Business and its Environment

Enterprise
What is enterprise?
It is an action taken to fulfill an identified need by either adding value to an existing product or
finding a gap by creating a product or service to fill it.

Purpose of business activity

 A business is any organization that uses resources to produce goods and services in
order to meet the needs of customers.
 Business activity involves creating and adding value to resources (such as raw
materials) and making them more desirable to the final buyer.
 Business activity uses scarce resources to produce goods and services that allow us to
enjoy higher standards of living that would be possible if individuals remained self-
sufficient (providing for themselves).

What businesses do:

 Businesses identify the needs of consumers or other firms.

 They purchase resources (factors of production) in order to produce goods and services
to satisfy these needs usually with the aim of making profit.
 Businesses produce consumer goods and services

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Factors of production
Factors of production are resources needed by the business to produce goods and services.
These include:

Value addition

 Value addition is the manipulation of existing products to make them more valuable to
consumers.
 All businesses aim to create value by selling goods and services at a higher price than
the cost of raw materials used.
 If the consumer is prepared to pay more than the cost of materials used then the
business would have successfully created value.
 The difference between the price at which the products and the costs of cost of the
materials brought in is the added value.

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Value added to a product can be:

 Refining a product
 Promotions and displays
 Branding
 Packaging or repackaging a product
 Choosing a more suitable location to sell the product

Nature of economic activity

Economic activity is governed by the relationship between producers and consumers.
Nature of consumer needs and wants

 Needs are basic products essential for human survival such as food, shelter, clothing,
water etc.
 Wants on the other hand are products that are desired but not essential for human
survival. Examples may include tourism, entertainment, etc.
 The nature of human needs and wants is that they are unlimited
Nature of resources

 The nature of resources (factors of production) is that they are limited

 Consumers want to buy many products but they are limited by income
 Producers what to produce more resources but they are limited by the resources they
have.
There are therefore insufficient goods and services to satisfy all of our needs and wants at any
given time. This is referred to as the basic economic problem.
The purpose of economic activity is to provide for as many of our wants as possible.
The shortage of products and or resources used to make those products forces all of us to
make choices.
It impossible to satisfy all our wants and hence we need to make choices on which wants to
satisfy.
However as producers and consumers make choices, they incurr opportunity cost.
Opportunity cost is the next best alternative forgone.

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Dynamic business environment

 Setting up a business is risky because the business environment is dynamic (constantly

changing)
 Despite the many difficulties faced by business, the risk of change in the environment
increases business risk.
 Environmental change may turn the fortunes of a business venture from a succesful
enterprise to a loss making one. These examples may include:
 New competitors
 Legal changes e.g. legislation might outlaw the production of certain goods.
 Economic changes that affect the incomes of consumers
 Technological changes that make the firms products or production methods oudated
and expensive.

What the business need to succeed

Factors that may enable the business to succeed include:

 Identifying a good business idea – a successful business emanates from developing a

gap in the market that will offer sufficient demand for their product that will make the
business profitable.

 Capital availability – the success of a business may depend on the availability of the
startup capital. Having a good idea only may not be enough to start a business. The
business requires capital so that the idea can be turned into a reality. A good business
plan may help the business to acquire the much needed capital.

 Appropriate location – choosing a location is one of the most important decisions that
a business should make. An appropriate location minimises costs and maximise on
revenues. An appropriate location will enhance the business chances of survival and
growth.

 Fighting competition – the success of a business depends on minimising the intensity

of competition from other firms. Competition can be minimised by developing business
ideas that are unique or differentiating the firm’s products from competitors.

 Building a customer base – a firm should establish itself in the market and build up
customer numbers over time so as to achieve success and growth. This can be done by
offering better customer service.

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  Proper record keeping – business success can emanate from proper record keeping
especially financial accounts. This ensures that the business does not fail to meet
important deadlines as is able to evaluate its performance over time.

 Financial management – successful businesses should be able to manage their

financial resources very well. They should be able to make cash flow forecasts so that
they are always aware of their working capital needs. They should also be able to
manage their working capital so that they are always able to meet their short term
obligations.

 Effective management – the success of the business may depend on the quality of the
quality of management in the organisation. Businesses that are effectively managed are
likely to achieve success than those that are poorly managed.

What makes a business fail

 Failure to keep proper records – the lack of accurate records is a big reason for
business failure. It is impossible to remember everything that happens in a business and
hence record keeping is very important. Record keeping enables the business to
remember when payments are due, which payments have been made and which ones
have been not, assess the performance of the business or other departments within the
business etc. Many businesses fail because of improper record keeping.

 Working capital shortages – running out of working capital to run the business is one
of the most common reasons of business failure. Cash flow problem can result in the
business failing to meet its short term obligations e.g. paying worker’s salaries, paying
suppliers and other creditors etc.

 Changes in the business environment – the ever dynamic business environment can
be a threat to the survival of the business. Setting up a business is risky on its own and a
changing environment makes it even worse. If not projected very well it may have
serious consequences on the survival of the business. Adverse changes in the
environment may include:

 New competitors
 Legal changes e.g. price controls or outlawing the production of certain products
 Economic changes that affect the purchasing power of the consumers
 Technological changes that make the business machinery and methods outdated
and costly.

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  Poor management skills – poor management skills may result in business failure. The
poor management skills may emanate from any of the following:
 Poor leadership skills
 Poor cash handling and cash management skills
 Planning and coordination skills
 Communication skills
 Marketing and promotion skills

 Poor business ideas – ideas that are not properly researched can result in a business
failure. Regardless of the effort invested in the business working on an idea that is not
conducive will not change the fortunes of the business.

 Poor location – a poor location can result in business failure since it can result in high
costs and low revenues. An inappropriate location will affect business survival and
hinder growth.

 Stiff competition – some business may fail because of stiff competition in the market
especially from established businesses.

Local, national and multinational businesses

 Local businesses operate in a small and well defined part of the country and do not have
a desire to expand to obtain customers across the whole country e.g. hair dressing
businesses, single branch shops etc.
 National businesses have branches or operations across most of the country and have
no attempt to establish operations outside the country.
 International businesses operate in more than one country and these are referred to as
Multinational companies.

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Qualities of entrepreneur and intrapreneurs

‘Intrapreneur’ is the term given to people who have the same qualities as
entrepreneurs and are encouraged to demonstrate the same skills as entrepreneurs
within an existing business.

 Innovation
 An entrepreneur should be able to generate new ideas that attract customers and
present their business as being unique from others.
 An entrepreneur may not be an inventor of something completely new but can carve
a new niche market.
 This means an entrepreneur should be able to develop original ideas and think
differently to succeed.

 Commitment and self-motivation

 Running a business is never easy and requires hard work and many hours each
day.
 This implies that for an entrepreneur to succeed they need to be willing to work
hard.
 They should be ambitious and focused and give every effort possible to succeed.

 Multitalented
 There are many tasks that should be done by the entrepreneur for their business to
succeed.
 An entrepreneur may have to produce a product, promote it, and sell it and record
financial information.
 In order to accomplish all these tasks the entrepreneur should be multitalented
since each task may require certain technical skills.

 Leadership skills
 An entrepreneur may need to employ other people as the business grows.
 An entrepreneur will have to provide leadership within the business.
 Therefore they need to have the personality that encourages people in the business
to follow and be motivated by them.

 Self-confidence
 Many start-up business fail and a successful entrepreneur should not be discouraged
by that.
 They should believe in their capabilities and that their business will succeed

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  Even when the business falls on hard times they should have an ability to bounce
back and keep moving forward.

 Risk taking
 A successful entrepreneur should be willing to take risks in order to earn returns.
 The greatest risk they take is usually the financial risk of investing their own money
which they may lose.

The role of the Entrepreneur in creating and starting up a business

 An entrepreneur is someone who takes the financial risk of starting and managing a new
venture.
 Entrepreneurs start new business ventures that can sometime emanate from a
completely new idea.
 This means that entrepreneurs should:
 Have a new business Idea
 Invest some of their own savings and capital
 Accept the responsibility of managing the business
Accept the risk the possible risk of failure

The role of intrapreneurship in the ongoing success of a business

 Introducing ideas
 Inspiring creativity
 Leading and motivating those around them
 Ensuring business meets targets
 Taking proactive steps to improve business operations

Barriers to entrepreneurship

 Inability to access finance

 Fear of not being successful
 Human resource issues – lack of employees with the required skills and expertise.
 Fewer opportunities
 Lack of capacity to exploit opportunities
 Less market experience
 Lack of risk taking capacity
 Corrupt business situations
 Lack of practical knowledge
 Inadequate training

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Business risk and uncertainty

Business risk implies that uncertainty in profits or danger of loss and the events that could pose
a risk due to some unforeseen events in future which causes business to fail. Business risk can
be in the form of:

 Risk associated with a changing global macro-environment

 Dependence on specific customers
 Risk associated with exchange rates
 Risk associated with changes in interest rates
 Risk associated with customer credit
 Risk associated with changes in laws
 Risk associated with safety

The role of the business enterprise in the development of the country

 Employment creation – an entrepreneur is likely to employ workers that will help in the
day to day running of the business. This means that the entrepreneur contributes to
employment creation and thereby reducing unemployment in the country.

 Economic growth – the new businesses created by entrepreneurs will contribute to

national output which will increase the gross domestic product.

 Firm’s survival and growth – some of these enterprises may survive and grow to become
large businesses. Large businesses employ more people and contribute significantly to
gross domestic product.

 Innovation and technological change – new business tend to be innovative and creative
which then facilitates technological change. If this technology is transferred to other
businesses then the business sector can be more competitive.

 Exports – some of these businesses can be involved in regional markets and the country
benefits from export revenue.

 Personal development – the accomplishment of starting a business and successful

managing it results in the development of useful skills for and it also provides an excellent
example for others to follow.

 Increased social cohesion – business enterprises contribute in minimising social problems

that could have been cause by unemployment. By creating jobs entrepreneurship can help
achieve social cohesion.

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Business plans

 A business plan is a document containing the business objectives and important details
about the operations, finance and owners of the new business.
 It provides a complete description of a business and its plans for the first few years;
explains what the business does, who will buy the product or service and why; provides
financial forecasts demonstrating overall viability; indicates the finance available and
explains the financial requirements to start and operate the business.

Contents of a business Plan

 Executive summary - brief summary of the key features of the business and the
business plan
The owner - educational background and what any previous experience in doing
previously
 The business - name and address of the business and detailed description of the
product or service being produced and sold; how and where it will be produced, who is
likely to buy it, and in what quantities
 The market - describe the market research that has been carried out, what it has
revealed and details of prospective customers and competitors
 Advertising and promotion - how the business will be advertised to potential
customers and details of estimated costs of marketing
 Premises and equipment - details of planning regulations, costs of premises and the
need for equipment and buildings
 Business organisation - whether the enterprise will take the form of sole trader,
partnership, company or cooperative
 Costs - indication of the cost of producing the product or service, the prices it proposes
to charge for the products
 Finance - how much of the capital will come from savings and how much will come from
borrowings
 Cash flow - forecast income (revenue) and outgoings (expenditures) over the first year
 Expansion - brief explanation of future plans

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Importance of a business plan to entrepreneurs

 It can be used to secure loans or other lines of credit (e.g. overdraft) since banks usually
demand a business plan as a requirement. Banks or creditors will not provide finance
unless clear details about the proposed business have been written down clearly.
 The process of drawing up a business plan forces the entrepreneur to think ahead and
plan carefully
 It helps the entrepreneur to think about future challenges that the business might face
and how they plan to meet those challenges.
 The business plan can enhance the chances of success for a business through
providing a clear sense of purpose, direction and marketing strategies.
 It can be used as a reference point or target in order to evaluate the performance of the
business.
 By documenting the various details about the business, the entrepreneur will find it much
easier to run it.
 There is a lesser chance of losing sight of the mission and vision of the business as
the objectives have been written down.

Limitations of Business Plan

 A business plan may turn out to be inaccurate

 Too much times can be spent drawing up the business plan
 There is often lack of accountability
 A great business plan requires great implementation practices
 It restricts the freedom once it is in place
 It creates an environment of false certainty
 there are no guarantees that the project will successful

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Business Structure
Economic sectors
Businesses can be classified into three broad types of business activities. These include:

Quaternary sectors - it is an economic activity based on the intellectual or knowledge based

company. Activities include programming, IT, technology developers, financial planners,
designers and educators.

Relative importance of business activities

 Contribution to national output (GDP)

 Contribution to employment
 Contribution to export earnings
 Provision of raw materials or markets for other levels of economic activity
Changes in the business activity

 The relative importance of a sector changes over time.

 Industrialisation is the growth of the secondary sector manufacturing industries
especially in less develop countries (e.g. Africa and Asia) as they run out of natural
resources.
 Deindustrilisation on the other hand is the decline in the secondary sector manufacturing
industries especially in developed countries as they concerntrate on the tertiary sector
activities

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Benefits and limitations of Industrilisation

Reasons for deindustrialisation in developed countries

 Raising incomes resulting in improved living standards that have led consumers to
demand more services such as tourism, restaurants, hotels etc.

 Secondary sector industries in developed countries have faced more competition as

more countries industrialise, these countries have had more competitive advantages in
the form of cheaper labour.

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The public and the private sector
There are basically three economic systems which are:

 Free market economy – resources are owned and controlled by the private lindividuals
(private sector).
 Command economy – resources are owned and controlled by the government (public
sector).
 Mixed economy – resources are owned and controlled by both the private sector and
public sectors.
Nearly most world economies are mixed. This implies that they operate with both the private
and public sector. The relative importance of the private sector as compared to the public
sector varies from one country to another.

 Public sector – comprises organisations accountable to and controlled by central or

local government (the state).

 Objectives of the public sector are social in nature and may include:
o To have an influence on the economy in the public interest.
o To provide goods and services that is affordable to the citizens.
o To ensure the survival of important firms.

 Reasons for public sector ownership include:

o Political reasons
o To enable citizens to benefit from the country’s resources.
o Control of strategic and industries and commercial activities e.g. central
banking and railways.
o Control of natural monopolies with no real competition e.g. electricity
o Capital costs of setting up the business might be too high for the private
sector with long payback periods.
o For the provision of social services
o Survival of unprofitable industries which might otherwise be forced to
close down

 In most economies the public sector usually concerntrates on the following goods
and services:
o Health delivery
o Education services
o Defence
o Law and order
o Energy
o Telecommunications
o Public transport
o Public goods – these are goods and services that are unprofitable for
private businesses because they cannot be charged for e.g. street lighting

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  Private sector – comprises of businesses owned and controlled by individuals or groups
of individuals.
 The objectives of most private sector business are profit centred/oriented.

The legal structure of business organisations in the private sector

Sole trade

 This is a business owned and run by the owner. The owner provides the finance for the
company and retains full control of the business and enjoys all profits.

 Features
o Owned by one person
o Owner provides permanent finance
o Owner manages the business
o No legal formalities
o Unlimited liability – should the business fail to pay its debts, creditors
will go after the owner’s personal possessions.

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Partnership

 It is a business organisation formed by two but not more than twenty people carrying
out business together with a view of making profit. It is an association of individuals but it
is not a legal entity.

 Features
o Two to twenty owners
o Partners contribute permanent capital
o Partners share responsibility in managing the business
o Decision making is made in consultation with other partners.
o No legal formalities but partnerships may prepare a partnership deed.
o Unlimited liability

Limited Companies

 Companies are business organisations that have a separate legal identity from their
owners. The owners provide permanent capital through the purchase of shares. There
are two types of companies, private limited company and public limited company.

 Features
o Limited liability – shareholders can only lose the money they invested.
o Continuity of existence
o Greater capital potential.
o Separation of ownership and control
o Legal status
o Legal formalities

 Legal formalities of companies

o Memorandum of association – it states the name of the company,
address of the head office, maximum capital for which the company
seeks authorization.
o Articles of association – it covers the internal workings and control of
the business e.g. procedures to be followed in meetings and names of
directors etc.

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Private limited companies

 It is a small to medium sized business that is owned by shareholders who are often
family members and cannot sell shares to the general public.

 Features
o Shares cannot be sold to the general public.
o They have maximum number of shareholders (50 in some countries).
o Transfer of shares is subject to the approval of other shareholders.
o Not obligated to publish financial results although a copy must be
submitted to government authorities.

Public limited companies

 These are often a large business that are owned by shareholders from the general
public who have the legal right to buy or sell their shares when they want to. It shares
are often traded on the stock exchange.

 Features
o Shares can be sold to the general public.
o Run by a board of directors elected by the shareholders.
o Obligated by law to publish their financial statements.
o Shares can be sold freely amongst the general public through the stock
exchange.
o No maximum number of shareholders.
o A lot of legal formalities required

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Limited liability and its importance

 Limited liability in companies means that should the company fail, shareholders would
only lose what they invested only and not their possessions.
 Limited liability is an important aspect of companies because:

 It makes people more prepared to invest in companies than any other type of
business since their private assets are protected.
 The greater risk of the business failing to pay debts is transferred from
investors/shareholders to creditors.

Cooperatives

 It is formed by a large number of individuals working together in order to achieve a

mutual interest.

 Types of cooperatives

o Producer or Worker cooperatives – those that produce goods and

services.
o Consumer cooperatives – those that sell goods and services

 Features
o All members contribute to the running of the business and share
responsibilities although committees elected by the members of the
cooperative to run the business.
o Each member has only one vote regardless of the amount of capital
contributed and this maintains democratic control.
o Decisions are made collectively or by electing managers from their own
ranks.
o There is also open membership, which means that there is no maximum
number of members and members are free to join and leave at anytime

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  Advantages of cooperatives

 Open membership allows continuity of existence of cooperatives.

 Effective decision making since every member has an equal say and an equal
vote.
 Few legal formalities
 Working together to solve problems.
 Good motivation for all members to work hard since they will benefit from shared
profits.

 Disadvantages of cooperatives

 They lack management expertise amongst the members themselves.

 Insufficient reserves of money or capital to keep the business going or expanding
since shares are not sold to non-members
 Low decision making since all members need to be consulted.
 Decisions are largely taken on the basis of popularity and not effectiveness.
 Managers or leaders can be elected on the basis of popularity and not
effectiveness.

Franchises

 It is a business that uses the name, logo and trading systems of an existing successful
business.
 It is an agreement between the franchisor (owner of the name) and the franchisee (the
one to use the name)

 Features
o It is not a form of legal structure.
o The relationship is governed by a franchise contract.
o Permits the franchisee to carry out a business concern for the duration of
the franchise using a specified name belonging to/associated with the
franchisor.
o Entitles the franchisor to exercise continued control during the period of
the franchise over the manner in which the franchisee carries on the
business that is the subject of the franchise.
o Oblige the franchisor to provide the franchisee with assistance in carrying
on the business.
o Requires the franchisee, periodically during the period of the franchise to
pay to the franchisor a sum of money in consideration for the
franchise/goods and services provided.

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Joint ventures

 It is when two or more businesses agree to work closely on a particular project and
create a spate business division to do so.
 Joint ventures are different from mergers.

 Features
o It is not a legal structure
o Shared investment
o Shared expertise
o Partnership focuses on the shared project only, the business still remain
separate outside the project

 Advantages of joint ventures

o Costs of the project are shared between the businesses which enable
business to embark on projects they could not afford.
o The risks associated with the project may be shared between the
businesses. The losses that the business could have faced alone can
now be shared.
o The different businesses may complement each other in terms of their
strengths and experiences and therefore fit well together.
o They can also take advantage of each other’s markets and exploit them
with the new project more effectively that doing it alone.

 Disadvantages of joint ventures

o Failure of the business to blend well together because of different
management styles and culture.
o Project profits will be shared between the partners.
o Businesses might blame each other for errors and mistakes that might
happen in the project
o The business failure of one partner might put the whole project at risk.
o Bad reputation from one of the partners might destroy the image of the
whole project.
o Lack of continuity

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Unlimited liability

 Unlimited liability means that business owners are responsible for their business’ debts.
 It is the legal obligation of the business founders to repay the debt in full on behalf of the
business they own.
 It means that if the business fails to pay the debt the owners’ personal assets will be
used to repay the business debt.
Limited liability

 It is a legal status where a person’s financial liability is limited only to the sum of money
invested in the business.
 It is a situation where the business loss will not exceed the amount invested in the
business.
 It is therefore a legal protection for shareholders and owners that prevent individuals
from being help personally responsible for the business debts.

Social enterprises

 These are businesses that are pursuing mainly the social objectives and if profits are
made, they are reinvested into benefiting society rather than maximising returns for
owners.
 Social enterprises are not necessarily charities but they do have objectives that are often
different from profit motivated businesses.
 Social enterprises do make money but it does so in a socially responsible way. It the
uses most or any of its surplus made to benefit society.
 Social enterprises may compete with other businesses in the market or industry however
they use these business principles to achieve social objectives.
 Most social enterprises have these common features:
 They directly produce goods and services
 They have social aims and use ethical ways of achieving them.
 They need to make a surplus or profit to survive as they cannot rely on donation
as charities do.

Objectives of social enterprises

Social enterprises often have three main aims that are known as the triple bottom line. These
are:

 Economic – It implies that they make profit to reinvest into the business and to provide
some return for their owners.
 Social – provide jobs and support for the locals usually disadvantaged societies
 Environmental – to protect the environment and to manage the business in an
environment environmentally sustainable way.

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Measuring Business size
Different stakeholders might wish to compare businesses by their size.

 Government – may want to compare business size because they want to give
assistance to small firms.
 Investors – may want to compare businesses and growth rates in order to determine
where they should invest in.
 Customers – may want to compare size because they want to deal with large firms
assuming they are more stable than small firms.
Problems of measuring business size

 There are several ways of measuring business size which might give different
comparative results.
 There is no internationally agreed definition of what is small, medium or large business.

Methods of measuring business size

 Number of employees
 It is the simplest and easy to understand method
 Large firms have more employees than small firms.
 However, some firms are large but employ fewer workers because of automation

 Revenue
 It is often used when comparing firms in the same industry.
 Large firms earn higher revenues than small firms.
 It is less effective when comparing firms in different industries.

 Capital employed
 Large businesses have greater value of capital than small firms.
 However comparison between firms in different industries maybe misleading as
some need more machinery and equipment than others.

 Market capitalisation
 Large firms have higher market capitalisation than small firms.
 Market capitalisation = current share price X total number of shares issued.
 However, it can only be used for businesses that have shares quoted on the
stock exchange.
 This method is also not very stable as since changes in share prices may also
have implications of the firm’s size.

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  Market share
 Market share are sales of the business as a proportion of total industry sales.

 Large firms have higher market share than small firms.

 However, a high market share in a small market does not indicate that the firm is
large.

 Other methods
 Number of shops/outlets
 Total floor sales space

Significance of small firms

Advantages and disadvantages of small firms
Advantages of small businesses

 Small firms benefit from government assistance. Government assistance include:

 Reduced rate of taxes (tax holidays or tax relief)
 Loan guarantee schemes
 Information, advice and support
 Can be managed and controlled by one owner
 Adapt quickly to changes in customer needs.
 Offer personal services to customers
 Easier to personally know each member of staff personally
 Employees may perform multiple roles which motivates them

Disadvantages of small businesses

 Cannot afford to employ specialist professional managers.

 Do not enjoy economies of scale.
 Problems in raising finances.
 Owners carry a large burden of responsibility.
 Marketing risks from a limited product range – makes them vulnerable to changes in
demand.
 Difficulties in finding suitable and reasonable priced premises.

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Strengths and weaknesses of family businesses

Strengths of family businesses Weaknesses of family businesses

Commitment and dedication from family Succession or continuity problems as later

members as they identify with the business generations may not have the skills to manage
the business properly
Reliability and pride because family Informality which leads to inefficiency as the
members have their name associated with the business grows larger.
business.
Knowledge continuity as families make it a They maybe too traditional and sometimes
priority to pass on their accumulated reluctant to change systems
knowledge to future generations
There is a common sense of purpose since Family conflicts and disagreements may
families are tied by blood relations. hurt the business.
Additional capital can come from family Lack of access to capital
members.
Long term view as the family takes into Nepotism as promotion may be based on
consideration future generations. family not ability.

The importance of small business and their role in the economy

 Small firms contribute to job creation thereby reducing unemployment.

 They help contribute to variety (new ideas) and consumers benefit from greater choice.
 Small firms create competition for large firms who could have exploited consumers.
 Small firms supply specialist goods and support services to other businesses.
 All great businesses started out small. These small businesses can grow and benefit the
economy in a large scale.
 Sometimes small firms may benefit from lower average costs since they pay lower
wages than large firms and this result in lower prices to consumers.

The role of small businesses as part of the industry structure

 For large firms to succeed in certain industries there is need for large network of small
firms supplying smaller components.
 These components will be more cost effective to buy than for large business to make
them.
 This will benefit the large business in the following ways:
 There will be less capital investment needed since smaller firms now supplying
components
 Small business can work for many large firms offering better economies of scale.
 Large firms will purchase the exact amount of components needed hence
reducing wastages of producing more than they need.

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Internal growth

 Internal growth (organic growth) is the expansion of a business by means of opening

new branches, shops, factories.

Why businesses grow internally

 To increase profits – growing increases sales and the business becomes more
profitable.
 Increased market share – firm becomes more competitive as it grows and access to
additional customers and markets.
 Increased economies of scale
 Increased power and status for the owners and the managers
 Reduced risk of takeover – a large business may become difficult to take over by a
predator firm.
 Aviod problems of excessive growth which leads to inadequate capital (overtrading)
 Avoid management problems associated with bring together businesses with different
cultures together.

How businesses grow internally

 Entering new markets – e.g. opening new shops in where it previously had none
 Increased marketing – e.g. generating more customers or encouraging existing
customers to buy more
 Better production processes - leading to higher output being produced
 Increased productive capacity – can be achieved by increasing the size of the factor
or increasing number of machinery.

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External growth

It is a form of business expansion achieved by means of merging with or taking over another
business, from either the same or a different industry

Types of external growth

 Merger is an agreement by shareholders and managers of two businesses to bring both

firms together under a common board of directors with shareholders in both businesses
owning shares in the newly merged business.
 Takeover is when a company buys more than 50% of the shares of another company
and becomes the controlling owner of it – often referred to as ‘acquisition’.

When two or more businesses come together, it is referred to as integration. It often results in
synergy which literally means that ‘the whole is greater than the sum of parts’, so in integration it
is oft en assumed that the new, larger business will be more successful than the two, formerly
separate, businesses were.

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Hostile Takeover – It occurs when an acquiring company attempts to take over the target
company against the wishes of the target company’s management.

Friendly merger – it occurs when the company’s shareholders and management are all in
agreement on a deal.

The impact of a merger/takeover on stakeholders

 Benefits to stakeholders
 Greater career opportunities for workers
 More job security because risks are spread across more than one industry.
 There may be more varied career opportunities.
 Consumers may resent lack of competition in the retail outlet because of the
withdrawal of competitor products consumers may obtain improved quality and
more innovative products.
 Lower prices as a result of low costs from economies of scale.

 Limitations to stakeholders
 Consumers now have less choice.
 Workers may lose job security as a result of rationalization.
 Control over supplies to competitors may limit competition and choice for
consumers

Why a merger/takeover may or may not achieve objectives

 Failure of the business to blend well together because of different management styles
and culture.
 Businesses might blame each other for errors and mistakes that might happen in the
project.
 The business failure of one partner might put the whole project at risk.
 Bad reputation from one of the partners might destroy the image of the whole project.
 Lack of continuity

The importance of joint ventures and strategic alliances as methods of external growth

 These are two forms of external growth that do not involve complete integration or
changes in ownership.
 Strategic alliances are agreements between firms in which each agrees to commit
resources to achieve an agreed set of objectives.
 These alliances can be made with a wide variety of stakeholders e.g.
 With a university – finance provided by the business to allow new specialist
training courses that will increase the supply of suitable staff for the firm.
 With a supplier – to join forces in order to design and produce components and
materials that will be used in a new range of products; this may help to reduce
the total development time for getting the new products to market, gaining
competitive advantage.
 With a competitor – to reduce risks of entering a market that neither firm currently
operates in.

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Business Objectives

 Business objectives can be described as a specific, often measurable results or targets

that an organisation hopes to maintain or achieve.
 Every business of any size can benefit from having clear objectives or targets to work
towards.
 Business objectives of small sole trader business are often not written down or
formalised but those of large companies are often clearly written on their memorandum
of association.

Importance of business objectives

 Importance of business objective is to

 Give a sense of purpose and direction to the efforts of the business, department
and individuals.
 Control the operations of the business
 Motivate the workers as they challenge them to exert extra efforts.
 Review the success of a business activity.
Nature of business objectives

 Effective business objectives should be SMART.

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Objectives of private sector businesses

 Profit maximisation – the business aims to achieve the highest positive between
revenues and costs. Profits are essential for rewarding investors and financing further
growth
 Profit satisficing – this involves aiming to achieve enough profit to keep owners happy
without working flat out to earn as much as possible. It is common with small business
owners who prioritise other objectives when they have achieved a satisfactory level of
profits.
 Growth
 Increasing market share
 Survival – most newly established businesses may aim to survive especially in their first
two years of operation.
 Maximising sales revenue
 Maximising shareholder value – this objective usually applies to public limited
companies and is aimed at taking decisions that increase the price of the company’s
shares.
 Corporate social responsibility
Objectives of social enterprises

These aims are often referred to as the triple bottom line.

 Economic (financial) – to make a profit to re-invest back into the business and provide
some financial return to the owners
 Social – to provide jobs or support for local, often disadvantaged, communities
 Environmental – to protect the environment and to manage the business in an
environmentally sustainable way.

This means that profit is not the sole objective of these enterprises.

Objectives of public-sector businesses

Typical objectives include:

 To provide an efficient, reliable service to the public, such as water supply or postal
service.
 To encourage economic and social development, especially in deprived areas.
 To create employment or prevent major job losses if the industry is making a financial
loss.
 To meet financial targets set by the government, but not necessarily make a profit.
 To achieve high environmental standards.

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Relationship between mission statements, objectives, strategy and tactics

 Corporate aims
 These are very long term goals of the business
 They represent the core central purpose of business activity.
 They are designed to provide guidance to the whole organisation
 They are the starting point for the entire set of objectives embracing
 Provide the framework within which the strategies or plans of the business
maybe drawn up.
 E.g. profitable growth
 Mission statements
 It is a statement of the business’s core aims, phrased in a way to motivate
employees and stimulate interests from outside groups.
 They condense the central purpose of a business’s existence in one statement.
 They quickly inform outside groups about the aim and vision of the business.
 Often include moral statements or values which help guide and direct individual
employee behaviour at work.
 Example of mission statements
o Google – to organise the world’s information and make it universally
accessible and useful.
o British telecom – to be the most successful worldwide
telecommunications group.
 Corporate objectives
 The aim and mission statements lack specific details of operational decisions and
are rarely quantitative.
 Corporate objectives are goals or targets that are designed to be specific to the
business.
 They are based upon the central aim or mission of the business.
 Divisional objects
 They are derived from the corporate objectives.
 They are specific to a particular sector or division of the business.
 Departmental objects
 These are derived from the divisional objectives
 They are specific results that a department wants to achieve.
 Individual targets
 These are measurable goals that are set for an individual employee

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  Aims and objectives provide the basis and focus for business strategies.
 For aims and objectives to be achieved it is important that there is an appropriate
strategy.
 A strategy is a detailed plan of action to ensure that resources are correctly directed
towards the final goal.
 Each strategy is then broken down to tactics that guide individual teams or people on
how to achieve their part of the overall objective of the business.
 A strategy needs to be constantly reviewed to check whether the business is on target
to achieve its objectives.
 A poor plan or strategy will result in failure to achieve objectives

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Example of a link between objectives and strategies

Corporate social responsibility (CSR)

 It is a concept that applies to businesses that consider the interests of society by taking
responsibility for the impact of their decisions and activities on customers, employees,
communities and the environment.
Reasons for the growing trend towards corporate social responsibility

 There is a general agreement that firms must adopt a wider perspective when setting
objectives besides profits and expansion.
 Pressure groups and legal changes are forcing businesses to reconsider their approach
to decision making and refrain from certain practices.
 Consumers and other stakeholders are reacting positively to businesses that act green
and operate in socially responsible ways.
 It is increasingly becoming profitable as adopting CSR improves reputation
 However some firms have adopted CSR because they have a public responsibility
objective and genuine want to behave this way.
Examples socially responsible businesses

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Common polices of CSR

Costs and benefits of CSR

Factors that determine the corporate objectives of a business

 Corporate culture – code of behaviour and attitudes that influence decision making
style of managers and employees of the business.
 The size and legal form of the business – divorce of ownership and control plus the
size of business may affect business objectives.
 The number of years the business has been operating
 Ethics
 Public or private sector businesses – objectives may differ depending on whether the
business is owned by private individuals or government.

Stages of business decision making and the role of objectives

 Effective decision making required clear objectives.

 Businesses cannot decide on future plans or strategies if they are uncertain of the
direction they want to take the business.
 There is an essential link between decision making and objectives.

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Stages in the decision making process

How corporate objectives might change

 Businesses may their corporate objectives over time.

 As objectives change, strategies should change too.

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  Translating objectives into targets and budgets

 Once objectives have been set they need to be broken down into specific targets for
separate divisions, departments and ultimately individuals.
 Divisional objectives are set by senior managers and should ensure that:

 Corporate objectives cannot be used by each division of the business to create

strategies since they relate to the whole business.
 Corporate objectives need to be broken down as follows:
 Divisional goals and targets
 Departmental objectives and budgets
 Then lastly targets for individuals
 In order to set individual targets managers may adopt management by objectives.

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Management by objectives

 It is a method of coordinating and motivating all staff in an organisation by dividing its

overall aim into specific targets for each department, manager and employee.
 This process will help the business in setting individual objectives or targets given that
managers have adopted McGregor’s Theory Y style.
 However individual targets may still be imposed by managers if they adopt theory Y.
Communication of objectives and their impact to workers
If objectives are communicated to the employees, it will result in:

How ethics may influence business objectives and activities

 The growing acceptance corporate social responsibility has led to businesses adopting
the ethical code.
 Business adopt the ethical code in order to influence the way in which decisions are
taken
 Most decisions have an ethical or moral dimension. More and more business are
considering the ethical dimensions of their actions.

Examples of ethical dilemmas

The decisions taken concerning the above questions will be influence by the business’ ethical
code of conduct.

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Different businesses have different answers to these dilemmas. Some will argue that:

 Any business decision that maximises profits and minimises costs is acceptable for as
long as it is legal
 Some still argue that even some illegal actions could be justified
 Some however will operate along strict ethical rules and argue that even if certain
actions are not illegal they are not right.
Benefits of operating ethically

 Avoiding potentially expensive court cases and this reduces costs for the business.
 Reduces bad publicity and improves consumer loyalty and long-term increases in sales.
 Ethical businesses attract ethical customers, as world pressure grows for corporate
social responsibility; this group of consumers is increasing.
 Ethical businesses are more likely to be awarded government contracts.
 The firm may attract well qualified staff as they are attracted to work for companies that
have ethical and socially responsible policies.

Limitations of operating ethically

 Not taking bribes to secure business contracts can mean losing out on significant sales.
 Accepting that it is wrong to fix prices with competitors might lead to lower prices and
profits.
 Fair wages, even in very low-wage economies, raises costs and may reduce a firm’s
competitiveness against businesses that exploit workers

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Stakeholders in a business

Stakeholders are people or groups of people who can be affected by, and therefore have an
interest in, any action by an organisation.

Stakeholder concept is the view that businesses and their managers have responsibilities to a
wide range of groups, not just shareholders

Internal stakeholders

 Employees
 Managers
 Shareholders

External stakeholders

 Supplies
 Customers
 Government
 Banks
 Creditors
 Pressure Groups
 Competitors

Impact of business decisions to stakeholders and stakeholder reactions

Examples of decisions that can affect diffect stakeholders

39
Roles, Rights and Responsibilities of stakeholders

40
How and why businesses need to be accountable to stakeholders

 Accountability can be both moral and legal

 Different stakeholders expect businesses to be accountable for different aspects of their
activities , for example:
 Customers and the local community expect businesses to be accountable for
products and the environment.
 Employees expect the business to be accountable for safe working practices and
conditions.
Three main aspects of accountability include:

 Legal requirements – to operate within the requires of the law

 Payments of taxes to governments and wages to employees within legal
requirements.
 Treatment of staff – health and safety and equal opportunities.
 Shareholders – published accounts must be made available for companies

 Ethical – to uphold the moral code in its operations

 Corporate social responsibility – it is a concept that accepts that businesses
should consider the interests of society in their activities and decisions, beyond
the legal obligations that they have.

 Commercial requirements – to uphold values as they conduct their buying and selling
activities.
 Transparency – improving relationships with suppliers and customers

Conflict from different stakeholders objectives

 Attempting to meet obligations of other stakeholders may conflict with the business duty
to its shareholders. These obligations may increase costs which may reduce profits.
 Conflicts also arise between the objectives of different stakeholder groups. Common
stakeholder conflicts:
 Customers requiring high quality and low costs vs. shareholders requiring
maximising returns
 Suppliers wanting prompt/early payment vs. customers wanting to delay
payments
 Shareholders wanting short terms returns vs. mangers wanting long term
investments
 Any major business decision may benefit others but at the same time disadvantage
others.
 In some situations, businesses should compromise for example:
 Closing factory in stages rather than immediately to give more time to workers to
find other jobs
 Plans to build a factory away from the residential areas
 In some situations management has to establish its priorities by deciding on the most
important stakeholders.

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Effects of changing objectives on stakeholders

 The business environment is dynamic

 Changes in the business environment may also force the business to change its
corporate objectives.
 Changes in objectives will impact on stakeholders.
 Different stakeholders will be affected in different ways by these changes in objectives
e.g. employees may lose jobs, customers may have less choice

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 People in organisations
Human Resources Management

Purpose and roles of HRM

 Monitoring: Measuring and monitoring employee performance.

Example of how HRM can contribute to achieving organizational goals

43
Workforce planning

Workforce planning means thinking ahead to establish the number of employees and the skills
required in the future to meet the business’s planned objectives.

The reasons for and role of a workforce plan

 Human resource (HR) departments need to calculate the future employment needs of
the business.
 Failure to do workforce planning will lead to too few workers with the right skills or too
many workers with the wrong skills.
 The first stage is always a workforce audit followed by assessing how many additional
employees and skills might be needed.

Determining the number of employees required

 Forecast demand for the product - Demand forecasts may be necessary to help
establish labour needs.
 The productivity level - If productivity (output per worker) is forecast to increase –
perhaps as a fewer workers will be needed to produce the same level of output.
 The objectives of the business - If the business plans to expand over the coming
years, then employee numbers will have to rise to accommodate this growth.
 Changes in the law regarding workers’ rights - If a government introduces laws that
establish a shorter maximum working week or a minimum wage level, then there could
be a big impact on the workforce plan.
 The labour turnover and absenteeism rate - The higher the rates at which workers
leave a business, then the greater the need will be to recruit replacements.

Determining the skills of the workers required

 The pace of technological change in the industry - for example, production methods and
the complexity of the machinery used.
 The need for flexible or multi-skilled workers as businesses try to avoid excessive
specialisation
 The need for business greater flexibility to meet changing market conditions – and can
also make the workers’ jobs more rewarding which means the business needs to recruit
workers with more than one skill who can be used in a variety of different ways.

Labour turnover
It is defined as the rate at which workers are leaving the an organisation. it can be calculated as
follows:

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Advantages and disadvantages of labour turnover

Recruitment and selection

Workers need to be chosen so that they meet the exact needs of the business in order to
reduce the risk of conflict between personal objectives and those of the business.

Internal and External recruitment

Internal recruitment - it is when a firm promotes or recruits from within the organisation.
External recruitment – it is a process of recruiting workers from outside the organisation

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Steps to the recruitment and selection process
1. Establishing the exact nature of the job vacancy and drawing up a job description
It involves the duties and responsibilities associated with the job and include:

This is so that the business can attract the right kind of workers since potential recruits will have
an idea of whether they are suited to the position.
2. Drawing up personal specification – analysing the type of qualities and skills being
looked for in suitable applicants. It is the person profile and will help when eliminating
applicants who do not match up to the necessary requirements.
3. Preparing a job advertisement – the job advert should clearly reflect the requirements
of the job and personal qualities required. It can be displayed within the business, in
government job centres, recruitment agencies and newspapers.

4. Drawing up a shortlist of applicants – it is a process of choosing a number of

applicants based on their application forms and CVs.
5. Selecting between applicants – involves the use of interviews to determine the best
candidate usually based on the seven point plan were candidates are assessed based
on achievements, intelligence, skills, interests, personal manner, physical appearance
and personal circumstances. Other section tests include aptitude (ability to do a task)
and psychometric tests (attitude, character, personality).
Personal details and work experience, often contained in a CV (curriculum vitae) or
résumé. References may have been obtained from previous employers to check on the
character and previous work performance of the applicants.

Assessment centres are increasingly popular for selecting between graduates and
other well-qualified applicants for high-profile jobs. A group of applicants undergo a

46
 series of personality tests, group problem-solving exercises, written tests and role play
situations.

Employment contracts

 It is a legal document that sets out the terms and conditions governing a worker’s job.
 Businesses should make sure that they should be fair and in line with current
employment laws.
 A contract imposes responsibilities on both the employer (to provide the conditions of
employment laid down) and employee (to work the hours specified and to the standards
expected in the contract).
 It is illegal in some countries for an employer to employ workers without a contract.
 Contents of a typical contract include:
 Employee’s work responsibilities and the main tasks to be undertaken
 Whether the contract is permanent or temporary
 Working hours and level of flexibility expected e.g. part time or full time, working
weekends or not, payment methods to be used and the hourly rates.
 Holiday entitlement
 The number of days’ notice must be given by the worker (if they wish to leave) or
the employer (if they want to make the worker redundant)

47
Redundancy and dismissal

 Redundancy is when a job is no longer required so the employee doing this job becomes
redundant through no fault of his or her own. It may be voluntary or involuntary.
 Redundancy occurs when workers’ jobs are no longer required and there is no possibility
of that person being re-employed somewhere else in the organisation.
 Redundancy can result from:
 Fall in demand
 Change in technology

 Redundancy may force a firm to implement its retrenchment policy in order to save on
costs to remain competitive.
 Retrenchment is the process of reducing the size of the workforce in order to avoid
unnecessary costs or to avoid the failure of the entire business

 Dismissal is the termination of employment by the organisation. It may be fair or unfair.

 It may be necessary for an HR manager to discipline an employee for continued failure
to meet the obligations laid down by the contract of employment.
 Dismissal of workers should be in accordance with the law otherwise civil court action
might result leading to substantial damages being awarded against the firm.
 Dismissal can only be done when:
 The employee being unable to do the job to the standard that the organisation
requires.
 It may also be that the employee has broken one of the crucial conditions of
employment.
 The department has done all that it can to help the employee reach the required
standard or stay within the conditions of employment but in vain.
 The act does not leave the organisation open to allegations of unfair dismissal.

48
Examples of unfair dismissal

Staff morale and welfare

HR departments may offer advice, counseling and other services to employees who are in need
of support to those facing family or financial problems.
This can reflect the caring attitude of the business towards its workers and this will make
workers feel that the employer is concerned about their long term welfare thereby increasing
worker morale.

The hours and times people work have changed resulting in employees working long and
unsociable hours. The following are reasons for these changes:

HR departments should help businesses find achieve a better work-life balance that will reduce
stress and thereby increasing employee efficiency.
The following can be adopted by the business to allow for more leisure and relaxation time:

 Flexible working – a situation in which an employer allows people to choose the times
that they work so that they can do other things.
 Teleworking – working from home for some of the working week by making use of
internet, email, and the telephone.
 Job sharing – allowing two people to fill one full time vacancy by splitting between two
individuals.
 Sabbatical periods – an extended period of leave from work (up to 12 months). Some
business will not pay for this period but guarantee to keep the job for the worker.

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Policies for diversity and equality

Equality policy
Promoting equality in the business means recruitment and dismissal decisions, pay promotions
and other benefits are not applied selectively to specific groups of people but to everyone in the
same way.
Examples of areas where equality is required:

 Sex/Gender
 Race
 Age
 Religion
Reasons why equality is important:

 Creates an environment with high worker morale.

 My increase worker effectiveness by increasing their desire to willingly contribute to a
business in a positive way.
 Developing good reputation
 Attract the best candidates or top talent
 To avoid charges of discrimination
 Can be used for marketing and promotion purposes.

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Diversity policy
It is about acknowledging the differences that exist amongst employees and deliberately
creating an inclusive environment that values those differences.
A workplace that encourages diversity will employ people of different;

 races
 ethnicities
 religions
 genders
Benefits of workplace diversity;

 Capturing a greater market across all divides as they are attracted by a diversified
workforce.
 Helps employ a more qualified and talent workforce.
 It results in increased creativity because of different backgrounds which gives different
problem solving methods.
 Business may benefit from diversity in language skills which allows them to sell products
internationally.

Training and development

The need for training

 Deterioration of productivity levels.
 A fall in quality
 Introduction of new technology in the form of machinery
 Introduction of new working methods.
 Diversification
 Poor communication
 Poor customer service

Benefits of Training
 It results in better skills, knowledge and the aptitude to perform duties effectively.
 Training lead to increased productivity and efficiency
 Training also leads to quality products being produced
 It improves morale as it motivates workers
 It makes it possible to introduce new machinery or technology

Limitations of Training
 Training can be expensive
 It can also lead to well-qualified staff leaving for a better-paying job once they have
gained qualifications.

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  This is sometimes referred to as ‘poaching’ of well trained staff and it can discourage
some businesses from setting up expensive training programs.
 Time consuming.

Induction training

Benefits
 Helps reduce mistakes and accidents by familiarising the employee with the rules and
safety precautions in the organisation.
 The worker is quickly integrated to the organisation and quickly moves to optimal
productivity.
 Gives workers a sense of belonging when introduced to colleagues.

Limitations
 Consumes production time
 Requires good communicators
 Requires the trainer to be well skilled and well versed with the organisation

On the job training

Advantages
 It is relatively inexpensive.
 It is easy to organise.
 It is specific to the job and not general.
 It is adaptable to meet the work need of workers and the trainer.

52
Disadvantages
 It may disrupt work.
 New ideas and methods are not introduced into the organisation.
 The trainer does not possess good training skills or may be a poor communicator.
 Bad work practices are passed on to the employed trainee

Off the job training

Advantages
 Specialist trainers are employed.
 Training takes place away from the work place thereby reducing production disruption.
 New trends and practices may be developed in workers by external trainers.

Disadvantages
 It is isolated from the practicalities of the work place.
 It removes employees from work therefore production suffers.
 Training is expensive.
 It can result in well qualified staff leaving the firm once they obtain improved
qualifications.

Impact of training on a business and its employees

Costs of training
 Training can be expensive.
 It can also lead to well-qualified employees leaving for a better-paid job once they have
gained qualifications from a business with a good training programme (poaching)
 Workers may be less productive during the training programme, especially if off-the-job
training is used.

Costs of not training

 Untrained employees will be less productive, less flexible and less adaptable.
 Poorly trained workers often give unsatisfactory customer service.
 Accidents are likely to result from workers untrained in health and safety matters.

The multi-skilling of workers can be a great benefit to a business, especially in times of rapid
economic and technological change.

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Development of employees
 This should be a continuous process.
 Development might take the form of new challenges and opportunities, additional
training courses to learn new skills, promotion with additional delegated authority and
chances for job enrichment.
 It enables workers to continually achieve a sense of self-fulfillment.
 HR department should work closely with the worker’s functional department to establish
a career plan that the individual feels is relevant and realistic.
 The HR department should analyse the likely future needs of the business when
establishing the development plan for each member of the workforce so that individual’s
progress and improvement can also be geared to the needs of the business.

Employee development to encourage intrapreneurship

 Many businesses have training and development programmes with the specific aim of
encouraging employees to become successful intrapreneurs.
 Most employees can demonstrate intrapreneurship if they are:
o encouraged to be independent thinkers and creative
o given opportunities to mix and work with other skilled employees from different
departments
o empowered with the authority and resources they need to introduce innovations
o assured that some failure is expected and acceptable. Removing the ‘don’t fail’
ethos is important – intrapreneurs are meant to take risks and some of their ideas
will not work!
o encouraged to start with small ideas and innovations – before moving on to the
bigger issues

Development and appraisal of workers

 This seeks to improve the present performance levels and identifies employee potential
for development and or promotion.
 It is also helps to establish written performance records which can be used in future
appraisal purposes.
 Improvement in performance must be recognised and fed back to staff.

Advantages
 It is a control process and ensures workers are doing what they are supposed to be
doing.
 Can identify the training needs of the organisation.
 Can provide for recognition of workers through awards for measured performance
hence motivation.
 Results can be important in separating candidates for promotion.
 Focuses on the contribution of the worker and not their job post.

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Disadvantages
 It can be viewed with suspicion and judged as a fault finding mission
 Recording of results can be time consuming.
 Does not eliminate bias when it comes to judgment of performance.

Management and workforce relations

 The relations between managers and the workforce have a great impact on the success
or failure of a business.
.
Benefits of cooperation between management and the workforce

 Fewer days are lost through strikes and other forms of industrial action.
 It will be much easier for management to introduce change in the workplace.
 The contribution of the workforce is likely to be recognised by management, and pay
levels and other benefits might reflect this.
 Agreement on more efficient operations will increase the competitiveness of the
business.
 It may result in low labour turnover.
.
Impact of trade union involvement in the workplace

 The basis of trade union influence has been ‘power through solidarity’ which is best
illustrated by the unions’ ability to engage in collective bargaining, negotiating on
behalf of all of their members within a business. This puts workers in a stronger position
than if they negotiated individually to gain higher pay deals and better working
conditions.
 Collective industrial action could result in much more influence over employers during
industrial disputes.
 Unions provide legal support to employees who claim unfair dismissal or poor working
conditions.
 Unions put pressure on employers to ensure that all legal requirements are met, for
example health and safety rules regarding the use of machinery.
 Many employers have a policy of trade union recognition, which allows for collective
bargaining. However, some employers prefer to negotiate with individual workers over
pay and work conditions.

Benefits of collective bargaining

 Employers can negotiate with one trade union officer rather than with individual workers.
This saves time and prevents workers from feeling that one individual has obtained
better pay and conditions than others.
 Union officials can provide a useful channel of communication with the workers. This
two-way communication through the trade union allows workers’ problems to be raised
with management and employers’ plans could be discussed with workers.
 Unions can impose discipline on members who plan to take hasty industrial action that
could disrupt a business. This makes industrial action less likely.
 The growth of responsible, partnership unionism has given employers a valuable forum
for discussing issues of common interest and making new workplace agreements.

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Disputes between trade union and management

Industrial action

 Continue collective bargaining, perhaps with the help of an independent arbitrator.

 Go slow – a form of industrial action in which workers keep working but at the minimum
pace demanded by their contract of employment.
 Work-to-rule – a form of industrial action in which employees refuse to do any work
outside the precise terms of the employment contract. Overtime will not be worked and
all non-contractual cooperation will be withdrawn.
 Overtime bans – industrial action in which workers refuse to work more than the
contracted number of hours each week.
 Strike action – the most extreme form of industrial action in which employees totally
withdraw their labour for a period of time. Strike action leads to production stopping and
the business shutting down during the industrial action.

Methods resolving industrial disputes

 Negotiations to reach a compromise solution with the aim of avoiding industrial action
 Public relations campaign to gain public support for the employer during a dispute and
put pressure on the union to settle for a compromise.
 Threats of redundancies to pressurise unions to agree to settle the dispute.
 Changes of contract, which require workers to work overtime, accept more flexible
working or agree not to take industrial action
 Lock-outs – short-term closure of the business or factory to prevent employees from
working and being paid
 Closure of the business, leading to the redundancy of all workers. This extreme
measure would clearly damage the long-term interests of both workers and business
owners.

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 Motivation as a tool of management and leadership

 Motivation is the internal and external factors that stimulate people to take actions that
lead to achieving a goal.
 Motivated workers have the desire to see a job done quickly.
 Motivation results from the individual’s desire to achieve objectives and to satisfy and to
satisfy them.

The need to motivate employees to achieve the objectives of a business

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Results of poorly motivated workers

Human needs
Human needs can be described as a set of requirements that can include wants (desires) that
have to be met to satisfy the basic requirements of people.
While some human needs are generic and needed by most, every person will have independent
needs.
How human needs may or may not be satisfied at work

 Employees are different which means their needs are different too.
 Some workers work for material/tangible rewards such as pay
 Some workers love their job and are motivated by intangible rewards such as praise and
additional responsibility.
 Therefore giving tangible rewards to workers who are motivated by intangible rewards
will not motivate them.
 Given intangible rewards to workers to workers who are motivated by tangible rewards
will not motivate them.

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Motivation theories

Content theories of motivation

 Content theories assume that workers are motivated by the desire to fulfill their inner
needs.
 These theories focus on these human needs that energise and direct human behaviour
and how managers can create conditions that allow workers to satisfy them.

Taylor – Scientific management

Taylor’s main motivational suggestion was wage levels based on output.

Taylor believed in a fair day’s pay for a fair day’s work.

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Limitations
 Its focal point is on money as a motivator however it ignores non-financial motivators.
 It may compromise on quality of goods despite an increase in productivity
 It may exhaust workers

Mayo – Hawthorne experiment

 The experiment was carried out in the Hawthorne factory of Western Electric.
 Initial study was based on the assumption that working conditions (lighting, heating, rest
periods etc.) had significant effect on worker’s productivity.
 The results surprised observers, both in the improved and worsened conditions groups,
productivity increased

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Mayo’s research for today’s business

 Workers are getting more involved business decisions and issues that affect them
 Team working and group working can be applied in many businesses.
Limitations
 It ignores the relevance of financial motivators.
 May not be applicable on theory X workers.

Maslow – Hierarchy of needs

 Individual needs start on the lowest

 Once a need is satisfied, humans seek next order of needs.
 Once a need is satisfied it no longer motivates one to action.
 Self actualisation is not reached by many but everyone is capable of reaching that level.
 The lowest order of needs is psychological needs while self actualisation needs are the
ultimate needs

Hierarchy of needs

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How needs can be satisfied

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Herzberg – Two factor theory
Herzberg’s research intended to discover:

 Those factors that led to them having very good feelings about their jobs
 Those factors that led them having very negative feelings about their jobs.

Herzberg’s conclusions were:

 Job satisfaction resulted from five main factors known as motivators

 Job dissatisfaction also resulted from five main factors known as hygiene factors.

Hygiene and motivators

Herzberg considered that hygiene factors had to be in place in order to prevent dissatisfaction
but even if they are in place, they would not motivate the workers.

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Consequences of the two factor theory to modern businesses

 Improving pay and working conditions can remove dissatisfaction about work but will not
motivate workers.
 Motivation to do the job and to do it well will only exist when motivators are in place. This
will make workers work willingly and do their best.
 Herzberg suggested adopting the principles of job enrichment with the following three
main features:
 Complete units of work – unlike typical production methods that make workers
assemble one part of the finished product.
 Feedback on performance – this communication could give recognition for work
well done.
 A range of tasks –to challenge and stretch the individual
 If a business offers hygiene factors they will remove dissatisfaction but they would be
quickly taken for granted.

Evaluation of Herzberg’s work

 Herzberg results had had an impact on businesses.

 Team work is now much more widespread
 Most firms are continually looking for ways to improve effective communication.
 However, it will be wrong to conclude that all these trends are Herzberg’s doing but there
is little doubt that his work conclusions hastened these trends.

McClelland – Motivational needs theory

 David McClelland developed achievement based motivation in employee assessment

methods.
 He described three types of motivational need which are:

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  McClelland stated that these needs are found in varying degrees in all workers and
managers.
 The mix of these motivational needs characterises a person’s behaviour in terms of what
motivates them and what they believe other people should be motivated.
 McClelland believe that achievement motivated people are generally the ones who make
things happen and get results.
 However achievement motivated managers can demand too much of their staff in the
achievement of targets and prioritise this above other needs of workers.

Process theories

 Process theories emphasize on how and why people choose certain behaviours in order
to meet their personal goals and the thought processes that influence their behaviour.
 They study what people are thinking about when they decide on whether to put effort or
not.
 Process theories include expectancy theory, equity theory, goal setting theory and
reinforcement theory.

Vroom – Expectancy theory

 Vroom suggested that individuals choose to behave in ways that they believe will lead to
outcomes that they value.
 individuals have different set of goals and can be motivated if they believe that:

 The expectancy theory is based on the following three beliefs:

 Valence – the depth of the want for an extrinsic reward, such as money or
intrinsic reward such as satisfaction.
 Expectancy – the degree to which people believe that putting effort into work will
lead to a given level of performance.
 Instrumentality – the confidence of employees that they will actually get what
they desire, even if it has been promised by the manager.
If one of these beliefs is missing then workers will not have the motivation to do the job well.

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For main stages need to be present for the theory to succeed

How useful are motivational theories

They provide a starting point and framework for analyzing and discussing main motivational
issues.
Theory is not real life and there are external factors that might affect it.

Motivation in practice
Very few people are prepared to work without financial rewards and therefore most theories
recognise that pay is necessary to encourage effort.
However there disagreements on whether pay is sufficient to generate motivation. if pay is
insufficient to ensure workers are motivated then non-financial motivators are needed.

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Financial rewards systems

Further advantages and disadvantages of financial reward system

Advantages and disadvantages of piece rates

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Advantages and disadvantages of a salary

Advantages and disadvantages of performance related pay

Advantages and disadvantages of profit sharing and worker share ownership

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Fringe benefits

 These are non-cash forms of rewards

 They are benefits given separate from pay, by an employer to some or all of the
employees.
 They include company cars, free insurance and pension schemes, medical aid,
discounts on company products, low interest loans etc.
 Since cash does not exchange hands between the employer and the employee, fringe
benefits are often classified as non-financial benefits although they have a financial
value.

Non-financial methods of motivation

 Job rotation

Benefits:
 Rotation may relieve the boredom of doing one task.
 It can give the worker several skills, which makes the workforce more flexible.
 Workers are more able to cover for a colleague’s absence.

Limitations:
 Job rotation is more limited in scope than job enrichment.
 It does not increase empowerment or responsibility for the work being performed.
It does not necessarily give a worker a complete unit of work to produce, but just
a series of separate tasks of a similar degree of difficulty

 Job enlargement

It is unlikely to lead to long-term job satisfaction, unless the tasks given to employees
are made more interesting or challenging.

 Job enrichment
It involves a reduction in direct supervision as workers take more responsibility for their
own work and are allowed some decision making authority.
Benefits:
 Complete units of work are produced so that the worker’s contribution can be
identified.
 Direct feedback on performance, for example by two-way communication, allows
each worker to have an awareness of their own progress.
 Challenging tasks are offered as part of a range of activities and obtaining further
skills and qualifications is a form of gaining status and recognition

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 Limitations:
 Lack of employee training or experience to cope with the greater depth of tasks
can result in lower productivity.
 Employees may see the enrichment process as just an attempt to get them to do
more work.
 Enrichment must be planned carefully with the employees involved so that the
benefits to both individuals and the business can be understood.
 If employees are just not able to cope with the additional challenges then this can
lead to frustration and demotivation.
 Managers must accept reduced control and supervision over the work of
employees, which they might find difficult.

 Job redesign

It is closely linked to job enrichment, which usually involves the employee’s input
and agreement.

 Quality circles

Benefits:
 Workers have hands-on experience of work problems and they often suggest the
best solutions.
 The results of the quality circle meetings are presented to management. The
most successful ideas are often adopted, not just in that location, but across the
whole organisation.
 Quality circles are an effective method of allowing the participation of all
employees.
 They fit in well with Herzberg’s ideas of workers accepting responsibility and
being offered challenging tasks.

Limitations:
 Quality circle meetings can be time-consuming and reduce the time available for
production.
 Not all employees will want to be involved in quality circles, preferring to get on
with their own job.
 Quality circles may not have the management power to make the changes that
they recommend. If management ignores the proposals, employees will become
discouraged and unwilling to participate.

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  Training and development
 It involves improving and developing the skills of workers and this improves their
status and chances of promotion.
 Most businesses offer schemes for the training and development of their
employees.
 Benefits
o Improving and widening the skills of employees can increase the
productivity and flexibility of the workforce and its ability to deal with
change.
o Training and development increase the status of workers and give them
access to more challenging, and probably better-paid, jobs within the
business.
o Developing employees and encouraging them to reach their full potential
increase the opportunities for self-actualisation.
o Training and development are often important incentives for employees to
stay with a business as they feel that they are being fully recognised and
appreciated by the company.

 Limitations
o Training can be expensive as trainers and training facilities are needed or
off-the-job courses must be paid for.
o Training and development programmes can take employees away from
their work for some time so other employees will need to cover for them.
o Training can lead to employees leaving a business as they become better
qualified to gain employment within other companies. This discourages
some businesses from paying for training programmes in case
competitors benefit from the people they have trained.

 Worker participation

Employee participation can be introduced at different levels of a business operation.

Workers can be encouraged to become involved in decision-making at the team or work
group levels.
 The benefits of participation include job enrichment, improved motivation and
greater opportunities for workers to show responsibility.
 The limitations of participation are that it may be time-consuming to involve
workers in every decision.
 Ways in which employees can participate in the management and control
o Workers could be encouraged to participate through electing a worker
director to the board of directors or speaking for employees at works
council meetings.
o Decisions on break times
o Decisions on job allocations to different workers
o Job redesign
o Ways to improve quality and ways to cut down wastage and improve
productivity.

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 Benefits:
 Better decisions could result from worker involvement as they have in-depth
knowledge of operations, whereas some managers lack this.

Limitations:
 May be time-consuming to involve workers in every decision.
 Autocratic managers would find it hard to adapt to the idea of asking workers for
their opinions.

 Team-working

 Target setting
It is related to management by objectives and has the aim of increasing enabling direct
feedback to workers on how they are performance compares with agreed objectives.

 Delegation
It involves passing down authority to workers in order to perform certain tasks

 Empowerment
It involves giving workers control on how tasks should be undertaken.
Benefits:
 Empowerment leads to quicker problem-solving. Employees are able to respond
to problems immediately and not take time referring them to managers.
 Higher levels of motivation and morale result as workers are given more
challenging work and are recognised for it.
 Managers are able to focus on bigger strategic issues as they are released from
more routine issues and problem-solving.

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 Limitations:
 Lack of experience increases risk, which is why employees must be trained in
accepting the additional authority that comes with empowerment.
 Reduced supervision and control might lead to poor decisions.
 There may be lack of coordination between teams as, for example, one manager
is no longer making consistent decisions and different groups might take different
approaches to problems.
 Some employees may be reluctant to accept more accountability but feel that
they have to in order to keep their job secure.

 Opportunities for promotion and increased status

 Employee promotion to a higher-level job is seen as a reward for hard work.
Promotion results in increased employee status, which satisfies a key human
need.
 If employees think there is no career structure and no opportunity for promotion,
they will not be motivated to perform to the best of their abilities.
 Businesses that do not recognise hard work and exceptional performance
through promotion always risk losing a talented employee.

Management
Managers get things done by working with and delegating to other people
Managers use different style of leadership and approach problems and decisions in different
ways but the key functions of management are the same.

Traditional functions of management

 Planning – giving the business a direction for the future

 Organising – the people and other resources needed
 Directing – leading and motivating people in the organisation
 Controlling – ensuring that the original plan is being followed.

Fayol: the functions of management

Henri Fayol was one of the first management theorists. He defined five functions of
management and these are still seen as relevant to businesses and other organisations today.

 Planning - All managers need to think ahead. Senior management will establish overall
objectives and planning needed to put these objectives into effect is also important.
 Organising resources to meet objectives - senior managers should ensure that the
structure of the business allows for a clear division of tasks so that each functional
department is organised to allow employees to work towards the common objectives.
 Commanding, directing and motivating employees – it means guiding, leading and
overseeing employees to ensure that business objectives are being met.

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  Coordinating activities - The goals of each branch, division, region and employee must
be welded together to achieve a common sense of purpose
 Controlling and measuring performance against targets - It is management’s
responsibility to appraise performance against targets and to take action if
underperformance occurs.

Management roles (Mintzberg)

To carry out the functions of management, managers need to perform these following roles:

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Differences between Fayol and Mintzberg’s approaches

 Mintzberg just thought that the simple division of managerial tasks into five functions was
too closed and limiting. He considered that the role of managers was much more open
ended.
 Mintzberg believed that he had demonstrated, through his systematic framework, that
management is much more than the five functions.
 He stated that it must include interpersonal relationships and open-ended discussions
with workers and customers.
 Despite their apparent differences, these two management thinkers have provided a
useful foundation for analysing what it is that managers must do to be effective.

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The contribution of managers to business performance

Effective managers lead successful businesses. The key indicators that managers are having a
positive impact on business performance are:

 the business regularly meets its objectives

 high levels of customer satisfaction
 high employee motivation levels and low labour turnover
 a respected brand image
 high regard from external stakeholders such as environmental and social pressure
groups
 excellent communication both within the business and with external stakeholders

Management styles
Managerial positions in business

 CEO - is the highest-ranking executive in a company. The primary responsibilities

include: making major corporate decisions, managing overall operations, managing
company resources.
 Directors – these are senior managers elected by shareholders.
 Managers – individuals responsible for staff, resources and decision making in an
organisation
 Supervisors – they are appointed by management to watch over the work of others.

Management styles

 Autocratic leadership – keeps all decision-making at the centre / top level of the
organisation
 Democratic leadership - promotes active participation of workers in taking decisions.
 Paternalistic leadership – based on the approach that the manager is in better
position than the workers to know what is best for the organisation
 Laissez fair leadership – leaves much of the decision making to the workforce (hands
off approach.

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77
McGregor theory X and Y
Theory reflects the attitude of managers towards workers

 If managers assume that workers behave in the Theory X way there will be control and
close supervision and no delegation of authority (autocratic leadership)
 If managers assume that workers behave in the Theory Y way there will be less control
and delegation of authority (democratic leadership)

Factor influencing choice of a management style

 The training and experience of the workforce.

 The amount of time available for consultation and participation.
 The attitude of managers (McGregor Theory X and Y)
 The importance of issues under considerations.

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 Marketing

What is marketing?

Link between marketing objectives and corporate objectives

Corporate objectives of a business will have a significant impact on both the marketing
objectives and marketing strategies.

Marketing objectives should fit in and reflect the overall aims and mission of the business

Marketing objectives
 To be effective, marketing objectives should:
o be linked to corporate objectives and be focused on helping the business
achieve those overall targets
o be realistic, motivating, achievable, measurable and clearly communicated to
other departments.
 Marketing objectives are important in that:
 They provide a sense of direction of the marketing department.
 It helps monitor progress against these standards.
 They form the basis of the marketing strategy.

 Examples of marketing objectives may include:

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Coordination of marketing and other departments
Marketing and Finance – finance department will use sales forecast from marketing
department to make cash flow forecast.
Marketing and Human resources – sales forecast can be used to devise a workforce plan by
the human resources department.
Marketing and Operations department – market research data can be used in the
development of new products and sales forecasts can be used to determine target output to be
produced by the operations department.

Supply and Demand

 There is a negative relationship between price and quantity demanded

 There is a positive relationship between price and quantity supplied

Factors influencing Demand

 Changes in consumers’ income

 Changes in the prices of substitute goods and complementary goods
 Changes in population size
 Fashion and taste changes
 Advertising and promotion spending

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Factors influencing supply

 Changes in the costs of production – change in labour or raw materials costs

 Taxes imposed on the suppliers by government, which raise costs
 Subsidies paid by government to suppliers, which reduce costs
 Weather conditions and other natural factors
 Advances in technology to make cost production lower

Determining the equilibrium price

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Markets

 Consumer and industrial markets

o An industrial market deals with products bought by businesses. These include

specialist industrial machines, trucks and office supplies.
o A consumer market deals with products bought by the final users of the
products. These include mobile phones, holidays and fashion clothing.

 Local, national and international markets

 Most businesses sell products to the local market that is to consumers in the
area where the business is located.
 The local market might be have limited sales potential and hence firms might sell
their products to:
o National markets – selling products to the whole country
o Regional markets – selling products to neighboring countries
o International markets – selling products overseas
 International markets offer the greatest sales potential.

 Production and Customer (or market) orientation

 Product-oriented businesses invent and develop products as they believe that they
will find consumers to purchase them.
 Pure research into technical innovations without consumer research is rare but still
exist e.g. this is true in the pharmaceutical and electronic industries.
 There is still the belief that if a business produces an innovative product of a good
enough quality, then it will be purchased.
 Product-oriented businesses concentrate their efforts on efficiently producing high-
quality goods. Such quality-driven firms do still exist, especially in product areas
where quality or safety is of great importance.

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  The chances of newly developed products failing in the market are reduced.
 Effective market research helps to prevent product failures.
 Reduces the risk of product failure.
 Products based on consumers’ needs will have a longer lifespan and be more
profitable than those that are sold using a product-led approach.
 Constant feedback from customers will allow the product and the method of
marketing it to be adapted to changing tastes before competitors get there first.
 Traditional product-oriented businesses, which assume there will always be a market
for the products they make, are fast disappearing.
 However, product-led marketing still exists to a limited extent:

 Measurement of market share and market growth

 Market size

 The market size can be measured in two ways: by the quantity of sales (units
sold) or by the value of products sold (revenue) by all businesses in the market
over a given time period.
 importance of the market size
o to access whether the market is worth entering or not
o Firms can calculate its market share.
o Growth or decline of the market can be identified.

 Market growth

 Some markets grow faster than others and businesses will prefer to enter in
markets that are growing faster.
 Such markets can potentially increase the firm’s profits over time especially when
competition is rapidly growing as well.
 The rate of market growth depends on several factors:
o a country’s rate of economic growth
o changes in consumer incomes
o development of new markets and products that reduce sales in existing
markets and products
o changes in consumer tastes
o technological change, which can boost market sales following a new
innovation

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 o whether the market is saturated because most consumers already own
the product

 Implications of market growth

o Increased market growth
Sales will increase if the business’s market share remains the
same.
It may be possible to increase prices and profit per unit.
More businesses might be attracted to the market, increasing the
level of competition.
o Reduced market growth
Sales will increase more slowly even if the business’s market
share remains the same.
Competitors might reduce prices to increase sales in a slow-
growing (or shrinking) market.
Lower prices might result in lower profit per unit.
Businesses might consider expanding into faster-growing markets
(e.g. in other countries).

 Market share

 Benefits of highest market share or increasing market share

o Results in increasing sales
o Retailers would want to stock the goods of the market leader
o Being market leader can be used by the business in its advertising and
promotions since consumers are keen to buy from popular brands.

 Implications of a fall in market share

o Sales are likely to fall unless there is rapid market growth.
o Retailers will be less keen to stock and promote the product.
o Larger discounts to retailers might have to be offered.

 Competitors

 Businesses operate in a competitive environment.

 The most common way businesses compete with is price.
 However non price competition can also be used such as customer service.

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Problems associated with measuring market share and market growth

 Maybe difficult to determine the total industry sales since it involves information about
sales of other firms which may not be easy to ascertain.
 The business can only ascertain what has happened in the past and the current situation
might have changed since then.
 It may be difficult to accurately identify all the competition in the industry.

Industrial and consumer markets

Product classification

 Industrial or producer goods - these are products that are bought to produce other
products e.g. machinery.

 Consumer goods – these are products that are bought for final consumption e.g. bread.
Some consumer goods are durable which means that they last for a long period of time
before replacement e.g. cars, televisions and other furniture related products and some
maybe non-durable goods meaning those goods that are used only once or for a few
times/short period of time

Classification of industrial or capital goods

 materials and components – needed for production to take place (e.g. steel and electric
motors for washing machines)
 capital items – equipment, machinery and vehicles (e.g. lathes, IT systems and industrial
buildings)
 Services and supplies – business services and utilities (e.g. power supplies and IT
support/maintenance).

Classification of consumer goods or products

These are products that are intended for immediate use by the customers or those that are for
final consumption. A distinction can be drawn between these consumer products so they can be
classified on the basis of buying habits into their convenience or shopping habits.

 Convenience goods - these are goods which are frequently purchased and relatively
inexpensive. Frequency of buying them is high e.g. buying of milk and sugar. A
consumer does not have to search for additional information before purchasing.
 Shopping goods - these are goods that are relatively expensive and consumers want to
get product information before buying them in order to make product comparison based
on prices, guarantees e.g. furniture and clothing. The customer does not have sufficient
information/knowledge of the range of shopping products available and he will shop
around to acquire information.
 Speciality goods - these are expensive products, infrequently purchased and
consumers require a lot of information before a decision can be made. They are usually
bought for status and for high performance. Customers are willing to pay higher prices to
acquire the brand desired.

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  Unsought goods - these are goods that customers will not normally buy without some
sort of push (without a lot of advertising they cannot be bought). Consumers need to be
persuaded in order to buy them e.g. insurance

The key differences between selling to businesses rather than consumers are:
 Most industrial products, such as equipment for power stations, are much more complex
than many consumer products so specialist sales employees and support services will
be more important with B2B selling.
 Industrial buyers often have much more market power and are better informed than the
average consumer. They need to be sold products by well-trained and experienced
sales employees.
 Industrial buyers will rarely buy on impulse. They will only purchase after long
consideration and detailed analysis of alternative products. A business selling B2B
needs to keep in regular contact with industrial customers.
 Traditional mass media advertising and sales promotion techniques are not used in most
industrial markets. Selling can be via trade fairs or direct contact with industrial buyers,
often, initially, via websites.
 Mass marketing in consumer markets is a common strategy but in most industrial
markets there are relatively few buyers. Products may need to be adapted to meet the
needs of a particular business buyer.

Niche marketing vs. Mass Marketing

Niche Marketing Mass Marketing

Focuses on a small market segment Focuses on the large market
Focuses on a fraction of the market Focuses on the entire market
Focuses on a specific type of consumer Focuses on consumer needs
Less competition Stiff competition
Rifle approach Short gun approach
Usually targeted by small firms Usually targeted by large firms

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Market segmentation
It is the process of subdividing the large heterogeneous market into distinct subsets of
customers with similar needs or characteristics.

Identifying consumer groups

 Successful segmentation requires that business have a clear picture of the consumers.
 This may require firms to generate consumer profiles.

Basis of consumer segmentation/Ways of segmentation

 Geographical factors - markets are subdivided on the bases of geography or location

with the assumption that people living in the same locality have similar needs e.g. urban
vs. rural, cold vs. hot regions etc.
 Demographic factors - markets are subdivided on the bases of age, sex, marital status,
level of education, incomes etc.
 Psychographic factors - the market is subdivided on the bases of psychological
characteristics of customer needs, lifestyle, social classes, personality, attitude etc.

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Customer relationship marketing

 The objective of customer relationship marketing (CRM) is to develop customer

loyalty to ensure that customers buy from the business in the future.
 It is costly to gain new customers (with expensive promotions) than it does to keep
existing ones.
 If a business can secure the loyalty of many customers, it means that there will be fewer
customers buying products from competitors.
 The aim is to gain as much information as possible about each existing customer e.g.
income, product preferences, buying habits and so on.
 Using this information, marketing tactics can then be adapted to meet the customer’s
needs.
 Developing effective long-term relationships can be achieved by:
o Targeted marketing – giving each customer the products and services they
have indicated, from records of past purchases, that they most need.
o Customer service and support – after-sales service and effective call centres
are good examples of the support essential to building customer loyalty.
o Communicate regularly with customers – to give frequent updates on new
products / special offers/ new features / new promotions and support services.
o Using social media – some CRM systems use social media sites to track and
communicate with customers.

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Market research

 Market research is the process of collecting, recording and analysing data about
customers, competitors and the market.

The purpose of market research

 To reduce the risks associated with new product launches - By investigating

potential demand for a new product or service the business should be able to assess the
likely chances of a new product achieving satisfactory sales.

 To predict future demand changes - Business may wish to investigate social and
other changes to see how these might affect the demand for products in the future.

 To explain patterns in sales of existing products and market trends - research can
be conducted for existing products to find out why sales are following a certain pattern
and be able to take remedial action.

 To assess the most favoured designs, styles, promotions and packages for a
product -Consumer tests of different versions of a product or of the proposed adverts to
promote it will enable a business to focus on the aspects of design and performance that
consumers rate most highly.

 Establishing the needs and wants of consumers

 Identify the main features of the market

 Overall size – is it worthwhile for the business to be entering this market?
 Growth – is the market becoming bigger or smaller in terms of sales?
 Competitors – how many other businesses sell in this market and how much
market power do they have?
 To identify the product and its perceived strengths and weaknesses
 Establishing the characteristics of the consumers (consumer profile)
 Determining customer reactions to:
 different price levels
 alternative forms of promotion
 new types of packaging
 different methods of distribution

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Sources of market research data

Secondary Research - involves studying existing information, which was gathered for a certain
different purpose. It can be found within an organisation itself or outside the organisation.

Sources of secondary data

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  Government publications
 population census
 Social Trends
 Family Expenditure Survey.

 Local libraries and local government offices

 local population census – total population size, age and occupation distributions
 number of households in the area
 Proportions of the local population from different ethnic and cultural groups.

 Trade organisations
 Trade organisations produce regular reports on the state of the markets their
members

 Market intelligence reports

 These are extremely detailed reports on individual markets and industries
produced by specialist market research agencies.

 Newspaper reports and specialist publications

 The Grocer
 Motor Trader
 The Financial Times

 Internal company records

 customer sales records
 guarantee claims from customers
 daily, weekly and monthly sales trends
 Feedback from customers on product, service, delivery and quality.

 The internet
 The internet has transformed secondary data collection.
 Whenever secondary research is conducted just from the internet, the accuracy
and relevance of the source should always be checked upon.

Primary research - it involves the collection of first hand data that is directly related to the firm’s
needs.

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Methods of primary research

 Quantitative research leads to numerical results that can be presented and analysed.
 Test marketing - This takes place after a decision has been made to produce a
limited quantity of a new product but before a full-scale, national launch is made.
It involves promoting and selling the product in a limited geographical area and
then recording consumer reactions and sales figures.

 Qualitative research is research into the in-depth motivations behind consumer buying
behaviour or opinions
 Focus group is a group of people who are asked about their attitude towards a
product, service, advertisement or new style of packaging. In these discussion
groups, questions are asked and the group is encouraged to actively discuss
their responses freely to each other.

 Consumer survey - These involve directly asking consumers or potential

consumers for their opinions and preferences. They can be used to obtain both
qualitative and quantitative.

Methods of primary research and their advantages and disadvantages

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Advantages and disadvantages of primary research

Sampling

A Sample is a group of people taking part in a market research survey selected to be

representative of the target market overall. It is impossible to seek evidence from the whole
population because it will be too expensive.

Sampling is very commonly used in market research when collecting primary data.

The need for sampling

 In nearly all market research situations, it is impossible to seek evidence from the total
population.
 Contacting everyone in it would be too expensive or time-consuming, or because it is
impossible to identify everyone in that market.
 The larger the sample, the more representative of the total population it is likely to be.

Limitations of sampling

 Researchers may not use the most appropriate sampling method

 Bias in the selection of the sample size
 Difficulties in selecting a truly representative sample
 Sometimes information about each and every unit of information is required.
 The results obtained from the sample may not represent the views of the whole
population.

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Market research results

Reliability of data collection

 Sampling bias/ insufficient sample size – the only accurate method is to ask the
entire population and results from a sample may be different from what could have been
obtained from the entire targeted population.

 Questionnaire bias/ Misleading questions – this happens when questions tend to lead
respondents towards a particular answer.

 Untruthful responses from respondents – some respondents may not be truthful

especially when it comes to embarrassing answers or to questions they feel might
incriminate them

 Poor recording of data

 Lack of training of the interviewer

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Analysis of quantitative data

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96
Analysis of qualitative data

 The answers to qualitative research are based on opinions, attitudes and beliefs.
 For that reason, qualitative data cannot be analysed using statistical techniques.
 Coding which is process assigns labels to key words or phrases used by consumers
during the research process can be used.
 These responses can then be matched against other data such as consumers’ ages or
income levels to establish key relationships.
 Analysing these relationships, for example between ‘branding’ and high-income
consumers, will help a business to plan marketing strategies.

Interpretation of information

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The marketing Mix

The marketing mix is a set of controllable variables in the organisation that managers blend to
produce the response they want in the market place.

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Product

 The term product includes consumer and industrial goods and services.

 Goods are products with a physical existence e.g. washing machine

 Services of the other hand have not physical existence e.g. hair dressing, banking etc.

Tangible and intangible attributes of a product

Importance of product development

 In some markets it is not possible to continue selling the same product over many years.
 It is an attempt to satisfy customer needs that have been identified through research.
 It helps the firm to gain and keep market dominance.
 It helps the business to maintain a competitive edge.
 It can be used to enter new markets.
 Changing consumer tastes and preferences.
 Increasing competition.
 Technological advancement.
 New opportunities for growth.
 Risk diversification.
 Improved brand image.
 Use of excess capacity.

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Success of new products

 Have desirable features that consumers are prepared to pay for

 Be sufficiently different from other products to make it stand out and offer a unique
selling point (USP)
 Be marketed effectively to consumers, who need to be informed about it.

Differentiated products and Unique selling point

 It is a differentiating factor that makes a company’s product unique, designed to motivate

customers to buy.
 Unless a business can pinpoint what makes its product unique in a world of
homogeneous competitors, its sales efforts will not be targeted effectively.
 Customers are often attracted towards goods or services that offer a distinctive image,
service, feature or performance.
 Establishing a USP is about differentiating a company product from its competitors.

Methods of differentiation and USPs

Examples and benefits of USPs

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Product Life Cycle

How the product Life Cycle can influence the marketing mix

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Decisions about extension strategies

When the firm is faced with a decline in sales for a particular product (decline stage), the firm
has to decide whether:
 Decline is irreversible – in this case the business can eliminate or withdraw the product
is necessary.
 The decline is capable of being reversed – in this case extension strategies can then be
adopted.

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Extension strategies aim to rejuvenate the product to prolong its life. Common strategies involve
include:
 Modification of the product i.e. the changing the style, improve quality or adding new
features.
 Modification of the marketing mix
 Enter new market segments.
 Expansion of the number of brand users i.e. increase market share, convert non users to
users.

Importance of the product life cycle

 Assists with the planning of marketing mix decisions

 Can assist in cash flow management since cash flows may depend on the product life
cycle stages
 Helps the firm to formulating its promotional budget depending on the product life cycle
stage.

Limitations of the PLC

 Not all products follow the typical life cycle
 Does not consider changes that might occur in the environment
 It is based on assumptions

Boston Matrix analysis

 It is a method of analysing the market standing of a firm’s products and the product
portfolio of a business which was developed by the Boston Consulting Group.
 It highlights the position of the products of a business when measured by market share
and market growth.

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Low market growth, high market share: product A: cash cow

 This is a well-established product in a mature market.

 This type of product is profitable and creates a high positive cash flow.
 The cash from this product can be ‘milked’ and injected into some of the other products
in the portfolio.
 The business will want to maintain cash cows for as long as possible.

High market growth, high market share: product B: star

 This is a successful product as it is performing well in an expanding market.

 The business will be keen to maintain the market position of this product in what may be
a fast changing market.
 Therefore, promotion costs will be high to help differentiate the product and reinforce its
brand image but a star is likely to generate high amounts of income.

High market growth, low market share: product C: question mark

 The question mark consumes resources but generates little return.

 It needs heavy promotion costs to help become established.
 This finance could come from the cash cow.

Low market growth, low market share: product D: dog

 The dog seems to offer little to the business in terms of either existing sales and cash
flow or future prospects, because the market is not growing.
 It may need to be replaced shortly with a new product development.
 The business could decide to withdraw from this market sector altogether and position
itself into faster-growing sectors.

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Impact of Boston Matrix analysis on marketing decisions

Boston Matrix has relevance when:

 analysing the performance and current position of existing product portfolios
 planning action to be taken with existing products
 planning the introduction of new products

By identifying the position of all products of the business will need marketing support or which
need corrective action. This action could include the following marketing decisions:

 Building – supporting question mark products with additional advertising

 Holding – continuing support for star products so that they maintain their good market
position.
 Milking – taking the positive cash flow from established products and investing it in
other products in the portfolio.
 Divesting – identifying the worst-performing dogs and stopping the production and
supply of these products.

Limitations of using the Boston Matrix for marketing decisions

 The technique doesn’t guarantee business success and will depend on the accuracy of
the marketing managers’ analysis and their skills in making marketing decisions.
 It doesn’t tell a manager what will happen next with any product.
 It is only a planning tool and it has been criticised for simplifying the complex set of
factors that determine product success.
 The Boston Matrix assumes that higher rates of profit are directly related to high market
shares and this is not necessarily the case when sales are being gained by reducing
prices and profit margins.

Product portfolio Analysis

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Price Mix

 Price is the amount paid by customers for a product. Determining an appropriate price
for a product (goods or services) is a vital component of the marketing mix.
 Price can have a great impact on the consumer demand for the product.
 The price level set for a product will also:
 impact on the level of value added by the business to components
 affect the revenue and profit made by a business due to its impact on demand
 help establish the psychological brand image of a product.

The pricing decision: How managers determine the appropriate price

 Costs of production - If the business is to make a profit, the price must cover all of the
costs of producing it.
 Competitive conditions in the market - If the business is a monopolist, it likely to have
more freedom in price setting than if it is one of many businesses selling the same type
of product.
 Competitors’ prices - It may be difficult to set a price that is very different from other
competitors.
 Business and marketing objectives
 Price elasticity of demand - if price elasticity of demand is elastic, the business should
charge a lower to increase revenue but if it is inelastic then a higher price maybe charge
to increase revenues.
 Whether it is a new or an existing product - For a new product, a decision will have to
be made as to whether a skimming strategy or a penetration strategy is to be adopted.

Types of pricing strategies

 cost based pricing

 Full cost based pricing/ Cost plus markup - it involves the full cost of the
product and adding a fixed percentage mark up of profit. It is advantageous in
that it guarantees that profit will be made and that it is easy to calculate. However
it ignores the demand of the product and competition.
 Target profit pricing – It is when the firm determines the level of profit which it
intends to get and then work out the price from there.
 Marginal pricing / contribution pricing - it is similar to cost price pricing, the
only difference being that marginal pricing is based on variable costs and ignores
fixed costs. It is commonly used in the service industries such as hotels, public
transport etc.

 Customer based/ Market based pricing - It takes into consideration customer

perceptions rather than cost of production. Examples of customer based pricing are:

 Perceived value pricing - this pricing strategy is based on how the firm wants its
products to be perceived by customers. This pricing strategy is used to position a
product in the market, a price which is consistent with the image of the market.

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  Price discrimination - this is the charging of different prices in different
segments of the market. For this to be possible, markets should be separable
such that for example a higher price can be charged where demand is inelastic
and a low price charged to a market where demand is elastic.
 Loss leader pricing - it is a scenario where by a firm charges below cost one or
few products of its range in order for customers to perceive the company as the
cheapest one while a majority of its products might be expensive or similar to
competitors.
 Odd even pricing/Psychological pricing - it is a psychological price meant to
deceive customers into thinking a product is cheap because its price has not
being rounded off, a small amount has been removed deliberately e.g. instead of
selling a product for $20 you charge it for $19,99.
 Dynamic pricing – offering products at a different price according to the level of
demand and the customer’s ability to pay.

 Competitor based pricing - Prices are based on what other firms in the industry are
charging.

 Going concern pricing / Going rate policy - charging the same price as the
competing firms.
 Destroyer pricing/ Predatory pricing - this involves charging prices and
weaken smaller and less efficient rivals.
 Price leadership – it occurs where there is one dominant firms and all other
firms charge the same price that the market leader is charging.

 Pricing for new products

 Skimming pricing - involves charging a higher price when the product is new to
the market and later reducing the price when customers are used to the
products.
o The aims of market skimming are to maximise short-run profits before
competitors enter the market with a similar product.
o This pricing strategy also helps to create an exclusive image for the new
product
 Penetration - involves introducing the product at a low price to penetrate the
market and increase the price as the sales volume increase.
o Firms tend to adopt penetration pricing because they are attempting to
use mass marketing and gain a large market share.
o If the product gains a large market share, then the price could slowly be
increased during the growth stage of the product life cycle.

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Advantages and disadvantages of pricing strategies

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Promotional methods

Promotional objectives
 Raising consumer awareness of a new product
 Remind consumers of an existing product and its distinctive qualities
 Encourage increased purchases by existing consumers or attract new consumers
 Demonstrate the superior specification or qualities of a product compared to those of
competitors – Often used when the product has been updated or adapted in some way
 Create or reinforce the brand image or ‘personality’ of the product
 Correct misleading reports about the product or the business and reassure consumers
after a ‘scare’ or an accident involving the product
 Develop or adapt the public image of the business – rather than the product
 Encourage retailers to stock and actively promote products to the final consumer.

Advertising promotion

 Advertising is communicating information about a product or business through the

media, such as radio, TV and newspapers.
 Successful advertising campaigns have led to substantial increases in consumer
awareness and sales.
 Informative advertising – adverts that give information about a product to
potential purchasers, rather than just trying to create a brand image.
o This information could include price, technical specifications, main
features or places where the product can be purchased.
o It is most effective when promoting a new products that consumers are
unlikely to be aware of, or when communicating a substantial change in
price, design or specification.
 Persuasive advertising – adverts trying to create a distinct image or brand
identity for the product.
o They may not contain any details at all about the materials, ingredients
used, prices, or places to buy the product.
o Advertisements then try to create a perceived difference in the minds of
consumers.
o In reality, there is little difference between these two styles of advertising:
‘The more informative your advertising, the more persuasive it will be’
(David Ogilvy).

 Advertising agencies
 These are specialists that advise businesses on the most effective way to
promote products in return for a substantial fee.
 This can be important to a business that does not have its own marketing experts
or may be entering a new market.

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  These agencies will undertake the following stages in devising a promotional
plan:
o research the market, establish consumer tastes and preferences, and
identify the typical consumer profile
o advise on the most cost-effective forms of advertising media to be used
o use their own creative designers to design adverts appropriate for each
medium
o film or print the adverts to be used in the campaign
o monitor public reaction to the campaign and feed this data back to the
client.

 Advertising methods
 Print advertising - This includes advertising in newspapers, magazines and
specialist publications.
o It can be directed at particular towns or regions, or consumers who read
particular special interest.
o It provides hard copy, which can be cut out and kept by the consumer for
future reference.
o Limitations:
 It is expensive to gain national coverage.
 Evidence suggests that it is now much less effective with younger
consumers than digital communications.

 Broadcast advertising - This is advertising on TV and radio, and in cinemas.

o Adverts have visual appeal and can create a brand image through the
actors used.
o National or even international coverage is possible.
o It can linger in the memory of consumers for a long time if visually
dramatic.
o Limitations:
 It is expensive to buy media time.
 It is expensive to design and produce the adverts.
 There is no permanent hard copy.

 Outdoor advertising - This includes advertising on billboards and bus shelter

posters.
o It is low cost compared to other media.
o It can be located in prime positions with many potential consumers
passing by.
o It can be read/seen more than once.
o limitations:
 The best locations are the most expensive.
 It can be damaged or vandalised.
 Many passers-by will not notice this type of advertising.

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  Product placement advertising - Products are featured in TV shows and films.
o The chosen shows or films will be targeted at a particular type of
consumer.
o This creates a desirable image if the product is associated with famous
actors or shows.
o It is not explicit advertising. Some consumers assume the product is
being used because it is desirable, not because a business has paid for
the placement.
o Limitations:
 The show, film or actors may become less popular.
 It is very expensive if the show or film is well known.

 Guerrilla advertising - Products are advertised at surprising and unconventional

events to make the public take notice.
o It is low cost: graffiti paint on walls is low cost, but it is best to gain
permission first!
o It can be creative, inventive and can appeal to young consumers.
o It encourages word-of-mouth communication between potential
consumers.
o A staged event can receive free publicity from the media.
o Limitations:
 The message may be misunderstood.
 It may be considered irresponsible and lead to a negative
backlash.
 It may be remembered for the wrong reasons.

 Sponsorship - This involves payment by a business to become associated with

an event, an individual or a sports team.
o It could lead to the business logo appearing on a team’s shirts, for
example
o the good publicity of being associated with big sporting and other events
o global press and TV coverage of the largest events
o The success of the team or individual can lead to greatly increased
interest in the brand.
o Limitations:
 It can be very expensive, for example, it costs up to $15m to
sponsor a Tour de France team.
 Failure of the event, team or individual can reflect badly on the
brand.

 Digital advertising - This is a rapidly growing method of advertising

Methods of digital promotion
 Social media marketing - Social media is not just a marketing channel but
also a way for people to keep in touch with friends and family, read the latest
news or follow topics they are interested in.
o Provides a lot of options since there are many social media
platforms businesses can choose to use.
o Promotion managers need to consider Facebook, Twitter,
Instagram and other platforms, and decide which are most

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 relevant to the target group of consumers they are trying to
communicate with.
o Twitter and Facebook advertisements, hashtag campaigns and
influencer marketing are among the most popular methods of
social media marketing.

 Email marketing - Email marketing connects with customers within their own
mailboxes.
o It is a well-established method of increasing brand loyalty and
selling more products to existing customers.
o The businesses can reach out to customers through email
marketing, including:
 newsletter campaigns
 purchase confirmation emails
 thank you emails
 email notifications about new products.

 Online advertising - Displaying pop-up banners or advertisements on other

websites aiming at the same niche is the most common form of online
advertising.
o Businesses can use online platforms such as Google AdSense
that allows adverts to be automatically delivered to other content
sites.

 Smartphone marketing - This is becoming one of the most important

methods of digital promotion, especially to younger consumers.
o It includes:
 sending text messages to subscribers that can appeal to
potential consumers
 Providing them with free apps for all phone types which
can send real-time push messages to consumers’ phones
when new products are available on the company
website.
 Messaging platforms such as Messenger and Telegram
also allow marketing teams to create marketing bots
which are used to gain new customers.

 Search engine optimisation (SEO) - Businesses that use e-commerce (sell

online) locate their websites on search engines such as Google, Bing, Yahoo
and Baidu (China).
o They need to use SEO to make sure that their content appears
among the first results of a search.
o Without SEO, it is very difficult indeed for a business trading
online to remain competitive.

 Viral marketing - Viral marketing makes use of all types of digital marketing.
o The essence of viral marketing is to create a post, video, meme or
similar short form of content that spreads across the web like a
virus.

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 o To make a successful viral marketing campaign, businesses
promote the same content across multiple channels such as
Twitter, YouTube, blog posts and newsletters over a short period
of time.
o Marketing managers try to identify individuals with high social
networking potential, called influencers.
o The managers create viral messages that appeal to the
influencers. These have a high chance of being passed on to
many people who may be impressed that the influencer has
contacted them about the product.

Benefits of digital promotion

 Worldwide coverage
 Relatively low cost –digital marketing campaign can reach the right customers at a
much lower cost than traditional forms of advertising.
 Easy to track and measure results – web analytics and other techniques of measuring
response rates make it easy to establish how effective a promotion campaign has been.
 Personalisation Each customer can be made to feel that only they are being sent a
special offer.
 Social media communication builds customer loyalty – involvement with social
media and quick responses to customers’ messages can build customer loyalty and
create a reputation for being easy to converse with.
 Content marketing – This means producing varied content such as images, videos and
articles, which can help a business gain social currency, especially if it goes viral.
 Website convenience increases sales – It is more convenient too, unlike other forms
of media which require people to get up and make a phone call or go to a shop.

Limitations of digital promotion

 Time-consuming –tasks such as optimising online advertising campaigns and creating
marketing content can be time-consuming.
 Skills and training – employees must have up-to-date knowledge and expertise to carry
out digital marketing with success.
 Global competition – reaching a worldwide audience is easy but this means
competitors can do so too!
 Complaints and feedback – unhappy customers can quickly send out negative
messages about a business or its products.

Advertising methods: which one to use?

 The bigger the advertising budget, the more choice there is.
 Limited finance will restrict advertising to the forms of communication that cost the least.
 The advertising method chosen depends on:
 Cost: Marketing managers must compare the cost of each method, including
the cost per target consumer.
 The consumer profile of the target audience – age, income levels,
interests: - Advertising decisions must consider the target market.
 The message and image to be communicated: Written forms of
communication are likely to be most effective for giving detailed information
about a product.

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  Other aspects of the marketing mix: The links and integration between the
other parts of the marketing mix.
 Legal constraints: A widespread ban on tobacco advertising in Formula One
grand prix racing forced many sponsors to use other media for presenting
their cigarette advertising.

Sales promotion methods

 Sales promotion generally aims to achieve short-term increases in sales, whereas
advertising often aims to achieve returns in the long run through building customer
awareness of and confidence in the product.
 They include:
 price offers – temporary reductions in price
 loyalty reward programmes – consumers collect points or credits for purchases
and redeem them for rewards
 money-off coupons – redeemed when the consumer buys the product
 point-of-sale displays in shops
 BOGOF – buy one, get one free
 games and competitions on packaging.
 Sales promotion can be directed either at:
 the final consumer, to encourage purchase (pull strategy),
 or the distribution channel, for example the retailer, to encourage stocking and
display of the product (push strategy).

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Direct promotion methods
These methods do not use a paid-for medium, unlike advertising.
 Direct mail - Direct mail is sent out by post.
o This is low cost and well-defined areas/regions can be targeted.
o It is easy to evaluate the success of a campaign by checking response rates (e.g.
tear-off slips).
o Limitations:
 Many potential consumers now prefer digital communication.
 The mailing may be viewed as junk mail and quickly thrown away.

 Telemarketing - This includes all marketing activities conducted over the telephone
(often from customer call centres), including selling, market researching and promoting
products.
o Telemarketing can be outsourced to an agency. They may charge for the cost of
the script to be used and then on an hourly basis, or might charge for each cold
call that leads to an interested potential customer being contacted again.
o This is lower cost than personal selling.
o It is easy to monitor the response/rejection rate.
o Limitations:

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  Many consumers object to cold-calling.
 It is very easy for consumers to reject a telemarketing message.

 Personal selling - Salesperson is employed to sell to each individual customer.

o Sales success rates are often high with skilled direct-sales employees.
o It is often used for expensive industrial products.
o It is effective with expensive and complex products that require specialist
knowledge.
o Limitations:
 Customers may complain about being pressured into buying, especially if
the sales employees are paid a high bonus for each sale made.
 Sales employees need to be well trained.
 This is a high-cost method of promotion and selling.

Measuring success of promotions

 Sales performance before and after the promotion campaign
 Consumer awareness data - based on answers to a series of questions concerning the
advertisements they have seen and responded to.
 Consumer panels: These are useful for giving qualitative feedback on the impact of
promotions
 Response rates to advertisements: Newspaper and magazine adverts often have
tear-off slips for consumers to request more details.
 Social media feedback:

The role of Packaging in promotion

 Packaging is the material used to protect the contents of the product within. Packaging
has essential marketing benefits such as:
 It protects the contents within and prevents damage during transportation.
 It facilitates labelling which provides essential information to the consumer.
 It controls the quantity of the product. Portion control creates product consistency.
 Packaging helps promote the product. Colourful packaging can attract customers.
 Packaging can makes a product tamper resistant and this provides security to the
final consumer and even handlers especially on harmful products.

The role of Branding in promotion

 A brand is an identifying symbol, name, image or trademark that distinguishes a product
from its competitors. Branding is important in marketing because of the following:
 Boosts or creates awareness of the product.
 It enables easier product recognition
 It gives the product an identity that consumers can relate to.
 Brand offer protection from competitors because of trademark laws.
 Makes products easily recognisable from competitors.
 Makes it easier to introduce new products.
 Increases customer loyalty to the brand which reduces price elasticity of demand
as consumers
 Enables brand loyalty thereby resulting in repeat orders.
 Limitations
 Designing brands is expensive
 It is difficult to change as it creates a strong product association with customers.
 Bad publicity of one product may affect the whole family brand.

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Place (Channels of distribution)

 Any business, whether it produces goods or provides services, needs to establish a

distribution strategy.
 This explains how a product will move from the point of creation to points of consumption
in an efficient and low-cost manner so that it is convenient for the consumer to buy.
 The choice of distribution channel is important because:
 Consumers can benefit from easy access to products.
 Manufacturers need outlets for their products that give a wide geographical
market coverage.
 Retailers, which sell goods to the final consumer, add on a mark-up to cover their
costs and make a profit.

Channels of distribution
Channel distribution refers to a chain of intermediaries a product passes through from the
producer to the final consumer.
Direct selling

Simple intermediary channel

Two intermediary’s channel

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119
E-commerce

This is one of the fastest-growing ways of selling and distributing to customers online.

Factors determining the choice of a channel

 Nature of products - industrial products are sold through shorter channels whilst
consumer products are sold through longer channels for a wide spread distribution.
 Type of product – perishable goods may require shorter channel of distribution while
durables can be distributed using a longer channel.
 The market - Geographically concentrated markets use shorter channels than dispersed
markets with large numbers of customers.
 The desire by manufacturers to exercise control-if the producer wishes to exercise
control he will distribute through his own outlets or dealers.
 Channels adopted by competitors-a firm can copy the methods used by a competitor
or may form unique strategies.
 Marketing strategy – a firm may choose to align its distribution channel with its
marketing strategy
 Producer or customer preferences

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Digital and physical distribution

 Products that can be converted into digital format are now being widely
distributed to consumers by digital means over the internet rather than in a
physical form.
 Digital distribution bypasses the traditional physical distribution formats, such
as paper, optical discs and film cassettes.
 The processes involved in digital distribution include streaming and downloading
of content.
 The key difference is that a streaming file is simply played as it becomes
available, while a download is stored onto a computer’s memory.
 Both processes involve the act of downloading, but only a download leaves the
consumer with a copy that can be accessed at any time from the device without
having to download the data again.
 The promoters of this form of distribution claim that music writers or music
performers of the content can:
 get their music output distributed globally on platforms such as iTunes,
Spotify and Google Play
 avoid the high costs of traditional physical distribution such as transport
and inventory holding costs
 expand a global fan base
 keep 100% of the revenue earned
 achieve a low carbon footprint method of distribution (e.g. no transport and
no packaging)

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Using the Internet for the 4Ps/4Cs

 Online advertising – it involves the use of internet and mobile advertising by using
banners in the company website or pop us that appear in other websites.
 Catalogues – this is when the business makes a list of products or services available to
the buyer presented over the internet.
 Dynamic pricing – it involves using online data about consumers to charge different
prices to different customers over the internet
 Distribution – it involves the use of online platforms deliver products to the customer
e.g. video games, Songs, eBooks, Videos etc. These products can be downloaded
online.
 Social media – it involves online advertising that focuses on social media platforms
such as Twitter, Facebook etc.
 Viral marketing – it involves the use of social media or text messages to increase brand
awareness of products. It can be in the form of video clips or text messages. The
business can use influencers (people with a large social media following) and create
messages that appeal to them and have a chance of being of being passed on to many
people.
 E-commerce – selling goods directly to customers or other businesses as orders are
placed online through the company website or through an online retailer such as
Amazon.

Consistency in marketing mix

It is important that customers get the same message and not confusing messages. All elements
of the marketing mix should be integrated and communicate the same message.

Effects of a marketing mix that is not integrated

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 Operations Management

 Operations management can be defined as the designing, planning, controlling, and

scheduling of any production system that converts desired inputs into desired outputs.
 Operations management is concerned with the use of resources called inputs to provide
output in the form of goods and services.
 It is concerned with the use of resources i.e. land, labour and capital to provide goods
and services that satisfy customers’ needs.

Resources needed in production

 Land – these are the natural resources that are used in the production process e.g.
water, minerals etc.
 Labour – this is the manual labour of a gardener to the mental skills of a scientist.
 Capital – it refers to the tool, machinery, computers and other equipment that the
business needs for production.
 Enterprise - the decision-making skills and risk-taking qualities of entrepreneurs are
essential for new business formation.
 Intellectual capital involves expertise need in the production process and is achieved
by from training employees, hiring better employees and developing new patents.

Stages of the transformational process

 The way businesses change factors of production into finished goods is called the
transformational process.
 The starting points of this process are the factors of production or inputs.
 These are converted, by an operations department, into outputs.

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The contribution of operations to added value

Operations managers can increase added value by effectively managing:

 Efficiency of production: keeping costs as low as possible will help to give competitive
advantage. By reducing waste, the operations department will increase the value.
Increasing productivity will reduce costs per unit and this will increase added value if
customer prices remain unchanged.
 Quality: the goods or services must be suitable for the purpose intended. Quality
features that will enable a high price to be charged.
 Flexibility and innovation: the need to develop and adapt to new processes and new
products is increasingly important in today’s dynamic business environment

Operations managers aim to produce goods and services of the required quality, in the required
quantity, at the time needed, in the most cost-effective way.

Efficiency, effectiveness, productivity and sustainability

The importance of efficiency, effectiveness, productivity and sustainability

 Efficiency is measured by productivity.

 Effectiveness is achieved when customer needs are met.
 Effectiveness is meeting objectives other than just being efficiency e.g. a firm might
reach the highest level of productive in producing and old model of cars that customers
no longer like, in this case they are efficient but not effective.

Production and Productivity

Labour productivity =

Capital productivity =

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Ways of increasing Productivity
Improvement in the productivity leads to low cost. Productivity might be increased by employing
fewer but skilled labour and using fewer but more technological advanced machines. Factors
that influence productivity levels:

 Training of staff to raise skills level.

 Purchase of more technologically advanced machines.
 Improved employee motivation through participation and fringe benefits.
 More efficient managers.
 Division of labour and specialisation.
 Adequate maintenance of machinery and equipment.

Raising productivity does not guarantee success

 If the product is unpopular with consumers, it may not sell profitably no matter how
efficiently it is made.
 Greater effort from workers to increase productivity could lead to demands for higher
wages.
 Workers may resist measures to raise productivity.
 The quality of the management determines the success of a policy to increase
productivity.

The importance of sustainability of operations

 Growing global concern about pollution and climate change has put pressure on
businesses to clean up their operations.
 Businesses are becoming increasingly focused on achieving sustainability of
operations. They can do this in a number of ways, by:
 reducing energy use and carbon emissions
 reducing the use of plastic and other non-biodegradable materials
 using recycled materials
 manufacturing products that are recyclable

Labour intensive and capital intensive operations

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The benefits and limitations of capital intensive operations

The benefits and limitations of labour intensive operations

Operations methods

Job production

 Products are unique e.g. wedding rings, made-to-measure clothes

 Usually labour intensive
 Labour is used is highly skilled
 Production method tends to be slow

Advantages
 The product meets the exact requirement of the customer
 Workers will have more varied jobs as each order is different, improving morale
 The method is very flexible meaning that changes can be implemented in a short
space of time.
 Goods produced are unique.
 There is production of high quality goods
 It encourages personal contact between the business and the customers.

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 Disadvantages
 It requires use of highly skilled labour which is expensive
 Costs are higher for job production firms because they are usually labour-
intensive.
 Production often takes a long time
 Since output is produced or made to order, it may be expensive to correct errors.
 High costs incurred on materials because each customer has own specifications.
 Business may not benefit from discounts in the purchase of materials since the
business orders in small quantities.

Batch production

 Involves producing products in separate groups

 Every unit in the batch has must go through an individual production stage before the
batch as a whole moves to the next stage e.g. small bakery.
 It allows each batch to be matched to the demand
 There is usually high levels of work in process
 Some businesses produce batches using flow production e.g. soft drinks

Advantages
 It reduces unit cost since a large amount of output is produced.
 Specific customer needs are met for instance size, weight and style.
 It is flexible since production can be easily switched from one product to another.
 It gives variety the worker’s job.
 It allows more variety to products which would otherwise be identical and this gives
more choice for consumers.

Disadvantages
 There is delay in production, when switching from one batch to another.
 Space is needed for storing raw materials and components.
 Finished goods may also be stored until they are sold which is very expensive (high
storage cost).
 It can be expensive as semi-finished or finished products will need moving about.

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Flow production

 Products move stage by stage without having to wait for each other.
 Large quantities of output are produce in a short space of time.
 It is well suited for products with high demand.

Advantages

 There is production of high output which makes it easier for the firm to meet demand
 Unit costs are low and therefore lower prices
 The use of machinery reduces labour costs.
 The firm may benefit from economies of scale from the production of higher output.
 Goods are produced quickly and cheaply.
 There is no need to move from one factor to another as with batch production, so
time is saved.

Disadvantages

 There is little job satisfaction and motivation since the system is boring for workers as
they may be doing repetitive tasks.
 There are high storage costs since there are significant storage requirements for raw
materials and output.
 The capital costs of setting up the business may be too high since a lot of machinery is
required.
 If one machine breaks down, the whole production line will have to be stopped.

Mass customisation

 It combines the latest technology with multi skilled labour force to use production lines to
make a range of varied products.
 It involves just changing a few key components in order to suit specific customer needs
e.g. Dell can manufacturer a computer according to specific customer needs in a few
hours.
 Mass customisation requires:
 advanced and flexible capital equipment
 skilled and well-trained workers to operate this machinery
 product designs that have many standardised parts but some interchangeable
ones
 suppliers able to supply variations on parts and components

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Advantages
 combines low unit costs with flexibility to meet customers’ individual requirements

Disadvantages
 Expensive product redesign may be needed to allow key components to be changed to
allow variety
 Expensive flexible capital equipment needed.

Factors influencing choice of production/operations methods

 Size of the market - if the market is small then job production is likely to be used. Flow
production is used when the market for similar products is constant throughout the year.
 Amount of capital available - line production is difficult and expensive to construct
therefore small companies are unlikely to afford this type of investment and are likely to
use job production.
 Availability of resources - Large scale line production often requires a supply of
relatively unskilled workers and a large flat area. On the other hand job production
requires skilled labour therefore as to which method to adopt will depend on availability
of such resources.
 Availability of other resources – some methods of production may require skilled
labour and the unavailability of such labour may influence the firm to choose another
method.
 The extent of variety required by the consumers

Problems of changing from one method to another

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Managing inventory

Purpose of Inventory includes:

 Raw materials and components – They will be held in storage until they are used in the
production process. They ensure smooth production in order to meet demand.
 Work in progress – emanates from the production process.
 Finished goods – Having been through the complete production process, goods may
then be held in storage until sold and dispatched to the customer. They are held in
storage for displays and to meet changes demand

Inventory management

Without effective inventory management serious problems can arise:

 There might be insufficient inventories to meet unforeseen changes in demand.
 Out-of-date or obsolete inventories might be held if an effective rotation system is not
used.
 Inventory wastage might occur due to mishandling or incorrect storage conditions.
 High inventory levels have high storage costs and a high opportunity cost.
 Poor management of the supply purchasing function can result in late deliveries, low
discounts from suppliers or a delivery too large for the warehouse to cope with.

Costs and benefits of inventory

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Optimum stock level

Inventory control charts

Buffer stock – is the minimum stock level held for uncertainties such as unexpected demand
and late deliveries.

Lead time – time taken between ordering time and delivery time of the inventory

Maximum stock level – is the highest amount of inventory that the firm cannot exceed given
its warehouse capacity

Reorder level – it is a stock level that should trigger the firm to purchase new stocks

Order quantity – this is a fixed amount of stock that the business that buys every time
they reach the reorder level

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Factors influencing the stock levels
 Businesses should try as much as possible to hold minimum levels of stock however if
they become too low, the operation of the business may be affected.
 The minimum or maximum stock levels will depend on the following:
 Storage space and costs.
 Opportunity costs of the space to other alternatives.
 Lead times-this is the interval between the identification of the need to order and
the time stocks arrive. The longer the lead time the higher the minimum level of
stock to be held by the business.
 Capital available-this determines the level of stock to be held since stocks
involves a capital outlay.
 The type of stock-whether there are perishable or durables. Low levels will be
required for perishables since they can easily go bad if they are stored for longer
periods of time.
 Purchasing power-this depends on the business’ ability to buy in bulk i.e. does it
afford to buy in bulk.
 External factors-viral diseases, wars, drought etc may affect the minimum stocks
of the business.

Importance of supply chain management

 Operational efficiency can be improved by managing the supply chain with the aim of
minimising costs and improving customer service.
 Supply chain management aims to reduce this time period by:
 establishing excellent communications with supplier companies, which helps to
ensure the right number of goods of the right quality are received exactly when
needed
 cutting the time taken to deliver all materials required for production by improving
transport systems
 speeding up the new product development process to improve the
competitiveness of the business
 speeding up the production process with technology and flexible workforces
 minimising waste at all production stages to cut costs

Inventory control methods

Just in time inventory control

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Comparing JIT with just-in-case inventory management

 JIT contrasts with the traditional method of managing inventory, which focuses on never
running out of inventory by holding high buffer inventory levels.
 Just-in-case (JIC) inventory management means holding more inventory than is
usually required ‘just in case’ there is a hold-up in supplies or an unforeseen increase in
demand.
 The business world is constantly seeking ways to reduce costs and increase efficiency,
so JIT is now much more common than JIC in industries in all economic sectors.

Just in case

The success of JIT depends on:

 Excellent relationships with suppliers
 Production staff has to be multi skilled and prepared to change jobs at short notice
 Equipment must be flexible
 Accurate demand forecasts
 Adapting latest IT equipment – for accurate data based records
 excellent employer-employee relationships
 Quality must be everyone’s priority

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Conditions for JIT to operate successfully

 Excellent supplier relationships

 Production employees must be multi-skilled and flexible
 Equipment and machinery must be flexible
 Accurate demand forecasts
 IT equipment is needed for JIT
 Excellent employee–employer relationships
 Quality must be everyone’s priority

Measurement and significance of capacity utilisation

 The maximum capacity means the total possible level of sustained output a business
can achieve in a given time period.
 Capacity utilisation measures the proportion of that capacity that is currently being used.
 Capacity utilisation is calculated by the formula:

 Capacity utilisation is a major factor in determining the operational efficiency of a

business.
 If a business is working at full capacity, it is achieving 100% capacity utilisation. There is
no spare capacity.
 Capacity utilisation rates are used by analysts to compare how one business or factory
is performing compared to the average, or how capacity utilisation differs from previous
periods.

Benefits of full capacity utilisation

 When capacity utilisation is at a high rate, the fixed costs of rent and machinery
depreciation are spread over a large number of units. Average or unit fixed costs will be
relatively low.
 Employees feel their jobs are secure and may have a sense of pride that the products
they produce are so popular.

Limitations of full capacity utilisation

 Employees may feel under pressure due to the workload and this could raise stress
levels.
 Operations managers cannot afford to make any production scheduling mistakes, as
there is no slack time to make up for lost output.
 Regular customers who wish to increase their orders will have to be turned away or kept
waiting for long periods.
 Machinery will be working continuously and there may be insufficient time for
maintenance and repairs.

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Operating at over maximum capacity
 Full capacity is the highest output level that can be maintained (sustained) over a
reasonable period of time.
 It might be possible, during emergency situations, to achieve higher output levels for
very short time periods.
 This could be done by using machines beyond their safe working limits and by asking
labour to work longer than the contractually permitted hours.
 This situation is not sustainable or recommended since it could result both in machines
breaking down, and in workers being too stressed to sustain high levels of output in
future.

Operating at under maximum capacity

 When a business is operating at less than full capacity it means that there is excess
capacity.
 Low levels of capacity utilisation lead to high unit fixed costs.
 Options for improving capacity utilisation depend on whether the excess capacity is a
short-term or long-term problem.
 Short-term excess capacity
o This might be caused by low seasonal demand.
o Options for improving capacity utilisation in the short term include:
Maintaining high output levels. This strategy adds to inventories
and could be expensive and risky if sales do not recover.
Adopting a more flexible production system, allowing other
products to be made that could be sold at other times of the year.
Insisting on flexible employment contracts so that, during periods
of low demand and excess capacity, workers work fewer hours to
reduce capacity and costs.
 Long-term excess capacity
o This might be caused by an economic recession or technological changes
which reduce demand for a business’s existing products.
o Options a business has when experiencing long-term excess capacity.

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Capacity shortage
 Capacity shortage is when business is faced by demand for its products that exceeds
current output capacity.
 The management options will depend on the cause of the excess demand and the time
period it is likely to last.
 For instance, if excess demand can be short term e.g. reduction in output caused by a
faulty machine or the firm has been producing at near 100% capacity for some time and
there seems to be no sign of demand falling.
 Long term capacity shortages require long-term options to be considered.
 Increase the scale of operation by acquiring more production resources
 Outsource or subcontract more work to other businesses
 Not to expand perhaps because of the danger that demand might fallback in the
near future

 The final decision will depend on many factors such as:

 The cost of expanding the scale of operations.
 The time factor - may be quicker to place work contracts with outside firms than
to build a new factory.

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Benefits of outsourcing:
 Reduction and control of operating costs - Instead of employing expensive
specialists who might not be required at all times.
 Increased flexibility - If demand falls, contracts can be cancelled much more quickly.
 Improved company focus - management can concentrate on the main objectives and
tasks of the business.
 Access to quality service or resources – these may not available internally.
 Freeing up internal resources for use in other areas.

Limitations
 Loss of jobs within the business - Workers who remain directly employed may
experience a loss of job security.
 Quality issues - The quality levels of the goods or services being outsourced will be
difficult to check on.
 Customer resistance - Customers may object to dealing with overseas outsourced
operations.
 Security - Using outside businesses to perform important IT functions may be a security
risk.
 Corporate social responsibility (CSR) - Using outsourced contracts, especially in low-
wage economies, means that the business is less able to ensure that its CSR policy
towards workers or the environment is being upheld.

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 Finance and Accounting

Business finance

The need for business finance

 Setting up a business - this requires start-up capital of cash injections from the
owner(s) to purchase essential capital equipment and, possibly, premises.
 Working capital – finance can be used for the day-to-day finance needed to pay bills
and expenses and to build up stocks.
 Business expansion – business needs finance to increase the capital assets held by
the firm – and, often, expansion will involve higher working capital needs.
 Promotional activities – finance may be required when faced with a decline in sales to
conduct the promotional activities.
 To sustain business stocks and special situations – An economic recession, could
lead to cash needs to keep the business stable; or a large customer could fail to pay for
goods, and finance is quickly needed to pay for essential expenses.
 To develop new products.
 To buy or replace fixed assets

The distinction between short and long term need for finance

 No single source or type of finance is likely to be suitable for all business needs.
 Managers have to decide which type and source of finance is best in each situation.
 Short-term loans are helpful to businesses that experience seasonal demand, such as
retail businesses in a tourist region, which have to hold more inventories for the holiday
season. Such a business might need a short-term loan to buy inventory before the
busiest months.
 When a business is expanding by buying more buildings and equipment, a short-term
loan of less than one year would be inappropriate. The chances of being able to pay
back a short-term loan from the income earned on these assets in just one year would
be small. In this case long-term finance will be required.
 A business may need short term finance for paying small sums of money and revenue
expenditures like suppliers, wages etc.
 However long term sources of finance may be required to finance large sums of money
and capital expenditures like buying an asset, expansion etc.

The difference between cash and profit

 Many business failures result from owners and managers not understanding the
difference between cash and profit.
 It is very common for profitable businesses to run short of cash.
 On the other hand, loss-making businesses can have high business inflows of cash in
the short term.
 The essential difference between cash and profit can be explained by the following:
 Credit sales – increase profits but not liquidity

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  High stocks levels – overstate profits but represent too much money tied on
inventories
 Too much money tied in debtors
 Shorter creditors payment periods
 Purchase of assets on cash basis – does not affect the firm’s profitability but
its bank and cash balances

Business failure as a consequence of lack of finance: bankruptcy, liquidation and

administration

 Lack of finance is the single most common cause of business failure.

 If a business fails due to lack of finance, it is often placed in administration. Specialist
administration accountants are appointed to try to keep the business operational and to
find a buyer for it.
 If this proves impossible, then bankruptcy will result. This means that a legal process
begins which will lead to liquidation of the assets of the business.
 The aim of liquidation is to raise as much finance as possible to pay back those people
and companies the bankrupt business owes money to.

Working capital

The meaning of working capital

 Working capital is the capital needed for day-to-day running of the business such as
paying for raw materials. It is calculated as:

Working capital = current assets − current liabilities

 Current assets - these are resources that can be easily converted into liquid
cash. Examples include debtors, stock, cash at bank, prepayments, income
accruals and cash in hand.
 Current liabilities - they are short term owings of the business that usually fall
due within a period of only one year. They include creditors, accruals of
expenses, overdrafts and declared but not yet paid dividend.

Importance of working capital

 Without sufficient working capital, a business will be illiquid and unable to pay its
immediate or short term debts.
 This will force the business to raise finance quickly, for example as a bank loan, or it
may be forced into liquidation or administration by its creditors (the firms it owes money
to).
 A high level of working capital can also be a disadvantage. There is an opportunity cost
of having too much capital tied up in inventories, accounts receivable and idle cash.
 It is likely that this money could earn a higher return elsewhere in the business, possibly
by being invested in fixed assets.
 The working capital requirement for any business will depend upon the length of its
working capital cycle. The longer the time period from buying materials and paying for
them to receiving payment from customers, the greater the working capital needs of the
business.

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  Therefore working capital is important for the following reasons:
 It maintains solvency and continuity of operations.
 Sound working capital helps the firm to secure loans.
 Used to pay dividends to shareholders.
 Used to pay salaries.
 Used to buy raw materials

Managing working capital

 Managing the level of working capital can be achieved by managing inventory, managing
trade payables and/or managing trade receivables (debtors who owe the business
money).

 Inventory can be managed in the following ways:

 Keeping smaller inventory levels
 Using computer systems to record sales and inventory levels, and to order
inventory as required.
 Efficient inventory control, inventory use and inventory handling so as to reduce
losses through damage, wastage and shrinkage.
 Minimise the working capital tied up in inventories by producing only when orders
have been received (just-in-time inventory ordering)
 Getting goods to customers as quickly as possible to speed up payments from
them.

 Trade payables can be managed by:

 Delaying payments to suppliers to increase the credit period
 Only buying goods from suppliers who will offer credit.

 Trade receivables can be managed by:

 Only selling products for cash and not on credit.
 Reducing the credit period offered to customers.

Capital and Revenue Expenditure

 Capital expenditure is money spent on the purchase of assets or adding value to

assets. Capital expenditure is usually once off. Examples include purchase of motor
vehicles, painting the premises etc.

 Revenue expenditure is money spent on the day to day running of a business. It

involves expenses that do not add value to an asset. Revenue expenditure is usually
frequent. Examples include wages, repainting the premises etc.

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Sources of finance

Business ownership and sources of finance

 Business ownership has a big impact on the sources of finance available to any
particular firm e.g. sole traders and partnerships cannot sell shares to raise capital.

Finance for limited companies

Internal sources of finance

 Retained earnings (retained profit) – The remaining profit after paying tax to the
government (corporation tax) and dividends to the shareholders is kept or retained in the
business becomes a source of finance for future activities. However retained profits may
not be available to companies trading at a loss and or newly formed company.
 Sale of unwanted assets – This involves raising cash by selling assets that are no
longer fully employed.
 Sale and leaseback of non-current assets – Some businesses will sell non-current
assets that they still intend to use, but which they do not need to own. The assets could
be sold to a specialist financial institution and leased back by the company.
 Working capital – It involves cutting down on working capital e.g. cutting back on
current assets by selling inventories or reducing trade receivables.

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Short-term external sources of finance

 Bank overdrafts - The bank allows the business to overdraw on its account at the bank
by making payments up to a greater value than the balance in the account. This
overdrawn amount should always be agreed in advance and always has a limit beyond
which the business should not go.
 Trade credit – This source of finance involves suppliers supplying goods and
services without receiving immediate payment.
 Debt factoring – it involves selling trade receivables to a debt factor. In this way
immediate cash is obtained, but not for the full amount of the debt. This is because the
debt factoring company’s profits are made by discounting the debts and not paying their
full value. Firms opt for debt factoring since it is commercially unwise to insist on cash
payments or to ask customers to pay before their accounts are due.

Long-term external sources of finance

 Hire purchase - This is a form of credit for purchasing an asset over a period of time.
This avoids making large initial cash payment to buy the asset.
 Leasing - Leasing involves a contract with a leasing company to acquire an asset, but
not necessarily to purchase it. Leasing allows businesses to avoid the cash purchase of
the asset. Leasing can be a high-cost option, but it reduces the inconvenience of having
to repair, maintain and sell the asset.
 Bank (long-term) loans – These are large sums of money offered at either a variable or
a fixed interest rate. Companies borrowing from banks will often have to provide security
or collateral for the loan.
 Debentures - A company wanting to raise funds can issue or sell debentures to
interested investors. The company agrees to pay a fixed rate of interest each year for
the life of the debenture, which can be up to 25 years. The buyers may resell to other
investors if they want to raise cash before the debenture matures. Debentures can be a
very important source of long-term finance.
 Business mortgages - Banks and other financial institutions may offer loans to a
business specifically for the purpose of buying premises and these are called business
mortgages. The loan will be secured by the property as the lender will sell the property if
the business fails.
 Share or equity capital - All limited companies issue shares when they are first formed.
Both private limited and public limited companies are able to sell additional shares – up
to the limit of their authorised share capital. This capital never has to be repaid unless
the company is liquidated as a result of ceasing to trade.
 Private limited companies can sell further shares to existing shareholders. This
has the advantage of not changing the control or ownership of the company, as
long as all shareholders buy shares in proportion to those already owned.
 Owners of a private limited company can also decide to go public and obtain the
necessary authority to sell shares to the wider public.
 Selling shares to the public can be done in two ways:
o Public issue by prospectus
o Rights issue of shares to existing shareholders

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  Government grants - These are funds that are given under certain circumstances and
often come with conditions attached, such as location and the number of jobs to be
created, but if these conditions are met, grants do not have to be repaid.
 Venture capital – These are funds provided by venture capitalists (these can be
specialist organisations or wealthy individuals) who invest in small companies that are
not listed on the Stock Exchange (unquoted companies). They are prepared to purchase
shares in, business start-ups or small to medium-sized businesses that find it difficult to
raise capital from other sources but the rewards can be great.

Finance for unincorporated businesses

 Unincorporated businesses – sole traders and partnerships – cannot raise finance from
the sale of shares.
 They are unlikely to be successful in selling debentures as they are likely to be relatively
unknown firms.
 These businesses can obtain finance from:
 Bank overdrafts and bank loans, including microfinance
 Crowd funding – it refers to funds that have been raised from a large pool
of individuals using crowd funding websites. Crowd funding websites allow
an individual to promote their new business idea to many thousands perhaps
millions – of people, who may be willing to each invest a small sum of money.
The idea behind it is that entrepreneurs rarely have sufficient finance to set up
their own businesses and banks may be unwilling to lend or may charge very
high interest rates, especially if the entrepreneur has no proven business record.
Crowd funding investors are, in effect, just making a donation.
o If successful, the crowd funding investors will receive either:
their initial capital back plus interest
an equity stake in the business and a share in profits when these
are eventually made.

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  Credit from suppliers (trade payables)
 Loans from family and friends
 Owners’ investment
 Taking on partners with capital to invest.
 Microfinance - provides small capital sums to entrepreneurs in relatively low-
income countries.

 All owners or partners in an unincorporated business have unlimited liability. Lenders are
often reluctant to offer loans or overdrafts to unincorporated businesses unless the
owners give personal guarantees, supported by their own assets, should the business
fail.
 Owners may have insufficient savings to invest in the business.
 Grants are available to small and newly formed businesses as part of most
governments’ assistance to small businesses.

Factors influencing the sources of finance

Selecting the source of finance

The appropriateness of each possible source in a given situation

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Cash flow forecasts

 A cash flow forecast is an estimate of future cash inflows and outflows of a business,
usually on a month-by-month basis.
 It clearly shows the expected cash balance at the end of each month.
 Forecasting cash flow means trying to estimate future cash inflows and cash outflows,
usually on a month-by-month basis.

Purpose

 For any business to survive, having sufficient cash to pay suppliers, banks and
employees is the single most important financial factor.
 Without positive cash flow, any company – no matter how promising its business model
– will become insolvent and bankrupt.
 The planning of cash flows using cash flow forecasts is particularly important for
entrepreneurs starting a new business because:
 New business start-ups are often offered much shorter credit to pay suppliers
than larger, well established firms.
 Banks and other lenders will need to see evidence of a cash flow forecast before
making any finance available.
 Finance is often very tight at start-up, so accurate planning is much more
significant for new businesses.

Interpretation of cash flow forecasts

Cash inflows
 Owner’s own capital injection: This is easy to forecast as it is under owner’s direct
control.
 Bank loan payments: These are easy to forecast if they have been agreed with the
bank in advance, in terms of both amount and timing.
 Customers’ cash purchases: These are difficult to forecast as they depend on sales,
so a sales forecast will be necessary.
 Trade receivables payments: These are difficult to forecast as they depend on two
unknowns. The proportion of sales that will be on credit and when will trade receivables
(debtors) actually pay.

Cash outflows
 Lease payment for premises: This is easy to forecast as it will be in the estate agent’s
details of the property.
 Annual rent payment: This is easy to forecast as this will be fixed and agreed for a
certain time period. However, the landlord may increase the rent after this period.
 Electricity, gas, water and telephone bills are difficult to forecast as these will vary
with many factors, such as the number of customers, seasonal weather conditions and
energy prices.
 Wage payments: These forecasts will be based largely on demand forecasts and the
hourly wage rate that is to be paid. These payments could vary from week to week if
demand fluctuates and if staff are on flexible contracts.
 Cost of materials and payments to suppliers: The cost of materials should vary with
the level of output or sales.

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Amendment of simple cash flow forecasts: calculating opening and closing

The structure of cash flow forecasts

 Cash flow forecasts have three basic sections:
 Cash inflows: This section records the cash payments to the business, including
cash sales, payments for credit sales, and capital inflows.
 Cash outflows: This section records the cash payments made by the business,
including wages, materials, rent and other costs.
 Net cash flow and opening and closing balance: This shows the net cash
flow for the period and the cash balances at the start and end of the period.

Benefits of cash flow forecasting

 They show negative closing cash flows. This means that plans can be made to source
additional finance.
 They indicate periods of time when negative net cash flows are excessive. The business
can plan to reduce these by taking measures to improve cash flow.
 They are essential to all business plans. A business start-up will never gain finance
unless investors and bankers have access to a cash flow forecast and the assumptions
behind it.

Limitations of cash flow forecasting

 Many factors can change and therefore affect the accuracy of a cash flow forecast.
 Mistakes can be made in preparing the revenue and cost forecasts
 Unexpected cost increases lead to major inaccuracies in forecasts.
 Incorrect assumptions can be made in estimating the sales of the business, perhaps
based on poor market research.

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Causes of cash flow problems

 Lack of planning - Some businesses have insufficient plans for cash flow management
and this is a major cause of cash flow problems.
 Poor credit control - If this credit control is badly managed, then trade receivables will
not be chased for payment and potential bad debts will not be identified.
 Allowing customers too long to pay debts - Allowing customers too long to pay
means reducing short-term cash inflows, this leads to cash flow problems.
 Expanding too rapidly - This overtrading can lead to serious cash flow shortages
even though the business is successful and expanding.
 Unexpected events - Unforeseen increases in costs could lead to negative net cash
flows not being indicated on the original cash flow forecast

Methods of improving cash flows

Methods of improving cash inflows

Improving cash flow by managing trade receivables

 Not extending credit to customers or asking customers to pay more quickly

 Selling claims on trade receivables to specialist financial institutions called debt factors
 Finding out whether new customers are creditworthy
 Offering a discount to customers who pay promptly

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Methods to reduce cash inflows

Improving cash flow by managing trade payables

 Purchasing more supplies on credit and not cash

 Extend the period of time taken to pay

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 Costs

The need for accurate cost data

 Business costs are a key element in the calculation of profits. Profits or losses cannot be
calculated without accurate cost data
 Cost data is important to the marketing department in making pricing decisions.
 Keeping cost records also allows comparisons to be made with past periods of time in
order to enhance efficiency of departments.
 Past cost data can help to set budgets for the future (incremental budgeting).
 Cost variances can be calculated by comparing cost budgets with actual data.
 Comparing cost data can help a manager make decisions about resource use e.g. if
wage rates are very low, then labour-intensive methods of production may be used.
 Calculating the costs of different options can assist managers in their decision making
and help improve business performance.

Different types of costs

 Direct costs - these costs can be clearly identified with each unit of production and can
be allocated to a cost centre e.g. cost of raw materials.
 Indirect costs - these are costs which cannot be identified with a unit of production or
allocated accurately to a cost centre. They are also known as overhead costs e.g.
supervisor’s wages.
 Fixed costs – these are costs that do not vary with output in the short run e.g. rent for
the premises.
 Variable costs – these are costs that vary with output e.g. raw materials used.
 Marginal costs – it is the extra cost of producing one more unit of output.

Problems in classifying costs

 Labour costs are often variable and direct costs. But, when labour is unoccupied
because of a lack of orders, most businesses continue to pay workers in the short run.
Wages then become a fixed cost.
 Electricity costs in a busy factory could be directly allocated to each range of products
made. Electricity costs would normally be classified as an indirect overhead expense.

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Approaches to costing

 Calculating the cost of each product (or department, process or location) is not easy.
 Managers use two main methods to help with this costing process: full costing and
contribution costing.

Costing methods: a major problem

 In calculating the cost of a product, both direct labour and direct materials should be easy
to identify and allocate to each product.
 Overheads, or indirect costs, cannot be allocated directly to particular units of production.
They must be shared between all of the items produced by a business.
 There is more than one way of sharing or apportioning these costs and, therefore, there
may be more than one answer to the question: ‘How much does a product cost to
produce?’

Cost centres
 Cost centre is a section of a business, such as a department, to which costs can be
allocated or charged.
 Examples of cost centres are:
 In a manufacturing business: products, departments, factories, etc.
 In a hotel: the restaurant, reception, bar, room letting etc.
 In a school: different subject departments.

Profit centres
 Profit centre is a section of a business to which both costs and revenues can be
allocated.
 Examples of profit centres are:
 Each branch of a chain of shops
 Each department of a department store
 In a multi-product firm, each product in the overall portfolio of the business.

The benefits of using cost and profit centres are:

 Managers and employees have targets to work towards.
 These targets can be used to compare with actual performance and help identify those
areas that are performing well and not so well.
 The individual performances of divisions and their managers can be assessed and
compared.
 Work can be monitored and decisions made about the future.

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Full costing technique
 Full costing allocates all costs to each product.
 It allocates all costs incurred i.e. fixed costs and variable costs to be included in costing
a product.
 The stages in full costing are:
 Identify and add up all of the direct costs.
 Calculate the total overheads of the business for a given time period.
 Add the total direct costs of making the product.
 Calculate the average cost of producing each product by dividing total costs by
output.

Uses of full costing

 Full costing is particularly relevant for single-product businesses and is a is a good basis
for pricing decisions in single-product firms.
 There is no uncertainty about the share of overheads to be allocated to the product.
 All costs are allocated so no costs are left out of the calculation of total full cost or unit
full cost.
 If the full unit cost is calculated, this could then be used for cost-plus pricing.
 Full costing data can be compared from one time period to another to assess
performance, as long as the same method of allocating overheads is used.

Limitations of full costing

 There is no attempt to allocate each overhead cost to cost centres or profit centres on
the basis of actual expenditure incurred. e.g. a product may take up a large proportion of
factory space but use low-cost and easy-to-maintain machinery.
 Inappropriate methods of overhead allocation can lead to inconsistencies between
departments and products.
 It can be risky to use this cost method for making decisions. The cost figures arrived at
can be misleading.
 The full unit cost will only be accurate if the actual level of output is equal to that used in
the calculation. A fall in output will push up the allocated overhead costs per unit.

Contribution costing
 Contribution costing/Marginal costing is a costing method that only allocates direct costs
to cost/profit centres not overhead costs.
 This method costing method ignores fixed costs but only considers variable costs of
production.
 The method concentrates on the following concepts:
 Marginal cost is the cost of producing an extra unit. This extra cost will clearly be
a variable direct cost.
 The contribution to fixed costs and profit. This is the revenue gained from selling
a product less its variable costs. This is not the same as profit

Difference between contribution and profit

 The contribution of a product is the revenue gained from selling a product less its
marginal (variable/ direct) costs. This is not the same as profit. Profit can only be
calculated after overheads have also been deducted

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Benefits/Importance of marginal costing can be applied
 Helps the firm in making decisions such as:
 Accept or reject an order at below normal selling price.
 Make or buy decisions.
 Closure of a department or branch
 Efficient allocation of resources between branches or departments
 This approach to costing solves the problem of how to apportion or divide overhead
costs between products. It does not apportion them at all.

Limitations of marginal costing

 Ignores fixed costs until final calculation of profit. In some instances fixed costs are very
high than variable costs and thus cannot be ignored.
 Some costs cannot be neatly classified into fixed and variable costs since some costs
are semi variable.
 They ignore qualitative factors such as goodwill.

Situations when contribution costing would be used

 Contribution costing avoids inaccuracies and arbitrary indirect cost allocations and gives
a contribution, not a profit total.
 Contribution costing can therefore be used in decision-making over whether to close a
cost/profit centre.
 Excess capacity is more likely to be effectively used, if special orders or contracts that
make a positive contribution are accepted.

Situations when contribution costing would not be used

 When indirect costs a higher.
 Contribution costing would not be used when making decisions about business
expansion or developing new products since all costs of these developments will need to
be considered, not just the direct costs.
 Contribution costing may lead managers to choose to maintain the production of goods
just because of a positive contribution and perhaps a brand-new product should be
launched instead that could make an even greater contribution.
 As in all areas of decision-making, qualitative factors may be important too, such as the
image a product gives the business.

Uses of cost information

 All businesses want to minimise costs, therefore it is important to know how to calculate
different types of costs.
 Once costs are calculated and understood businesses can use the information to
calculate profit, check and improve the business, take decisions on future
growth/investment, and making pricing decisions.

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Break even Analysis

Break-even point can be established using:

 Formula
 Graphical

Formula method

Graphical method

Typical features of the BEP graph

 The fixed cost line is horizontal showing that fixed costs are constant at all output levels.
 The variable cost line starts from the origin (0). If no goods are produced, there will be
no variable costs. It increases at a constant rate and, at each level of output shows that
total variable costs = quantity × Variable cost per unit. The line is not necessary to
interpret the chart and is often omitted.

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  The total cost line begins at the level of fixed costs, but then follows the same
slope/gradient as variable costs.
 Sales revenue starts at the origin (0) since if no sales are made, there can be no
revenue. It increases at a constant rate and, at each level of output shows that total
revenue = Quantity X price.
 The point at which the total cost and sales revenue lines cross (BE) is the breakeven
point. At production levels below the break-even point, the business is making a loss; at
production levels above the breakeven point, the business is making a profit.
 Profit is shown by the positive difference between sales revenue and total costs – to the
right of the BE point.
 Maximum profit is made at maximum output and is shown on the graph.

Margin of safety

 Margin of safety the amount by which the sales level exceeds the break-even level of
output.
 This is a useful indication of how much sales could fall without the firm falling into loss.
 If a firm is producing below break-even point, it is in danger. This is sometimes
expressed as a negative margin of safety.
 The minus sign simply tells us that the production level is below break-even.

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Decision making effects on Break-even analysis

Usefulness of Break Even Analysis

Importance of BEP
 It can be used for other important decisions e.g. charts can be redrawn to show a
potentially new situation which can be compared with the firms current position and the
decision made accordingly.
 Charts are relatively easy to construct and interpret.
 It provides useful guidelines to management on breakeven points, safety margins and
profit/loss levels at different rates of output.
 It affects the manager’s decisions in selecting new equipment e.g. Break-even analysis
can be used to assist managers when taking important decisions, such as location
decisions, whether to buy new equipment and which project to invest in.
 Influences the marketing decision by analysing the impact of a price increase.
 Comparisons can be made between different options by constructing new charts to show
changed circumstances.

Limitations of BEP
 It assumes fixed costs would remain the same throughout. It is also unlikely that fixed
costs will remain unchanged at different output levels up to maximum capacity.
 Neither variable costs nor prices are likely to be linear. The assumption that costs and
revenues are always represented by straight lines is unrealistic. Not all variable costs
change directly or ‘smoothly’ with output. The revenue line could be influenced by price
reductions made necessary to sell all units produced at high output levels.
 It assumes that costs can be neatly be classified into variable and fixed costs while
some costs are semi variable. Not all costs can be conveniently classified into fixed and
variable costs. Semi variable costs will make the technique much more complicated.
 There is no allowance made for stock levels on the break-even chart. It is assumed that
all units produced are sold. This is unlikely to always be the case in practice.
 The technique is appropriate for single product firms since Break even Analysis can only
be done for one product not a combination of products.

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Budgets

The meaning and purpose of budgets

 A budget is a detailed financial plan for a future time period. If no financial plans are
made, an organisation drifts without real direction and purpose.
 This is the budgeting process: setting and agreeing financial targets for each section of a
business set for the next 12 months, broken down on a month-by-month basis.

Key features of effective budgeting

 A budget is not a forecast (a prediction of what would occur) but a plan that businesses
aim to fulfil.
 Budgets may be established for any part of an organisation as long as the outcome of its
operation is measurable.
 Coordination between departments when establishing budgets is essential. This should
avoid departments making conflicting plans.
 Budget setting should involve participation. Those who are responsible for fulfilling a
budget should be involved in setting it.
 Budgets are used to review the performance of each manager controlling a cost or profit
centre.

The measurement of performance

 All business managers should consider how they might measure the performance of
their business.
 Assessing actual performance against pre-set targets is the best way of measuring the
performance, over time, of each section of a business.
 In order to review the financial performance of a business, financial targets will need to
be set.
 These targets are called the budgets of the business and they should be established for
all divisions and sections of a business.
 Measuring financial performance is one of the benefits of budgeting.

Benefits of using budgets

 Facilitates planning – the budgetary process makes managers consider future plans
carefully so that realistic targets can be set.
 Effective allocation of resources – budgets can be an effective way of making sure that
the business does not spend more resources than it has access to.
 Setting targets to be achieved – most people work better if they have a realizable target
at which to aim. This will motivate workers.
 Co-ordination – discussion about the allocation of resources to different departments
and divisions requires co-ordination between these departments.
 Monitoring and controlling – budgets cannot be ignored once in place. Checks must be
undertaken regularly to control and monitor the performance of the budget holder and
their department
 Assessing performance – once the budgeted period has ended, variance analysis will
be used to compare actual performance with the original budgets

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Limitations of Budgets

 Minimises flexibility in departments

 Focuses on the short term e.g. the next 12 months.
 It may result in unnecessary spending. As the end of the budgeting period approaches
and managers realise that they have under spent their budgets, unnecessary spending
decisions might be made so that the same level of budget can be justified next year.
 Requires extensive training for budget holders to handle the setting and the
responsibility of controlling budgets.
 Setting budgets maybe difficult especially for new projects or once off projects and
frequent revisions in the budgets might be necessary.

Setting and using budgets

Incremental budgeting
 This method takes last year’s budget and makes changes for this year based on last
year’s budget.
 The revised budget might be raised or lowered, depending on market conditions.
 Using last year’s figure as a basis means that each department does not have to justify
its whole budget for the coming year – only the change or increment.

Zero budgeting
 The zero budgeting approach requires all departments and budget holders to justify
their whole budget each year.
 This is time-consuming, as a fundamental review of the work and importance of each
budget holding section is needed each year.
 It does provide added incentive for managers to defend the work of their own section.

Flexible budgeting
 Most budgets are fixed for the time period under review.
 This means that they are based on the assumption that the level of output remains at the
predicted or budgeted level.
 If actual output falls or rises above this level, then this could lead to obvious variances
from the fixed budgets.
 Flexible budget is a budget that can be adjusted with changes in volume or activity. It is
a financial plan that can be adjusted to the current actual output.

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Variance analysis

 A variance is the difference between a budget and the actual figures achieved at the end
of the budget period.
 It is important to calculate and analyse the reasons for these variances because:
 Measuring performance - Variances measure differences from the planned
performance of each department over a given period.
 Finding out the reasons for variances can help set more realistic budgets in the
future.
 Finding out the reasons for variances can help the business take better
decisions.
 The performance of each individual cost centre and profit centre may be
appraised in an accurate and objective way.

 Favourable variance - If the variance has had the effect of increasing profit above
budget, then it is called a favourable variance.
 Unfavorable variance - If the variance has had the effect of reducing profit below
budget, then it is called an unfavorable or adverse variance

 Managers may need to respond adverse variances by:

 Trying to find cheaper material supplies
 Increasing labour productivity will help to reduce adverse variances in future.

 Managers may need to respond favourable variances by:

 correcting poor and inaccurate budgeting process

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Calculation and interpretation of variances

 The benefits to be gained from regular variance analysis include:

 Identifying potential problems early so that remedial action can be taken.
 Allowing managers to concentrate their time and efforts on the major problem
areas.

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