their own business if the profit
margin is too low. 20

Indirect taxes

Hassan Khalil
0322-7892189
 These taxes are a percentage of the price of goods, making them more expensive. Governments want to avoid
putting them on essential goods such as food. A rise would mean:

• The effect would be almost the same as that of an increase in income tax. People would buy less but they would
still spend money on essential goods.
• Again, real incomes fall. Costs will rise when workers demand higher wages.

Import tariffs and quotas

Governments put tariffs on imports to make local goods look more competitive and also to reduce imports. When
governments put import tariffs on imports:

• Sales of local goods become cheaper than imports, leading to increased sales.
• Businesses that import raw materials will suffer higher costs.
• Other countries will retaliate by putting tariffs on the country's exports, making it less competitive.

Quotas may be used to limit the number of imports coming in.

Monetary policy and interest rates

Governments usually have to power to change interest rates through the central bank. Interest rates affect people
who borrow from the bank. When interest rates rise:

• Businesses who owe to bank will have to pay more, resulting in a less retained profit.
• People are more reluctant to start new businesses or expand.
• Consumers who took out loans such as mortgages will now have less disposable income. They will spend less on
other goods.
• Demand will fall for businesses that produce luxury or expensive goods such as cars because people are less willing
to borrow.
• Higher interest rates will encourage other countries to deposit money into local banks and earn higher profits. They
will change their money into the local currency, increasing its demand and causing exchange rate appreciation.

Supply-side policies

These policies aim to make the country's economy more efficient so that it can produce more goods and compete
in the international economy. In doing so their GDP will rise. Here are some policies:

• Privatization: It aims to use profit as an incentive to increase efficiency.

• Improve training and education: This increases efficiency. This is crucial to countries with a big computer software
industry.
• Increase competition: Competition causes companies to be more efficient to survive. Governments
need to remove any monopolies.
21
Government controls over business activity

Hassan Khalil
0322-7892189
 The government also influence major areas of business activity:

• what goods can be produced

• responsibilities to employees and working conditions
• responsibilities to consumers
• responsibilities to the natural environment
• location decisions

Undesirable effects created by business activity make governments want to control business activity:

• The business might ruin cheap but beautiful areas.

• Monopolies.
• Advertising can mislead customers.

Why government control business activity

Production of certain goods and services:

Governments can pass laws to restrict and ban certain dangerous goods such as:

• Weapons like guns and explosives.

• Drugs
• Goods that harm the environment

Consumer protection:

Consumers are easily misled by advertising. It is because consumers lack technical knowledge and advertising can be
very persuasive. In the UK, these laws are passed to protect customers from being exploited by businesses:

• Weights and Measures Act: to stop underweight goods being sold to customers.
• Trade Descriptions Act: all advertisements must be truthful.
• Consumer Credit Act: makes it illegal to not give customers a copy of the credit agreement to check how much
money they have.
• Sale of Goods Act: Makes it illegal to sell:

- Goods that have serious flaws or problems.

- Products that are not fit for the purpose intended by the consumer.

- Products that do not function as described on their label or by the retailer.

• Consumer Protection Act: Make false pricing claims illegal. Consumers can now sue producers or
22
retailers if their products cause harm to them.

Competition policy: Control of monopolies

Hassan Khalil
0322-7892189
 Monopolies could cause a lot of harm to an economy because there is nobody to compete against them:

• They exploit consumers with high prices.

• They prevent new firms from starting up.
• Monopolies are not encouraged to be efficient because there are no competitors.

In some countries, monopolies are banned and must be broken up into smaller firms. In the UK, monopolies can be
investigated by the Competition Commission. This government body reports two main types of problems:

• Business decisions that are against consumer interests, such as trying to eliminate all competitors.
• Proposed mergers or takeovers that will result in a monopoly.

Protecting employees:

Employees need protection in the following areas:

• Unfair discrimination
• Health and safety at work
• Unfair dismissal
• Wage protection

Protection against unfair discrimination:

Often workers are discriminated }”+

|against in a job because of various reasons. Some laws protect the employee from such reasons to be discriminated
against:

• Sex Discrimination Act: people of different genders must have equal opportunities.
• Race Relations Act: people of all races and religions must have equal opportunities.
• Disability Discrimination Act: it must be made suitable for disabled people to work in businesses.
• Equal Opportunities Policy: That is what everything is all about.

The UK is currently working on an age discrimination act.

Hassan Khalil
0322-7892189
 Health and Safety at work:

Laws protect workers from:

• protect workers from dangerous machinery.

• provide safety equipment and clothing.
• maintain reasonable workplace temperatures.
• provide hygienic conditions and washing facilities.
23
• do not insist on excessively long shifts and provide breaks in the work timetable.

Managers not only provide safety for their employees only because laws say so. Some believe that keeping employees
safe and happy improves their motivation and keeps them in the business. Others do it because it is

Hassan Khalil
0322-7892189
 present in their moral code. They are then considered to make an ethical decision. However, in many countries,
workers are still exploited by employers.

Protection against unfair dismissal

Employees need protection from being dismissed unfairly. The following reasons for the employee to be
dismissed is unreasonable:

• for joining a trade union.

• for being pregnant.
• when no warnings were given beforehand.

Workers who think they have been dismissed unfairly can take their case to the Industrial Tribunal to be judged and
he/they might receive compensation if the case is in his/her favor.

Wage Protection

Employers must pay employees the same amount that has been stated on the contract of employment, which states:

• Hours of work.
• Nature of the job.
• The wage rate to be paid.
• How frequently wages will be paid.
• What deduction will be made from wages, e.g. income tax?

A minimum wage rate is present in many Western countries and the USA. There are Advantages and cons of the
minimum wage:

Advantages:

• Prevents strong employees to exploit unskilled workers who could not easily find work.
• Encourages employers to train unskilled employees to increase efficiency.
• Encourages more people to seek work.
• Low-paid workers can now spend more.

Disadvantages:

• Increases costs, increases prices.

• Owners who cannot afford these wages might make employees redundant instead.
24
• Higher-paid workers want higher wages to keep on the same level difference as the lower-paid workers. Costs will
rise.

Hassan Khalil
0322-7892189
 Location of Industry

How governments want to locate businesses:

• They encourage businesses to move to areas with a high level of unemployment or call
development areas.
• They discourage firms from locating in overcrowded cities or sites noted for their natural beauty.

How governments will influence the decisions of firms to locate:

• Businesses will be refused planning permission (permit to build in a place) if they wish to locate in overcrowded
cities or beautiful areas. Building in these areas might be banned altogether.
• Governments can provide regional assistance, such as grants and subsidies to encourage firms to locate in
undeveloped areas.

Governments can help businesses too

Governments can help businesses to:

• to encourage businesses to locate in poorer regions.

• to encourage enterprise by helping small businesses set up and survive.
• to encourage businesses to export.

Regional Assistance:

• Governments want development to be spread evenly over the whole country.

• Grants and subsidies can be used to attract firms to an area.

Small firms

Small firms are important for and economy because:

• They provide most of the employees because they are usually labor-intensive.
• Small firms operate in rural areas where unemployment tends to be high.
• They can grow into very important businesses employing thousands of workers and producing output worth
millions of dollars.
• Provides more choice for customers. They compete against bigger companies.
• They are often managed in a very flexible way and are quicker to adapt to changing demands.

Governments help them by:

• Lower rates of profits tax, so they can have more retained profit.
• Giving grants and cheap loans. 25
• Providing advice and information centers to small firms.

Exporting goods and services

Hassan Khalil
0322-7892189
 Why governments want businesses to export:

• Exports earn foreign currency, which can be used to buy imports.

• More exports mean more people needed to produce them, increasing employment and standards of living.
• Successful exporters earn more money and have to pay more profits tax.

Governments can support exporters by:

• Encourage banks to lend to exporting businesses at lower interest rates.

• Offering subsidies or lower taxes to firms. However, other countries would retaliate and there would be no overall
advantage.
• Trying to keep the local currency as stable as possible to make it easier for businesses to know how much they are
going to make from exports.
• Organizing trade fairs abroad to encourage foreign businesses to buy the country's exports.
• Offering credit facilities. This means that if a foreign customer refuses to pay for goods, the company could be
compensated by the government.

Businesses in the economic and legal environment

Businesses could not ignore the power of the government in controlling business activity. Multinationals are an
exception although normally businesses cannot afford to move to other countries. Government decisions create the
environment to which businesses will have to operate and adapt to. The environment created by legal and economic
controls is one of the constraints to managers when making decisions.

26

Hassan Khalil
0322-7892189
 Chapter 5: Other influences on business

External constraints and constraints on business activity

Businesses cannot survive by neglecting the "real world", which includes influences that force a business to make
certain decisions or constraints that limit or controls actions. External constraints are things that businesses
cannot control, these are:

• Technological change: New products.

• Technological change: New production processes.
• Increased competition.
• Environmental issues.

Here is a table from the book giving examples and the possible impacts on business activity:
Technological changes

Technological change brings about constant changes in consumer products and production processes. By using
R&D to develop new products, companies could open up new markets and make huge amounts of money. Such
companies include Microsoft, Sony, and Apple. However, new products quickly replace old ones just like how
machines are replacing workers in production processes.

There are two general things a firm could do when facing technological change:

• Ignore the changes and operate in the "traditional and old fashioned way". However, they can only sell to a small and
limited market.
• Compete by welcoming changes and having access to huge mass markets.

Here are some Advantages and cons of technological change:

27

Advantages:

Hassan Khalil
0322-7892189
• New products encourage customers to buy more.
• If a business comes up with a new product first, they gain a huge competitive advantage.
• "High-tech" production methods make production more efficient.
• Fewer workers are required.
• New production methods can be adapted very quickly which gives businesses more flexibility in meeting
consumer wants.
• E-commerce opens up new markets and the Internet is a medium of advertising.

Disadvantages:

• R&D is expensive, without guaranteed success.

• Businesses that do not develop new products will fail, leaving workers unemployed.
• New production methods and machines are expensive.
• Workers will need expensive retraining. They might be reluctant to learn or fear that they will not do well. This could
lead to a fall in motivation.
• E-commerce lacks personal customer service.
• Smaller businesses cannot afford these things.

Introducing technological change successfully

Workers and managers may fear change. Workers might think:

• Will I be able to operate the new machines?

• Will I lose my job because the machines are more efficient?

Older workers are especially afraid of losing out to younger and better-trained workers. Managers also fear
change, since recruiting technology experts will make them look more inferior in some way.

To make these changes work better, workers need to be involved in the changes. Workers might be told why the new
machines are necessary and how they will be trained to use them, as well as letting them suggest ways to make work
more efficient with the machines. It leads to more opportunities for trained and skilled staff and can lead to new ideas
and products.

Competition

Most businesses have competitors. Most business decisions are based on:

• What competitors are doing?

• How they might react?

When you develop a successful product, other businesses will undoubtedly copy you. Therefore, you will need 28
to research and develop even more products, keeping ahead of them. Competition is a major influence on
business activity.

Hassan Khalil
0322-7892189
 Environmental constraints on business activity

There are two general opinions on caring about the environment:

- Opinion A: Keeping the environment clean is too expensive. We want to keep prices low and this is what
consumers want too.

• Protecting the environment is too expensive and reduces profits.

• Increased prices mean increased costs.
• Firms could become less competitive compared to others that are not environmentally friendly.
• Governments should pay to clean it up.

- Opinion B: Consumers are now starting to prefer businesses with social responsibility. Cleaner and more
efficient machinery benefit the business in the long run.

• Environmental issues affect us all and businesses have a social responsibility to deal with them.
• Using up scarce resources leaves less for future generations and raises prices.
• Consumers are becoming more socially aware. More now prefer environmentally-friendly firms which could become
a marketing advantage.
• If a business damages the environment, pressure groups could protest and damage its image and
reputation.

Ways to make a business more environmentally friendly

Governments make these business activities illegal:

• locating in environmentally sensitive areas.

• dumping waste products into waterways.
• making products that cannot be easily recycled.

Manufacturers often complain that these laws raise prices. Therefore, some governments usually do not make these
laws strict with the hope of increasing output and in turn employment.

Financing penalties, including pollution permits

Pollution permits are licenses given to a business to pollute up to a certain level. If "dirty" businesses pollute over
the permitted level, they either have to buy permits from "cleaner firms" or pay heavy fines. This encourages firms
to be cleaner and sell their permits to dirtier companies for more money. Other penalties
include additional taxes. 29

Consumer action and pressure groups

Hassan Khalil
0322-7892189
 Consumers are becoming more socially aware, and many of them will stop buying goods from companies that pollute
the environment, harming a business' reputation and image. Bad publicity means lower sales. If they want to keep
their sales revenue up firms would have to adapt to more environmentally friendly production processes again.

Pressure groups are becoming very powerful nowadays. They can severely damage businesses that are not
socially responsible.

These are their powers:

• Consumer boycotts
• Protests
• Blocking waste pipes.

These are times when they are likely to take action:

• They have popular public support and have a lot of media coverage.
• The group is well organized and financed.

These are times when they are less likely to take action:

• What a company is doing is unpopular but not illegal. (e.g. testing drugs on rats)
• The cost of making the company cleaner is more than losses that could be made by losing image and sales.
• The firm supplies other firms and not customers, public support will be less effective.

Environmental issues and cost-benefit analysis

Governments are increasingly concerned about the social and environmental effects of business activity. They have
started to use a new type of analysis on businesses and government proposals which will not only take into account
financial costs but also external costs.

Cost-benefit analysis requires an awareness of external costs (costs to the rest of society) and external benefits
(gains to the rest of society). Here are some examples.

Decision: A new chemical plant will be built. 30

Hassan Khalil
0322-7892189
 Social costs are worked out from private costs and external costs.

Social benefits are worked out from private benefits and external benefits.

In other words:

• Social costs = private costs + external costs.

• Social benefits = private benefits + external benefits

31

Hassan Khalil
0322-7892189
 Chapter 6: Business costs and revenue
Business costs

All business activity involves some kind of cost. Managers need to think about the because:

• Whether costs are lower than revenues or not. Whether a business will make a profit or not.
• To compare costs at different locations.
• To help set prices.

There are two main types of costs, fixed and variable costs. Here are some types of costs:

• Fixed costs = stay the same regardless of the amount of output. They are there regardless of whether a business has
made a profit or not. Also known as overheads.
• Variable costs = vary with the number of goods produced. They can be classified as direct costs
(directly related to a product).
• Total costs = fixed + variable costs

Break-even charts, comparing costs with revenue

Drawing a break-even chart

Uses of break-even charts

There are other benefits from the break-even chart other than identifying the breakeven point and the maximum profit.
However, they are not all reliable so there are some disadvantages as well:
Advantages:

• The expected profit or loss can be calculated at any level of output. 32

• The impacts of business decisions can be seen by redrawing the graph.
• The breakeven chart shows the safety margin which is the amount by which sales exceed the breakeven point.
Hassan Khalil
0322-7892189
 Disadvantages:

• The graph assumes that all goods produced are sold.

• Fixed costs will change if the scale of production is changed.
• Only focuses on the breakeven point. Completely ignores other aspects of production.
• Does not take into account discounts or increased wages, etc., and other things that vary with time.

Break-even point: the calculation method.

It is possible to calculate the breakeven point without having to draw a graph. We need two formulas to achieve this:

• Selling Price - Variable Costs = Contribution

• Break-even point = Total fixed costs/Contribution

Business costs: other definitions

There are other types of costs to be analyzed that is split from fixed and variable costs:

• Direct costs: costs that are directly related to the production of a particular product.
• Marginal costs: how much costs will increase when a business decides to produce one more unit.
• Indirect costs: costs not directly related to the product. They are often termed overheads.
• Average cost per unit: total cost of production/total output

Economies and Diseconomies of scale:

Economies of scale are factors that lead to a reduction in average costs that are obtained by the growth of a
business. There are five economies of scale:

• Purchasing economies: Larger capital means you get discounts when buying bulk.
• Marketing: More money for advertising and own transportation, cutting costs.
• Financial: Easier to borrow money from banks with lower interest rates.
• Managerial: Larger businesses can now afford specialist managers in all departments, increasing efficiency.
• Technical: They can now buy specialized and latest equipment to cut overall production costs.

However, there are diseconomies of scale which increases average costs when a business grows:

• Poor communication: It is more difficult to communicate in larger firms since there are so many people a message
has to pass through. The managers might lose contact with customers and make wrong decisions.
• Low morale: People who work in large businesses with thousands of workers do not get much attention. They
feel they are not needed this decreases morale and in turn efficiency.
• Slower decision making: More people have to agree with a decision and communication difficulties also make
decision making slower as well.

Budgets and forecasts: looking ahead

The business also needs to think ahead about the problems and opportunities that may arise in the future. There are
things to try to forecast such as 33

• sales or consumer demands.

• exchange rates appreciation or depreciation.

Hassan Khalil
0322-7892189
• wage increases.

There are some forecasting methods:

• Past sales could be used to calculate the trend, which could then be extended into the future.
• Create a line of best fit for past sales and extend it for the future.
• Panel consensus: asking a panel of experts for their opinion on what is going to happen in the future.
• Market research.

Budgets

"Budgets are plans for the future containing numerical and financial targets". Better managers will create many
budgets for costs, planned revenue, and profit and combine them into one single plan called the master budget.

Here are the advantages of budgets:

• They set objectives for managers and workers to work towards, increasing their motivation.
• They can be used to see how well a business is doing by comparing the budget with the result in the process of
variance analysis. The variance is the difference between the budget and the result.
• If workers get a say in choosing the objectives for a budget, the objectives would be more realistic since they are the
ones that are going to do it and it also gives them better motivation.
• Helps control the business and its allocation of resources/money.

All in all, budgeting is useful for:

• reviewing past activities.

• controlling current business activity - following objectives.
• planning for the future.

34

Hassan Khalil
0322-7892189
 Chapter7:BusinessAccounting

What are accounts and why are they necessary?

Accounts are financial records of a firm's transactions that are kept up to date by the accountants, who are
qualified professionals responsible for keeping accurate accounts and producing the final accounts.

Every end of the year, a final account must be produced which gives details of:

• Profits and losses made.

• The current value of the business.
• Other financial results.

Limited companies are bound by law to publish these accounts, but not other businesses.

Financial documents involved in buying and selling.

Accountants use various documents that are used for buying and selling over the year for their final accounts. They
can help the accountant to:

• keep records of what the firm bought and from which supplier.
• keep records of what the firm sold and to which customer.

These documents are:

• Purchase orders: requests for buying products. It contains the quantity, type, and total cost of goods. Here is an
example.
• Delivery notes: These are sent by the firm when it has received its goods. It must be signed when the goods are
delivered.
• Invoices: These are sent by the supplier to request payment from the firm.
• Credit notes: Only issued if a mistake has been made. It states what kind of mistake has been made.
• Statements of account: Issued by the supplier to his customers which contains the value of deliveries made each
month, the value of any credit notes issued, and any payments made by the customer. Here is an example.
• Remittance advice slips: usually sent with the statement of accounts. It indicates which invoices the firm is paying
for so that the supplier will not make a mistake about payments.
• Receipts: Issued after an invoice has been paid. It is proof that the firm has paid for its goods. 35

Methods of making payment

Hassan Khalil
0322-7892189
 There are several ways goods can be paid for:

• Cash: The traditional payment method. However, many businesses do not prefer to use cash for several security
reasons. When cash is paid, a petty cash voucher is issued by the person in charge of the firm's money who also
signs it to authorize the payment. The person making the purchase signs it too to show that the money has been
received.
• Cheque: It is an instruction to the bank to transfer money from a bank account to a named person. To do this the bank
needs a cheque guarantee card, saying that they have enough money in their account to support this payment.
• Credit card: Lets the consumer obtain their goods now and pay later. If the payment is delayed over a set period
then the consumer will have to pay interest.
• Debit card: Transfers the money directly from the user's account to that of the seller.

Recording accounting transactions

Businesses usually use computers to store their transactions so that they can be easily accessed, calculated, and printed
quickly.

Who uses the financial accounts of a business?

• Shareholders: They will want to know about the profit or losses made during the year and whether the business is
worth more at the end of the year or not.
• Creditors: They want to see whether the company can afford to pay their loans back or not.
• Government: Again, they want to check to see if correct taxes are paid. They also want to see how well the business
is doing so that it can keep employing people.
• Other companies: Other companies want to compare their performance with a business or see if it is a good idea to
take it over.

What do final accounts contain?

The trading account

This account shows how the gross profit of a business is calculated. It will contain this formula:

Gross profit = Sales revenue - Cost of goods sold

Note that:
36
• Gross profit does not take to account overheads.
• Only calculate the cost of goods sold, and forget the inventory.
• In a manufacturing business, direct labor and manufacturing costs are also deducted to obtain gross profit.

Hassan Khalil
0322-7892189
 The profit and loss account

The profit and loss account shows how net profit is calculated. It starts with gross profit acquired from the trading
account and by deducting all other costs it comes up with a net profit.

Depreciation is the fall in the value of a fixed asset over time. It is also counted as an indirect cost to businesses.

As for limited companies, there are a few differences with the normal profits and loss account:

• Profits tax will be shown.

• It needs to have an appropriation account at the end of the profits and loss account. This shows what the company
has done with its net profits, in other words, how much retained profit has been put back into the company.
• Results from the previous year are also included.

Balance sheet

The balance sheet shows you a business's assets and liabilities at a particular time. The balance sheet records the
value of a business at the end of the financial year. This is what it contains:

• Fixed assets: land, vehicles, buildings that are likely to be with the business for more than one year. They
depreciate over time.
• Current assets: stocks, inventory, ash, and debtors that are only there for a short time.
• Long-term liabilities: long-term borrowings that do not have to be paid in one year.
• Short-term liabilities: short-term borrowings that have to be paid in less than one year.

If your total assets are higher than your total liabilities, then you are said to own wealth. In a normal business, wealth
belongs to the owners, while in a limited company, it belongs to the shareholders. Hence the equation:

Total assets - total liabilities = Owners'/Shareholders' wealth

Here are some terms found in balance sheets:

• Working capital: is used to pay short-term debts and is known as net current assets. If a business does not have
enough working capital then it might be forced to go out of business. The formula:

Working capital = Current assets - Current liabilities

37
• Net assets: Shows the net value of all assets owned by the company. These assets must be paid for or financed by
shareholders' funds or long-term liabilities. The formula:

Net assets = Fixed assets + Working capital

Hassan Khalil
0322-7892189
• Shareholders' funds: The total sum invested into the business by its owners. This money is invested in two ways:

- Share capital: Money from newly issued shares.

- Profit and loss reserves: Profit that
is owned by shareholders but not distributed to them but kept as part of
shareholders' funds.

• Capital employed: Long-term and permanent capital of a business that has been used to pay for all the assets.
Therefore:

Capital employed = net profits

Capital employed = Shareholders' funds + long-term liabilities

Analysis of published accounts

Without analysis, financial accounts tell us next to nothing about the performance and financial strength of a
company. To do this we need to compare two figures with each other. This is called ratio analysis.

Ratio analysis of accounts

The most common ratios used are for comparing the performance and liquidity of a business. Here are five of the
most commonly used ratios.

Ratios used for analyzing performance:

• Return on capital employed: This result could show the efficiency of a business. If the result rises, the managers are
becoming more successful.

Return on capital employed (%) = Operating profit/Capital employed * 100

• Gross profit margin: If this rises, it could mean that either they are increasing added value or costs have fallen.

Gross profit margin = Gross profit/Sales revenue * 100

• Net profit margin: The higher the result, the more successful the managers are. This could be compared
with other businesses too. 38

Net profit margin = Net profit before tax/Sales revenue * 100

Hassan Khalil
0322-7892189
 Note: Net profit does not include tax.

Ratios used for analyzing liquidity: This is to see how much cash a business has to pay off all of its short-term
debts.

• Current ratio: This ratio assumes that all current assets could be converted into cash quickly, but this is not always
true since stock/inventory could not be all sold in a short time. Generally, a result of 1.5 to 2 would be preferable, so
that a business could pay all of its short-term debts and still have half of its money left.

Current ratio = Current assets/Current liabilities

• Acid test or liquid ratio: This type of analysis neglects stocks, but it is similar to the current ratio analysis.

Acid test ratio = (Current assets - Stocks)/Current liabilites

These ratios can be used to:

• Compare with other years.

• Compare with other businesses.

It must be remembered that a ratio on its own will give you nothing, but when it is compared with ratios from the past
and other businesses it will tell you a lot of things.

However, there are still some disadvantages of ratio analysis:

• Only shows past results, does not show anything about the future.
• Comparisons between years may be misleading because of inflation.
• Comparisons between businesses could be difficult since each has its accounting methods.

39

Hassan Khalil
0322-7892189
 Chapter 8: Cash flow planning

What is meant by cash flow?

Cash is a liquid asset, meaning that it can be spent on goods and services at any time. Many businesses experience
cash flow problems, meaning that they do not have enough cash to do what they want to do. Cash flow means "the
flow of money in and out of a business". These are ways cash flow can occur:

Cash inflows:

• Sale of goods for cash.

• Payment from debtors.
• Borrowing from a source (but will inevitably lead to cash outflow in the future).
• Sale of unwanted assets.
• Investment from investors: shareholders and owners

Cash outflows:

• Purchasing goods for cash.

• Payment of wages, salaries, and others in cash.
• Purchasing fixed assets.
• Repaying loans.
• Repaying creditors.

Cash flow cycle

A cash flow cycle explains the stages that are involved in the process of cash out and finally into the business. This is
what happens:

40

Hassan Khalil
0322-7892189
 The longer it takes for the cash to get back to the business, the more they will need working capital to pay off their
short-term debts. This cycle also helps us understand the importance of cash flow planning. This is what happens
when a company is short on cash:

• Not enough to pay for materials, therefore sales will fall.

• The company will want to insist customers on paying in cash, but they might lose them to competitors who let them
pay in credit.
• There could be a liquidity crisis when it does not have enough cash to pay for overheads (bills, rent, etc.) and the
business might be forced to close down by its creditors.

Managers need to plan their cash flow so that they do not end up in these positions.

Cash flow is not profit!

First, we need to examine the formula for cash flow:

Cash flow = Cash inflow - Cash outflow

However, when calculating profit, we also take into account the credit that debtors owe us. Therefore, a company might
make $20,000 in profit but only $10,000 is received in cash because half of it is paid by credit card.

This creates something known as insolvency:

• A profitable business could run out of cash because of various reasons. This is called insolvency and it is one main
reason why businesses fail.
• This can be because of several reasons:
o Allowing customers too long to pay back, so that they will not have paid off the debts yet by the time the business has
run out of cash.
o Purchasing too many assets at once.
o Producing or purchasing too much stock/inventory when expanding too quickly. This is called overtrading.

Here is an example of a cash flow statement:

41

As you can see, the closing bank balance in February is negative, which means that it has become overdrawn.

Hassan Khalil
0322-7892189
 Cash flow forecasts

Because of the aforementioned problems, the manager needs to get an idea of how much cash will be available for
which months. A cash flow forecast can tell the manager:

• How much cash is available for paying bills, loans, and other fixed assets.
• How much the bank might need to lend to avoid insolvency.
• Whether the business has too much cash which could be more useful if used.

Uses of cash flow forecasts:

• Starting up a business: In the first months of a business, a lot of capital will be needed to set it up properly. The
problem is, not everybody realizes that the amount of money they needed is much more than they had expected.
Therefore, a cash flow forecast will give them a better idea of how much money will be needed.
• Keeping the bank manager informed: It needs to be shown to the bank to inform it of the size of the needed
loan/overdraft when it is needed, how long it is needed and when it could be repaid. Only then will the bank give you a
chance to get a loan.
• Running an existing business: It is important to know the cash flow of a business so that loans could be arranged in
advance to get the least interest possible. If a firm has cash flow problems and goes to the bank for a loan for the next
day, it will charge high interest because it knows that the business has no choice. Also, if a business exceeds the
overdraft limit without informing the bank, it could be asked to repay the overdraft immediately and could result in the
closure of the business.
• Managing cash flow: If a business has too much cash, it should put the cash to some good use quickly. Some
examples of this are: repaying all loans for less interest, paying creditors immediately to get discounts.

How can cash flow problems be solved?

Here are some steps to solve cash flow problems:

• Arrange for future loans with the bank when you anticipate negative cash flow.
• Reduce or delay planned expenses until cash is available, e.g. ask to pay in credit.
• Increasing forecasted cash inflow, e.g. by getting a part-time job.

42

Hassan Khalil
0322-7892189
 Chapter 9: Financing business activity
Why do businesses need finance?

Businesses need finance, or money, to pay for their overhead costs as well as their day-to-day and variable
expenses. Here are three situations when businesses need finance the most:

• Starting a business: Huge amounts of finance are needed to start a business which requires buying fixed assets, paying
rent and other overheads as well as producing or buying the first products to sell. The finance required to start up a
business is called start-up capital.
• Expanding a business: When expanding, a lot of capital is needed to buy more fixed assets or fund a takeover.
Internal growth by developing new products also requires a notable amount of finance for R&D.
• A business in difficulties: For example, for loss-making businesses, money is needed to buy more efficient
machinery, or money is needed to cover negative cash flow. However, it is usually difficult for these firms to get
loans.

In all cases, businesses need finance for either capital expenditure or revenue expenditure:

• Capital expenditure: Money spent on fixed assets.

• Revenue expenditure: Money spent on day-to-day expenses.

Sources of finance

There are many ways to obtain finance, and they can be grouped in these ways.:

• Internal or external.
• Short-term, medium-term, or long-term.

Internal finance:

This is finance that can be taken from within the business itself. There are advantages and disadvantages to each of
them:

• Retained profit: Profit reinvested into a business after part of the net profit has been distributed to its owners.
o + Retained profit does not have to be repaid, unlike a loan.
o - New businesses do not have much-retained profit.
43
o - Retained profits from small firms are not enough for expansion.
o - Reduces payment to owners/shareholders.
• Sale of existing assets: Firms can get rid of their unwanted assets for cash.
o + Makes better use of capital that is not used for anything.

Hassan Khalil
0322-7892189
o - Takes time to sell all of these assets.
o - New businesses do not have these assets to sell.
• Running down stocks: Sell everything in the current existing inventory.
o + Reduces opportunity cost and storage costs of having inventory.
o - Risks disappointing customers if there is not enough stock left.
• Owners' savings: This only applies to businesses that do not have limited liability. Since the legal identity of the
business and owners are the same, this method is considered to be internal.
o + Available quickly.
o + No interest paid.
o - Limited capital.
o - Increases risks for owners.

External finance:

This is money raised from individuals or organizations outside a business. It is the most common way to raise
finance.

• Issue of shares: Same as owners' savings, but only available to limited companies.
o + A permanent source of capital that does not have to be repaid.
o + No interest paid.
o - Dividends will have to be paid.
o - Ownership of the company could change hands to the majority shareholder.
• Bank loans: money borrowed from the bank.
o + Quick to arrange.
o + Variable lengths of time.
o + Lower rates are offered if a large company borrows large sums.
o - Must be repaid with interest.
o - Collateral is needed to secure a loan and may be lost.
• Selling debentures: These are long-term loan certificates issued by limited companies.
o + These can be used to raise long-term finance, e.g. 25 years.
o + No collateral is required, just the trustworthiness of a big company.
o - Must be repaid with interest.
• Factoring of debts: Some businesses (debt factors) "buy" debts of a firm's debtors (e.g. customers) and pay the firm
cash in return. The firm now does not worry about worrying about whether their customers will pay or not and 100% of
all the debts go to the factor.
o + Immediate cash is obtained.
o + Risk of collecting debt becomes the factor.
o - The firm does not receive 100% value of the debt.
• Grants and subsidies: can be obtained from outside agencies like the government.
o + Do not have to be repaid.
o - They have conditions that you have to fulfill (e.g. locating in poor areas).

Short-term finance:

This is working capital required to pay current liabilities that are needed for up to three years. There are three
main ways of acquiring short-term finance:
44
• Overdrafts: This allows you to draw more from your bank account than you have.
o + Overdrafts can vary every month, making it flexible.
o + Interest-only needs to be paid only to the amount overdrawn.
Hassan Khalil
0322-7892189
 o + They can turn out cheaper than loans.
o - Interest rates are variable and often higher than loans.
o - The bank can ask for the overdraft back immediately anytime.
• Trade credits: Delaying payment to your creditors, which leaves the company with better cash flow for that month.
o + It is almost a short-term interest-free loan.
o - The supplier could refuse to give discounts or to supply you at all if your payments are delayed too much.
• Factoring of debts

Medium-term finance:

Finance is available for 3 to 10 years that is used to buy fixed assets such as machinery and vehicles.

• Bank loans
• Hire purchase: This allows the firm to pay for assets over time in monthly payments which have an interest.
o + The firm does not have to come up with a lot of cash quickly.
o - A deposit has to be paid at the start of the period of payment.
o - Interest paid can be very high.
• Leasing: Hiring something. Businesses could use the asset but will have to pay monthly. The business may choose to
buy the asset at the end of the leasing period. Some businesses sell their fixed assets to a leasing company that leases
them back so that they could obtain cash. This is called sale and leaseback.
o + The firm does not have to come up with a lot of cash quickly.
o + The leasing firm takes care of the assets.
o - The total leasing costs will be higher than if the business has purchased it.

Long-term finance:

This kind of finance is available for more than 10 years. The money is used for long-term fixed assets or the takeover of
another company.

• Issue of shares: Shares are sometimes called equities, therefore issuing shares is called equity finance. New
issues or shares sold by public limited companies can raise near limitless finance. However, a business will
want to give the right issue of shares so that the amount bought by shareholders will not upset the balance of
ownership.
o + A permanent source of capital that does not have to be repaid.
o + No interests paid.
o - Dividends will have to be paid. And they have to be paid after tax (so taxes become higher), while interest on
loans is paid before taxes.
o - Ownership of the company could change hands to the majority shareholder.
• Long-term loans or debt finance: Loans from a bank and this is how they are different from issuing shares:
o Interest is paid before taxes, it is counted as an expense.
o Interest has to be paid every year but dividends only need to be paid if the firm has a maid
profit.
o They are not permanent capital. 45
o They need collateral.
• Debentures

Hassan Khalil
0322-7892189
 How the choice of finance is made in a business

These are the factors that managers consider when choosing the type of finance they need.

• Purpose and period: Managers need to match the source of finance to its purpose. It is quite simple, short-term
finance is used to buy current assets and things like that, while long-term finance is for fixed assets and similar
things.
• Amount needed: Different types of finance depend on how much is needed.
• Status and size: Bigger companies have more choices of finance. They pay less interest to banks.
• Control: owners lose control if they own less than 51% of shares in their company.
• Risk and gearing: loans raise the gearing of a business, meaning that their risk is increased. Gearing is can be
obtained by calculating the percentage of long-term loans compared to total capital. If long-term loans take up more
than 50% of total capital, then the business would be called highly geared. This is very risky because the business will
have to pay back a lot of its loans and has to succeed to do so. Banks are less willing to lend to these businesses, so they
will have to find other types of finance.

Will banks lend and will shareholders invest?

Loans will be available to businesses but information about the business is required:

• The firms' trading records.

• Forecasts about the future.
• Forecasts have to show that the firms are solvent, i.e. able to repay the loan and the interest.

Banks will also consider:

• Experience of the people running a business.

• The gearing ratio of a business.

This is what shareholders will consider if they want to invest:

• The prospects of the company.

• How many dividends are given out compared to other companies?
• The trend of share prices.
• Gearing ratio.

Business plans

Banks will want to see a business plan if they are to lend to most businesses, especially a newly created one. A
46
a business plan contains:

• Objectives.
Hassan Khalil
0322-7892189
• How the business will be operated.
• How the business will be financed.

By creating a business plan owners will have to think carefully ahead about their business to ensure the best plan
possible. These are things they will need to consider:

• Target market and consumers.

• Profits, costs, and break-even point.
• Location of the business.
• Machinery and workers required.

Without a detailed plan which works, bank managers will be reluctant to lend any money to businesses
because their owners have not shown that they are serious enough about their business.

Here is an example of a business plan from the book, it shows the things you need to put in a business plan:

47

Hassan Khalil
0322-7892189
 Chapter 10: Organisational Structure

What is organizational structure?

Organizational structure refers to the levels of management and division of responsibilities within a business, which
could be presented in an organizational chart.

For simpler businesses in which the owner employs only himself, there is no need for an organizational structure.
However, if the business expands and employs other people, an organizational structure is needed. When
employing people, everybody needs a job description. These are its main advantages:

• People who apply can see what they are expected to do.
• People who are already employed will know exactly what to do.

Here is an example of a Job Description taken from the book:

When there is more than one person in a small business and they all do different things, it means that they are
specializing in different jobs.

Delegation
48

Hassan Khalil
0322-7892189
 Delegation refers to giving a subordinate the responsibility and authority to do a given task. However, the final
responsibility still lies with the person who delegated the job to the subordinate. Here are the advantages of delegation
for managers and employees, as well as why some managers choose not to delegate.

Advantages for the manager:

• By letting subordinates do smaller tasks, managers have more time to do more important tasks.
• Managers are less likely to make mistakes if tasks are done by specialist employees.
• Managers can measure the success of their tasks more easily.

Advantages for the subordinates:

• Work becomes more interesting and rewarding.

• Employees feel important and trusted.
• Helps train workers, giving them better career opportunities.

Why some managers don't want to delegate:

• Managers are afraid that their employees will fail.

• Managers want total control.
• Managers are scared that the subordinate will do tasks better than them, making them feel insecure.

The delegation must mean:

• A reduction in direct control by managers or supervisors.

• An increase in trust of workers by managers or supervisors.

Organizational charts

Eventually, when a business grows larger and employs many people, they will have to create an organizational chart
to work out a clear structure for their company. Here is another example of an organizational chart from the book:

49

Here are the most important features of the chart:

Hassan Khalil
0322-7892189
• It is a hierarchy. There are different levels in the business which has different degrees of authority. People on the
same level have the same degree of authority.
• It is organized into departments, which have their function.
• It shows the chain of command, which is how power and authority are passed down from the top of the hierarchy,
and span of control, meaning how many subordinates one person controls, of the business.

Advantages of an organizational chart:

• The charts show how everybody is linked together. Makes employees aware of the communication channel that
will be used for messages to reach them.
• Employees can see their position and power, and who they take orders from.
• It shows the relationship between departments.
• Gives people a sense of belonging since they are always in one particular department.

Chain of command and span of control:

Here are two organizations, one having a long chain of command and the other a wide span of control. Therefore, the
longer the chain of command, the taller the business hierarchy and the narrower the span of control. When it is short,
the business will have a wider span of control.

In recent years, people have begun to prefer to have their business have a wider span of control and shorter chain of
command. In some cases, whole levels of management were removed. This is called de-layering. This is because short
chains of commands have these advantages:

• Communication is faster and more accurate. The message has to pass through fewer people.
• Managers are closer to all employees so that they can understand the business better.
• Spans of control will be wider, meaning that the manager would have to take care of more subordinates,
this makes:
o The manager delegate more, and we already know the advantages of delegation.
o Workers gain more job satisfaction and feel trusted because of delegation. 50

However, if the span of control is too wide, managers could lose control. If the subordinates are poorly trained, many
mistakes would be made.

Hassan Khalil
0322-7892189
 Functional departments

Here is an example of an organizational chart from a larger business from the book:

Here are the key features of this graph:

• The business is divided into functional departments. They use specialists for each job and this creates more
efficiency. However, workers are more loyal to their department than to the organization as a whole. Therefore,
conflict can occur between different departments. Managers working in these departments are called line managers,
who have direct authority and the power to put their decisions into effect over their department.
• Not only are there departments, but there are also other regional divisions that take care of outlets that are situated in
other countries. They use the local knowledge to their advantage.
• Some departments do not have a distinctive function but still employ specialists and report directly to the
CEO/Board of Directors. These departments are the IT department, and the Economic Forecasting department.
Some say the HR department fits in this category. These departments give specialist advice and support to the
board of directors and line managers, and the managers of these departments are called staff managers. They are
often very highly
qualified personnel who specializes in only their area.

Here are the pros and cons of employing staff managers:

51
Advantages:

• Staff managers help and provide advice for line managers on things such as computer systems.

Hassan Khalil
0322-7892189
• Helps line managers concentrate on their main tasks.

Disadvantages:

• There may be a conflict between the two groups on important decisions and views.
• Line employees may be confused and do not know who to take orders from, line or staff managers.

Decentralization

Decentralization refers to a business delegating important decisions to lower divisions in the business. In a
centralized structure important decisions are taken at the center, or higher levels of management.

Advantages of a decentralized structure:

• Decisions are made by managers who are "closer to the action".

• Managers feel more trusted and get more job satisfaction due to delegation.
• Decisions can be made much more quickly.
• The business can adapt to change much more quickly.

Decentralization means that:

• Less central control.

• More delegation.
• Decisions are taken "lower down" in the organization.
• Authority is given to departments/regions

Different forms of decentralization:

• Functional decentralization: Specialist departments are given the authority to make decisions. The most common
of these are:
o Human Resources.
o Marketing.
o Finance.
o Production.
• Federal decentralization: Authority is divided between different product lines. e.g separate truck/car/bus
divisions.
• Regional decentralization: In multinationals, each base in each country has the authority to make its own decisions.
• Decentralization by project means: For a certain project, decision-making authority is given to a
team chosen from all functional departments.

Is complete decentralization a good idea?

52
It is dangerous to let the lower-level management make all the decisions. Therefore, it is wise for the central
management to decide on major issues, long-term decisions, growth, and business objectives. If these issues are not
centralized then there would be a lack of purpose or direction in the business.

Hassan Khalil
0322-7892189
 Chapter 11: Managing a business

What do managers do?

All organizations have managers. They can come by the name of the director, headmaster, etc... but they all
perform similar tasks. These tasks are:

Planning:

Planning for the future involves setting goals for a business. These goals give the business a sense of direction and
purpose. Now the whole business will have something to work towards. Managers also need to plan for resources
that will be needed. These are only two strategies managers use to keep the business running.

Organizing:

A manager cannot do everything by himself. Therefore, jobs must be delegated to employees. Employees need
sufficient resources to complete their job, so managers need to organize people and resources effectively.

Co-ordinating:

Managers need to bring people together in a business for it to succeed. This is called coordination. If different
functional departments do not coordinate, they could be doing completely different things which do not follow any
common plan. Managers could coordinate the departments by holding regular meetings or setting up a project team
with different members from different departments.

Commanding:

Commanding refers to guiding, leading, and guiding subordinates which is very important in any organization. Managers
need to make sure that all subordinates are following targets and deadlines. It is the responsibility of 53
of the manager to ensure that all tasks are completed and therefore instruction and guidance must be provided to
employees so that they can do so.

Hassan Khalil
0322-7892189
 Controlling:

Controlling means evaluating the performance of subordinates, so that corrective action can be carried out if the
subordinates are not sticking to goals.

To sum up, this is what management gives to any organization:

• a sense of control and direction.

• co-ordination between departments, preventing wastage of efforts.
• control of employees.
• making the most out of resources (organization)

What makes a good manager?

There are different views of why some managers are better than others. Some say that managers are born that way,
while others say good managers are trained. However, good managers do have these distinct characteristics:

• intelligence: to understand difficult ideas and deal with different issues.

• initiative: to be able to think of solutions and take control of situations.
• self-confidence: to be willing to lead others and be a model image.
• assertiveness and determination: to be able to take command of others and take ideas and solutions to the end.
• communication skills: to be able to inform subordinates plainly so that they will respond positively.
• energy and enthusiasm: to work with high effort and involvement so that others will follow.

Styles of leadership:

Different managers use different styles of leadership, and each one makes subordinates react in a certain way. The
managers need to choose the appropriate leadership style for the right situation. These styles will be discussed in
Chapter 13: Motivation at work.

Management involves taking risks:

All managers need to make decisions in what they do, whether it is planning, organizing, coordinating, etc. All as you
know, all decisions involve some sort of risk.
54

Are all decisions as important as each other?

Hassan Khalil
0322-7892189
 There are three types of decisions that have their type of importance and the length of time that is going to affect the
business. They are:

• Strategic: These are very important decisions that will affect the overall success of an organization. They are long-term
decisions such as company goals or growth. They are usually taken by the top management.
• Tactical: These are decisions that are less important decisions that are taken more frequently. They can include new
ways to train staff, new transportation routes used, advertising methods, etc... They are usually taken by the middle
management.
• Operational: They are day-to-day decisions taken by the lower management. They tend to be repetitive and previous
experience could be used to help make these decisions. They can be: inventory/stock levels, ordering goods, dealing
with customers.

All of these decisions involve risk. Since they all cost time, money and opportunity cost one should think well
before making a decision.

In business, decisions need to be made and the risks need to be accepted. People like sole traders who have unlimited
liability risk losing all that they own by setting up a business are called entrepreneurs. As we already know they are
the managers and risk-takers of a company. Managers in a limited company are not "real" entrepreneurs, because
they are not risking their assets but the capital of the shareholders.

How can managers reduce risks when making decisions?

Risks are the results of failure. Risks cannot be eliminated, but they can be reduced by the process of making
decisions. Here are the steps:

• Set goals: It is impossible to make decisions if the aims are not clear.
• Identify and analyze the problem: Managers all make decisions to solve a problem. This problem might be how to use
your salary in the most efficient way possible, how to spend the rest of your life, etc... You must understand the
problem before finding a solution for it. Otherwise, you might make the wrong decision.
• Collect data on all possible alternative solutions: It is always important to analyze all possible solutions to
find which one is the best. The data collected should also contain constraints and limitations on the possible
decisions (e.g. the law).
• Make the final decisions and put them into effect: This is called implementing the decision. This means that the
manager must see to it that the decision is carried out and is working to plan.
• Review and evaluation of decision: This is looking back at the decision to identify the pros and cons of a decision
so that the experience can be used in the future. This is often hard to do especially when the wrong decision is made.
It is nevertheless necessary.
55
Here is a decision-making flow chart from the book that will help you visualize the process:

Hassan Khalil
0322-7892189
 Management responsibilities in departments:

Human resources department:

• Forecasting staffing needs.

• Recruiting staff.
• Preparing the job descriptions and job specifications.
• Planning and implementing staff training programs.
• Interviewing and selecting staff.
• Negotiating with worker representatives, such as union leaders, on wages and working conditions.
• Keeping staff records.
• Disciplining staff

The role of this department is becoming more and more important as the cost of hiring staff rises so that the HR
department must manage people firmly and fairly. An unsuccessful HR department results in a high staff turnover
(people leaving the business early). The department must also make sure that the business and staff comply with all
employment laws.

Marketing department:

• Market research for:

o New products.
o New markets.
o New opportunities.
• Planning the release of new products, often working with the Production and R&D departments.
• Decide on the best marketing mix (discussed later) for a product and implement it.
• Keeping track of products so extension strategies can be used or to take the product off the market.
56
The marketing department is crucial for the business to keep in touch with its customers. No business can
survive without this kind of function.

Hassan Khalil
0322-7892189
 Accounting and finance department:

• Recording all financial transactions.

• Collecting all the data and presenting it as regular accounts.
• Preparing all budgets.
• Analyzing the profitability of new projects.
• Deciding on which source of finance to use.
• Keeping control over business cash flow.

Production department/Operations management:

• Ordering stock/inventory of materials and resources used for producing goods.

• Developing and designing new products.
• Locating in the most cost-effective place possible.
• Deciding on the methods of production and machinery. Purchase of new machinery will involve the Finance
department.
• Controlling production to maintain high levels of efficiency.
• Maintaining the efficiency of machines.
• Keeping the quality high to meet the standards of the consumers. All staff will need to co-operate because
poor quality is normally blamed on bad staff.

Administration department:

The responsibilities of the Administration department vary with the business it is in. For example, in smaller businesses,
the administration department would be the same as the Accounts and Finance department. A larger business will have a
more specialized administrative department. These are what the department does:

• Clerical and office support services: Ensure the smooth running of all other departments.
o Sorting of incoming mail and sorting and franking of outgoing mail.
o A reception will greet visitors, answer calls, and schedule rooms for meetings.
o Office tasks will include filing all records. e.g. visitors and calls.
o Information and data processing.
• Responsibility for the IT system:
o The IT department is part of the Administration department.
o Allows information to be delivered between departments accurately.
o Provides managers with data to help in decision-making.
• Cleaning, maintenance, and security:
o Vital for safe and healthy working conditions.
o Failure to maintain equipment and the building (e.g. air conditioner) will result in reduced
efficiency.

The widespread use of computers means that many workers in all departments can do some of these tasks by
themselves (clerical and support services), reducing the function of the Administration department and making
them less common in businesses. 57

Hassan Khalil
0322-7892189
 Chapter 12: Communication in business

What is effective communication and why is it necessary?

Communication is when a message is transferred from one person to another and is understood by the latter.
We communicate every day (by talking, by chatting, by texting, etc.) but we need to learn how to communicate
effectively. Effective communication means that:

"The information or message being sent is received, understood, and acted upon in the way intended."

In business, ineffective communication or communication failure could result in serious problems.

Why do people within a business need to communicate with each other?

In business, if we do not communicate, we would be working as individuals with no coordination with anybody else in
the business. The management, whose tasks are guiding, instructing, and commanding subordinates, could not be done
because they cannot communicate with them. Here are some common messages found in the workplace:

• No Smoking (sign)
• You are fired because you are always late (letter)
• Do not touch (sign)
• There will be a fire drill at 11:00 today (notice board)

There are many more things that are communicated. Consequences would be severe if these matters are not
communicated effectively.

The process of effective communication:

Effective communication involves four features:

• The transmitter/sender who sends the message. He has to choose the next two features carefully for effective
communication.
• The medium of communication. It is the method of communication, e.g. notice board, letter, etc...
• The receiver who receives the message. 58
• Feedback means that the receiver has received the message and responded to it. This confirms that the
the message has been understood and acted upon if necessary.

Hassan Khalil
0322-7892189
 One-way and two-way communication

There are two types of communication. One-way communication is when there is no feedback required for the
message, or the receiver is not allowed to reply. This might be the sign that says "No smoking", or your boss saying:
"give me a biscuit". The other is two-way communication when feedback is required. Therefore, both people are
now involved in the communication process. This could lead to better and clearer information.

Advantages of two-way communication:

• The sender can now know whether the receiver has understood and acted upon the message or not. If they have not,
the message might have to be sent again or made clearer. Effective communication takes place only if the message
is understood by the receiver.
• Both people are involved in the communication process. This makes the receiver feel more important
which might motivate them to make better contributions to the topic discussed.

Internal and external communication

Internal communication is messages sent between people inside a business. For example:

• The boss talks to his subordinates.

• A report sent to the CEO

External communication refers to messages sent to people or organizations outside the business. For example:

• Orders for goods from suppliers.

• Talking to customers.
• Advertising to the public.

Both types of communication are almost the same, the only difference is who is being communicated with.

Why external communication has to work well

External communication can greatly affect the efficiency and image of a business. Imagine if the wrong information is
sent to a supplier and a customer. The supplier would send the wrong materials while the customer might buy products
from another company. Here are some cases in which ineffective external communication might turn out to be very
dangerous:

• The Finance Manager writes to the tax office inquiring about the amount of tax that must be paid this 59
year.
• The Sales Manager receives an order of 330 goods to be delivered on Wednesday.
• The business must contact thousands of customers because a product turned out to be dangerous. An ad must be put
into the newspaper so that customers can return the product for a refund.
Hassan Khalil
0322-7892189
 Different ways of communicating: the communication media

Information can be transmitted in several ways:

• Verbal: Involves the sender speaking to the receiver.

• Written: The message is written to the receiver.
• Visual: Using charts, videos, images, or diagrams to communicate a message.

There is no best method of communication, so the appropriate medium of communication must be selected depending
on the situation. First, the sender also has to analyze the advantages and disadvantages of each type of communication.

Verbal communication

Verbal/Oral communication might be:

• One-to-one talks.
• Telephone conversations.
• Video conferencing.
• Meetings.

Advantages:

• Information is transferred quickly. This is an efficient way to communicate in meeting with lots of people.
• There is an opportunity for immediate feedback which results in two-way communication.
• The message might be enforced by seeing the speaker. Here the body language and facial expression
could make the message easily understood.

Disadvantages:

• In big meetings, we do not know if everybody is listening or has understood the message.
• It can take longer for verbal feedback to occur than written feedback.
• Verbal communication is inappropriate for storing accurate and permanent information in a message. (e.g.
warning to a worker)

Written communication including electronic communication

Here are some written forms of communication:

• Letters: Used for both external and internal communication. Follows a set structure.
• Memos: Used only for internal communication. 60
• Reports: Detailed documents about any problem. They are done by specialists who send them to managers to
analyze before meetings. These reports are often so detailed that they cannot be understood by all employees.

Hassan Khalil
0322-7892189
• Notices: Pinned to notice boards that offer information to everyone. However, there is no certainty on whether they
are read or not.
• Faxes: Written messages sent to other offices via telephone lines.
• E-mails: Messages sent between people with the same computing facilities. The message is printed if a hard copy is
needed.
o Intranet: A network inside a business that lets all employees with a computer message each other.
o Internet: The global network for messaging anyone. (e.g. customers, suppliers)

Advantages:

• There is hard evidence of the message which can be referred to and help solve disputes in the future
over the content of the message.
• It is needed when detailed information is transferred: it could be easily misunderstood. In some countries, the law
states that businesses need to put safety notices up because people could forget them.
• The written message can be copied and sent to many people.
• Electronic communication is a quick and cheap way to get to many people.

Disadvantages:

• Direct feedback is not always possible unless electronic communication is used. However, this could result in
too many emails being sent (information overload). Direct feedback via other means of written communication is
hard.
• It is not as easy to check whether the message has been understood or acted upon.
• The language used might be difficult to understand. The message might be too long and disinterest
the reader.
• There is no opportunity for body language to be used to enforce the message.

Visual communication

Here are some forms of visual communication:

• Films, videos, and PowerPoint displays: often to help train new staff or inform salespeople about new products.
• Posters: can be used to explain a simple but important message. (e.g. propaganda poster)
• Charts and diagrams: Can be used in letters or reports to simplify and classify complicated data. Computer
technology could help in the design of these charts or diagrams. A printed copy might be needed for hard data to
add to reports and documents.

Advantages:

• Present information appealingly and attractively that encourages people to look at it.
• They can be used to make a written message clearer by adding a picture or a chart to illustrate the point being made.

Disadvantages: 61

• No feedback is possible. People need to check via verbal or written communication to check that they have
understood the message.

Hassan Khalil
0322-7892189
• Charts and graphs might be difficult for some people to understand. The message might be
misunderstood if the receiver does not know how to interpret a technical diagram.

Formal and informal communication

Formal communication is the channel of communication that is recognized by the business, such as notices on
boards, emails, and memos. Formal means of communication are important. It shows that the information given is true.

Informal communication might be communication between friends and co-workers. There is no set structure and the
information transferred is not recognized by the business. This channel of communication could be used by the
manager to try out new ideas, before publicly announcing them to the rest of a company. However, informal
communication can result in gossip can rumor, and managers have no way to remove these informal links from people.

Communication nets

There are many groups of people in any organization, and each of them communicates in different ways. People have
connections with each other, and these links form communication nets. There are three standard types of
communication nets:

Chain network:

62
+ Can be used to transfer important messages from higher management levels to lower levels.

- This often leads to one-way communication.

Hassan Khalil
0322-7892189
 - The message could become altered as it passes through different management levels.

Wheel network:

+ The central management can pass messages to all departments quickly.

- The departments cannot communicate directly between themselves.

Connected network:

+ This is used to create or discuss new ideas.

+ It specializes in two-way communication.

- Can be time-consuming.
63
- There is no clear leader or sender of messages.

Hassan Khalil
0322-7892189
 Which network works best?

There is again, no best network. A company is likely to use the different networks at different times or for different
groups.

• The chain network is for communicating important business policies.

• The wheel network is used for sending different messages to different departments.
• The connected network is used to generate new ideas or solutions to problems where group discussion is
the most effective.

The direction of communications

Here is an organization chart from the book explaining the direction of communications within the business. The
arrows are labeled A, B, and C which shows the direction of communication:

• Arrow A (downwards communication):

o Used by managers to send important messages to subordinates.
o Do not allow feedback.
o The message might be altered after passing different levels.
• Arrow B (upwards communication):
o Used by subordinates send feedback to managers.
o Feedback from subordinates ensures that there is effective communication.
o Feedback results in higher morale and new ideas contributed to the business.
• Arrow C (horizontal/lateral communication):
o People at the same level of management communicate with each other.
o Information and ideas can be exchanged both formally and informally.
o Can cause conflict between departments. (e.g. Production department asks the Finance department for a
budget to hire new staff but is rejected)

Barriers to effective communication 64

As we already know, the four parts of effective communication include the sender, medium, receiver
, and feedback. However, communication may fail if there are problems with one of these four features. If one part

Hassan Khalil
0322-7892189
 fails, it becomes a barrier to effective communication which might cause a breakdown in communication
resulting in serious consequences to the business. Here are some common barriers to effective communication and
how to overcome them.

Problems with sender:

• Problem: Language is too difficult to understand. Technical jargon may not be understood.
Solution: The sender should ensure that the receiver can understand the message.
• Problem: There are problems with verbal means of communication. (e.g speaking too quickly)
Solution: The sender should make the message as clear as possible and ask for feedback.
• Problem: The sender sends the wrong message to the wrong receiver.
Solution: The sender must ensure that the right person is receiving the right message.
• Problem: The message is too long with too much detail which prevents the main points from being understood.
Solution: The message should be brief so that the main points are understood.

Problems with the medium:

• Problem: The message may be lost.

Solution: Check for feedback. Send the message again!
• Problem: The wrong channel has been used.
Solution: Ensure the appropriate channel is selected.
• Problem: Message could be distorted after moving down a long chain of command.
Solution: The shortest channel should be used to avoid this problem.
• Problem: No feedback is received.
Solution: Ask for it! Use different methods of communication (e.g. meeting)
• Problem: Breakdown of the medium.
Solution: Use other forms of communication.

Problems with the receiver:

• Problem: They might not be listening or paying attention.

Solution: The importance of the message should be emphasized. Request feedback.
• Problem: The receiver might not like or trust the sender, and may be unwilling to act upon the message.
Solution: Trust is needed for effective communication. Use another sender to communicate the message.

Problems with the feedback:

• Problem: There is no feedback.

Solution: Ask for feedback. Use a different method of communication that allows feedback.
• Problem: The feedback is received too slowly and may be distorted.
Solution: Direct lines of communication should be available between the subordinate and the manager.

Note: The forms of communication are: verbal, written, and visual. The methods of communication can be: 65
telephone, e-mail, meeting, etc...

Hassan Khalil
0322-7892189
 Chapter 13: Motivation at work
Motivati
on

People work for several reasons. Most people work because they need to earn money to survive, while others work
voluntarily for other reasons. Motivation is the reason why people work, and it drives them to work better. Therefore,
managers try to find out what motivates workers and use them to encourage workers to work more efficiently. This
results in higher productivity, increased output, and ultimately higher profits.

• Nowadays, machinery is more common in businesses which result in increased productivity as well. However, the
amount that a well-motivated workforce can produce must still be recognized, since employees are a firm's
greatest assets!

Motivation theories

People work very hard when they are working for themselves. When they work for other people, less so.
Managers have been looking into what makes employees contribute their fullest to the company and these
studies have resulted in four main theories of motivation.

F.W.Taylor

Theory:

• Money is the main motivator.

• If employees are paid more, they work more.
• Work is broken down into simple processes, and more money is paid which will increase the level of
productivity an employee will achieve.
• The extra pay is less than the increased productivity.

Disadvantages:

• Workers are seen rather like machines, and this theory does not take into account non-financial motivators.
• Even if you pay more, there is no guarantee of a productivity rise.
• It is difficult to measure an employee’s output. 66

Maslow

Hassan Khalil
0322-7892189
 Maslow created what is known as the hierarchy of needs.

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

• Physiological needs: basic requirements for survival.

• Security needs need to be physically safe.
• Social needs: the need to belong and have good relationships with co-workers.
• Esteem needs need for self-respect and to be respected by others.
• Self-actualization needs the need to reach your full potential and be promoted.

Businesses realize that the more levels of motivation are available to workers, the harder they will work. Maslow also
suggests that each level of motivation must be achieved before going to the next level. Once one level of motivation
is met, more of that will no longer motivate the employee.

Disadvantages:

• Some levels are not present in some jobs.

• Some rewards belong to more than one level on others.
• Managers need to identify the levels of motivation in any job before using them to motivate employees.

Herzberg

To Herzberg, humans have hygiene factors or basic animal needs of humans. We also have motivational
factors/motivators that are required for a human to grow psychologically.

Hygiene factors:

• Status.
• Security.
• Working conditions.
• Company policies and administration.
• Relationship with a supervisor.
• Relationship with subordinates.
• Salary.

Motivational factors:

• Achievement.
• Recognition.
• Personal growth/development.
• Advancement/promotion. 67
• Job satisfaction.

Hassan Khalil
0322-7892189
 To Herzberg, if the hygiene factors are not satisfied, they will act as demotivators. They are not motivators, since
the motivating effect quickly wears off after they have been satisfied. True motivators are Herzberg's motivational
factors.

McGregor

McGregor splits his theory into what managers believe. One type believes in theory X, while the other type
believes in theory Y. Here is the table:

Here are some differences in how an X manager will work and how a Y manager will work:

• X managers believe that people are naturally lazy, and have to be pushed with external factors to work harder. (e.g.
higher pay).
• Y managers believe that people want to do a good day's work but need a good environment to do the work. A
better environment is an internal factor.
• X managers will try to provide incentives and supervision for employees to work hard.
• Y managers will try to provide a favorable environment so that employees can enjoy their work.

Theories like Taylor's theory are X theories, while others like McGregor's theory are Y theories. People may say
that money is the main motivator, but studies have shown that many people leave jobs because other motivational
factors are not available to them.

Why do people work?

Here is a summary of why people work:

• Money: to satisfy needs and wants.

• Security: knowing that you are physically safe and have job security.
• Social needs: to belong to a group, make friends at work.
• Esteem needs (self-importance): feeling important, feeling the job you do is important.
• Job satisfaction: enjoyment from the feeling of having done a good job.

Motivating factors - financial motivators

There are three ways to motivate a workforce:

• financial motivators 68
• non-financial motivators
• ways to increase job satisfaction

Financial rewards
Hassan Khalil
0322-7892189
 Pay may be the basic reason why people work, but different kinds of pay can motivate people differently. Here are
the most common methods of payment:

Wages

Wages are paid every week, in cash or straight into the bank account, so that the employee does not have to wait long
for his/her money. People tend to pay wages to manual workers. Since wages are paid weekly, they must be calculated
every week which takes time and money. Wages clerks are paid to do this task. Workers get extra pay for the
overtime that they do. There are some ways that wages could be calculated:

Time rate: Time rate is paid according to how many hours an employee has worked. It is used in
businesses where it is difficult to measure the output of a worker.

+ Easy to calculate the wage of the employee. A time-sheet must be filled out by the Accounts department
to calculate the wage.
• - Both good and bad workers get paid the same wages. Therefore, more supervisors are needed to maintain good
productivity. A clocking-in system is needed to know how many hours an employee has done.

Here is an example of a wage slip and time-sheet

69

Hassan Khalil
0322-7892189
 They show:

• Basic pay + Overtime = Gross Pay

• Gross pay - Deductions = Net Pay

Deductions include:

• Taxes
• Pension
• Union fees
• National insurance: entitles the payee to short-term unemployment benefits, sickness benefits and
state pension.

Piece rate: Piece rates are paid depending on how many units they have produced. There is usually a base pay
(minimum wage) and the piece rate is calculated as a bonus on how many units were created. Piece rates are found in
businesses where it is possible to measure a workers’ productivity.

+ Encourages workers to work faster and produce more goods.

• - Workers will often neglect quality, and businesses will need a quality control system which is
expensive.
• - Workers who focus on quality will earn less. Tension is caused when some workers earn more than others.
• - If machinery breaks down, employees earn less. That is why there is a guaranteed minimum pay.

Salaries

Salaries are paid monthly and normally straight into the bank account. They are usually white-collar workers. A
salary is counted as an amount per year that is divided into 12 monthly accounts. You do not usually receive
overtime. Managers only need to pay their workers once a month, and since the amount is
transferred by the bank, the manager loses much less time and money tocalculate salary. 70

Salaries are usually a standard rate, but other rewards could be given to employees:

Hassan Khalil
0322-7892189
• Commission: A percentage is paid, usually to sales staff, depending on the value of goods they have sold. Workers
are encouraged to sell more. However, they could persuade customers to buy products they don’t want, making the
company look bad. Just like the piece rate, in a bad month where there are little sales, workers' pay will fall.
• Profit-sharing: Employees receive a percentage of the profits made. However, they will get nothing if the business
doesn't make a profit. This is often used in the service sector, where it is hard to find an employee’s contribution to
the company.
• Bonus: A lump sum paid to employees who have done well. It is usually paid at the end of the year or before the
holidays. However, this could cause jealousy between workers. Giving bonuses to a team works better.
• Performance-related pay: Employee pay is linked to the effectiveness of their work. It is often used in organizations
where it is hard to measure productivity. It uses the system of appraisal: employees are observed and their colleagues
are interviewed to determine their effectiveness. Afterward, the immediate superior of the employee has a meeting
with them to discuss their effectiveness.
• Share ownership: Employees receive some shares from the company. They will either benefit from dividends or sell
the shares when their price has risen. They will be more motivated because they feel like a part of the company.

Motivating factors - non-financial motivators

Other factors motivate people in a business, and they are often called perks or fringe benefits. They may be having
free accommodation, free car, etc... However, when you look at it, it is just money in different forms. Here is a list of
these motivators:

• Children's education.
• Discounts on company products.
• Free Healthcare.
• Company vehicle.
• Free accommodation.
• Share options.
• Expense accounts.
• Pension.
• Free holidays.

Job satisfaction:

Employees will become more motivated by enjoying the job they do. Job satisfaction can come in different ways.
However, some factors demotivate employees if they are not satisfied, and must be satisfied before the motivators can
take effect. Here are some things that make workers' jobs satisfying:

• Pay.
• Promotion.
• working conditions.
• Fringe benefits.
• Management 71
• Working hours.
• The nature of the work itself.
• Colleagues, etc...

Hassan Khalil
0322-7892189
 Herzberg and Maslow stress that things such as responsibility recognition are also crucial to provide job
satisfaction. Letting workers contribute to the job would also help, making jobs less boring and more creative. Here
are some policies to increase job satisfaction:

Job rotation:

Workers in a production line can now change jobs with each other and make their jobs not so boring. It helps train
the employee in different aspects of their jobs so that they can cover for other employees if they do not show up.

Job enlargement:

Adding tasks of a similar level to a worker's job. Job enlargement simply gives more variety to employees' work
which makes it more enjoyable.

Job enrichment:

Adding tasks of a higher level to a worker's job. Workers may need training, but they will be taking a step closer to
their potential. Workers become more committed to their job which gives them more satisfaction.

Autonomous work groups or team working:

This is when a group of workers is given total responsibility to organize themselves and perform a task. This makes
the employees feel more important, as well as gives them a sense of belonging when they are part of a team. If they
organize themselves differently every time, the team could get job enlargement and job enrichment too!

Leadership
72
Studies have shown that leadership has a great impact on workers' motivation. Good managers have leadership skills
that inspire their workers to work better, as well as direct them with a common goal. Managers use many styles of
leadership, and they can be summarised into 3 main styles:

Hassan Khalil
0322-7892189
 Autocratic leadership:

• The manager controls all aspects of their subordinates' work.

• They keep themselves separate from employees.
• Employees are expected to obey every command and cannot contribute to decisions.
• Communication is only top-down.

Laissez-faire leadership:

• Objectives are shown to employees, but the task is completely delegated to them.
• Communication can be difficult since clear instructions are not given.
• The manager has a limited role in this type of leadership.

Democratic leadership:

• The manager discusses tasks with his employees before making decisions.
• Communication will be two-way, both top-down and bottom-up.

Here is a diagram to summarise the leadership styles:

The style of leadership used can vary depending on situations where they are the most effective.

Formal and informal groups

A formal group is an official group that is formed to do a specific task in an organization. An informal group is a
group of people who are formed independently by themselves. They are not official, but the people in the group have a
common interest or cause. Both of these groups are needed in business, and let's see why in this
example. e.g. a school might create a football team (formal group) but the players need to band together to play 73
effectively (informal group).

Hassan Khalil
0322-7892189
 Formal groups in business

Departments within a business are good examples of formal groups. From time to time different groups might be set up
to cope with different problems or do different tasks. Sometimes people from different departments could come together
in a group to do a team project.

Informal groups in business

There are can be many informal groups in a business that can increase the motivation of workers because they have a
true sense of belonging. e.g. There is a group of factory workers who are interested in basketball, and they form an
informal group, as a result, when they get back into their formal group they are likely to coordinate better with each
other.

There are other scenarios where two departments merge to become one, making them one formal group. However,
the people from these former departments still see themselves as separate from each other. These two groups of
people will refuse to co-operate until they are also merged into an informal group. Therefore, informal groups
should be handled carefully in business to yield the best results.

Regular meetings, free holidays, sporting events, and such things could be organized to create informal groups and
use them in a more positive way to avoid them getting into the way of business activity.

74

Hassan Khalil
0322-7892189
 Chapter 14: Recruitment, Training, and human resources

The work of the Human Resources department

We all know that recruitment and selection is one of the tasks that the HR department fulfills.
The other tasks will be discussed below:

• Recruitment and selection: Involves selecting and attracting the best workers.

• Wages and salaries: Must be enough to motivate or attract workers.

• Industrial relations: There must be effective communication between departments.
• Training programs: Must meet the training needs of employees and accomplish business
objectives.
• Health and safety: Must do things according to the law.
• Redundancy and dismissal: Must obey all laws when firing workers.

Recruitment and selection

Workers are needed when a business starts up, expands, or an existing employee leaves.
Businesses use the recruitment process to successfully employ the right people. This process is
usually undertaken by the HR department, but in small businesses, HR departments do not exist
since the businesses employ too few workers for it to be of much use. Here is a diagram
summarising the recruitment process:

1. Vacancy arises.

2. A job analysis is done, which identifies the responsibilities and tasks of the job.
3. A job description lists the responsibilities and tasks of the candidates who apply for the
position.
4. A job specification outlines the required qualifications, expertise, and experience a 75
candidate needs so that they can be accepted.
5. The job is advertised in the appropriate media. (e.g. newspapers)

Hassan Khalil
0322-7892189
6. Candidates fill out application forms, which are short-listed so that only the best candidates
remain.
7. Interviews are held with the remaining candidates, and the ones suitable for the job are
selected.
8. Vacancy filled.

The recruitment process

Job analysis and description:

When a new employee is needed, a job analysis needs to be taken to identify the tasks and
responsibilities of the position. This should be easy for a job that needs replacement, but not
so much for a job that has just been created.

Once all the details of the job have been gathered, a job description needs to be drawn up. This job
description has several functions:

• Given to candidates so they will know what the job will involve.

• Allows a job specification to be drawn up which will state the requirements for the job.
• Shows whether an employee carries out the job effectively or not. It helps solve disputes
between employees and employers about wages, working hours, etc.

The job description for any business will usually contain:

• The title of the job.

• The department one will work in.

• Who will be in charge of the job-holder?
• Who the job-holder will be in charge for.
• The purpose of the job (job summary).
• The main duties of the job.

Job descriptions sometimes contain information about:

76
• The conditions of employment – working hours, wages, pension schemes.

• Training that will be offered.

Hassan Khalil
0322-7892189
 • Opportunities of

promotion. Job specification

After the job description has been drawn up, the qualifications for the job can be identified.
They usually include:

• The level of educational qualifications.

• The amount and type of experience.

• Special skills, talents, or knowledge.
• Personal characteristics. (e.g. type of personality)

Advertising the vacancy

The next stage is on how to get people to know that you have a job to be filled.

Internal recruitment

The vacancy can be filled by an employee already in the business. It might be suitable for
employees seeking promotion.

Advantages of internal recruitment:

• Saves time and money.

• The candidates' reliability, ability, and potential are already known.

• The candidates know the expectations and rules of the company.
• Motivates other employees to work harder to get promoted too.

Disadvantages of internal recruitment

• No new ideas or experiences come into the business.

77
• May create jealousy and rivalry between existing employees.

Hassan Khalil
0322-7892189
 External recruitment

Most vacancies are filled with external recruitment, which always involves advertising the
vacancy. Here are some suitable media of advertising:

• Local newspaper: Usually for office and manual workers. These people are plenty since the
job does not require too much skill.

• National newspaper: Used to find workers for senior positions that require a lot of skills. It
can be read by people anywhere in the country or overseas.
• Specialist magazines: Used for particular technical specialists such as physicists. Can be
used to hire people in the home country or abroad.
• Recruitment agencies: Keeps details of qualified people, and will send the suitable
applicants to interviews when a business asks for a worker. Many businesses prefer to use
recruitment agencies to find workers because it is easier. However, it is expensive since their
fee is based on a percentage of the worker's pay.
• Government job centers: Place where businesses can advertise their vacancies. These
vacancies are usually for unskilled or semi-skilled workers.

Possible effects of government legislation on the recruitment process

Many governments pass laws to create equal employee

opportunities. They state that all employees should be treated equally in the workplace and
receive the same salary for doing the same job. People of any sex and people with disabilities
are treated equally. Therefore, businesses need to be careful when advertising and treating
their employees because they could be prosecuted and fined.

Job advertisement

This is what a business needs to decide when drawing up an advertisement:

• What should be included?

o Job description
78
o Job specification
• Where the ad will be placed.
o (depends on job)

Hassan Khalil
0322-7892189
• Advertising budget.
o (depends on job)

Applications forms and CVs/résumés

When a person applies for a job, he will have to fill out an application form or write an
application letter with a CV enclosed. CVs are descriptions of one's qualifications and skills in
a set format.

Businesses will use application forms and CVs to see whether an applicant matches the job
specifications or not. The closest matching applicants are invited to interviews in the
selection stage. A shortlist is drawn up.

These are what CVs should contain:

• Name

• Address
• Telephone Number
• Date of Birth
• Nationality
• Education and qualifications
• Work experience
• Positions of responsibility
• Interests
• Names and addresses of references.

The letter of application should contain

briefly:

• Why the applicant wants the job.

• Why the applicant feels he/she would be suitable.

Applicant forms ask for the same information as the application letter and CV but may ask for
other types of information.

Interviews 79

Applicants who are invited to interviews will have provided the names and addresses of -them
Hassan Khalil
0322-7892189
 references. These people can give their opinions on the reliability, honesty, and skills of the

Hassan Khalil
0322-7892189
 applicants and they will be likely, to tell the truth, because the applicants will not know what
they have said.

Interviews are the most popular form of selection. However, interviews are not always the
most reliable process of selection. They aim to find out these things:

• The applicant's ability to do the job.

• Personal qualities that are advantageous and disadvantageous.

• General characteristics – whether they can "fit

in"? These are the likely questions in an interview:

• Why have you applied for the job?

• What do you know about this company?

• What qualities do you have to offer the company?
• What ambitions do you have?
• What are your hobbies and interests?
• Do you have any questions to ask us?

Interviews can be one-to-one, two-to-one, or a panel of people to interview people which is

used to select people for important jobs. Some businesses include tests in their selection.

• Skill tests: To test the skills of the candidates.

• Aptitude tests: To test how easily candidates can be trained/learn new things.
• Personality tests: To test for people who have specific personal qualities which will fit into
jobs – e.g. that has a lot of stress; requires you to work with a team.
• Group situation tests: To test how well applicants work with other people.

Rejecting unsuccessful applicants

When applicants fail to get the job, they should be informed and thanked for applying.
80
Training
Training is often needed to do achieve the needs listed below. These needs can be long-term or

Hassan Khalil
0322-7892189
 short-term.

• Introduce a new process or equipment.

• Improve efficiency.
• Decrease supervision needed.
• Improve the opportunity for internal promotion.
• Decrease the chance of accidents

Employees should know the benefits of training for them to take it seriously. Here are some
objectives of training:

• Increase skills.

• Increase knowledge.
• Change attitude, raise

awareness. There are three main

types of training:

• Induction training:

o Introducing a new
employee to their business/management/co-workers/facilities.

o Lasts one to several days.

• On-the-job training:
o Employees are trained by watching
professionals do a job.
o Only suitable for unskilled and semi-skilled jobs.
o Cuts travel costs.
o The trainee may do some
work.
o The trainer's productiveness is decreased because he has to show things to the 81
trainee.
o The trainer's bad
habits can be passed to the trainee.

Hassan Khalil
0322-7892189
• Off-the-job training:
o Workers go to another place for training (e.g. school).
o Methods are varied and usually more complex.
o Usually classroom training.
o Employees still work during the day.
o Employees can learn many skills.

Workforce planning
A business will need to forecast the type and number of employees needed in the future.
This depends on the firm's growth and objectives. The forecast can be done by:

• Finding out the skills of all current employees.

• Counting out people who are leaving soon (e.g. retirement).

• Talk to staff about who would want to retrain for new jobs.
• Provide a recruitment plan. (how much new staff are needed, and how they should be
recruited, internal or external)

Dismissal and Redundancy

There are some situations when businesses need to reduce the number of employees they have.
This can be done in two ways:

• Dismissal:

o A worker is fired for unsatisfactory work or behavior.

o The fault of the employee.

• Redundancy:
o Employees are no longer needed.
o Not the fault of the employee.
o Some reasons are:
▪ A business is closing down a factory.
▪ A business wants to cut costs by reducing the number of employees.
82
▪ A business has merged/taken over another and there are too many staff in
certain departments.
▪ New machinery replaces workers.

Hassan Khalil
0322-7892189
o Employees are given some money to compensate for their lost job.
▪ The money is often negotiated with trade unions.
▪ Some government has laws that make businesses pay for their workers this way.
o If only some employees are to be made redundant, trade unions will agree with the
fairest way to see who goes. These terms are negotiated with the HR department.
▪ Sometimes there will be voluntary redundancy by members.
▪ Older workers.
▪ There may be some who want to leave because they have other ideas.

83

Hassan Khalil
0322-7892189
 Chapter 15: Employee and employer associations
In smaller businesses, if employees have any problems they can talk directly to their employer.
However, in larger businesses that employ many people, it becomes extremely hard to do so. It
is also hard for the Human Resources department to make decisions when they have about 500
employees (e.g. who will get a pay rise?). It becomes much easier if decisions are negotiated
with a trade union and employee association that represents them. This saves the management a
lot of time because they do not have to see individual employees discuss problems.

Employees might not be treated fairly at work. They may be overworked and underpaid. Trade
unions have the role of bargaining with the HR department for better working conditions,
conditions of employment, and better pay.

Trade Unions

Employees with similar interests (higher pay) form a trade union. Trade unions are a form of
pressure group with can influence business activity. There are four main types of trade unions:

• Craft union: For workers skilled at a particular job.

• General union: For unskilled and semi-skilled workers from different industries.
• Industrial union: For all types of workers in an industry.
• White-collar union: For non-manual or office workers.

Why do workers join a trade union?

84
Unions have a shop steward, who is an unpaid representative of the union. When someone is new
to a job they may ask if they may want to join. If the person joins, they will have to pay an
annual subscription. This money will be used for employing union officials who will
represent the views of

Hassan Khalil
0322-7892189
 the employees.

Advantages of a union

• Strength in numbers.

• Improved conditions of employment.

• Improved working conditions.
• Improved sickness benefits, pensions, and retrenchment benefits.
• Improved job satisfaction and encourage training.
• Advice/Financial
support if a worker is dismissed unfairly/made redundant or is asked to do something not
part of their job.
• Improved fringe benefits.
• Employment where there is a closed shop, which is when all employees in a business must
belong to the same union.

Trade unions need to:

• Put forward their views in the media to influence government decisions on pay,
employment, etc…

• Improve communications between workers and managers.

Closed shop

A closed
the shop is when all employees must join one union to be employed. It is because its members
feel that the union is doing nothing when non-members receive the same pay rises as them. They
think it is unfair. Trade unions also gain greater strength if all the employees are members of the
union. However, many people think that it is unfair since they are forced to join – they should be
able to make their own decisions. 85

Single union agreement

Hassan Khalil
0322-7892189
 Some companies have a single union agreement when a business only agrees to deal with a
single union. Any employee who wants to join a union can join this union. It is becoming
more popular nowadays because many employees are becoming multi-skilled, and do not
know which union to join.

Advantages to the employee:

• Discussions are clearer if there is only one union to deal with.

• The union has greater power.

• No disagreements between different unions.
• A better working relationship should develop between the union and the management.
• Disputes are solved more quickly.

Advantages to the employer:

• Discussions are clearer.

• A better working relationship should develop, meaning that there would be fewer industrial
disputes, benefiting both employees and employers.
• Disputes are solved more quickly.
• It is easier to agree to changes.

The structure of a trade union

The structure of different unions vary, but most elect a President or General Secretary to
work full-time for and get paid by the union. They work at the union's headquarters. If the
union is large, there will be union officials to take care of members in different branches.
Each branch represents its members in one worksite, one factory, or one employer. Each
branch has a representative. Unions are usually democratic and their union officers are
voted up by the
members. 86

Hassan Khalil
0322-7892189
 Employer associations

Employers join what is called employer associations/employer federations/trade associations.

Like trade unions, employer associations are made up of businesses and employers who all pay
annual fees for their benefits.

Advantages of joining an employer association:

• They negotiate with trade unions on behalf of their members.

• They advise on employment laws, health, and safety, taxation laws, etc…
• Strength in numbers, they want to influence government decisions.
• They can share ideas and research facilities.
• They can organize bulk buying for members and get discounts.

Employer associations and the government.

Employer associations represent similar wants of businesses, and will try to influence the
governments to give better conditions for businesses to prosper:

• They want the government to control things such as inflation, law and order, health and
safety, and education for the workforce.

• Lower taxes.
• More freedom for businesses.
• Fair competition.
• Good transport infrastructure.
• Access to overseas markets.
• A reliable source of power.

Collective bargaining
87

This is when representatives of different interest groups negotiate and a collective agreement is

Hassan Khalil
0322-7892189
 made. The bargaining can be with businesses or with the government. Collective
bargaining in businesses usually means that the representatives of one or more trade
unions negotiate with one or more employers or employer associations to come up with a
mutually acceptable agreement on conditions of employment.

Why trade unions want wage increases:

• Inflation.

• It is difficult to recruit qualified workers (so pay them more!).

• Pay differentials need to be maintained (everybody's wages should rise when the minimum
wage rises).
• Changes in the workplace, e.g. new machinery.
• If there is increased productivity, wages should increase too. There are productivity
agreements when managers and trade unions agree to raise prices for increased
productivity.

Often agreements take place and the "middle path" is taken. However, this does not always
happen, and if the workers and unsatisfied with the agreements, they will use industrial
action.

Industrial action
Various forms of industrial action try to influence the decisions of employers. Here are some of
their most comment forms.

Strikes

Strikes are when workers stop working and leave the workplace to protest against things.

• Token strike: Stoppage for an hour, a few hours, or half a day to show strong feelings.

• Selective strike: Only a few workers go on strike. They are chosen by the union to cause as 88
much disruption as possible.
• All-out strike: All union members stop working and wait until a dispute has been settled.

Hassan Khalil
0322-7892189
 Unions have to pay their members out of strike
funds as long as the strike has been approved by the union. All members vote to see if the strike
is favorable or not.

Picketing
This is when workers stand outside the factory holding signs to protest and stop any people
going in and out as well as goods. This can halt the production process. The strikers gain
publicity and give the firm a bad image. This puts pressure on the firm to settle the dispute.

Work to rule
This is when workers stick rigidly to every rule and regulation in the business so that it slows
down the production process. They still get paid since they are technically doing nothing
wrong, but this still causes a lot of disruption in the workplace.

Go slow
All workers deliberately do things very slowly.

Non-cooperative
Workers refuse to work with any new rules or follow any new practices they do not
approve of.

Overtime ban
Workers refuse to do any overtime. This might damage the business if they need to complete some
orders quickly.

Possible harmful consequences of industrial action:

• For employers:
o Loss of output.
89
o Loss of profit.
o Loss of customers.
o Poor reputation.

Hassan Khalil
0322-7892189
o Bad image.
• For employees:
o Loss of wages.
o They might lose their jobs if the company suffers low profits.
• For customers:
o They need to find another supplier which might cost more (production is stopped)
o Shortage of products.
o Deliveries not made.
o For other businesses:
▪ May lose income.
▪ May not have materials to produce goods.
• For the economy:
o Workers have less money to spend.
o Less tax revenue.
o The country gains a bad reputation for late deliveries.
o Workers may be made redundant.
o Exports may be lost and imports increased.

Employer's powers
However, employers can do something about the situation. Usually, they will sign a no-strike
agreement with the union which also involves pay rises. The pay rises are determined by an
arbitrator, an independent person who represents both sides and decides on the best decisions
possible. Again, he will most likely choose the "middle path".

Nevertheless, if strikes do happen, here are some things employers can do:

• Dismiss all workers: This leaves the company in a very terrible position since they can't
produce goods or deliver goods.

• Lock-out the workers: Stop workers from coming to work or getting paid. Used to
counterwork to rule and go slow strategies.
• Institute a pay freeze: Used if employees are refusing to follow new rules, practices, or
operate new machinery.

90

Hassan Khalil
0322-7892189
 Worker participation:
The management needs to let everyone feel that they are part of the business. This means that
managers will let workers participate in business decisions. There are several ways of doing this:

• Worker directors: Some workers become directors, but they are not allowed to attend all
board meetings.

• Works councils: These are where representatives of employees get together and discuss
matters that affect employees with managers. Works councils are called European
committees in Europe and are becoming more common there. Multinationals with more than
1000 workers or 100 workers per branch will have to create a works council and will have to
always consult it when making decisions affecting employees.
• Quality circles: This is often used in Japanese companies, where workers regularly debate on
how to improve quality and efficiency.
• Using a democratic style of leadership: Workers have delegated tasks and are consulted in
business decisions.

Advantages of worker participation

• It increases the flow of information and improves relationships between the employer and
the employee.

• It increases motivation.
• It increases job satisfaction.
• It benefits the company since it can use knowledge from experienced workers.

Disadvantages of worker participation

• It is time-consuming.

• Workers may lack the necessary technical knowledge.

• If representation is done via trade unions, nonunion members won't be affected.
• There could be a conflict of interests.
91

Hassan Khalil
0322-7892189
 Chapter 16: The market and marketing

What is marketing?
A market is where buyers and sellers come together and exchange their products for
money. It can be in the streets, on the internet, in shops around the world, etc… Customers
and sellers exchange both goods and services for money.

Product-orientated and market-orientated businesses

A product-orientated business focuses on the quality and price of the product before
finding a market for it to sell in. These types of businesses usually produce basic needs.
New technology could be developed this way, and customer wants are created by
advertising.

Other big companies cannot afford to produce a product that will not sell, so they have to do
market research first to find consumer wants before developing a product. They are called
market-orientated businesses. They will need to set up a marketing budget for this, which is a
financial plan for the marketing of a product, which contains the amount of money the
Marketing department may spend on marketing.

What is marketing
Marketing is the management process that identifies consumer wants, predicts future wants,
creates wants, and finds ways to use these wants to the fullest (most profitably). In other words,
businesses try to satisfy wants in the most profitable way possible. Marketing covers a wide
range of activities such as advertising, packaging, promotion, etc…

The Marketing department

Most businesses will have a Marketing department, which will have a Marketing Director. He
will be in charge of things such as R&D, distribution, and pricing. Here is an organizational chart
showing what departments the marketing director controls:
92

Hassan Khalil
0322-7892189
 • Sales department: Responsible for the sale and distribution of products for each region.
There may also be an export department.

• Research and Development department: Responsible for finding out consumer wants and
developing new products. They also need to find ways to improve an existing product.
• Promotion department: In charge of advertising and promotion. It will need a marketing
budget that limits the amount of money it can spend.
• Distribution department: It transports products to their markets.

The objectives of marketing

A successful marketing department should be able to achieve these objectives for the business:

• To increase sales revenue and profitability.

• To increase market share (percentage of sales a product has in a market).

• To maintain or improve the image of a product or company.
• To target a new market or market segment.
• To develop new products or improve existing ones.

SWOT analysis
This is a method to evaluate the statistics of a product of the business. It assesses these things:

• Strengths (internal)

• Weaknesses (internal)
• Opportunities (external)
• Threats (external)

Strengths and weaknesses of a product are its internal factors, while opportunities and threats are
external factors.

Market segments
93
Market segments are parts of a market that contains people who have similar preferences for
their products. The Marketing department should know which segment their product fits the
most so that they can advertise and sell their products to it.

Hassan Khalil
0322-7892189
 There are two ways to segment markets. By the type of product or the attributes of the customers
buying it. Here are two types of markets that are segmented based on the product:

• Mass market: Where there is a large number of sales of a product. (e.g. Pepsi can be bought
anywhere)

• Niche market: A small market for specialized products. (e.g. Ferrari

cars) Here is how a market can be segmented regarding people buying the

product:

• Income

• Age
Region
• Gender
• Use of product
• Lifestyle

It is very important to target the right market segment since it can increase
sales a lot. If a business can analyze all of these market segments, they may find a market
segment whose needs are not being met. This is when the business finds a gap in the market,
and it could produce goods to take advantage of this gap and again increase
sales.

The marketing mix

The marketing mix is a term that describes how products are marketed. You must remember
that before marketing can be achieved, market research is needed. The rest is summarized into
the four Ps. Let's look at them briefly first, since they will be covered in other chapters:

• Product: Design and quality, competitiveness, packaging, etc… 94

• Price: There are different pricing strategies. Businesses need to use them so that they
Hassan Khalil
0322-7892189
 increase sales.

Hassan Khalil
0322-7892189
• Promotion: Advertising and promotion. Discounts, TV adverts, sales, packaging,
etc…
• Place: The location of the point of sale (the shop). Channels of distribution. Type of shop
(wholesaler or retailer?)

A successful product requires effective use of the four Ps. However, businesses must be
careful to not let each of these factors counteract each other (e.g. expensive but low-quality
goods), else the product will fail.

95

Hassan Khalil
0322-7892189
 Chapter 17: Marketresearch

Why is market research needed?

Any business should find out what people want to buy and how many people are going to buy that
product before producing a product since the chances of failing are very high. Usually,
market research tries to answer these questions:

• What feature of the product do they like/dislike?

• Are people willing to buy the product?

• What price are people prepared to pay?
• Location of the selling point of the product.
• Type
of customer who buys the product.
• Type of promotion that will be effective.
• Competition in the same industry.

Businesses need to know these things, as well as consumer, wants to be more

competitive. There are two main types of information that can be gathered from
market research:

• Qualitative information: information where opinion or judgment is necessary.

• Quantitative information: information about the quantity of something.

There are two ways to gather any information for market research:

• Primary research or field research.

• Secondary research or desk research.

96

Hassan Khalil
0322-7892189
 Primary research
Primary research is gathering original data which may require direct contact with customers.
There are several ways to do primary research:

• Questionnaires

• Interviews
• Consumer panels
• Observation
• Experiments

Note: Questionnaires, interviews, and consumer panels are all types of

surveys. The process of primary research

1. Identify the purpose of the market research.

2. Decide on the best method of research. (primary, secondary or both)

3. Decide on the size and type of sample (group of people who will be asked)
4. Carry out the research.
5. Collate data and analyze results.
6. Produce a report. (may include recommendations of action paths to take)

Methods of primary research

Questionnaires

Questionnaires involve asking people questions. Deciding what questions to ask since
sometimes questions may mislead people and make them answer what they don't think.

Advantages:

• Detailed qualitative information can be gathered.

97
• Customers' opinions can be gathered.

Hassan Khalil
0322-7892189
 Disadvantages:

• If the questions are bad it could mislead customers.

• Takes time and money to collate the results.

Interviews
Interviews are face-to-face conversations with customers where the interviewer has a set of
prepared

questions.

Advantages:

• The interviewer can explain any questions the interviewee does not understand.

• Detailed information about customers'

opinions. Disadvantages:

• Interviewer bias. The interviewer might unconsciously lead the interviewee to answer in a
certain way.

• Time-consuming and expensive.

Samples
A group of people who are chosen to do market research on. There could be:

• Random sample: A random number of people are selected.

• Quota sample: People are selected for certain characteristics.

Consumer panels
98
Consumer panels are groups of people who agree to provide information and spending
patterns about a product. They may even test it and give feedback on likes and dislikes.

Hassan Khalil
0322-7892189
 Advantages:

• They provide detailed information about a product.

Disadvantages:

• They can be time-consuming, expensive, and biased if the opinions of some are influenced
by others.

Observation
involves:

• Recording: e.g. meters can be fitted to a monitor to see what people are watching.

• Watching: e.g. see how many people go into a shop and buy something.
• Audits: e.g. counting inventory to see what has sold well. (inspecting)

Advantages:

• It is inexpensive.

Disadvantages:

• Only provide basic figures and not reasons why people do things.

Experiments
Experimenting involves giving products to consumers to see what they think about it. 99

Hassan Khalil
0322-7892189
 Advantages:

• Easy to set up, carry out, and gather consumer opinions.

Disadvantages:

• People might give wrong feelings to avoid offense.

• Representatives of samples may not be asked, just people who shop in an area.
• Many potential customers may not be asked.

Secondary research
Secondary research means taking information that has been already collected by others.

Internal sources of information

Data collected from past researches could easily be used again if it is needed. Examples of internal
sources of information include:

• Sales
department: sales records, pricing data, customer records, sales records.

• Distribution and PR personnel.

• Finance department.
• Customer service department.

External sources of information

Data collected from sources outside the business. The data may still be useful but there are many
limitations since it has been gathered for other purposes. Sources include:

• Internet: gives all sorts of information, but the info must be validated. 100
• Trade and employer associations give info about things in the industry.
• Specialist journals.

Hassan Khalil
0322-7892189
• Research reports.
• Newspapers: about the economy and disposable income of workers.
• Government reports and statistics: contains things such as age groups and culture.
• Media reports.
• Market research agencies' reports: detailed reports on the economy. Expensive to buy.

Secondary research is often a much cheaper way of obtaining information. It also gains access
to data that cannot be gathered by primary research such as government issues or the economy.

Who carries out market research?

Normally, research is done by any business that needs it. In smaller businesses, owners use
secondary research since they cannot afford to conduct primary research. However, if a business
has enough money, it can afford to have a specialist market research agency to research it.

Accuracy of market research information

The accuracy of market research depends on how the research was conducted and how carefully
samples have been selected. Here are some ways to make information from market research more
accurate:

• A sample needs to be truly representative of the total population, hence a quota sample is
normally used.

• The larger the sample, the more accurate the results.

• Questionnaires need to be tested on a small group of people to see if there are
misinterpretations. The questionnaires will be modified to be as clear as possible.

Concerning secondary research, there are a few problems with it:

• Data collected by others may not be accurate since it was used for other purposes.

• Data can be out of date. 1

0
All in all, it must never be assumed that information collected from market research is 1

completely correct.

Hassan Khalil
0322-7892189
 How to design and use a questionnaire
Firstly, you need to ask yourself some questions:

• What do I need to find

out?

• Who do I need to ask?

• Where will I carry out my questionnaire?

Writing the questions

• Ask no more than 12 questions. (impatience)

• Make the questions simple. The answers should be simple enough to collate. (e.g. Yes/No
answers)
• Use a choice of age groups.
• Avoid open-ended questions.
• Avoid misleading the interviewee with questions. (don't want to offend)
• The order of the questions should be logical.

Carrying out the questionnaire

First, you need to figure out:

• How you will ask the questions.

• How you will collate the

results. Then:

• Where are you going to ask the questions?

• Who are you going to 1

0
2
ask? And finally:

Hassan Khalil
0322-7892189
• How many people will be asked?

• When will you ask the questions? (time)

Analyzing questionnaires
Analyzing the results should be straightforward if you have easily collated the data. It simply
involves reading the answers and thinking about what they mean. It takes practice.

103

Hassan Khalil
0322-7892189
 Chapter 18: Presentation of information

Presentation of data from market research

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

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

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

Pictogram:
It is similar to a bar chart but uses symbols instead of columns. It becomes extremely effective if
the data is short and simple.

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

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

Alternative ways of presenting information for 1

0
coursework 4

Hassan Khalil
0322-7892189
 Tables

Hassan Khalil
0322-7892189
 Tables could be also be used to present data in situations such as when people are
interviewed on why they like a product and they are given multiple choices.

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

Diagrams
Diagrams are used to simplify information. It can be used to show relationships of things that
all lead to the same root, which is usually at the center of the diagram. It can also be used to
show variation, e.g. diagram for ways to save water with different ways to do so branching out
from the center of the diagram.

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

105

Hassan Khalil
0322-7892189
 Chapter 19: The marketing mix: productand packaging

The role of product in the marketing mix

The product itself is the most important element in the marketing mix. Without it, the other
three wouldn't exist. Most companies today are market-oriented and will identify a suitable
product for the market before moving on to determine the other 3 elements. Large companies
have R&D departments that spend all their time developing new products and analyzing the
pros and cons of competitors' products.

Types of products:

• Consumer goods: Goods that are used up by consumers. (e.g. food, cake)

• Consumer services: Services that are produced for people. (e.g. education)
• Producer goods: Goods produced for businesses. (e.g. machinery)
• Producer services: Services for businesses. (e.g. accounting, insurance)

Each type of product determines the price, promotion, and place to sell the product. Here are
what make products successful.

• Products need to satisfy consumer wants/needs to be successful.

• The product must be of the right quality so that customers are willing to pay for it.
• Costs should be low enough to make a profit.
• The design of a product is important. This means that its quality and durability should
meet expectations and match the price of the product. The design should also enhance the
product's brand image.
• Products are novelties (newly introduced to the market).
• Products can stimulate new wants.

Product development
1
Most businesses use a general process to develop any 0
product: 6

Hassan Khalil
0322-7892189
1. Generate ideas: Ideas can be generated by:

1. Employees.

2. Customers.
3. Competitor's products.
4. R&D department.
5. Sales department.
2. Further research: The best ideas are selected and further research is done to see their pros and
cons.
3. Will there be enough sales?: To see whether there will be enough sales of the product to
break even (development costs included).
4. Develop a prototype: To see how a product could be manufactured and identify its
problems.
5. Test launch: To see if the product can sell or not.
6. Full launch.

The importance of branding

Traditionally, a product's unique features and quality were explained by the sellers who made
the product. However, since products are usually sold in private retail shops nowadays, these
points need to be projected differently. Products, therefore, need to be branded with a unique
brand name, and the product's features and quality will be projected with advertisement. The
price of branded goods is usually higher since customers are more confident to buy them. Here
are things that are involved with branding:

• Unique name.
• Unique packaging.
• Needs advertising to enforce the brand's qualities.
• Higher price than unbranded products.
• Higher quality than unbranded products.
• Creates a brand image (unique image associated with using the product)
• Creates brand loyalty.
• Consistent quality.

Packaging
1
Getting the packaging right is very important. Packaging performs several 0
7
tasks:

Hassan Khalil
0322-7892189
• Protecting the product (also includes preserving foods)

• Making it easy to transport.

• Allow the product to be used easily. The container must be able to be opened easily. (e.g. juice
in a can)
• Suitable for the product to fit in.

Packaging also helps promote the

product:

• Make it eye-catching.

• Carries information about the product.

• Promotes the brand image.

The product life cycle

Product life cycles show the stages that a product goes through from its introduction, to its
growth, and then to its decline. Here is a graph to show the product life cycle:

1. Development: The product is under development.

2. Introduction: The product is introduced. Sales grow slowly and informative advertising starts
to attract customers. Price skimming could be used if the product is new to the market. The main
aim of sales is to break even.
3. Growth: Prices rise rapidly. Persuasive advertising is used to encourage brand loyalty. Prices
1
may be reduced a little. Sales start to generate profits since costs have been covered.
0
4. Maturity: Sales rise more slowly. Competition forces prices to be lowered and the firm uses 8
competitive pricing. Advertising is used to maintain sales. Profits are at their highest.
Hassan Khalil
0322-7892189
5. Saturation: Sales reach their limit. There are no new competitors. Sales and advertising
become stable but profits fall because of lowered prices to be competitive.
6. Decline: Product goes out of fashion and sales and profits decline. Advertising eventually
stops. It is no longer profitable to produce the product.

The length of each stage varies with products. The business needs to identify which stage their
products are in so that they can use a suitable marketing strategy for it.

Extending the product life cycle

When a product has reached its maturity or saturation stage a business may adopt extension
strategies to stop sales from falling which extends the product life cycle. Sales are given a
boost by these strategies.

• Introducing new variations of the product.

• Sell into new markets.

• Make small changes to the design and packaging of the product.
• Sell through additional, different retail outlets.
• Update the product (make it better)
• Use a new advertising campaign.

Extension strategies aim to prolong the maturity stage of a product. Successful extension
strategies may result in something like this:

Nevertheless, it must be noted that businesses manufacture more than one product. They should
have a product in the growth stage to counteract an older one that is declining.
109

Hassan Khalil
0322-7892189
 Chapter 20: The marketing mix: price

The role of price in the marketing mix

When pricing a product, a business needs to choose one that fits with the rest of the elements in
the marketing mix. E.g. high price so that consumers think they are buying high-quality goods,
low price for low-quality goods, or competitive prices in a market with a lot of competition.

Price determination in a free market

People think that prices are determined by the seller of the product, but that is not quite so.
Prices are driven by market forces called demand and supply.

Demand
Demand is not only that people want to buy a product, but that they want it can are willing to
pay for it. Prices can affect how much demand there is for a product. Normally, if the price
goes up, demand goes down, and vice versa. This can be shown on the graph below:

Supply
Supply also varies with price. However, it is different. If the price goes up, then the owners
1
would want to be supplied with more products to take advantage of the high price, thus the 1
supply goes up (and vice versa). This can be demonstrated on the graph below: 0

Hassan Khalil
0322-7892189
 The market price
For the market price to be determined, demand and supply must all be put onto the same
graph. The place where the two lines (called curves) cross is called the equilibrium, where
the same number of goods are demanded and in supply resulting in no leftovers. All the
products are demanded and all of them are sold.

Factors that affect demand and supply

The graphs above assume that the demand and supply of goods are fixed. But these things can
change, which moves the demand or supply curve to the left or the right in the graph. Changes
in the price affect where you are on the curves. But changes in other factors affect the
position of the curve on the graph. 1
1
1
Factors affecting demand

Hassan Khalil
0322-7892189
• The popularity of substitute products. (products that can be used instead of the product)

• The popularity of complementary products. (products that require each other or are used
together)
• Changes in income.
• Changes in taste and fashion.
• Changes in advertising.

The result is: if demand falls, the market price and sales will fall, and the demand curve will
move to the left. If demand rises, the market price and sales will rise, and the demand curve
will move to the right. It is illustrated in the graphs below.

Elasticity of demand
The elasticity of demand is how easily demand can change when prices change. A product with
an elastic demand curve would have a higher change in demand than a change in price (uses
percentages). A product with an inelastic demand curve would have a lower change in
demand than a price change. The elasticity of demand for a product is mainly affected by how
many substitute products it has.

Factors affecting supply

• Costs in supplying goods to the market:

o Price of raw materials.

o Wage rates.
• Improvements in technology: 112
o Makes it cheaper to produce goods.
• Taxes and subsidies:
o Higher taxes mean higher costs.

Hassan Khalil
0322-7892189
• Climate (for agricultural products):
o The supply of crops depends on the weather.

The result is: if supply falls, the market price will rise, sales will fall and the supply curve will
move to the left. If supply rises, the market price will fall, sales will rise and the demand
curve will move to the right. It is illustrated in the graphs below.

Elasticity of supply
The elasticitycity of supply is how easily and quickly supply can change when prices change.
How quickly means how quickly products can be produced and supplied, which is not very
quick for products made by agriculture. A product with an elastic supply curve would have a
higher % change in supply than a price change product with an inelastic supply curve would
have a lower change in supply than a price change.

Pricing strategies
If a product is easily recognizable from other products, it would probably have a brand name.
And if it has one, it would need a suitable pricing strategy to complement the brand name
that should improve its brand image. Here are the strategies that are used:

Cost-plus pricing
Cost-plus pricing involves covering all costs and adding a percentage mark-up for profit.

+ Easy to apply.
113
• - You lose sales if your price is higher than your competitor's price.

Hassan Khalil
0322-7892189
 Penetration pricing
Penetration pricing is used to enter a new market. It should be lower than competitors' prices.

+ Ensures that sales are made when a product enters a market.

• - Prices will be below. Sales revenue will

be low. Pricing skimming

High prices are used when a new product is introduced into a market, partly because it has a
novelty factor, and because of the high development costs. High prices could be charged
because a product is of high quality. One last use of it is to improve the brand image of a
product since people usually associate high prices with good products.

+ Skimming can help establish a product as being good quality.

• - It may lose potential customers because of the high price.

Competitive pricing

Competitive pricing means setting your price to a similar or lower level than your
competitor's prices.

+ Sales will be high because your price is at a realistic level (not under/over-priced).

• - You have to research your competitor's prices which costs time and money.

Promotional pricing

Promotional pricing means that you lower the prices of goods for a short time.

+ Help get rid of unwanted stock.

+ Can renew interest in a product.

• - Sales revenue will be
1
1
lower. Psychological pricing 4

Hassan Khalil
0322-7892189
 Psychological pricing involves setting the price that changes consumers' perception of a
product. This may be by:

• Using high prices to make using the product give the user a status symbol.

• Pricing a product at just below a whole number (e.g. $99) gives it an impression that it is
cheaper.
• Supermarkets charge low prices for products that are bought daily to give consumers an
impression that they are being given good value for money.

115

Hassan Khalil
0322-7892189
 Chapter 21: The marketing mix: promotion

The role of promotion in the marketing mix

Promotion informs consumers about the rest of the marketing mix. Without it, consumers do
not know about the product, the price, or the place. Promotion is more than just advertising,
and it includes several activities. It is crucial when you are selling in a mass-market or you
have a brand name. Promotion includes:

• Advertisements: They can take different forms, e.g. on TV, in newspapers.

• Promotion: e.g. Money off coupons.

• Personal selling: Sending out sales representatives to talk directly to the consumers.
• Public relations: Involves making the public aware of the company, e.g. creating publicity in
the media.

The aims of promotion

• To inform people about particular issues.

• To introduce new products to the market.

• To compete with competitors' products.
• To improve the company/brand image.
• To increase sales.

Advertising
The advertising process

1. Set objectives: A business needs to determine the purpose of advertising.

116
2. Decide
the

Hassan Khalil
0322-7892189
 advertising budget: Set a limit on how much the business can spend on advertising. It can be
decided based on:
1. A percentage of predicted sales revenue.
2. How many competitors are spending?
3. How much the business can afford.
3. Create an advertising campaign: Decide on what advertising campaign to run. Can be
determined based on:
1. Target audience.
2. Objectives.
4. Select the media: Using the suitable media for advertising that is the most cost-effective.
E.g. TV, newspaper.
5. Evaluate the effectiveness of the campaign: Has the advertising met objectives?

Different types of advertising

• Informative advertising: Involves giving as much information about the product as possible.
(e.g. computer)

• Persuasive advertising: Involves persuading consumers that they need the product and
should buy it. (e.g. perfume)

Different media of advertising

Media Advantages Disadvantages Examples

Television Millions of people will see Expensive Food

it. Cars
The product can be Household tools
presented in a very
attractive way.
Easy to reach target
audiences.
Radio Cheaper than TV. Cannot use visual Local services
Uses song or tune which message. Shops
makes ads memorable. Expensive compared to
others. 117
The advert has to be
remembered.
Not as wide audience as

Hassan Khalil
0322-7892189
 TV
Newspaper Can reach many people. Cheap Not eye-catching if they Local products
for local newspapers. are in black and white. Cars
A lot of info can be put into Does not grab reader’s Banks
the ad. attention.
Adverts are permanent*.
Magazines Can use specialist magazines to They are only published Perfume
reach only target audience. once per month/week. Golf equipment
Magazine ads are in colour More expensive then Fashion clothes
and are more attractive. newspapers.
Posters/billb Permanent* Cheap Can easily be missed. Events
oards Potentially seen by anyone No detailed info can be Products bought by a
who passes by them. included. large section of the
population
Cinemas Visual image shows product in a Only seen by people who Toys for a children’s
positive way. Fairly cheap. go to watch films. film.
Effective if target audience goes
to see particular
films.
Leaflets Cheap May not be read. Local events.
Given to a wide range of Retail stores like
people. Seven-Eleven
Delivered to people’s
houses.
May contain vouchers to
encourage readers to keep the
advert.
Permanent*
Internet Can be seen by anybody Internet searches may not Virtual goods.
around the world. highlight the website and Services such as
Can store lots of info. Orders it could be missed. banking or insurance.
can instantly be made. Internet access is limited Virtually anything that
in some countries. is not too small.
Competition from other
websites.
Security issues may
discourage people from
buying online.
118

Hassan Khalil
0322-7892189
Others (delivery Cheap May not be seen by Shops put their
everyone. names on plastic
vehicles or sides of
bags.
bags) Coca cola use neon
signs. *Perma
nent:
adverts can be kept for future references.

Design of adverts
Businesses usually use the AIDA model:

• Attention: Informs consumers that the product exists.

• Interest: Consumers need to become interested in the product.

• Desire: Makes consumers want the product.
• Action: Prompts consumers into buying the product.

The AIDA model is most effective on products that are not used regularly. It is less effective on
products that are bought daily because people will know how good the quality is.

Promotion
Different types of promotion
Promotion is usually used to support advertising and to encourage new or existing customers to
buy the product. Its main function is to boost sales in the short-term, but not in the long term. It
is used to attract new customers so that they can try out items with the hope that they will like
them and continue to buy them after the promotion has ended. Here are some ways in which
promotion is used:

• Price reductions: Involves sales or price reduction coupons.

• Gifts: Gifts are placed in the packaging of the product to encourage consumers to buy it.
(e.g. toys in McDonald's happy meal).
• Competitions: A card may be put in the packaging allowing the consumer to enter contests
1
such as the lottery. 1
9

Hassan Khalil
0322-7892189
• Point-of-sale displays and demonstrations: This can be put near the window and
displayed attractively. It could also encourage people to buy it if they can see how it works
(demonstrated by sales staff)
• After-sales service: e.g. warranty services. It reassures the customers that if the product has a
problem then they can go and fix it for free. This makes the product more attractive than others
without a warranty.
• Free samples: Encourages people to try the product. It can be included in other products as
well. E.g. washing machine comes with free washing powder.

The advantages of promotion

• Can boost sales during the year when sales are traditionally low (encourage off-season
purchases)

• Encourages people to try a product.

• Encourages people to buy a product or the product in greater quantities.
• Encourages people to buy a product instead of competitors' products.

Which type of promotion should be used?

When deciding on what type of promotion should be used, these points should be considered:

• The stage of the product life cycle: e.g. use informative advertisement in the introduction
stage of the life cycle.

• The nature of the product itself: e.g. consumer goods use coupons but producer goods use
discounts on bulk buying.
• The advertising budget: the type of promotion depends on how much you can spend.
• The cultural issues involved in international marketing: businesses need to consider
whether their type of advertising might offend the local people. They should also take into
account things such as how many people own TV, literacy level, etc…
• The nature of the target market: Different markets require different media for advertising.

Personal selling
• Used when the nature of the product varies. e.g. housing

o Price varies.

Hassan Khalil
0322-7892189
o Quality varies.
o Customer requirements vary.
• When customers need advice on what type of product is the most appropriate for their
situation.
• When selling expensive products such as cars.
• When negotiation about price or products is needed. This is common for businesses that sell
to other businesses. (e.g. discounts on bulk buying)
• When a business has a stand at a trade fair.

Public relations
• Good for improving the brand/company's image.

• These activities raise public awareness of the company.

• Includes:
o Sponsoring events such as football matches.
o Giving products to charity.
o Employees take part in an activity for a good cause.

Customer service
It is far more expensive to attract customers than to keep old customers, so one key objective
for any business is to retain their old ones. In the international business environment, there are
many competitors, so businesses need to raise the value of their products with customer
service.

Good customer service is not only producing a good product but also means:

• Advising about the product: It is always good to give as much information about a product as
possible so that the customers can be sure that they have purchased the product that meets their
requirements.

• Delivering goods for customers: It becomes convenient for the customer which encourages the
customer to buy products from the business since they do not have to go anywhere.
• Providing credit facilities: This means letting customers pay later or in monthly installments.
This makes products look cheaper and more affordable encouraging customers to buy them. 1
Credit facilities are usually offered when people buy expensive products. You usually get 2
1
interested as a result, but you could charge no interest for promotional purposes.

Hassan Khalil
0322-7892189
• Providing product information: This means giving information on how to use the product
and offering help on customer service helplines.
• After-sales service: The aim is to show that you care about customers' satisfaction.
Examples of after-sales service include:
o Warranties.
o Regular product checks.
o Giving refunds for faulty products.
o Exchanging unsatisfactory goods.

122

Hassan Khalil
0322-7892189
 123

Hassan Khalil
0322-7892189
 Chapter 22: The marketing mix: place

The role of place in the marketing mix

After the product, price, and promotion have been decided, the product/service has to be
available to the consumer where and when they want to buy. Consumers should be able to get
to the product easily, and the product has to be in the right place (e.g. expensive chocolate
shouldn't be in a small grocery store) to sell well.

Channels of distribution
Businesses need to know how to get the product to the consumer. They may use a variety of
channels of distribution:

• Channel 1: The manufacturer sells directly to the customer. e.g. agricultural goods are sold
straight from the farm, businesses buy raw materials from another…

• Channel 2: Involves selling to retailers. Common when the retailer is large or the product is
expensive.
• Channel 3: Involves the product going through wholesalers as well. Wholesalers break bulk
so that retailers can buy them in smaller quantities. This is common for perishable items such as
foods.
• Channel 4: Involve selling the product overseas through an agent, who sells them to
wholesalers on behalf of the company. This may be because he/she has better knowledge of the
local conditions.

Methods of distribution 1
Methods of distribution for different channels of distribution can include: 2
4

Hassan Khalil
0322-7892189
• Department stores: Usually in the center of town that sells a wide range of goods from
many producers.

• Chain stores: Two or more which has the same name/characteristics.

• Discount stores: Offers a wide range of products, including branded products, at discount
prices. Often all the products are similar.
• Superstores: Very large out-of-town stores.
• Supermarkets: Very large retail stores with all kinds of goods. (usually daily needs, foods)
• Direct sales: Goods are sold directly to the consumer.
• Mail order: Customers order via the post by looking at the catalog
• Internet/e-commerce: Customers order via the internet by looking at the website.

E-commerce
The use of the internet to carry out business transactions. Businesses could communicate via email
as well. Producers, as well as retailers, can use the internet to sell to customers.

Advantages and disadvantages of a wholesaler

Advantages

• Breaks bulk.

• Reduces storage costs for retailers and producers.

• Fewer transactions are needed for the producers. (only a few wholesalers) they no longer
need to do as many deliveries.
• Gives credit to small retailers.
• May deliver to small retailers reducing their transport costs.
• Promotion carried out by wholesaler instead of the producer.
• They advise retailers/producers on what is selling well.

125

Hassan Khalil
0322-7892189
 Disadvantages

• More expensive for small retailers.

• May not have the full range of products to sell.

• Takes longer for perishable products to reach the retailer.
• A wholesaler may be far from small shops.

Selecting the channel of distribution to use

When selecting the channel of distribution to use producers need to consider a few things:

• Type of product? Is it sold to other producers or customers?

• Is the product very technical?: Will you need to explain how to use the product? If yes,
Channel 1 should be selected (e.g. airplanes)
• How often is the product purchased?: If it is bought every day, it should be available in
• many retail outlets, otherwise people might not bother to buy it at all.
• How expensive is the product?: If it is expensive and has an image of being expensive, then it
will be sold in a limited number of retail outlets.
• How perishable is it?: If it is very perishable, it should reach the customers quickly or be
available in many outlets so it can be sold quickly.
• Location of customers?: Channel 4 might be used for customers overseas. E-commerce
would be viable anywhere apart from the countryside.
• Where do competitors sell their products?:
Usually, producers will sell their product in retail stores where their competitors sell too so that
they can compete directly for consumers.

Methods for transporting goods

This is what kind of vehicles are used to transport the products. They should be fast enough for the
product to reach its destination in time. However, they must also be cost-efficient and safe. These
factors a taken into account when deciding which method of transportation is used.

• Road haulage:

o Cheap and fast. 126

o Require no rail links.

o Can advertise on side of lorries.

Hassan Khalil
0322-7892189
o Not cost-effective if lorries are not used often, may need to hire a specialist transport business
instead.
• Railways:
o Even cheaper and faster than road haulage.
o Useful for long distances.
o Goods need to be transported to retail stores by road haulage at the end of the destination.
• Canal and river:
o Slow but cheap.
o Good for products far too big/heavy to be transported by road/train.
o Need canals and rivers.
• Sea freight:
o Used mainly for international trade.
o Can carry a lot of products.
o Products are stored in containers, which can be easily loaded onto lorries. Makes it cheap to
load and unload the ships.
• Airfreight:
o Extremely fast but expensive.
o Used for small, expensive, or perishable products.
• Pipelines:
o Used to transport liquids or gases over long distances.
o Cheaper than using road haulage for liquids. Roads are not always available.

Drawing up a marketing plan

Finally, after all the four P's of the marketing mix have been decided, the Marketing department
will put them together into one marketing plan. It will also consider how the 4 P's will be
modified or adapted to fit the overall image of the product. If this is successful, sales and profits
will be likely to increase.

Note: a detailed drawing of the product must be included in the marketing plan.

127

Hassan Khalil
0322-7892189
 Chapter 23: Factors affecting production

What is meant by production?

Production is the provision of a product to satisfy wants and needs. The process involves
businesses adding value to their products. For E.g. The production process of matches involves
cutting wood into matchsticks, putting phosphorus ends on them, and packaging them to sell.

Productivity
Productivity is the outputs measured against the inputs used to create it. This is measured by:

Output (over a given period)/Number of employees

If a worker makes more products in the same amount of time, his productivity increases. Firms
aim to be productively efficient to be able to make more profits and compete against their
competitors.

Methods of production
Job production

• Goods are made individually, by one person.

• Goods are usually specialized, no two goods are the same.

• Usually made to order.

Advantages

• The product meets the exact requirements of the customer.

• The workers have more varied jobs.

• More job satisfaction for workers.
1
Disadvantages 2
8

Hassan Khalil
0322-7892189
• Skilled labor is needed.

• Slower and more expensive than other methods of production.

• Usually labor-

intensive. Batch

production

• Products are made in batches according to order.

Advantages

• It is flexible. You can easily change from making one product to another.

• Still gives some variety to workers' jobs.

• Production is not too affected by machinery

breakdown. Disadvantages

• Expensive to move products around the workplace.

• Storage space will be needed to store raw materials.

Expensive. Flow production

• Large quantities of a product are produced in a continuous process.

• Uses specialization.
• Benefits from economies of scale.
• Is capital

intensive.

Advantages

• Low costs. Low prices. High sales.

• Increased efficiency. • Qu
• Little training is needed. alit
• Goods are produced quickly and cheaply. y is
• Goods do not need to be moved around like batch production. Saves time. hig
Hassan Khalil
0322-7892189
 h and standardized

129

Hassan Khalil
0322-7892189
 Disadvantages

• Boring for the workers. Little job satisfaction.

• Needs a lot of capital to set up.

• If one machine breaks down then the whole production process stops.

Which type of production should be used?

The type of production that should be used varies with how the product is demanded:

• Job production: Unique and individual service is required.

• Batch production: Demand is higher but products will not be sold in large quantities.
Batches are made to orders.
• Flow production: Demand for the product is high and steady.

Stock control
Stock control is important so that a business will not run out of stock and be unable to satisfy demands. When
stock levels get to a certain point, more goods need to be reordered for the stock level to reach its
maximum again. If more goods are not reordered, stocks could run out because of an unexpected
surge in demand. However, keeping a lot of stock costs money, so the level of stock in a company
should always be balanced. The following graph demonstrates how stock can be controlled:

130

Hassan Khalil
0322-7892189
 Lead production

• Focuses on cutting down waste, increasing efficiency.

• It tries to reduce the time taken to produce a product and transport it to the selling point.
• Includes the following methods:
o Kaizen.
o JIT production.
o Cell production.
o Kanban.

Kaizen

• Continuous improvement through the elimination of waste.

o Ideas of workers.

o Regular meetings of workers to discuss how to increase efficiency.

• The advantages of Kaizen:
o Increased productivity.
o Reduced amount of space needed for the production process.
o Work-in-progress is reduced.
o Improved layout of the factory floor may combine jobs of some employees, freeing others to
do other things.

Just in time production

• Eliminating the need to hold stocks.

• Goods are delivered to the selling point just when they are needed.
• JIT production needs:
o Reliable suppliers.
o An efficient system of ordering raw materials.

Cell production
131

• The production line is divided into cells.

Hassan Khalil
0322-7892189
• Each cell makes an identifiable part of the finished product.
• Boosts

morale. Kanban

• A system of ordering is used with JIT production.

• Operates with two-component bins.

o When one is emptied, production begins to fill it.
o The other one is then left to be emptied.
o The first one is filled up when the second one is emptied.

Improvements in technology
Here are some things that technology does in the production process:

• Automation: Equipment in the production process is controlled by a computer.

• Mechanization: Tasks are done by machines operated by people.

• CAD (computer-aided design): Used for designing 3-D objects.
• CAM (computer-aided manufacture): Computers control machines in the production
process.
• CIM (computer integrated manufacture): CAD and CAM are used together. The computer
that uses CAD is directly linked with the one that controls the production process.

Here are some things that technology does in shops:

• EPOS (electronic point of sale): When products' bar codes are scanned and the information is
printed out on a receipt. Data is also sent to a computer to keep track of stocks.

• EFTPOS (electronic fund transfer at point of sale): When the cash register is connected to
the retailer's main computer and banks. The customer's credit/debit card is swiped and the
money is debited from the customer's bank account. A receipt is printed out to confirm the
transaction. 1
3
The advantages of new technology 2

Hassan Khalil
0322-7892189
• Increased productivity.

• Boring jobs are done by machines. Boosts motivation.

• Training is needed to operate new machines. Workers become more skilled.
• Better quality.
• Better stock control.
• Quicker communication and reduced paperwork.
• Info is available faster, resulting in faster decision-making (for managers).

The disadvantages of new technology

• Unemployment

• Expensive
o To invest in new technology.
o To replace outdated technology.
• Employees are unhappy with changes in the workplace.

Quality control
There are three ways to control quality:

Quality control

• Involves checking and removing faulty products at the end of the production process.

• Wastes a lot of money.

Quality assurance

• Involves inspecting during and at the end of production.

• Aim to
o Stop faults from happening.
o Set a quality standard that all products have to achieve. 133
• Need team working and responsibility.

Hassan Khalil
0322-7892189
 Total quality management

• Encourages everyone to concentrate on quality.

• Quality is the main aim for all staff.

• Products need to satisfy all customer need.

134

Hassan Khalil
0322-7892189
 Chapter 24: Factors affecting location

Location of industry
The location of a business is considered when it starts up or when its present location is
unsatisfactory. The business's objectives as well as the conditions of the environment
change, so the business may need to look for a new location once in a while.

Many factors affect the location of businesses, and these factors are different for each
business sector. We'll take a look at them below.

Factors affecting the location of a manufacturing business

Production methods and location decisions

• Small
scale: transport and location of suppliers are less important.

• Large
scale: transport and location of suppliers are more important.

Market

• Need to be near to transport perishable goods.

• Need to be near to cut transportation

expenses. Raw materials/components

• Need to be near to transport perishable goods.

• Need to be near to cut transportation

1
expenses. External economies of scale 3
5

Hassan Khalil
0322-7892189
• How good nearby businesses are?

o For maintenance of equipment.

o For training workers, etc…

Availability of labor

• Wages of the laborers.

• How skilled they are.

Government influence

• Grants/subsidies.

• Restrictions on dumping, etc…

Transport and communication

• To be able to transport product easily.

Power

• Need a reliable source of power to operate effectively.

Water supply

• A lot of water is needed in the production process (e.g. cooling, cleaning)

• Cost of water.

Personal preferences of the

1
owners
3
6

• May locate in areas that:

Hassan Khalil
0322-7892189
o They come from.

o They like.
o Pleasant weather, etc…

Climate

• E.g. to reduce heating costs in a warmer climate.

• Some climates are required to produce certain items.

Factors affecting the location of a retailing business

Shoppers

• Do shoppers go there?

• What kind of shoppers go there?

Nearby shops

• Competitors.

• Mass market.
• The gap in the market.

Customer parking available/nearby

• Convenience for the customer.

Availability of suitable vacant premises]

• Goods sites (e.g. in shopping centers) are in short supply. 137

Hassan Khalil
0322-7892189
 Rent/taxes

• The more popular the site, the more expensive it is.

Access for delivery vehicles

• For delivering goods.

Security

• If the area is insecure

o Goods will be stolen.

o Insurance will be reluctant to insure the shop.

Legislation

• Laws restrict the trade of goods in certain areas.

Factors that influence a business to relocate either at home or abroad

• The present site is not large enough for expansion.

o If a business simply prefers to expand elsewhere, the factors affecting location will have to be
considered.

• Raw materials run out.

o One alternative is to import raw materials from elsewhere.
o Important for mining industries.
• Difficulties with the labor force 138
o Wages are too high.
o Need skilled labor.
• Rents/taxes rising.

Hassan Khalil
0322-7892189
• New markets open up overseas.
o Cuts transport costs.
o Bypass trade barriers.
• Government grants
o To attract businesses to locate in development areas.
o To attract foreign investment.
• To bypass trade barriers
o Tariffs
o Quotas

Factors affecting the location of a service sector business

Customers

• Whether customers require:

o Direct contact.

▪ Is it convenient for customers to go the business?

▪ Will the service arrive at customers' houses in time?

o No direct contact is needed.
▪ Mail
▪ Internet

Personal preference of owners

• Near their homes.

Technology

• Technology allows businesses to locate on cheaper sites.

139
o Telephone.

o Internet.

Hassan Khalil
0322-7892189
o Transport.
• No need to be near customers.

Availability of labor

• Need to locate sites where skilled laborers live.

o Laborers may relocate to be near the business.

Climate

• Important for tourism.

Near to other businesses

• Businesses that supply or repair machinery to others need to be near them to respond
quickly.

• Post offices/banks need to be in busy areas for the convenience of customers. That is, being
near malls, shops, etc…

Rent/taxes

• If the business does not need direct contact with the customer, then it could locate in
cheaper areas

140

Hassan Khalil
0322-7892189
 Chapter 25: Business in the international community

The international dimension

In business, no manager can operate without being affected by the international community.

Exchange rates
Exchange rates are the value of one currency compared to another.

How are exchange rates determined?

There are two types so currencies:

• Floating rates: The exchange rate of the currency is allowed to change freely depending on
market forces, i.e supply and demand of the currency.

• Fixed rates: The exchange rate of the currency is set by the country's central bank.

When the exchange rate rises, it is called appreciation. When it falls, it is called

depreciation. How are businesses affected by changing exchange rates?

• Appreciation:

o Import prices fall.

o Export prices rise.

• Depreciation:
o Import prices rise.
o Export prices fall.

These exchange rate movements can cause serious damage to businesses, making business
endeavors that would have been profitable make losses because of changes in the currencies. The
EU, for example, wants to limit these bad effects and hence established a common currency, the

Hassan Khalil
0322-7892189
 Euro.

International economic organizations

• Economic and political unions. (e.g. the EU)

• Free trade agreements. (e.g. NAFTA)

• Organizations working for free trade between countries. (WTO)

The European Union

• Consists of 25 European countries.

• Creates a single market in the EU.

o To tariffs, quotas, or any trade boundaries.
o This results in:
▪ A huge market benefiting from economies of scale.
▪ Increased competition results in better products.
• Common currency.
o The issue of Euros is controlled by the European Central Bank.
o Interest rates for the Euro become the same.
• The social charter:
o The EU wants to improve working
conditions and make finding jobs equal in
the EU.
o The main conditions include:
▪ Workers can look for work anywhere in the EU.
▪ Workers must be consulted on important issues.
▪ Equal treatment of full/half time workers.
▪ Limits on maximum working hours.
▪ Improved health and safety rules at work.

Advantages for the UK to join the EU

142
• Lower costs because:

o One price list throughout Europe can be used.

Hassan Khalil
0322-7892189
o No more charge through currency conversion.
• Easier to:
o Trade with EU countries.
o Compare costs of supplies with EU countries.
• No risk of losing out on exchange rate changes.

Disadvantages for the UK to join the EU

• More competition from non-UK firms.

• Consumers might buy cheaper products from other EU countries.

• The rate of interest might no longer suit UK firms.

Free trade unions

Eliminates all trade barriers. Businesses within the free trade union are affected in the
following ways:

• More competition from foreign firms.

o Consumers have more choices and prices are lower.

• No 'protection' by governments.
• More opportunities for exporting.
o Efficient firms will be more successful.

The long-term aim of the free trade union is to encourage

trade between the member countries, ultimately improving living conditions for the people.

Globalization
Globalization is the word used to describe the increased worldwide competition and
business activity. Goods and services that once can only be found in one country have spread
all around the world. There are several reasons for this:

143
• Free trade agreements encourage international trade.

• Improved travel links and communication.

Hassan Khalil
0322-7892189
• Countries that have been undeveloped before start to develop and export their goods, leading to
more international competition.

Globalization results in:

• More choices and lower prices for the consumer.

• Businesses look into more ways to become more efficient.

o Why do many businesses merge to become multinationals?
• Inefficient businesses go out of business.
• Free trade results in:
o More workers losing jobs, since governments can no longer protect them from foreign
competition.

Multinational businesses
Multinationals are businesses that have factories, services, or operations in more than one
country. It is important to note that, for a business to become multinationals, it must produce
goods in more than one country.

Why do firms become multinationals?

• To cut costs:

o Labor costs.

o Raw material costs.

• To extract raw materials not found elsewhere.
• To produce goods nearer to the market.
• To bypass trade barriers.
• To expand and spread risks.

Advantages of multinationals operating in a country

• Jobs are created.

144
• New investment increases national output.
• Imports are reduced since there are more goods in the country. More exports.
• More taxes are paid to the government.

Hassan Khalil
0322-7892189
 Disadvantages of multinationals operating in a country

• Jobs created are usually unskilled jobs.

• Local firms are forced out of business since they can't compete with multinationals.
• Profits flow out of the country.
• Multinationals use up scarce resources.
• May influence the government.

145

Hassan Khalil
0322-7892189