UNIT 1: BUSINESS AND ITS ENVIRONMENT

LO:-To understand what business activity involves

-To analyse the meaning and importance of creating value
-Recognize the key characteristics of successful entrepreneur

The purpose of a business:

1. The main purpose of a business is to combine human,physical and financial resource to
create goods and services in order to satisfy the needs and wants of people,
organizations and the government.
2. This is a decision making organization involved in the process of using inputs to produce
good/or to provide services.

Key Terms:
1. Consumer goods: are physical and tangible products sold to the general public include
durable (eg;car) and nondurable consumer goods (e.g;food)
2. Consumer services: are intangible products sold to the general public (e.g;hairdresser)
3. Product: refers to both goods and services
4. Capital goods/producer goods: physical goods bought by businesses to produce other
goods/service (e,g;wood to make chair).

Factors of production:
Land; renewable non renewable source of nature (e.g;coal)
Labour; manual skilled workforce
Capital; finance to run and capital goods (e.g;computer)
Enterprise; risk taking individuals-managing, decision making and coordinating role.
 Creating or adding value:
Creating value: Increasing the difference between the cost of purchasing bought-in materials
and the price the finished goods are sold for. PHYSICAL

Added value: The actual differences between the cost of purchasing the bought-in materials
and the price the finished goods are sold for. NUMERAL

Other ways of adding value:

● Building a brand (e.g. Armani)
● Delivering excellent service (e.g.Talabat)
● Product features and benefits (e.g.Apple)
● Convenience (e.g.Amazon, first class)

Economic Problems
Opportunity cost: the benefit of the next most desired option which is given up exists for all
economic decision makers: consumers, business government

Entrepreneur
LO:- To recognize the key characteristics of successful entrepreneurs.
- To asses the importance of enterprise and entrepreneurs to a country’s economy.

What is an entrepreneur?
Someone who takes the financial risk of starting and managing a whole venture.

Challenge Explanation Possible solution

Identify successful business Being able to identify a ● Have skills such as

opportunities market need that will offer confidence and
sufficient demand for their leadership.
product ● Experienced with
● Own skills or hobbies business.
● Previous employment ● Franchising
conferences
● Do market research

Sourcing Capital (finance) This is a difficulty due to ● Borrow a loan

finance as they may not have ● Save up money
a lot of personal savings, lack ● Build up a reputation
 of financial support, lack of ● Hire an accountant
trading record.

Determining a location This may be a problem ● You can work from

because it is away from the home.
biggest market and lacks ● Rent nearby location,
status. ● Market research

Competition New businesses will face ● Unique idea

competition from other more ● Better services
established brand. ● Good prices
● Better offers

Building a customer base New businesses need to get ● Social media

in customers (loyal) ● Personal customer
service
● Make customers
happy
● Good employees

Homework on google classroom

Outline the problems Farah had to deal with opening a new business (6):
1. One problem is the cost of the location of her business in the city centre. It is too
expensive and Farah may experience difficulty having to pay the bank back for her loan.
2. Another problem is contacting an accountant who would look at the financial situation of
the business because he requested at least $2000 per year whereas that money could
be spent on other things in the business such as electricity and water.
3. Lastly, Farah would be overwhelmed and stressed out because she didn’t realize the
amount of paperwork she has to do as well also she may attend evening local college
creating too much pressure mixing her personal life with her work/professional life.

Which of these problems do you think was the most important one for Farah to find a
good solution to (6)
The most significant problem that Farah has to face is accounting aspect of her business. I feel
like even though attending accounting class will take time and money, it would be a better
solution for her in the long run as she wouldn’t need to spend money on getting an accountant
to look after the finance of the business. Therefore, that money she saves from accounting
herself- she could spend elsewhere in the business for example by having an ideal busy
location which can boost up her popularity and sales.
I believe that Farah did have some of the right qualities to be an entrepreneur. One of the
reasons is her experience in her craft. She had already, worked in two of the biggest dress
shops in town. Her experience means that she wasn’t going into opening a business empty
minded. Working there gave her an idea of how these types of the business are run which she
can now implement into her own company with an addition of her originality which would make
her products stand out from her competitors. Moreover, people are interested in her work
specifically, so by her stepping up to start a business shows that she has confidence within
herself and her designs, which is a quality in an entrepreneur. An entrepreneur is also about
taking the financial risk, she shows that by using her own savings and willing to take out a bank
loan. These are both risks as it is uncertain if the business will succeed. One thing you may say
is that she lacks ability to have an open mid. This is shown when she was looking for a shop
premises and only concentrated on one specific area.

Reasons for failure:

● Wrong environment/changing environment
● Wrong investment
● Lack of market research
● Wrong location
● Borrowing in excess
● Lack of finance
● Lack of communication
● Lack of working capital
● Lack of record keeping
● Poor management skills

Impact of enterprise on a country’s economy:

- Employment creation;- when entrepreneurs start a business, they need employees and
other stakeholders which lowers the unemployment rate.
- Economic growth;an increase in output which increase the GDP- Government tax
businesses- small businesses need more employees which increases the GDP due to
exports changed and imports not changed- improves the standard of living,
- Survival Growth- when new businesses either fail or succeed they complete the impact
of each other.
- Innovation & Technology; new technology making the economy more improved and
making the business have a higher competitive edge.
- Exports; Improve international competition.
- Personal development; others to follow- encourages development.
- Increased social cohesion; when there is an increase in unemployment, there is an
increase in crime and social issues.

Enterprise
 Definition of social enterprise:
Aims to make profit that would be generated back to the business to improve or benefit society
rather than maximising returns to the owner.

What is the difference between charities and social enterprises?

Charity runs on funds
Social enterprises make profit but it isn’t the company's sole purpose

Triple Bottom Line: Social enterprises have three main aims:

1. Economic: Make a profit to reinvest into the company and provide some return to
owners.
2. Social: To provide jobs or support for local,often disadvantaged communities.
3. Environmental: To protect the environment and manage the business in an
environment sustainable way.

Business Structures
These are sectors of production:
- Primary : The sector where all the raw materials are found
- Secondary: The sector where all the raw materials are manufactured into products
- Tertiary: The sector where the products are sold

Examples of the production:

Primary: fishing, pearl diving, bapco
Secondary: jewelry making, tailor, bapco
Tertiary: jewelry selling, bapco, hairdressing, tailor

Industrialisation- Secondary sector

It is the development of secondary sector manufacturing in developing countries.

Advantages Disadvantages

More government revenue (tax) Pollution- environmental harm

Increase GDP More importing raw materials

High exports More employment

Economy of scale Over populated town and cities

More jobs created

 Value added goods

Private Sector: Comprises businesses owned and controlled by individuals or groups of

individuals.

Public Sector: Comprises organizations accountable to and controlled by the government.

Mixed economy: Economic resources owned and controlled by both private and public sectors.

Free market economy: Economic resources are owned largely by the private sector with little
state intervention.

Command Economy: Economic resources are owned,planned and controlled by the state.

Business Structure

Sole Trader:
A business where one individual provides the permanent finance thus he/ she have full control
over decision making.
Examples: Jena bakery
Advantages:
● Easy to set up
● Small amount of capital needed
● Owner keeps all profit
Disadvantages:
● Has no one to share responsibility
● Long working hours
● Sole trader personally liable for all debts the business has

Partnership:
When two or more people operate a business as co-owners and share income.
Examples: McDonald’s, HP
Advantages:
● More capital can be invested in the business as there are more people to invest money
● Responsibilities are shared between the partners
● Partners can help each other in decision making - if one partner is unsure he may ask
the other partner(s) for help
Disadvantages:
● Conflict between the two partners in term of vision
● Partners are taxed individually as if they are sole traders
 ● Profit must be shared

Limited Liability:
When a business owner is only liable for the original investment - should the business fall in
debt, the owner and the business have two separate identities.
Examples: Nike, Target, Harley Davidson
Advantages:
● Can raise money by selling shares
● No personal liability
● Business continuity
Disadvantages:
● Higher start-up costs
● Double taxation
● Higher cost to operate

Co-operatives:
A jointly owned enterprise engaging in the production or distribution of goods or supplying of
services operated by its members for their mutual benefit.
Examples: Farmers
Advantages:
● Buying in bulk
● Working together to solve problems and make decisions
● Good motivation for members as they will share profit
Disadvantages:
● Poor management skills
● No selling of shares
● Slow decision making - all members need to be consulted

Public Limited Company:

A limited company that is able to sell its shares to the general public. Shares are sold based on
the value of the business of the business on the stock market.
Examples: Coca Cola, Apple, Nike
Advantages:
● Limited liability
● Continuity
● Ease of buying and selling shares
Disadvantages:
● Share prices can fluctuate based on the economy
● Risk of takeover due to the availability of shares on the stock market
● Legal formalities

Private Limited Company:

A private company whose owners are legally responsible for its debts only to the amount of
capital they invested (limited liability).
Examples: Google, Burberry
Advantages:
● Limited liability
● Continuity
● Taxation - only get taxed from their profits
Disadvantages:
● Expensive to set up
● The company is expected to produce complex accounts
● Shares are restricted - can’t sell shares

Franchisee:
When a business uses a name, trading system and logo of an existing successful business.
This is to done raise awareness for their own business and get more customers worldwide.
Examples: Starbucks 24,000 stores in 70 countries
Advantages:
● Advice and training offered from the business
● National advertising is paid by the franchise
● Less chance of the business falling since they are an established brand
● Franchise agrees not to open another branch in the businesses local area
● Don’t need to get their own supplies since other businesses are supplying them with
their own products
Disadvantages:
● Profit or revenue share has to be paid back to the franchise every year
● Starting up a franchise can be difficult as franchise license can be expensive
● You don’t have a choice on which supplier supplies the business
● Strict rules like overpricing and layout of the business - the owner of the business is less
in control of their business
● Local promotions have to be paid by the franchisee

Joint Ventures:
When two or more business agree to work together on a project and create a separate business
division.
Examples: Sony Ericsson - joint venture between Sony and Ericsson
Advantages:
● The costs and risks of a new business are shared which makes it cost efficient. This is a
major consideration when costs are rising
● Different companies have different strengths, so they may complement each other
● If the businesses have major markets in different companies, they can exploit their
product to a larger market than they could have done separately
Disadvantages:
● Style of management and their culture may not blend with each other
 ● Errors and mistakes may lead to business blaming each other, resulting in a dispute
● The business failure of one partner would put the whole project at risk

Holding companies:
A business organisation that owns and controls a number of separate businesses, but does not
unite them into one unified company.
Advantages:
● The separate business are in completely different markets - so the holding company has
diversified markets
● Keeping businesses separate means that they are independent of each other for major
decisions or policy changes
Disadvantages:
● There will be ineffective decision making since the holding company has a controlling
interest in several corporations, management may have limited knowledge in the
industry
● Since capital of the holding company may be pooled together it may result in over
capitalization (debt). This would result in shareholders not getting a fair return on their
invested capital

Exam Questions
Define the following types of business organisation:
● Partnership - a business formed by two or more people - they share capital, investment
and responsibilities.
● Sole trader - a business that is owned by one person - this individual takes provides all
the finance and in return makes all the decision making and receives all the full profit.
● Private limited company - a small to medium sized business that is often owned by
shareholders who typically belong to the same family; this type of company can not sell
shares to the general public.

Measuring business size

Business name Size of business (small, medium, large)

Cold store Small because it only affects the local area

Nestle Large because it’s an international business

with a huge customer base

Batelco Medium because it’s a national business and

only affects the people in Bahrain

McDonalds Large because it's an international business

and hus multiple stores worldwide
 Jasmis Medium because it’s a national business and
only operates in Bahrain

How can we measure size:

● Number of employees
● Revenue (sales turnover)
● Capital employed (amount of money invested in the business)
● Market capitalisation (the value of the company’s shares on the stock market
● Market share

Why do we compare business sizes?

● Investors
● Government
● Competitors
● Workers and bank

They will want to know about the size so they can evaluate if it is what they are looking for, or
something to watch or be aware of, something they can invest in or trust, somewhere they’d like
to work or be part of.

Key terms:
● Labour intensive
● Capital intensive

Disadvantages of this measurement

Number of employees - amount of people a A business that relies heavily on machinery to

company hires to complete its tasks produce its goods and is a large-scale
operation may have few employees; simply
because the machines do all the work, that
doesn’t mean the business is a small scale
business.

Sales turnover - total value of sales in a A large sales turnover may be seen with a
given time period small business that sells small, high value
items. For example, an artist may sell works
of art for £100,000 each reaching over
£1,000,000 in sales turnover a year - this
doesn’t mean they are a large business

Capital employed - total value of all long This may differ from industry to industry as
term finance invested in the business some fields of work require huge investments
set up the business while others don’t -
businesses like hotels require a lot of money
 to set up; on the other hand, organisations
like amazon may have needed less of an
investment

Market capitalisation - total value of a The value of a company’s shares can change
company’s issued shares regularly and my increase/ decrease on a
Formula: Share price x Number of shares in daily basis. If a company releases a new
issue product, the share prices can increase
massively - this doesn’t mean the business
has changed in size

Profit - amount of money the business A business may deal with a small office, with
makes after you take away the cost of making few employees creating software which
the product generates millions of pounds of profit. The
business size is small, even though there is
high profit generated

Market share - the percentage that business If the market the business operates in is
makes on the market small, the shares may look larger than how
e.g. McDonald’s makes up 50% share of the big the business actually is
fast food market
Formula: (Total sales of business / Total sales
of industry) x 100p

Difference between sales turnover and profit is:

● Sales turnover is the amount of money a business makes from sales without taking the
cost into consideration
● Profit is the amount of money made with the consideration of how much it costs to make
them

Which is best?
In reality, no measurement is the best and it depends on a case to case scenario. The business
might be going either for comparative size or absolute size. If the firm is going for absolute size,
then at least any two of the above criteria should be considered.

Questions:
1) Which business is largest, using the following measures of size: Employee's - Z, Capital
employed - Y, Revenue - X, Selling space - Y, Number of outlets - Z
2) What do your results tell you about your attempt to measure business size? My results
tell me that there isn’t one factor to determine the certain size of the business - many
factors can affect this and all factors should be taken into consideration. An example of
this is, some industries may be smaller in size than other industries, so that business
could make up a larger market share than another business in another industry -
 although the market share of that business could have been smaller, that business could
be larger in size.

Business Growth

Internal growth: Expansion of a business by opening new branches, shops or factories also
known as (organic growth).

External growth: Business growth achieved by means of margins with or taking over another
business either from the same industry or a different industry.

Reasons:
- Increased profits
- Increased market share
- Increase economies of scale
- Increased power
- Reduced risk of takeover

Advantages of being a small business Disadvantages of being a small business

Less cost Less recognition

Less tax The owners have to carry a large burden of

responsibility

Easier control Less revenue

Less wages and salaries to pay Lack of economies of scale

Decision making will be easier- adaptable May have limited access of finance
(changing needs of customers)

Offer personal service for customers Greater risk as it is not diversified- if there is
external factors

How have small firms affected the economy?

- Job creation
- New ideas
- Competition for the larger firms (benefit for customers)
- Specialist goods for the larger business
- Lower average cost
 How can governments help?
- Taxes; corporation tax reduced
- Loans; loan guarantee scheme
- Information and advice

Advantages for family businesses Disadvantages for family business

Commitments Conflict

Pride- increase quality and reputation Traditional- lack of innovation\

Continuity Continuity problem; generations and

members not interested or have the qualities.

Vision statement and mission statement

A vision statement: is an organization’s long-term aspirations, i.e. where it ultimately wants to

be.
A mission statement: a statement of the businesses’ core aims, phrased in a way to motivate
employees and to stimulate interest by outside groups.

Mission The overall purpose of the business

Vision The overall aspiration of the business

Aims or goals General statements of what business intends

to achieve

Objective More precise and detailed statements of the

aims / goals

Main differences between the two

Vision statement Mission statement

Deals with what the company wants to Deals with what the business is
become

Focused on long term Medium or long term

 Not updated as frequently Updated frequently

Do not have to be actual targets Actual targets underpin mission statements

Outlines the values of the business i.e. it’s

beliefs and guiding principles

Characteristics of a good mission statement:

1. Contains a formulation of objectives that enables progress towards them to be measured
2. Differentiates the business from its competitors
3. Defines the markets or business in which the firm wants to operate
4. Is relevant to all major stakeholders - not just to shareholders and managers
5. Excites, inspires, motivates and guides

Task - write a mission & vision statement for Jasmis

Mission statement: To provide you with faster, finer and fresher food that satisfies your needs
Vision statement: To be in the leading position of the fast food competition

Corporate aims and objectives

Aims: are long term goals of a business, often expressed in the mission statement. They are
set by managers and generally aren’t measurable.
Example - “To increase shareholder returns each year through business expansions”.

Objectives: are short term to medium term targets set to help meet the aim. They are more
specific and measurable.
Example - “Our objective is to increase the profitability of all divisions by 10 percent in the
2015/2016 financial year”.

Targets: short term plan of action that organisation’s use to achieve their objectives.
Example - “Our target is to increase out market share by 10 percent and decrease overheads by
5 percent in the 2015/2016 financial year”.

Strategy: long term plans of action that businesses uses to achieve their target.

Tactics: the short term plans of action that firms use to achieve their objectives - they are even
shorter than targets.

All objectives in businesses should be SMART

 S Specific The objective should state exactly what is to be achieved.

M Measurable An objective should be capable of measurement - so that it is

possible to determine whether (or how far) it has been achieved.

A Achievable The objective should be realistic given the circumstances in which it

is set and the resources available to the business.

R Relevant / Objectives should be relevant to the people responsible for

Realistic achieving them.

T Time Bound Objectives should be set with a time-frame in mind. These deadlines
also need to be realistic.

Corporate objectives: are objectives that relate to the business a whole. They are made by top
management and provide more focus to the vision and mission statement.
Examples:
● Survival
● Profit maximisation
● Profit satisficing
● Increase market share
● Growth
● CSR (corporate social responsibility)

Profit maximisation: producing at the level of output where the greatest amount of profit can
be achieved - the difference between total revenue and total costs.
Limitations of profit maximisation:
● Many businesses seek to maximise sales in order to secure the greatest market share
rather than maximise their profit - the business then expects a target rate of profit from
these sales
● Business analysts assess the performance of a business through return on capital
employed rather than total profit figures
● Focus on high short term profits may encourage competitors to enter the industry and
may jeopardise the long term survival of the business

Profit satisficing: aiming to make enough profit to satisfy the business owners but not aiming
to make as much profit possible. This objective is commonly found among small business
owners who wish to live comfortably - the owners want to enjoy their leisure time rather than
spend hours and hours in trying to make profit.

Growth: this is measured in terms of sales or the value of output.

Limitations of business growth:
● Expansion that is too rapid can lead to cash-flow problems
● Sales growth might be achieved at the expense of lower profit margins - less profit
 ● Using profits to finance growth - known as retained earnings - can lead to lower short
term returns to shareholders

Benefits of Increasing market share:

● Retailers will be keen to stock and promote the best-selling brand
● Profit margins (the amount of profit a business can make out of a particular product)
offered to retailers may be lower than competing brands as the shops are so keen to
stock it - this leaves more profit for the producer
● Effective promotional campaigns are often based on ‘buy our product with confidence - it
is the brand leader’
● They receive better prices from suppliers- economies of scale
● Companies have a higher competitive edge

CSR: stands for corporate, social, responsibility in which businesses take an initiative in being
more ethical - they consider what effect their actions may have on society. This is done by
businesses paying their employees well, using products made from recycled materials and
using organic food. CSR is important as it ensures all businesses are taking care of the
environment surrounding them - this not only satisfies customers and increases their consumer
base but also gives businesses a good reputation.

Maximising shareholder value: the ultimate measure of a company’s success is the extent to
which it enriches shareholders - it is the market capitalisation of the company.
Conflict: Don’t focus on the company as much as the shareholders leading to bad quality
products

Economies of scale (positives of a business getting larger):

when the average costs of running a business falls as a firm increases its output and size due to
gains in production efficiency. Examples of economies of scales is your costs drops as
businesses are able to purchase products in bulk.

Diseconomies of scale (negatives of a business getting larger):

when the average costs start to rise with an increased output.This is when economies of scale
are no longer functional for a business - rather than seeing a decrease in production costs and
increase in output, the business will see an increase in production costs. Production costs can
increase as the business chose to employ more people rather than make their business capital
intensive (machinery).

The importance of corporate aims?

● Designed to make the aims and mission of a business specific
● Provide a much clearer guide for management and workforce action throughout a
business
● Develop a sense of purpose and vision for the business
 ● Allow assessment to be made at a later date of how successful the business is - tracking
progress
● If you have no corporate aims the business will drift along and workers will be
demotivated
● Access to superior advertising channel and best rates.

Reasons why corporate objectives may change :

● The economy might change
● The business might grow and expand - changing the aims
● Competition may change
● If short term goals aren’t met, they turn into long term goals

What affects corporate objectives?

● Size and legal form - smaller businesses focus on a satisfactory level or profit whilst
large businesses will be concerned with rapid business growth
● Age of the business - a new business will want to survive, whereas, more established
businesses will focus on growth and profit
● Economic situation - Recession or boom?
● Sector - Private or public?
● Corporate culture - focuses on the code of behaviour and attitudes of those in power -
some care about society and the environment more whilst others are more aggressive
and care about profit

Explain why corporate objectives are important to a business. [5 marks]

Corporate objectives are objectives that relate to the business a whole. They are usually written
by top managers and highlight ways the business can achieve its mission and vision
statements. Examples of corporate objectives are growth and survival. They are essential in a
business as they show realistic ways businesses can achieve their goals. These objectives are
generally long term and are achieved over a long period of time. A business will want growth as
it’ll maximise their profit and it’ll show the business is improving in its industry. They’d also want
to survive as they’d want to keep their name in the industry and they want maintain the survival
of their business in the market over the years.

Questions - Software Creations (SC)

1. A partnership is a business that is set up by two or more individuals. They share the
responsibilities of the business and make the decision making; in return they’ll share the
profit.
2. A public limited company is a business in which the owners are only liable for the original
investment put in the business (limited liability). Should the business fail, the business
and the owner have two separate legal identities. This type of company can sell shares
to the general public.
3. Corporate objectives are objectives that relate to the business as a whole. These
objectives are generally changeable and can be adjusted overtime to suit the economy
 and the direction the business is heading towards at that period of time. They may be
changed for multiple reasons like the legal form and size of the business. When SA first
started up as business, it was a relatively small company that operated in the sales of
car alarms, their main aim was to be the leading company in the industry. Overtime, SA
realised its full potential as a business and decided to increase the size of their
operations having a change in business objectives. The owners of the business realised
the fact that they had a competitive edge in the industry and decided to use it to
maximise the business’ profit - that would have not been an aim to begin with. In addition
to that, SA initially started off as a partnership; it is now a public limited company
naturally giving the company a more aggressive nature as there are more stakeholders
affected by the company’s decisions. Partnerships have no limited liability meaning the
owners were legally liable for any wrong doing the business made - this would’ve largely
impacted the characteristics of the owners as they would’ve had a more relaxed nature
and would have only wanted to be satisfied by the profit they made resulting in them
being less of risk takers. In addition to that, the shift of structure the business had now
gives the owners limited liability and allows them to sell shares to the general public.
This would give SA a more assertive, forceful nature.

Management by objectives: A method of coordinating and motivating all the staff within the
organisation by dividing the overall aim into specific targets for each department, manager and
employee.

Corporate Social Responsibility (CSR)

Definition
the concept that accepts that businesses should consider the interest of society in their
activities and decisions, beyond the legal obligations that they have.

Ethical Code of Conduct - what a business has to do

A document detailing a company’s rules and guidelines on staff behaviour that must be followed
by all employees.
Possible ethical dilemmas:
● Should a company advertise to children so they pester parents into buying them
● Is it acceptable to close a factory to save costs when it means lots of jobs will be lost
● Do we accept lower profit in the short term by purchasing less pollution production
equipment

Primark - CSR
● All unsold items are donated to a children’s charity called Newlife - this is not only useful
for the charity but also for the environment as it reduces the amount of waste thrown in a
landfill site
 ● They have an Ethical Trade and Environmental Sustainability team in the factories they
work with that deliver training programs to the local partners that helps locals address
any relevant questions
● They use brown, recycled paper bags - don’t use plastic bags

Ways a businesses can incorporate CSR:

● Paying higher wages
● Improving working conditions
● Improving safety standards
● Cutting waste and pollution
● Support worker security

Advantages Disadvantages

Good reputation Cause conflict between stakeholders

Stops pressure groups More costly in the long run

Increased customer preferences Main aim of a business should be profit

(Private Sector)

More revenue Could ruin your reputation as pressure

groups may pick up on faults

Motivated employees - good cause Do not want to pay higher prices

Creates a positive ethical atmosphere Less money to reinvest in the business

Customers feel better about giving back to CSR is a way for governments to impose less
society restrictions

Employee loyalty

Question - ‘Because there is conflict between profit and corporate social responsibility
(CSR), private sector businesses should not have CSR as an objective.’
Do you agree? Justify your view. [20 marks]

‘Because there is conflict between profit and corporate social responsibility, private sector
businesses should not have CSR as an objective’ do you agree? Justify your view (20)

CSR is a business objective which expresses the concept that accept that business should
consider the interest of society in their activities and decisions, beyond the legal obligations that
they have and contributes to development by offering social,economic and environmental
benefits for all stakeholders. The private sector comprises organisations owned and controlled
by individuals or groups of individuals and includes profit making businesses that are not owned
or controlled by the government. (K)

Legal workers are an example of the advantages of CSR towards some stakeholders.These
employees will be happy to work for the business because they will get paid well and feel more
motivated.(K) As a result of this, private business does not have to waste money recruiting staff
as well as training them. Hence, this money could be reinvested into business for future
activities that will improve the business’ reputation such as being ethical towards the
environment by placing recycling bins near each branch. (An)

Another advantage of CSR would be the benefits that would be gained by the shareholders.
Shareholders would be pleased that the business has CSR because it will create a good
reputation as well as stop pressure groups. (K) This will increase the number of customers as
they prefer it. As a result of this, private companies would have less pressure and create a
bigger trust between the business and their customers as well as increase the number of profit
the business is generating which could be reinvested into the business which could be used for
other CSR activities such as helping lower income countries with medical care. (An)

However, other stakeholders such as the customers may demonstrate the disadvantages of
CSR. This is because customers do not want to pay more for products with higher prices. (K)
Some private companies may increase the price of their products to add CSR into their
business; for example a business could start fair-trade which is costly which adds on to the cost
of their product; and some customers are not bothered about CSR. As a result to this, the
business will lose numbers of their customers which will eventually lead to them losing profit as
they will be inserting more into the business rather than gaining. (An)

Another perspective that people including shareholders and managers have is that CSR isn’t
the sole purpose of a business. (K) Businesses in the private sector should have one main aim
which is to make profit. Including CSR may distract the business from other business activities
such as adding value to their products and making decisions which benefit the business by
making it generate more revenue whereas CSR is rewardless and should not be considered in
private companies but voluntary associations,the government, and charities instead. As a result
to this, managers in the business have less money to reinvest in the business. This could also
lead to unmotivated managers (An)

Good introduction and explanation of CSR and private sector.

The layout of your question is really good Shaikha, you have given a balanced argument looking
at the positives and negatives. You have also explained each of your points and discussed the
consequences. The breakdown of your marks are as follows
K: 4/4
Ap: 4/4
An: 8/8
Ev: 0/4 You are asked to justify therefore you must give an evaluation. This needs to be a
balanced approach e.g. in the short run it’s expensive in the long run it’s much better and
why?You need to think outside the box for this and come up with other factors a private sector
business will have to take into account. These could be external e.g. state of the economy.

16/20 Keep up the good work..:)

To conclude, I believe it’s important for businesses to implement CSR in their regular activities;
although some may see it as pointless and rewardless, it’s important for businesses to realize
that their decisions have a large impact on society. In addition to that, business owners need to
realize that it’s not all about making money but about leaving a positive mark on the
environment surrounding them - individuals in power should absolutely help ones in need. This
however doesn’t dismiss the importance of businesses, in particular the private sector, to have
profitability as a main aim - making no to little profit is more useless than not implementing CSR
as it benefits no one.

1. Partnership is the legal form of business operation between two or more individuals who
share management and profit making. (2/2)

2. Public limited company is a large business with the legal rights to sell shares to the
general public and whose debts are limited if the business fails financially or goes
bankrupt. The shareholders and the business have separate legal identities. (3/3)

3. Business objectives this should be corporate objectives are those that relate to the
business as a whole. They are set by managers.Designed to make the aims and mission
of a business specific.Provide a much clearer guide for management and workforce
action throughout a business.Two possible reasons why SA’s objectives have changed
over time may be affected by the size and the legal form of the business.

When SA was a new business it may have different objectives for the business which revolves
around profit satisfaction (nothing in the text suggests that the business would have profit
satisfying as an objective in fact it wants to be the leading business in the market). This means
that the business will centre their attention into reaching their expected sales and making
enough profit to succeed and continue as a business. However, when SA has become a bigger
business and could now be more concerned with profit maximisation. This means that the
business’ output level achieves the highest level of profit. Now that SA is a bigger company, it
also has a current objective of maximising its shareholder value; this reflects how the objectives
have changed due to the size and legal forms of the business moreover the age of the
business. This is relevant point they didn’t have shareholders before
Another reason why SA’s objectives could have changed overtime is because of the corporate
culture. This means that it focuses on the code of behaviour and attitudes of those in power. In
the business’ early stages, it may have been more aggressive in the pursuit of profit making
revenue their main aim (this contradicts what you said in the first paragraph) . However as SA
was growing and expanding it may have been more aware and contribute to other external
factors such as society and the environment. As a result, the business may introduce CSR
which goes beyond the legal obligations that SA has.This is relevant point they didn’t have
shareholders before

The breakdown for your question is:

K:1/2
Ap: 1/2
An: 1/4
3/8

Other factors that you could have considered include the following:

● Unrealistic original objective; one shop to become market leader?

● Not specific enough original objective; market leader where?
● Legal structure has changed to plc, so shareholders may now be part of
● the objective
● Core business has changed – now in secondary and tertiary sector
● Now producing and selling home alarms, not car alarms
● Tastes may have changed
● New focus on the industrial market.
● The priority of objectives may have changed

Stakeholders
Stakeholders:
are individuals or organizations with a direct interest in the activities and performance of a
business e.g shareholders, employees, customers and suppliers.
Stakeholder concept:
is the view that businesses and their managers have a wide range of groups, not just
shareholders.
Shareholder:
any person/ company/ institution that owns at least one share in a company.

The owners of a company have the potential to profit if the company does well, but they also
 have the potential to lose if the company does poorly.

Internal stakeholder:
● Employees
● Managers
● Shareholders
● Board of directors

External stakeholders:
● Customers
● Government
● Suppliers
● Creditors

*Creditor: a person or an organisation whom money is owed to e.g Ebrahim when he gives me 5
BD
*Debtor: a person or an organisation who owes debt e.g. me when I need to pay Ebrahim back

Stakeholder Why are they interested in the business Rights

Shareholders ● Returns on investment ● Voting rights

● High dividend payments

Customers ● Purchase goods and services ● To receive goods

● Provide revenue from sales, which and services that
allows the business to function meet local laws

Employees ● Provide manual and other labour ● To be treated and

services to the business, in manner paid fairly
with employment contract ● To be treated with
● To allow goods and services to be the minimum limits
provided to customers established by the
national law

Government ● Pass laws that restrain many aspects ● To ensure

of business activity businesses are
● Provide law and order to allow legal producing legal
business activity to take place goods and are
● Achieve economic stability to paying taxes on
encourage business activity time

Competitors - Market share - Integrity from the

- Their financial information other business.
- Their competitive edge
Creditors ● Provide finance to the business ● To be repaid on
time

Managers / Directors - Want to make revenue and expand

Suppliers ● Supply goods and services to allow the ● To be paid on time

business to offer its products to its own
customers

Question - Identify the stakeholders and explain the effects these decisions will have on
them.

Expansion of the business building

Employees They will have a larger building, giving them

more space to work in

Owners Their business may profit more as there will

be more space to run their activities

Local community They may be affected by traffic and

congestion

New machinery used in production methods

Customers Will receive better quality, more efficient

products

Employees May lose their jobs due to mechanisation

Owners Will have to invest a lot of money in the

purchasing of machinery

Stakeholder Conflict:
Refers to situations where stakeholders have disagreements on certain matters due to
differences in their opinions. This can lead to arguments and tension between the various
stakeholder groups.

Possible conflicts:
● Managers want big bonuses but owners and shareholders don’t want to pay them as this
will impact costs and lower profits.
 ● Customers want low prices and high quality but owners and shareholders want high
profit so want to charge high prices and quality cots so may also have an impact on
profit.
● Local communities want lower pollution levels, but owners and shareholders want high
profits and reducing pollution will raise costs and so may lower profit.

Stakeholder Problem Solution

Timber company ● Pressure from other ● Try to build trees to

stakeholders and replace the ones that
groups especially were cut down
environmentalists. ● Be ethical in all ways
and keep a good
image

Consumers ● Bothered with the ● Reasonable prices

traffic congestion. ● Assure that there is no
● May not agree with dangerous machinery
the prices because it police to control the
may be expensive traffic
due to intense labour.

Government ● Try to stabilize the ● Enforce sustainable

economy. laws
● Need to be ethical. ● Suggest different
● Pressure and difficulty option for everyone to
with pleasing agree with
everyone. ● May enforce more tax

Forestry workers ● Might not agree with ● Set a reasonable

working conditions amount of working
and wages. hours
● It is unstable- it is a ● Offer them a
temporary job guaranteed job within
meaning that some the business
people may have to
leave their jobs to do
this.

Forest users ● No space for bikers or ● Create a separate

walkers. path for the bikers and
● No opportunities for walkers
recreation- a place to ● Keep a section of the
study, relax or play. forest unused

Indigenous people ● No housing ● Build houses for them

 ● Noise pollution ● Provide free education
● Traffic congestion to their children
● They may not want to ● Give them money to
move compensate from
● Destroys their culture moving out

Environmental organisations ● Angry with ● Come to an

deforestation agreement with other
● Unhappy due to lost stakeholders like the
habitats timber company.2

UNIT 2: PEOPLE IN ORGANISATIONS

Management:
responsible for setting objectives, organising resources and motivating staff so that the
organisations aims are met.

Functions of management:
1. Setting objectives and planning
2. Organising resources to meet objectives
3. Directing and motivating staff
4. Coordinating activities
5. Controlling and measuring performance against targets set
Supervision
Monitor progress
Recruitment

Role title Description for role Examples of management

activities action to perform the role

1. Interpersonal roles

Figure head Symbolic leader of the Opening new

organisation undertaking factories/offices; hosting
duties of a social or legal receptions; giving important
nature presentations

Leader Motivating subordinates; Any management tasks

selecting and training other involving subordinate staff
managers/staff

Liaison Linking with managers and Leading and participating in

 leaders of other divisions of meetings; business
the business and other correspondence with other
organisations organisation

2. Informational roles

Monitor (receiver) Collecting data relevant to the Attending seminars,business

business’s operations conferences, research
groups; reading research
reports

Disseminator Sending information collected Communication with staff

from external and internal within the organisation, using
sources to the relevant appropriate means
people within the organisation

Spokesperson Communicating information Presenting reports to groups

about the organisation- its of stakeholders (e.g. annual
current position and general meeting) and
achievements- to external communicating with the press
groups and people and TV media

3. Decisional roles

Entrepreneur Looking for new opportunities Encouraging new ideas from

to develop the business within the business and
holding meetings aimed at
putting new ideas to effect

Disturbance handler Responding to changing Taking decisions on how the

situations that may put the business should respond to
business risk; assuming threats, such as new
responsibility when competitors or changes in the
threatening factors develop economic environment

Resource allocator Deciding on the spending of Drawing up and approving

the organisation’s financial estimates and budgets;
resources and the allocation deciding on staffing levels for
of its physical and human departments and within
resources departments

Negotiator Representing the Conducting negotiations and

organisation in all important building up official links
negotiations, e.g. with between the business and
government other organisations

Leadership:
The art of motivating a group of people towards achieving a common objective.
 Management:
Individuals responsible for setting objectives, organising resources and motivating staff so that
the organisations aims are met.

Functions of management:
1. Setting objectives and planning
2. Organising resources to meet objectives
3. Directing and motivating staff
4. Coordinating activities
5. Controlling and measuring performance against targets set
6. Supervising the work area
7. Recruitment

Management roles according to Mintzberg

Role title Description of role Examples of management

activities action to perform the role

Interpersonal

Figurehead Symbolic leader of the Opening new factories /

organisation undertaking offices; hosting receptions;
duties of a social or legal giving important
nature presentations

Leader Motivating subordinates; Any management tasks

selecting and training other involving subordinate staff
managers / staff

Liaison Linking with managers and Leading and participating in

leaders of other divisions of meetings, business
the business and other correspondence with other
organisations organisations

Informational

Monitor (receiver) Collecting data relevant to the Attending seminars, business

business’ operations conferences, research
groups, reading research
reports

Disseminator Sending information collected Communicating with staff

from external and internal within the organisation, using
sources to the relevant appropriate means
people within the organisation
 Spokesperson Communicating information Presenting reports to groups
about the organisation - its of stakeholders (e.g. annual
current position and general meeting) and
achievements - to external communicating with the press
groups and people and TV media

Decisional

Entrepreneur Looking for new opportunities Encouraging new ideas from

to develop the business within the business and
holding meetings aimed at
putting new ideas into effect

Disturbance handler Responding to changing Taking decisions on how the

situations that may put the business should respond to
business at risk; assuming threats, such as new
responsibility when competitors or changes in the
threatening factors develop economic environment

Resource allocator Deciding on the spending of Drawing up and approving

the organisation’s financial estimates and budgets;
resources and the allocation deciding on staffing levels for
of its physical and human departments and within
resources departments

Negotiator Representing the Conducting negotiations and

organisation in all important building up official links
negotiations e.g. with between the business and
government other organisations

Different styles of leadership:

● Autocratic
● Democratic
● Paternalistic
● Laissez-Faire (let them do it)

Characteristics of a leader:
● Self confidence that they will do well
● Ambitious have a drive to be successful
● Creative and think beyond the obvious
● Multitalented
● Incisive - they can go to the heart of an issue rather than unnecessary details
*Different characteristics lead to different styles.

Autocratic leadership
The focus of the power is with the leader and there is no discussion with workers.
 ● Management sets the business objectives and issues instructions they do not encourage
feedback (one way communication)
● Use of reward and penalties
● Give limited information to staff (tell them what they need to do)
● Faster decision making
● Supervision of staff is essential (staff can be unmotivated)
● Employees may not try their hardest as they feel no attachment towards the company
● Decisions made may not reflect staff input and may not be very accurate
● Used in jobs the require quick movement e.g. police, doctors etc

Democratic leadership
This style promotes the active participation of workers in taking decisions.
● There will be two-way communication and staff are encouraged to respond
● Motivated staff - they are given responsibility for business objectives and strategy
● Employees feel a sense of belonging and will try their hardest when completing tasks
● This approach can be potentially slow down decision making
● Can only used in a company with experienced staff e.g. Google, Governments
● Useful in situations that demand a new way of thinking
● Useful in business’ that expect worker to contribute fully to decision making and
production decisions

Paternalistic leadership
This is based on the approach that the manager is in a better position than the workers to know
what is best for the business.
● Leaders will explain issues and consult with workforce but will not allow them to make
decisions
● Tries to satisfy the safety and security needs of the workers
● Decision making is effective - employees can share their opinions
● Could also lead to demotivation and disappointments
● Can be useful for unskilled / untrained and newly appointed staff

Laissez-Faire leadership (Let them do it)

This leaves much of the business decision-making up to the workforce.
● Management has little input into day-to-day decision making
● Conscious decision to delegate power - subordinates do what they feel is best
● Gives the employee control
● Can result in poor role definition for managers
● Workers may not appreciate the lack of structure
● Poor monitoring may lead to demotivation
● Research and design teams
● Can only be used with highly skilled staff
 Which is the best style?
There is not one style that is best in all circumstance. The style will depend on many factors:
1. Training and experience of the workforce
2. Amount of time available for consultation
3. Attitude of managers
4. Importance of the issues under consideration

Leadership positions Explanation

Directors ● Senior managers are elected into

office by shareholders in a limited
company
● Head of a major functional department
e.g. marketing
● Responsible for delegating
instructions within their department
● Assist with the recruitment of senior
staff
● Responsible for meeting the
objectives of the department set by
the board of directors

Managers ● Responsible for people, resources

and decision making
● Have authority over their subordinates
● Direct, motivate and discipline staff if
necessary

Supervisors ● Appointed by managers to watch over

the work of others
● Not a decision making role
● Responsible for directing the team
towards a pre-set goal
● Colleague who is appointed to help
staff achieve objective in a
cooperative spirit

Workers’ representatives ● Elected by workers to discuss areas

of concern with managers e.g. trade
union, work council representative

McGregor’s theory
● Examines how managers attitudes affect how workers behave
● He identified two extreme types of managers
 ● The theory is about the views that managers have not about what motivates the workers
● Most managers fall somewhere between Theory X and Theory Y

Theory X Theory Y

These managers believe that workers:

Lazy Are keen

Need to be pushed Will work on their own

Avoid responsibility Seek responsibility

Have no initiative Seek to show initiative

Respond to threats Respond to rewards

Informal leadership
A person who has no formal authority but has the respect of colleagues and some power over
them.

Emotional intelligence
The ability of managers to understand their own emotions, and those of the people they work
with, and to use this information to guide thinking and behaviour to achieve better business
performance.

The aim is to increase employee motivation and to reduce absenteeism and labour turnover.

The more managers can understand these feelings it is argued the more effective they become.

Goleman’s model of emotional competencies:

This suggests that there are 4 key emotional competencies:
1. Self awareness: Having a realistic view of your own ability.
2. Self management: Being able to recover quickly from stress, being trustworthy,
conscientious and ambitious.
3. Social awareness: Knowing what others feel and taking their views into account. Being
able to get along with a range of people.
4. Social skills: Understanding different social situations and using social skills to
persuade, negotiate and lead.
Exam question - Maya
Intro - define emotional intelligence

K - helps Maya understand the emotions of her worker

APP - she can then identify the employees’ problems and solve them
AN - useful for the business as it’ll result in more motivated employees / higher levels of
productivity / reduction in labour turnover

K / APP - main problem is absenteeism + high labour turnover - this requires action not
understanding of EI
AN - the reason they’re leaving - low salaries / poor working conditions (external factors)

EV - business needs to consider the issues and why they’re happening may not have anything
to do with EI / leadership style

Due Thursday

Motivation theories

1. F.W. Taylor (1856-1915) was the first to analyse the management of his workers
His “scientific approach” was to:
- Select workers to perform a task
- Observe them, and then note the key elements
- Record the time taken to do each part of the task
- Train all workers to do the task in the quickest way
- Supervise workers to ensure they use this method
- Pay workers on the basis of results
This lead Taylor to believe that workers were motivated solely by money
He promoted the idea of “ A fair day’s pay for a fair day’s work”
Many of Taylor’s ideas were originally adopted by businesses
However, his ideas became less popular after the 1960s for a number of reason:
- It was found that not all workers are there for the money
- His “best-method” ideas would not suit all worker or all industries
- The piece-rate system of payment was not always appropriate
As such Taylor’s ideas were often dropped in favour of new Japanese models of motivation

Taylor’s approach Relevance to modern industry

Economic man Some managers still believe that money is

the only way to motivate staff however, the
more general view is that workers have a
wide range of needs

Select the right people for each job Before taylor there had been a few attempts
to identify the principles of staff collection.
 Observe and record the performance of staff This was widely adopted and became known
as the ‘time and motion study’. Regarded with
suspicion by workers as a way of making
them work harder, it is still employed as a
technique but often with the cooperation and
involvement of staff

Establish the best method of doing a Again, this is still accepted as being important
job-method study as efficiency depends on the best ways of
working behind adopted. However, the Taylor
approach is undesirable as it gives instruction
without discussion and feedback.

Piece- work payment systems This is not now a widely used payment
system. Quality may be sacrificed in the
search for quantity- workers will vary output
according to their financial needs at different
times of the year and it discourages them
from accepting changes at work in case they
lose some pay.

2. Vroom-
suggests that individuals choose to act a particular way as they believe it would lead to a
desired outcome
Based on three beliefs:
- Valence: how much does an employee want a reward- holiday, bonus
- Expectancy: how much effort does the employee think is required to reach a specific
outcome
- Instrumentality: the confidence of the employee in the fact that they will get what they
desire, even if promised by the manager
How are these beliefs important?
- Vroom, argues that if one of the three beliefs are missing, workers would lack motivation
to work toward a goal (ie, if valence is missing, it would be difficult to motivate a worker).
Managers can use one of the beliefs to motivate a workers
How can managers use this?
- Managers should try and ensure that
employees believe that increased work
effort will improve performance and
that this performance will lead to
valued rewards.

3. Maslow's Theory
(1908-1970) believed that the reason people
go to work changes
He created a hierarchy
Which he believed people work up

Problems of maslow’s approach:

- Maslow was primarily studying human behaviour so he was not concentrating on the
effect of the business
In practice there are a number of problems with Maslow’s approach:
- Some levels of the hierarchy do not exist for some people
- Some rewards fit into more than one level, e.g. money
- It can be difficult to recognise which level an individual is on
- Self- actualisation is never permanently achieved

4. Elton mayo (1880-1949) is best known for his study of the Hawthorne electric factory in
Chicago
Mayo initially believed that workers were motivated by:
- Working conditions
- The skills of workers
- Financial incentives
This was put to test over a 5 year period
They found that changes in working conditions of financial rewards had little effect
The conclusion was that workers are motivated by the way that they interact with each other
In other words- working in teams, within which they can make decision.

Herzberg- Two factor theory

Motivators: intrinsic factors that can lead to positive job satisfaction e.g. recognition, meaningful
work, achievement, advancement at work.
Hygiene factors: extrinsic factors that may lead to workers being dissatisfied. They need to be
addressing to prevent this from happening. They do not lead to enhanced performance from
happening. E.g. pay, company policy, treatment at work.
Believed in the democratic leadership style:
Job enlargement: giving workers more variety in what they do making it more interesting.
Working together to complete tasks.
Job enrichment: giving workers more complex and challenging tasks, this will lead to a sense of
achievement
Job employment: allowing workers to make decisions
Advantages:
1. Encourages teamwork
2. Workers are more responsible for the quality of their worker
3. Two way communication is key in most firms
4. Helps to ensure workers are not demotivated by ensuring hygiene factors are met
Disadvantages:
1. Does not apply to low skilled, low paid jobs
2. Some people may not want job enrichment/job satisfaction
3. Research was based on a very small sample

McClelland (1917-1998)
He based his theory on 3 types of motivational needs
- Achievement motivation: those who have this as a dominant need require constant
feedback regarding progress and achievement. Research suggested result driven
attitude is a characteristic of success
- Authority/power motivation: Some people have this as a dominant need. The desire to
control others brings personal status and prestige.
- Affiliation motivation: this person has the need for friendly relationships and interaction.
Good team members
Advantages:
1. Provides a clear picture of employees needs for managers and this will influence the
type of leadership style they use
2. Gives an indication of who is subtle to be promoted to a manager
Disadvantages:
1. Achievement motivators can demand too much from workers in the achievement of
targets
2. Not all people are motivated by the three types of motivational needs he suggests
3. The need for affiliation may lead to lazy workers

Discuss how Maslow’s ‘hierarchy of needs’ theory could be used by the managers of a retail
business to motivate employees [20]- (MJ 11 2017)

Plan:
Intro:
4 middle:
conclusion/evaluation:

Motivation in practise

There are 2 categories that you need to know:

● Financial rewards
● Non-financial rewards

Financial Rewards

Types Explanations Advantages Disadvantages

Time Based Wage Payment to a worker 1. Encourage 1. Not directly
Rate made for each period workers to linked to the
of time worked, e.g. work more level of output
one hour 2. Offers or effort
security to the 2. Costly for
workers company if an
3. Employer employee
flexibility works a lot
4. 3. Ignores
efficiency

Salary Annual income that is 1. Should 1. Income not

usually paid on a depend on directly
monthly basis experience, related to
progress effort/
2. Security of productivity
income 2. May lead to
3. Linked to laziness
status 3. Regular
4. Helps costing appraisal
5. Suitable for essentia, time
where output consuming
is not
measurable
6. Suitable for
management
(unpredictable
hours)

Piece Rates A payment to a 1. Encourages 1. Needs

worker for each unit effort measurable
produced 2. Unit costs output/sales
known,helps 2. May lead to
Commission A payment to a sales setting prices failing
person for each quality/bad
salaries sale
3. Workers may
only want to
achieve target
pay
4. Provides little
security
5. Workers
discouraged
from change
Bonuses A payment made in 1. Will motivate 1. Costly for the
addition to the workers business
contracted wage or 2. Increase in 2. Difficult to
salary output decide how
3. Increase in much to pay
productivity
4. Reduce
labour
turnover
5. Reduce
absenteeism

Profit Sharing A bonus for staff 1. Potential 1. Reward may

based on the profits conflicts not be related
of the business- between to individual
usually paid as a owners and effort
proportion of basic workers 2. Can be costly
salary 2. Should lead to to operate
greater 3. Small profits
effort/cost may
reduction de-motivate
3. Attract better 4. Reduced
results shareholder
4. Does not add dividends
to costs initially
5. Could lead to 5. Reduced
increased retained
profitability profits may
reduce
investments
6. Could dilute
value of
existing
shares

Performance related A bonus scheme to 1. Staff 1. Will not

pay reward staff for motivated to motivate if
above-average work improve staff not
performance performance driven by
2. Target setting financial
important rewards
3. Appraisal may 2. Team spirit
be of benefit can be
damaged
3. Could be
subject to
claims of
 manager
favouritism
4. May push
conformity
rather than
innovation

Non Financial Rewards

Types Explanations Advantages Disadvantages

Training Improving and 1. Lead to 1. Costly

developing the skills motivation 2. Time
of employees 2. More skilled consuming
and efficient 3. Once they are
3. Once they are trained, they
trained, they can leave and
can train other go to a better
people job

Job Rotation Increasing the 1. Gives workers 1. Increased

flexibility of the force new skills workload
and the variety of 2. Organisationa
work they do by l problems
switching from one
job to another

Job enlargement Attempting to 1. Less 1. Not easy to

increase the scope of supervision apply in
a job by broadening 2. Workers have practice
or deepening the complete jobs 2. Workers may
tasks undertaken 3. Workers have not respond
more well
responsibility 3. May be seen
4. Challenging as threatening
jos
4. More work for
some pay?

Job redesign Involves the 1. Can lead to 1. Difficult to

restructuring of a improved implement
job-usually with recognition 2. May be seen
employees’ 2. Allows as a threat
involvement and introduction of
agreement- to make team working
work more 3. More skills,
 interesting,satisfying better
and challenging promotion
chances

Team working Production is 1. Better 1. Time

organised so that motivation consuming
groups of workers 2. Makes better 2. Not everyone
undertake complete use of talents is good in
units of work 3. Can reduce teams
costs 3. Training costs
4. Complete 4. Time costs
tasks can be
allocated

Empowerment Passing down 1. Motivation 1. Manager

authority to perform 2. More time for retains
tasks to workers managers to responsibility
do other tasks 2. Need for
3. Staff monitoring
development and control
4. Can achieve 3. Can be
self-fulfillment time-consumi
ng
4. Depends on
trust
5. Clear
definition of
task needed

Worker participation Workers are actively 1. Improved 1. Time-consumi

encouraged to motivation ng
become involved in 2. Greater 2. Autocratic
decision-making opportunities managers
within the for workers to would find it
organisation show hard to adapt
responsibility to the idea of
3. Better asking
decisions workers for
could result their opinions
from worker 3.
involvement

Fringe Benefits:
Benefits give, separate from pay, by an employer to some or all employees:
● Company vehicle
 ● Discount on the firm’s product
● Health care paid for
● Children’s education fees paid
● Free accommodation
● Pension paid for by the business
● Free trips abroad/holidays

Quality circles:
Voluntary groups of workers who meet regularly to discuss work-related problems or issues.
- Results are presented to management and successful ideas may be implemented

Evaluation on financial and non financial rewards:

- Pay is not the only factor that motivates workers
- The leadership style of the manager and the culture of the organisation will affect the
reward systems

Exam questions on this:

● Analyse the advantages and disadvantages to an employer of using performance related
pay [8] (12ON2016)
● Discuss the importance for a large hotel of staff development and training [12] (12 ON
2016)
● Discuss the advantages and disadvantages to PM’s employees of change from
performance related pay to a profit sharing scheme [11] (MJ 21 2016)
● (ON1612) Evaluate the motivation methods used at SC [11]
● Explain one benefit to FF of using commission as a payment method for sales staff (3
marks) (22FM2016)
● ‘Money is the most important factor for motivating teachers in a school’ discuss this view
[20] (MJ 12 2017)
● N1621 Evaluate the motivation methods used at SC [11] (O/N 21 2016)
● Discuss the view that non-financial measures of business performance may be as
important as financial measures of business performance [12] (13 ON 2016)
● ‘The most effective way to realise the human potential in a manufacturing business is to
give high rates of financial rewards to the workforce’ Do you agree? Justify your view
[20]

Human resources
What is HRM:
The strategic approach to the effective management of an organisations workers in order to give
the business a competitive advantage
HR is responsible for the following aspects:
 1. Workforce planning: Amount and type of staff needed
2. Recruitment and selection
3. Developing employees: Training & Appraising
4. Employment contracts: Permanent, temporary, full time or part time
5. Ensuring HRM operates across the business: All managers are involved in employee
developments.
6. Ensuring employee morale and welfare: Advice and guidance to staff
7. Incentive system: pay systems and other incentives
8. Monitoring/Measuring employee performance

Recruitment & Selection:

Recruitment: is the process of identifying the need for new employees, defining the job to be
filled and type of person needed to fill it and attracting suitable candidates.
Selection: series of steps taken by candidates once they are selected e.g. interviews,tested for
choosing the most suitable candidate.

Recruitment and selection process (need to know them in order)

1. Drawing up a job description
2. Drawing up a person specification
3. Preparing a job advertisement
4. Drawing up a shortlist of applicants
5. Selecting between the applicants

Job description:
- A detailed list of the key points about the job to be filled-stating all it’s key tasks and
responsibilities
- It should attract the right kind person for the job
Key features:
● Job title
● Details of tasks to be performed
● Responsibilities to be performed
● Place in hierarchical structure
● Working conditions
● How performance is measured

Person specification:
A detailed list of the qualities, skills and qualification that a successful applicant will need
- Helps to eliminate applicants that are not suitable

Job advertisement:
This reflects the requirements of the job and the personal qualities needed. It can be displayed
within the business, recruitment agencies, newspapers and the internet.

A shortlist of applicants:
- Applicants shortlisted based on CV
- References are contacted

Selecting between the applicants:

Shortlisted applicants are interviewed and are question on skills, experiences and character

Contact of employment:
This is a legal document that sets out the terms and conditions governing a worker’s job.

Main features of a contract employment:

- Employees work responsibilities
- Type of contract (temporary, permanent)
- Working hours and level of flexibility required
- Holiday entitlement
- The number days of notice that must be given by the worker and employer

Types of training:

Induction training
Introductory training programme to familiarise new recruits with the systems used in the
business and the layout of the business site

On-the-job-training
Instruction at the place of work on how a job should be carried out
Off-the-job-training
All training undertaken away from the business, e.g. work-related college courses

Training

Advantages Disadvantages

Motivates workers Can be expensive

Employees will be more flexible Employees can leave for better job once
trained

Prevents accidents Time-consuming

Employee appraisal:
 - The process of assessing the effectiveness of an employee judges against pre-set
objectives
Key terms:
- Dismissal: being sacked from a job due to incompetence or breach of discipline
- Unfair dismissal: ending a workers employment contract for a reason that the law
regards as unfair
- Redundancy: when a job is no longer required, the employee doing this job becomes
unnecessary no fault of their own

Work-life Balance
A situation in which employees are able to give the right amount of time and effort to work and
to their personal life e.g. family,hobbies.

Ways of encouraging work-life balance:

- Flexible working
- Teleworking
- Job sharing
- Sabbatical periods

Policies for diversity and equality

- Equality policy: practices and processes aimed at achieving a fair organisation where
everyone is treated in the same way and has the opportunity to fulfil their potential
- Diversity policy: practices and processes aim creating a mixed workforce (various
races, religions, ethnicities) with an inclusive environment

Labour turnover:
Measures the rate at which employees are leaving an organisation.
It is measured by:

Number of employees leaving in 1 year

_________________________________ X 100

Average number of people employed

Labour Turnover

Advantages Disadvantages

Low-skilled and less-productive staff might be Costs of recruiting, selecting and training new
leaving- they could be replaced with more staff
carefully selected workers
 New ideas and practices are brought into an Poor output levels and customer service due
organisation by new workers to staff vacancies before new recruits are
appointed

A business that plans to reduce staff numbers Difficult to establish loyalty and regular,
anyway- due to rationalisation- will find that familiar contract with customers
high labour turnover will do this, as leaving
staff will not be replaced

Difficult to establish team spirit

UNIT 3: MARKETING
Marketing:
The management task that links the business to the customer by identifying and meeting the
needs of customer profitability through getting the right product at the right price to the right
place.
- It is not limited to advertising and selling products.

Marketing can include any of the following management functions:

● Market Research
● Product design
● Pricing
● Advertising
● Distribution
● Customer service
● Packaging

Marketing objectives: These are the goals for the marketing department to help the business
achieve its overall objectives.

Marketing Strategy: Long term plan established for achieving marketing objectives.

Possible Marketing objectives- to increase or maintain:

1. Market Share
2. Average number of items purchased per customer visit
3. Frequency that a customer visits
4. Customer Satisfactions
5. Brand identity

Why are marketing objectives important?

● Provide a sense of direction provides a common goal
● Progress can be monitored against targets
 ● They lead the way for marketing strategy to be used
● Motivates individuals

Criteria for effective marketing objectives:

● They fit in well with the overall aim and mission of the business
● They should be determined by senior management
● Be realistic, motivating, achievable and measurable
● Be clearly communicated

Marketing and Product Orientation

Communication between departments:
1. Marketing & Finance
2. Marketing & Human Resources
3. Marketing & Operation
4. Marketing & IT

Market Orientation:
An outward looking approach basing product decision on consumer demand as established by
market research (gives the business a customer focus)
- Associated with the 4Cs and CRM

The 4Cs:
1. Customer solution: what the firm needs to provide to meet customer needs and wants
2. Cost to customer: total cost of the product including delivery charges
3. Communication with customer: providing two way communication links with customers
4. Convenience to customer: To access the product

CRM:
1. Customer
2. Relationship
3. Management
Using marketing activities to establish successful customer relationship

Product Orientation:
An inward looking approach that focuses on getting the product right-then market it effectively
and sell it to the customer- associated with the traditional 4Ps approach to marketing.

4Ps:
1. Product
2. Price
3. Place
 4. Promotion

- Companies do not focus on what the consumer wants. They will develop a product in
belief, they will find consumers to purchase it.

Market Orientation Advantages Disadvantages

Chances of newly developed But they are still not

failing are much reduced eliminated.

If consumer needs are being

met with appropriate
products, they are likely to
survive longer and make
higher profits than those that
are being sold following a
product-led approach

Constant feedback from

consumers- market research
never ends

Product Orientation Advantages Disadvantages

Demand, Supply and Price Relationship

Demand:
The quantity of a product that consumers are willing and able to buy at a given price and at a
given time.

Determinants of demand:
1. Changes in the price- causes a movement
2. Changes in income- non price determinant- causes a shift
 3. Tastes and preferences- non price determinant- causes a shift
4. Changes in population size and structure-non price determinant- causes a shift
5. Advertising and spending on promotion- non price determinant- causes a shift

Demand Curve
At higher prices, a lower quantity will be demanded
At lower prices, a higher quantity will be demanded

Movements along a demand curve

A movement along a demand curve only occurs when there is a change in the price of the good
in question.
BY PRICE DETERMINANT ONLY
 Shifts of a demand curve
A shift in the demand curve occurs if one of the ‘other’ (ie.non-price) determinant of demand
change. This means that for a given price level the quantity demanded will change.
If it moves to the right, it increases
If it movies to the left, it decreases
Depending on the nonprice determinant:
(everything other than price).

Supply

Supply:
the quantity of a product that firms are prepared to supply at a given price in a time period.

Determinants of Supply:
1. Cost of production e.g. change in labour or raw material costs-non price
determinant-shift-if it increases, the supply would decrease.
2. Taxes imposed on the suppliers non price determinant-shift- if it increases, the supply
will decrease
3. Subsidies paid by the government to suppliers - non price determinant-shift- if it
increases, the supply would increase.
4. Weather conditions and other natural factors non price - determinant-shift- depends on
the product for example winter clothes or ice cream.
 5. Advances in technology that make productions costs lower - non price determinant-shift-
if it increases, the supply would increase.

Equilibrium Price:The market price that equates supply and demand for a product.

Market Features
Features of market:
1. Location
2. Size
3. Growth
4. Market share
5. Competitors

Regional markets:
cover a large geographical area. Generally, a business that have been successful locally often
expand into the region. E.g. in n out, only in west coast, California, LA.

National markets:
same product or service is offered to customers who are spread around the country. A business
may have several (or many) locations in the country in order to reach those customers. E.g.
Jasmis, bahrain.

International markets:
offer the greatest sales potential. They expand into foreign markets. E.g. McDonalds.

Consumer markets:
 the consumer market pertains to buyer who purchase goods and services for consumption
rather than resale.

Producer markets:
producers buy goods and services and transform them into a sellable product, which they sell
to their customers for the purpose of making a profit.

Market size:
it is the total level of sales of all producers within a market. Revenue and number of units sold
are two ways of measuring market size.

Why is it significant?
1. A manager can assess whether a market is worth entering or not.
2. Businesses can calculate their own market share
3. Growth / decline of the market can be examined.

Market growth:
the percentage growth in the size of the market, measured over a specific period.
● Businesses try to operate in rapidly growing markets however this is not always the case
as rapidly growing markets cause fierce competition.
● Growth depends on several factors: economic growth, changes in consumer incomes
and development of new markets.

Examples of rapidly growing markets:

1. Electronics
2. Cosmetics

Examples of declining markets:

1. Dvds

Market Share:
the share of the total market that is owned by a particular business, product or brand. Usually,
expressed in percentage terms. The firm with the largest percentage market share is known as
the market leader.

Calculating market share:

In the chocolate market, the sales total was 162 million dollars for 2016. Calculate the market
share for each business.

1. Nestle 56 million= 34.6%

2. Cadbury 48 million= 29.6%
3. Lindt 30 million= 18.5%
4. Milka 28 million= 17.3%

Benefit of being a market leader:

1. Can set prices- high or low
2. Suppliers are keen to stock their products and give them priority
3. More likely to get loans from banks
4. Attract investors
5. More competitive edge
6. Branding & advertising
● Sales are higher than those of any competing business in the same market and this
could lead to higher profits too.
● Retailers will be keen to stock and promote the best selling brands. They may be given
the most prominent position in shops.
● As shops are keen to stock the product, it might be sold to them with a lower discount
rate- say 10% instead of 15% which has to be offered by the smaller, competing brands.
● Can used in advertising and other promotional material. Consumers are often keen to
buy the most popular brands.

Market Features
Competitors
● Businesses operate in competitive environments.
● Businesses try to provide the best possible value to their customers.

Direct competitors:
provide the same or very similar goods or services

Indirect competitors:
provide products or services are not the same but that could satisfy the same customer need.

creating/adding value:
 - exclusivity/luxurious environment
- Packaging
- Promotion
- USP: the special feature of a product that differentiates it from others
- Product differentiation: making a product distinctive so that it stands out from competitors
products in consumers.
- Advertising
- Convenience
- Product feature and benefits

Mass Marketing:
selling the same products to the whole market with no attempt to target groups within it.

Niche Marketing:
attract a small segment of a larger market by developing products to suit it.

Advantages of mass marketing Advantages of niche marketing

- Small market niche do not allow - Small firms may be able to survive
economies of scale to be achieved. and thrive in markets that are
Therefore, mass-market businesses dominated by larger firms.
are likely to enjoy substantially lower
average costs than production.

- Mass market strategies run fewer - If the market is currently unexploited

risks than niche strategies. As niche by competitors, then filling a niche can
markets contain relatively small offer the chance to sell at high prices
numbers of consumers, any change in and high profit margins- until the
consumer buying habits could lead to competitors react by entering too.
a rapid decline in sales. This is a Consumers will often pay more for an
particular problem for small firms exclusive product.
operating in only one niche market
with one product.

- Niche market products can also be

used by large firms to create status
and image- their mass-market product
may lack qualities.

Market Segmentation:
Identifying different segments within a market and targeting different products or services to
them.
 Market segment:
A subgroup of a whole market in which consumers have similar characteristics.

Methods of segmentation:
- Income
- Demographics: gender,age,ethnic background, social class
- Geographic location:alcohol in the middle east, air conditioning/heater in cars
- Psychographic: taste, attitude, lifestyle, personality, characteristics

Victoria’s Secret:
Undergarments: demographic- gender
Makeup: psychographic
Clothes (winter): geographic- bigger shop
Income: high

Page 227- do advantages and disadvantages of market segmentation

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

Why bother?
- To reduce the risk associated with new products
- To predict future demand changes
- To explain patterns in sales of existing products and market trends
- To asses the most favoured designs flavours, styles, promotions and packages for a
consumer.

Sources of data:
Primary Research- the collection of first hand data that is directly related to the firm’s needs.
Secondary research- the collection of data from second hand sources.

Types of research:
● Qualitative research: seeks to gather and explore feelings and thoughts about product
from consumers (motivations behind consumer buying).
● Quantitative research: research that leads to numerical results that be statistically
analysed.

Test marketing:
Definition: promoting and selling the product in a limited geographical area and then recording
consumer actions a sales figures.
Advantage:
- Reduces the risk of a new product launch failing
Disadvantage:
- Not always accurate

Focus group:
Definition: a group of people who are asked about their attitude towards a product, service,
advertisement or new style of packaging.
Advantages:
- More accurate
- More realistic
- People are more willing to give honest opinions
Disadvantages:
- Time consuming
- Very subjective
- Pressure in a group

Consumer surveys:
Definition: these involve directly asking consumers or potential consumers for their opinions or
preferences.
Advantages:
- More accurate
- More realistic
- People are more willing to give honest opinions
Disadvantages:
- Time consuming
- Very subjective
- Pressure in a group

Observation and researching:

Definition: market research who observe and record how consumers behave
Advantages:
Disadvantages:

Primary Research

Advantages Disadvantages

Up to date and therefore more useful than Costly- market research agencies can charge
most secondary data thousands of dollars for detailed customer
 surveys and other market research reports

Relevant- collected for a specific purpose- time-consuming -secondary data could be

directly addresses the questions the business obtained from the internet much more quickly
answers to

Confidental- no other businesses has access Doubts over accuracy and validity- largely
to this data because of the need to use sampling and the
risk that the samples used may not be fully
representative of the population

How accurate is primary research?

- Sampling bias; you can’t ask the entire target population
- Questionnaire bias
- Respondents may not answer truthfully

Secondary research:
- Government publications
- The internet
- Market intelligence reports
- Trade organisations
- Internal company records

Secondary research

Advantages Disadvantages

Often obtainable very cheaply- apart from the May not be updated frequently and may
purchase of the market intelligence report therefore be out of date

Identifies the nature of the market and assists As it is was originally collected for another
with the planning of primary research purpose, it may not be entirely suitable or
presented in the most effective way for the
business using it

Obtainable quickly without the need to devise Data-collection methods and accuracy of
complicated data gathering methods these may be unknown

Allows comparison of data from different Might not be available for completely new
sources product development

Sampling:

Sample:
the group of people taking part in a market research survey, selected to be representative of the
overall target market.

Types of sampling:
- Random sampling: every member of the target population has an equal chance of
being selected.
- Stratified sampling: this draws a sample from a specified sub-group or segment of the
population and uses random sampling to select an appropriate number from each
stratum.
- Quota sampling: when the population has been stratified and the interviewer selects an
appropriate number of respondents from each stratum.
- Systematic sampling: every nth item in the target population is selected
- Cluster sampling: using one of a number of specific groups to draw samples from and
not selecting from the whole population, e.g: using one town or region

Stratified vs Quota:
- Both involve segmenting the market into different ‘strata’, but the difference is that:
- Stratified sampling would choose 100 people in that strata at random with every person
in that strata having an equal chance of being chosen, whereas quota sampling would
ask the first 100 people in that strata they came across.

Limitations of sampling:
Sampling errors are an issue with the samples such as:
- Too small
- Not representative
- Wrong method
- Biased research
- Inadequate budget to determine the sample, as it could be very/too expensive
- Some sampling may be tedious and time-consuming

Non sampling errors come from human mistakes such as:

- Miscalculation
- Lack of truth from respondents

Page 243

1a) 3
1b) 21
2a) 22 people
2b) 68 people
2c) 25 people
 Mean,Median,Mode,Range,Interquartile range
Number of sales per hour

Monday 1,5,19,5,7,16,3,12,1,4,3,2

Tuesday 9,6,1,2,8,16,14,5,8,9,11,17

Mean:6.5- add all of them divided by number of digits

Mean:8.8
Mode: 1,3,5
Mode:8,9
Median:4.5
Median:8.5
Range:18
Range:16
Interquartile range: ¾=9 ¼= 3. You get the third number and the ninth number and subtract
them so it is 2 and 7. Which is 5
1,1,2,3,3,4,5,5,7,12,16,19

Interquartile range: ¾ =9 ¼=3.

1,2,5,6,8,8,9,9,11,14,16,17= 6

Average Uses Advantages Disadvantages

measure

Mean ● When the range - The mean - The main problem is

of results is includes all of that the mean is
small, the mean the data in its affected by one or two
can be a useful calculation. extreme results. For
indicator of likely - It is well instance, if in the
sales levels per recognized as wages example on
period of time. the average page 245, the income
This could be as it is so of managing director
used to help widely used- had been included
determine and therefore (say $500,000 per
reorder levels. easily and year), then mean
● Often used for understood. result would increase
making - It can also be substantially. This
comparisons used to would make it less of
between sets of analyse data a meaningful average
data, e.g. further in for all of the other 135
attendance at other ways workers.
football clubs. that assist in - It is commonly not a
 understanding whole number. Is it
the really useful for
significance of stock-ordering
the results purposes to know that
collected. the mean shoe size
sold was 6.38?

Mode ● As the most - It is easily - For grouped

frequently observed and distribution, the result
occuring, the no calculation is estimated from the
result could be is necessary. modal group- a fairly
used for The result is a complex calculation
stock-ordering whole could be made if this
purposes. For number. estimate was not
instance, the Easily accurate enough.
shoe shop in our understood. - The mode does not
example above consider all of the
would need to data. As a
hold more pairs consequence, it
of size 6 shoes cannot be used for
than any other further statistical
size. analysis.
- There may be more
than one modal result,
which could cause
confusion.

Median ● Could be used in - It is less - Calculation from

wage influenced by grouped data is not
negotiations, extreme straightforward and
e.g. ‘half of our results than there is an element of
union members the mean is. inaccuracy when
earn less than This makes it doing this.
$xx per week’. more - When there is an even
● Often used in representative number of items in the
advertising, e.g. than the mean results, its value is
‘the reliability when there approximated.
records show are a few - It cannot be used for
that our products significantly further statistical
are always in the high or low analysis.
best-performing results.
50% of all
brands’.

Marketing mix
 refers to those elements of a firm’s marketing strategy which are designed to meet the need of
its customers.
- It helps to ensure the company produces the right product, at the right price in the right
place and lets customers know about it through promotion (the 4Ps).

The 4Cs:
- Customer solution
- Cost to customer
- Communication with customer
- Convenience to customer

Customer relationship management:

Using marketing activities to establish successful customer relationship so that existing
customer loyalty can be maintained.

What is product?
The end result of the production process sold on the market to satisfy customer needs.

Consumer products
Bought by individuals for personal use, e.g. Iphone
Individual products
Sold by one business to another business,e.g. Raw material

Goods
Have a physical existence- tangible

WServices
Have no physical existence but satisfy customer needs- intangible

Product and marketing mix

To establish customer loyalty the product must be right
- It should be functional-e.g-
- It should have good design-e.g-
- It should be affordable-e.g-
- Must conform to legal standards-e.g-
- Environmentally and socially friendly-e.g-
- USP(unique selling point)-e.g.-

Benefits of having a usp?

● Can charge higher prices due to exclusive design.
● Free publicity.
● Higher sales than an undifferentiated products.
 Brand:
An identifying symbol, name, image pr trademark that distinguishes a production from its
competitors.
Intangible attributes of a product:
subjective opinions of customers about a product that cannot be measured or compared easily.
Tangible attributes of a product:
measurable features of a product that can easily compared with other products.
Product:
The end result of a production process sold on the market to satisfy customer need.

Product positioning:
The consumer perception of a product or service as compared to competitors can be achieved
through market mapping

Market mapping;
- The analyses of a new brand will relate to other brands in the market
The market map illustrates the range of “positions” that a product can take in a market based on
two dimensions that are important to customers.
Product portfolio analysis:

- Analysing the range of existing products

of a business to help allocate resources effectively between them.
 ● The size of the market for the product is small, which means that the sales are low,
although they will be increasing.
● The cost of research and development, consumer testing, and the marketing needed
to launch the product can be very high.
Growth:
- Strong growth in sales and profitscurrent
- The company can start to benefit from the economies of scale
- Invest more money in the promotional activity to maximize the potential of this growth
stage
- Can’t last forever, will eventually decline

Maturity:
- Sales grow but no significantly but do not decline significantly
- Most people have already bought the product
- Sales are based on breakdowns and replacement
- Companies are working hard on new ideas
- Where the peek is and where you reach saturation

Decline:
- Sales decline steadily
- Newer competitors products changing consumer tastes main cause
- New technology is an important factor
- When the product becomes unprofitable or replacement is ready, it is withdrawn

Extension strategy:
Marketing plans to extend the maturity stage of the product before a brand new one is needed

Methods of extension strategies:

- Advertising: try to gain a new audience or remind the current audience
- Price reduction:more attractive to customers
- Adding value: add new features to the current product, e.g. video messaging on mobile
phones
- Explore new markets: try selling abroad
- New packaging:brightening up old packaging, or subtle changes such as putting crisps
in foil packets.

Introduction: ipod touch- apple watch features

Growth: iphone x
Maturity: macbooks
Decline: ipod

Evaluation of product life cycle:

Pros:
 - Good for assessing performance
- Important part of marketing audit
Cons:
- Based on past/current data- can’t predict future
- Needs to be used with sales forecast and management experience.
Identifying how cash flow might depend on the product lifestyle:
- Cash flow is vital to business’ survival and ignoring the link between cash flow and
product life cycles could be very serious.
- Cash flow is negative during the development of the product as costs are high, but
nothing has been produced or sold.
- At introduction, the development costs might have ended but heavy promotional
expenses are likely to be incurred- and these could continue into the growth phase. In
addition, there is likely to be much unused factory capacity at this stage, which will place
a further strain on costs. As sales increase, then cash flow should improve precisely
when this will happen will depend on the length of consumer credit being offered.
- The maturity phase is likely to see the most positive cash flows, because sales are high,
promotion costs might be limited and spare factory capacity should be low.
- As the product passes into decline, so price reductions and falling sales are likely to
combine to reduce cash flows. Clearly, if a business had too many of its products either
at the decline or the introduction phase, then the consequences for cash flow could be
serious. This introduces the next concept.

Phase of the Price Promotion Place Product

product life (distribution
cycle outlets)

Introduction May be high High levels of Restricted Basic method

compared to informative outlets- possibly
competitors advertising to high- class
(skimming) or make outlets if a
low (penetration) consumers skimming
aware of the strategy is a
product’s arrival adopted
on the market

Growth If successful, an Consumers Growing Planning of

initial need to be numbers of product
penetration convinced to outlets in areas improvements
pricing strategy make repeat indicated by and
could now lead purchases-brand strength of developments to
to rising prices identification will consumer maintain
help to establish demand consumer
consumer loyalty appeal
 Maturity Competitors Brand imagining Highest New models,
likely to be continues- geographical colors,
entering growing need to rage of outlets accessories, etc.
market-there will stress the possible- as part of
be a need to positive developing new extension
keep prices at differences with types of outlets strategies.
competitive competitors’ where possible
levels products

Decline Lower prices to Advertising likely Eliminate Prepare to

sell off stock- or to be very unprofitable replace other
if the product limited- may just outlets for the products- slowly
has a small ‘cult’ be used to product withdraw from
following prices inform lower markets
could even rise prices

Homework: look at the correlation between the two

Price
What is price?
This is the amount paid by customers for a product

Pricing levels for product:

● Determines the degree of value added by the business to the brought on components
● Influence the revenue and the profit made by a business due to the impact of demand
● Reflect on the marketing objectives of the business and help establish the image and
brand of the product

Considerations before selecting a price:

- The objectives of the business
- The degree of competition in the industry (and their prices)
- New or existing product
- Cost of production (variable and fixed)
- Price elasticity of demand

You must be able to analyse the follow strategies:

1. Competitive pricing
2. Penetration pricing
3. Market skimming
 4. Price discrimination
5. Cost based pricing

Strategy Definition Advantages Disadvantages

Competitive pricing A firm will base its Almost essential for Price set may not
price upon the price firms with little market cover all of the costs
set by its competitors power- price-takers of production

Flexible to market May have to vary

and competitive price frequently due
conditions to changing market
and competitive
conditions

Penetration pricing Setting a relatively Entry barrier. If a Branding defense.

low price often company continues Competitors may
supported by strong with its penetration have such strong
promotion in order to pricing strategy for product or service
achieve a high some time, possible branding that
volume of sales new entrants to the customers are not
market will be willing to switch to a
deterred by the low low-price alternative.
prices
Customer loss. If a
Reduces competition. company only
Financially weaker engages in
competitors will be penetration pricing
driven from the without also
market, or into improving its product
smaller niches within quality or customer
the market. service, it may find
that customers leave
Market dominance. It as soon as it raises
is possible to achieve its prices.
a dominant market
position with this Perceived value. If a
strategy, though the company reduces
penetration pricing prices substantially, it
may have to continue creates a perception
for a long time in among customers
order to drive away a that the product or
sufficient number of service is no longer
competitors to do so. as valuable, which
may interfere with
any later actions to
 increase prices.

Price war.
Competitors may
respond with even
lower prices, so that
the company does
not gain any market
share.

Market skimming Setting a high price A high price Customers may be

for a new product establishes the deterred by high
when a firm has a product as a must prices
unique or highly have item
differentiated product Customers may
with low price Customers want become disloyal to
elasticity of demand exclusivity the brand after prices
fell from such a high
Innovation is price
expensive so When firms decide to
charging high prices cut prices their image
will be able to pay off may suffer
those costs

Price discrimination the action of selling - Uses price - Administrative

the same product at elasticity costs of
different prices to knowledge to having
different buyers, in charge different
order to maximize different pricing levels
sales and profits. prices in order - Customers
to increase may switch to
total revenue lower-priced
market
- Consumer
paying higher
prices may be
object and
look for
alternatives

Cost-based pricing Adding a profit Price set will cover all costs of production
(mark up) margin on the unit
price of the product Easy to calculate for single-product firms
depending on how where there is no doubt about fixed cost
much they pay the allocation
producer for it and
taking into Suitable for firms that are ‘price makers’ due
 consideration the to market dominance
demand and the Inaccurate for business with several products
stage of life cycle where there is no doubt over the allocation of
fixed costs

Adding a fixed Does not take market/competitive conditions

markup for profit to into account
the unit price of a
product Tends to be inflexible, e.g. there might be
opportunities to increase prices even higher
Cost based pricing They take the fixed
(full cost) cost and the variable If sales fall, average costs often rise-this
cost into could lead to the price being raised using this
consideration based method
on the unit cost

Setting a price by
calculating a unit cost
for the product and
adding a fixed profit
margin

Target pricing Setting a price that

will give a required
rate of return at a
certain level of
outputs/sale

Cost based pricing: A pricing method in which a fixed sum or a percentage of the total cost is
added (as income or profit) to the cost of the product to arrive at its selling price.

Example questions:

1. Competitive pricing and price cost based pricing (full cost)

2. Loss leader pricing is is a pricing strategy where a product is sold at a price below its
market cost to stimulate other sales of more profitable goods or service
3. There are many potential benefits to universal not increasing its prices following the
decision by disneyworld to increase its entry fees. Firstly, universal would attract disney’s
customers because the prices are cheaper, this would give them a competitive edge
over disney. As a result, universal would gain more customers leading to an increase to
their revenue. Moreover, universal will gain more customer loyalty as the customer will
 appreciate universals effort in keeping their price low. This will positively affect the
business as they would appear to be ethical by keeping its product price fair.
4. The managing director of carib cement should not increase its prices, despite higher
costs because if carib cement was priced highest in the market, this would have negative
effects on the business as the customers would be turned off by the high prices and buy
cement from other businesses. It would also damage the business’ reputation as well as
customer loyalty because they are known for being the lowest priced cement business in
the region, as a result from this, the business would lose customers and then lose profit
which would make them struggle even more with paying for input costs such as
electricity and oil.
5. The product life cycle is the pattern of sales recorded by a product from launch to
withdrawal from the market and is one of the main forms of product portfolio analysis.
In the launch stage, the product’s pricing strategy would be pricing penetration as the
stage include low prices, this is to attract customers to the product and to give off a
positive image and first impression of the business. The business would also have high
costs because the market for that product is very small as most customers are not aware
of the product, the business would be loosing as the cost of research and the marketing
needed to launch the product is high as well as increasing the awareness of the product.
Being in the introduction stage, means that there would few (if any) competitors, this is
because other businesses wouldn’t be aware of the products moreover the sales at the
point would increase steadily.
The pricing strategy used at the maturity stage is pricing discrimination.The maturity
stage is when the product reaches its peak and is at its most saturated period. This is
because sales sales grow but not significantly and do not decline due to most people
already buying the product. The profit is at the highest in the stage as the cost of
production has reduced and due to its popularity. It also now benefits from economies of
scales. The business now has many competitors as it is now recognized by other
businesses and people. The company are now working hard on new ideas and products.

Issues with pricing decisions:

Business compete with competition in one of the following ways:
1. Price wars to gain market share: A price war is when companies continuously lower
prices to undercut the competition. A price war may be used to increase revenue in the
short term or as a longer term strategy to gain market share.
2. Non-price competition: a form of competition in which two or more producers use such
factors as packaging, promotion, or customer service rather than price to increase
demand for their products.
3. Collusion: two big businesses with a large share working together in keeping the pricing
strategy the same- same industry- illegal because it is not fair to smaller business.
4. Loss leader: when a business sells a products for lower than the cost of production in
order to bring attention of other products- cupcakes 1bd and coffee 2bd
 5. Psychological pricing: when businesses attempt to give you a better sense of values
to make it seem like it is lower based- tv for 499.99 BD.

Price elasticity of demand

- Measures the responsive of demand following a change in price

%change in quality demanded

_________________________

% change in price

- PED is normally negative (-ve). This is because a fall in price usually results in a rise in
demand. Referred to as an inverse.

- Generally ignore the minus sign

Value of PED Interpreting the Elasticity

Price elastic More than 1 Change in demand is more

than the change in price

Price inelastic Less than 1 Change in demand is less

than the change in price

Unitary price elasticity Exactly = 1 Change in demand= change

in price

Factors that determine PED:

- How necessary the product is- more necessary it is the less it will react to a changing
price
- The amount of similar competing products there are
- The level of consumer loyalty
- Price of product compared to income

Analysis of PED:
- More accurate sales forecast
- Aids pricing decisions
- However- assumes nothing else is changing and it can be outdated

What is promotion?
This is a way of informing/persuading consumers to buy a particular product or service
 - Television
- Internet
- newspaper/ magazines
- Radio
- Posters or billboards
- Public relations (PR)
- Publicity
- Sales promotions
- Branding
- Direct selling

Above the line promotion

Above the line promotion is any form of promotion that is undertaken by a business by paying
for communication with consumers, e.g. mass media- tv-radio-magazine

Informative advertising:
Adverts that give information rather than just creating a brand image (new products)

Persuasive advertising:
Adverts that create a distinctive brand identity for the product

Promotion Objectives:
1. Raise customer awareness and increase sales
2. Remind customers of existing product
3. Demonstrate superior spec
4. Create of reinforce a brand image or personality
5. Create customer confidence after a scare
6. Develop public image of business

Below the line promotion

is promotion that is not a directly paid-for means of communication but, based on short term
incentives to purchase, e.g. sales promotion

Sales promotion:
incentives such as special offers directed at customers/retailers to achieve short-term sales
increases

Sales promotions:
- Price promotions
- Money off coupons
- Customer loyalty schemes
- Money refunds
 - BOGOF

Direct selling:
- Direct mail
- Telephone
- Door-to-door drops
- Personal selling

Factors to consider when choosing a promotional method:

● Cost
● Size of the audience
● The profile of the target audience, income age, interests
● Message to be communicated
● Other aspects of the marketing mix
● Legal constraints
● Competitors

Promotional mix:
When a business uses both above-the-line and below-the-line methods of promotion.

Packaging
Packaging is often advanced as an additional P to the 4P’s - the quality, design, colour of a
product’s packaging is often considered to be very important e.g. perfume / fragrance as a
luxury product.

Functions of packaging:
● It’s functional e.g. protects the product
● Give information depending on the product
● Support image of the product
● Aid the recognition of the product
● It attracts the customer
● It differentiates the product - it encourages purchasing

Disadvantages of packaging:
● If the packaging is poor, it can destroy the quality image that is sought for a product
● Hard to stock
● If it is seen to be too wasteful of resources, consumers may respond negatively in an
environmentally concerned way

Exam question - Analyse, using examples, why packaging could be important in the
marketing mix. [8]
Packaging is the technology of enclosing and protecting a product for distribution, storage, sell
and use. Packaging is crucial to a business as it may attract attract customers to purchase a
product. An example of this is the KKW fragrance line which was shown having a chocolate
cover surrounding it, the chocolate was then broken with a hammer and the perfume bottle was
found inside. This not only gave the business a unique selling point for its innovative packaging
but was also useful in making people aware and familiar with the product. Another important
aspect of packaging is it adds value to the product - if a business packaged their products
nicely, customers will be more willing to pay a higher price to buy the product. This is useful for
the business as they’ll be able to increase their sales revenue. A disadvantage to packaging is it
may destroy the image of a business if the product is packaged in a poor manner; customers
may be turned off by the product due to it’s ‘tacky’ packaging. A popular example of this is
Toblerone, when they decided to change their packaging and increase the spacings between
the chocolate, customers were angered by this and referred to social media to show their
outrage. To conclude, I believe packaging is crucial for a business as it adds a sense of luxury
to the product, it also shows the customer that the business cares about its image and
reputation.

Branding
The strategy of differentiation from those of competitors by creating an identifiable image and
clear expectations about a product.

Benefits of branding:
● Recognition
● Personality
● Reduce price elasticity and demand
● Increase loyalty
A strong brand can lead to brand extension to create a family of products.

Brand extension
A strong brand identity can be used as a means of supporting the introduction of new or
modified products e.g. KFC, originally started off by selling fried chicken but now they sell a
range of product from chicken to fish.

Product life cycle and promotion

Stage of life cycle Promotional options

Introduction ● Informative advertising to make

consumers aware of the product’s
existence, price and main features
● Sales promotion offering free samples
or trial periods to encourage
customers to test the product -
 incentives may need to be offered to
the trade to stock the product

Growth ● To continue some informative

advertising, but the focus may now
move to brand building and
persuasive advertising
● Sales promotion to encourage repeat
purchase ]attempt to develop brand
loyalty

Maturity ● Advertising to emphasise the

differences between this product and
competitors - may be needed to
remind consumers of the existence of
the product
● Sales-promotion incentives to
encourage brand switching and
continued loyalty

Decline - assuming no extension strategy ● Minimal advertising, apart from

informing customers of special offers
● Sales promotion - there may be little
additional support for the product if
the intention is to withdraw it

Place and distribution

- Place is about how and where the product is to be sold to a customer
- Transportation: is a separate concept and is all about how the product is to be physically
delivered

Distribution Channels
This refers to the chain of intermediaries a product passes through from producer to final
consumer.
1. Direct selling
2. One intermediary
3. Two intermediaries

Channels of distribution
 Direct distribution

Advantages Disadvantages

No profit margin taken by other business All storage costs paid by producer

Producer has complete control over No advertising paid by intermediaries

marketing mix

Use for market research May not be convenient to consumer

One- intermediary

Advantages Disadvantage

Often in convenient locations for customer Takes a profit mark-up

Producer can focus on production May sell competitors products too

Can offer after sale service

Two- intermediary

Advantages Disadvantages

They incur storage costs They may not market products how producer
wants

Retailers don’t need to purchase huge

quantities from the producer

Lower transaction costs for producer

Manufacturers can focus time on production

instead of distribution
Wholesaler:
They buy in bulk from producers, then split the bulk purchases into smaller units to customers
for resale (breaking-bulk)
Both producers and retailers benefit as:
- They incur storage costs
- Retailers don’t need to purchase huge quantities from the producer
- Lower transaction costs for producer
- Manufacturers can focus time on production instead of distribution
However
- They may not market products how producer wants

Retailers
Sell products to the final consumer- supermarkets, chain stores, department stores,
independent retailers, hypermarkets
Both producers and retailers benefit as:
- They incur storage costs
- Retailers don’t need to purchase huge quantities from the producer
- Lower transaction costs for producer
- Manufacturers can focus time on production instead of distribution
However
- They may not market products how producer wants

What factors affect the choice of the channel used?

● Geographical dispersion of the target market. If the target market is widespread then an
intermediary will be necessary
● Level of service expected e.g. after sales for servicing cars, means internet selling is not
appropriate
● Technical complexity of the product- may have to train staff to sell certain products
● Number of customers
Internet marketing
● Refers to advertising and marketing activities that use internet, email and mobile
communication to encourage direct sales via electronic commerce.
● E-commerce: the buying and selling of goods and services by businesses and
consumers through a electronic medium

Internet marketing & E-commerce

Advantages Disadvantages

World wide audience Low speed internet

 Not expensive Unable to touch, feel

Customers can communicate with website Product returns

Accurate records- ‘clicks’ visitors Postage- costs may be limiting

Lower fixed costs for selling products Website must be kept up to date

Dynamic pricing- different prices to different Internet security

customers

Intro: define recession

Recession may be short term but will present specific challenges that will require a
revised/changes to marketing. Customers will likely cut spending and have stricter priorities.

Product
- Maintain quality food and offer more ‘family meals’ e.g. food and drinks combos (K) and
(AP)
- Give the impression of value for money (AN)
- Build a good relationship with customers (AN)
- Ensures repeat customers (AN)
However, this could also be costly for the business

- Cheaper supplier and ingredients

- Saves money
- However, less quality
- Attract the customers
- Damage the reputation
- Less profit
Price
- Decrease price
- Because of economic recession
- Everyone is going through the same thing
- Low prices to achieve high volume of sales
- Reduces competition by attracting more customers
- Leads to higher revenue
- However, it may not be sustainable in the long run
- However, increases costs in the long run
Promotion
- Promote value for money/establish an emotional relationship with customers
- Above the line of Below the line
- Explain why
- Effects on the customer?
 - Effects on the business?
Emotional relationship with the customers
Use below the line
Because it is cheaper
Social media like facebook,instagram
Because it's free
Reaches a wide target audience
Allows two way communication
Creates publicity for the communication

Place
Through retailer
One-intermediary
Go to supermarket
Sells more places
More product awareness
Attract wider range of customers
More profit
Money could be reinvested in the business

Evaluation
- Opportunity to strengthen the brand and prepare for better times
- Keep within the marketing budget
- Ensure it’s an integrated strategy- meaning that the company has to make sure that
they’re all fit together to achieve the main goal

UNIT 4: NATURE OF OPERATIONS

Operations:
Is concerned with the use of resources called inputs (land, labour, capital) to provide outputs in
the form of goods/services.

Operation Processes:
● Converting a need into a product efficiently.
● Choosing the correct supplier and controlling stock.
● Choosing a location to produce/sell.
● Selecting the ideal production method.
● Ensuring products meet quality standards.

CELL:
 ● Capital
- This can be the man-made assets of the business such as equipment, machinery,
computer..
- It can also include intellectual capital which is the intangible assets (well-trained and
knowledge employees, good supplier relationship, efficient IT)
● Enterprise
● Land
- This is the natural resources used to make the product, as well as the location the
product is made/sold.
● Labour
- Workforce of the business such as employees or managers. Quality of labour has huge
influence on business success.

Efficiency:
producing outputs at the highest ratio of outputs to inputs
- Last week we produced 20 units using 50 BD of materials and 2 workers. This week we
used 50 BD and 2 workers but produced 25 units. Our efficiency has increased.

Effectiveness:
meeting objectives of the enterprise using inputs productively to meet customer demands. It is
concerned with satisfying customer profitability.

Production:
the number of units produced during a time period.

Productivity:
the output per worker during a time period.
- Labour productivity=total output/total workers employed.
- Capital productivity= output/capital employed.

If total output is 10,000 units and there is 50 workers, then labour productivity equals 200 units
per worker.

Improving productivity:
● Staff training
- Staff with increased skills and flexibility will perform tasks more efficiently. However, the
costs of training can be high.
● Improve motivation
- Giving staff more responsibility or providing them with more autonomy.
● Buy better equipment
- Increased output with fewer staff. High capital cost and high training costs, plus workers
could worry about job security.
● Efficient management
 - Inefficient allocation of resources can mean reduced productivity from staff. Managers
who know how to manage people and make good decisions will see increased output.

Added value:
the difference between the cost of purchasing the raw materials, and the price for which they
are sold for. NUMERICAL.

Methods of adding value (creating value)

● The product quality and design.
- Consumers are willing to pay more for a product which is known to be of reliable quality,
or if it is aesthetically pleasing (pretty).
● Production efficiency
- By reducing waste or training staff, productivity will increase. This will result in lower unit
costs, meaning added value will increase if selling price remains the same.
● Branding (marketing)
- The exclusivity of certain brands means they can charge a higher price (designer
clothing/watches,luxury products). This will increase added value.

Labour intensive Capital intensive

Definition: involving a high level of labour Definition: involving a high quantity of capital
input compared with capital equipment. equipment compared to labour input.

Advantages: Advantages:
- Can use initiative when required. - Can work 24/7 without breaks.
- Cheaper than purchasing and - High quality of work.
maintaining equipment. - Accurate and precise work.
- Better interactions with customers - More productive
-

Disadvantages: Disadvantages:
- Expensive to train employees. - Costly
- Accuracy and quality can vary. - Regularly needs to be maintained and
- High wages updated.
- Limited hours of work - Machinery can break down.
- Worker can become ill/ take holidays. - Can cause unemployment
- Can only be used for the task they
were designed to do.

The choice between labour and capital intensive depends on:

● Size of the firm
● The prices of the inputs at the time
 ● The nature of the product

Operations – Exam Questions

1. Define ‘productivity’. [2]
2. Briefly explain two ways of improving manufacturing productivity in a business. [3]
3. Explain why efficiency is important to a manufacturing business. [5]
4. Analyse the disadvantages of a labour intensive production process for a business.
[8]
5. Discuss the importance of ‘intellectual capital’ for a university. [12]

1. Productivity is the output per worker during a time period. It goes into both labour
and capital productivity. Labour productivity is total output divided by the total
workers employed and the capital productivity is output divided by capital
employed.
2. Two ways of improving manufacturing business is through staff training meaning
employing staff with increase skills and flexibility to perform tasks more efficiently.
However, this has disadvantages such as high training costs. Another way is by
having efficient management in the business; inefficient allocation of resources
can mean reduced productivity from staff. Managers who know how to manage
people and make good decisions will see increased output.

3. Efficiency is producing outputs at the highest ratio of outputs to inputs. This is

very important because it helps the business with growing and generating more
profit. The business has to use their raw materials effectively in order to increase
effectiveness of the business. If efficiency was low, the business would produce
less products, it also increases the chances of damaged products which could
lead to less production and productivity in the business. It also, can affect the
reputation of the business negatively by breaking the trust between the business
and it’s customers. This could reduce the business’ profit which could have been
used for future activities in the business such as expansion by opening a new
project.
4. The disadvantages to MS of using labour intensive production process is the
issues with the employees. It is difficult to find skilled employees that can
manufacture shoes leading to higher recruitment costs. This lead to ineffective
training because it requires more training, which is also more costly. In addition,
labour turnover in MS is high which is another disadvantage of using labour
intensive production for the business because it is difficult to recruit other
employees who are skilled and can take their place. This would waste time in the
business as well as money.
Another disadvantage to MS of using labour intensive production processes is
that the unit costs are higher. This is because the productions in MS is increasing
however the productivity is decreasing making the business less efficient. This
has lead to the shoe price falling which reduces their profit which leads to a
 decrease to their gross profit margin. Moreover, their competitors are capital
intensive giving them a competitive edge over MS. This means that their
competitors have better quality products which means that they would attract
more customers leading to a higher profit margin.

Operation planning

Operation and marketing

● The most important information is forecasted demand, so operations can match supply
to demand.
● With accurate sales forecasts, operations can:
- Match output with demand
- Keep held inventory to minimum efficient level
- Reduce wastage from perishable or obsolete products
- Produce the right range of products at the right level

Operations and resources availability

The production of all goods/service requires the factors of production (CELL). Their availability
influences key decisions:
- Location: they may choose to locate in an area that has a steady supply of necessary
materials.
- Production method: if there is lots of good labour and wages are low then a business
may use labour intensive production.
- Automation: of machinery or automated equipment prices are falling then a business
may opt to change to a more capital intensive, IT based approach.

Process Innovation: the use of a new or improved method of production or delivery.

Looking for improvements:
- Ordering
- Production
- Quality
- Delivery

Production methods have changed significantly in recent decades due to the availability of
cheap technology which can be used throughout the whole operations department.
 Methods & picture Definition Advantages Disadvantages

CAD-computer The use of computer - Lower product - Complexity of

aided design programs to create development the programs
two or three costs. - Extensive
dimensional graphical - Increased employee
representation of productivity training
physical objects. - Improved - Large
product amounts of
quality computer
processing
power

CAM- computer The use of computer - Precise - Cost of

aided software to control manufacturing hardware
manufacturing machine tools and & reduced programs and
related machinery in quality employee
the manufacturing of problems. training
components of - Faster - Hardware
complete products. production failure
increased - Quality
labour assurance is
productivity still needed
- More flexible
production

Importance of flexibility in the production process:

- Demand for a product is higher/lower than expected. Ability to repurpose machinery or
hire/fire workers on flexible contracts.
- Reduces delivery times as resources can be allocated where they are required.
- Staff/machinery can make a variety of products, so can adjust to meet demand of a
specific product.

Exam question - Discuss the advantages and disadvantages to CC from introducing and using
CAM

Computer aided manufacturing is the usage of computers to control and manage the
manufacturing processes - examples of this are cutting and forming machines.

There are many advantages to CC for using this type of software as it has faster production
which increases labour productivity. This is useful for CC as they can produce more units than
they normally would with human aided management. This will have a positive effect on the
business as they’ll have a higher profit margin which they can use to expand the business.
Another advantage for CC to using CAM is the manufacturing is more precise and reduces
quality problems. Reducing quality problems is crucial for all businesses as it gives them a
better name and reputation in the industry. This will attract a larger number of customers having
a useful effect on the business. More profit will help CC achieve its mission statement which is
to “maximise value for all stakeholders”.

Disadvantages to introducing the CAM software to CC is its very expensive and requires an
intense amount of staff training to be applied. This is negative for the business as the money
can be used to buy more raw materials. In addition to that, the business may not have enough
money to introduce the system. Another disadvantage to using CAM is hardware failures occur
regularly. This is negative for the business as it delys CC’s operations and costs a lot of money
to fix the machinery - they are also very time consuming. This will have a negative effect on CC
as the money is essentially going to waste. However, introducing CAM may conflict CC’s CSR
aims as introducing machinery will contribute to polluting the environment and will require firing
people - this may be seen as unethical as a large number of staff will be jobless.

To conclude, I believe CC should introduce CAM to its operations as it has many benefits which
will help them increase their shareholder value. Although it may be expensive to introduce in the
beginning, in the long run it will have a positive effect as it will reduce their overheads and
increase their asset value.

Production Methods

Method Definition & Advantage Disadvantage

Examples

Job Producing a one-off - High quality - Requires skills

item specially work and training
designed for the - Customers get - Cost of producing
customer. exactly what one unit or job is
For example, they want higher
customized wedding - Labour intensive
dresses. - Time consuming

Batch Producing a limited - Reduces unit - Time lost

number of identical costs switching
products- each item - Use of between batches
in the batch passes speciality - Machinery can be
through one stage of machinery & costly
production before skills can - Employees can
passing on to the increase output be unmotivated
next stage. and productivity
For example, Krispy
Kreme Doughnuts.
 Flow Producing items in a - Labour costs - High initial set up
continually moving tend to be cost
process. relatively low, - The work
For example, Cars because of the involved tends to
and Iphones. process being be boring,
mechanised demotivating and
and little repetitive.
physical
handling of the
products.
- Quality tends to
be consistent
and high

Mass The use of flexible - Unit costs are - Highly advanced

customisation computer-aided lowered machinery which
production systems - Customers get is costly.
to produce items to input in what - Difficult to
meet individual they want achieve due to
customers’ advanced
requirements at software.
mass-production. - Expensive
For example, Nike ID software
shoes.

Problems of changing production methods:

Job to batch:
- Cost of equipment
- More working capital needed to hold stocks
- Staff demotivated as equipment replaces their skills
Job/batch to flow:
- Cost of equipment
- Staff need to be trained to be flexible and multi-skilled
- Accurate estimates of demand to make sure output matches demand

Choosing a production method

Factor (define Scenario State and explain best method

further)
 Size of the market Large Market Flow production: you will be making many- has
constant output rate

Small Market Job production: you won’t be making many products

Capital Available Lots of capital Mass customisation: customers get input in what
they want and it is affordable

Not lots of capital Batch production: you can get benefits of economies
of scale
Job production: because you will need less products

Availability of Widely available Flow production: lots of resources mean that you
other resources will be making many

Not available Job production: you need highly skilled people to do

it because the resources are limited

Market demand High demand Mass customisation: because customers get input in
for customized what they want yet it is not time consuming
products Job customisation: specific to what the customer
wants

Low demand Batch production: because a business can make

more than one product

Flow production is another phrase for mass production

Location:
- Geographic
Features of the location (cost,environment,ethics)
- Demographic
Structure of the population (age/income/gender/religion)
- Legal
Minimum wage or policies/procedures
- Political
Government incentives & unemployment rate
- Resources
Availability of land,labour
- Infrastructure
Transport and communication links
- Marketing
Sales potential & competition

Optimal Location:
● A business location that gives the best combination of qualitative and quantitative
factors.

Key Terms:
Outsourcing:Contracting a third-party to perform business processes.
Offshoring: Relocating processes to another country,either by keeping it within the business or
outsourcing.

Locating Abroad

Advantages Disadvantages

May reduce costs Language/cultural problems

Access global markets Quality/service issues

Avoid trade barriers Ethics

Exchange rates

Available skills

Sara should select Location B for her new shop. Location B is located in a quiet street, this is
effective because there would be less chances of crimes in the area such as theft as well as less
traffic congestion and noise pollution. However, the business may find difficulty in receiving
customers because of their unpopular area.
In addition, location B has low rent, this is a huge advantage for Sara’s business because she
would be saving her money by lowering her expenses and use it for future activities in the
business such as employing highly skilled employees which could improve the quality of the
business. As a result from this, the business would gain a good reputation, attracting more
customers and increasing the business’ profit.
Moreover, location B has a large window shop, this is beneficial but also threatening towards
the business. Having a large window means that the business can display more of their products
for people to walk pass, this is a method of effective advertising as it can attract more
customers to the business. However, having a large window can also increase the chances of
theft.
Location B also has high income residents nearby, Sara can take advantage of this and increase
her selling price, this means by selling one unit she can increase her profit as there is more
contribution per unit.
The business being the only jewellery shop in the area is another huge advantage because that
means that they would have no competition, which would increase the number of customers
they, which would result to an increase in their revenue. However, having competitors means
that you could gain market share as more people are likely to visit Sara’s shop if they are looking
for jewelry in a specific area.
Having limited storage space is a disadvantage of location B because it means that Sara would
have less space to keep her stock because she may not sell all her products making her throw
some of her products that don’t fit away or store it somewhere which could be costly.
In conclusion, I believe Sara should locate her store in Location B as the advantages outweighs
the disadvantages. Sara has very limited amount of money and it is essential for her to cut off all
her costs for her to continue improving and increasing her profit. This decision however mat
differ when taking political factors like the taxation in that area into consideration.
Economies of scale
The maximum output that can be achieved using available outputs - this can only be increased
by increasing all inputs.

Economies of scale
means reducing the average cost of producing a unit from increasing the scale of operation.

Diseconomies of scale
means a rise in the average cost of producing a unit from increasing the scale of operations.

● Economies of scales - relates to the scale of production

 ● A business working at less than full capacity can decrease average unit cost by
increasing output. This is not economies of scale.

Economies of scale:
● Purchasing - These are often known as bulk-buying economies and involve suppliers
offering substantial discounts for large orders. This is because it’s cheaper for them to
process and deliver one large order at once rather than several small orders.
● Technical - The main advantage of this is implementing flow production - this process is
expensive to begin with but if the business produces a lot of units, the price would be
worth it in the long run. Small businesses can’t implement this.
● Financial - Large organisations have two clear cost advantage when it comes to raising
finance. The main advantage is banks and other organisations tend to prefer lending
money to large organisations with a large range of products - they charge them lower
interest rates. The other advantage is going public by issuing shares - for both small and
large businesses ‘going public’ is a very expensive process but if the business was a
large organisation the cost would be more evenly spread out.
● Marketing - The main benefit of this is the cost of the adverts are more evenly spread out
as the business is producing more units e.g. small business $1,000 among 500 units;
$1,000 among 5,000 units.
● Managerial - A benefit of economies of scale is firms are able to employ more
specialised managers rather than the owner being the manager for a small firm. This is
useful as it helps the business reduce error.

Total cost at current level 30 800

Total cost after expansion 155 000
Average unit cost at current level 77
Average unit cost after expansion 51.56
Selling price if the business wishes to make a 40% profit margin at current level 107.80
Selling price if the business wishes to make a 40% profit margin after expansion 72.32
 Inventory management
Ensuring an appropriate level of inventory is held, maintain uninterrupted production
Different types of inventory:
Raw Materials: the natural resources bought in from suppliers, waiting to be used in the
production process.
Working in progress: materials in the middle of the production process that are yet to become
finished goods.
Finished goods: the final products held in storage at the end of the production process, waiting
to be sold.
Why is inventory held?
Raw materials: can be drawn upon at any time in case demand increase, then rate of
production can increased.
Finished goods: held to cope with unexpected increases in demand, so customers can receive
the product instantly, and be satisfied
Holding Inventory:
Benefits:
- Take advantage of unexpected demand, maximising sales
- Provide customers with goods demanded, increasing satisfaction, loyalty and brand
reputation
Costs:
- Opportunity cost: the money
tied up inventory could be used
in other areas of the business
- Storage: held in secure
warehouse with guards and must
be insured. More inventory=
higher costs
- Expire/obsolescence: if they are
not sold as quickly as expected,
they could reach their expiration
date or becoming outdated.
 - Efficiency drop: could overcrowd the workplace, and cause productivity to drop.

Key Terms:
Buffer inventory: safety stock in case of sudden increase in demand or supply problems
Re-order: the number of units remaining where a new order is triggered
Lead time: normal time take between re-order and delivery arriving
How much inventory should a business hold?
- Application
- It depends on the industry and the business
- For example, you might not mind waiting a week on car, which means it can be built
after you order it
- You expect a luxury restaurant to have the raw materials required to make your food
- You expect a supermarkets to have finished goods ready for you to pick up immediately

Analyse why effective inventory control is important to a manufacturing business (8):

Just-in-time
After watching video, i have answered these questions
1. Toyota created the JIT method of inventory control
2. 3 problems that japan faced was lack of cash, no resources and no freeland
3. The biggest saving from using a JIT system is inventory
4. 3 of the 4 costs mentioned when holding lots of stock is power, staff and security
5. The core idea of JIT is to look at each area of production and ask if it’s adding value to
the product
6. In JIT, everything is cut down to the most efficient form
7. It is important that suppliers deliver on time because if you get problems with the
supply, the whole system can shut down
8. The saving other than storage which is made from using JIT is staff wages
9. The working philosophy you have to create is no room for errors
10. In order to minimise risk, JIC (just in case) tries to minimize risk through an extra buffer
11. JIT is reactive
12. JIT is good for staff morale because they trust staff and expect them to work consistently
Raw materials: delivered only when needed
Work in progress: kept to a minimum by efficient production process
Finished products: dispatched to customers as soon as completed

Advantages Disadvantages

Opportunity cost of inventory and storage is Failure to receive supplies cause expensive
reduced production delays

Less chance of goods being wasted/obsolete Delivery costs/admin costs rise as frequent
small deliveries are necessary

Less chance of damage May be reduction in bulk discounts.

(purchasing EOS)

Greater flexibility leads to quicker response Reputation of business depends on outside

time when demand/tastes change factors like reliability of suppliers

Multi-skilled staff may be more motivated

Evaluating JIT
● The cost of implementing JIT is unlikely to outweigh savings in a small business
● Need to balance the cost of holding buffers to potential cost savings
 ● Requires a change in business culture where employees/processes are held accountable
for their own performance
● If inflation is rising, holding large quantities of stock could be beneficial

Discuss the advantages and disadvantages for a manufacturing business of using JIT method on
inventory control (12)
Analyse two benefits of improving productivity (8)
Analyse the advantages and disadvantages of JIT stock control (8)
Advantages:
-save on storage costs
-less chance of products becoming outdated or obsolete
-greater workforce/machinery flexibility means it is easy to adapt to consumer demand
-multi-skilled workforce will be

UNIT 5: FINANCE
- Short term finance (<1 year)
- Medium term finance (1-5 years)
- Long term finance (>5 years)

Working Capital:
This is used for everyday expenses such as paying wages or buying inventory
=current assets-current liabilities

Liquidity:
the ability of a firm to pay its short term debts

Liquidation:
when a firm stops trading and its assets are
sold for cash to pay suppliers other creditors

Working capital cycle:

 - The longer the cycle, the more working capital is needed.
- The longer you give credit, the more working capital is needed.
- The longer you receive credit, the less working capital is needed.

Capital Expenditure:
the purchase of assets that are expected to last for more than 1 year (building and machinery).

Revenue Expenditure:
spending on all costs other than fixed assets- day to day costs such as wages, electricity and
salary.

Business situations that are likely to use long term finance:

1. A business would want to expand by opening a new factory as well as branches and
buildings because they might have too much working capital and would like to be
productive.
2. A business could want to expand by research and development by offering their
customers new products because they might have too much working capital and reinvest
in the business to generate more profit.

Business situation that require short-term finance:

1. A business would want to pay off their wages such as electricity and rent which is a
monthly payment.
2. A business would want to give their staff higher salaries to increase motivation or may
want to employ more professional staff which improves productivity.

Sources of Finance

Internal sources of finance:

1. Profits retained in the business

Definition: the profit left in the business which becomes a source of finance for future activities
from the money taken for tax and shareholders.
Advantages:
- if the company is liquid, it is good for expansion.
- No interests or other costs, making it cheap.
Disadvantages:
- Starting businesses can’t have this finance.
- Too much money not being used for useful activities.
- Needs agreements from owners/shareholders.

2. Sale of assets:
Definition: Some business sell & lease assets that they don’t need to own to make profit.
Advantages:
- Saves space
- Makes better use of capital
Disadvantages:
- New businesses won’t have assets to sell
- Some people may not be interested in it

3. Reduction in working capital:

Definition: This is shortening the working capital cycle to use the money for other activities such
as big projects.
Advantages:
- Less money to run the businesses
Disadvantages:
- Less businesses would like to interact with you
- Loss of customers

External Sources of Finance (short term):

1. Bank Overdraft
Definition: an overdraft allows a business to continue withdrawing money even if the account
has no funds in it or not enough.
Advantages:
- Flexibility
- Less paperwork
Disadvantages:
- Risk of seizing, if you don’t pay them back, they may take your assets
- Higher interest rates,it comes with a cost

2. Trade Credit
Definition: Items are bought from suppliers and are payed for later.
Advantages:
- Doesn’t take any interest charge
- Gives the business more cash to use to run the business
Disadvantages:
- Can only be used to buy certain things
- But usually has to be settled with 3060 in 90 days.

3. Debt Factoring
Definition: the selling of debtors (people who owe you money) to a third party.
Advantages:
- Generates cash
- Guarantees the firm of percentages of money owed to it
Disadvantages:
 - Reduces income and profit margin made on sales
- High cost involved in factoring

External Medium Term Finance:

1. Hire purchase and leasing

Definition: hire purchase is a form of credit for purchasing an asset over a period of time and
leasing involving a contract where you rent an asset however don’t own it forever.
iAdvantages:
- More flexible
- Avoid large cash payment
Disadvantages:
- Expensive if you are the buyer
- Less control on the leased equipment

2. Medium Term Bank loan

Definition: A loan that if from 1-5 years
Advantages:
- You can choose how to spend your money
- Quick way
Disadvantages:
- Collateral
- Hard condition, big interest

External Long term finance:

1. Long term loans from banks

Definition: long term loans over 5 years from banks
Advantages:
- Wide choice of types of loans to suit different situations
- No loss of shareholders
Disadvantages:
- May involve collateral
- High interest
- Risky

2. Debentures (also known as loan stock or corporate bonds)

Definition: 20-25 years, when the customers buy debentures and the business pays interest
frequently and then the full payment at the end of the time period.
Advantages:
- No collateral for the business
- Fixed rate of return
Disadvantages:
 - High risk

3. Grant
Definition: a gift of money from an organization that does not have to be paid back
Advantages:
- You don't have to pay it
Disadvantages:
- Certain conditions may apply
- Not all businesses are eligible for grants

4. Share issues
Definition: Selling a part of the business for exchange of investment.
Advantages:
- Able to raise money if the business has good prospect
- You don’t have to pay the money back
Disadvantages:
- You have to pay dividends, pay percentage of your profit.
- Lose part of control of your business.

Unincorporated business:
means that in the eyes of the law , the person that owns the business itself and the business
itself are the same identities, personal possessions could be taken from the owner and sold to
pay debts.

Incorporated business:
means that in the eye of the law, the person that owns the business and the business itself are
separate entities, meaning that personal possessions are safe.

Microfinance:
A small loan with interest.

Venture Capital:
A risky investment in businesses who would otherwise struggle to obtain finance.
- Often seen in tech companies due to complex research.
- Risky, but returns could be massive.

What factors have to be considered when choosing a source of finance and what is it
going to be used for?
● Cost
● Amount required
● Legal structure/control
● Size of existing debt
● Flexibility
Recommend a suitable source of finance to solve liquidity problems:
Define source of finance
Choose between: reduction in working capital, bank overdraft, trade credit, sale of assets
Explain why you have chosen it
Explain advantages and disadvantages
Make suggestions about the future of the business
Discuss the influence of the source of finance

Costs
Why is it important to have costs?
● Helps determine profit.
● Helps make pricing decisions.
● Helps make production decisions.
● Allows monitoring and comparison.
● Sets budgets and targets.
● Helps decision making with resources
● Key to decision making in general

Different types of costs:

● Direct
- Can only be identified with each unit of production.
- Raw materials

● Indirect/Overheads
- Cannot be clearly identified with a unit of production
- Rent, insurance, electricity.

● Fixed:
- Does not vary with output in the short run
- Rent

● Variable:
- Varies with output
- Salaries

● Marginal:
- The additional cost of producing one more unit of production.
 Cost fixed Variable Direct Indirect

Purchase of Yes
equipment

Raw materials yes yes

Rent yes yes

Advertising yes yes

Power yes yes

Internet yes yes

Delivery yes yes

Break Even
Break Even: the point at which total costs is equal to sales revenue. No profit or loss is being
made.

Key-terms:
● Unit contribution: selling price per unit cost per unit
● Total costs: fixed costs + variable costs

The break even point can be worked out given the:

● Fixed costs
● Variable costs
● Selling price

1. Fixed cost= 40 0000

Selling price= 150
Variable cost= 70
Unit contribution= 150-70= 80
BEP= 40 000/80= 500

2. FC= 25 000
SP= 75
VC= 50
UC= 75-50=25
BEP= 25 000/25= 1000
 3. FC= 30 000
SP= 30
VC= 15
UC= 15
BEP= 200

4. FC= 9 000
SP= 10
VC= 5.5
UC- 4.5
BEP= 200

Margin of safety:
the amount by which the sales level exceeds the break even level of output
● Formula: expected sales units- break even point sale units

Maximum Capacity:
This will be highest amount of the y-axis.

Desired Profit:
Fixed costs + Desired profit / unit contribution.
This formula is used to calculate how
many units needed to be sold in order
to reach your desired profit.

1. Fixed Costs= 100

Selling price= 10
Variable= 5
Desired profit= 250
=70 units

Advantages of BEP:
● Price decisions
● Purchasing new equipment
● Choosing between location
● Performing ‘what if’ analysis
● Which project to invest in
Disadvantages of BEP:
● Assumption may not be realistic
● Cost etc; may not be linear
● Costs difficult to identify for new projects
● Costs difficult to classify
● Assumes all units are sold

1. TL is worried that they won’t meet their break even point due to the economic downturn.
Recommend a method that TL could use to lower their break even point.

The break even point is the point at which total costs are equal to the revenue; no profit or loss
is being made. The breakpoint analysis on the other hand is using this information (investigating
the costs and revenue finding the breaking even point) however to make business decisions.

In order to lower the break even point TL could increase their selling price. Making their
products more expensive could make them lose customers as well as damage their reputation.
Their customers could switch into another business that sell electronics such as Samsung or
Virgin increasing their competition which could make them put more effort into advertising which
is expensive in order to gain their customers back. Also TL are known for their lowest prices and
reliability so increasing it will break their customer trust. This in the long-term will lead them into
losing profit and could even make TL a failed business.

Another option that TL could investigate is lowering their variable costs. This means that they
would have to lower the prices of their raw materials and production. TL could do this by buying
cheaper raw material and having cheaper labor. For example, they could buy and manufacture
their products in a LIC such as China where the resources and Labor are less expensive.
However this leads to major consequences such as providing a lower quality product which
leads to them losing customers and significantly damaging their reputation of being reliable as
this it would make them untrustworthy. This in the long-term will also lead them to losing profit
and increase the risk of them failing.

TL could lower their break even point by lowering their fixed costs. This means that the business
need to lower costs such as rent, salaries,electricity, water and other utilities, For example, the
business could change their location into a smaller factory or workplace further away from the
city centre. This could lead to discomfort and inconvenience because it may not be able to fit all
the necessary machinery and workers to work comfortably and make the amount of units
required in the right amount of time. Another issue with changing the location is that it would be
less popular if it is further away from the customers and could be time consuming and
expensive for transportation. Another possibility is lowering the salaries of the employees, this
could raise huge problems within the business between stakeholders such as the employees
and the owner and could even make them quit this occupation making TL spend important time
looking for other employees to take their place. Lowering the prices of utilities such as water and
gas could lead to problems such as not having warm water or air conditioning or the electricity
could be less effective. This would lead to problems within TL leading to an encouraging
environment affecting the quality of the product which could lead to the loss of customers. You
should mention here that TL doesn’t necessarily need a state-of-the-art office space for
innovators as they are a budget business who produces reliable basic products. This means
they are likely not innovators, and more about making products cheaply and reliably.

Lowering the break even point could also have advantages to it. The main advantage is that it
would make it easier to generate more profit if they select the most suitable option as it could
lead to product development meaning that TL could be at a better position than some other
business during the economic turn down. It also less risky because the business would have
less chance of being in debt. However, it also has disadvantages such as having less appeal to
a wider customer base because it damages their customer trust and loyalty as well as the
disadvantages I have mentioned in the previous paragraphs. This section isn’t wrong, it just
doesn’t gain you any marks as it isn’t relevant to the question.

I would suggest TL to lower their break even point by lowering their fixed costs. This is because
i believe that this option has the least damage towards the business short-term wise and
long-term wise. Lowering the fixed costs involves the internal factors of the business and won’t
significantly affect the business in a way that would damage their reputation and make them
lose customers if they carefully select their options. TL already has to face import tariffs hence
they have to be careful in maintaining a good image and keeping their customers in order to
keep generating profit to pay them off. They should move locations into a smaller however good
location area not too far from the customers. They should also contact a reliable however low
priced business like them for water, electricity and gas lowering the prices of their utilities.

Your evaluation is a good start. You need to keep it more balanced, and realise that though
lower fixed costs seems the most sensible, it isn’t the only option. You should also prioritise your
arguments a bit more strongly, mentioning that they don’t need a space for innovation as they
are a budget business. Lastly, you should question the question. If they really need to look at
lowering the breakeven point due to the economic downturn, maybe they should consider not
releasing the product at all? Or wait until the economy is more stable.

Knowledge 4/4
Application 3/4
Analysis 4/4
Evaluation 2/4

➢ This is an excellent essay. Your knowledge and analysis are fantastic.

➢ Make sure you are always applying directly from the case study.
➢ Focus on making the order of paragraphs knowledge > application > analysis. This
ensures your analysis is always based directly on the application!
13/16
A
 Accounting fundamentals
Key Terms:
● Revenue: total value of sales made during trading period. Selling price * quantity sold.
● Gross profit: sales revenue- cost of sales
● Cost of sales: direct costs of the goods sold during the year
● Operating profit/net profit: Gross profit- overheads
● Profit of the year: Operating profit- interest tax
● Dividends: share of the profits paid to shareholders for investing
● Retained earnings: the profit remaining that has been reinvested in the business.

Income Statement: an income statement records the revenue and costs before delivering a final
profit (or loss) figure of a business over the course of a given time.
1. Example:
Trading account:
- Sales 10 000 - GIVEN
- Less cost of sales 3 000 - GIVEN
- Gross profit 7 000
Profit + loss account:
- Overload expenses 2 000- GIVEN
- Operating profit 5 000
- Less interest 50 - GIVEN
- Profit before tax 4500
- Less tax (20%) 900
- Profit of the year 3600
Appropriation:
- Divident 100
- Retained earning 3500

2. example
- Sales 20 000
- Cost of sales 6 000
- Gross profit 14 000
 - Overload expenses 3 000
- Operating profit 11 000
- Less interest 200
- Profit before tax 10 800
- Less tax (20%) 2160
- Profit of the year 8640
- Divident 700
- Retained earning 7940
-
Low quality and high quality profits:
● High-quality profits are those which are likely to be manufactured. For example, having
high-quality and exclusive products such as apple,
● Low quality profits are those that are unlikely to be repeated. This could be selling a
piece of your land or receiving money from an insurance claim.
● Think a yearly salary compared to a big gambling win.

STATEMENT OF FINANCIAL POSITION (BALANCE SHEET)

- This shows the estimated value of a business at a specific point of time.
Key-terms:
● Non current assets= assets to be kept and used by the business for <1 year
● Fixed assets= assets which have no physical presence such as patents or copyrights
● Current assets= assets that are likely to be turned into cash before the next financial
year
● Inventories (stock): stock held by the business in the form of raw materials.
Work-in-progress and finished goods.
● Trade receivables: the value of payments of customers who have bought goods on
credit.
● Current liabilities: Debts of the business usually paid within 1 year.
● Non- current liabilities: Value of debts of the businesses which will be payable after one
year.
● Account payables: value of debts bought on credit payable to suppliers.
● Share capital: Total value of money raised by selling shares.

Current asset Non current Current Non current Shareholders

 assets liability liability equity

Company car yes

Four-year yes
bank loans

Work in yes
progress

Account yes
payable

Issued state yes

capital

Dividends yes
owed to
shareholders

Dividends yes
owed to
shareholders

Value of yes
patents

Retained yes
earning

Cash in bank yes

1. example :
Non current assets:
- Property 150
- Machines 24
174
Current assets:
- Inventory 30
- Trade receivables 4
34
Total assets: 208

Current liabilities:
- Bank overdraft 16
- Trade payables r12
28
Non current liabilities:
- Long term loan 30
Shareholder equity:
- Share capital 110
- Retained earnings 40
208

The accounting equation:

● The equation that is the foundation of double entry accounting. The accounting displays
that all assets are either financed by borrowing money of the company’s shareholders.
Thus, the accounting is:
Assets = liabilities + shareholder equity.
● Inventory is purchased used trade credit
- Current assets increases
- Current liabilities increases

● The business takes out a bank loan

- Non current liabilities increases
- Current assets increases

● New shares are issued

- Current assets increases
- Shareholder equity increases

● A mortgage is taken out

 - Non- current liabilities increases
- Non- current liabilities assets

● Products are sold for cash

- Current assets (inventory) decreases
- Current assets (bank) increases

Gross Profit= gross profit/sales revenue x100

Operating profit= operating profit/sales revenue x100

Distinguish the difference between profit and profitability. Apply it to the business.

How to increase/improve liquidity ratios

Method to increase liquidity Example Evaluation of method

Sells off fixed assets for cash- Land and property could be If assets are sold quickly, they
could lease these back if still sold to a leasing company might not raise their true
needed by the business. value.
If assets are still needed by
the business, then leasing
charges will add dto
overheads and reduce
operating profit margin.

Sells off inventories for cash Stock of finished goods could This will reduce the gross
(note: this will improve the be sold off at a discount to profit margin of inventories
acid test ratio but not the raise cash. are sold at discount.
current ratio) JIT stock management will Consumers may doubt the
achieve their objective. image of the brand if
inventories are sold off
cheaply.
Inventories might be needed
to change customer demand
levels- JIT might be difficult to
adapt in some countries.
 Increase loans to inject cash Long-term loans could be This will increase the gearing
into the business and taken out of the bank is ratio.
increase working capital confident if the companies This will increase interest
prospects. costs.

How useful are these accounts/ratios?

● Data can be out of date by the time accounts are completed, organized and published.
● Accounts can be ‘window-dressed’ (made to look better than they are)
● Different companies may have different year ends, which makes comparisons different
● External environment can have an effect-ratios tell us what happens, not why, this
means that they highlight problems but not the solutions.
● Ideal ratios differ between ratios
● The past doesn’t always predict the future.
Gearing ratio:
how much your business relies on loans.

Page 46:
1. Two reasons why an entrepreneur who has just set up a business should keep a set of
accounts is because they would want to monitor the business’s success and keep track;
this could be used to make business decisions such as opening a new project. Another
reason is because they legally have to so they do not get into trouble with the law.
2. It might be important for a multinational company to keep accurate accounts in order to
maintain consistency. Problems would be created for them if some of their accounts
based on activities in foreign countries were recorded using different concepts and
conventions to those in the country.
3. Managers need more detailed account that the external users because they need to
measure the performance of the business and to compare against targets, previous time
periods and competitors. In addition, to help them take decisions such as investments,
closing branches and launching new products.
4. Three differences between the work management accountants and financial
accountants are:
- In financial accounting, information are prepared once or twice a year whereas in
management accounting, accounting reports are prepared as and when required by the
managers and owners.
- In financial accounting, accounts are bound by rules whereas management accounting
has no rules set.
 Cash flow
What is the difference between cash and profit?
● Profit is recorded as soon as a sale or order is made
● Cash is only recorded when the payment actually occurs
● If someone purchased goods on two months credit terms on march 5th it would be only
recorded as profit on march 5th. However, it would not be recorded as cash until may
5th.
Exam tip: emphasise importance of having cash in the short term. Profit can wait, but cash
payment are always being made.

Importance of cash:
● Used to pay revenue expenditure
● If employees aren’t being paid, they are unlikely to be motivated to work hard, if they
stay with the business at all.
● If there is no cash for raw materials, the business will have to halt production- customers
could be dissatisfied and not return to the business; reputation could also be damaged.
● You may have to delay paying suppliers, which could ruin a good relationship and result
in a loss of trade discounts or credit terms.
● The bank may reduce your credit rating,resulting in higher interest rates being charged
in future, or refusal of a loan together.
Key-terms:
● Cash flow: the sum of cash receipts to the business (inflows) less the sum of cash
payments from the business (outflow).
● Liquidation: when a firm stops trading and assets are sold for cash to pay suppliers and
other creditors.
● Insolvent: when a business cannot meet its short term debts.
● Cash inflows: payments in cash received by a business such as trade receivables, a bank
loan, or share issues.
● Cash outflows: payments in cash made by a business such as overheads, purchase of
machinery or loan repayments.
● Cash flow-forecast: a prediction and estimate of a business future monthly cash flows
and outflows.

Cash flow statement

 March April May

Cash inflows $(000) $(000) $(000)

Cash sales 50 60 70

Payment of trade 15 20 25
receivables

Total cash in 65 80 95

Cash outflows

Raw materials 20 24 28

Loan repayment 5 5 5

labour 18 20 22

Insurance 8 8 8

Total cash out 51 57 63

Net cash flow

Net monthly cash 14 23 32

flow

Opening balance 25 39 62

Closing balance 39 62 94

Cash inflows $ $ $

Cash sales 14 000 18 000 12 000

Payment of TR 54 000 60 000 40 000

Total cash in 68 000 78 000 52 000

Cash outflows

Rent 5 000 5 000 5 000

Labour 15 000 17 000 19 000

Electricity 2 000 2 000 2 000

Lease 8 000 8 000 8 000

Raw materials 24 000 30 000 36 000

Total Cash out 54 000 62 000 36 000

Net monthly cash 14 000 16 000 -18 000

flow

Opening balance 4 000 18 000 34 000

Closing balance 18 000 34 000 16 000

- The closing balance of december was 4000

- Instead of leasing machinery in January, the business will outbuy it for 40,000$
- The business is starting to purchase materials from abroad starting in February. This will
be 50% cheaper.

Cash inflow Jan Feb Mar

Cash sales 14 000 18 000 12 000

Payment of TR 54 000 60 000 40 000

Total cash in 68 000 78 000 52 000

Cash outflow

(bought-in lease) 40 000

 Rent 5 000 5 000 5 000

Labour 15 000 17 000 19 000

Electricity 2 000 2 000 2 000

Raw materials 24 000 15 000 18 000

Total cash out 86 000 39 000 44 000

Net Monthly cash -18 000 39 000 8 000

flow

Opening balance 4 000 -14 000 25 000

Closing balance -14 000 25 000 33 000

Purchasing machinery is good and bad because in the short-term you have a minus but in the
long term it is good because you have an even bigger cash flow (increase).
The uses of cash-flow forecasts:
- The main purpose of cash-flow forecasts is to highlight future problems a business may
have with cash flow. These could be:
Negative cash balance at the end of the month.
Decreasing cash balance.
Decreasing cash outflows.
Increasing cash outflows.
- A business can then use their information to suggest a solution.
- Can also be used to perform ‘what if’ analysis:
What if we were to purchase a new vehicle in march?
What if we moved premises and increased our monthly rent?
- Businesses can use this information in setting targets for the future, motivating staff by
giving them a target to work towards.
- Can also be used to convince investors to buy shares, give a loan.
Limitations of cash flow forecasts:
- Mistakes could be made in completing forecasts if done by inexperienced or untrained
staff.
- Unexpected events could change predicted costs dramatically.
- Only as good as initial assumptions, if poor market research incorrectly predicts sales,
cash flow will be inaccurate.

Causes of cash flow problems:

- Lack of planning: no forecasts means problems are not be identified, so can’t be solved.
- Poor credit control: the business is not cashing up late payments, meaning trade
receivables are paid late, if at all (bad debts).
- Giving too much credit: this will reduce short term inflows.
- Expanding too rapidly: pays for increased labour, materials before cash is received from
sales (overtrading).
- Unexpected events: unforeseen costs such as breakdown in machinery, or a drop in sales
due to competitors lowering prices.
Improving cash inflows (increasing cash inflow):
- Obtain bank (overdraft: high interest rates can be withdrawn by the bank).
- Short-term loan: (interest to be repaid due date for loan).
- Sale of assets:(leasing costs, loss of profit if asset rises prices).
- Reduce credit terms, making customers pay soon: (customers could go elsewhere).
- Debt factoring: (only receive some of full debt, debt collected by finance company
indicates trouble).
Improving cash flows (decreasing cash outflows):
- Delay paying trade receivables: (discount for quick payment received goods not supplied
unless cash on delivery).
- Delay capital expenditure such as land/building until a more sustainable time: (Business
efficiency could fall, expansion becomes difficult).
- Lease capital equipment instead of purchasing outright:(asset isn’t always owned,
leasing includes interest and increases overheads).
- Cut overheads that don’t affect output such as advertising (future demand could be
reduced).

1. Bad debts= a debt that cannot be recovered.

2. The difference between cash and profit is that profit is recorded as a sale or order is
made whereas cash is only recorded when the payment actually occurs.
3. Two limitations of cash flow forecasting is that mistakes could be made, this is due to
human error by unexperienced or untrained staff because they might add incorrect
figures or not be familiar with calculating it. Moreover, unexpected events could change
 predicted costs dramatically such as in WL, the animals have attacked the tourists who
are on safari.
4. Three potential causes of cash flow problems are lack of planning meaning that no
forecast means problems are not identified, so it cannot be solved. Aslo, giving too much
credit will reduce short term inflows. Moreover, expanding too rapidly which pays for
increased labour, materials before cash is received from sales.