IB Business SL Notes: (2016-New Syllabus)

IB Business & Management SL
IB Business SL Notes
(2016-New Syllabus) 
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Chapter 1: Business Organisation and Environment 7

1.1 Introduction to business management 8
Inputs into a Business 8
Management Responsibilities in Departments 8
Sectors of Business Activity 10
Difference between Entrepreneurship and Intrapreneurship 11
Role of a Business 11
Reasons for Starting a Business 12
Common steps in starting a business 12
1.2 Types of Organisations 13
Difference between Private and Public Sectors 13
Main Types of Commercial Organisations 13
1.3 Organisational Objectives 21
Aims 21
Mission Statement 21
Vision Statement 21
Objectives 21
Business Ethics 23
Corporate Social Responsibility (CSR) 23
SWOT Analysis 24
Ansoff Matrix 26
1.4 Stakeholders 28
Stakeholders 28
Internal Stakeholders 28
External Stakeholders 29
Stakeholders Conflict 31
1.5 External Environment 33
S.T.E.E.P.L.E. Analysis 33
1.6 Growth and Evolution 35
Parameters to Measure Size of Businesses 35
Reasons for Growth 35
Economies of Scale 35
Diseconomies of Scale 36
Dealing with Diseconomies of Scale 37
Small vs. Large Businesses 37
Internal (Organic) Growth 38
External (Inorganic/Amalgamation) Growth 39
Main Types of Inorganic Growth 39
Impact of Globalisation 42
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Reasons for the growth of multinational companies 43

Factors that allowed MNC’s to grow so rapidly 43
Impact of MNC’s on the host country 44
1.7 Organisational Planning Tools (HL) 45
Decision Tree 45
Chapter 2: Human Resources Management 46

2.1 Human Resources Planning 47
Human Resources Management 47
Labour Turnover 47
Demographic Change 47
Labour Mobility 48
Workforce Planning 49
Recruitment 49
Training 52
Appraisal and Development 55
Dismissal of Employees 56
Outsourcing and Offshoring 56
Redundancies 57
Employment Patterns and Practices 57
2.2 Organisational Structure 59
Organisational Structures 59
Internal Organisation of Firms 59
Key Terms in Structure 59
Formal Hierarchical Structure 59
Tall vs. Flat Organisations 60
Factors influencing organisational structure 60
Delegation and Accountability 61
Delayering 61
Bureaucracy 62
Centralisation and Decentralisation 62
Different Types of Organisational Structures 63
Changes in Organisation Structures 65
Communication in Business 67
2.3 Leadership 68
Leadership 68
Key Function of Management 68
Management vs. Leadership 68
Autocratic Leadership 69
Democratic Leadership 69
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Laissez-Faire Leadership 70
Paternalistic Leadership 70
Situational Leadership 71
Ethical and Cultural Considerations 71
2.4 Motivation 72
Motivation 72
Abraham Maslow and Hierarchy of Needs 72
Douglas McGregor & Theory X-Y 73
Frederick Herzberg & Two-Factors 74
Frederick Taylor & Scientific Management 74
John Adams & Equity Theory 75
Daniel Pink & Self-Determination Theory 75
Motivation Methods 76
Non-Financial Motivators 78
Cultural Differences and Non-Financial Rewards 79
Chapter 3: Finance and Sources 80

3.1 Sources of Finance 81
Need for Financing 81
Types of Expenditure 81
Internal Sources of Finance 81
External Sources of Finance 82
3.2 Costs and Revenues 86
Types of Costs by Output 86
Types of Financial Costs 86
Total Revenue and Revenue Streams 87
3.3 Break-Even Analysis 88
Contribution 88
Break-Even Analysis 88
3.4 Final Accounts 91
Stakeholders and Purpose of Accounts 91
Income Statements or Profit and Loss Statement 92
Balance Sheets 94
Intangible Assets 97
3.5 Profitability and Liquidity Ratio Analysis 99
Profitability Ratios 99
Efficiency Ratios 100
Liquidity Ratios 101
3.7 Cash Flow 103
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Difference between Cash Flow and Profit 103

Working Capital 103
Cash Flow 103
Cash Flow Problems 105
3.8 Investment Appraisal 107
Payback Period 107
Average Rate of Return 108
Chapter 4: Marketing 109

4.1 Role of Marketing 110
Relation of Marketing between Departments 110
Differences between Goods and Services 110
Market-Orientated Business 110
Product-Orientated Business 111
Types of Marketing Strategies 111
Understanding the Market 112
Marketing Objectives for NPOs 113
Marketing Strategies and Consumer Preferences 114
Innovation, Ethical Considerations and Cultural Differences 114
4.2 Marketing Planning 115
Marketing Plan 115
Market segmentation 115
Market Targeting 116
Consumer profiles 117
Product Positioning Map 117
Unique Selling Point or Proposition (USP) 118
4.4 Market Research 120
Market Research 120
Types of Research 121
Primary Research (Field Research) 121
Secondary Research (Desk Research) 123
Ethical Considerations for Market Research 125
Sampling 126
Results from Data Collection 128
4.5 The 4 P’s of Marketing 130
Product Development Stage 130
Product Life Cycle (4 P’s) 130
Boston Consulting Group Matrix (BCG Matrix) (4 P’s) 133
Branding (4 P’s) 134
Packaging (4 P’s) 135
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Price (4 P’s) 136

Promotion (4 P’s) 139
Types of Promotions (4 P’s) 139
Promotional Mix (4 P’s) 141
Impact of New Technology on Promotional Strategies (4 P’s) 141
Guerilla Marketing (4 P’s) 143
Place — Channels of Distribution (4 P’s) 144
4.7 International Marketing (Part HL) 148
Reasons for International Marketing 148
Methods of Entering International Market 148
4.8 E-Commerce 149
Features of E-Commerce 149
Effect on the Marketing Mix 149
Types of E-Commerce 150
Advantages and Disadvantages to Consumer 150
Advantages and Disadvantages to Firm 151
Chapter 5: Operations 152

5.1 Role of Operations Management 153
Operations Management 153
Productivity 154
Operations and Business Functions 155
Operations Management and Sustainability 155
5.2 Production Method 156
Production Methods 156
Changing Production Methods 158
Choosing Method of Production 159
5.4 Location 160
Factors in Locating 160
Globalisation 161
Offshoring and Outsourcing 162
In-housing and Reshoring 162
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Chapter 1: Business
Organisation and Environment 
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1.1 Introduction to business management

Inputs into a Business
• Land: Raw resources that are put into any business.
• Labour: Human input involved in any business such as effort, research etc.
• Capital: Money or tangible long-term assets of a business that can help in production.
• Enterprise: The initiative taken to managing a business activity and allocation of resources
within a business.
Management Responsibilities in Departments

• Human Resources:
- A few jobs of the HR department include:
‣ Forecasting staff needs for the business.
‣ Recruiting staff.
‣ Preparing job descriptions and job specifications.
‣ Planning and implementing staff training programs.
‣ Interviewing and selecting staff.
‣ Negotiating with workers’ representatives, such as union leaders, on pay and
working conditions.
‣ Keeping staff records.
‣ Disciplining and warning staff if necessary.
- With increasing recruitment costs, the HR department is the most important department of a
business.
- If a business has a high ‘staff turnover’ then the HR department is failing.
• Marketing:
- A few jobs of the marketing department include:
‣ Market research into existing or new markets in order to identify new market
opportunities.
‣ Planning new products, working closely with the Research and Development and
Production departments.
‣ Deciding upon the best ‘marketing mix’ for each product and making sure that it
is put into effect.
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‣ Keeping records of the sales of each product/service so that decisions can be

made about ‘extensions’ strategies or taking products off the market.
- Without effective marketing, no business will survive. Marketing managers have the role of
keeping contact with customers so that the products meet the needs.
• Accounting and Finance:
- A few jobs of the accounting and finance department includes:
‣ Recording all financial transactions with other firms and individuals.
‣ Collecting all of this data together and presenting it in the regular account.
‣ Preparing budgets for the organisation.
‣ Analysing profitability of new investment projects
‣ Deciding on the most appropriate methods of finance
‣ Keeping control of the cash flow of the business.
- The accounting department keeps charge of the back-office helping the business to run
smoothly.
- They ensure that the business holds profitability and doesn't hit bankruptcy.
• Production or Operations:
- A few jobs of the production department includes:
‣ Ordering stocks of material and other resources to allow production to take
place.
‣ Developing and designing new products to ensure productivity.
‣ Locate buildings in cost-effective areas.
‣ Deciding on production methods and machinery.
‣ Controlling production to ensure high levels of efficiency.
- The productions manager will have to make sure that work is carried out smoothly.
• Administration:
- A few jobs of the administration department includes:
‣ Clerical and office support service.
➡ Mail delivery, keeping records etc.
‣ Responsibility over Information Technology systems.
➡ Networks, tech support etc.
‣ Cleaning, maintenance and security.
➡ Healthcare, hygiene etc.
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- The administration manager has to ensure that the work environment is kept in good
condition so that there is employee satisfaction.
Sectors of Business Activity

• Primary sector:
- This sector deals with the extraction of natural resources from the earth. Eg:
‣ Farming,
‣ Mining,
‣ Fishery,
‣ Forestry,
‣ Extraction of oil.
- Their goals are to obtain the highest amount of raw material (good quality) at the lowest
cost.
• Secondary sector:
- This sector deals with the manufacturing of products; it uses the raw materials from the
primary sector to create consumer goods or capital goods. Eg:
‣ Construction,
‣ Aircraft assembly,
‣ Automobile assembly,
‣ Automobile industry,
‣ Computer,
‣ Engineering,
‣ Textiles.-
- The main goal of this sector is to obtain the most amounts of raw materials in the cheapest
rate and using the most efficient but cheapest method of production to produce goods of the
highest quality.
• Tertiary sector:
- This sector deals with the provision of goods and services to the consumers, firms and other
businesses. Eg:
‣ Transport
‣ Banking
‣ Insurance
‣ Hotels
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‣ Retail
- This sector aims to provide goods and services through the most efficient methods.
• Quarternary sector:
- This sector deals with intellectual operations and is based on knowledge applicable to some
business activity that involves provision of services. Eg:
‣ IT
‣ Business consulting groups
‣ Teaching
- This sector aims to provide information with greatest profitability.
Difference between Entrepreneurship and Intrapreneurship

• Entrepreneur:
- An individual who demonstrates enterprise and initiative in order to make profit.

- Finds a gap in the market, takes risks to go about providing for the gap by allocating
resources efficiently.
• Intrapreneur:
- An individual who is employed by a large organisation who demonstrates entrepreneurial
thinking in the development of new products or services.
- Difference is that the fruits of the success are the credited to the organisation. Additionally,
the failures are also credited to the organisation.
- Any initiative of the intrapreneur is supported by the organisation and is allowed only if the
company allows it.
Advantages Disadvantages
The idea is company property Possible losses will directly affect the business/
brand image and finance.
Any profits made are all defaulted to the business. Employee ‘productive’ time is affected
Role of a Business
• A business aims to meet the needs and wants of individual or organisations.
• Some businesses focus on one activity, others undertake many.
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• Mainly, businesses process the inputs and add value to it.

• Key outputs of a business include:
- Consumer Goods:
‣ Goods which are consumed by people.
‣ They do not have to be goods that last long.
‣ Some can last long such as furniture.
- Consumer Services:
‣ Services that are produced for people.
‣ Examples of these are hairdressers and car repairing shops.
- Producer/Capital Goods:
‣ These are goods produced for other businesses to use.
‣ They are used as part of the production process.
‣ Examples of these are machinery and components.
- Producer Services:
‣ Services that are produced to help other businesses.
‣ Examples of these are accounting and advertising agencies.
Reasons for Starting a Business
• Losing a job encourages people to start a business and hope for greater stability.
• Desire for independence and inability to take orders from others encourages people to start their
own business.
• Wish to make more money.
• Providing good/service for a market gap.
Common steps in starting a business

• Conduct market research
• Manage financing for start-up
• Organise and plan business/organisational structures
• Decide on business aims/branding

• Get all the necessary licenses and permits
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1.2 Types of Organisations

Difference between Private and Public Sectors
Private Public
Not government owned Government owned
Goods and services provided outside of the Goods and services provided through government
government funds
Aims to make a profit by selling goods and services Aim to help the local population
High priced goods and services Cheaper or free goods and services
Values Profit Values public interest and political compromise
Main Types of Commercial Organisations

• Sole Trader:
- A business organisation owned and controlled by one single individual.
- Sole trader businesses do not have a separate legal existence from their owners; therefore
individuals are unlimitedly liable for any of the business’ endeavours.
- A sole trader has more direct control over the business and there is less seed capital.
Firms are small and usually easy to set up, as there A sole trader has no one to share the responsibility
are very few legal requirements to start them. of running the business with. A good hairdresser, for
example, may not be very good at handling the
accounts.
Benefit from secrecy as they are the sole owners of Sole traders often work long hours and find it
the organization and have complete and total control difficult to take holidays, or time off if they are ill.
over it
It is easier to keep overall control, because the Developing the business is also limited by the
owner has a hands-on approach to running the amount of capital personally available and so
business and can make decisions without consulting owners cannot benefit from economies of scale due
anyone else. to having small businesses.
The wage bill will usually be low, because there are There is also the risk of unlimited liability, where
a few or no employees. the sole trader can be forced to sell personal assets
to cover any business debts.
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• Partnership:
- Partnerships are businesses owned by two or more people (up to 20 people). A contract
called a deed of partnership is normally drawn up. This states the type of partnership it is,
how much capital each party has contributed, and how profits and losses will be shared.
- Doctors, dentists and solicitors are typical examples of professionals who may go into
partnership together. They can benefit from shared expertise, but like the sole trader, have
unlimited liability.
- A partnership can also have a sleeping partner who invests in the business but does not have
dealings in the day to day running of the enterprise.
Shared responsibility. This allows for specialization, Disputes can arise over decisions that have to be
where one partner's strengths can complement made, or about the effort one partner is putting into
another's. For example, if a hairdresser were in the firm compared with another.
partnership with someone with a business
background, one could concentrate on providing the
salon service, and the other on handling the
finances.
More people are also contributing capital, which The distribution of profits can cause problems. The
allows for more flexibility in running the business. deed of partnership sets out who should get what,
but if one partner feels another is not doing enough,
there can be dissatisfaction.
There is less time pressure on individual partners A partnership, like a sole trader, has unlimited
and there is someone to consult over business liability.
decisions
• Private Limited Company:

- A private limited company is a voluntary association of not less than two and not more than
fifty members, whose liability is limited, the transfer of whose shares is limited to its
members and is not allowed to invite the general public to subscribe to its shares or
debentures.
- Features:
‣ Selling of shares: To family members, relatives or friends. All shareholders have
limited liability. This factor encourages people to buy shares.
‣ Limited Liability: The Company is a separate legal entity from the owners. The
owner’s and the business’ financial accounts are separate
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‣ Article of Association: Rules of the working mechanism of the company.

Procedural information is included; how to elect top position in the company;
how shares are sold/floated; duties of the directors.
‣ Memorandum of Understanding: Details agreement between parties and each
party’s requirements and responsibilities.
‣ Certificate of Incorporation: These documents allow for transparency of
company so shareholders have an idea on what company to invest capital in.
These documents are submitted to the registrar of businesses and the business is
given a certificate as proof.
Continuity of existence if either of the shareholder Shares cannot be freely transferred, sold or bought
pass away or exit from the business without the agreement of other shareholders.
More capital for investing into the business through Shares cannot be sold to the general public.
the sale of shares. This allows for expansion of
business.
Original owner can still have complete control over Paperwork is quite a lot and time consuming.
the business as long as excess shares are not sold.
Can benefit from limited liability and it is easier to Less privacy than a sole trader business as all
get loans from bank because limited companies are shareholders have access to internal information of
very large the company through the documents.
• Public Limited Company:

- The standard legal designation of a company, which has offered shares to the general public
and has limited liability. A Public Limited Company's stock can be acquired by anyone and
holders are only limited to potentially lose the amount paid for the shares.
- Most suitable for large business and well-known businesses and it is owned by private
individuals and private business in the private sector.
- Features (to become a Public Limited Company):
‣ Amend Memorandum of Understanding and add clause to say that there will be a
change in type of company.
‣ Float shares based on the minimum amount stated by each country in the stock
markets.
‣ Modify bank account to make it accessible to general public.
‣ Get listed in the Stock Exchange, share trading is easier.

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‣ Prospectus: Issued by company inviting general public to invest in the company.
It is a detailed document with information on company’s past performance and
future plans.
‣ Initial Public Offering (IPO): Company is being announced to public, and the
initial share that is being offered is the initial public offering.

- Owners and majority shareholders may or may not be the decision making panel. Directors
are elected by shareholders and are professionals:
‣ There can be thousands of shareholders
‣ Shareholders are not involved in the business other than electing directors.
‣ Shareholders invited to Annual General Meetings (AGM)
- Floatation: Allowing others to purchase shares of the company. Process in which private
limited companies move into public limited company. Reverse floatation is the opposite
motion.
- Hostile Takeover: When an individual or a group of people buys a majority of shares to a
company, they can kick out the founder. . . . . . . . . . . . . . . . . .
The shareholders and the owners can benefit from Legal formalities are very lengthy with a lot of
limited liability and this encourages people to paper work involved in the process.
invest in the business.
Continuity of business should a shareholder die. More regulations and control over interest of
shareholders.
No limit on number of shareholders, which allows The company will lack secrecy as the general
for a larger sum of capital to be cumulated. public has access to internal data.
Additionally there are no restrictions of buying,
selling and transfer of shares.
The company will have a higher status and Size of business might become too large to handle
credibility making it easier to obtain loans from and the original owners might lose control over
banks. the business as more shares are sold and another
individual buys the higher percentile of the
floating shares.
Cost of selling shares becomes more expensive
bank services are hired at cost.
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• Co-operatives:
- Groups of people combine their resources and agree to work together
- Features:
‣ All members have one vote, regardless of capital invested or share holdings.
‣ All members share work and decision-making.
‣ Legal entity
‣ In larger co-operatives, manager may be appointed to perform day-to-day
business tasks.
‣ Equal sharing of profits.
- Forms of Co-operatives:
‣ Producer Co-operatives: like any manufacturing business, producing products
‣ Retail Co-operatives: provide members with quality and low priced consumer
goods and services
‣ Agricultural Co-operatives: for farmers. Arranging purchasing of raw materials
in bulk, and hence at discounted prices for members; and arranging selling of
output of the members at good prices to big customers. Better for smaller
farmers to be part of a co-operative rather than trading alone.
- Eg: Equal Voting Rights cooperative.
Simple to create a cooperative and there is no The can be absence of motivation between
limitation to the people that can join. members, due to the lack of organisation within the
business.
The cooperative benefits from limited liability. Individuals within the company can sell ideas of the
cooperative for cash to other businesses.
• Micro-financiers:
- Type of banking service that provides money for small businesses during their startup, as
startup capital.
- Loans that are given without security. But the loan is given after an informal background
check so that the money is used for advancing rather than consuming.
- Maximum loan is around AED 1500. They are called micro credits (small loans).
- They also manage savings and insurance.
- It is given to underprivileged people and to poorer people. It is also given to women to help
them in any initiatives.
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- Defaulting chances are lower than conventional bank loans, and almost 99% of loans are
returned.
- Eg: Gramin Bank, Kiva
Works as women empowerment and initiates people The amount is usually small, restricts the amount of
to attempt to do something. innovation.
Assurance that the default rate is low and the The company does not make a lot of money out of
amount will be paid back. these loans.
• Public-Private Partnership/Enterprises:
- Business relation between private sector companies and public sector industries.
- Not generally for profit, but to help the community.
- They are generally used to developing new alliances and developing services such as public
transport and public spaces.
- Since the job is being provided to a private industry, the work is usually done more
efficiently with better usage of resources.
- Public does not have to pay extra taxes.
- This is done by private companies to amass a large sum of money, but the gain is extremely
slow.
- Partaking in Public-Private enterprises enhances the company’s credential and reputation
(this is a motivating factor).
Since this is for service motive, there is lesser tax on Private individuals have to make profit, so the
the consumer. consumer has to pay more for the service in a long
run.
Since private companies are investing, the public Legalities are complicated to work together with the
sector has to put less input. private companies and public sector. Since there are
2 parties, it is difficult to manage (even though it is
faster than when it is done by just a public sector).
• Non-Profit Social Enterprises:

- Business operating in the private sector that don't aim to make profits at all.
- The main aim is for social purposes.
- Social enterprises generate surplus rather than profit (conceptually the same thing). Rather
than being distributed to the owners of the business, it is used to advance its social purpose.
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They help people or causes in need There is lack of control, can result with socially
undesirable goods.
They can foster a philanthropic spirit in the Sometimes the employees of non-profit social
community. enterprises have a passion and that hurts the aim of
the organisation.
They help inform the world regarding global issues Fundings are irregular (they rely mainly on external
and help in allocation of resources. funding)
They can innovate and try new ideas. Less motivation for working.
- NGOs:
‣ Stands for non-governmental organisation.
‣ Support a cause that is considered socially desirable. They are concerned, with
either a single issue or have other political aims.
‣ Eg: Save the Whales, Greenpeace, National Rifle Association.
- Charities:
‣ Charities are a form of a Non-governmental Organisation, whose aim is to
provide relief to those in need in a niche of a specific cause. The difference
between NGO's and Charities is that Charities' focus on philanthropy
‣ Profits are not generated. Usual source of surplus or revenue include:
➡ Events: Although there is a high overhead, most charities can raise
thousands of dollars a night.
➡ Product sales: Some charities sell certain types of products that support
their cause.
➡ Donations and Grants (Main sources of revenue and surplus)
‣ There is unclear ownership and control in charities.
‣ Charities do not have to pay taxes because of their philanthropic nature and
charitable status.
‣ Eg: Greenpeace, Red Cross and Red Crescent.
- Difference between NGOs and Charities:
‣ Charities handle philanthropic causes but in a relatively small scale. Whereas
NGOs are associated with large scale international work. This includes natural
disaster relief, famine, disease, and military bases.
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➡ Charities handle small scale funding, while NGOs are involved in

obtaining funding through marketing and general business activities etc.
‣ NGO’s funds can be raised by the government, but it maintains its non-
government organisation status. They are also known as civil society
organisation.
‣ A charity uses all its extra funds to further the benefit of the organisation/
charitable cause while an NGO does not.
‣ NGO’s still have to pay taxes since unlike charities, because they are still
considered a business.
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1.3 Organisational Objectives

Aims
• An aim is a goal that the business sets for itself.
• Some common aims of a business are to:
- To make a profit,
- To increase value added,
- Growth,
- Survival,
- Provision of services.
• Various strategies are adopted by businesses to help achieve the business aims. The business’
strategies are subject to change as time passes.
Mission Statement
• Mission statements define the organisation's purpose and primary objectives.
• These statements are set in the present tense, and they explain why you exist as a business, both
to members of the organisation and to people outside it.
• Mission statements tend to be short, clear and powerful.
Vision Statement
• Vision statements not only define your organisation's purpose, but they focus on its goals and
aspirations.
• These statements are designed to be uplifting and inspiring.
• They're also timeless: even if the organisation changes its strategy, the vision statement can
often stay the same.
Objectives
• An objective is something that helps the business achieve its aims.
• The best type of objectives of a business are SMART:
- Specific: Needs to be clear what is to be achieved.
- Measurable: Desired outcome needs to be a measurable number value.
- Achievable: Is within the business’ capabilities.
- Realistic: Is sensible for business context and pushes business limits.
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- Timely: The deadlines for the business need to be achievable and appropriate.
• Tiers of objective:
- Strategic Objectives:
‣ These are very important objectives which can affect the overall success of the
business.
‣ Highest level of the objective hierarchy and are usually expensive and longterm.
‣ These objective define the organisation; may change its future.
‣ Managers that make strategic objectives:
➡ Chairman.
➡ President.
➡ CEO.
- Tactical Objectives:
‣ Important objectives within a specialised area that are relatively less important.
‣ These objectives are based on the strategic objectives taken by the higher-ups.
‣ These objectives are limited to sectors of a whole organisation and affect it if
they are made wrong.
‣ These objectives are taken based on a medium term time frame.
‣ Managers that make tactical objectives:
➡ Advertising manager.
➡ Creative director.
➡ Personnel manager.
- Operational Objectives:
‣ These objectives are day-to-day one set by managers of low levels to manage
non-management staff.
‣ They are directed to the ‘coal face’ of the business; the ones that go out or make
the sales.
‣ These objectives are short-term and immediate to be taken.
‣ Managers that make operational objectives:
➡ Store manager
➡ Foreman
➡ Employee
• Common Strategic Business Objectives:
- Profit maximisation.
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- Profit satisficing.
- Growth.
- Increasing market share.
- Survival.
• Changes in Business Objectives:
- Previous goals may have been satisfied, calling for a change in objectives.
- Senior management might have changes.
- External competitive and economic environment might change.
- Governmental resistances might call for changes in business objectives.
Business Ethics
• Ethics: Moral principles that guides the way a business operates and the way the businesses
make decisions.
• Ethical code (code of conduct): A document detailing a company’s rules and guidelines on staff
behaviour that must be followed by all employees.
• There are different point of views when it comes to making ethical decisions. For instance, a
manager will find the safety of a company with higher regards to the satisfaction of his
employees. This doesn't mean that the manager is not ethical.
• Being an ethical company has many benefits and disadvantages:
Offers a company a competitive edge against their Being ethical limits the business’ freedom to expand
competitors. and take on different strategies to make profit.
Ethical businesses benefit from consumer loyalty Being ethical increases the costs faced by the
and have better brand image business especially in manufacturing and
production.
The society will benefit from ethical actions
conducted by businesses
Ethical businesses will benefit from high employee
retention rates (as per research).
Corporate Social Responsibility (CSR)

• Corporate social responsibility differs from ethics as it emphasises that a business has an
obligation to operate in a way that will have a positive impact on the society.
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• It is corporate initiative to assess and take responsibility for the company’s effect on the
environment and impact on social welfare.
• It usually involves incurring short-term costs, with no immediate benefits, to promote positive
social and environmental change (as well as boosting company image).
The image of a business and its products can be Short run costs of the business may increase.
improved with socially responsible approach.
Attracting better employees and motivating them There may be conflicts among shareholders
becomes much easier concerning the costs.
Lesser pressure of environmental groups and Loss of price competitiveness if competitors don’t
pressure groups. adopt CSR and thus have lower prices.
Better relations from stakeholders and goodwill. Backlash if the company “greenwashes” instead of
Which can help the company attain loans and bank actually adopting CSR and others find this out.
acceptance.
• Fairtrade: Fairtrade means that traders get a fair price for their products which covers
sustainable costs of production.
SWOT Analysis
• This is the technique used to help the marketing department assess a product or a company’s
strengths, weaknesses, opportunities and threats in the competitive market.
• This analysis provides information that is helpful in matching the firm’s resources and
capabilities to the competitive environment where it operates.
- Strengths and Weaknesses:
‣ Internal to the firm.
‣ Relate to present situation in the firm.
- Opportunities and Threats:
‣ External to the firm
‣ Relate to the changes in the environment that will impact the firm.
• Strengths:
- Market dominance.
- Economies of scale.
- Low cost of production.
- Leadership and management skills.
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- Financial resources.
- Research and Development capabilities.
- Core competence.
- Technological leadership.
- Brand reputation.
- Patents and copyrights.
- Distribution networks.
- Employee skill.
- High productivity.
- Plant and equipment.
- Access to high grade resources.
• Weaknesses:
- Low market share.
- Old plant.
- Outdated technology.
- Problems over quality.
- Few core competence.
- Low Research and Development capabilities.
- Weak position.
- Weak brand name.
- High cost structure.
- Lack of access to best resources.
- Cash flow problems.
- Undifferentiated products.
- Low employee morale.
- Poor reputation.
• Opportunities:
- Technological innovation.
- New demand.
- Market growth.
- Demographic change.
- Social or lifestyle change.
- Economic upswing.
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- Trade liberalisation.
- EU enlargement.
- Diversification opportunities.
- Deregulation of the market.
‣ When the government involvement is reduced in a country to allow for greater
competition between industries. The regulations that a government imposes upon
business is diluted or removed altogether.
• Threats:
- New market entrants.
- Change in customer needs or wants.
- Demographic change.
- Consolidation among buyers.
- New regulation.
- Change in laws.
- Economic downturn.
- Rise of low cost production abroad.
- Higher input prices.
- Threat from rival.
- Threat from substitute products.
- Competitive price pressure.
Ansoff Matrix
Current Products New Product
Current Market Market penetration stategies Product development strategies
New Market Market development strategies Diversification strategies
• Parts of Matrix:
- Market Penetration:
‣ The firm seeks to achieve growth with existing products in their current market
segments, aiming to increase its market share.
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‣ Least risky as it leverages many of firm’s existing resources and capabilities.

‣ Once market approaches saturation another strategy MUST be pursued if the
firm stills wants to grow
- Market Development:
‣ The firm seeks growth by targeting it’s existing product to new market segments.
‣ Pursuit of additional market segments or geographical locations.
‣ Development of new markets for a product might be good if the firm’s core
competency is related more to that product that the market segment.
‣ Since it is going to a new market it is riskier than market penetration strategy.
- Product Development:
‣ The firm develops new product targeted to it's existing market segments.
‣ Appropriate if firm’s strengths are related to it’s specific customer rather than the
specific product.
‣ Leverages strengths by developing new product targeted to it's existing
consumer.
‣ New product development carries more risk and is as risky as market
development.
- Diversification:
‣ The firm grows by diversifying into new business and developing new products
for new markets.
‣ The riskiest of the four growth strategies as the company is dropping everything
and investing in a whole knew unknown venture.
‣ It is known as the “suicide cell” of the matrix.
‣ Can be compensated if there is high return to the risk taken. 
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1.4 Stakeholders
Stakeholders
• Stakeholder refers to any person or organisation that has a direct interest in or is affected by the
activities of a business.
• They have interest in the business, are influenced by the business and they influence the
business.
Internal Stakeholders
• Internal stakeholders are those within an organisation who benefit financially from their
contributions to an organisation's success.
• Shareholders:
- They are the owners of a private or public limited company.
- They invest money into a business’ shares and expect returns from the business in the form
of dividends on capital gains.
- Objectives:
‣ Maximum dividend payments from companies.
‣ Rise in share price of the business through capital gains.
• Employees:
- They are the workers within the business that impact the way the business operates.
- They are directly involved in the decisions made by the business.
- Objectives:
‣ Good salary.
‣ Job security.
‣ Benefits.
‣ Training and career progression.
‣ Good working atmosphere.
• Managers and Directors:
- Managers control, plan and organise daily runnings of the business.
- They make the big decisions for the business’ operations and influence what happens to the
business in the future.
- Objectives:
‣ Greater profits.
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‣ Increased benefits.
‣ Employment security.
‣ Recognition and power.
External Stakeholders
• External stakeholders are those not directly involved in a business and do not form the business.
• Suppliers:
- They provide the business with the stocks and raw materials. They manage the capital goods
or services that a business purchases.
- A supplier is also considered to be a business.
- Objectives:
‣ Get paid on time for any purchases of goods or services.
‣ Create a strong relationship with the consuming business so that they make
continuous purchases.
• Customer/Consumers:
- Consumers are the most important stakeholder of the business as they determine its success
in the market.
- The business cannot survive in the market without it’s consumers.
- Objectives:
‣ Better quality goods and services.
‣ Competitive prices and a value for money.
‣ Good brand image and reputation
• Government:
- The business’ operating location is managed by the government so they are considered an
important stakeholder.
- Businesses must be in good relations with the government to survive in the market.
- Objectives:
‣ Jobs are created for the citizens.
‣ Taxes are paid on time by the businesses (Corporation tax) .
‣ Business performs CSR related activities, to benefit the society.
• Banks and Creditors:
- These stakeholders are the financial support of the business and they impact the businesses
ventures.
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- Businesses must be in good relations with banks so that they get better loans and leniency.
- Objectives:
‣ Security for the loans so that businesses can pay them back on time.
‣ Better relations with a business so that their services (loans, debentures etc.) are
purchased frequently.
• Pressure Groups:
- Pressure groups are organisations set up to try to influence what we think about the business
and its environment.
- A pressure group can challenge and even change the behaviour of a business by:
‣ Writing letters to MPs
‣ Contacting the press
‣ Organising marches
‣ Running campaigns
‣ Boycotting:
➡ A boycott is an act of voluntarily abstaining from using, buying, or
dealing with a person, organisation, or country as an expression of
protest, usually for social or political reasons
‣ Lobbying:
➡ Lobbying (also lobby) is the act of attempting to influence decisions
made by officials in the government, most often legislators or members
of regulatory agencies.
‣ Public Relations:
➡ Is the practice of managing the spread of information between an
individual or an organisation and the public.
‣ Direct Action:
➡ It's about taking direct action against the government, so it is still
political. You're seeking to influence the government by what you do.
- Objectives:
‣ Business is operating ethically.
‣ Business is being fair with its activities.
• Trade Union:
- Organisation or group of workers joined together to negotiate pay, hours, benefits and
working conditions.
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- Better relations with trade unions will provide the business with better interaction with its
employees.
- Objectives:
‣ Workers are treated fairly.
‣ There are sufficient benefits for the workers in the business.
• Competitors:
- Competitors affect the business by regulating the market in which the business operates in.
- Competitors ensure that there isn't a monopoly and that the consumer has an option.
- Objectives:
‣ Access to information of strategic plans of the business.
‣ Fairness in competitive practices.
• Local Community:
- The local community is the business’ physical location and its surrounding atmosphere.
- This can include residents or other businesses.
- Objectives:
‣ The business affects the environment positively.
‣ The business’ activities doesn’t impact the general routines of the local
community.
Stakeholders Conflict
• Groups of people with a common interest may also have a difference of opinion. This makes
sense since even though all stakeholders have a say in the business, their focuses are different.
• A good business takes into consideration the interest of the stakeholders and manages them
efficiently.
• To do this, a stakeholder mapping mechanism is used.
• Stakeholder Mapping:
Low Interest High Interest
Low Power Group A: Monitor (Minimum Effort) Group B: Keep Informed
High Power Group C: Keep Statisfied Group D: Manage Closely
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- Group A (Low Interest - Low Power):

‣ These stakeholders, who have minimal interest in the business and have limited
power over it, are rarely a problem for the business.
‣ Owners and managers fairly safely ignore these stakeholders.
- Group B (High Interest - Low Power):
‣ For owners and managers, making the group feel included is important.
‣ Simple methods of communication such as newsletters etc. to convey a sense of
belonging is sufficient.
- Group C (Low Interest - High Power):
‣ This group must be kept satisfied as they have the ability to influence other
groups.
‣ The business must aim to flatter self-esteem of this group members to make
them feel important.
- Group D (High Interest -High Power):
‣ These are the most important stakeholders of the business, and the business must
not only inform them but also consult them before making important decisions.
‣ Failure to comply to this might cause very taxing negative impacts on the
business.
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1.5 External Environment

S.T.E.E.P.L.E. Analysis
• An acronym that stands for Social, Technological, Economic, Environmental, Political, Legal
and Ethical that refers to an analytical framework for external environmental factors affecting
business objectives and strategies.
• A STEEPLE analysis is conducted in conjunction with a SWOT analysis by managers to assess
a business’ operating environment so that decisions and strategies taken by the business are
suitable for the situation.
• Socio-Cultural:
- Demographics.
- Lifestyle patterns and changes.
- Attitude towards issues such as education, corporate responsibility and the environment.
- Social mobility.
- Media views and perceptions.
- Ethnic and religions differences.
• Technological:
- Relevant current and future technology innovations.
- The level of research funding.
- The ways in which consumers make purchases.
- Intellectual property rights and copyright infringement policies.
- Global communication technological advances.
• Economic:
- Overall economic situation.
- Strength of consumer spending.
- Current and future levels of government spending.
- Ease of access to loans.
- Current and future levels of interest rates, inflation and unemployment rates.
- Specific taxation policies and trends.
- Exchange rates.
• Environmental:
- The level of pollution created by product or service.
- Recycling considerations.
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- Attitude to the environment from the government, media and consumers

- Current and future environmental legislative changes.
• Political:
- Current taxation policy.
- Future taxation policy.
- The current and future political support.
- Grants, funding and initiatives.
- Trade bodies.
- Effect of wars or worsening relations with particular countries.
• Legal:
- Legislation in areas such as employment, competition, health and safety.
- Future legislation changes.
- Change in EU laws.
- Trading policies.
- Regulatory bodies.
• Ethics:
- Business ethics.
- Corruption levels in operating level.
- Corporate social responsibility and its recognition.
- Community ethics and attitude.
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1.6 Growth and Evolution

Parameters to Measure Size of Businesses
• Sales Turnover:
- Money earned through their sales of goods or services. It is also known as sales revenue.
• Market Share:
- The sales revenue of the business expressed as a percentage of the total sales revenue in the
industry.
• Capital Employed:
- Rate of profit returned on each unit of currency invested into the business.
- Also the valuable items within the control of the company, eg. Machinery...
• Employees Hired:
- The number of employees working within the business
Reasons for Growth

• Reap benefits of larger scale productions, also known as economies of scale.
• To gain a larger market share in order to gain a better market standing and market power.
• As a means of survival against rivals in the industry.
• To spread risk by diversifying into new markets and industries. This helps to spread risks faced
by focussing on only a specific market.
Economies of Scale
• This refers to lower average production costs due to larger sales in the market, resulting with
increase in profit margins.
• Internal Economies of Scale:
- Reduction of average costs of productions as a result of internal factors; factors within the
business.
- Technical Economies: Large firms can use sophisticated machinery in an intensive way to
mass produce products for lower costs.
- Financial Economies: Large firms can benefit by being able to borrow massive sums of
money as loans from banks at lower interest rates.
- Managerial Economies: Economies of scale incurred through specialisation of managerial
positions.
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- Specialisation Economies: Similar to managerial economies except due to efficient

specialisation and division of labor.
- Marketing Economies: Large firms can benefit from lower average costs by selling in bulk,
as there will be lesser paperwork (brand recognition).
- Monopsony Economies: These savings can be enjoyed by large firms that have strong buying
powers, when there is only one buyer for products.
- Commercial Economies: These are similar to monopsony economies in which the business
can benefit from buying in bulk, but applicable to all businesses.
- Risk-bearing Economies: Economies of scale benefited by conglomerates that have spread
risks and costs over a large portfolio of brands and products.
• External Economies of Scale:
- External economies of scale are those that arise from outside the business due to favourable
location or growth in industry.
- Technological Progress: Economies of scale arising from better technology in the market,
thus making trade better and efficient.
- Transportation and Communication Networks: Better transport and communication
improves deliveries and employee efficiency.
- Trained Labour Force: Government supported training programs provide better efficiency
from workers and reduce training costs from within business itself.
- Regional Specialisation: Economies of scale in businesses selling goods that are specialised
in the specific countries. Eg: Swiss chocolate, Indian Mangoes, Mediterranean Grapes etc.
Diseconomies of Scale
• Higher unit costs as a firm becomes too large and inefficient for managing. Average costs per
quantity produced rises.
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• Internal Diseconomies of Scale:

- Lack of Control and Coordination: As firm becomes larger the span of control increases.
This means communicated information has to travel to a large base of staff, which makes it
inefficient.
- Poor Working Relationship: With a large oversized business, senior management is most
likely to become detached with those lower down the hierarchy, making them feel left out or
alienated.
- Slack: With a larger workforce there may be higher chance for repetition in tasks resulting
with lower efficiency and procrastination among staff.
- Increased Bureaucracy: The amount of paperwork, administration and policies is likely to
increase with size of business which makes decisions slower to be implemented or made.
• External Diseconomies of Scale:
- Increasing Market Rents: Concentration of businesses in one location results with land
becoming scarce and market rent to increase.
- Rise in Transport Costs: Due to concentration of businesses in one region, traffic
congestions start to form. This reduces transporting efficiency and employee efficiency.
- Higher Wages: Due to trade unions, the average minimum wages might increase causing the
average cost of production to increase.
Dealing with Diseconomies of Scale

• Improving working environment through motivational strategies such as performance related
pay.
• Reducing the level of output.
• Outsource certain parts of production to other companies.
• Find out more efficient production methods with machineries etc.
Small vs. Large Businesses
Small Businesses Large Businesses

Unaffected by diseconomies of scale from having a Brand recognition allows businesses to market their
large uncontrollable business product to a wider audience.
Lower overall financial risks as the business isn't Consumers of products from larger businesses
operating within a large scale usually receive more perks and facilities.
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Small Businesses Large Businesses

They can better provide personalised service to their Larger businesses enjoy better consumer loyalty as
consumers as they have time to devote to them. they are more capable to provide discounts.
Smaller businesses are more flexible to changes in More choice is available from larger businesses as
the market and can easily change their products they have opportunities for diversifying into other
without facing costs. markets.
There is lesser costs are the business operates in a Larger businesses tend to be more trusted as they
niche market (usually). have better image and record of reliability.
Internal (Organic) Growth

• Internal or organic growth occurs when a business grows internally, or using capital from within
the company such as retained profit.
Better control and coordination. It is often easier to Diseconomies of scale. Growing too much results
grow internally that rely on external resources to with management becoming harder to maintain
fund the growth. resulting with overall rise in average cost of
production.
Relatively inexpensive. The main source of organic Overtrading. Taking too many orders and being
growth comes from retained profits so it is more unable to control its costs or manage the human
reliable and inexpensive. resources well.
Maintain corporate culture. One problem facing A need to restructure. When a firm grows larger
mergers or acquisitions is that the new company there is a need to change its management and
may have different corporate policies than the main personnel structure.
business.
Dilution of control and ownership; If a firm grows
by changing legal status, like from a partnership to a
public limited company, then the original owners
will lose control.
• Ways of Organic Growth:

- Changing Price: More consumers tend to buy a product at lower prices. Determining price
of a good or service is based on the price elasticity of demand of the product. If few
substitutes of goods exist in the market, then changing its price will earn business more
revenue.
- Advertising and Promoting: People are more likely to buy a product if they are more
informed about it.
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- Improving or Bettering Products: Through market research, business can improve their
products to grow in the market.
- Selling in Different Location: If product is widely available, customers are more likely to
make a purchase.
- Offering Credit Payment Terms: Customers are more likely to make a purchase if they are
offered the ability to ‘buy now and pay later’.
- Increasing Capital Expenditures: Investing in new forms of production processes and
technologies.
- Improving Training and Development: Improving employee efficiency helps improve
production and, resultantly, sales revenue.
External (Inorganic/Amalgamation) Growth

• External or inorganic growth occurs through expansion or dealing with outside the firm itself.
Usually a much faster way to grow and evolve External growth is generally more expensive and
costly.
It’s a quick way to reduce competition in the It is time consuming due to all the legal paperwork.
market.
Increases market share. There is dilution of control between the businesses.
Sharing of good practices and ideas between There is introduction of new working culture into
businesses is possible. the business.
Spreads risks faced by the firm. There is a possibility that existing employees might
lose their jobs.
Main Types of Inorganic Growth

• Joint Ventures:
- An arrangement in which two or more parties agree to pool their resources for the purpose of
accomplishing a specific task.
- This task can be a new project or any other business activity. In a joint venture, each of the
participants is responsible for profits, losses and costs associated with it.
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- The venture is its own entity, separate and apart from the participants' other business
interests.
Provides companies with the opportunity to gain It takes time and effort to build the right relationship
new capacity and expertise. and partnering with another business can be
challenging.
Allow companies to enter related businesses or new The profits of the joint venture are also shared, this
geographic markets or gain new technological may or may not be a disadvantage.
knowledge.
Access to greater resources, including specialized There is an imbalance in levels of expertise,
staff and technology investment or assets brought into the venture by the
different partners.
The risks are share between companies There might be conflict due to cultural differences
especially between companies from two different
countries
The costs and risks are shared among the companies
or two countries.
• Strategic Alliances:
- A strategic alliance is when two or more businesses seek to form a mutually beneficial
affiliation by cooperating in a business venture. In a way it is similar to Joint Ventures.
- Affiliated businesses remain independent organisations.
Strategic alliances help introduce newer skills and Risk of sharing proprietary information.
obtain newer management capabilities.
Costs and risks are faced as a group and they are Fear of losing an organization’s unique community
distributed between the affiliated business identity or autonomy
Increases market share and reduces competition. Each business is legally liable for any issues faced
• Mergers and Takeovers:

- Mergers: Takes place when two firms actually agree to form a new company. A company
agrees with another to join their due to a similar aim.
- Takeover: Occurs when a company buys a controlling interest in another company, by
buying enough shares in the target business to hold a majority stake. Also known as
acquisition and the sold company becomes part of the business.
- Types of Mergers and Takeovers:
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‣ Horizontal merger or horizontal integration:

➡ When one company or business integrates or merges with another
company in the same industry and stage of production.
‣ Vertical merger or vertical integration:
➡ When one business merges with another in the same industry but
different stage of production.
‣ Forward vertical integration or merger:
➡ Merging with a business at a later stage of production.
➡ Eg. A car manufacturer can merge with a car showroom.
‣ Backward vertical integration or merger:
➡ Merging with a business at an earlier stage of production.
➡ Eg. Car manufacturer can merge with a car body parts manufacturer.
‣ Conglomerate integration:
➡ When one business merges or takes-over a completely different company
at a different industry.
➡ Eg. A real estate agency buys a clothing manufacturer.
➡ Also known as “Diversification".
Greater market share. Loss of control.
Economies of scale. Culture clash between the merged companies.
Greater synergy between combined firms. Possibilities for conflict between the merged firms.
Higher chance for survival in the market. Possibilities for redundancies and diseconomies of
scale.
Diversification Regulatory problems from the government
• Franchising:
- A form of business organisation in which a firm which already has a successful product or
service (the franchisor) enters into a continuing contractual relationship with other
businesses (franchisees) operating under the franchisor's trade name and usually with the
franchisor's guidance, in exchange for a fee.
‣ Franchisor: An individual or organisation sells the right to use a business idea in
a particular location.
‣ Franchisee: A person who buys the rights from a franchisor to copy a business
format and provide the goods or service under their name.
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Advantages and Disadvantages to a Franchisor
Franchisee pays for the license to use the brand If the established outlet does not do well it can
name affect the reputation of the whole business.
Expansion of the business is much more rapid as Franchisee keeps that profit from the outlets
franchisor does not need to finance it
Managing the franchise is the franchisee’s
responsibility.
All products that are to be sold must all be
purchased from the franchiser.
Advantages and Disadvantages to a Franchisee
Benefit from an established brand name and well- The franchisee has very little independence over
known business. decisions for his/her outlet.
The advertising costs for the outlet will be paid by Unable to take important decisions that suit the
the franchisor. local area and region and cultures.
All supplies are obtained from the franchisor Licensing fee must be paid to the franchisor and
therefore the franchisee does not have to search for possibly a percentage of annual turnovers.
a supplier.
There are a fewer decisions to make regarding
range of product sold, store design etc. as the
franchisor pays for those.
Training for staff is provided by the franchisor
Relatively easier to obtain loans from banks due to
relatively lower risks
Impact of Globalisation
• Globalisation is the process by which the world’s regional economies are becoming one
integrated global unit.
• Increased Competition:
- Large foreign business can force a competition upon domestic business as the domestic
consumer has more choice to purchase from and the producer has to increase productivity to
match the competition.
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- The local producer also can act as a competition to the multinational business as their goods
can be cheaper, albeit unbranded.
- This newer competition can often help improve the efficiency of domestic business as they
have to work more efficiently to survive in the market.
• Greater brand Awareness:
- To match with the competitions of the big brand names of the MNCs, small domestic
businesses have to create a unique selling point (USP) to attract consumers.
- This initiative to create a USP (within domestic business) helps grow the business as they
have to adopt unique strategies and force them to operate more efficiently and competitively.
• Closer Collaboration:
- With a global corporation at their doorsteps, local business can create strategic alliances and/
or joint ventures.
- The global corporations will agree to this as it grants them an opportunity to witness local
business techniques and cultures to help improve their operation within the country
- Additionally, this collaboration reduces the amount of competition the domestic businesses
have to face as they are working with the greater competition.
Reasons for the growth of multinational companies

• A multinational company is a business that operates in more than one country or is legally
registered in more than one country. The size of the business doesn’t matter.
• A small business that runs in operates in both Luxembourg and Belgium is a MNC, while a
large company registered in and operating only in the United States is not.
• An example would be Coca-Cola, McDonalds, and Walmart.
• Multinational companies are the biggest type of business, and in fact they often generate more
revenues than the country they operate in.
• For example, they can avoid transportation costs to ship a product from one country to another.
Factors that allowed MNC’s to grow so rapidly

• The search for growth markets.
• Improved communications: Not only through ICT but also through transport and distribution
networks.
• Dismantling of trade barriers: Allowing for easier movement of raw materials, components and
finished products.
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• Extension of product life cycles: A product’s life cycle may end in one country, but it may begin
in another.
• Deregulation of capital markets: Allowing for easier transfer of funds and also tax avoidance
• Desire to reduce production costs.
• Desire to shift production to countries with lower unit labour costs.
• Desire to avoid transportation costs.
Impact of MNC’s on the host country
Investments of multinational companies into a new Multinationals usually produce products in cheapest
country will cause a direct flow of capital into the and efficient way, which may not be most
country’s economy giving it a boost. environmentally friendly.
Multinationals also provide employment They may use up more natural resources from the
opportunities for people living in host nation. host country.
MNCs are large so their projects will also be large
and labour intensive.
Multinationals also provide tax revenue for the host Increased competition for existing companies in the
country. host companies.
New technology and innovation is brought into the Unstable jobs from the multinational as they can
country. change and adapt quickly.
Increased consumer choice. Multinationals in new countries may only offer low-
skilled employment as they have a strong higher up
management.
Improves the image of the host country. Export of profits, as the foreign company will take
the profits generated by the new branch.
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1.7 Organisational Planning Tools (HL)

Decision Tree
• A diagrammatic technique used to illustrate the possible options available in a decision and to
analyse the numerical (money) results of taking each action.
• A decision tree is used to find theoretical financial values for various outcomes to form a
decision.
• The outcome that produces the best EXPECTED OUTCOME is the best one and is chosen.
• Constructing Decision Trees:
- The diagram is constructed from left to right
- Decision Nodes are shown as squares. They are used when there is a decision to be made,
such as whether to launch a new product, invest in new machinery etc.
- Chance Nodes are shown as circles. These are used to show the different possible outcomes
of a decision. Typically these include criteria such as “failure” or “success”. Usually each
chance also has possible outcomes (usually 3 “better, same or worse” and each of them have
a proposed percentage chance and result).
- For each chance node there will be two or more routes (outcomes). These show the
probability of the different outcomes for each chance node. The probabilities for each
chance must add up to 1, or 100%.
- The actual values for each outcome are stated at the end of each branch. It is important to
remember that the costs of each option must be deducted prior to writing down this figure.
- Each unwanted branch of the decision is cut-off (rejected) by drawing two parallel lines.
This leave one best option to follow.
Gives a clear answer to a complex decision. Is based on estimates of both outcomes and
probabilities of outcome.
Is flexible and can be applied to many situations. Is based on quantitative data and so ignores
qualitative issues.
Is simple to draw out and coherent to follow by any Can be difficult to draw for highly complex
iterated stakeholder. decisions with multiple outcomes and interrelated
choices.
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Chapter 2: Human Resources

Management 
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2.1 Human Resources Planning

Human Resources Management
• Strategic approach to the effective management of an organisation’s workers so that business
can use it to gain a competitive advantage.
• HR aims to recruit capable, flexible and committed people. While managing and rewarding their
performance and developing their key skills to benefit of the organisation.
Labour Turnover
• It measures the rate at which employees are leaving an organisation. And it is measured by the
following formula:
!
• High labour turnover can have various impacts on a business.
Low-skilled and less productive staff may be Recruiting and training process can be costly.
leaving which makes way for better staff.
New ideas and practices brought in to the business Poor output levels and customer service due to high
with new workers. number of job vacancies.
Difficult to establish loyalty with consumers.
Poor staff morale.
Demographic Change
• The potential supply of labor to any organisation is affected by demographic changes.
• Population growth:
- Opportunities:
‣ May be easier to recruit good staff.
- Constraints:
‣ Increased birthrates may take years before they impact the working population.
• Net migration:
- Opportunities:
‣ May be easier to recruit good staff at lower rates of pay.
‣ Highly qualified staff might be recruited from other countries.
- Constraints:
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‣ Brain Drain of qualified and experienced staff to other countries will reduce
competitiveness.
‣ Immigrants may need more training.
• Ageing population:
- Opportunities:
‣ It is often claimed that older staffs are more loyal and reliable than younger
workers.
- Constraints:
‣ Older staff can be less flexible and adaptable to change, especially with
technology.
Labour Mobility
• Occupational mobility:
- How much workers are willing and able to move to different jobs needing different skills.
• Geographical mobility:
- How much workers are willing and able to move geographical region.
• High labour mobility helps a country achieve economic efficiency.
• In developed economies, labour tends to be relatively immobile because:
- People own their own house.
- High skill levels in one occupation.
• In emerging market economies, despite strong family and ethnic ties, mobility tends to be higher
because:
- Home ownership is low.
- Low skill levels mean that workers can undertake low-skilled jobs in many different
industries.
• Alternatively, high degree of geographical mobility, mostly between rural and urban areas, can
cause overcrowding and very poor living conditions in cities.
• Many governments pursue policies to attempt to increase labour mobility. These include:
- Relocation grants for key public sector workers.
- Job centres and other government offices to advertise .
- Job vacancies nationally
- Training and retraining programmes for the unemployed .
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Workforce Planning
• Analysing and forecasting number of workers and the skills of the workers that will be required
by the organisation to achieve its objectives (mostly the long-term goals).
• HR departments need to calculate the future staffing needs of the business. The starting points
for workforce planning is always a workforce audit.
• Workforce Audit:
- A check on the skills and qualifications of all the existing employees.
• Workforce Plan:
- Thinking ahead and establishing the number and skills of the workforce required by business
to meet its objectives.
• Workforce Planning Involves:
- Forecasting number of staff required. This will depend on: demand for product, productivity
level, objective of the business, changes in laws dealing with workers rights, labour turnover
and absenteeism.
- Forecasting skills required. This will depend on the pace of technological change and need
for flexible or multi-skilled staff.
Recruitment
• The process of identifying the need for a new employee, defining the job to be filled and the
type of person needed to full it, attracting suitable candidates for the job and selecting the best
one.
• Organisations needs to obtain the best workforce available if they are to meet their objectives
and be competitive.
• Stages of Recruitment:
- Vacancy Arises
- Job Analysis:
‣ Identifies and records the responsibilities and tasks relating to a job.
- Job Description:
‣ Outlines the responsibilities and duties to be carried out by someone employed
to do a specific job.
‣ Includes:
➡ Job title, department and who the employees will be responsible to and
for.
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➡ Job’s purpose as a summary.

➡ Main duties of the job.
➡ Conditions of employment — salary, hours of work pension scheme and
welfare.
‣ Consists of :
➡ Job purpose
➡ Job context
➡ Accountability
➡ Performance criteria
➡ Resource requirements
- Job Specification:
‣ It is a document that outlines the requirements, qualifications, expertise, physical
characteristics, etc. for a job. (refers mainly to the applicant not the job itself).
‣ Includes:
➡ Level of educational qualifications.
➡ The amount of experience and type of experience.
➡ Special skills, knowledge or particular aptitude.
➡ Personal characteristics and personality traits.
- Job Advertising
- Application Forms/CVs/Résumés:
‣ Job advertisements will require the applicants to apply in writing. This is either
through filling in an application form or sending a letter of application with a CV
or résumé attached.
‣ CV (Curriculum Vitae) or Résumé:
o A summary of applicant’s qualifications, experience and qualities, and is
written in standard format
‣ Parts of a CV or Résumé:
o Name
o Address
o Telephone number
o Date of birth, Nationality
o Education qualifications
o Work experience
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o Position of responsibility
o Interests
o Details of referees (References)
‣ Parts of a letter of application:
o Why the applicant wants the job?
o Why the applicant feels he/she would be suitable?
- Interviews:
‣ The recruitment department scans the application forms and shortlists the
applicants.
‣ The shortlisted applicants are invited for interview, and the referees that are
provided will be contacted to give opinion of the applicant’s character, reliability
etc.
‣ Purpose of interviews:
o Applicants ability to do a job?
o Personal qualities that are advantageous or disadvantageous?
o General character and personality — will they fit in?
‣ Questions:
o Why have you applied?
o What do you know about this company?
o What qualities do you have to offer?
o What ambitions do you have?
o What are you hobbies?
o Do you have any questions?
‣ Some businesses include tests in their selection process for example:
o Skill tests: Aim to show the ability of the candidate to carry out certain
tasks.
o Aptitude tests: Aim to show the candidate’s potential to gain additional
skills.
o Personality tests: Aim to assess the personality of the candidate to see if it
will fit in the company.
o Group Situation tests: Aim to show the candidate’s ability to work in a
group.
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- Rejecting Unsuccessful Applicants: When a suitable candidate is offered the job and is
accepted into the business, it is customary that the department informs the other applicants
about it and thanks them for applying.
• Types of Recruitment:
- Internal Recruitment: Internal recruitment is when a vacancy is filled by someone who is an
existing employee of the business.
Rewards good work of current employees. Can result with organisational inbreeding;
candidates may have limited perspective.
Cost-effective form of recruitment Places heavy burden on training and development.
Improves morale of the employees. May cause political infighting for promotions.
Can assess known past performance to determine
suitable candidates.
Can result in succession of promotions
- External Recruitment: External recruitment is when a vacancy is filled by someone who is

not an existing employee and will be new to the business.
Brings new ideas/talents into the organisation. May results in misplacements.
Helps organisation get needed competencies. Increases recruitment costs.

Provides cross-industry insights May cause morale problems for internal candidates.
May reduce training costs (experienced hired). Requires longer orientation or adjustment time.
Helps organisation meet equal employment
opportunity/affirmative action goals
Training
• Having recruited and selected the right staff, the HR department must ensure they are well
equipped to perform the duties and undertake the responsibilities expected of them.
• For Employers:
Greater motivation and commitment of employees. Employee may leave once training is received
benefiting other organisations.
Increased productivity. Cost of training involved.
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Improved quality of output May raise employee expectation of promotion
Improved customer service Loss of output whilst training
Ability to use new technology
Greater flexibility of labour force
• For Employees:
May get increased pay May be asked to undertake additional duties
Improved chance of promotion May have to work in a different way

Easier to apply for jobs in other business May be moved to a different job
• Training is needed for:

- Introducing a new process or equipment
- Improving efficiency of workforce
- Unskilled workers
- Decreasing supervision needs
- Improving opportunities for internal promotion
- Decreasing accidents chances
• Training is used to achieve:
- Increased skill levels
- Increased knowledge
- Change people’s attitude/raise awareness
• Types of Training:
- Induction Training:
‣ An introduction is given to an employee, explaining the firm’s activities,
customs and procedures and introducing them to their fellow workers.
‣ The employees are given a schedule for introducing various business activities
that will last for a day or for several.
- On-the-job Training:
‣ This is where the person is trained by watching a more experienced worker
doing the job and are shown what to do.
‣ This is mostly suitable for jobs that are unskilled to semi-skilled.
‣ Main methods of on-the-job trainings include:
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➡ Demonstration/Instruction: Showing the trainee how to do the jobs.

➡ Coaching: Intensive training with close working between trainee and
experienced worker.
➡ Job Rotation: Several jobs in succession to gain experience of wide range
of activities.
➡ Project Teams: Employees undertake in a multidisciplinary project.
Less expensive than sending them to a course (no Mistakes made by the trainee can be damaging to
travel costs involved). the company.
Knows where the employee is and what he is doing The trainer will be less productive whilst he is doing
at all times. the training.
Trainer’s bad habits can also be transferred.
- Off-the-job Training:
‣ This is where the worker goes away from the place of work to obtain training.
‣ This is more useful when the worker is required to have a varied set of skills and
the job is more complex, since a broad range of skills can be taught this way.
‣ Main methods of on-the-job trainings include:
➡ Day Release: Time off work to attend local college.
➡ Distance Learning/Evening Classes: Training after working hours are
over.
➡ Sandwich Courses: When an employee spends a longer period of time in
college before returning.
➡ Self Study and Computer Based learning
Gains an official qualification, which will help Once the employee has gained the qualification, he
when applying for a promotion or a new job. may use it to find another job.
If courses are held outside of work hours, the Travel costs are involved.
employee is still working normally.
The employee will be missing work time to go to
the courses.
- Cognitive Training:
‣ Referred to as brain exercise.
‣ Focusing to improve on core abilities.
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‣ Work on skills required for learning, such as auditory, perception etc. This is a
basic form of training.
‣ To raise brain capabilities, such as when the brain hasn’t been working
analytically for an extended period of time.
- Behavioural Training:
‣ Training in skills involved in daily activities such as communication, bargaining,
customer service.
‣ These can be variable based on the type of job.
Appraisal and Development

• Development should be a continuous process. To enable the worker to continually achieve a
sense of self-fulfilment, the HR department should work closely with the worker to establish a
career plan.
• An individual’s progress and improvement can also be geared to the needs of the firm.
• Appraisal is the process of assessing the effectiveness of an employee against pre-set objectives.
This is often undertaken annually.
• An appraisal form is often used which will comment on the workers ability to meet certain
criteria and may suggest areas for action and improvement or recommendations for training or
promotion.
• Types of Appraisal:
- 360-Degree Feedback:
‣ The HR manager interview and employee’s supervisor, peers and any direct
reports.
‣ This technique allows an appraiser to gain a complete profile of the employee.
‣ The appraiser can gauge the worker’s job performance and technical skill set as
well as receive in-depth feedback on the employee’s behaviour.
‣ Measuring areas of subjectivity allows an employer to manage employees
development.
- Summative Appraisal:
‣ The goal is to measure the level of employee’s success or proficiency in meeting
predetermined benchmarks.
‣ To be effective, these benchmarks should have been discussed and agreed with
each employee before time period of assessment.
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‣ The outcome of the assessment could be used to influence an employee’s pay

grade, annual bonuses or chances of promotion.
- Self-Appraisal:
‣ This involves asking the employee to self-evaluate his or her job performance.
‣ Typically the supervisor will ask the employee to complete an evaluation form,
which will be used as a basis for discussion during the annual performance
review meeting.
‣ In the meeting the employer and manager discuss self-appraisal results, negotiate
final evaluations based on both manager’s and employer’s perception.
Dismissal of Employees
• It may be necessary for a HR manager to discipline an employee for continued failure to meet
the obligations laid down by the contract of employment.
• Dismissal of employees is not to be taken lightly, not only does it withdraw the employee’s
immediate means of financial support and social status, if the conditions of the dismissal are not
fully in accordance with company policy and law the civil court action might result.
• This can lead to substantial damage to the firm.
• Dismissal could result from employee being unable to do the job to the standard that the
organisation requires too may be that the employee has broken one of the crucial conditions of
employment.
• Before the dismissal can happen the HR department must do all it can to help the employee
reach the required standards or to the conditions of employment.
• This can be done by providing support and training as the organisation must not leave itself
open to allegations of unfair dismissal.
• Dismissal: Being removed or sacked from the job due to incompetence or breach of discipline.
• Contract of employment: A legal document that sets out the terms and conditions governing a
workers job.
• Unfair dismissal: ending a workers employment contract for a reason that the law regards as
being unfair.
Outsourcing and Offshoring

• HR costs can be very significant for a business, mainly one in a service, tertiary and quartenary
sectors.
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• One method of cutting costs is outsourcing by contracting or subcontracting specific business

activities to other companies. This helps to cut back on costs and operations managements
• Since the sub-contractors are considered professionals/experts, the business can expect better
quality of results from the subcontractors/contractors.
• This can, however, reduce the main companies direct involvement in that activity and lead to
loss of direct control.
• Offshoring is when the business moves outside its immediate borders in order to reduce costs.
Usually productions aspect of the business are sent offshore. You still have control though.
Redundancies
• When a job is no longer required so the employee doing his job becomes redundant through no
fault of his or her own.
• Redundancy occurs when a worker’s job is no longer required, maybe because of the following
men or changing technology.
• The way these announcements are handled can have a very serious effect on the staff that
remain and on the wider community.
• If the firm is seen to be acting in an uncaring or unethical manner, then the external stakeholders
can react negatively to the business.
• Redundancy can happen if the job someone has been doing is no longer required and there is no
possibility of the person being re-employed somewhere else in the organisation, or even if the
firm needs to reduce its workforce due to budget cuts.
Employment Patterns and Practices

• In recent years, there has been a move away from traditional work pattern and practices.
Traditionally, these were characterised by:
- Full-time employment contracts.
- Permanent employment contracts for most workers.
- Regular working hours each week.
- Working at the employer’s place of work.
• Nowadays, the working population in now faced with very different patterns in work such as:
- Part-time and temporary employment contracts.
- Teleworking from home.
- Flexible hours contract.
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- Portfolio working — several simultaneous employments at the same time.

• Reason for these Changes:
- Focus on competitiveness, driven by competitive pressures from globalisation, by cutting
overhead labour costs.
- Need for greater labour flexibility with the rapid pace of technological change.
- Greater opportunities for outsourcing, especially in low wage economies.
- Changing social and demographic patterns.
• Consequences:
- Eventually, nowadays, companies have to consider what sort of employment contracts
people must be hired in.
- Should it be a permanent contract, temporary contract, part-time contract or flexi-time
contract.
Part-time & Flexible contracts for Business
Employees can be asked to work at particularly More employees to manage than if they were full
busy periods of day and not during slack times. time.
More employees are available to be called upon Effective communication will be more difficult as
should there be sickness or other causes of holding large meetings will be harder.
absenteeism.
Employee efficiency can be measured prior to Motivation levels of part-time workers differs from
getting the contract. permanent workers.
Teleworking from home saves overheads. Some fear teleworking can lower productivity.
Part-time & Flexible contracts for Contractors
Contract could be ideal for certain types of workers. They will be earning less than full-time workers.
The workers can combine different jobs from There will be lower job security and working
different firms to have a variety to working lives. conditions than permanent workers.
Teleworking allows workers to organise their own Teleworking leads to less social contact with fellow
working day at home. workers.
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2.2 Organisational Structure

Organisational Structures
• The internal, formal framework of a business that shows the way in which management is
organised and linked together and how authority is passed through the organisation.
• Traditionally, head offices housed all key personnel taking all important decisions. Nowadays
more and more firms are using “flatter” and more decentralised structures, and the structures are
becoming flatter and flatter.
• This is because employees are becoming better qualified and more knowledgeable, so they don’t
want to work in formal hierarchies.
Internal Organisation of Firms

• In small firms:
- Each worker may undertake a range of roles.
- The structure may be informal and fluid.
• As firms grow bigger:
- The roles and responsibilities of each worker must become clearer.
- A more formal structure is necessary.
Key Terms in Structure

• Level of Hierarchy: A stage of organisation structure at which the personnel on it have equal
status and authority.
• Tall(vertical) Structure: One with many levels of hierarchy and, usually, narrow spans of
control.
• Flat(horizontal) Structure: One with few levels of hierarchy and wide spans of control.
• Span of Control: The number of subordinates reporting directly to a manager.
• Chain of Command: This is the route through which authority is passed down an organisation.
Formal Hierarchical Structure

• The structure has different layers of the organisation with fewer and fewer people on each
higher level. Often displayed as a pyramid.
• The chart Indicates:
- Who has overall accountability for decision making.
- The formal relationship between people and departments.
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- How accountability and authority are passed down the organisation — chain of command.
- The number of subordinates reporting to each senior manager — span of control.
- Formal channels of communication both vertical and horizontal.
- The identity of the supervisor or manager to whom each worker is answerable to.
Decision making starts at the top. One way top down communication is rarely
efficient.
Employees can see the path of the career ladder. Lack of coordination between departments.
Role of each individual is clear as is the chain of Department and organisation views are different.
command.
Inflexible and resistance to change.
Tall vs. Flat Organisations
Tall Organisation Flat Organisation

Many Layers. Few layers.
Small spans of control. Large spans of control.
High levels of control (usually appropriate for Low level of control.

unskilled workers).
More opportunities for promotion. Promotion opportunities are limited.
Poor communication as information has to pass Better communication as information reaches target
through layers. directly.
Factors influencing organisational structure

• The size of the business and the number of employees.
• The style of leadership and culture of management.
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• Job loss due to economic recession could lead to delayering to cut costs.
• Corporate objectives.
• New technologies.
Delegation and Accountability

• Giving a subordinate the authority to perform a particular task which was originally assigned to
you.
• It is simply the authority that is delegated as the ultimate responsibility still falls onto you; if the
job was done poorly then you will be held responsible.
• It results with a reduction in direct control by supervisors and increasing trust towards the
workers.
• The accountability is the obligation of an individual to account for his or her activities and to
disclose results in a transparent way.
• Reasons for delegation:
- Streamlining work load.
- Increasing time
- Decreasing stress
- Motivate staff and make them more confident.
Gives senior managers more time to focus on If the task is not well defined or if inadequate
important strategic roles. training is given, then delegation will be unlikely to
succeed.
Shows trust in subordinates and this can motivate Delegation will be unsuccessful if insufficient
and challenge them. authority(power) is given to the subordinate who is
performing the tasks.
Develops and trains staff for more senior positions. Managers may only delegate the boring jobs that
they do not want to do — this will not be
motivating.
Encourages staff to be accountable for their work-
based activities.
Delayering
• Many businesses aim for a flatter organisational structure to reduce costs of management
salaries. This is known as delayering,
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• It is the removal of one or more of the levels of hierarchy from an organisational structure.
• This development in organisational structure has been assisted by improvements in IT and
communication technology, which has enabled senior managers to communicate directly with
their subordinates.
• This has basically made the middle-manager a redundant role.
Reduces business costs. Could be one-off costs of making managers
redundant.
Shortens the chain of command and should improve Increased workloads for managers who remain —
communication through the organisation. this could lead to overwork and stress.
Increases spans of control and opportunities for Fear that redundancies might be used to cut costs
delegation. could reduce the sense of security of the whole
workforce.
May increase workforce motivation due to less
remoteness from top management and greater
chance of having more responsible work to perform.
Bureaucracy
• It is a system that is most commonly found in government organisations. It is an organisational
system with standardised procedures and rules.
• It discourages initiative and enterprise as decisions are taken centrally and then put into effect
by staff following set procedures and protocols.
• The main attributes of bureaucracy can be identified as rationality and efficiency but it is also
recognised through impersonality and ineffectiveness.
Centralisation and Decentralisation

• Centralisation: Keeping all of the important decision-making powers within head office or the
centre of the organisation.
• Decentralisation: Decision-making powers are passed down the organisation to empower
subordinates and regional/product managers.
• Centralised businesses want to maintain exactly the same image and product range in all areas
— perhaps because of cost savings or to retain a carefully created business identity.
• Decentralised businesses are those multinationals that allow regional and cultural differences to
be reflected in the products and services they provide.
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Advantages of Centralisation Advantages of Decentralisation

A fixed set of rules and procedures in all areas of the More local decisions can be made which reflect
firm should lead to rapid decision-making. There is different conditions — the managers who take the
little scope for discussion. decisions will have local knowledge and are likely
to have close contact with consumers.
The business has consistent policies throughout the More junior managers can develop skills and this
organisation. This prevents any conflicts between prepares them for more challenging roles.
the divisions and avoids confusion in the minds of
consumers.
Senior managers date interest of the whole business Delegation empowerment are made easier and these
not just one division of it. will have positive effects on motivation.
Central buying should allow for greater economies Decision-making in response to changes should be
of scale. quicker and more flexible as Head office will not
have to be involved every time.
Senior managers at head office will be experienced
decision-makers.
Different Types of Organisational Structures

• The Hierarchical Structure
- A structure in which power and responsibility are clearly specified and allocated to
individuals according to their standing or position in the hierarchy.
- Decision-making power starts at the top but may be passed down to lower levels.
- The goal for each individual will be clear and well defined, and there is a clearly identifiable
chain of command.
- By Product:
‣ An organisational structure based on products consists of several parallel teams
focussing on a single product or service line.
‣ Examples of a product line can be the different car brands under General Motors
or the softwares under Microsoft. Service line is Bank of America’s retail,
commercial, investing and asset management.
‣ This gives larger business the ability to segregate large sections of the company
into semi-autonomous groups. These are mostly self-managed and their focus is
narrow.
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‣ Unlike functional departments, they tend to be more autonomous with each

section having a top executive managing the budgeting, recruitment, advertising
etc. individually.
Product divisions can work well because they allow Product divisions may compete with each other for
a team to focus on a single product or service, with available financial resources and might reduce
an appropriate leadership structure. cooperation.
Having a senior executive makes it more likely the Divisions can result in compartmentalisation that
division will receive resources it needs from the results in lack of coordination or even duplication of
company. developments.
A product division’s focus allows it to build a
common culture and esprit de corps that contributes
to higher morale and better knowledge of division;s
range of products.
- By Function:
‣ This is the traditional for of organisational structure.
‣ It is the most common type of structure that follows the generic hierarchical
format.
‣ It is used by many large organisations.
Grouping employees by functional skills can Such a structure tends to suggest that one-way
improve efficiency. Specialists get clustered communication is the norm — this is rarely the most
together promoting collaboration and development. efficient form.
Employees can capitalise on their specialised skills There are few horizontal links between the
as a means to move up the ladder in a given department, and this leads to lack of coordination
department. between them.
As each department specialties in a specific Managers get tunnel vision, they will mostly focus
function, managers train and develop employees on the departmental objectives as opposed overall
within their unit to be proficient in their given role. business aims.
This is very inflexible and often leads to change
resistance.
- By Region:
‣ Multinational businesses are often structured using regional divisions. This is an
additional level on top to differentiate the different regional branches.
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‣ Large businesses operating within one country might also divide the structure
into different regions.
Communication between representatives can be There may be duplication of personnel between
very direct and personal in a geographical head office and regional offices.
organisational structure.
Grouping employees into regional sections can There may be conflict and unhealthy competition
encourage the formation of strong, collaborative between different areas.
teams.
The ability to recruit local management offers It could make it more difficult to be consistent in
companies the advantage of having leaders who are core company beliefs.
completely familiar with local business
environment.
Customers can feel more at ease when speaking Inconsistent company strategies might be adopted in
with a local representative. different regions (poor coordination between
regional offices).
Tracking performance of individual regional
markets is simplified under this structure.
Changes in Organisation Structures

• Matrix Structure:
- This approach to organising businesses aims to eliminate many of the problems associated
with the hierarchical structure.
- This cuts across the departmental lines of a hierarchical chart and creates project teams made
up of people from all departments or divisions.
- This method of organising a business is task or project focused.
- Instead of highlighting the role or status of individuals it gathers together a team of
specialists with the objective of completing a task or a project successfully.
- Emphasis is placed on individual’s ability to contribute to the team rather than their position
in the hierarchy
It allows total communication between all members There is less direct control from the top as the teams
of the team, cutting across traditional boundaries may be empowered to undertake and complete a
between departments in a hierarchy. project.
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There is less chance of people focusing on just what The benefit of a faster reaction to new situations is,
is good for their department. therefore, at the expense of reduced bureaucratic
control, this may be resisted by some senior
managers.
The crossover of ideas between people with Team members may have, in effect, two leaders if
specialist knowledge in different areas tends to the business retains levels of hierarchy for
create more successful solutions. departments but allows cross-departmental teams to
be created.
As new project teams can be created quickly, this
system is well designed to respond to changing
markets or technological condition.
• Horizontally Linked Structure:

- The structure is primarily found in the IT and high-tech sectors.
- In this structure, employees are grouped by function into three areas — planning, building
and running.
- This structure allows the company to respond quickly to changing market conditions and
technological advances but may not work well for companies that produce products with a
longer lifespan, or service industries.
• Handy’s Shamrock Organisation:
- Charles Handy is a well-known writer on organisational structure who focused on
organisation structure introduced in businesses with greater cost pressures and need for
greater flexibility.
!
- Core managerial and technical staff, who must be offered full-time, permanent contracts with
competitive salaries and benefits. These workers are central to the survival and growth of the
organisation. In return for high rewards they are expected to be loyal and work long hours
when needed. As core workers are expensive, their numbers are being reduced in most
organisations.
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- Outsourced functions/sub-contractors by independent providers, who may once have been

employed by the company. These workers provide specific services that do not have to be
kept within the core. These may include payroll services, transport, catering and IT.
- Flexible/temporary workers on part-time contracts, who are called on when the situation
demands their labour. As the organisation demonstrates little concern or loyalty towards
these workers, they often respond in kind. These workers are most likely to lose their jobs
during economic downturns.
Communication in Business
• Communication between its stakeholders is effective for a business to be effective.
• Communication can be:
- Formal: Followed though the organisational structure.
- Informal: Followed through the “proper” channels.
• Communication can take a variety of media:
- Verbal:
‣ It is direct effective and feedback is immediate. However message can be
misunderstood due to language constraints.
‣ Formal: Interviews, meetings, lectures, presentations, telephone conversations
(recorded)
‣ Informal: Face-to-face, gossiping, telephone conversation (unrecorded).
- Visual:
‣ Permanent, recognisable and immediate. However it can be bad if the receiver
has bad eyesight.
‣ Formal: Presentations, videos, notice boards, signs, sign language, symbols,
maps.
‣ Informal: Body language, gestures.
- Written:
‣ This is information that can be kept on records. However, tone of the
information can be lost through writing.
‣ Formal: Reports, letters, notices, bulletins, forms, press release.
‣ Informal: memos, emails, texts, blogs. 
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2.3 Leadership
Leadership
• Leaders operate and exercise their authority differently. Each is said to have a different
leadership style.
• The leadership styles are about:
- The way the functions of leadership are carried out
- They way a leader behaves
• The person who leads or commands a group, organisation or country is a leader; he/she will
have a vision and will lead a group towards the common goal.
Key Function of Management

• Planning — Managers must plan, set strategic objectives, tactical objectives and even
operational objectives. All of which have implications throughout the organisation.
• Organising — Managers must then make sure that the business has sufficient resources to
achieve its objectives. This requires careful organisation, since too many resources tie up excess
capital and too few means that the objectives cannot be met.
• Commanding — Managers must then make sure that the individuals know which duties they are
supposed to perform. They must also ensure that employees receive instruction in how they are
to perform the tasks.
• Coordinating — Managers must bring various resources together to achieve an objective. Many
activities occur within a business at the same time, managers make sure that these activities are
coordinated to where it is supposed to be.
• Controlling — Managers have power over a given situation to achieve objectives. They must
utilise this power to manage the workforce to help achieve an objective.
Management vs. Leadership

• Manager:
- Manager is responsible for planning and overseeing work of a group, monitoring a group’s
progress, and ensuring that the plan is put into effect.
- Managers are generally task-oriented; they focus on getting tasks accomplished in a timely
manner rather than on leading people.
- Work of Manager:
‣ Instruct and coordinate people.
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‣ Help subordinates to resolve problems.

‣ Generally have technical expertise, and bring that technical expertise to bear.
‣ Have authority by virtue of their position in the organisation.
‣ Focus on just making organisation function.
• Leaders:
- A leader’s role is more emotional since a great leader has the ability to inspire people to
follow her/him voluntarily.
- A leader spends a great deal of time and energy building relationships and are thus
relationship-oriented.
- Work of Leader:
‣ Motivate and inspire with personal qualities.
‣ Often rely on instincts.
‣ Have a vision and others follow them because of that vision.
‣ Can sometimes oppose the way organisation chooses to do something.
Autocratic Leadership
• Orders MUST be followed.
• Leader believes he knows best.
• The leader makes it clear to the employees what must be done.
• Autocratic leaders hold onto as much power and decision-making as possible.
• Communication is top-down and one-way.
• Most likely to be used when subordinates are unskilled, not trusted and their ideas are not
valued.
Workers may feel secure because they just do as Could be demotivating because workers are not
they are told and don't need to think for themselves. given a chance to express themselves.
Things are resolved quickly since time is not wasted Could lead to staff wanting to leave the company if
in decision making. they feel like they cannot make suggestions.
Decisions are made quickly in emergencies or Staff may feel, “they do not matter” and are
crises. unimportant to the business.
Democratic Leadership
• The style of leader believes that decision making is done better if it is shared.
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• Focus of power is more with the group as a whole.

• Emphasis on delegation of tasks.
• Employees have greater involvement in decision-making and are asked for ideas and
suggestions.
• Better if the workers have higher skill level and decisions affects the business.
Workers may feel more motivated as they can see Could be demotivating if the leader takes credit for
the ideas being used in the business worker’s ideas.
Decision making takes longer and is bad in crises or
emergencies since time is taken in decision making.
Staff may feel demotivated if the manager earns
more for worker’s decisions.
Laissez-Faire Leadership
• The name means “let it be” — this leadership style is one in which the leadership
responsibilities are shared by all.
• Can be useful when creative ideas are involved.
• Managers/employees have freedom to what they think is best.
• Leader has little input into day-to-day decision making.
• Conscious decision to delegate power.
Can be motivating if people have control of their Sometimes the freedom can cause individual
work life. interest of employee to diverge far from business’.
Can help employees since they will be more Employees become less interested since they are
responsible for their jobs. responsible for everything as well.
Paternalistic Leadership
• Follows the concepts of autocratic and democratic leadership styles.
• Decides what is best for the employees and the decisions are usually justified.
• Still there is little delegation.
Employee is motivated to impress leader and takes Low staff motivation if loyal connection to
ownership of business. management is not established.
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Staff turnover decreases and there is employee Increasing dependency of employees on leader
loyalty. leading to more supervision required.
Decisions take employee’s best interests into Dissatisfaction in employees if employees feel
account. leader is playing favourites.
Situational Leadership
• Style of leadership used will depend on the nature of the task and the work group’s skills and
willingness to accept responsibility.
• Adapting leadership style.
By allowing flexibility of leadership style, different Varying style of leadership may be difficult for
leadership approaches can be used in different some workers to accept and they may become
situations with different groups of people. uncertain of how they will be led.
Ethical and Cultural Considerations

• Ethical leadership by knowing and doing what is ‘right’. It can be utilitarian or deontological
approach, in the sense that either the leader looks towards bettering the company as a whole or
makes decisions that aid the staff.
• Ethical leadership involves:
- The ability to ignore personal interests for the sake of the organisation, the needs of the
employees and the greater good of the community.
- A willingness to encourage and consider seriously feedback, opinions different from the
manager’s own, and challenging the manager’s ideas and proposed decisions.
- Encouraging leadership in others.
• Ethical leaders tend to be paternalistic or democratic than autocratic.
• Culture also influences the leadership style of a manager. This is because in different culture, the
way to handle people is different.
• For instance Asians uphold a collectivistic attitude towards work, to them it is more about the
group as a whole than the individual employee, paternalistic and autocratic leadership is also
dominant.
• On the other hand, individualism is dominant in western culture, and there we see greater stress
on employee relationship and we get to see more democratic leaders in those organisations. 
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2.4 Motivation
Motivation
• Motivation is needed for:
- Better productivity
- Better quality
- Lower absenteeism
- Lower staff turnover
- Lower recruitment needs
• Various theorists created theories on what really motivates workers, a few of them are explained
below.
Abraham Maslow and Hierarchy of Needs

• This theory of motivation was based on classifying the different aspects of motivation into
sections and was published in 1954.
• His theory stated that to be truly motivated, different aspects had to be first satisfied like a
pyramid.
• The hierarchy (from bottom to top):
!
- Physiological needs: These were considered the basics requirements such as food, air, shelter
etc.
- Safety needs: These involved the worker’s feeling of security and the feeling that he/she was
safe.
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- Social needs: There are the needs to have rewarding relationships with families and
employees at work.
- Esteem needs: This is the need for self-respect and respect from others.
- Self-actualisation: This is the need to feel satisfied about what one does.
Understanding of employee’s position on the Empirical and not completely proven; it
pyramid saves the business from over generalises the targets making it difficult for it
expenditure to motivate the employee. to be applied effectively.
Simple and easy to follow and apply in Some elements of motivation are skipped: such
businesses and organisations. as money as a motivator and a self-esteem
symbol.
Douglas McGregor & Theory X-Y

• McGregor developed 2 theories of human behaviour at work: Theory X and Y in 1971.
• He described the theories in the following manner:
- Theory X:
‣ Individuals who dislike work and avoid it where possible.
‣ Individuals who lack ambition, dislike responsibility and prefer to be led.
‣ Individuals who desire security
‣ Require a management system of coercion, control and punishment.
- Theory Y:
‣ Consider effort at work to be as important as rest or play.
‣ Ordinary people who don't dislike work.
‣ Individuals who seek responsibility (if they are motivated enough).
‣ Require a management system in which the workers can show and develop their
skills and creativity,
Managers found it easy to understand and The concept was too generalised making it
classify some of the employees in the theories. difficult to classify the workers that fell in the
middle.
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Helps individuals relate to their work The theories are too separated with them being
experience and adapt to the management styles. too extreme and this was not supported by
evidence to prove its credibility.
Frederick Herzberg & Two-Factors

• Herzberg proposed a “two-factor theory” in 1959 in which it stated that the lower two sections
of Maslow’s hierarchy were irrelevant in motivation.
• He stated that humans could be made to do things by providing the basic needs, but they can
only be motivated by the higher levels.
• His two factors included:
- Hygiene factor: The basic needs for employees to work in a business. The lack of which can
only lead to dissatisfaction.
- Motivation factor: The factors of motivation that cause job satisfaction and are needed for
employee productivity.
Helps when the focus is in a broader context It is too generalised and does not help when
and it needs to be addressed or mitigated in focus is needed on individuals in a group or
general. organisation.
Makes it easier for businesses to understand the The theory was based solely off of accountants
general context of motivation towards their and engineers and will work differently for
employees. other working classes; e.g. hourly employees
may not be particularly interested in job
enlargement and enrichment, and may be more
motivated by increased pay.
Frederick Taylor & Scientific Management

• Believed that humans are rational economic animals concerned with maximising their economic
gains; published this theory in 1911.
• People resounded as individuals, not as groups.
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• People can be treated in a standardised fashion, like machines. Management task decide exactly
how every task should be completed. Then they need to design the tools needed to enable the
workers to achieve the task as efficiently as possible.
• Believed that workers should get paid based on what they produced — as piece rates.
• Believed that money was the sole motivation factor.
Helped increase productivity in monotonous Not everyone is motivated by money.
jobs, e.g. product manufacturing lines.
Helps standardised training and development of Some workers felt uncomfortable being
staff. observed constantly while working.
Unfair if workers could not work due to health
problems.
John Adams & Equity Theory

• John Adams’s equity theory is built on the belief that employees become demotivated towards
their jobs and employer if they feel that their inputs are greater than their outputs.
• Inputs include effort, loyalty, commitment and skill. Outputs include financial rewards,
recognition, security and sense of achievement.
• Adams argued that employers should attempt to achieve a fair balance between what the
employee gives an organisation and what they receive in return.
• If workers consider that their inputs are greater than the outputs received, they will be moved to
try to redress this imbalance.
• When a balance is found, employees will be more motivated and they will look forward to
working.
Daniel Pink & Self-Determination Theory

• Autonomy:
- Provide employees with autonomy over some (or all) of the four main aspects of work
- When they do it (time) – Allowing employees to have flexibility over when they complete
tasks.
- How they do it (technique) – Don’t dictate how employees should complete their tasks.
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- Whom they do it with (team) – Although this can be the hardest form of autonomy to
embrace, allow employees some choice over who they work with.
- What they do (task) – Allow employees to have regular ‘creative’ days where they can work
on any project/problem they wish.
• Mastery:
- Allow employees to become better at something that matters to them.
- Provide “Goldilocks tasks” – Pink uses the term “Goldilocks tasks” to describe those tasks
which are neither overly difficult nor overly simple — these tasks allow employees to extend
themselves and develop their skills further.
- Create an environment where mastery is possible – to foster an environment of learning and
development, four essentials are required — autonomy, clear goals, immediate feedback and
Goldilocks tasks.
• Purpose:
- Take steps to fulfil employees’ natural desire to contribute to a cause greater and more
enduring than themselves.
- Communicate the purpose – make sure employees know and understand the organisation’s
purpose goals not just its profit goals.
- Place equal emphasis on purpose maximisation as you do on profit maximisation – research
shows that the attainment of profit goals has no impact on a person’s well-being and actually
contributes to their ill-being. Organisational and individual goals should focus on purpose as
well as profit.
- Use purpose-oriented words – talk about the organisation as a united team by using words
such as “us” and “we," this will inspire employees to talk about the organisation in the same
way and feel a part of the greater cause.
Motivation Methods
• Piece Rate:
- System where employees are paid per product produced.
Encourages workers to work faster and produce This usually results with poor quality goods
more goods. since quality control systems are expensive.
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Careful workers earn less money than rushers.
Machinery malfunction results with lesser pay

towards employees.
• Commission:
- Type of payment relating to the number of sales made.
Encourages sales staff to sell as many products Excessive persuasion results with a bad
as possible. Increases company sales. reputation to the company.
Stresses sales staff during a bad month.
• Fringe Benefits:
- Extra benefits or perks provided with regular salaries, not considered taxable; thing such as
phone, transport etc.
Greater employee retention percentage. Changing benefit plans causes excess
investments and distress between employees.
Attracts prospective employees. Costs the business to support the benefit

packages.
Benefits keep employees in good and healthy
condition.
• Bonus:
- Additional amount of payment above basic pay as a reward for good work.
Acts as an incentive to work harder. Adds to cost for the company.
Provides employees with job satisfaction. Bonus counts towards taxes for the employees.
Causes jealousy to ensue between employees.
• Performance related pay:

- Pay related to the effectiveness of the employees
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Adds incentive to work harder and produce Individual performance related pay causes
quality goods or services. demotivation in team related work.
Ensures that goals are achieved fruitfully. Unhealthy rivalry between managers.
Difficult to measure performance to pay the

employees correctly.
• Share Ownership:
- System where employees are given shares to the company.
Makes employees feel part of the company. Reduces share price as more is released into the
market.
Aligns employee aims with that of the Discourages employees when share prices fall
shareholders. or company goes through rough times.
Non-Financial Motivators
• Job Enlargement:
- Extra tasks of similar levels of work are given to employees as an add-on.
- Extra work and responsibility to employees thus improving skill and reducing monotony.
• Job Enrichment:
- Looking at jobs and adding tasks that requires more skill and responsibilities to an employee.
- Increases productivity and skill but investment into training the programs will be needed.
• Job Rotation:
- Involve workers swapping round and doing each specific task for only a limited time and
then changing round again.
- Increases variety in work and reduced risk of excess specialisation. However the tasks
themselves remain the same and aren't made better.
• Cell Production:
- A lean method of producing similar products using cells, or groups of team members to
facilitate operations by elimination setup time between operations.
• Job Redesign:
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- Involves the restructuring of a job — usually with employees’ involvement and agreement
— to make work more interesting, satisfying and challenging.
• Team Working:
- The team working approach to work places each member of staff into a small team of
employees.
- It reduces overall stress on staff and improves flexibility and motivation. It is also argued
that sometimes employees may waste time through necessary team meetings.
• Autonomous work groups:
- A group of workers are given the responsibility for a job and they go about it however they
like.
- Provides a feeling of control and increases morale of the employees.
• Kaizan:
- Japanese term for a long-term approach to work that methodically seeks to attain small,
incremental changes in processes.
- This is done to obtain maximum quality and competence and involves all levels of
management.
Cultural Differences and Non-Financial Rewards

• Culture also influences the method of motivating employees. This also changes between
countries.
• In Asia, employees prefer to be recognised as a group rather than individuals. But this is
different in the West where employees prefer to be singled out (employee of the month schemes
etc.)
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Chapter 3: Finance and Sources
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3.1 Sources of Finance

Need for Financing
• Start a new business:
- When an individual plans to start their own business, they should consider all of the assets
they will need to buy in order to start trading. The finance needed to start a new business is
known as a start-up capital.
• Expand an existing business:
- The owner of a successful business will often take a decision to expand it in order to increase
profits.
- This could be in any form as in: expansion of size, increasing range of products etc.
• Support a business during difficulty period:
- Some businesses may need financing during any dry period to maintain liquidity.
- Capital is always necessary for a business to stay liquid.
Types of Expenditure
• Capital Expenditure:
- Money spent on capital expenditure is money spent on fixed assets that last for more that a
year. Non-current assets.
- Fixed assents are needed to start a business and support it as it expands.
• Revenue Expenditure:
- Revenue expenditure is money spent on day-to-day expenses, which do not involve the
purchase of a long-term asset. Working capital.
- EG: wages, rent etc.
Internal Sources of Finance

• This is finance arranged from within a company, from its daily operations.
• Retained Profits:
- Profit kept in the business after owners have received their fair share from the profits. As
either dividends or salaries.
- This doesn’t have to be repaid.
- However new businesses may not have sufficient retained profits.
- Small/specialised firms wont make heavy profits so they can’t benefit from this.
• Managing Working Capital:
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- Its is a short term finance that is important for daily functioning of a business.
- It helps in maintenance of the company.
- It is not quantitative enough to be useful for expansion or starting a business.
• Sales of existing assets:
- Selling off existing assets that may not be of any use to the business, or are simply in
surplus.
- Makes better use of capital tied up in the business.
- New businesses may not have excess fixed assets that they may be willing to sell and
capitalise.
• Running down of stocks:
- This reduces storage cost of high stock levels.
- This however must be done carefully to avoid disappointing customers if not enough of
goods are available.
External Sources of Finance

• Finance obtained from outside of a business, from a third-party source.
• Short Term Finance (Finance for day-to-day operations; up to 3 years):
- Overdrafts:
‣ The banks allows the business to “overdraw” its bank account, which means to
let the business spend more that what is present in their account.
‣ The firm can use this to pay wages or suppliers, but this cannot be done
indefinitely.
‣ Interests are paid for the overdrawn amount only.
‣ Overdrafts have variable rates of interest.
‣ Banks may also ask business to pay off overdrafts in short notices.
- Trade Credits:
‣ This is when businesses delays payment to its suppliers.
‣ Its almost like interest-free loans to the businesses for the length of time the
payment is delayed for.
‣ Suppliers may refuse to give discounts or refuse to supply if it is done
excessively.
- Debt Factoring:
‣ This is when businesses pay off debtors through specialist debt factoring firms.
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‣ The factor provides company with immediate cash to pay off a percentage of a
debt, and company has to pay of the factor the amount back with certain interest.
‣ This means that the risk of collecting debt is now in the hands of the debt
factoring firm.
• Medium Term Finance (Finance for machinery, capital goods; up to 3-10 years):
- Bank Loans:
‣ It is money borrowed from a bank, to be paid back with fixed interest.
‣ Really quick to arrange, and large businesses receive lower interest rates.
‣ There is usually some security/collateral, which is taken by the bank if loans are
not paid back in time. For instance a public limited companies might have to sell
some of the parts of the company if they fail to repay any loans. A sole trader
will have to place his/her property at line as well.
- Sponsorship:
‣ It is when one company provides finances, services or products in exchange for
advertisements etc.
‣ It is an easy source of money.
‣ The sponsored brand can overtake the sponsor, which can be a disadvantage for
the company sponsoring another.
- Hire Purchase:
‣ Allows a business to buy fixed assets over a long period of time (the asset must
be purchased at the end of the hire period).
‣ The payments are made in monthly instalments with interest charges.
‣ A cash deposit is made initially as down payment.
- Leasing:
‣ Allows a firm to use an asset, but not have to purchase it at the end of the leasing
period.
‣ The cost of leasing is fixed.
‣ This is good for small businesses as they don’t have to have a large sum of
money to handle start-up.
‣ Leasing company carries out maintenance of leased asset.
‣ Some businesses decide to sell of some of their fixed assets for cash and lease
them back from the company it was sold to. This is called sale and leaseback. It
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allows for easy access to large sums of money even though the leased cost of the
asset is higher that the product itself.
• Long Term Finance (Finance for expansion; over 10 years):
- Equity Finance:
‣ This is finance obtained through sales of shares. This is only applicable for
public and private businesses.
‣ Private limited companies can sell more shares to reduce their ownerships over
the business.
‣ Public limited companies can float more shares to accumulate a large sum of
money.
‣ Preferential shareholders benefit from fixed dividends and lower risks, but there
are lower returns. They also have no votes in AGM.
‣ Ordinary shareholders gain higher returns, but their dividends are flexible and
the investment is riskier. They have a vote in the AGM.
‣ Share capital does not have to be repaid.
‣ Issuing a lot of shares can alter the balance of power.
- Mortgages:
‣ It is similar to hire purchasing but is specifically for houses, or land.
‣ It is a loan taken from the bank for the use of purchase of a property with it
being the collateral.
‣ The money is paid back in instalments with interest to the bank.
- Debentures:
‣ Long term loan certificate issued by limited companies.
‣ Debentures can be used to raise very long-term finance.
‣ Similar to loans, they have to be paid back with interest.
- Venture Capital:
‣ Venture capital is a high risk high return investment. It is usually undertaken by a
venture capitalists who look for small businesses with potential for growth.
‣ It is an option that will provide loan to a business if banks have turned them
down.
‣ The company must come up with a good plan and present it to the venture
capitalist firm and convince them of its possibilities to obtain the loans.
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‣ The venture capitalist usually looks for a stake in the business in return.
However they won’t have a majority stake in decision making.
- Business Angels:
‣ Theses are companies that provide money to small scale businesses. This loan is
highly risky as the company may go bankrupt.
‣ Business angles look for extremely risky businesses.
‣ It is last option to borrow money, and is only given to firms with potential.
‣ The business angles will take percentage ownership of the venture in return.
They will also have a majority say in the decision making. 
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3.2 Costs and Revenues

Types of Costs by Output
• Fixed Costs:
- Costs that do not vary with output in the short run.
- They are considered to be consistent during the daily running of the business and are not
usually affected by external factors.
- Examples: Rent of premises.
• Variable Costs:
- These cost vary as output changes, such as the direct cost of materials used in making a
washing machine or the electricity used to cook a fast-food meal.
- They are usually represented as rates (i.e. cost per unit).
- Examples: Cost of production of goods.
• Semi-Variable Costs:
- These include both a fixed and a variable element.
- Examples: The electricity standing charge plus cost per unit used, sales person’s fixed basic
wage plus a commission that varies with sales.
Types of Financial Costs

• Direct Costs:
- These costs can be identified with each unit of production; can be allocated to departments.
- The two most common direct costs in a manufacturing business are labour and materials.
The most important direct cost in a service business, such as retailing, is the cost of goods
being sold.
- Examples: Direct costs of a hamburger joint is the cost of meat.
• Indirect Costs:
- These costs cannot be identified with a unit of production or allocated accurately to a cost
centre — these are also known as overhead costs.
- Production overheads include factory rent and rates, depreciation of equipment and power.
- Selling and distribution overheads include warehouse, packing and distribution costs and
salaries of sales staff.
- Administration overheads include office rents and rates, clerical and executive salaries.
- Financial overhead include interest on loans.
- Examples: Indirect costs of a supermarket is in its promotional expenditures.
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Total Revenue and Revenue Streams

• Revenue streams usually refer to methods through which money comes into a company. It is
associated with the branded products of a company, specific merchandises or specialised
services.
• Total revenue is a basic/quantitative representation of the amount of money earned by selling
products or services
!
• Example:
- For Ferrari, their main revenue stream is through their merchandises as opposed to their cars.
This trend is similar to many other companies as well. Such was Disney, whose main
revenue stream is from their merchandises, theme parks and TV shows as opposed to their
movies. 
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3.3 Break-Even Analysis

Contribution
• The difference between the selling price and the variable costs involved in the production of the
item is the contribution.
• Contribution per Unit:
- Contribution on the sale of one unit, a single item or service.
!
• Total Contribution:
- The difference between the total revenue made and the total variable costs incurred.
!
• Contribution and Profit:
- Since the contribution is a representation of the sales revenue less the variable costs, total
profit can be calculated by deducting the fixed costs from the total contribution.
Break-Even Analysis
• The point where total costs are exactly the same as total revenue, is called the break-even point.
• The level of output a business needs to produce so that total costs are exactly the same as total
revenue is called the break-even output.
• Break-Even Point:
- By nature, the break even point is when total revenue equals total costs. Or when there is no
profit being made.
!
• Break-Even Point and Contribution:
- By further using this formula an easier method can be derived.
TC = TR
(VC x Q) + FC = P x Q
(VC x Q) - (P x Q) = -FC
(P x Q) - (VC x Q) = FC
Q (P-VC) = FC
Q = FC/Contribution
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- In other words, the break-even point is fixed costs divided by contribution per unit.
!
• Break-Even Point and Profit:
- Total profit for a given level of production can be determined by finding the product of
contribution per unit and the difference between the target production and break-even
quantity.
!
- This can be rearranged to find target production given profit:
!
• Break-Even Chart:
- A graph containing the total cost and total revenue lines, illustrating the break-even output of
the business. d
!
- Break-even output:
‣ The output a business has to produce so that its total revenue and total costs are
the same.
- Break-even point:
‣ The point at which the total revenue and the total costs are the same.
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- Margin of Safety:
‣ The range of output between the break-even level and the current level of output,
over which the profit is being made. Calculated using:
!
- Advantages and limitations of Break Even Charts:
Charts are relatively easy to construct and interpret. It is also unlikely that fixed costs will remain
unchanged at different output levels up to maximum
capacity.
It provides useful guidelines to management on The assumption that costs and revenues are always
break- even points, safety margins and profit/loss represented by straight lines is unrealistic. Not all
levels at different rates of output. variable costs change directly or ‘smoothly’ with
output.
Comparisons can be made between different options Not all costs can be conveniently classified into
by constructing new charts to show changed fixed and variable costs. The introduction of semi-
circumstances. The charts could be amended to variable costs will make the technique much more
show the possible impact on profit and break-even complicated.
point of a change in the product’s selling price.
Break-even analysis can be used to assist managers It is assumed that all units produced are sold. This is
when taking important decisions, such as location unlikely to always be the case in practice.
decisions, whether to buy new equipment and which
project to invest in.
- Effect of Changes In Factors:
Increases Decreases
Steeper Revenue line; lower break-even Flatter Revenue line; higher break-even
Price
output and higher margin of safety. output and lower margin of safety.
Upward parallel shift of Total cost line; Downward parallel shift of Total Cost line;
Fixed Costs
higher break-even output and less profit. lower break-even output and high profit.
Steeper Total Cost line; higher break-even Flatter Total Cost line; lower break-even
Variable Costs
output and lower margin of safety. output and higher margin of safety.
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3.4 Final Accounts

Stakeholders and Purpose of Accounts
• Business Managers:
- Measure the performance of the business to compare with targets, previous time periods and
competitors.
- Help in taking decisions, such as new investments, closing branches and launching new
products.
- Control and monitor the operation of each department and division of the business.
- Set targets or budgets for the future and review these against actual performance.
• Banks:
- Decide whether to lend money to the business.
- Assess whether to allow overdraft facilities.
- Decide whether to continue an overdraft facility or loans.
• Creditors (Suppliers):
- Assess whether the business is liquid enough to pay off its debts.
- Assess whether the business is good credit risk.
- Decide whether to press for early repayments for outstanding debts.
• Customers:
- Assess whether the business is secure.
- Determine whether they will be assured of future supplies of the goods they are purchasing.
- Establish whether there will be security of spare parts and service facilities.
• Government and Tax Authorities:
- Calculate due taxes from the businesses.
- Determine whether the business is likely to expand and further create newer jobs.
- Assess whether the business is in danger of closing down, creating economic problems.
- Confirm whether the business is staying within the law in terms of accounting regulations.
• Investors:
- Assess value of business and their investment in it.
- Establish whether the business is becoming more or less profitable.
- Determine what shares of the profits investors are receiving.
- Decide whether the business has potential for growth.
- As potential investors, compare details from accounts with those of other businesses to
determine which one to buy shares from.
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- As actual investors, decide whether to consider selling of all or parts of their holdings.
• Workforce:
- Assess whether the business is secure enough to pay wages and salaries.
- Determine whether the business is likely to expand or reduce in size.
- Determine job security.
- Find out whether, if profits are rising, potential wage increments are possible.
- Compare the average wage in the business with that of the directors.
• Local Community:
- See if business is likely to expand; good for local economy.
- Determine if business is making losses and leading to closure.
Income Statements or Profit and Loss Statement

• An income statement records the revenues, costs and profits or losses of a business over a given
period of time.
• A detailed income statement is produced for internal use because managers will need as much
information as possible. It can be produced as frequently as possible (once per month etc.).
• A less detailed summary is produced usually at the end of a year for external use.
• Trading Account:
- This shows how gross profit (or loss) has been made from the trading activities of the
business.
- Sales Revenue: Total values of sales made during the period of time.
!
- Cost of Goods Sold: Direct costs of purchasing goods sold in the financial year.
!
- Gross Profit: Sales revenue less the costs of sales or goods sold.
!
• Profit and Loss Account:
- This section of the income statement calculates both the net profit (or profit before interest
and tax) and the profit after tax of the business.
- Overheads: Costs or expenses of the business not directly related to number of items made
or sold.
- Non-Sales Income: Any profits or incomes of money not related with he business’ sales.
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- Operating Profits (Net profit before tax and interest): Gross profits and the non-sales income
minus the overhead expenses.
!
- Net Profit (after tax and interest): The net profit after corporation tax and interest costs are
deducted.
!
• Appropriation Account:
- This shows how profit after deduction of tax and interest is divided among owners — as
dividends — and the remainder — retained profit. This is not usually shown in the published
accounts.
- Dividends: Share of profits paid to shareholders and return for investing into the company.
- Retained Profit: Profits left after all deductions, including dividends, are made. This is
‘ploughed back’ into the company as a source of finance.
!
• Example Income Statement/Profit and Loss Statement:
Trading Account
Revenue 3060
Cost of Goods Sold (1840)
Gross Profit 1220
Profit and Loss Account
Overheads (580)
All Other Incomes 220
Net Profit (before I & T) 860
Interest (80)
Tax (112)
Net Profit (after I & T) 668
Appropriation Account
Dividends (200)
Retained Profit 468
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• Using Income Statements:

- They can be used to compare and measure performance of a business over time with other
firms.
- Actual profit data can be compared with expected profit values to help make future
predictions more accurately.
- Bankers and creditors of the business will need to know this information to help decide
whether to lend money to the business or not.
- Investors assess the value of investing into the business after looking at the level of profits
being made.
Balance Sheets
• Also known as the statement of financial position; outlines the assets, liabilities and
shareholder’s equity at a specific point in time. It’s a snapshot of a business at a specific time
period.
• Fixed Assets:
- Fixed Assets: Long-term assets that last in a business for more than 12 months. These assets
usually depreciate over a period of time this is depreciation.
- Accumulated Depreciation: The net amount the fixed asset has depreciated by being within
the company
- Net Fixed Assets: Value of the fixed assets after deduction of the depreciation.
!
• Current Assets:
- Short term assets that last in a business for up to 12 months. They are listed in the order of
liquidity from the most to least liquid.
- Cash: Cash within the company.
- Debtors: The value of payments to be received from customers who have bought goods on
credit.
- Stock: Sticks held in the business in the form of materials, work in progress and finished
goods.
- Total Current Assets: Sum of the values of all the current assets.
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• Current Liabilities:
- Short-term debts that are payable by the business within 12 months.
- Overdraft: When a lending institution allows a firm to withdraw more money that it
currently has in its account.
- Creditors: Unpaid suppliers who sold goods on credit to the firm.
- Short-term loans: Money borrowed from banks that need to be returned with interest within
12 months time.
- Total Current Liabilities: Sum of all the values of the current liabilities.
!
• Working Capital (Net current assets):
- This is a number that indicates whether the business is capable of paying off its day-to-day
bills or running costs.
!
• Total Assets Less Current Liabilities:
!
• Long Term Liabilities:
- These are long-term debts or borrowings payable after 12 months by the business. They are
inclusive of long-term bank loans and mortgages.
• Net Assets:
!
• Equity:
- These are pre-existing fundings from within the firm or from outside it.
- Share Capital: This refers to original capital invested into the business through shares
- Retained Profit: This is the profit ploughed back into the business obtained from the profit
and loss statement or income statement. It is also known as reserves as it includes profit that
the business has made in the previous years.
!
Therefore:
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• Example Balance Sheet:
FIXED ASSETS
Fixed Assets 600
Accumulated Depreciation 30
Net Fixed Assets 570
CURRENT ASSETS
Cash 20
Debtors 15
Stock 55
Total Current Assets 90
CURRENT LIABILITIES
Overdrafts 10
Creditors 20
Short-term Loans 15
Total Current Liabilities 45
Net Current Assets (Working Capital) 45
Total Assets less Current Liabilities 615
LONG-TERM LIABILITIES 250
Net Assets 365
FINANCED BY
Share Capital 220
Retained Profit 145
Equity 365
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Intangible Assets
• These are fixed assets that lack physical substance or are non-physical in nature, however they
still can prove to be very valuable to a firm’s long-term success or failure.
• Patents:
- These provide inventors with the right to manufacture, use, sell, or control their invention of
the product.
- Inventors are provided legal protection to prevent others from copying their ideas. Anyone
wishing to do so must apply and pay a fee to be granted permission.
- The legal life for most patents is about 20 years.
• Goodwill:
- Refers to the value of positive of favourable attributes that relate to a business.
- It includes the good customer base and relations, strong brand-name, highly skilled
employees, desirable location and the good reputation a firm enjoys with its clients.
- Goodwill usually arises when one firm is purchased by another.
- During an acquisition goodwill is valued as the amount paid by the purchasing firm over and
above the book value of the firm being bought.
• Copyright laws:
- These are laws that provide the creator with the exclusive right to protect the production and
sale of the artistic or a literary work.
- Copyright laws only apply if the original idea is put to use such as in the creation of a
published novel, a music album or developed computer software.
- Most copyright last for between 50-100 years after the death of the creator. Usage of
copyrighted information requires creators permission similar to patents.
• Trademarks:
- These are a recognisable symbol, word, phrase or design that is officially registered and that
identifies the product or business.
- Trademarks also help to distinguish one firm's products from another's.
- Trademarks infringement can be sued by the trademarks owner.
- Trademarks can be sold for a fee and last for a 15 year renewable period depending on their
use.
• Intangible assets are difficult to value, due to their subjective nature and in many cases they
might not be shown on the balance sheet.
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• Their value can fluctuate over time and simple changes in the reputation of the organisation can
either inflate or deflate a firm's value.
• Intangible assets are simply use to artificially increase the value of the firm just before
purchases.
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3.5 Profitability and Liquidity Ratio Analysis

• Financial analysis tool used in interpretation and assessment of a firm’s financial statements.
• Helps evaluating a firm’s financial performance and determining certain trends and exposing
various strengths and weaknesses.
Profitability Ratios
• Assesses performance of a firm in terms of its profit-generating ability.
• Gross Profit Margin (GPM):
!
- Businesses always aim for higher gross profits to help them manage their expenses.
- Useful for:
‣ Shareholders
‣ Managers and Directors
‣ Employees
- Strategies to Improve:
‣ Increase prices for products in less competitive markets or markets in which
consumers are less perceptive to price changes. This could however damage
image of business as consumers might feel cheated.
‣ Business might source cheaper suppliers of materials so as to cut down on
purchasing costs. However, this could possibly compromise on quality of the
goods.
‣ A firm might adopt more aggressive promotional strategies to persuade
consumers. This could however lead to further costs regarding the management
of the promotions.
‣ Business might aim to reduce direct labour costs by ensuring that its staff are
more productive. However, excessive firings might lower staff morale.
• Net Profit Margin (NPM):
!
- Measure of profit that remains after deducting all costs from the revenues.
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- High NPM means that firm is meeting its expenses very well; low NPM could indicate
difficulties in controlling overall costs.
- Useful for:
‣ Shareholders
‣ Employees
‣ A firm can carefully check indirect costs to see where unnecessary expenses may
be avoided. This can demoralise the higher-ups who benefit from these fringe
benefits.
‣ Firm could negotiate with key stakeholders with aim to cut costs. However,
negotiating for cheaper rent could lead to firm being located in a poorer
environment.
Efficiency Ratios
• These ratios assess how well a firm internally utilises its assets and liabilities. They also help to
analyse performance of a firm.
• Return on Capital Employed (ROCE):
!
- This ratio measures both efficiency and profitability of a firm’s invested capital; i.e. returns
on a firms capital employed.
!
- Higher the ROCE the greater the returns businesses get from their capital employed.
- This incentivises business owners to inject more money into their businesses for higher
returns.
- It is important as it measures and judges how well a firm is able to generate profit from its
key sources of finance.
- Useful for:
‣ Shareholders and investors
‣ Employees
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‣ A firm should try to reduce amount of loan capital while still ensuring that net
profit remains unchanged or doesn’t fall. However, this reduces possibilities to
extend a business using loans from banks.
‣ Declare and pay additional dividends to shareholders as it can reduce retained
profit and increase ROCE. This can however reduce retained profit leading to
less being ploughed back into the business for future investments.
Liquidity Ratios
• These ratios measure the ability of a firm to pay off its short-term debt obligations. Businesses
need sufficient levels of liquid assets to help in meeting day-to-day bills.
• Liquidity is a measure of how quickly an asset can be converted into cash.
• Current Ratio:
!
- Current ratio needs to equal to or higher for the firm to be considered healthy, however some
firms such as branded clothing stores can manage with a low current ratio.
- Too high a ratio is also bad as it can mean:
‣ There is too much cash being held back and not being invested.
‣ There are too many debtors, increasing possibility of bad debts.
‣ Too much stock is being held back, leading to high warehouse storage costs.
- Useful for:
‣ Banks
‣ Creditors
‣ A firm might reduce bank overdrafts and instead choose long term loans. This
helps to reduce current liabilities and improve the current ratio. However this can
increase the gearing ratio of the company and lower its future liquidity.
‣ A firm could also sell existing long-term assets for cash to increase its working
capital. The disadvantage is that if they are needed back then leasing costs will
be faced.
• Acid Test (quick) Ratio:
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!
- More stringent indicator of how well a firm is able to meet its short-term obligations. This is
because it removes stock as part of current assets and considers them to be a liability.
- In this, they remove the least liquid of assets to focus on extreme short term liquidity
situation.
- A high acid test ratio is also not a good thing; same implication as for quick test but without
stocks.
- Useful for:
‣ Banks
‣ Creditors
‣ A firm could sell off stock at discount for cash to improve liquidity position of
business and avail more working capital to pay off short-term debts. However,
this may reduce revenue generated from sold stock to reduce firm’s profits.
‣ A firm might increase the credit period for debtors to purchase more stock on
credit. This can however lead to bad debts in businesses.
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3.7 Cash Flow

Difference between Cash Flow and Profit
• Cash flow is the money that flows in and out of a business over a given period of time.
• The product is the difference between the sales revenue and total cost.
Working Capital
• Capital needed to pay for raw materials, day-to-day running costs and credit.
• It is current asset less current liabilities.
• It differs from profit because:
- Profit looks at the big picture.
- Working capital looks at the current situation, as it focuses on the cash inflow and cash
outflow.
• A loss making company may have high cash inflow, and a profit making company may have a
high cash outflow (through loans).
• Liquidity:
- The ability of a firm to be able to pay off its short-term debts.
• Liquidation:
- When a firm ceases trading and its assets are sold for cash.
• Working Capital Cycle:
- Period of time between spending cash on production process and receiving cash payment
from the customer.
Cash
Sold for cash and credit to Used to acquire resources

customers and materials
Resources used for

production
Cash Flow
• Sum of cash payments to business (inflows) less the sum of cash payments made by it
(outflows).
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• Insolvency is when a business cannot meet its short-term debts, due to low working capital.
• Controlling Cash Flow:
- It is important that business continually monitors and controls its cash flow, so that it has
enough cash for immediate spending.
- Holding back cash is also bad as it means that the company cannot benefit from profits made
by spending it.
- A business will have more effective control over their cash flow if they:
‣ Keeps up to date business records.
‣ Always plan ahead, for example by producing more accurate cash flow forecasts.
‣ Operate an efficient credit control system.
• Cash Flow Forecasting:
- Forecasting cash flow is estimating future cash inflows and cash flows is cash flow
forecasting.
- Cash Inflows include:
‣ Owner’s Capital
‣ Bank loan payment
‣ Customer’s cash purchases
‣ Debtor’s payment
- Cash Outflows include:
‣ Lease payment
‣ Annual rent payment
‣ Electricity, gas, water and telephone bills
‣ Labour costs
‣ Variable costs
- Reasons for Forecasting:
‣ Identifying the timing of cash shortages and surpluses.
‣ Supporting applications for funding.
‣ Enhancing the planning process.
‣ Monitoring cash flow
- Improving Forecasts:
‣ Accurate data
‣ Coping with external factors.
‣ Reducing bias.
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- Example Cash Flow Forecast (statement):
January February March April May

OPENING BALANCE 1000 1250 950 750 400
CASH INFLOWS
Sales 500 250 250 400 600

Loans 200 0 0 0 0
Total Cash Inflows (Receipts) 700 250 250 400 600
CASH OUTFLOWS
Materials 250 250 250 250 250

Utility Bills 0 100 0 100 0
Wages 50 50 50 50 50
Marketing 50 50 50 50 50
Others 100 100 100 300 100
Total Cash Outflows (Payments) 450 550 450 750 450
NET CASH FLOW 250 (300) (200) (350) 150

CLOSING BALANCE 1250 950 750 400 550
‣ Net Cash Flow:
!
‣ Closing Balance (Opening Balance next month):
Cash Flow Problems

• Causes of Cash Flow Problems:
- Overtrading: Overtrading occurs when a business is attempting to fund a large volume of
production with inadequate cash.
- Investing too much in fixed assets: It is usually a better idea to usually lease the fixed assets
over purchasing them at early stages.
- Stockpiling: Holding back too much stock can be expensive and it can cost too much to
support.
- Credit accumulation: Having too much money as credit can cause the cash flow to reduce, as
it takes time for the credit to convert to cash.
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- Under or Overestimation of external factors: The cash flow statement doesn’t usually
account for external issues, and this can pose a problem in short notice.
• Alleviating Cash Flow Problems:
- Improving Cash Inflows:
‣ Improve marketing (be more aggressive).
‣ Introduce newer products
‣ Sell of/reduce stocks
- Reducing Cash Outflows:
‣ Use debt factoring companies.
‣ Sell of unwanted fixed assets (reduce maintenance).
‣ Sale and leaseback.
‣ Delay payments to producers.
- Additional Finances:
‣ Bank loans.
‣ Overdrafts. 
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3.8 Investment Appraisal

Payback Period
• Refers to the amount of time it takes for a project to recover or payback the initial investment.
• It is calculated using the following table:
Year Cash Flow Cumulative Cash Flow
0 (500) (500)
1 100 (400)
2 125 (275)
3 125 (150)
4 160 10
5 150 160
- We know that the whole investment will be covered between year 3 and 4. So to find out the
exact months we use the following formula:
!
- Example: This will show that the above example the payback period is 3 years 11 months.
• This method of appraising an investment has its own advantages and disadvantages.
Quick and easy to calculate. It does not measure overall profitability of a project.
Results are easily understood by stakeholders. This concentration on short term may lead
businesses to reject very profitable long term
projects.
Particularly useful for business where liquidity is of Does not take into consideration timing of cash flow
greater significance that overall profitability. during payback period.
The result can be used to eliminate or ‘screen out’
projects that give returns too far into the future.
The emphasis on speed of return of cash flows
benefit on concentrating on the more accurate short-
term forecasts of the project’s profitability.
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Average Rate of Return

• This measures the annual profitability of an investment as a percentage of the initial investment.
• It can be calculated with the following table.
Year Cash Flow
0 (500)
1 100
2 125
3 125
4 160
5 150
• Using this, the following steps are used:

- Step 1: Add all returns in investment
- Step 2: Subtract initial cost of investment
- Step 3: Divide by duration
- Step 4: Find the value as a percentage of the initial investment
- Example: This will show that the ARR is going to be 5%
• This method has its own advantages and disadvantages.
It uses all of the cash flows. It ignores timing of cash flows. This could have 2
project having same ARR while one has faster
payback period than other.
It focuses on profitability, which is the central As all cash inflows are included, the later cash
objective of many business decisions. flows, which are less likely to be accurate, are
incorporated into calculations.
The results are easily understood and easy to The time value of money is ignored as the cash
compare with other projects coppering for a limited flows have not been discounted.
investment fund.
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Chapter 4: Marketing 
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4.1 Role of Marketing

• Marketing is essential for the success of any business. However, marketing is not just about
selling or advertising.
• Marketing is a business philosophy of how best to think about satisfying consumer needs and
wants.
• Marketing is the management process involved in identifying, anticipating and satisfying
consumer needs profitably.
Relation of Marketing between Departments

• Finance Department:
- Setting appropriate budgeting.
- Managing areas of expenditure.
- Planning R&D budgets.
• Human Resources Department:
- Workforce planning.
- Ensuring that right quality of employees are hired.
• Production Department:
- Choosing amount of goods to produce from market research.
- Marketing products with right specifications.
Differences between Goods and Services
Goods Services
Are tangible. Are intangible.
Can be returned if consumers do not like it. Cannot be returned.
Can be stored and consumed later. Cannot be stored and have to be consumed
immediately.
There is ownership of the product. You cannot own the service.
Goods are easier to compare because they will have Services are more difficult to compare due to the
a similar nature. different experiences of the customers.
Market-Orientated Business
• A business who's approach is to first establish consumer demand in the market through market
research before making or selling a product.
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• Most business have a market orientated approach, especially in the technology market.
As a result of market research, there is an increased Conducting market research can be costly and
amount of confidence in the production of a therefore weigh heavily on a firm’s budget.
product.
Access to market information means that firms can Due to frequently changing consumer tastes, firms
respond more quickly to change and anticipate may find it difficult to meet every consumer need
them. with limited resources.
Firms will be in a strong position to meet the Uncertainty about future could also have a negative
challenge of new competitors entering the market influence on market-planning strategy.
resulting from regular consumer feedback.
Product-Orientated Business
• A business whose approach is to focus on making the product first before selling it. It is product
led, and assumes that supply creates its own demand. Here businesses produce innovative
products and tempt consumers to buy them.
• This is more common in health-care product markets.
It is associated with the production of high-quality Since firms ignore need of market, it takes a risk
products. that may cause failure.
It can succeed in industries where speed of change Spending money on research and development
is slow and firm already has high reputation. without considering consumer needs could be costly
and yield any promising results.
It has control over its activities, with strong belief
that consumer will purchase the products.
Types of Marketing Strategies

• Social Marketing
- The design, implementation and control of programs to influence the acceptability of social
ideas involving the use of the marketing mix.
- A strategy where the success of marketing is evaluated to the extent to which the society
benefits.
- Social marketing campaigns may include public-health campaigns or environmental
campaigns.
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It gives firms a competitive advantage as consumers This technique works by influencing consumer
may perceive firm to be more socially responsible. perspective, however some consumers may not be
that easily influenced.
Firms can charge premium prices for providing
goods or services that society derives benefits from.
• Commercial Marketing:
- Involves creating, developing and exchanging goods and services that consumers need or
want.
- In this case, market research is carried out to establish consumer demand.
Consumer demand is known, so attracting Market research is a time consuming and very
customers becomes easier. expensive process.
Chances of success are higher, since the market
trend is pre-known.
• Social Media Marketing:

- This is a marketing technique in which businesses use social networking websites to market
their goods or services.
- Social networking sites include Facebook, Twitter, Google Plus, Tumblr, Instagram etc. This
way the firm can target the exact target audience that they want.
Firms can obtain direct feedback from consumers Due to the easiness of advertising through this, it
while appealing to them personally. will be harder for business to stand out form others.
It is a low-cost way in which firms can reach a large

target audience.
Understanding the Market

• A market is an arrangement where buyers and sellers can exchange goods and services for
currency.
• Market Size:
- Represents the total sales of all businesses in a given market and is measured in two ways.
- Volume:
‣ This measures the number of goods and services bought by customers.
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‣ This is a quantitative measure of the units sold by the business.

- Value:
‣ This measures the amount of money spent by customers on the total number of
goods sold by the businesses.
• Market Growth:
- It is the percentage change in the market size over a given period of time, usually a year.
- This may be based on the market value or market volume.
• Market Share:
- This is the percentage of one firms’s share to the total sales in the market the firm is
operating in.
!
- It can also be measured by value (revenue) or volume (unit) just like the market size.
- Market Leader: A firm with the highest market share in a given market
- Advantages of Leading the Market:
‣ The market leader will have increased sales.
‣ The business will be able to gain economies of scale.
‣ Since the market leader could also be the brand leader, the leading brand can act
as a good promotional tool for other sub-brands or brands of the company.
- Interpreting Market Share:
‣ Since market share may be measured through volume or values, different values
may be obtained in the same time period.
‣ Changes in time period and market can influence market share results.
‣ Type of products can influence calculations of the market share.
Marketing Objectives for NPOs

• For-profit organisations aim to identify, design and develop marketing strategies that will
ultimately be profitable.
• NPOs usually use marketing strategies more for social marketing reasons.
• NPOs are using more complex marketing strategies to achieve their aims, which include
enhancing their image and reputation.
• NPOs also use marketing to inform and influence certain behavioural change such as educating
public of the danger of smoking.
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• Due to their limited financing, NPOs look to raise funds from fundraiser events, seminars and
endorsements while simultaneously improving public relations. These activities also work like
marketing and attract potential consumers.
• Many NPOs are now using social media marketing.
• To maintain free publicity, NPOs have to be ethical at all times and practice a high degree of
social responsibility.
Marketing Strategies and Consumer Preferences

• Companies must change marketing strategies to meet demands of changing consumer wants.
• Failure to adapt can result in a loss of profitability or total failure.
• Changes may include:
- Changing marketing methods.
- Changing marketing mix.
- Modifying main objective.
Innovation, Ethical Considerations and Cultural Differences

• It is increasingly globalised world where worlds economies and markets are integrating,
innovation, ethics and culture now greatly affect marketing.
• Businesses must be ready to adapt to new innovations and change their products. Especially in
the technology market.
• Businesses must ensure that the process and the product or service is most ethical.
• Businesses must advertise ensuring cultural norms of people are adhered to. 
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4.2 Marketing Planning

Marketing Plan
• Marketing planning is the process of formulating marketing objectives and devising appropriate
marketing strategies to meet these objectives.
• A marketing plan is a detailed document about the marketing strategies that are developed in
order to achieve an organisation’s marketing objectives.
• This plan is made exclusively by the marketing department of a business.
• Components of the Plan:
- Marketing Objectives: These have to be SMART for it to be effective.
- Key strategic plans: These are steps that provide an overview of how the marketing
objectives will be achieved.
- Detailed marketing actions: These provide information on specific marketing activities that
are to be carried out.
- Marketing budget: This includes finance required to find overall marketing strategy.
Marketing planning helps firms in identifying their Marketing plans may become outdated if market
potential problems and seeking solutions. conditions change and organisation doesn’t adapt.
Setting SMART objectives improves the chance of Process may consume considerable resources and
success of a firm’s marketing strategy. time.
Sharing marketing plan with other business Failure to prioritise marketing objectives may make
departments improves coordination and provides it difficult for firms to tell whether they are meeting
better focus on objectives. them.
Devising marketing budget ensures that resources
are not wasted.
Clearly spelled-out plan could improve employees’
motivation and inspire confidence in them.
• Good marketing plans take into consideration the 4 P’s: Product, Price, Place and Promotion,
and how these aspects will be managed efficiently to meet the marketing objectives.
Market segmentation
• A segment refers to a sub-group of consumers with similar characteristics in a given market.
• Market segmentation is process of dividing the market into smaller or distinct groups of
consumers in an effort specifically to meet their desired needs and wants.
• Segmentations:
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- Demographic segmentation: This considers the varying characteristics of the human

population in a market, including:
‣ Age
‣ Gender
‣ Religion
‣ Family characteristics
‣ Ethnic groupings
- Geographic segmentation: This is where the market is divided into different geographical
sectors and may consider factors including:
‣ Regions in a country where consumers reside
‣ Climate conditions
- Psychographic segmentation: This divides the market based on people’s lifestyle choices or
personality characteristics, such as:
‣ Social and economic status
‣ Values
Segmentation helps businesses identify existing Market segmentation can be expensive in terms of
gaps and new opportunities in domestic as well as research.
international markets.
Designing products for a specific group of When characteristics of market segments change,
consumers can increase sales and profitability. investments can become useless.
Segmentation minimises waste of resources by Separate promotion and production for different
businesses through identifying the right consumers segments can become expensive.
for their products.
By differentiating their products, businesses could
diversify and spread their risks in the market and so
increase market share.
Market Targeting
• After segmenting the market, a firm now decides on the market segment it is going to target.
• A target market consists of a group of consumers with common needs or wants that a business
decides to serve or sell to.
• Targeting is therefore the process of marketing to a specific market segment.
• Targeting Strategies:
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- Undifferentiated marketing:
‣ Also called mass marketing, it is when the firm ignores specific market segments
and targets the entire market.
‣ Here businesses consider the common needs or wants of consumers in the
market and aim to sell their products to a large number of customers to maximise
sales.
- Differentiated marketing:
‣ Differentiated marketing and segmented marketing strategy target several market
segments and develop appropriate marketing mixes for them.
‣ With this, the firm wants to gain stronger position in each of the segments and so
increase their sales and market share of their brands.
- Concentrated marketing or Niche marketing:
‣ This is a strategy that appeals to smaller and more specific market segments.
‣ It is suitable for smaller firms that may have limited resources as there are
limited resources.
Consumer profiles
• Consumer profiles consist of information provided about the characteristics of consumers of a
particular product in different markets.
• These characteristics include gender, age, social status and income levels.
• Consumer profiles can also include details of spending patterns as numbers or frequency.
• For segmentations and targeting, this is very important for firms to have good knowledge of
who their consumers are. This enables them to target their product effectively to right
consumers.
• This also makes it easier to expend on promotions, as businesses will know where to expend
their money and where to cut costs at.
Product Positioning Map

• Product positioning involves analysing how consumers define or perceive a product compared
to other products in the market.
• An effective tool to help in this is a position or perception map, which is a visual representation
of how consumers perceive a product in relation to competing products.
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• The position map helps to position a product on the basis of 2 features (1 on each of the axes).
This way, the business will know how to achieve what they want to achieve with their
marketing.
A position map helps firm to establish which are its Product position maps are highly relative.
close competitors or threats in market.
It also helps identify important market gaps that A product position map is also highly subjective to
business can fill in with a new product. consumer tastes.
It is a simple and quick way of presenting This means that the position map will lack precision
sophisticated research data. and accuracy (it will be more arbitrary).
It helps firms in targeting specific market segments
to satisfy consumer needs and wants.
Unique Selling Point or Proposition (USP)

• This is a feature of the product that differentiates it from other competing products in the
market. This differentiating factor is what makes the product unique and help consumers choose
one product over another.
• Importance of having a USP:
- Helps establish a firm’s competitive advantage in its product offering and helps attract more
consumers.
- Leads to customer loyalty as consumers can identify something special about the product in
comparison to rival products, resulting in increased size.
• Examples:
- Product: Apple is renowned for its unique products.
- Price: Flydubai offers cheaper airline flights (budget airlines), this is their USP.
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- Place: Coca Cola have retail outlets everywhere (and of every kind) and this is their USP.
- Promotion: Nike’s “Just Do It” slogan is unique and emphasises the action element, which
are the types of products they sell.
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4.4 Market Research

Market Research
• Market research is the systematic and objective collection, analysis and evaluation of
information relating to the market.
• Stages of Research:
- Purpose.
- Collection.
- Interpretation.
• Reason for Market Research:
- To establish current position.
- To predict future.
- Minimise risk while launching new product.
• Data Obtained through Research:
- The Market:
‣ Size of market.
‣ Location of market.
‣ Profile of customers.
‣ Potential market.
‣ Consumer behaviour.
‣ Market Segments.
- The Products:
‣ Strengths and weaknesses.
‣ New uses for existing products.
‣ Packaging.
‣ Potential life of new products.
‣ New product development.
‣ Pricing policies.
- Sales:
‣ Sales methods.
‣ Sales personnel.
‣ Distribution systems.
‣ Suitable outlets.
- Promotion:
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‣ Promotional activities.
‣ Media effectiveness.
- Competitors:
‣ Activities of competitors.
‣ Market shares.
‣ Trends.
‣ Identifying unique selling points (USP).
- Economic Environment:
‣ Macro and Micro Economic environment.
Types of Research
Qualitative Research Quantitative Research

Based on quality, addressing questions regarding Quantity based, addressing questions based on how
why. much or how many.
Involves finding out opinions, attitudes and feeling Market research involving numerical data;
regarding something. involving the quantity of something.
More useful than quantitative data but it is more Generally collected from large samples and is easy
difficult to analyse to analyse.
Includes focus groups and in-depth interviews Includes written and online questionnaires.
Researcher is part of process. Researcher can be separate from the process.
Primary Research (Field Research)

• Finding out new, first-hand information is called primary research
• Tends to be time consuming and expensive but more relevant and useful.
• Primary research could include:
- Questionnaires
- Focus groups
- Interviews
- Observations
• Process of primary research:
- Decide on the purpose of the market research.
- Decide on the most suitable method of research.
- Decide on the size of the sample needed and who will be targeted.
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- Carry out the research.

- Collate data and analyse the results.
- Produce a report of the findings.
Directly relevant to the business Time consuming
Up-to-date data obtained Often expensive

Competitors do not have access to the findings Results may be misleading if the sample size is too
small, questions are unclear or if there is an
interviewer bias.
• Methods of Primary Research:

- Questionnaires:
‣ A type of survey conducted through any media of communication. It involves
asking a list of same questions to various individuals and creating graphic
representations to analyse the results.
Detailed quantitative information can be gathered Accuracy of answers depends on the specificity of
about the product or service. the questions and bias can occur in the answers.
Easier to reach out to different people. Collating and analysing data is time consuming and
money consuming.
- Interviews:
‣ Research where an interviewer visits the target market personally to ask readily
set out questions to obtain qualitative responses.
The interviewer can explain the questions if the Interviewer bias: the tone of presence of interview
target cannot understand them. may alter the target’s train of thoughts and produce
biased results.
Detailed qualitative data can be gathered. It is time consuming to carry out.
- Focus Groups/Consumer Panels:

‣ Specific group of people agree on providing information of a specified product
including hands-on experience and are usually experts in the product.
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They can provide detailed information about Hard to determine quality of the product.
consumer opinions.
Easier than targeting a mass audience to obtain The respondents can lie sometimes under pressure
market information. and this can also cause faulty results. Sometimes
people might not want to stand out.
- Observation:
‣ Recording, monitoring subjects through a camera.
‣ Watching and observing the consumers.
‣ Audits, counting stocks and sales.
Inexpensive way of data gathering. Only provides basic figures and does not provide
the company with reasons for consumer decisions.
Easy to make the research focused on what the Observer bias: sometimes the observers point of
company wants to know. view impacts the data collected.
Secondary Research (Desk Research)

• Secondary research or desk research is information that has already been collected and put up
for use for others. It could be obtained from internal or external sources.
• Secondary research is relatively less time consuming to conduct and is generally a cheaper
method of conducting market research.
• Market research agencies produce research reports into the market that companies can purchase.
These are extremely detailed but are expensive to purchase.
• Internal Sources:
- A lot of information can be readily be obtained from within the firm’s own records such as:
‣ Sales department’s sales records.
‣ Public relations personnel.
‣ Finance department
‣ Customer Service department.
• External Sources:
- This kind of information is obtained from outside sources. The results may have varied
nature since the information is not out of the company’s need such as:
‣ Academic Journals.
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‣ Government publications
‣ Market research agencies’ reports.
‣ Media articles.
Data is available freely or at far lesser cost Secondary researcher needs to understand various
through secondary sources. parameters and assumptions that primary research
had taken while collecting information.
An organisation can filter that data and consider The data may not fit the topic being researched,
only parts which they are targeting. and may include bias.
From secondary data one can form hypothesis and Using copyrighted information can cause legal
can evaluate the cost and efforts required to infringements and issues.
conduct own surveys
• Methods of Secondary Research:

- Market Analysis Reports:
‣ Detailed reports written by expert market research agencies, that lists everything
that the company will want to know.
Allows company to look at the competition they Extremely expensive, as the agencies are hired.
may face in the market
Allows company to gather detailed intel on Sometimes the agencies can provide misjudgement
consumer opinions on products based on their perspectives.
- Academic Journals:
‣ Academic journal issued by a well-known institution (research centres,
universities etc.) that includes scholarly data with citations.…………………
Reputable source. Niche information, doesn’t target company aims.
Cheaper to obtain. Data that the company is looking for may be

outdated.
- Government Publication:
‣ Information gathered by the government and published for the masses.
It is freely obtained. Usually biased, sometimes information may be
overestimated to project it favourably.
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Usually updated, so the information may not be It is not for the industry, so the information cannot
unreliable in that sense. be focussed to what the company may be looking
for.
- Media Article:
‣ Any article obtained through mass media such as newspapers, magazines etc.
There are multiple sources for the same topic, e.g. Since there are multiple sources, the data can be
there are multiple sources for 1 figure from distorted sometimes and sometimes the data might
different newspapers. be under or over estimated.
You can obtain the information through different Multitude of perspectives.
media, such as printed information, online sources
etc.
Ethical Considerations for Market Research

• Market research has experienced a resurgence with the widespread use of the Internet and the
popularity of social networking.
• It is easier than ever before for companies to connect directly with customers and collect
individual information that goes into a computer database to be matched with other pieces of
data during transactions.
• Deceptive Practices:
- The ease with companies can access and gather data about its customers can lead to
deceptive practices and dishonesty in the company’s research methods.
- This means not telling customers that information is being collected when they visit a
website misrepresenting research results by changing database numbers.
• Invasion of Privacy:
- One of most serious ethical considerations involved in market research is invasion of
privacy.
- Companies have an unprecedented ability to collect, store and match information relating to
customers that can infringe on a person’s right to privacy.
• Breaches of Confidentiality:
- Another significant ethical consideration involves breaches of confidentiality.
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- Some companies regularly share information about customers with partners and affiliates,
requiring customers to opt-out if they don’t want to be involved.
- Some companies even sell information that they have gathered to other companies for a
price.
• Objectivity:
- Sometimes the researcher’s personal point of view can affect the research being conducted.
- Researchers that tend to allow their own prejudices skew their work ten to contribute to
perpetuation of stereotypes in advertising.
Sampling
• When conducting market research it would be ideal to use results from the whole market (all
customers and potential customers). This is a census.
• This may however not always be practical, sensible or even possible.
• Why to do Sampling:
- Census is too large.
- Conducting wide market research is time consuming.
- It is too expensive otherwise.
• If the business decides not to use a census, it must decide who to ask, and the chosen target is
called a sample.
• Types of Samples:
- Random Samples:
‣ People are chosen at random as a source of information for market research.
‣ This means that everybody in the group has the same chance for being picked for
research.
‣ This can be good way of choosing unbiased sample, but it cannot show a fair
example of the market you are trying to target.
Random sampling reduces bias as everyone has an The sample which is chosen may be too small and/or
equal chance of being chose. may not consist of target population.
Relatively easier to obtain the sample and data The process lacks the specificity of the type of
from surveys. question being addressed through research. Since the
target population may not be present.
- Stratified Samples:
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‣ This is away go choosing people making sure that a fair spread of people are
used.
‣ This is done by splitting the population into certain characteristics. One this has
been done, a random sample will be done on each group of people.
‣ This is an advantage from a pure random sample as it gives a fair spread of
market, however this tends to be much harder.
The sample selected is more representative of it is not easy to select relevant strata from a
particular population. population of very similar people.
Random sampling within the stratified sample The process is more time consuming.
ensures that there is no bias.
- Quota Samples:
‣ This is where the interviewer is given a list of amount of type of people they
must interview.
‣ Once target amount has been reached, the interviewer may not interview anyone
within the segment.
‣ This is good way of sampling if exact figures of your market are known, it is like
sampling a mini version of the market.
Quick and cost effective sampling method. Results obtained are not always statistical
Especially when proportions of different groups in representative of population. Statistical errors.
population are known.
Findings are usually more reliable than random Interviewer bias in choosing interviewees may
samples. occur.
- Cluster Samples:
‣ Cluster Sampling is a survey method in which groups (clusters) of sampling
units are selected from a population for analysis and then random sampling is
conducted within the clusters.
‣ This is most appropriate when the population is geographically dispersed.
Quick and easy as it does not require complete Expensive if the clusters are large.
population information.
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Good for face-to-face surveys. Greater risk of sampling error
- Snowballing Samples:
‣ This is when sampling is done to one group of individuals who suggest further
people who are willing to participate.
‣ This is similar to snowballing as the initial participants contact their friends
themselves.
‣ It is also used when researching expensive sophisticated products where the
range of potential customer limited.
It is a cost effective method of obtaining There is a potential for getting a biased sample, since
participants. friends may share similar lifestyles.
The process is not that time consuming as well. There is a chance that the participants may not be
from the targeted market.
- Convenience Samples:
‣ Sampling technique where groups are selected based on their access and
proximity to the researcher.
‣ This can be used when the results needed are immediate and unrelated to target
markets.
It is a fast process as the participants are in Sample may be biased and not representative of
immediate vicinity. population.
It is cost-effective as the business needn’t expend The business may not even receive information from
money on finding participants. the target market they want.
Results from Data Collection

• Businesses are interested in the range of results in they get from their research. It is therefore
extremely important to make it so that it is well understood.
• Graphical format is the most effective in terms of displaying research results, but it only works
with quantitative data.
• Benefits of Properly Collected Data:
- Ability to research answers to research questions.
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- Ability to repeat and validate a particular study.

- Increased accuracy of other resources used in data collection.
- Good opportunity for researchers to pursue areas needing further investigation.
• Types of Graphical Representations:
- Table/Tally chart:
‣ Is usually data in raw form and it is very brief.
‣ The data needs to be later converted into a chart or graph form.
- Bar chart:
‣ Eye-catching type of data presentation.
‣ The bar chart needs to be easily understandable so it can be seen in a more
meaningful way.
- Pictogram:
‣ Shows data in similar ways using symbols to represent data.
‣ A key needs to be given and can only be effective if data is simple.
‣ Not usually used if:
➡ A lot of data
➡ Odd numbers
- Pie charts:
‣ Used to show proportions of the total figure.
‣ Each slice represents particular component’s contribution.
- Line graph:
‣ Shows relations between two variable.
‣ Can be drawn as a straight or curved line.
- Tables:
‣ Useful when interviewing
- Photographs:
‣ Attractive, supports what you are saying
- Maps:
‣ Presents information and shows location
- Diagram:
‣ Simplify information 
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4.5 The 4 P’s of Marketing

Product Development Stage
• Generate ideas:
- Customer’s suggestions.
- Employees.
- Research and development department.
- Competitor’s products.
- Sales department.
• Select best ideas for further research:
- Needs to decide which ideas to abandon and which to research further.
- Some products may be too expensive to produce, other products would probably not sell
well.
• Decide if the company will be able to sell enough:
- Marketing department looks at the ideas and assesses how large the sales will have to be
cover costs.
- The department will have to consider the company’s market share while assessing.
• Develop prototype:
- A prototype allows production department to see how a product could be manufactured.
• Launch product to test market:
- The product is launched to a small part of the market.
- If product sells well then it is produced and if not, it is scrapped or improved.
• Full launch into the market:
- Product is launched in main market.
- First it is done nationally and then internationally.
Product Life Cycle (4 P’s)

• The stages a product will pass through from its introduction through its growth until it is
matured and declining. Applies to product class (soft drinks), product form (diet cola) or a brand
(Dr. Pepper).
• It shows the life of a product in the market.
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• Stages of PLC:
!
- Research & Development:
‣ Begins when the company develops a new product idea.
‣ Sales are zero.
‣ Investment costs are high: R&D, Advertising, Materials costs.
‣ Profits are negative.
‣ Strategies:
➡ Pre-booking options.
➡ Provide consumer testing and trials to promote.
- Introduction and Launch:
‣ Low sales.
‣ Negative profits due to promotion costs.
‣ Early adopters are targeted.
‣ Minimal competition.
‣ Strategies:
➡ Offer a basic product.
➡ Use cost-plus pricing.
➡ Build selective distribution.
➡ Build awareness among early adopters and dealers/resellers.
➡ Create trials.
- Growth & Development:
‣ Rapidly rising sales.
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‣ Rising profits.
‣ General market is targeted.
‣ Growing competition.
‣ Strategies:
➡ Offer product extensions, services, warranties.
➡ Use penetration pricing.
➡ Build intensive distribution.
➡ Tone down aggressive promotion.
➡ Reduce expenditures to take advantage of consumer demand.
- Maturity:
‣ Sales peak.
‣ High profits.
‣ Target loyal consumers.
‣ Competition begins to decline.
‣ Strategies:
➡ Diversify brand and models.
➡ Set prices to match or beat competition.
➡ Build more intensive distribution.
➡ Stress brand differences and benefits.
➡ Increase sales promotions to increase switching from other brands.
- Decline:
‣ Declining sales.
‣ Declining profits.
‣ Laggards are targeted.
‣ Declining competition.
‣ Strategies:
➡ Phase out weak items.
➡ Cut price.
➡ Use selective distribution; phase out unprofitable outlets.
➡ Reduce marketing to level needed to retain hard-core loyalists.
➡ Reduce sales to minimum level.
- Extension strategies:
‣ Change function for existing customer.
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‣ Launch in a new market.

‣ Modifying the product or service.
‣ Reducing the price.
‣ Redesign or change packaging.
‣ Alter distribution strategy
‣ Promoting to a different market sector and/or increase promotion budget.
 
Boston Consulting Group Matrix (BCG Matrix) (4 P’s)
• It is also known as the growth-share matrix and is a useful tool for a business to manage its
product portfolio, evaluating environment and to allocate resources.
Problem Child/Question
Stars Cash Cows Dogs
Mark
High share brand in a high High share brand in a low Low share brand in a high Low share brand in a low
growth market growth market growth market growth market
Business is likely to Business can be used to Business requires a lot of Business is a cash trap and
generate enough cash to be support other business cash to maintain market is barely at break even
self sustaining. units. share. point.
Recommended Tactics
• Expand product and • Focus on short term

• Defend and maintain
services. • Invest more cash • Avoid risky project
position (hold).
• Holding strategy. • Building strategy • Limited future
• Harvesting strategy.
• Invest in R&D • Divesting strategy
• Generally the BCG matrix is compared to the Product Life Cycle:

- Introduction: Question Marks
- Growth: Stars
- Maturity: Cash Cows
- Decline: Dogs.
!
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Useful tool for helping managers evaluate balance High market share in not the only success factor.
in the companies’ current portfolio.
The model is easy to understand and simple to This analysis neglects the effects of synergy between
design. business units.
It provides a base for management to decide and There are only two dimensions to this analysis
prepare for future actions. process.
Company will know exactly how to manage each High market share does not directly equate to a high
product based on its market position. profits. This is because sales revenue could be
gained through specific pricing strategies that can
cause losses.
Branding (4 P’s)
• A brand is a name, term, symbol, design or any other feature that allows consumers to identify
the goods and services of a business and to differentiate them from competitors.
• Brands are considered to be intangible assets of companies. Their worth is evaluated
quantitatively but it cannot be listed in the balance sheets.
• A brand might be one product, a family or range of products or the actual business itself.
• Brand names are a part of that brand that can be spoken, usually a product from a brand is
directly affiliated to the brand name.
• Developing a Brand:
- Being the first/Filling a gap:
‣ It is suggested that successful brands are often the first in the market.
‣ This might mean being the first product to reach target consumers or to use new
technology.
‣ It also involves taking advantage of a gap in the market or new developments.
- Choosing right brand name:
‣ An effective brand name should be easy to pronounce and spell, especially if the
company wants to operate in international markets.
‣ A good brand name is short and to the point and must indicate something
positive about the product.
‣ A brand name must be distinctive so that customers can identify and differentiate
them from the competitors.
- Finding a USP:
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‣ A brand that is successful has a unique selling point (USP) that differentiates it
from the competitors in the market.
‣ What makes them different from other products and what makes people want to
buy them.
- Position the Brand:
‣ A brand must be places in the correct market for it to be successful, for instance
a brand associated with its high-quality will probably have an exclusive channel
of distribution.
‣ A brand that produces tangible goods may not need such exclusivity in its sales.
• Aspects of Branding:
- Brand awareness: This refers to the ability of consumers to recognise the existence and
availability of a firm’s good or service.
- Brand development: This is any plan to improve or strengthen the image of a product in the
market, it is a way of enhancing brand awareness.
- Brand loyalty: This is when consumers become committed to a firm's brand and are willing
to make repeated purchases. Brand loyalty comes from brand preference.
- Brand value: This refers to how much a brand is worth in terms of its reputation, potential
income, and market value. Brand value is the extra money a business can make from its
products because of its brand name.
Having a brand image raises awareness of the firms Developing a maintaining a brand can get very
product among the consumers. tedious and costly.
A brand boasts a sign of consistency in the market, Similar to how positive attributes are related to a
this means consumers will be more likely to buy brand, a bad reputation also sticks.
your product than consumers.
A brand can act as a differentiating factor among After some time a brand can become generic and
firms and can be a way for creating a global image. lose its originality in the market due to competitors.
Packaging (4 P’s)
• Packaging refers to the designing and production of the physical container or wrapper of a
product.
• Packaging plays a significant role in marketing and can help in distinguishing one product from
another.
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• Uses of Packaging:
- It provides physical protection for the product.
- It offers convenience for consumers use.
- It provides information,
- It can help reduce security risks.
- It aids in promotion.
Price (4 P’s)
• Price plays a significant role in marketing mix because it is the only one that generates the
revenue for the business.
• Price refers to the money consumers pay for having the good or service. And business need to
set good/appropriate prices based on their strategies.
• Price Skimming Strategy:
- When a company launches products with high prices and reduce this cost as time passes.
- This is usually used for a short period of time when he aim of the company is to gain as
much profit as possible from the product.
- This is a way to get short run profits mostly, and this is best suited for companies that are
well developed in the market.
Consumers associate high price with high value or The high prices may discourage consumers from
high-quality product, and enhanced brand image. purchasing product.
Firms are able to obtain initial high revenues that
help in recovering their research and development
costs.
• Price Penetration Strategy:

- When a company charges a low price for their products initially in order to reach the largest
amount of target market.
- Lower price attracts consumers and increases market shares. Best if consumers are sensitive
to consumers.
- This can be used by businesses introducing new products in an existing market or entering a
new market.
- Low price causes large demand and if company cannot cope then it can cause issues. If
prestigious brands use this strategy, then it can lower brand equity.
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As the prices are low, consumers are encouraged to Gaining high sales volume doesn't mean achieving
buy the products, leading to high sales volume and high profits, especially if prices are low.
market share.
The high sales volume can lead to decreases in the Consumers may perceive the product to be of low
costs of production and increase in stock turnover. quality if the price is kept too low.
• Competitive Pricing Strategy:

- This is a pricing strategy that takes into consideration what the competitors are charging for
their product.
- It involves charging a price that is in line with or just below the competitors’ prices.
- This is mostly applicable to businesses selling similar products.
- Charging lower than consumers to drive them away is called predatory pricing.
Consumers benefit from the low prices, especially Predatory pricing is illegal in many countries as it
in a competitive market. destroys competition and can lead to a monopoly.
After using predatory pricing, remaining dominant

firms could gain higher sales revenue as a result of
higher prices charged
• Cost-Plus Pricing Strategy:

- A strategy in which extra charge is added to products as “mark-up” to the average cost of
production.
- The mark up is the profit the competitors wish to gain for every product they sell.
- (Total Cost ÷ No. of Output) x %Mark up = Mark up price
- (Total Cost ÷ No. of Output) + Mark up price = Selling price
It is a simple and quick method of calculating It fails to consider market needs or consumer value
selling price of a product. when setting prices. And the mark-up can be
discouraging for the consumer.
It is a good way to ensure that a business covers its Since competitors’ prices are not considered, a firm
costs and makes a profit. could lose sales if it sets the selling price that is
higher than that of the competitors. This can lead to
a loss in the shirt term.
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• Psychological Pricing Strategy:

- This refers to when the firms considers how pricing affects consumers’ perception of the
value of their products.
- It considers the psychological effect of pricing on consumers. Consumers may associate a
high-priced product with high quality.
- Sometimes, businesses can charge 1 denomination less than the whole number price to make
them perceive as if the cost is lesser.
Psychological effect of selling at a slightly lower Using absurdly accurate prices can be difficult for
price can obtain large revenues for a firm selling in making transactions if the business lacks the
large quantities. denominations.
Since it looks at consumers’ perceptions, it is a Psychological pricing is considered exploitation of
strategy that can be suitably applied in many consumer perception which is ethically incorrect.
market segments.
• Loss Leader Pricing Strategy:

- Business charges a low price for a product, usually below its average cost.
- The aim of this strategy is to attract many customers and to sell off near expired products and
empty stocks.
Businesses selling a large number of frequently Firms using this strategy may be accused by
purchased products may attract many customers competitors of undercutting them using unfair
and benefit from higher overall profits. business practices.
Businesses may use loss leaders as promotional
strategy to encourage consumers to switch to their
brand.
• Price Discrimination Strategy:

- Charging different prices to different groups of consumers for the same product.
- This requires some conditions met first, the firms must be a market leader or else this might
be very difficult for the pricing strategy to catch on.
- The market must be elastic demand, so that having discriminated pricing can be more
attractive to them.
- The market has to be separated to ensure that product is not easily traded.
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Businesses can create a sense of urgency or This strategy requires some research to be
exclusivity based on how they want the consumers conducted, and the market’s elasticity has to be
to react. known very well.
Businesses can promote sub-brands by using this
strategy to attract consumers.
Promotion (4 P’s)
• Promotion is concerned with communicating information about a firm’s products to consumers.
The main aim of promotion is to obtain new customers and to retain existing ones.
• Promotional activities should be communicated clearly to consumers and provide useful
information to enable them to purchase a firm’s product.
• Some promotional activities include:
- Creating awareness or informing consumers of a new or improved product in the market.
- Convincing or persuading consumers to purchase a firm’s products instead of its competitors’
products.
- Reminding consumers of the existence of a product in order to retain existing customer or
gain new customers.
- Enhancing the brand image of product as well as corporate image.
Above the Line Below the Line

Paid form of advertising. Promotion which is not paid by the business.
Done through mass media. Uses specific media to advertise.
Targets a mass market. Has a focus on specific market segment or
consumer.
Can be costly and expensive. It is a cheaper form of communication.
Helps brand building. Helps in selling product.
Company does not have much control over who all Company has greater control over their promotion.
the promotion reaches.
Types of Promotions (4 P’s)

• Above the Line:
- Informative Advertising:
‣ The focus here is to provide information about a product’s features, price, or
other specification to the consumer.
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‣ It increases consumers’ awareness of a firm’s product so as to enable them to

make rational decisions about what they are going to buy.
‣ Eg: Classified ads in newspapers, governmental campaigns.
- Persuasive Advertising:
‣ The aim here is to convince consumers to buy a firm’s product instead of
competitors’
‣ It is used to create a sense of necessity within the consumer, and encourages
impulse buying.
‣ It helps in enhancing a product’s brand image.
‣ Eg: Adverts that show before and after etc.
- Reassuring Advertising:
‣ The focus is on existing consumers to remind them that they are making the right
purchasing decision.
‣ It is used to satisfy and hold existing consumers.
• Below the Line:
- Direct Marketing
‣ This ensures that the product is aimed directly at the consumers.
‣ It eliminates the use of intermediaries and therefore can save the business
money.
‣ Sometimes, direct mail can be used as a method approaching consumers directly,
but this can sometimes be flagged as junk or spam.
- Personal Selling:
‣ This involves the sale of a firm’s product through personal contact.
‣ It uses a sales representatives that sell the product face-to-face.
‣ It is commonly used when selling technically complex products like machinery,
houses etc. As this will ensure that the consumers make the right decisions.
‣ This can get costly as the sales representative has to be paid commission.
- Public Relations:
‣ These are promotional activities aimed at enhancing the image of the business
and its products.
‣ It includes use of publicity or sponsorships.
‣ A press conference is a good example of this, and in this process the business
can show case their products.
- Sales Promotion:
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‣ These are short-term incentives provided by business with the aim of increasing
or boosting sales.
‣ Examples include:
➡ Money-off coupons.
➡ Point-of-sale displays.
➡ Free offers and gifts.
➡ Competitions.
➡ Buy-one-get-one-free offers.
Promotional Mix (4 P’s)

• The successful promotional mix will involve good balance of both the types of promotional
methods.
• However some facts which have to be considered for an effective promotional mix:
- Cost: Does the marketing budget support the use of a particular promotional method?
- Legal framework: Has the law been taken into account when deciding on various
promotional methods to use?
- Target Market: What specific segment of the market is the product aimed at?
- Stage in product life cycle: Which promotional methods will be most appropriate at the
different product life cycle stages?
- Type of product: Has the promotional method considered the nature of the product and how
it would be successfully sold to customers?
Impact of New Technology on Promotional Strategies (4 P’s)

• In marketing context, technology is defined as the information or tools required to sell a firm’s
good or service.
• Over the last decade, technology has changed rapidly and marketers are incorporating this
change into the their strategies.
• Key Terms:
- Social Media:
‣ It is defined as the technology that connects people. It is any medium where
content is shared or where individuals chat.
‣ It doesn't necessarily have to be through Internet.
- Social Networks:
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‣ Places where social interactions happen, which include sharing, discovering, or

advertising information.
‣ Eg: Facebook, Twitter, LinkderIn etc.
- Social Networking Service:
‣ It is a platform to build social networks or social relations among people who,
for example, share interests, activities, backgrounds, or real-life connections.
‣ A social networking service consist of representations of each user, their social
links and variety of additional services.
‣ Usually, these services are web-based.
• Social Media Marketing:
- This refers to the way technology is used to build relationships, drive repeat business, and
attract new customers by individuals sharing with other individuals.
- SMM is the process of gaining website traffic or attention through social media sites. This
usually centres itself on attracting attention and encourages readers to share it on their social
networks.
- The information being advertised here may not be viral.
- SMM is at the basic level, word-of-mouth marketing powered completely by technology.
• Viral Marketing:
- It is a form of peer-to-peer communication where individuals are encouraged to pass on
promotional messages within their social networks.
- Advertisements in the form of YouTube videos are often called “viral ads” and are highly
capable of amassing millions of views and hits.
- The main objective of viral marketing is to increase brand awareness though replicating
viral-like process, similar to how a virus spreads.
- This is completely word-of-mouth irrespective of the method through which it is spread.
- Viral marketing has to be hip and short to spread effectively. It must also attract the target
audience.
Wide Reach — Internet has enabled firms to reach Accessibility Problems — Regions with no
out more consumers at a more personal and computers or Internet, areas with poor Internet
interactive level. connections miss out on promotional campaigns.
Engagement — Market research can now be Distractions — The use of pop-ups in advertising is
conducted directly without having to leave vicinity viewed negatively by consumers and can lead to bad
of the office. brand recognition.
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Market Information — Social networking, SMM, Lurkers — There are individuals who just absorb the
and viral marketing provide useful information on information without spreading it, this means that
market trends. viral spreading is slower.
Cost Savings — Social media marketing and Viral Misinformation — Marketing through this method
marketing are relatively cost-effective. can lead to distortion of information and can lead to
false publicity.
Brand Recognition — Quick spreading of brand
information increases exposure of brand and
consumer awareness.
Speed — Advertisements can quickly reach a
global market, as long as consumer has an Internet
connection.
Guerilla Marketing (4 P’s)

• It is unconventional method of marketing that tries to make an emotional connection with the
consumer.
Traditional Marketing Guerilla Marketing

The primary investment is money. The primary investments are time, effort and
creativity.
It forms a model for big businesses. It focuses on small businesses.
Success measured in sales Success measured in profits.
What can I take from the customers? What can I give to the customers?
Mass media are used. Marketing weapons are numerous and most are free.
Advertising works. Types of non-traditional marketing succeed.
How much money do you have at the end? How many relationships do you have at the end?
• It is used by small to medium sized companies because it is more cost-effective than

conventional marketing, and it also raises brand awareness.
• Guerrilla marketing strategies are usually more imaginative.
• Principles of Guerrilla Marketing:
- Activity — Firms need to have an awareness of the available opportunities that exist to make
their products known and they should seek ways of doing this when an opportunity presents
itself.
- Presence — Firms should look for ways to make their products known to the market using
different promotional methods.
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- Energy — Businesses need to note that every contact and every day is an opportunity to
market their company.
- Networks — Businesses should be on the lookout for new contacts and focus on building
relationships.
- Smart — Firms should ensure that they do not offend consumers.
• Methods used in Guerrilla Marketing:
- Peer Marketing — Bringing people with similar interests or ages together to build up interest
in the product.
- Product giveaways, demos and consultations.
- SMS texting and video messaging.
- Roach baiting and buzz marketing — where actors are used to behave as normal customers
to create interest, controversy or curiosity in a product or service.
- Intrigue — the process of generating mystery to engage customers.
- Live commercials — using people to do live commercials in key places such as clubs and
pubs.
- Bill stickers.
Low cost — the types of activities involve do not Denting brand image — if guerrilla marketing
require large financial outlay. technique is badly executed it hurts the brand.
Flexibility — it can be changed easily as its small High negative attitudes — since main goal of
scale. advertisement is to evoke emotions, sometimes it’s
provocative.
Simplicity — many of these marketing techniques Negative impact on social life — distractive
are simple and easy. advertisements can cause accident.
Direct interaction and communication — Ethical issues — since we are playing with
companies can connect directly to the consumers. consumer emotions the activity is considered
Accessibility — most guerrilla marketing unethical
marketing activities are accessible to consumers.
Place — Channels of Distribution (4 P’s)

• The place talks about how the product reaches the consumers. It is concerned with how the
product is distributed to make it available to customers.
• Areas of Distribution:
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Method of
Description
Distribution
A large store, usually in the centre of the town or a city that sells a wide variety of products from
Department stores
a wide range of suppliers.
Chain stores Two or more stores which have the same name and have the same characteristics.
Retail stores offering a wide range of products, many branded products, at discount prices. Often
Discount stores
the product ranges are of similar types of products such as electrical goods.
Superstores New very large out-of-town stores which sell a wide range of products.
Supermarkets Retail grocery stores with dairy products, fresh meat, packaged food and non-food departments.
Direct sales Product are sold directly from the manufacturer to the consumer.
Customers look through a catalogue or magazines and order via the post. Orders can also be
Mail order
placed by the telephone or Internet.
Internet/e- The use of Internet to carry out business transactions. Businesses could communicate via email
commerce as well. Producers as well as retailers can use the Internet to sell to customers.
• A channel of distribution is basically a pipeline from a producer to the consumer, and this takes
into consideration the mediums through which the products will pass through.
• There are 2 main types of channels:
- Direct Channel: When a producer and ultimate consumer deal directly with each other.
- Indirect Channel: When there are intermediaries between the producer and consumers.
• Producers usually take indirect channels because it saves money and helps producer focus
elsewhere and optimise other parts of production.
• Channels of Distribution:
- Channel 0:
‣ Manufacturer sells directly to the consumer.
‣ EG: Agricultural goods are sold straight from the farm and businesses buy raw
goods directly from another.
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- Channel 1:
‣ Involves selling a good or device through a retailer. Common when the retailer is
large or the product is expensive.
‣ EG: Apple sells its goods through retailers in locations where they do not have a
store yet.
- Channel 2:
‣ Involves selling though a wholesalers because they break bulk so that retailer
can purchase in smaller quantities.
‣ EG: Perishable goods are sold through this form.
- Channel 3:
‣ Involves selling the product overseas through an agent, who sells them to a
wholesaler on behalf of the company.
‣ This may be because the agent may have better knowledge of the local
conditions.
• Selecting the Channel of Distribution:
- Who buys the product?
‣ Is it sold to other producers or to ordinary customers?
- Is the product very technical?
‣ Will you need to explain how to use the product? If so then the ‘Channel 1’
should be selected unless a technically intellectual retailer is available.
‣ EG: Aeroplane engines
- How often is the product purchased?
‣ If it is then they should be in many retail outlets otherwise consumers may not
buy it.
‣ EG: Newspapers
- How expensive is the product, does it have an image of being expensive?
‣ If it is, then it should be sold in a limited number of retail outlets. These shops
need to be known for selling expensive products.
‣ EG: Jewellery needs to be sold at expensive outlets, not in discount stores
- How perishable is the product?
‣ If the product is extremely perishable then it should be available for consumers in
many retails stores to purchase as soon as possible.
‣ EG: Vegetables are sold in many supermarkets
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- Where are the consumers located?

‣ If consumers are located in far off places then ‘Channel 3’ can be useful and e-
commerce can be useful for any location except for countryside.
‣ EG: Company selling phones to an overseas location
- Where do competitors sell their product?
‣ The retail outlets the competitors use to sell might have to be considered. Usually
similar retail outlets are used so that they can compete directly with consumers.
‣ EG: Two laptops companies sell in same location. 
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4.7 International Marketing (Part HL)

Reasons for International Marketing
• Home market is saturated, so growth in that market is limited. Also the home market is very
competitive and survival in the market is difficult.
• Profit potential as they can sell to a larger market.
• They can spread the risks over a larger area.
• Regional trading blocs.
• Gain economies of scale which makes production costs decrease for all markets and make the
firm more competitive in all markets.
• Enhancing the brand image by being considered global.
Methods of Entering International Market

• Internet.
• Exporting.
• International franchising.
• Joint ventures.
• Licensing allowing another firm to produce its branded goods or patented products.
• Direct investments by setting up subsidiaries.
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4.8 E-Commerce
• If the Internet is used to sell products/services then it is considered e-commerce.
Features of E-Commerce
• Ubiquity — the source is available anywhere, 24 hours 7 days per week.
• Customisation — The consumer will have greater involvement in the customisation of the
product they are purchasing.
• Global reach — this extends over national boundaries, and is available globally.
• Integration — allows combined use of audio, video and text to deliver marketing message to the
consumer.
• Universal standards — there is one set of Internet standards.
Effect on the Marketing Mix

• Product:
- Stock more products.
- You can individualise more products.
- Stock of manuals on the Internet and don’t have to provide to each individual.
- Software can be downloaded on-line.
• Price:
- Prices become transparent.
- More competitive pricing opportunity, even for luxury goods.
- However they cannot use differentiated pricing.
• Promotion:
- Use of online advertising.
- Advertising can be changed quickly, and the sites where it is advertised can be also changed
quickly.
- Use of cookies to gather market data.
- Customers have a chance to view reviews of products online.
• Place:
- More use of post or express mail service.
- Customer may pay for distribution/mail charge.
- However, they may be some risk in delivery and damage during shipping.
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Types of E-Commerce
• B2B:
- Business to business.
- This involves purchasing of capital goods from business to be used later in the production
process.
- Eg: SupplierUAE.com
• B2C:
- Business to consumer.
- This is when businesses sell their goods online rather than through another channel.
- Eg: Amazon, apples
• C2C:
- Consumer to consumer.
- This is when consumers transfer goods between themselves, such as secondhand good etc.
- Eg: Dubizzle, Ebay, Torrenting
Advantages and Disadvantages to Consumer
Can check the prices between different stores and No physical contact with producer and product.
sources. There is no guarantee on the quality.
It is very accessible and convenient. Shipping costs can be expensive sometimes.
Consumers can get reviews from others. Credit card (i.e. electronic money) is needed. And
people must have bank accounts.
Large variety of products. The product is not instantly available as there are
shipping timings.
Open 24/7. Since there is no formal way of transferring G&S,
there is a probability that the consumer can get
cheated.
Can get the good delivered to home. Hacking of information.
The consumer can know more about the product Websites can sometimes not be consumer friendly
before purchasing it.
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Advantages and Disadvantages to Firm
They have access to a larger market for consumers. The firm will not be able to use differentiated
pricing, since consumer has access to other sites
with similar products.
People don’t have to be hired to make sales. The old-fashioned consumers cannot use the method
of purchasing the goods.
Rent on selling location do not have to be paid by If delivery time exceeds promised time, then the
the seller. consumer will lose trust.
They can have their products in a different place, Maintaining websites can get cumbersome.
i.e. save in storage costs by spreading the goods
over different places.
Easy to promote goods online. Competitors can also access information from the
firms website.
The market research through cookie data can be Hacking of information.
accumulated.
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Chapter 5: Operations 
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5.1 Role of Operations Management

Operations Management
• Management of resources to achieve efficient output of goods or services.
• They have a direct impact on the level of competitiveness of that organisation and the
attainment of corporate objectives.
• An efficient and effective operations management system:
- Maximises efficiency.
- Maintains high quality standards.
- Includes ethical and social considerations.
- Assists in the achievement of organisational objectives.
• Operations management involves:
- Planning.
- Organisation.
- Leading.
- Controlling.
• Role of operations manager:
- Ensuring that the operations systems are in line with organisational objectives.
- Strategic decisions relating to planning and designing an operating system.
- Operating the system, which includes:
‣ Inventory management.
‣ Manufacturing.
‣ Quality control.
‣ Maintenance/engineering.
• Elements of Operations Management:
INPUT PROCESSING OUTPUT
- Inputs:
‣ Raw materials and components.
‣ Human resources.
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‣ Technology.
‣ Capital, plant and equipment.
‣ Information and knowledge.
‣ Time.
- Processing:
‣ Assembly.
‣ Testing.
‣ Packaging.
‣ Dispatch.
- Outputs:
‣ Goods.
‣ Services.
Productivity
• A measure of the functioning and efficiency of a production system; the level of output obtained
from a set level of input.
• Productivity Improves When:
- Less amount of inputs required for the same level of output.
- More output produces with the same level of input.
• Productivity Measurements:
- Units of production produced per employee.
- Crop tonnage per hectare planted.
- Number of clients attended to per hour or per unit of wage cost.
- Number of units produced per unit of money.
• Determinants of Productivity:
- Technology levels.
- Research and development.
- Equipment and facilities.
- Tasks and process.
- Layout of facilities.
- Communication processes.
- Workplace safety.
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Operations and Business Functions

• Every business function revolves around operations department.
• Operations are done by people, so the HR department gets involved to manage the workers and
the personnel.
• Operations involve funding, so the finance department gets involved to predict costs and
determine a break-even quantity.
• Operations produced goods, so the marketing department has to do the research as well as the
marketing for the product.
• In essence all business organisations are inter-related and interdependent
Operations Management and Sustainability

• Economic Sustainability:
- Refers to the fact that budgets must be respected, wastage must be kept to a minimum and,
whenever possible, further savings should be made.
- The aim is to use the available resources and raw materials to their best advantage —
ultimately ensuring profitability in the long term.
- The management must always look to cut unnecessary costs when possible.
• Social Sustainability:
- Refers to the fact that organisations are becoming more aware of their responsibility towards
the internal and external stakeholders.
- They have to ensure that the work environment of the workers is kept well and that their
actions do not influence the external community.
• Ecological Sustainability:
- Refers to the fact that organisations are becoming more and more aware of the impacts their
actions have to the environment.
- This focuses mainly on the air, water, land and noise pollution caused by their actions.
• Triple Bottom Line:
- The need to take economic, social and ecological factors into consideration while making
business decisions.
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5.2 Production Method

Production Methods
• There are several different ways in which goods and services can be produced.
• Job Production:
- Used for the production of single, one-off products. These products may be small or large
and are often unique.
- In order to be called job production, each individual product has to be completed before the
next one is started. Only one product is being made at the same time.
- Job production enables specialised products to be produced and tends to be motivating for
workers because they produce the whole product and can take pride in it.
- However this production method tends to result in high unit costs, often takes a long time to
complete and is usually labour intensive.
- The labour force needs to be highly skilled and this is not always easy to achieve.
- Often marketed as: bespoke, one-off etc.
Unique product or service, prestige status of High skilled workforce will need high wages or
owning the product or service. salaries.
Job satisfaction — Increased motivation since There will be high production costs since at a period
workers will do different jobs at the same time. of time, only small amount of products are made.
• Batch Production:
- Batch production makes products in separate groups and the products in each batch go
through the whole production process together.
- The process includes a number of distinct stages and the key feature is that every unit in the
batch must go through an individual product stage before the whole moves on to next stage.
- Batch production allows firms to use division of labour in their production process and it
enables economies of scale if batch is large enough.
- It is usually employed in industries where demand is for batches of identical products.
- It allows each individual batch to be specifically matched to the demand, and the design and
composition of each batch can be easily altered.
Possible economies of scale. Businesses will need to hold large stocks within the
business.
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Can help deal with unexpected orders. Batch size is limited by the capacity of the
machinery
Batch production gives consumer more choice — Maintenance for machines can be costly and can
and so captures more market share. reduces efficiency.
• Mass Production:
- This is used when individual products move from stage to stage of the production process as
soon as they are ready, without having to wait for any other products.
- Flow production systems are capable of producing large quantities of output in a relatively
short period of time.
- For industries where the demand of product is high and consistent.
- It suits production of standardised item with only minimum alterations.
- Also referred to as “flow production” (refers to continuous flow of products) or “line
production” (referring to the step-by-step production stage).
Systems need little maintenance once they are set- Set-up costs are high.
up.
Business can cater to large orders to achieve huge Breakdowns are costly, as the whole assembly line
economies of scale. can be stopped.
Labour costs are low and relatively low skilled Production process can be demotivating for workers
workers may also be hired. doing repetitive activities.
• Cell Production:
- Mass production where flow is broken up by teams of workers who are responsible for
certain parts of the line.
- Each individual cell produces a complete unit of work.
- Each cell has a team leader and below that a single level of hierarchy made up of multi-
skilled workers.
- Performance of each cell is measured agains pre-set targets. These will include output levels,
quality and lead times.
- Cells are responsible for the quality of their complete unit of work.
- Cell Production system has lead to: significant improvement in worker commitment and
motivation as there is team work and sense of “ownership” of the complete unit of work, job
rotation within the cell, increased productivity.
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- Success of cell production depends on a well-trained and multi-skilled workforce prepared

and able to accept a more responsible style of working.
Changing Production Methods

• From Job to Batch:
- Cost of equipment.
- Additional working capital needed.
- Staff demotivation, and can no longer promote the product as “customised to each
consumer”.
- May have to promote the benefits of lower prices and consistent quality.
• From Job/Batch to Mass:
- Cost of capital equipment.
- Production delays will impact cash flow.
- Risk of low motivation and boredom.
- Mass production required mass marketing therefore market research needed.
- Accurate estimates of demand are needed to ensure appropriate output.
- Promotion and pricing will have to be geared towards mass marketing.
• From Batch/Flow to Cell:
- Recruitment of flexible workers.
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- Adaptable staff to work in teams.

- Staff training needed to obtain multi-skilling.
- Productivity and quality improvements should allow competitive pricing and promotion of
quality products.
Choosing Method of Production

• There is no one method that is best for business; it will depend on a number of different factors
to which system an organisation may prefer.
• Factors include:
- Target Market — Is the business producing high volume consumer goods?
- State of existing technology — Which can limit how flexible production can be?
- Availability of resources — Fixed capital, working capital and/or human capital?
- Government Regulations — Are the working conditions and goods meeting quality
standards?
• It is not uncommon for businesses to use more than one production methods.
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5.4 Location
Factors in Locating
• Costs:
- Land — If the business is a large manufacturer, it may need a large, flat surface area,
whereas a small home-based office may only require a spare room.
- Labour — If the business is a technical one (such as a laboratory) requiring skilled workers,
the biggest cost may be labour.
- Transport — If the business is producing large quantities of a physical product, transport
costs could be crucial. Two options are possible:
‣ If the business is bulk increasing (i.e. buying in many components and building
something bigger) it may be sensible to set the business close to the market
(transporting bigger items would be more expensive).
‣ If the business is bulk decreasing (i.e. buying in large quantities of raw materials
and turning them into smaller end products, such as happens at paper mills or
slaughterhouses) business may set up close to source of raw materials.
• Competition:
- Retail outlets, theatres, law firms and may other business often set up close to their rivals.
- Sometimes companies adopt a system called cannibalistic marketing where they set up more
than one branch in a location, until eventually there are so many outlets that there is no more
possible extra trade to be generated.
• Type of Land:
- Different types of land will not only incur different costs, but it will also vary in suitability
for the business.
- For example, a ski ship would prefer to be near a snowy region, while a desert safari
company would situate itself near the desert.
• Markets:
- Many businesses had to set up close to their customers. Sometimes special marketplaces
would be set up to cater to a specific market segment.
- Now due to the mobility of the market, and the transition from a physical to an electronic
marketplace, companies now have to focus on efficient distribution systems.
• Familiarity with Area:
- Often, new businesses are set up in the place that the owners are familiar with. New
businesses try not to take any risks and this is effective.
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- This is disadvantageous because they have to give up opportunities to try newer places.
• Labour Pool:
- Some companies require highly educated staff and for that reason they tend to locate
themselves in regions with a more highly educated populace.
- Others look for low-skilled staff for cheaper, this means they will situate themselves in such
a region.
• Infrastructure:
- Infrastructure refers to everything related to the distribution networks. It could include the
transport, people, products and even the technology.
- Access to such infrastructure is important for all businesses to stay ahead of the curb.
• Suppliers:
- Businesses like to locate themselves near a supplier for many reasons.
- Lower transports costs and transport time since raw material does not have to be transported
for a long distance.
- Loyalty, the company and supplier can make an agreement and can mutually benefit.
- Some businesses may even expand to supply themselves (backward vertical expansion).
• Government:
- Local government and national government can be crucial for a business.
- Laws:
‣ Businesses must be careful about local laws to make sure that it does not get into
trouble.
‣ Some laws to be kept in mind include: local labour laws, laws on trade and
transportation etc.
- Taxes:
‣ Businesses must pay taxes to the government in which it operates. To default on
tax payments can damage a company.
‣ Business must also consider how much tax it will have to pay before relocating,
if the taxes are stringent then it will be bad for the business.
Globalisation
Page 43
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Offshoring and Outsourcing

Page 57
In-housing and Reshoring

• Some companies have now started to reverse outsourcing. To stop the approach and to perform
peripheral activities internally again.
• The business decisions to stop outsourcing can be motivated by the desire to gain full control or
to reduce external costs.
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IB Business & Management SL

Chapter 1: Business Organisation and Environment 7

Reasons for the growth of multinational companies 43

Chapter 2: Human Resources Management 46

Chapter 3: Finance and Sources 80

Difference between Cash Flow and Profit 103

Chapter 4: Marketing 109

Price (4 P’s) 136

Chapter 5: Operations 152

1.1 Introduction to business management

Management Responsibilities in Departments

‣ Keeping records of the sales of each product/service so that decisions can be

Sectors of Business Activity

Difference between Entrepreneurship and Intrapreneurship

- An individual who demonstrates enterprise and initiative in order to make profit.

- An individual who is employed by a large organisation who demonstrates entrepreneurial

thinking in the development of new products or services.

the failures are also credited to the organisation.

company allows it.

• A business aims to meet the needs and wants of individual or organisations.

• Some businesses focus on one activity, others undertake many.

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• Mainly, businesses process the inputs and add value to it.

Reasons for Starting a Business

• Providing good/service for a market gap.

Common steps in starting a business

• Manage financing for start-up

• Organise and plan business/organisational structures

• Decide on business aims/branding

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1.2 Types of Organisations

Values Profit Values public interest and political compromise

Main Types of Commercial Organisations

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• Private Limited Company:

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‣ Article of Association: Rules of the working mechanism of the company.

• Public Limited Company:

change in type of company.

‣ Modify bank account to make it accessible to general public.

‣ Get listed in the Stock Exchange, share trading is easier.

‣ Prospectus: Issued by company inviting general public to invest in the company.

It is a detailed document with information on company’s past performance and

initial share that is being offered is the initial public offering.

are elected by shareholders and are professionals:

‣ There can be thousands of shareholders

‣ Shareholders invited to Annual General Meetings (AGM)

company, they can kick out the founder. . . . . . . . . . . . . . . . . .

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• Non-Profit Social Enterprises:

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➡ Charities handle small scale funding, while NGOs are involved in

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1.3 Organisational Objectives

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Corporate Social Responsibility (CSR)

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