Business activity

The Economic Problem

- Need: a good or service essential for living. Examples include water and food and shelter.

- Want: a good or service that people would like to have, but is not required for living. Examples
include cars and watching movies.

- Scarcity is the basic economic problem. It is a situation that exists when there are unlimited
wants and limited resources to produce the goods and services to satisfy those wants. For
example, we have a limited amount of money but there are a lot of things we would like to buy,
using the money.

Opportunity cost

Opportunity cost is the next best alternative forgone by choosing another item. Due to scarcity,
people are often forced to make choices. When choices are made it leads to an opportunity cost

SCARCITY → CHOICE → OPPORTUNITY COST

Example: the government has a limited amount of money (scarcity) and must decide on whether to
use it to build a road, or construct a hospital (choice). The government chooses to construct the
hospital instead of the road. The opportunity cost here are the benefits from the road that they have
sacrificed (opportunity cost).

Factors of Production

Factors of Production are resources required to produce goods or services. They are
classified into four categories.

Land: the natural resources that can be obtained from nature. This includes minerals,
forests, oil and gas. The reward for land is rent.

Labour: the physical and mental efforts put in by the workers in the production process.
The reward for labour is wage/salary

Capital: the finance, machinery and equipment needed for the production of goods and
services. The reward for capital is interest received on the capital

Enterprise: the risk taking ability of the person who brings the other factors of production
together to produce a good or service. The reward for enterprise is profit from the business.
Specialization

Specialization occurs when a person or organisation concentrates on a task at which they are
best at. Instead of everyone doing every job, the tasks are divided among people who are skilled
and efficient at them.

Advantages Disadvantages

Workers are trained to do a particular task and It can get monotonous/boring for workers,
specialise in this, thus increasing efficiency doing the same tasks repeatedly

Higher labour turnover as the workers may

Saves time and energy: production is faster by
demand for higher salaries and company is
specialising
unable to keep up with their demands

Quicker to train labourers: workers only

concentrate on a task, they do not have to be
Over-dependency: if worker(s) responsible for
trained in all aspects of the production process
a particular task is absent, the entire
production process may halt since nobody else
Skill development: workers can develop their may be able to do the task.
skills as they do the same tasks repeatedly,
mastering it.

Purpose of Business Activity

Business is any organization that uses all the factors of production (resources) to create goods
and services to satisfy human wants and needs.

Businesses attempt to solve the problem of scarcity, using scarce resources, to produce and sell
those goods and services that consumers need and want.

Added Value

Added value is the difference between the cost of materials bought in and the selling price of
the product.

Which is, the amount of value the business has added to the raw materials by turning it into
finished products. Every business wants to add value to their products so they may charge a higher
price for their products and gain more profits.

How to increase added value?

- Reducing the cost of production. Added value of a product is its price less the cost of production.
Reducing cost of production will increase the added value.
- Raising prices. By increasing prices they can raise added value, in the same way as described
above.

But there will be problems that rise from both these measures. To lower cost of production, cheap
labour, raw materials etc. may have to be employed, which will create poor quality products and
only lowers the value of the product. People may not buy it. And when prices are raised, the high
price may result in customer loss, as they will turn to cheaper products.

Classification of businesses

Primary, Secondary and Tertiary Sector

Businesses can be classified into three sectors:

Primary sector: this involves the use/extraction of natural resources. Examples include
agricultural activities, mining, fishing, wood-cutting, oil drilling etc.

Secondary sector: this involves the manufacture of goods using the resources from the
primary sector. Examples include auto-mobile manufacturing, steel industries, cloth
production etc.

Tertiary sector: this consists of all the services provided in an economy. This includes
hotels, travel agencies, hair salons, banks etc.

Industrialization: the process of transforming a primarily agricultural economy to one focused on

manufacturing goods or an industrial economy

Deindustrialization: process of social and economic change caused by the removal or reduction of
industrial capacity or activity in a country or region (especially of heavy industry or manufacturing
industry)

Private and Public Sector

Private sector: where private individuals own and run business ventures. Their aim is to make a
profit, and all costs and risks of the business is undertaken by the individual. Examples, Nike,
McDonald’s, Virgin Airlines etc.

Public sector: where the government owns and runs business ventures. Their aim is to provide
essential public goods and services (schools, hospitals, police etc.) in order to increase the welfare
of their citizens, they don’t work to earn a profit. It is funded by the taxpaying citizens’ money, so
they work in the interest of these citizens to provide them with services. Example: the Indian
Railways is a public sector organization owned by the govt. of India.

In a mixed economy, both the public and private sector exists.

Enterprise, business growth and size

Entrepreneurship

An entrepreneur is a person who organizes, operates and takes risks for a new business
venture. The entrepreneur brings together the various factors of production to produce goods or
services. Personalities of an entrepreneur: risk taker, creative, optimistic, self-confident, innovative,
independent, effective communicator, hark working

Business plan

A business plan is a document containing the business objectives and important details about
the operations, finance and owners of the new business.

It provides a complete description of a business and its plans for the first few years; explains what
the business does, who will buy the product or service and why; provides financial forecasts
demonstrating overall viability; indicates the finance available and explains the financial
requirements to start and operate the business.

Some of the content of a regular business plan are:

Executive summary: brief summary of the key features of the business and the business
plan

The owner: educational background and what any previous experience in doing previously

The business: name and address of the business and detailed description of the product or
service being produced and sold; how and where it will be produced, who is likely to buy it,
and in what quantities

The market: describe the market research that has been carried out, what it has revealed
and details of prospective customers and competitors

Advertising and promotion: how the business will be advertised to potential customers and
details of estimated costs of marketing

Premises and equipment: details of planning regulations, costs of premises and the need for
equipment and buildings

Business organisation: whether the enterprise will take the form of sole trader, partnership,
company or cooperative

Costs: indication of the cost of producing the product or service, the prices it proposes to
charge for the products

Finance: how much of the capital will come from savings and how much will come from
borrowings
 Cash flow: forecast income (revenue) and outgoings (expenditures) over the first year

Expansion: brief explanation of future plans

By documenting the various details about the business, the owners will find it much easier to run it.
There is a lesser chance of losing sight of the mission and vision of the business as the objectives
have been written down. Moreover, having the objectives of the business set down clearly will help
motivate the employees. A new entrepreneur will find it easier to get a loan or overdraft from the
bank if they have a business plan.

Government support for business startups

A startup is a company typically in the early stages of its development. These entrepreneurial
ventures are typically started by 1-3 founders who focus on capitalizing upon a perceived market
demand by developing a viable product, service, or platform.

Why do governments want to help new start-ups?

They provide employment to a lot of people

They contribute to the growth of the economy

They can also, if they grow to be successful, contribute to the exports of the country

Start-ups often introduce fresh ideas and technologies into business and industry

How do governments support businesses?

Organise advice: provide business advice to potential entrepreneurs, giving them

information useful in staring a venture, including legal and bureaucratic ones

Provide low cost premises: provide land at low cost or low rent for new firms

Provide loans at low interest rates

Give grants for capital: provide financial aid to new firms for investment

Give grants for training: provide financial aid for workforce training

Give tax breaks/ holidays: high taxes are a disincentive for new firms to set up.
Governments can thus withdraw or lower taxation for new firms for a certain period of time

Measuring business size

Business size can be measured in the following ways:

Number of employees: larger firms have larger workforce employed

Value of output: larger firms are likely to produce more than smaller ones
 Value of capital employed: larger businesses are likely to employ much more capital than
smaller ones

However, these methods have their limitations and are not always accurate. Example: When using
the ‘number of employees’ method to compare business size is not accurate as a capital intensive
firm ( one that employs a large amount of capital equipment) can produce large output by
employing very little labour (workers). Similarly, value of capital employed is not a reliable
measure when comparing a capital-intensive firm with a labour-intensive firm. Output value is also
unreliable because some different types of products are valued differently, and the size of the firm
doesn’t depend on this.

Business growth

Businesses want to grow because growth helps reduce their average costs in the long-run, help
develop increased market share, and helps them produce and sell to them to new markets.

There are two ways in which a business can grow- internally and externally.

Internal growth

This occurs when a business expands its existing operations. For example, when a fast food chain
opens a new branch in another country. This is a slow means of growth but easier to manage than
external growth.

External growth

This is when a business takes over or merges with another business. It is sometimes called
integration as one firm is ‘integrated’ into the other.

A merger is when the owner of two businesses agree to join their firms together to make one
business.

A takeover occurs when one business buys out the owners of another business , which then
becomes a part of the ‘predator’ business.

External growth can largely be classified into three types:

Horizontal merger/integration: This is when one firm merges with or takes over another
one in the same industry at the same stage of production. For example, when a firm that
manufactures furniture merges with another firm that also manufacturers furniture.

Benefits:

- Reduces number of competitors in the market, since two firms become one.

- Opportunities of economies of scale.

- Merging will allow the businesses to have a bigger share of the total market.
 Vertical merger/integration: This is when one firm merges with or takes over another
firm in the same industry but at a different stage of production. Therefore, vertical
integration can be of two types:

- Backward vertical integration: When one firm merges with or takes over another
firm in the same industry but at a stage of production that is behind the ‘predator’
firm. For example, when a firm that manufactures furniture merges with a firm that
supplies wood for manufacturing furniture.

Benefits:

- Merger gives assured supply of essential components.

- The profit margin of the supplying firm is now absorbed by the expanded firm.

- The supplying firm can be prevented from supplying to competitors.

- Forward vertical integration: When one firm merges with or takes over another firm
in the same industry but at a stage of production that is ahead of the ‘predator’ firm.
For example, when a firm that manufactures furniture merges with a furniture retail
store.

Benefits:

- Merger gives assured outlet for their product.

- The profit margin of the retailer is now absorbed by the expanded firm.

- The retailer can be prevented from selling the goods of competitors.

Conglomerate merger/integration: This is when one firm merges with or takes over a
firm in a completely different industry. This is also known as ‘diversification’. For
example, when a firm that manufactures furniture merges with a firm that produces
clothing.

Benefits:

- Conglomerate integration allows businesses to have activities in more than one country.
This allows the firms to spread its risks.

- There could be a transfer of ideas between the two businesses even though they are in
different industries. This transfer o ideas could help improve the quality and demand for the
two products.

Drawbacks of growth

- Difficult to control staff: as a business grows, the business organisation in terms of departments
and divisions will grow, along with the number of employees, making it harder to control, co-
ordinate and communicate with everyone
- Lack of funds: growth requires a lot of capital.

- Lack of expertise: growth is a long and difficult process that will require people with expertise in
the field to manage and coordinate activities

- Diseconomies of scale: this is the term used to describe how average costs of a firm tends to
increase as it grows beyond a point, reducing profitability. This is explored more deeply in a later
section.

Why businesses stay small

Type of industry: some firms remain small due to the industry they operate in. Examples of these
are hairdressers, car repairs, catering, etc, which give personal services and therefore cannot grow.

Market size: if the firm operates in areas where the total number of customers is small, such as in
rural areas, there is no need for the firm to grow and thus stays small.

Owners’ objectives: not all owners want to increase the size of their firms and profits. Some of
them prefer keeping their businesses small and having a personal contact with all of their
employees and customers, having flexibility in controlling and running the business, having more
control over decision-making, and to keep it less stressful.

Why businesses fail

Not all businesses are successful. The main reasons why they fail are:

Poor management: this is a common cause of business failure for new firms. The main
reason is lack of experience and planning which could lead to bad decision making. New
entrepreneurs could make mistakes when choosing the location of the firm, the raw
materials to be used for production, etc, all resulting in failure

Over-expansion: this could lead to diseconomies of scale and greatly increase costs, if a
firms expands too quickly or over their optimum level

Failure to plan for change: the demands of customers keep changing with change in tastes
and fashion. Due to this, firms must always be ready to change their products to meet the
demand of their customers. Failure to do so could result in losing customers and loss. They
also won’t be ready to quickly keep up with changes the competitors are making, and
changes in laws and regulations’

Poor financial management: if the owner of the firm does not manage his finances
properly, it could result in cash shortages. This will mean that the employees cannot be paid
and enough goods cannot be produced. Poor cash flow can therefore also cause businesses
to fail
Why new businesses are at a greater risk of failure

Less experience: a lack of experience in the market or in business gets a lot of firms easily pushed
out of the market

New to the market: they may still not understand the nuances and trends of the market, that
existing competitors will have mastered

Don’t a lot of sales yet: only by increasing sales, can new firms grow and find their foothold in the
market. At a stage when they’re not selling much, they are at a greater risk of failing

Don’t have a lot of money to support the business yet: financial issues can quickly get the better of
new firms if they aren’t very careful with their cash flows. It is only after they make considerable
sales and start making a profit, can they reinvest in the business and support it

Types of business organizations

Sole Trader/Sole Proprietorship

A business organization owned and controlled by one person. Sole traders can employ other
workers, but only he/she invests and owns the business.

Advantages:

Easy to set up: there are very few legal formalities involved in starting and running a sole
proprietorship. A less amount of capital is enough by sole traders to start the business.
There is no need to publish annual financial accounts.

Full control: the sole trader has full control over the business. Decision-making is quick and
easy, since there are no other owners to discuss matters with.

Sole trader receives all profit: Since there is only one owner, he/she will receive all of the
profits the company generates.

Personal: since it is a small form of business, the owner can easily create and maintain
contact with customers, which will increase customer loyalty to the business and also let
the owner know about consumer wants and preferences.

Disadvantages:

Unlimited liability: if the business has bills/debts left unpaid, legal actions will be taken
against the investors, where their even personal property can be seized, if their investments
don’t meet the unpaid amount. This is because the business and the investors are the legally
not separate (unincorporated).

Full responsibility: Since there is only one owner, the sole owner has to undertake all
running activities. He/she doesn’t have anyone to share his responsibilities with. This
workload and risks are fully concentrated on him/her.
 Lack of capital: As only one owner/investor is there, the amount of capital invested in the
business will be very low. This can restrict growth and expansion of the business. Their only
sources of finance will be personal savings or borrowing or bank loans (though banks will
be reluctant to lend to sole traders since it is risky).

Lack of continuity: If the owner dies or retires, the business dies with him/her.

Partnerships

A partnership is a legal agreement between two or more (usually, up to twenty)people to own,

finance and run a business jointly and to share all profits.

Advantages:

Easy to set up: Similar to sole traders, very few legal formalities are required to start a
partnership business. A partnership agreement/ partnership deed is a legal document
that all partners have to sign, which forms the partnership. There is no need to publish
annual financial accounts.

Partners can provide new skills and ideas: The partners may have some skills and ideas
that can be used by the business to improve business profits.

More capital investments: Partners can invest more capital than what a sole trade only by
himself could.

Disadvantages:

Conflicts: arguments may occur between partners while making decisions. This will delay
decision-making.

Unlimited liability: similar to sole traders, partners too have unlimited liability- their
personal items are at risk if business goes bankrupt

Lack of capital: smaller capital investments as compared to large companies.

No continuity: if an owner retires or dies, the business also dies with them.

Joint-stock companies

These companies can sell shares, unlike partnerships and sole traders, to raise capital. Other
people can buy these shares (stocks) and become a shareholder (owner) of the company.
Therefore they are jointly owned by the people who have bough it’s stocks. These shareholders
then receive dividends (part of the profit; a return on investment).

The shareholders in companies have limited liabilities. That is, only their individual investments
are at risk if the business fails or leaves debts. If the company owes money, it can be sued and taken
to court, but it’s shareholders cannot. The companies have a separate legal identity from their
owners, which is why the owners have a limited liability. These companies are incorporated.
(When they’re unincorporated, shareholders have unlimited liability and don’t have a separate legal
identity from their business).

Companies also enjoys continuity, unlike partnerships and sole traders. That is, the business will
continue even if one of it’s owners retire or die.

Shareholders will elect a board of directors to manage and run the company in it’s day-to-day
activities. In small companies, the shareholders with the highest percentage of shares invested are
directors, but directors don’t have to be shareholders. The more shares a shareholder has, the more
their voting power.

These are two types of companies:

Private Limited Companies: One or more owners who can sell its’ shares to only the people known
by the existing shareholders (family and friends). Example: Ikea.

Public Limited Companies: Two or more owners who can sell its’ shares to any
individual/organization in the general public through stock exchanges (see Economics: topic 3.1 –
Money and Banking). Example: Verizon Communications.

Advantages:

Limited Liability: this is because, the company and the shareholders have separate legal
identities.

Raise huge amounts of capital: selling shares to other people (especially in Public Ltd.
Co.s), raises a huge amount of capital, which is why companies are large.

Public Ltd. Companies can advertise their shares, in the form of a prospectus, which tells
interested individuals about the business, it’s activities, profits, board of directors, shares on
sale, share prices etc. This will attract investors.

Disadvantages:

Required to disclose financial information: Sometimes, private limited companies are

required by law to publish their financial statements annually, while for public limited
companies, it is legally compulsory to publish all accounts and reports. All the writing,
printing and publishing of such details can prove to be very expensive, and other competing
companies could use it to learn the company secrets.

Private Limited Companies cannot sell shares to the public. Their shares can only be sold
to people they know with the agreement of other shareholders. Transfer of shares is
restricted here. This will raise lesser capital than Public Ltd. Companies.

Public Ltd. Companies require a lot of legal documents and investigations before it can be
listed on the stock exchange.
 Public and Private Limited Companies must also hold an Annual General Meeting (AGM),
where all shareholders are informed about the performance of the company and company
decisions, vote on strategic decisions and elect board of directors. This is very expensive to
set up, especially if there are thousands of shareholders.

Public Ltd. Companies may have managerial problems: since they are very large, they
become very difficult to manage. Communication problems may occur which will slow
down decision-making.

In Public Ltd. Companies, there may be a divorce of ownership and control: The
shareholders can lose control of the company when other large shareholders outvote them
or when board of directors control company decisions.

Franchises

The owner of a business (the franchisor) grants a licence to another person or business (the
franchisee) to use their business idea – often in a specific geographical area. Fast food companies
such as McDonald’s and Subway operate around the globe through lots of franchises in different
countries.

Advantages Disadvantages
To franchisor
Rapid, low cost method of Profits from the franchise
business expansion needs to be shared with the
Gets and income from franchisee
franchisee in the form of Loss of control over running of
franchise fees and royalties business
 Franchisee will better If one franchise fails, it can
understand the local tastes affect the reputation of the
and so can advertise and sell entire brand
appropriately
Franchisee may not be as
Can access ideas and skilled
suggestions from franchisee
Need to supply raw
Franchisee will run the material/product and provide
operations support and training

Cost of setting up business

No full control over business-
need to strictly follow
franchisor’s standards and
An established brand and
rules
trademark, so chance of
business failing is low
Profits have to be shared with
Franchisor will give technical
To franchisee franchisor
and managerial support
Need to pay franchisor
Franchisor will supply the raw
franchise fees and royalties
materials/products
Need to advertise and
promote the business in the
region themselves

Joint Ventures

Joint venture is an agreement between two or more businesses to work together on a project.
The foreign business will work with a domestic business in the same industry. Eg: Google Earth is a
joint venture/project between Google and NASA.

Advantages

Reduces risks and cuts costs

Each business brings different expertise to the joint venture

The market potential for all the businesses in the joint venture is increased

Market and product knowledge can be shared to the benefit of the businesses

Disadvantages
 Any mistakes made will reflect on all parties in the joint venture, which may damage their
reputations

The decision-making process may be ineffective due to different business culture or

different styles of leadership

Public Sector Corporations

Public sector corporations are businesses owned by the government and run by directors
appointed by the government. They usually provide essentials services like water, electricity, health
services etc. The government provides the capital to run these corporations in the form of subsidies
(grants). The UK’s National Health Service (NHS) is an example. Public corporations aim to:

- Keep prices low so everybody can afford the service.

- Keep people employed.

- Offer a service to the public everywhere.

Advantages:

Some businesses are considered too important to be owned by an individual. (electricity,

water, airline)

Other businesses, considered natural monopolies, are controlled by the government.

(electricity, water)

Reduces waste in an industry. (e.g. two railway lines in one city)

Rescue important businesses when they are failing through nationalisation

Provide essential services to the people

Drawbacks:

Motivation might not be as high because profit is not an objective

Subsidies lead to inefficiency. It is also considered unfair for private businesses

There is normally no competition to public corporations, so there is no incentive to

improve

Businesses could be run for government popularity

Business objectives and stakeholder objectives

Business objectives

Business objectives are the aims and targets that a business works towards to help it run
successfully. Although the setting of these objectives does not always guarantee the business
success, it has its benefits.

Setting objectives increases motivation as employees and managers now have clear targets
to work towards.

Decision making will be easier and less time consuming as there are set targets to base
decisions on. i.e., decisions will be taken in order to achieve business objectives.

Setting objectives reduces conflicts and helps unite the business towards reaching the
same goal.

Managers can compare the business’ performance to its objectives and make any changes
in its activities if required.

Objectives vary with different businesses due to size, sector and many other factors. However,
many business in the private sector aim to achieve the following objectives.

Survival: new or small firms usually have survival as a primary objective. Firms in a highly
competitive market will also be more concerned with survival rather than any other
objective. To achieve this, firms could decide to lower prices, which would mean forsaking
other objectives such as profit maximization.

Profit: this is the income of a business from its activities after deducting total costs. Private
sector firms usually have profit making as a primary objective. This is because profits are
required for further investment into the business as well as for the payment of return to
the shareholders/owners of the business.

Growth: once a business has passed its survival stage it will aim for growth and expansion.
This is usually measured by value of sales or output. Aiming for business growth can be
very beneficial. A larger business can ensure greater job security and salaries for
employees. The business can also benefit from higher market share and economies of scale.

Market share: this can be defined as the proportion of total market sales achieved by one
business. Increased market share can bring about many benefits to the business such as
increased customer loyalty, setting up of brand image, etc.

Service to the society: some operations in the private sectors such as social enterprises do
not aim for profits and prefer to set more economical objectives. They aim to better the
society by providing social, environmental and financial aid. They help those in need, the
underprivileged, the unemployed, the economy and the government.
A business’ objectives do not remain the same forever. As market situations change and as the
business itself develops, its objectives will change to reflect its current market and economic
position. For example, a firm facing serious economic recession could change its objective from
profit maximization to short term survival.

Stakeholders

A stakeholder is any person or group that is interested in or directly affected by the

performance or activities of a business. These stakeholder groups can be external – groups that
are outside the business or they can be internal – those groups that work for or own the business.

Internal stakeholders:

Shareholder/ Owners: these are the risk takers of the business. They invest capital into the
business to set up and expand it. These shareholders are liable to a share of the profits made by the
business.

Objectives:

Shareholders are entitled to a rate of return on the capital they have invested into the
business and will therefore have profit maximization as an objective.

Business growth will also be an important objective as this will ensure that the value of the
shares will increase.

Workers: these are the people that are employed by the business and are directly involved in its
activities.

Objectives:

Contract of employment that states all the right and responsibilities to and of the
employees.

Regular payment for the work done by the employees.

Workers will want to benefit from job satisfaction as well as motivation.

The employees will want job security– the ability to be able to work without the fear of
being dismissed or made redundant.

Managers: they are also employees but managers control the work of others. Managers are in
charge of making key business decisions.

Objectives:

Like regular employees, managers too will aim towards a secure job.

Higher salaries due to their jobs requiring more skill and effort.
 Managers will also wish for business growth as a bigger business means that managers can
control a bigger and well known business.

External Stakeholders:

Customers: they are a very important part of every business. They purchase and consume the
goods and services that the business produces/ provides. Successful businesses use market
research to find out customer preferences before producing their goods.

Objectives:

Price that reflects the quality of the good.

The products must be reliable and safe. i.e., there must not be any false advertisement of the
products.

The products must be well designed and of a perceived quality.

Government: the role of the government is to protect the workers and customers from the
business’ activities and safeguard their interests.

Objectives:

The government will want the business to grow and survive as they will bring a lot of
benefits to the economy. A successful business will help increase the total output of the
country, will improve employment as well as increase government revenue through
payment of taxes.

They will expect the firms to stay within the rules and regulations set by the government.

Banks: these banks provide financial help for the business’ operations’

Objectives:

The banks will expect the business to be able to repay the amount that has been lent along
with the interest on it. The bank will thus have business liquidity as its objective.

Community: this consists of all the stakeholder groups, especially the third parties that are affected
by the business’ activities.

Objectives:

The business must offer jobs and employ local employees.

The production process of the business must in no way harm the environment.

Products must be socially responsible and must not pose any harmful effects from
consumption.
Public- sector businesses

Government owned and controlled businesses do not have the same objectives as those in the
private sector.

Objectives:

Financial: although these businesses do not aim to maximize profits, they will have to meet
the profit target set by the government. This is so that it can be reinvested into the business
for meeting the needs of the society

Service: the main aim of this organization is to provide a service to the community that
must meet the quality target set by the government

Social: most of these social enterprises are set up in order to aid the community. This can be
by providing employment to citizens, providing good quality goods and services at an
affordable rate, etc.

They help the economy by contributing to GDP, decreasing unemployment rate and raising
living standards.

Conflicts of stakeholders’ objectives

As all stakeholders have their own aims they would like to achieve, it is natural that conflicts of
stakeholders’ interests could occur. Therefore, if a business tries to satisfy the objectives of one
stakeholder, it might mean that another stakeholders’ objectives could go unfulfilled.

For example, workers will aim towards earning higher salaries. Shareholders might not want this to
happen as paying higher salaries could mean that less profit will be left over for payment of return
to the shareholders.

Similarly, the business might want to grow by expanding operations to build new factories. But this
might conflict with the community’s want for clean and pollution-free localities.

Motivating workers

Motivation

People work for several reasons:

Have a better standard of living: by earning incomes they can satisfy their needs and wants

Be secure: having a job means they can always maintain or grow that standard of living

Gain experience and status: work allows people to get better at the job they do and earn a
reputable status in society
 Have job satisfaction: people also work for the satisfaction of having a job

Motivation is the reason why employees want to work hard and work effectively for the
business. Money is the main motivator, as explained above. Other factors that may motivate a
person to choose to do a particular job may include social needs (need to communicate and work
with others), esteem needs (to feel important, worthwhile), job satisfaction (to enjoy good work),
security (knowing that your job and pay are secure- that you will not lose your job).

Why motivate workers? When workers are well-motivated, they become highly productive
and effective in their work, become absent less often, and less likely to leave the job, thus
increasing the firm’s efficiency and output, leading to higher profits.

Motivation Theories

F. W. Taylor: Taylor based his ideas on the assumption that workers were motivated by personal
gains, mainly money and that increasing pay would increase productivity (amount of output
produced). Therefore he proposed the piece-rate system, whereby workers get paid for the number
of output they produce. So in order, to gain more money, workers would produce more. He also
suggested a scientific management in production organisation, to break down labour (essentially
division of labour) to maximise output

However, this theory is not entirely true. There are various other motivators in the modern
workplace, some even more important than money. The piece rate system is not very practical in
situations where output cannot be measured (service industries) and also will lead to (high) output
that doesn’t guarantee high quality.

Maslow’s Hierarchy: Abraham Maslow’s hierarchy of needs shows that employees are motivated
by each level of the hierarchy going from bottom to top. Mangers can identify which level their
workers are on and then take the necessary action to advance them onto the next level.
One limitation of this theory is that it doesn’t apply to every worker. For some employees, for
example, social needs aren’t important but they would be motivated by recognition and
appreciation for their work from seniors.

Herzberg’s Two-Factor Theory: Frederick Herzberg’s two-factor theory, wherein he states that
people have two sets of needs:

Basic animal needs called ‘hygiene factors’: status, security, work conditions, company policies
and administration, relationship with superiors, relationship with subordinates, salary

Needs that allow the human being to grow psychologically, called the ‘motivators’:
achievement, recognition, personal growth/development, promotion, work itself

According to Herzberg, the hygiene factors need to be satisfied, if not they will act as de-motivators
to the workers. However hygiene factors don’t act as motivators as their effect quickly wear off.
Motivators will truly motivate workers to work more effectively.

Motivating Factors

Financial Motivators

Wages: often paid weekly. They can be calculated in two ways:

Time-Rate: pay based on the number of hours worked. Although output may increase, it
doesn’t mean that workers will work sincerely use the time to produce more- they may
simply waste time on very few output since their pay is based only on how long they work.
The productive and unproductive worker will get paid the same amount, irrespective of
their output.

Piece-Rate: pay based on the no. of output produced. Same as time-rate, this doesn’t
ensure that quality output is produced. Thus, efficient workers may feel demotivated as
they’re getting the same pay as inefficient workers, despite their efficiency.

Salary: paid monthly or annually.

Commission: paid to salesperson, based on a percentage of sales they’ve made. The higher the
sales, the more the pay. Although this will encourage salespersons to sell more products and
increase profits, it can be very stressful for them because no sales made means no pay at all.

Bonus: additional amount paid to workers for good work

Performance-related pay: paid based on performance. An appraisal (assessing the effectiveness of

an employee by senior management through interviews, observations, comments from colleagues
etc.) is used to measure this performance and a pay is given based on this.

Profit-sharing: a scheme whereby a proportion of the company’s profits is distributed to workers.

Workers will be motivated to work better so that a higher profit is made.
Share ownership: shares in the firm are given to employees so that they can become part owners
of the company. This will increase employees’ loyalty to the company, as they feel a sense of
belonging.

Non-Financial Motivators

Fringe benefits are non-financial rewards given to employees: company vehicle/car, free
healthcare, children’s education fees paid for, free accommodation, free holidays/trips, discounts
on the firm’s products

Job Satisfaction: the enjoyment derived from the feeling that you’ve done a good job. Employees
have different ideas about what motivates them- it could be pay, promotional opportunities, team
involvement, relationship with superiors, level of responsibility, chances for training, the working
hours, status of the job etc. Responsibility, recognition and satisfaction are in particular very
important.

Job Rotation: involves workers swapping around jobs and doing each specific task for
only a limited time and then changing round again. This increases the variety in the work
itself and will also make it easier for managers to move around workers to do other jobs if
somebody is ill or absent. The tasks themselves are not made more interesting, but the
switching of tasks may avoid boredom among workers. This is very common in factories
with a huge production line where workers will move from retrieving products from the
machine to labelling the products to packing the products to putting the products into huge
cartons.

Job Enlargement: where extra tasks of similar level of work are added to a worker’s job
description. These extra tasks will not add greater responsibility or work for the employee,
but make work more interesting. E.g.: a worker hired to stock shelves will now, as a result of
job enlargement, arrange stock on shelves, label stock, fetch stock etc.

Job Enrichment: involves adding tasks that require more skill and responsibility to a job.
This gives employees a sense of trust from senior management and motivate them to carry
out the extra tasks effectively. Some additional training may also be given to the employee
to do so. E.g.: a receptionist employed to welcome customers will now, as a result of job
enrichment, deal with telephone enquiries, word-process letters etc.

Team-working: a group of workers is given responsibility for a particular process, product

or development. They can decide as a team how to organize and carry out the tasks. The
workers take part in decision making and take responsibility for the process. It gives them
more control over their work and thus a sense of commitment, increasing job satisfaction.
Working as a group will also add to morale, fulfill social needs and lead to job satisfaction.

Opportunities for training: providing training will make workers feel that their work is
being valued. Training also provides them opportunities for personal growth and
development, thereby attaining job satisfaction
 Opportunities of promotion: providing opportunities for promotion will get workers to
work more efficiently and fill them with a sense of self-actualisation and job satisfaction

Organization and management

Organization structure

Organizational structure refers to the levels of management and division of responsibilities

within a business. They can be represented on organizational charts (left).

Advantages:

All employees are aware of which communication channel is used to reach them with
messages

Everyone knows their position in the business. They know who they are accountable to and
who they are accountable for

It shows the links and relationship between the different departments

Gives everyone a sense of belonging as they appear on the organizational chart

The span of control is the number of subordinates working directly under a manager in the
organizational structure.
The chain of command is the structure of an organization that allows instructions to be passed on
from senior managers to lower levels of management. In the above figure, there is a short chain
of command since there are only four levels of management shown.

 The wider the span of control the shorter the chain of command since more people will
appear horizontally aligned on the chart than vertically. A short span of control often leads to long
chain of command.

Advantages of a short chain of command (these are also the disadvantages of a long chain of
command):

Communication is quicker and more accurate

Top managers are less remote from lower employees, so employees will be more
motivated and top managers can always stay in touch with the employees

Spans of control will be wider, This means managers have more people to control This is
beneficial because it will encourage them to delegate responsibility (give work to
subordinates) and so the subordinates will be more motivated and feel trusted. However
there is the risk that managers may lose control over the tasks.

Line Managers have authority over people directly below them in the organizational structure.
Traditional marketing/operations/sales managers are good examples.

Staff Managers are specialists who provide support, information and assistance to line managers.
The IT department manager in most organisations act as staff managers.

Management

Roles of manager:

Planning: setting aims and targets for the organisations/department to achieve. It will give the
department and it’s employees a clear sense of purpose and direction. Managers should also plan
for resources required to achieve these targets

Organizing: managers should then organize the resources. This will include allocating
responsibilities to employees, possibly delegating.

Coordinating: managers should ensure that each department is coordinating with one another
to achieve the organization’s aims. This will involve effective communication between departments
and managers and decision making. They need to come together regularly and make decisions that
will help achieve each department’s aims as well as the organization’s.

Commanding: managers need to guide, lead and supervise their employees in the tasks they do
and make sure they are keeping to their deadlines and achieving targets.
Controlling: managers must try to assess and evaluate the performance of each of their
employees. If some employees fail to achieve their target, the manager must see why it has
occurred and what he can do to correct it- maybe some training will be required or better
equipment.

Delegation is giving a subordinate the authority to perform some tasks.

Advantages to managers:

Managers cannot do all work by themselves

Managers can measure the efficiency and effectiveness of their subordinates’ work

However, managers may be reluctant to delegate as they may lose their control over the work.

Advantages to subordinates:

The work becomes more interesting and rewarding- increased job satisfaction

Employees feel more important and feel trusted– increasing loyalty to firm

Can act as a method of training and opportunities for promotions, if they do a good job.

Leadership Styles

Leaderships styles refer to the different approaches used when dealing with people when in a
position of authority. There are mainly three styles you need to learn: the autocratic, democratic
and laissez-faire styles.

Autocratic style is where the managers expects to be in charge of the business and have their
orders followed. They do all the decision-making, not involving employees at all. Communication is
thus, mainly one way- from top to bottom. This is standard in police and armed forces
organizations.

Democratic style is where managers involve employees in the decision-making and

communication is two-way from top to
bottom as well as bottom to top.
Information about future plans is openly
communicated and discussed with
employees and a final decision is made by
the manager.

Laissez-faire style makes the broad

objectives of the business known to
employees and leaves them to do their
own decision-making and organize tasks.
Communication is rather difficult since a clear direction is not given. The manger has a very limited
role to play.

Trade Unions

A trade union is a group of workers who have joined together to ensure their interest are
protected. They negotiate with the employer (firm) for better conditions and treatment and can
threaten to take industrial action if their requests are denied. Industrial action can include overtime
ban (refusing to work overtime), go slow (working at the slowest speed as is required by the
employment contract), strike (refusing to work at all and protesting instead) etc. Trade unions can
also seek to put forward their views to the media and influence government decisions relating to
employment.

Benefits to workers of joining a trade union:

Strength in number- a sense of belonging and unity

Improved conditions of employment, for example, better pay, holidays, hours of work etc

Improved working conditions, foe example, health and safety

Improved benefits for workers who are not working, because they’re sick, retired or made
redundant (dismissed not because of any fault of their own)

Financial support if a member thinks he/she has been unfairly dismissed or treated

Benefits that have been negotiated for union member such as discounts on firm’s products,
provision of health services.

Disadvantages to workers of joining a trade unions:

Costs money to be member- a membership fee will be required

May be asked to take industrial action even if they don’t agree with the union- they may not
get paid during a strike, for example.

Recruitment, selection, and training of workers

The Role of the H.R. (Human Resource) Department

Recruitment and selection: attracting and selecting the best candidates for job posts

Wages and salaries: set wages and salaries that attract and retain employees as well as motivate
them

Industrial relations: there must be effective communication between management and workforce
to solve complaints and disputes as well as discussing ideas and suggestions

Training programmes: give employees training to increase their productivity and efficiency
Health and safety: all laws on health and safety conditions in the workplace should be adhered to

Redundancy and dismissal: the managers should dismiss any unsatisfactory/misbehaving

employees and make them redundant if they are no longer needed by the business.

Recruitment

Job Analysis, Description and Specification

Recruitment is the process from identifying that the business needs to employ someone up to the
point where applications have arrived at the business.

A vacancy arises when an employee resigns from a job or is dismissed by the management. When a
vacancy arises, a job analysis has to be prepared. A job analysis identifies and records the tasks
and responsibilities relating to the job. It will tell the managers what the job post is for.

Then a job description is prepared that outlines the responsibilities and duties to be carried
out by someone employed to do the job. It will have information about the conditions of
employment (salary, working hours, and pension scheme), training offered, opportunities for
promotion etc. This is given to all prospective candidates so they know what exactly they will be
required and expected to do.

Once this has been done, the H.R. department will draw up a job specification, a document that
outlines the requirements, qualifications, expertise, skills, physical/personal characteristics
etc. required by an employee to be able to take up the job.

Advertising the vacancy

Internal recruitment is when a vacancy is filled by an existing employee of the business.

Advantages:
 Saves time and money- no need for advertising and interviewing

Person already known to business

Person knows business’ ways of working

Motivating for other employees to see their colleagues being promoted- urging them to
work hard

Disadvantages:

No new skills and experience coming into the business

Jealousy among workers

External recruitment is when a vacancy is filled by someone who is not an existing employee
and will be new to the business. External recruitment needs to be advertised, which can be done in
local/national newspapers, specialist magazines and journals, job centres run by the government
or even recruitment agencies (who will recruit and send along candidates to the company when
they request it).

When advertising a job, the business needs to decide what should be included in the advertisement,
where it should be advertised, how much it will cost and whether it will be cost-effective.

When a person is interested in a job, they should apply for it by sending in a curriculum vitae (CV)
or resume, this will detail the person’s qualifications, experience, qualities and skills. The business
will use these to see which candidates match the job specification. It will also include statements of
why the candidate wants the job and why he/she feels they would be suitable for the job.

Selection

Applicants who are shortlisted will be interviewed by the H.R. manager. They will also call up the
referee provided by the applicant (a referee could be the previous employer or colleagues who can
give a confidential opinion about the applicant’s reliability, honesty and suitability for the job).
Interviews will allow the manager to assess:

The applicant’s ability to do the job

Personal qualities of the applicant

Character and personality of applicant

In addition to interviews, firms can conduct certain tests to select the best candidate. This could
include skills tests, aptitude tests (candidate’s potential to gain additional skills), personality tests,
group situation tests (how they manage and work in teams) etc.

When a successful candidate has been selected the others must be sent a letter of rejection.
The contract of employment: a legal agreement between the employer and the employee listing the
rights and responsibilities of workers. It will include: the name of employer and employee, job title,
date when employment will begin, hours to work, rate of pay and other benefits, when payment is
made, holiday entitlement, the amount of notice to be given to terminate the employment that the
employer or employee must give to end the employment etc.

Employment contracts can be part-time or full-time. Part-time employment is often considered to

be between 1 and 30-35 hours a week whereas full-time employment will usually work 35 hours
or more a week.

Advantages to employer of part-time employment (disadvantages of full-time employment to

employer):

More flexible hours of work

Easier to ask employees just to work at busy times

Easier to extend business opening/operating hours by working evenings or at weekends

Works lesser hours so employee is willing to accept lower pay

Less expensive than employing and paying full-time workers.

Disadvantages to employer of part-time employment (advantages of full-time employment to

employers)

Less likely to be trained because the workers see the job as temporary

Takes longer to recruit two part-time workers than one full-time worker

Can be less committed to the business/ more likely to leave and go get another job

Less likely to be promoted because they will not have gained the skills and experience as
full-time employees

More difficult to communicate with part-time workers when they are not in work- all work
at different times.

Training

Training is important to a business as it will improve the worker’s skills and knowledge and help
the business be more efficient and productive, especially when new processes and products are
introduced. It will improve the workers’ chances at getting promoted and raise their morale.

The three types of training are:

Induction training: an introduction given to a new employee, explaining the firm’s activities,
customs and procedures and introducing them to their fellow workers.
Advantages:

Helps new employees to settle into their job quickly

May be a legal requirement to give health and safety training before the start of work

Less likely to make mistakes

Disadvantages:

Time-consuming

Wages still have to be paid during training, even though they aren’t working

Delays the state of the employee starting the job

On-the-job training: occurs by watching a more experienced worker doing the job

Advantages:

It ensures there is some production from worker whilst they are training

It usually costs less than off-the-job training

It is training to the specific needs of the business

Disadvantages:

The trainer will lose some production time as they are taking some time to teach the new
employee

The trainer may have bad habits that can be passed onto the trainee

It may not necessarily be recognised training qualifications outside the business

Off-the-job training: involves being trained away from the workplace, usually by specialist
trainers

Advantages:

A broad range of skills can be taught using these techniques

Employees may be taught a variety of skills and they may become multi-skilled that can
allow them to do various jobs in the company when the need arises.

Disadvantages:

Costs are high

It means wages are paid but no work is being done by the worker
 The additional qualifications means it is easier for the employee to leave and find another
job

Workforce Planning

Workforce Planning: the establishing of the workforce needed by the business for the foreseeable
future in terms of the number and skills of employees required.

They may have to downsize (reduce the no. of employees) the workforce because of:

Introduction of automation

Falling demand for their products

Factory/shop/office closure

Relocating factory abroad

A business has merged or been taken over and some jobs are no longer needed

They can downsize the workforce in two ways:

Dismissal: where a worker is told to leave their job because their work or behaviour is
unsatisfactory.

Redundancy: when an employee is no longer needed and so loses their work, through not
due to any fault of theirs. They may be given some money as compensation for the
redundancy.

Worker could also resign (they are leaving because they have found another job) and retire (they
are getting old and want to stop working).

Legal Controls over Employment Issues

There are lot so government laws that affect equal employment opportunities. These laws require
businesses to treat their employees equally in the workplace and when being recruited and
selected- there should be no discrimination based on age, gender, religion, race etc.

Employees are protected in many areas including

Against unfair discrimination

Health and safety at work (protection from dangerous machinery, safety clothing and
equipment, hygiene conditions, medical aid etc.)

Against unfair dismissal

Wage protection (through the contract of employment since it will have listed the pay and
conditions). Many countries have a legal minimum wage– the minimum wage an employer
 has to pay its employee. This avoids employers from exploiting its employees, and
encourages more people to find work, but since costs are rising for the business, they may
make many workers redundant- unemployment will rise.

An industrial tribunal is a legal meeting which considers workers’ complaints of unfair dismissal
or discrimination at work. This will hear both sides of the case and may give the worker
compensation if the dismissal was unfair.

Internal and external communication

Effective Communication

Communication is the transferring of a message from the sender to the receiver, who
understands the message.

Internal communication is between two members of the same organisations. Example:

communication between departments, notices and circulars to workers, signboards and labels
inside factories and offices etc.

External communication is between the organisation and other organisations or individuals.

Example: orders of goods to suppliers, advertising of products, sending customers messages about
delivery, offers etc.

Effective communication involves:

A transmitter/sender of the message

A medium of communication eg: letter, telephone conversation, text message

A receiver of the message

A feedback/response from the receiver to confirm that the message has benn received and
acknowledged.

One-way communication involves a message which does not require a feedback. Example: signs
saying ‘no smoking’ or an instruction saying ‘deliver these goods to a customer’

Two-way communication is when the receiver gives a response to the message received. Example:
a letter from one manager to another about an important matter that needs to be discussed. A two-
way communication ensures that the person receiving the message understands it and has acted up
on it. It also makes the receiver feel more a part of the process- could be a way of motivating
employees.

Downward communication: messages from managers to subordinates i.e. from top to bottom of an
organization structure.

Upward communication: messages/feedback from subordinates to managers i.e. from bottom to

top of an organization structure
Horizontal communication occurs between people on the same level of an organization structure.

Communication Methods

Verbal methods (eg: telephone conversation, face-to-face conversation, video conferencing,

meetings)

Advantages:

Quick and efficient

There is an opportunity for immediate feedback

Speaker can reinforce the message- change his tone, body language etc. to influence the
listeners.

Disadvantages:

Can take long if there is feedback and therefore, discussions

In a meeting, it cannot be guaranteed that everybody is listening or has understood the

message

No written record of the message can be kept for later reference.

Written methods (eg: letters, memos, text-messages, reports, e-mail, social media, faxes, notices,
signboards)

Advantages:

There is evidence of the message for later reference.

Can include details

Can be copied and sent to many people, especially with e-mail

E-mail and fax is quick and cheap

Disadvantages:

Direct feedback may not always be possible

Cannot ensure that message has been received and/or acknowledged

Language could be difficult to understand.

Long messages may cause disinterest in receivers

No opportunity for body language to be used to reinforce messages

Visual Methods (eg: diagrams, charts, videos, presentations, photographs, cartoons, posters)

Advantages:

Can present information in an appealing and attractive way

Can be used along with written material (eg: reports with diagrams and charts)

Disadvantages:

No feedback

May not be understood/ interpreted properly.

Factors that affect the choice of an appropriate communication method:

- Speed: if the receiver has to get the information quickly, then a telephone call or text message has
to be sent. If speed isn’t important, a letter or e-mail will be more appropriate.

- Cost: if the company wishes to keep costs down, it may choose to use letters or face-to-face
meetings as a medium of communication. Otherwise, telephone, posters etc. will be used.

- Message details: if the message is very detailed, then written and visual methods will be used.

- Leadership style: a democratic style would use two-way communication methods such as verbal
mediums. An autocratic one would use notices and announcements.

- The receiver: if there is only receiver, then a personal face-to-face or telephone call will be more
apt. If all the staff is to be sent a message, a notice or e-mail will be sent.

- Importance of a written record: if the message is one that needs to have a written record like a
legal document or receipts of new customer orders, then written methods will be used.

- Importance of feedback: if feedback is important, like for a quick query, then a direct verbal or
written method will have to be used.

Formal communication is when messages are sent through established channels using
professional language. Eg: reports, emails, memos, official meetings.

Informal communication is when information is sent and received casually with the use of
everyday language. Eg: staff briefings. Managers can sometimes use the ‘grapevine’ (informal
communication among employees- usually where rumours and gossips spread!) to test out the
reactions to new ideas (for example, a new shift system at a factory) before officially deciding
whether or not to make it official.

Communication Barriers

Communication barriers are factors that stop effective communication of messages.

Marketing, competition and the customer

A market consists of all buyers and sellers of a particular good.

What is marketing?

By definition, marketing is the management process responsible for identifying, anticipating and
satisfying consumers’ requirements profitably.

The role of marketing in a business is as follows:

Identifying customer needs through market research

Satisfying customer needs by producing and selling goods and services

 Maintaining customer loyalty: building customer relationships through a variety of
methods that encourage customers to keep buying one firm’s products instead of their
rivals’. For example, loyalty card schemes, discounts for continuous purchases, after-sales
services, messages that inform past customers of new products and offers etc.

Gain information on customers: by understanding why customers buy their products, a

firm can develop and sell better products in the future

Anticipate changes in customer needs: the business will need to keep looking for any
changes in customer spending patterns and see if they can produce goods that customers
want that are not currently available in the market.

Some objectives the marketing department in a firm may have:

Raise awareness of their product(s)

Increase sales revenue and profits

Increase or maintain market share (this is the proportion of sales a company has in the
overall market sales. Company sale/total sale * 100)

Enter new markets at home or abroad

Develop new products or improve existing products.

Market Changes

Why customer spending patterns may change:

Change in their tastes and preferences

Change in technology: as new technology becomes available, the old versions of products
become outdated and people want more sophisticated features on products

Change in income: the higher the income, the more expensive goods consumers will buy
and vice versa

Ageing population: in many countries, the proportion of older people is increasing and so
demand for products for seniors are increasing (such as anti-ageing creams, medical
assistance etc.)

The power and importance of changing customer needs:

Firms need to always know what their consumers want (and they will need to undertake lots of
research and development to do so) in order to stay ahead of competitors and stay profitable. If
they don’t produce and sell what customers want, they will buy competitors’ products and the firm
will fail to survive.

Why some markets have become more competitive:

Globalization: products are being sold in markets all over the world, so there are more competitors
in the market

Improvement in transportation infrastructures: better transport systems means that it is easier

and cheaper to distribute and sell products everywhere

Internet/E-Commerce: customers can now buy products over the internet form anywhere in the
world, making the market more competitive

How business can respond to changing spending patterns and increased competition:

A business has to ensure that it maintains its market share and remains competitive in the market.
It can ensure this by:

Maintaining good customer relationships: by ensuring that customers keep buying from
their business only, they can keep up their market share. By doing so, they can also get
information about their spending patterns and respond to their wants and needs to increase
market share

Keep improving its existing products, so that sales is maintained.

Introduce new products to keep customers coming back, and drive them away from
competitors’ products

Keep costs low to maintain profitability: low costs means the firm can afford to charge low
prices. And low prices generally means more demand and sales, and thus market share.

Niche & Mass Marketing

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

Advantages:

Small firms can thrive in niche markets where large forms have not yet been established

If there are no or very few competitors, firms can sell products at a high price and gain
high profit margins because customers will be willing be willing to pay more for exclusive
products

Firms can focus on the needs of just one customer group, thereby giving them an
advantage over large firms who only sell to the mass market

Limitations:

Lack of economies of scale (can’t benefit from the lower costs that arise from a larger
operations/market)
 Risk of over-dependence on a single product or market: if the demand for the product
falls, the firm won’t have a mass product they can fall back on

Likely to attract competition if successful

Mass Marketing: selling the same product to the whole market with no attempt to target groups
with in it. For example, the iPhone sold is the same everywhere, there are no variations in design
over location or income.

Advantages:

Larger amount of sales when compared to a niche market

Can benefit from economies of scale: a large volume of products are produced and so the
average costs will be low when compared to a niche market

Risks are spread, unlike in a niche market. If the product isn’t successful in one market, it’s
fine as there are several other markets

More chances for the business to grow since there is a large market. In niche markets, this is
difficult as the product is only targeted towards a particular group.

Limitations:

They will have to face more competition

Can’t charge a higher price than competition because they’re all selling similar products

Market Segmentation

A market segment is an identifiable sub-group of a larger market in which consumers have similar
characteristics and preferences

Market segmentation is the process of dividing a market of potential customers into groups, or
segments, based on different characteristics. For example, PepsiCo identified the health-conscious
market segment and targeted/marketed the Diet Coke towards them.

Markets can be segmented on the basis of socio-economic groups (income), age, location, gender,
lifestyle, use of the product (home/ work/ leisure/ business) etc and each segment will require
different methods of promotion and distribution.

Advantages:

Makes marketing cost-effective, as it only targets a specific segment and meets their needs.

The above leads to higher sales and profitability

Increased opportunities to increase sales

Market research

Product-oriented business: such firms produce the product first and then tries to find a market for
it. Their concentration is on the product – its quality and price. Firms producing electrical and
digital goods such as refrigerators and computers are examples of product-oriented businesses.

Market-oriented businesses: such firms will conduct market research to see what consumers want
and then produce goods and services to satisfy them. They will set a marketing budget and
undertake the different methods of researching consumer tastes and spending patterns, as well as
market conditions. Example, mobile phone markets.

Market research is the process of collecting, analysing and interpreting information about a
product.

Why is market research important/needed?

Ensure that they are producing goods and services that will sell successfully in the market and
generate profits. If they don’t, they could lose a lot of money and fail to survive. Market research
will answer a lot of the business’s questions prior to product development such as ‘will customers
be willing to buy this product?’, ‘what is the biggest factor that influences customers’ buying
preferences- price or quality?’, ‘what is the competition in the market like?’ and so on.

Market research data can be quantitative (numerical-what percentage of teenagers in the city have
internet access) or qualitative (opinion/ judgement- why do more women buy the company’s
product than men?)

Market research methods can be categorized into two: primary and secondary market research.

Primary Market Research (Field Research)

The collection of original data. It involves directly collecting information from existing or potential
customers. First-hand data is collected by people who want to use the data (i.e. the firm). Examples
of primary market research methods include questionnaires, focus groups, interviews, observation,
and online surveys and so on.

The process of primary research:

1. Establish the purpose of the market research

2. Decide on the most suitable market research method
3. Decide the size of the sample (customers to conduct research on) and identify the
sample
4. Carry out the research
5. Collate and analyse the data
6. Produce a report of the findings

Sample is a subset of a population that is used to represent the entire group as a whole. When
doing research, it is often impractical to survey every member of a particular population because
the number of people is simply too large. Selecting a sample is called sampling. A random
sampling occurs when people are selected at random for research, while quota sampling is when
people are selected on the basis of certain characteristics (age, gender, location etc.) for research.

Methods of primary research

Questionnaires: Can be done face-to-face, through telephone, post or the internet. Online surveys
can also be conducted whereby researchers will email the sample members to go onto a particular
website and fill out a questionnaire posted there. These questions need to be unbiased, clear and
easy to answer to ensure that reliable and accurate answers are logged in.

Advantages:

Detailed information can be collected

Customer’s opinions about the product can be obtained

Online surveys will be cheaper and easier to collate and analyse

Can be linked to prize draws and prize draw websites to encourage customers to fill out
surveys

Disadvantages:

If questions are not clear or are misleading, then unreliable answers will be given

Time-consuming and expensive to carry out research, collate and analyse them.

Interviews: interviewer will have ready-made questions for the interviewee.

Advantages:

Interviewer is able to explain questions that the interviewee doesn’t understand and can
also ask follow-up questions

Can gather detailed responses and interpret body-language, allowing interviewer to come
to accurate conclusions about the customer’s opinions.

Disadvantages:

The interviewer could lead and influence the interviewee to answer a certain way. For
example, by rephrasing a question such as ‘Would you buy this product’ to ‘But, you would
definitely buy this product, right?’ to which the customer in order to appear polite would
say yes when in actuality they wouldn’t buy the product.

Time-consuming and expensive to interview everyone in the sample

Focus Groups: A group of people representative of the target market (a focus group) agree to
provide information about a particular product or general spending patterns over time. They can
also test the company’s products and give opinions on them.

Advantage:

They can provide detailed information about the consumer’s opinions

Disadvantages:

Time-consuming

Expensive

Opinions could be influenced by others in the group.

Observation: This can take the form of recording (eg: meters fitted to TV screens to see what
channels are being watched), watching (eg: counting how many people enter a shop), auditing (e.g.:
counting of stock in shops to see which products sold well).

Advantage:

Inexpensive

Disadvantage:

Only gives basic figures. Does not tell the firm why consumer buys them.

Secondary Market Research (Desk Research)

The collection of information that has already been made available by others. Second-hand data
about consumers and markets is collected from already published sources.

Internal sources of information:

Sales department’s sales records, pricing data, customer records, sales reports

Opinions of distributors and public relations officers

Finance department

Customer Services department

External sources of information:

Government statistics: will have information about populations and age structures in the
economy.

Newspapers: articles about economic conditions and forecast spending patterns.

 Trade associations: if there is a trade association for a particular industry, it will have
several reports on that industry’s markets.

Market research agencies: these agencies carry out market research on behalf of the
company and provide detailed reports.

Internet: will have a wide range of articles about companies, government statistics,
newspapers and blogs.

Accuracy of Market Research Data

The reliability and accuracy of market research depends upon a large number of factors:

How carefully the sample was drawn up, its size, the types of people selected etc.

How questions were phrased in questionnaires and surveys

Who carried out the research: secondary research is likely to be less reliable since it was
drawn up by others for different purpose at an earlier time.

Bias: newspaper articles are often biased and may leave out crucial information
deliberately.

Age of information: researched data shouldn’t be too outdated. Customer tastes, fashions,
economic conditions, technology all move fast and the old data will be of no use now.

Presentation of Data from Market Research

Different data handling methods can be used to present data from market research. This will
include:

Tally Tables: used to record data in its original form. The tally table below shows the
number and type of vehicles passing by a shop at different times of the day:

Charts: show the total figures for each piece of data (bar/ column charts) or the proportion
of each piece of data in terms of the total number (pie charts). For example the above tally
table data can be recorded in a bar chart as shown below:
 Graphs: used to show the relationship between two sets of data. For example how average
temperature varied across the year.

Marketing mix

Marketing mix refers to the different elements involved in the marketing of a good or service- the 4
P’s- Product, Price, Promotion and Place.
Product

Product is the good or service being produced and sold in the market. This includes all the
features of the product as well as its final packaging.

Types of products include: consumer goods, consumer services, producer goods, producer services.

What makes a successful product?

It satisfies existing needs and wants of the customers

It is able to stimulate new wants from the consumers

Its design – performance, reliability, quality etc. should all be consistent with the product’s
brand image

It is distinctive from its competitors and stands out

It is not too expensive to produce, and the price will be able to cover the costs

New Product Development: development of a new product by a business. The process:

1. Generate ideas: the firm brainstorms new product concepts, using customer
suggestions, competitors’ products, employees’ ideas, sales department data and the
information provided by the research and development department
2. Select the best ideas for further research: the firm decides which ideas to abandon and
which to research further. If the product is too costly or may not sell well, it will be
abandoned
3. Decide if the firm will be able to sell enough units for the product to be a success: this
research includes looking into forecast sales, size of market share, cost-benefit analysis
etc. for each product idea, undertaken by the marketing department
4. Develop a prototype: by making a prototype of the new product, the operations
department can see how the product can be manufactured, any problems arising from it
and how to fix them. Computer simulations are usually used to produce 3D prototypes
on screen
5. Test launch: the developed product is sold to one section of the market to see how well
it sells, before producing more, and to identify what changes need to be made to
increase sales. Today a lot of digital products like apps and software run beta versions,
which is basically a market test
6. Full launch of the product: the product is launched to the entire market

Advantages:

Can create a Unique Selling Point (USP) by developing a new innovative product for the
first time in the market. This USP can be used to charge a high price for the product as well
as be used in advertising.
 Charge higher prices for new products (price skimming as explained later)

Increase potential sales, revenue and profit

Helps spreads risks because having more products mean that even if one fails, the other will
keep generating a profit for the company

Disadvantages:

Market research is expensive and time consuming

Investment can be very expensive

Why is brand image important?

Brand image is an identity given to a product that differentiates it from competitors’ products.

Brand loyalty is the tendency of customers to keep buying the same brand continuously instead
of switching over to competitors’ products.

Consumers recognize the firm’s product more easily when looking at similar products-
helps differentiate the company’s product from another.

Their product can be charged higher than less well-known brands – easier to charge high
prices because customers will buy it nonetheless.

Easier to launch new products into the market if the brand image is already established.
Apple is one such company- their brand image is so reputed that new products that they
launch now become an immediate success.

Why is packaging important?

It protects the product

It provide information about the product (its ingredients, price, manufacturing and expiry
dates etc.)

To help consumers recognize the product (the brand name and logo on the packaging will
help identify what product it is)

It keeps the product fresh

Product Life Cycle (PLC)

The product life cycle refers to the stages a product goes through from it’s introduction to it’s

retirement in terms of sales.

At these different stages, the product will need different marketing decisions/strategies in terms of
the 4Ps.
Extension strategies: marketing techniques used to extend the maturity stage of a product (to keep
the product in the market):

Finding new markets for the product

Finding new uses for the product

Redesigning the product or the packaging to improve its appeal to consumers

Increasing advertising and other promotional activities

Price

Price is the amount of money producers are willing to sell or consumer are willing to buy the
product for.

Different methods of pricing:

Market skimming: Setting a high price for a new product that is unique or very different from
other products on the market.

Advantages:

Profit earned is very high

Helps recover/compensate research and development costs

Disadvantage:

It may backfire if competitors produce similar products at a lower price

Penetration pricing: Setting a very low price to attract customers to buy a new product

Advantages:

Attracts customers more quickly

Can increase market share quickly

Disadvantages:

Low revenue due to lower prices

Cannot recover development costs quickly

Competitive pricing: Setting a price similar to that of competitors’ products which are already
available in the market

Advantage:

Business can compete on other matters such as service and quality

 Disadvantage:

Still need to find ways of competing to attract sales.

Cost plus pricing: Setting price by adding a fixed amount to the cost of making the product

Advantages:

Quick and easy to work out the price

Makes sure that the price covers all of the costs

Disadvantage:

Price might be set higher than competitors or more than customers are willing to pay,
which reduces sales and profits

Loss leader pricing/Promotional pricing: Setting the price of a few products at below cost to
attract customers into the shop in the hope that they will buy other products as well

Advantages:

Helps to sell off unwanted stock before it becomes out of date

A good way of increasing short term sales and market share

Disadvantage:

Revenue on each item is lower so profits may also be lower

Factors that affect what pricing method should be used:

Is it a new or existing product?

If it’s new, then price skimming or penetration pricing will be most suitable. If it’s an
existing product, competitive pricing or promotional pricing will be appropriate.

Is the product unique?

If yes, then price skimming will be beneficial, otherwise competitive or promotional pricing.

Is there a lot of competition in the market?

If yes, competitive pricing will need to be used.

Does the business have a well-known brand image?

If yes, price skimming will be highly successful.

What are the costs of producing and supplying the product?

 If there are high costs, costs plus pricing will be needed to cover the costs. If costs are low,
market penetration and promotional pricing will be appropriate.

What are the marketing objectives of the business?

If the business objective is to quickly gain a market share and customer base, then
penetration pricing could be used. If the objective is to simply maintain sales, competitive
pricing will be appropriate.

Price Elasticity

The PED of a product refers to the responsiveness of the quantity demanded for it to changes in
its price.

PED (of a product) = % change in quantity demanded / % change in price

When the PED is >1, that is there is a higher % change in demand in response to a change in price,
the PED is said to be elastic.

When the PED is <1, that is there is a lower % change in demand in response to a change in price,
the PED is said to be inelastic.

Producers can calculate the PED of their product and take suitable action to make the product more
profitable.

If the product is found to have an elastic demand, the producer can lower prices to increase
profitability. The law of demand states that a fall in price increases the demand. And since it is an
elastic product (change in demand is higher than change in price), the demand of the product will
increase highly. The producers get more profit.

If the product is found to have an inelastic demand, the producer can raise prices to increase
profitability. Since quantity demanded wouldn’t fall much as it is inelastic, the high prices will
make way for higher revenue and thus higher profits.

Place

Place refers to how the product is distributed from the producer to the final consumer. There are
different distribution channels that a product can be sold through.

Distribution
Explanation Advantages Disadvantages
channel
Manufacturer to The product is sold to the – All of the profit is – Delivery costs may
consumer consumer straight from the earned by the be high if there are
manufacturer. producer customers over a wide
– The producer area
controls all parts of – All storage costs
the marketing mix must be paid for by
– Quickest method of the producer
 – All promotional
activities must be
getting the product to
carried out and
the consumer
financed by the
producer
– The retailer takes
– The cost of holding
some of the profit
inventories of the
The manufacturer will sell from the producer
product is paid by the
its products to a retailer – The producer loses
retailer
(who will have stocks of some control of the
Manufacturer to – The retailer will pay
products from other marketing mix
retailer to for advertising and
manufacturers as well) who – The producer must
consumer other promotional
will then sell them to pay for delivery for
activities
customers who visit the the retailers
– Retailers are more
shop. – Retailers usually sell
conveniently located
competitors’ products
for consumers
as well

The manufacturer will sell

large volumes of its
– Wholesalers will – Another middleman
products to a wholesaler
advertise and is added so more
Manufacturer to (wholesalers will have
promote the product profit is taken away
wholesaler to stocks from different
to retailers from the producer
retailer to manufacturers). Retailer
– Wholesalers pay for – The producer loses
consumer will buy small quantities of
transport and storage even more control of
the product from the
costs the marketing mix
wholesaler and sell it to the
consumers.

The manufacturer will sell

their products to an agent
who has specialized
information about the
market and will know the
Manufacturer to
best wholesalers to sell – Another middleman
agent to – The agent has
them to. This is common is added so even more
wholesaler to specialised knowledge
when firms are exporting profit is taken away
retailer to of the market
their products to a foreign from the producer
consumer
country. They will need a
knowledgeable agent to
take care of the products’
distribution in another
country

What affects place decisions?

The type of product it is: if it’s sold to producers of other goods, distribution would either be direct
(specialist machinery) or wholesaler (nuts, bolts, screws etc.).

The technicality of the product: as lots of technical information needs to be passed to the
customer, direct selling is usually preferred.

How often the product is purchased: if the product is bought on a daily basis, it should be sold
through retail stores that customers can easily access.

The price of the product: if the products is an expensive, luxury good, it would only be sold
through a few specialist, high-end outlets For example, luxury watches and jewellery.

The durability of the product: if it’s an easily perishable product like fruits, it will need to be sold
through a wide amount of retailers to be sold quickly.

Location of customers: the products should be easily accessible by its customers. If customers are
located over the world, e-commerce (explained below) will be required.

Where competitors sell their product: in order to directly compete with competitors, the products
need to be sold where competitors are selling too.

Promotion

Promotion: marketing activities used to communicate with customers and potential customers to
inform and persuade them to buy a business’s products.

Aims of promotion:

Inform customers about a new product

Persuade customers to buy the product

Create a brand image

Increase sales and market share

Types of promotion

Advertising: Paid-for communication with consumers which uses printed and visual media like
television, radio, newspapers, magazines, billboards, flyers, cinema etc. This can be informative
(create product awareness) or persuasive (persuade consumers to buy the product). The process of
advertising:
Sales Promotion: using techniques such as ‘buy one get one free’, occasional price reductions, free
after-sales services, gifts, competitions, point-of–sale displays (a special display stand for a product
in a shop), free samples etc. to encourage sales.

Below-the-line promotion: promotion that is not paid for communication but uses incentives to
encourage consumers to buy. Incentives include money-off coupons or vouchers, loyalty reward
schemes, competitions and games with cash or other prizes.

Personal selling: sales staff communicate directly with consumer to achieve a sale and form a long-
term relationship between the firm and consumer.

Direct mail: also known as mailshots, printed materials like flyers, newsletters and brochures
which are sent directly to the addresses of customers.

Sponsorship: payment by a business to have its name or products associated with a particular
event.

What affects promotional decisions?

Stage of product on the PLC: different stages of the PLC will require different promotional
strategies; see above.

The nature of the product: If it’s a consumer good, a firm could use persuasive advertising and use
billboards and TV commercials. Producer goods would have bulk-buy-discounts to encourage more
sales. The kind of product it is can affect the type of advertising, the media of advertising and the
method of sales promotion.

The nature of the target market: a local market would only need small amounts of advertising
while national markets will need TV and billboard advertising. If the product is sold to a mass
market, extensive advertising would be needed. But niche market products such as water skis
would only need advertising in special sports and lifestyle magazines.

Cost-effectiveness: the amount of money put into promotion (out of the total marketing budget)
should be not too much that it fails to bring in the sales revenue enough to cover those costs at
least. Promotional activities are highly dependent on the budget.

Technology and the Marketing Mix

E-Commerce is the use of the internet and other technologies used by businesses to market and sell
goods and services to customers. Examples of e-commerce include online shopping, internet
banking, online ticket-booking, online hotel reservations etc.

Websites like Amazon and e-Bay act as online retailers.

Online selling is favoured by producers because it is cheaper in the long-run and they can sell
products to a larger customer base/ market. However there will be increased competition from
lots of producers.
Consumers prefer online shopping because there are wider choices of detailed products that are
also cheaper and they can buy things at their own convenience 24×7. However, there is no
personal communication with the producer and online security issues may occur.

However, e-commerce means an entire new type of marketing strategy is also required – online
promotions, new channel of distribution, new pricing strategies (since price competition in e-
commerce is very high and demand is very price elastic). It requires a lot of money to set up –
online websites, promotions, web developers and technicians to run and maintain the system etc.

The internet is also used for promotion and advertising of products in the form of paid social
media ads and sponsors, pop-ups, email newsletters etc. It helps reach target customers, is
relatively cheap and helps the firm respond to market changes quicker (since online ads can be
easily altered/updated rather than billboards and TV ads). But it can alienate and chase
customers away if they see it too frequently and find it annoying. There is also the risk of the
adverts being publicized negatively if it has annoying or offensive content that customers quickly
criticize (since content is more easily shareable online).

Marketing strategy

Marketing Strategy

A marketing strategy is a plan to combine the right combination of the four elements of the
marketing mix for a product to achieve its marketing objectives. Marketing objectives could include
maintaining market shares, increasing sales in a niche market, increasing sale of an existing product
by using extension strategies etc.

Factors that affect the marketing strategy:

Legal Controls on Marketing

There are various laws that can affect marketing decisions on quality, price and the contents of
advertisements:

Laws that protect consumers from being sold faulty and dangerous goods

Laws that prevent the firms from using misleading information in advertising Example:
Volkswagen falsely advertised environmentally friendly diesel cars and were legally forced
to pull all cars from the market

Laws that protect consumers from being exploited in industries where there is little or no
competition, known as monopolizing.

Entering New Markets

Growing business in other countries can increase sales, revenue and profits. This is because the
business is now available to a wider group of people, which increases potential customers. If the
home markets have saturated (product is in maturity stage), firms take their products to
international markets. Trade barriers and restrictions have also reduced significantly over the
years, along with new transport infrastructures, so it is now cheaper and easier to export
products to other countries.

Problems of entering foreign markets:

Difference in language and culture: It may be difficult to communicate with people in

other countries because of language barriers and as for culture, different images, colors and
symbols have different meanings and importance in different places.

Lack of market knowledge: The business won’t know much about the market and the
customers won’t be familiar with the new brand  established will be difficult and
expensive

Economic differences: The cost and prices may be lower or higher in different countries so
businesses may not be able to sell the product at the price which will give them a profit

High transport costs

Social differences: Different people will have different needs and wants from people in
other countries, and so the product may not be successful in all countries

Difference in legal controls to protect consumers: The business may have to spend more
money on producing the products in a way that complies with that country’s laws.

How to overcome such problems:

Joint venture: an agreement between two or more businesses to work together on a project. The
foreign business will work with a domestic business in the same industry.
Advantages:

Reduces risks and cuts costs

Each business brings different expertise to the joint venture

The market potential for all the businesses in the joint venture is increased

Market and product knowledge can be shared to the benefit of the businesses

Disadvantages:

Any mistakes made will reflect on all parties in the joint venture, which may damage their
reputations

The decision-making process may be ineffective due to different business culture or

different styles of leadership

Franchise/License: the owner of a business (the franchisor) grants a licence to another person
or business (the franchisee) to use their business idea – often in a specific geographical area.

Advantages Disadvantages
Rapid, low cost method of business
expansion
Profits from the franchise needs to be
shared with the franchisee
Gets an income from franchisee in
the form of franchise fees and
Loss of control over running of business
royalties
If one franchise fails, it can affect the
To franchisor Franchisee will better understand
reputation of the entire brand
the local tastes and so can advertise
and sell appropriately
Franchisee may not be as skilled
Can access ideas and suggestions
Need to supply raw material/product
from franchisee
and provide support and training
Franchisee will run the operations
Cost of setting up business
Working with an established brand
No full control over business- need to
means chance of business failing is
strictly follow franchisor’s standards
low
and rules
To franchisee Franchisor will give technical and
Profits have to be shared with franchisor
managerial support
Need to pay franchisor franchise fees
Franchisor will supply the raw
and royalties
materials/products
Need to advertise and promote the
business in the region themselves