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Disadvantages
CONFLICT OF OBJECTIVES:
Business tries to satisfy the objectives of more than one group,
when they can't satisfy two groups at the same time, this
problem is known as: conflict of objective.
UNIT 2
The levels of business activity 3 main stages:
Primary stage of production: The primary sector industry
extracts and uses the natural resources of the earth.
Secondary stage of production: The secondary sector of
industry manufactures goods using the raw materials provided
by the primary sector.
Tertiary stage of production: The tertiary sector of industry
provides services to customers and the other sectors of
industry. E.G: Transport, bakery.
De-industrialization: Occurs where there is a decline in the
importance of the secondary, manufacturing sector of industry in a
country.
Public and private sectors of industry: 3 different types of
economic system which are used by countries to manage their
resources as efficiently as possible.
Free market economy:
There is no government control over land, capital and labour;
all resources are owned privately. As a consequence, are the
private owners the ones in charge of taking any decision, what
they produce and the prices they sold their goods.
Nevertheless, as there is not any intervention from the
government or any state organization, the prices are forced by
the market; the variation between the supply and the demand
together with the competition will be what regulates the
business.
In the other hand, owners will have making profits as their
main objective and they will respond to the people demand. As
a consequence, they produce what they want because of the
absence of the state and so, the free choice is created, this is
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o Disadvantages:
There is less incentive to work as the government
fixes wages and private property is not allowed.
The government may not produce goods which
people want to buy. There is not freedom of choice.
The lack of a profit motive for firms leads to low
efficiency.
Mixed economy:
This type of economy mixes some features of both, the
command economy and the free market one. Because of this
you can difference two sectors, the private and the public one.
Nearly every country in the world has a mixed economy with a:
o Private sector (like the free market economy): It is made
up of bss not owned by the government. Most of them
will have the aim of making profits. The owner is the one
who decides what and how to produce and also the price
charged for it. Nevertheless, the private sector might be
affect by the influence of the government control, for
example, the dictation of laws that affect the business or
the taxes.
o Public sector (command economy): Made up of
government or state- owned and controlled bss and
organizations. Some goods or services are provided free
of charge to the consumers. The many for it comes from
the taxpayers. Different to the private sector, here the
aim is not always to make profit but most likely is to
provide a service to the community.
expanded business.
Backward vertical: You get sure of having the component needs,
the raw materials, you prevent this material to be sold to other
business, you can control more or less the prices for them obtaining
cheaper prices, and the profit of the business mergered is absorbed
by the expanded business.
Conglomerate: As you are having to totally different business you
are diversifying the business and like this you are spreading the risk
of the business. Also this permits you a transfer of ideas of both
business, for example if you join with an advertisement company, this
will permit you know how to improve the image of your previous
business.
What do some business what to stay small?
The type of industry: Many industries might be very specific or
personalized and by having such a large business this will not
be possible. For example, a hairdresser attended by a famous
character, if the business expands, this worker would not be
able to be in all the shops so the attention would not be the
same.
The market size: As many of them have a specific or personal
type o industry the market sizes low, because consumers are
also limited in those business that are located far of the cities or
those who specialized or rally luxurious goods.
The owners objectives: Owners may not want to enter in the
stress or worries that having a big business imply, they prefer
staying with their business with which they are already known
and they feel more confidence. Expanding the business also
mean a lot of risks that many owner would not want to take.
UNIT 3
PRIVATE SECTOR
Business organizations: The private sector: five main forms of
bss organization in the private sector:
Sole owner: Is a business form of organization in which only
one person is the one who owned and operate the business.
Even though the sole trader can employ others the owner is the
sole proprietor. Is a common form of organization because
there are so few legal requirements to set it up. The only legal
regulations that it must follow are:
o The owner must register with and send annual accounts
to, the Inland Revenue or tax office.
o The name of the bss is significant, you have to register it
or write it in all your documents depending to the country
where you live.
o The sole trader will have to observe certain laws which
apply to all firms in that type of industry.
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careers.
o This type of bss cannot afford specialists and so the
owner may do many jobs that he or she is not skilled at.
o There is not anyone who will take control of the bss if you
are absent.
This type of organization is recommended to people who are
setting up a new business since they do not need much more
capital to get it going and they will be dealing mainly with the
public (personal and direct contact between the costumer and
the owner) which is often very important for the success of the
bss.
Partnership
A partnership is a form of bss organization in the private sector
run and owned by a group of people that can vary between 2
and 20 people who agree to set the business. The owners are
called partners and they are the ones who contribute to the
capital of the business. To be able to set up this type of
business, in legal terms is not so difficult, instead, partners can
do it on an informal way called verbal agreement or they can
also do it in a more formal way, creating a written agreement
called partnership agreement.
As any form of organization it has advantages and
disadvantages, as an advantage, there is more capital to be
invested as the owners are more than one and this would allow
expansion. Also the responsibility of running the business are
shared and as a consequence, the ones who form part of the
partnership can be specialist in one job and absence would not
be a problem because there would be a partner to replace you.
Moreover, all of the partners are motivate to work hard because
they all benefit from the profit make.
According to the disadvantages, the partners have unlimited
liability so if the business fall the creditors will force the
partners to sell their own properties to pay the business debts.
Also, they have no separate identity and as a consequence, no
continuity. This is due to the fact that if one partner dies the
business ends. About partners, they can disagree on important
decisions; a part of this, consulting partners takes a lot time.
On the other hand, one of the partners can be inefficient or
dishonest which would decrease the money and other partners
could suffer from it.
At the beginning I had said that as there is more capital
because there are more people than one the business could
expand but this has a limitation, as there are only 20 partners
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Disadvantages
COOPERATIVES
Co-operatives are groups of people who agree to work together
and pool their resources. It is thought for small enterprises that
can't do anything alone so they join to become strong. All
members have one vote, no matter how many shares they have
bought, and help in the running of the business. The workload
and decision making are shared. In large co-operatives there is
a manager that manages the day-to-day matters of the
business. In this type of organisation, the profits are shared
equally amongst members.
o Producer co-operatives: group of workers who design
and produce products in just the same way as other
manufacturing businesses.
o Retail co-operatives: have the aim of providing their
members with good quality consumer goods and services
at reasonable prices.
o Workers co-operatives: workers are owners at the
same time. This occur many times when a business is in
bankruptcy so as a consequence they left to the workers
to manage the business instead of selling it in order to
not pay certain money to the workers if they close it. The
disadvantage is that the workers don't know how to
administrate the business.
o Agricultural co-operatives: members arrange for the
purchase of materials in bulk in order to benefit from
economies of scale. They arrange to sell the output of all
of its members at attractive prices to big costumers.
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Disadvantages:
The size limit is not suitable for a large business.
Members may disagree just like in a partnership.
Disadvantages
Franchising
A franchise is a business based upon the use of the brand names,
promotional logos and trading methods of an existing successful
business. The franchisee buys the licence to operate this business
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from the franchisor. The franchisor is the owner of the name and of
the idea while the franchisee is the person who buys the right to use
the name and that idea, for this he must have a license. The
franchisee has to obey some rules, if he breaks the rules, the
franchisor can take his license. Also, the franchisee has to give part of
the profits to the franchisor. Regarding to the franchisor, he opt for
franchising because he wants to grow and expand without putting so
much money.
To the franchisor
The buy of the licence to
use the brand name raises
money.
To the franchisee
The chances of business
failure are much reduced
because it is a well-known
business.
Disadvantages
PUBLIC SECTOR
The public sector is a very important part of the economy of all
countries. The term Public Sector includes all businesses owns by
the state and local governments, public services, such as hospitals
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FIXED COST
VARIABLE
COST
23
TOTAL COST
REVENUE
0
2000
$5000
$5000
$0
$6000
$5000
$11000
$0
$16000
BREAK EVEN CHART: graph that shows how costs and revenues
of a business change with sales. They show the level of sales
the business must make in order to breakeven.
BREAK EVEN POINT: is the level of sales at which total costs
and total revenue are equal meaning that the firm will have
neither profits nor losses.
BREAKEVEN OUTPUT: be the amount of output that should be
sold to reach the breakeven point.
This is useful since the proportion between the sales before and
after the increase of advertisement is more.
Financial: Is easier to large businesses to raise capital than to
small business because of the fact that banks often consider
less risky to lend money to big organization than to small ones.
Larger businesses are more reliable and have a better power of
negotiation.
Managerial economies: Small business cannot usually afford
to pay for specialist managers. As an advantage, large
businesses incorporate specialist managers to increase their
efficiency and help to reduce the average costs.
Technical economies: Large manufacturing firms often use
flow production methods, this apply the principle of the division
of work and the use of an expensive equipment that maybe
compare to the quantity produce I smaller firms, is not
necessary to use it in those organizations. As a conclusion,
larger firms introduce technology lije new machines in order to
increase efficiency.
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12
10
8
6
4
2
0
RESUME:
Production
Average costs
Disadvant
age
BUDGETS AND FORECASTS: LOOKING AHEAD
Business also needs to think ahead about the problems and
opportunities that may arise in the future. Forecasting means time to
think, plan or achieve. It will help businesses to be ready when the
moment comes. There are things to try to forecast (predictions of the
Diseconomy of
future, for example, likely future changes in the size of the market)
scale
such as:
Sales or consumer demands.
Diseconomy of scale
Economies of scale
Note that:
Gross profit does not take to account overheads.
Only calculate the cost of goods sold, and forget the
inventory.
In a manufacturing business, direct labour and
manufacturing costs are also deducted to obtain gross
profit.
Vocabulary up to here:
The cost of goods sold: Is the cost of the good actually sold by
the business during a time period. Goods sold are obtained by
doing the following operation opening stocks + Purchases
Closing stock.
The sales revenue: Is the income to a business during a period
of time from the sale of goods or services.
Gross profit: The difference between the cost of goods sold and
what they were sold for, the sales revenue. It is made when
sales revenue is greater than the cost of goods sold.
The profit and loss account
The profit and loss account shows how net profit is calculated. It
starts off with gross profit acquired from the trading account and by
deducting all other costs it comes up with net profit.
Gross profit...X
Less expenses.X
Net profit.X
Vocabulary:
Net profit: The profit made by a business after all costs have
been deducted from sales revenue. It is calculated by
subtracting overhead costs from gross profit.
As for limited companies, there are a few differences with the
normal profits and loss account:
Profits tax will be shown.
It needs to have an appropriation account at the end of
the profits and loss account. This shows what the
company has done with its net profits, in other words,
how much retained profit has been put back into the
company.
Results from the previous year are also included.
Appropriation account
The part of the profit and loss account which shows how the net profit
is distributed-either as drawings/dividends or as retained profit.
Dividends...X
+Retained profit.X
Net profit.X
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Sales revenue
XXXX (numbers)
XXXX (numbers)
Gross Profit
XXXX (numbers)
Less Expenses
XXXX (numbers)
Net profit
XXXX (numbers)
XXXX (numbers)
Net profit
XXXX (numbers)
Some vocabulary:
Depreciation: The fall in the value of a fixed asset (anything that
remains in the business for more than a year) over time. It is
calculate by doing:
Straight line method:
Depreciation = (total costs of the assets the residual
value) / Live expectancy of the asset.
o E.G: 2 splits at $6000. Life expectancy 10 years. No scrap
value Dep: (12000 0) : 10 years = 1200 less every
year.
o It is also counted as an indirect cost to the business.
Drawings: Part of the profit that goes to the owner. The owner could
be partners or soul owners.
Dividends: Used when we are talking about a public or limited
company
Retained profits: Part pf the profits that remain in the business
Bad debt: A debt that you will never recover. They are written off
that is, included in expenses because there is no chance of getting
the money. E.G: maybe the debtor has died.
The residual value: The value that the asset will have at the end of
its residual life.
Non trading income: Money that doesnt come from trading. For
example, Coca-Cola pay you in order than you lead them have coca
cola written in your business.
Interest payable: Is an expense.
Tax = part of expenses
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BALANCE SHEET
A balance sheet is a statement showing the financial health of a
business at a particular moment in time. It is usually drawn up at the
end of the financial year, but can also be created at other times. It
shows what the business owns, is owned (assets) and owes to others
(liabilities). This is what it contains:
If your total assets are higher than your total liabilities, then you are
said to own wealth. In a normal business, wealth belongs to the
owners, while in a limited company, it belongs to the shareholders.
Hence the equation:
Total assets - total liabilities = Owners'/Shareholders' wealth
EXPLANATION OF BALANCE SHEET TERMS:
Working capital: is used to pay short-term debts, to do the dayto-day trades and known as net current assets. If a business
does not have enough working capital then it might be forced to
go out of business.
Working capital = Current assets - Current liabilities
Net assets: Shows the net value of all assets owned by the
company. These assets must be paid for or finance by
shareholders' funds or long term liabilities.
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Sponsors
Repaying loans.
o Lack of planning.
o Unexpected events.
To prevent insolvency CASH FLOW FORECAST IS NEEDED.
This predict the movement of money from the business: outflows
inflows.
Cash flow planning is important because it relates to the payments to
workers and suppliers and the customer payments as well. If a
business does not plan the timing of these payments, it may run out
of cash even though it is gaining a profit! Why do you want to
aticipate it? To know how much cash you are going to have aveilable.
This will permit you to organize yourself.
A cash flow forecast can tell the manager:
How much cash is available for paying bills, loans and other
fixed assets.
How much the bank might need to lend to avoid insolvency.
Whether the business has too much cash which could be more
useful if used.
And so, looking at the inflows and outflows you can determinate the
following:
Shortages of cash
Cash flow problem
Solution: Over draft (when you overspend in your account. As the
bank takes directly the money, at the moment it enter to the bank,
the overdraft is quickly paid. This is a solution to the negative.
(current liability).
La overdraft no se acumula Te fijas el closing balance mas negativo
y eso es el minimo que vas a necesitar del overdraft. Asi te aseguras
de resolver tu problema ya que no es que si en un mes vos no
gastaste, lo que no gastaste se te acumula al otro sino que gastas lo
que gastas y por eso tenes que estar seguro de poder gastar lo que
necesitaras en el mes que mas vas a necesitar.
Surples of cash
What to do? Investment to know this gives you time to think
how to invest.
Uses of cash flow forecasts:
Starting up a business: In the first months of a business, a lot
of capital will be needed to set it up properly. The problem is,
not everybody realizes that the amount of money they needed
is much more than they had expected. Therefore, a cash flow
forecast will give them a better idea of how much money will be
needed.
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39
FEB
MAR
Inflows:
Cash
Sales
Credit
Sales
Total
Inflows
Outflows:
Rent
Materials
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APR
MAY
Labour
Other
Cost
Total
Outflows
Net Cash
flow (TITO)
Opening
Balance
Is equal to
the closing
balance of
the previous
month
Is equal to
the closing
balance of
the previous
month
Is equal to
the closing
balance of
the previous
month
Is equal to
the closing
balance of
the
previous
month
Closing
Balance
(Net CF +
OB)
Now that we have a cash-flow forecast we can look at the closing
balance to see if any month we will be having a shortage of cash, or
in other words, negative cash. Or maybe we have positive cash,
called surplus.
UNIT 9
What is a finance? Finance is money. Here there are 3 example why
bss needs money:
Starting up a new business: When an individual plans to start their
own business, they should consider all of the assets they will need to
buy in order to start trading. This include the basic fixed assets and
some current assets as for example: Stock. This type of finance is
called: Start-Up Capital (finance needed by a new business to pay for
essential fixed and current assets before it can begin trading).
Expanding an exsisting business: People of sucessful businesses
will probably take the decision to expand it in order to increase
profits. With this aim, additional fixed assets could be purchased
(buildings and machinery), another business could be purchased
through a take-over and an expansion related with developing new
products to reach new markets can also occur. For the first two cases
it would be probably necessary to increase the working capital in
order to finance additional stocks and debtors. For the third case, a
substantial amouts od finance could be requird for research and
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development.
A business in difficulties: Sometimes businesses that are not doing
so well may also need finance. For example, a loss-making business
may need to purchase new machineries in order to become more
efficent while a firm with cashflow problems may need finance to
cover short-term expensives. Is really difficult to raise essential
finance for this king of businesses.
In all this cases above, bss may need finance to pay for either capital
expenditure or revenue expenditure. Expenditures Why we
require finance?
Capital expenditure: Is money spent on fixed assets which will last
more than one year. There is a slow recover of this money. These are
needed at the start of a business and as it expands. Is related with
medium, long term finance as for example machines.
Revenue expenditure: Is money spent on day-to-day expenses
which do not involve the purchase of a long term asset. For example,
wages and rent. This is money you recover as you sell your stock or
service and is related with short term finance.
Sources of finance: How we are going to finance?
Internal: Money obtain from within the business itself.
Retained profit/Ploughed back: Profits kept in the business after the
owners have taken their share of the profits.
Advantages: Doesnt have to be repaid
Disadvantages: In one hand, new businesses will not have it and in
the other hand, small businesses can find that their profits are too
low compare to the amount of money they need. In addition, the
opportunity cost is also a disdvantage. Moreover, if you use it, you
leave your business without any reserve and so, in the case you have
partners, you have to consult it a lot with each of them.
Sales of assets: The sell of those assets which are no longer required
by the business. Rationalization
Advantages: This makes better use of the capital tied up in the
business.
Disadvantages: It may take some time to sell the asset and new
firms do not have the possibility to do it as they will not have surplus
assets to sell.
Running down stock to rise cash:
Advatages: Reduces the chances of lossing money if stock is not sold.
This reduces the opportunity cost and storage cost of high stock
levels. In addition, you get the many in a fast way.
Disadvages: It must be done carefully to avoid disappoinment of
costumers.
Owners savings: A sole trader or member of a partnership can put
more of their savings into their unincorporated businesses.
Advantages: It should be available for the firm quickly and no interest
are paid.In addition, you do not have to give any explanation to
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nobody.
Disadvatages: Savings may be too low and it increases the risk taken
by the owners. By this way, owners could loose more money. The
opportunity cost is also a disadvantage here.
External finance: This is money obtained from individuals or
institutions outside of the business.
Issue of shares: (Only possible for limited companies). The sell of
them sometimes call equity finance as it refers to us as equities.
Private limited company can raise more capital by selling shares
privetly to family, friends or business contacts. On th epublic limited
companies, a large number of shares can be sell to the general
public. These new issues can raise very large sums of money but can
be expensive to organize and advertise.
Advatages: It is a permanent source of capital which sould not have
to be repaid to shareholders. In addition, no interest have to be paid.
Disadvatages: Ownership of the company could change hands, the
loose of power and control is a big disadvantage (In the private
limited company all the shareholders have the riht to vote at AGMs.
In the public limited company, a right issue of new shares is very
common to raise their caipital; this gives existing shareholders the
right to buy new shares in proportion to their current holding. By this
way, the problem of new shareholders changing the balance of
ownership is avoid). On the other hand, dividends will be expected by
shareholders.
Bank loans: They are design for the purchase of fixed assets that is
why is related with medium and long term finance and with the
capital expenditures.
Advantages: Usually quick to arrange and can be for varying lengths
of time. Large companies are offered low rates of interest by bank if
they borrow a large sum.
Disadvanages: Has to be repaid and with interests. In the other hand,
in order to ask for a loan you need to explain the bank why you need
the money and you have to sign a lot of papers. You will also need a
collateral that will be in charge of the payments if you dot pay them.
A security can be also required; for example, a bank may insists that
it have the right to sell some of the firm's propoerty if it does not
repaied the loan or the interests. For sole traders is even worst
because they will have to put their own house as security on a bank
loan.
Selling debentures: These are long-term (more than 25 years) loan
certificates issued by limited companies. This are loans make for
someone of the public.
Advatages: Debentures can be used to raise very long-term finance.
Disadvatages: Must be repaid with interest.
Factoring of debts: Debts factors are specialist agencies that buy the
debts of firms for immediate cash. They may offer the 90 % of an
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existing debt and the debtor will pay them the 100% of the debt.
Advatages: Immidate cash is made available now and for sure. Now
the risk is taken by the company.
Disadvantage: The firm does not receive the 100 per cent of the
value of its debts.
Grants and subsidies from outside agencies: (eg: government)
Advatages: usually does not need to be repaid.
Disadvatages: They are often given with strings attached, for
example, the firm must be located in a particular area. As a big
disadvantage, you own a favor to the government.
Overdraft: These are arranged by a bank. Short-term finances.
Advantages:The bank gives the firm the possibility to overspend their
account. With this money, the business will be able to cover any cost
but the overspend of the account is not indefinitely; the overdraft will
vary each month according to the needs of the business. Interests
will be only payed on the ammount you overdrawn. This can be
cheaper than loans.
In additiion you dor have to specify anything to the bank and you
dont have to sign all the papers you need to obtain a bank loan.
Disadvatages: Interests rate are variable different to the loans that
have fixed rates. The bank can ask for the overdraft to be payd at
very short notice.
Renting: You hire something to use. It is for a certain period of time.
Leasing: Is a long term renting. Leasing an asset allows the firm to
use an asset but it does not have to purchasing. Monthly leasing
payments are maid. The business could decide to purchase the asset
at the end of the leasing period. Some businesses decide to sell off
some fixed assets for cash and lease them back from a leasing
company. This is called Sale and leaseback.
Advantages: The firm does not have to find a large cash sume to
purchase the assets to start with. The care and maintenance of the
asset are carried out by the leasing company. In addition, after
leasing you can buy the asset and the money you have already lease
goes to the final price.
Disadvantages: The total cost of the leasing charges will be higher
than purchasing the asset.
Hire Purchase: This allow the business to buy a fixed asset over a
long period of time with monthly payments which include an interest
charge.
Advantages: The firm does not have to find a large cash sum to
purchase the asset. You have to put down a deposite od between
15% and 20% of the value in cash and the rest will be paid month by
month.
Disadvantages: A cash deposit is payed at the start of the period.
Moreover, interest payments can be quite high. In addition, if you
stop paying and you have already paid less than the 80% they can
take you all the money.
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Trade credit: This is when a business delays paying its suppliers, wich
lives the business in a better cash position.
Advantages: It is almost an interest-free loan to the business for the
length of time that paymentsis delayed for. Many suppliers will lend
you to pay them later to maintain you as a costumer happy.
Disadvantage: The supplier ,ay refuse to give discounts or even
refuse to supply any more goods if payments is not made quickly.
Differences between long term loans and share capital:
Loan's interests are paid before tax as an expensive
Loan's interests must be paied every year but divided do not have to
be paid if for example the firm has made a loss.
Loans must be repaid as they are no permament capital.
Loans are often secured against particular assets.
Short-term finance: This provides the working capital needed by
businesses for day-to-day operations. It is finance which is needed for
up to 3 years. Shortages of cash in the short term can be overcome
in three main ways:
Overdraft
Trade credit
Factoring of debts
Medium-term finance: This is finance which is available for
between three and ten years. It is usually needed to to purchase
machinery and vehicles. Shortages of cash in the medium term can
be overcome in the following main ways:
Bank loans
Hire purchase
Leasing
Long-term finance: This is finance which is aveilable for more than
ten years. Usually this money will be used to purchase long-term
fixed assets to update or expand the business or to finance a takeover of another firm. The main sources pf long term finance are:
Issue of shares
Debentures
Long-term loans or debt finance
*****ISSIUNG SHARES OR DEBENTURES IS NOT AN OPTION FOR
SOLE TRADERS AND PARTNERSHIPS.
How the choice of finance is made in business: What factos does
the mannager consider?
Purpose and time period: Is to match the source of finance to the
use that will be made of it. And so, the manager will ask him self
what is the finance to be spent on? It is to be used to pay for fixed
assets or is it needed to pay for a short tern cashflow crisis?
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If the use is long term (eg: purchase of a fixed asset) the source
should be long term. If the use is short term (eg the purchase of
additional stock to cover a busy period), the source should be short
term.
Amount needed: Different sources would be used depending on the
amount of money nedeed.
Status and size: The bigger the company is the more sources of
finance they can acces, especially public limitied companies that can
make use of the shares and debentures. It depends also on the status
of the company to access to certain finance sources. Sole traders and
partnerships if they wish to expand have to depend in their own
savings and they also have to pay higher interest to banks.
Control: Owner of businesses may loose control of the business if
they ask other people to invest on their firm.
Risk and gearing: Loans increase the gearing of the business and
that is a common measure of risk that the manager is taking. The
gearing of a business measures the proportion of total capital raised
from long-term loans. If this proportion is higher than 50% the
business is highly geared. It is being financed more from loans than
from shareholders; this is said to be a risky way of financing a
business. The reason for this is that interest must be paid on the
loans wheather than the business is making profit or not. When
interest rates are high and companies profits are low the firm may
not be able to pay all of the interests. The future of the business will
be at risk. This is why banks are usually reluctant to lend to a highly
geared business. Such businesses may have to use sources of finance
other than loans.
Sources of finance: Will bank lend and will shareholders
invest? Banks and other landing institutions will makes loans
aveilable to businesses only as long as:
Financial information is provided about the firm trading record (if its
already operating) and forecasts about the future.
The forecasts show that the business is likely to remain solvent. By
this, the bank manager will be able to see id the firm is going to be
able to pay the interests on the loan and repay it when this is due.
Banks will also consider the experience of people working in the firm
and how conviving they are as likely succesful business people. Banks
wont take unnecessary risks and so, they will refuse to finance any
business that is in a risky situation.
Bussines plans
Any bank will ask for a business plan before agreeing to a loan or
overdraft; particulary if it is a newrly created firm. A business plan is
a document containing the business objectives and important details
about the operations and finance of the firm. Because of this, the
owners are forced to think ahead and plan carefully the first few
years.
46
They will have to consider what products they will want to make and
to what costumers will be destinate it, what will be their main costs
and if they will be able to sell enough products to pay them, where
will the firm be located and what machinery and how many people
will be require in the business.
Without this detalis that shows that the owner is conscious about the
future of the business, the bank won't lent money to any business.
Still, if the bank manager has some consern about the business plan,
he might refuse to lend money to the firm.
UNIT 10
WHAT IS ORGANISATIONAL STRUCTURE? It refers to the levels
of management and divisions of responsibilities within an
organisation. This data can be represented in the form of an
organizational charts. When a business grows and employs more
people, they will have to create an organizational chart to work out a
clear structure.
When employing people, everybody needs a JOB DESCRIPTION.
These are its main advantages:
People who apply can see what they are expected to do.
People who are already employed will know exactly what to do.
WHAT DOES AN ORGANISATIONAL CHART SHOW?
Levels of hierarchy: There are different levels in the business
which has different degrees of authority. People in the same
level have the same degree of authority. In the graph the
hierarchy is shown by the horizontal lines. It is the status that a
person occupates in the business.
Authority: Power Showned by the vertical lines.
Departments: Each department has its own function.
Spans of control: Amount of people (or departments) there are
directly under a hierarchy. How many subordinates a person or
a business controls. At higher levels the maximum span of
control is 8. More than that it wll mean that the cordination is
not efficienly possible. If there is so many people under
someone this will lead to a bad communication that will
generate misunderstanding and will lower the efficiency. This
will be relatd with a diseconomy of scale.
Chain of command: How power and authority is passed down
from the top of the hierarchy. When a chain of command is very
wide a diseconomy of scale is likely to happen. If the chain is
too long there will communication problems. Among them:
misunderstanding, slowness (competitors will make decisions
47
FUNCTIONAL DEPARMENTS
In large businesses (like the one in page 159), the key features that
are likely to be in an organizational chart are:
Functional departments: They use specialists for each job and
this creates more efficiency. However, workers are more loyal to
their department than to the organization as a whole.
Therefore, conflict can occur between different departments.
Managers working in these departments are called line
managers, who have direct authority and the power to put their
decisions into effect over their department.
Regional division: these are present when a business is in a
foreign country. The advantage of having a regional division is
that they use the local knowledge to their advantage.
Staff managers: these are part of departments which do not
have a distinctive function and which employ specialists in
particular areas. For example an Economic Forecasting
Manager. They report directly to the Board of Directors. They
provide specialist advice and support to the Board of Directors
and to the Line Managers. They are often very highly qualified
49
DESCENTRALISATION
A decentralized management structure means that many decisions
are not taken at the centre of the business but are delegated to lower
levels of management.
Advantages of decentralization:
Decisions are taken by managers who are closer to the action,
to the customers.
Managers who are now able to take the decisions will feel more
trusted and will have more satisfaction from their work.
As information doesnt have to be given to the top layers,
decisions are taken quicker.
Disadvantages of decentralization:
The Board of Directors is likely to lose control on important
decisions.
No common policy or consistency between departments or
divisions of the businesses as each manager is taking their own
decisions without enough central guidance.
The directors dont know whats happening in some
departments.
There are several ways of decentralization:
FUNCTIONAL DECENTRALISATION: when specialist departments
are delegated decision-making authority. The most common are
Human Resources, Marketing, Finance and Production
departments.
FEDERAL DECENTRALISATION: when authority is divided
between the different product lines of the business.
REGIONAL DECENTRALISATION: when a business has bases in
many different regions or countries and each one has authority
over its own operations.
50
UNIT 11
WHAT DO MANAGERS DO?
PLANNING: involves setting aims or targets that will give the
organization a sense of direction or purpose causing a common
feeling in the business of having something to work towards. A
manager must also plan for the resources that will be needed
(strategies). So, managers have to set aims by making
strategies to give the business a purpose. It means, giving a
direction to the business.
ORGANISING: A manager cannot do everything by himself.
Therefore, jobs must be delegated to employees. Employees
need sufficient resources to complete their job, so managers
need to organize people and resources effectively.
CO-ORDINATING: Managers need to bring people together in a
business for it to succeed. This is called co-ordination. If
different functional departments do not co-ordinate, they could
be doing completely different things which does not follow any
common plan. Managers could co-ordinate the departments by
holding regular meetings or setting up a project team with
different members from different departments.
COMMANDING: managers have to make sure that all
supervisors and workers are keeping to targets and deadlines
by providing instructions and guidance. This is telling people
what to do.
CONTROLLING: involves measuring and evaluating the work of
all individuals and groups to make sure that they are on target.
It is checking that the original aims are being met. It is the
managers responsibility to find out why targets are not being
met and then correct the problem. The manager is in charge to
make an evaluaton after an activity is round up. Here he will
have to compare the results with the expectations.
Without a good management a business would lack a sense of control
and direction, co-ordination between departments leading to a stage
of effort, control of employees and organization of resources, leading
to low output and sales diseconomies of scale.
WHAT MAKES A GOOD MANAGER?
INTELLIGENCE: ability to understand difficult ideas and dealing
with different issues. Is knowing how to act in front of any
situation.
INITIATIVE: ability to solve problems and to take control of
situations.
SELF-CONFIDENCE: to be able to lead others and set an
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example.
ASSERTIVENESS AND DETERMINATION: to be able to take
command of others and take ideas and solutions to the end.
COMMUNICACTION SKILLS: to be able to put ideas and
messages across to subordinates in a clear way. This will
encourage them to respond positively.
ENERGY AND ENTHUSIASM: to set high standards of effort and
involvement.
CREATIVE
UNIT 12
55
by the receiver.
Both people are now involved in the communication process: The
receiver feels more part of this process. He or she can make a real
contribution to the topic being discussed or communicated. This may
help to motivate the receiver.
Internal (1) and external communication (2):
When messages are sent between people working in the same
organisation.
Is when messages are sent between one organization and another
organization or outside individual, eg: costumers.
The features and methods of both types are the same. The unique
difference is who is being communicated with.
Why external communication has to work well?
Is very important to the image and efficiency of a business. In
addition, if a bss communicate ineffectively with suppliers, it may be
sent the wrong materials and if it sends innacurate information to a
costumers, he or she may buy a product from another firm.
Different ways of communicating: The communication media.
Verbal forms of communication: Involves the sender of the
message speaking to the receiver.
Methods:
One to one talks between the sender and the receiver
Telephone conversations
Video conferencing where groups of people in different locations are
able to see and hear each other through a video link.
Meetings which could involve a few people or hundreds.
Adv:
Information can be given out quickly. It is an efficient way of
communicating with a large number of people.
There is an opportunity for immediate feedback and two-way
communication.
The message is often reinforced by seeing the speaker and his or her
body language. This does not apply to telephone conversations.
Dis:
In a big meeting, there is no way of telling wheter everybody is
listening or has understood the message.
It can take longer to use verbal methods when feedback occurs than
using written methods.
When an accurate and permanent record of the message is needed,
such as warning to a worker, a verbal method is inappropriate.
Written forms of communication: Include letters but may
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Description
points being
understood. This is
again the fault of the
sender.
understood.
It is important to insist on
feedback, if not feedback
is received then the
sender assumes the
messege was lost.
Breakdown of the
medium. E.g computer
failure.
Other forms of
communication should,
where possible, be made
available
Direct lines of
communication between
subordinates and
managers must be
available. Direct
communication is always
more effective.
UNIT 13
MOTIVATION
People work for a number of reasons. Most people work because they
need to earn money to survive, while others work voluntarily for
other reasons. Motivation is the reason why people work, and it
drives them to work better. Therefore, managers try to find out what
motivate workers and use them to encourage workers to work more
efficiency. This results in higher productivity, increased output, and
ultimately higher profits.
Motivation theories:
Taylor (1911) based his ideas on the assumption that all individuals
are motivated by personal gain and therefore , if they are paid more,
they will work more effectively.
Maslow: He proposed a hierarchy of needs in the year 1954.
Physological needs are the basic requirements of foods, shelter,
warmth and sleep.
Security needs enssure you that you are phisically safe
Social needs are the needs to have rewardig relationships with other
employees at work
Esteem needs are the needs for self respect and to be respected and
value by other people.
Self-fulfilment / self-actualisation needs are being able to be creative
and feeling that you have done a good job. In practice, very few
reach this level.
McGregor (1960) identified two types of managers, the ones who
believed in the thoery X and the ones who believed in the theory Y.
X:
The average theory X person will dislike work and will try to avoid it.
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LEADERSHIP
A good leader in a large bss is someone who can inspire and get the
best out of the workforce, getting them to work toward a common
goal. There are three main leadership styles (different approaches to
dealing with people when in a position of authority).
Autocratic leadership: The maanger expects to be in charge of the bss
and to have their orders followed. They keep themselves separate
from the rest of the employees. They make virtually all the decisions
and keep information to themselves. Communication in the bss is
mainly one way, top down and the workers have little or not
opportunity to comment on anything.
Laissez-faire leadership = leave to do: Tends to make the broad
objectives for the bss known to employees, but then they are left to
make their own decisions and organise their own work.
Communication can be difficult in this type of organisation as clear
direction wil not be given, The leader has only a very limited role to
play.
Democratic leadership: Will get other employees incolved in the
decision-making process. Information about future plans will be
openly discussed before the final decision will be made.
Communiation will be both, top doen and bottom up.
Fromal and informal groups:
Informal gropus: They usually join together by choice. Is a group of
people who form independently of any official groups set up within
the bss and who have similar interests or something else in common.
For a bss to worw effectively, informal groups needs to be handled
carefully. Regualr meetings between managers and employees, joint
fund-raising efforts, activity weekends for staff, and improved
communication are all ways of using informal groups in a positive
way.
Fromal groups: A group designated to carry out specific tasks within a
bss.
UNIT 14
THE WORK OF THE HUMAN RESOURCES DEPARTMENT
It's responsabilities are:
Recruitment and selection: Involves selecting and attracting the
best workers for vacancies that arise.
Wages and salaries: Must be enough to motivate or attract and
retain workers.
Industrial relations: There must be effective communication
between departments.
Training programmes: Must meet the training needs of
employees and accomplish business objectives.
Health and safety: Must do things according to the law on
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noticeboard or in a newspaper.
Advantages of internal recruitment:
Saves time and money.
The candidates' reliability, ability and potential are already
known.
The candidates know the expectations and rules of the
company.
Motivates other employees to work harder to get promoted too.
Disadvantages of internal recruitment
No new ideas or experience come into the business.
May create jealousy and rivalry between existing employees.
External recruitment: When a vacancy is filled by someone who is
not an existing employee and will be new to the business.
Most vacancies are filled with external recruitment, which always
involves advertising the vacancy. Here are some suitable media of
advertising:
Local newspaper: Usually for clerical (office) and manual
workers. These people are plenty since the job does not require
too much skill.
National newspaper: Used to find workers for senior positions
that require a lot of skills, experience and qualifications. It can
be read by people anywhere in the country or overseas. As the
positions will be well paid, people will be willing to move to
another part of the country.
Specialist magazines: Used for particular technical specialists
such as physicists. Can be used to hire people in the home
country or abroad.
Recruitment agencies: Keeps details of qualified people, and will
send the suitable applicants to interviews when a business asks
for a worker. Many businesses prefer to use recruitment
agencies to find them workers because it is easier. However, it
is expensive since their fee is based on a percentage of the
workers pay.
Government job centres: Place where businesses can advertise
their vacancies. These vacancies are usually for unskilled or
semi-skilled workers.
POSSIBLE EFFECTS OF GOVERNMENT LEGISLATION ON THE
RECRUITMENT PROCESS
Many governments pass laws to create equal employee opportunities.
They state that all employees should be treated equally in the work
place and receive the same salary for doing the same job. People of
any sex and people with disabilities are treated equally. Therefore,
businesses need to be careful when advertising and treating their
employees because they could be prosecuted and fined.
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JOB ADVERTISEMENT
This is what a business needs to decide when drawing up an
advertisement:
What should be included.
Job description
Job specification
Where the ad will be placed.
How much the advertising will cost and is it too expensive?
APPLICATIONS FORMS AND CVS/RSUMS
When a person applies for a job, he will have to fill out an
application form, or write a letter of application and enclose a
curriculum vitae (CV) or rsum. Cvs are descriptions about one's
qualifications, experience and skills written in a standard format.
Businesses will use application forms and CVs to see whether an
applicant match the job specifications or not. The closest matching
applicants are invited to interviews in the selection stage. A short-list
is then drawn up.
These are what CVs should contain (well laid out and clear):
Name
Address
Telephone Number
Date of Birth
Nationality
Education and qualifications
Work experience
Positions of responsibility
Interests
Names and addresses of references.
The letter of application should contain briefly:
Why the applicant wants the job.
Why the applicant feels he/she would be suitable.
Applicant forms ask for the same information as the application letter
and CV, but may ask for other types of information.
INTERVIEWS
Applicants who are invited to interviews will have provided the names
and addresses of their references. These people can give their
opinions on the reliability, honesty and skills of the applicants and
they will be likely to tell the truth because the applicants will not
know what they have said.
Interviews are the most popular form of selection. However,
interviews are not always the most reliable process of selection. They
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71
TRAINING
Training is often needed to:
Introduce a new process or equipment.
Improve efficiency.
Provide training for the unskilled workers to make them more
valuable to the company.
Decrease supervision needed.
Improve the opportunity for internal promotion.
Decrease the chance of accidents
Older workers.
Strength in numbers.
Improved conditions of employment: holidays, rates of pay.
Improved the environment where people work: health, safety,
noise.
Improved benefits for members who are not working because
they are sick, retired or have been made redundant
(retrenchment).
Improved job satisfaction by encouraging training.
Advice/Financial support if a worker is dismissed unfairly/made
redundant, have received unfair treatment or is asked to do
something not part of their job.
Benefits that have been negotiated or provided for union
members such as discounts in certain shops, provision of
sporting facilities or clubs.
Improved fringe benefits: discounts, etc.
Employment where there is a closed shop, which is when all
employees in a business must belong to the same union.
Trade unions also seek to:
Put forward their views in the media to influence government
decisions on pay, employment, etc
Improve communications between workers and managers.
CLOSED SHOP
A closed shop is when all employees must join one union in order to
be employed. It is because its members feel is unfair when nonmembers receive the benefits negotiated by the trade union. Trade
unions also gain greater strength if all the employees are members of
the union. However, many people think that it is unfair since they are
forced to join they should be able to make their own decisions.
SINGLE-UNION AGREEMENT: is when a firm will deal with only one
particular trade union and not others.
Some companies have a single union agreement, when a business
only agrees to deal with a single union. Any employees who want to
join a union can join this union. It is becoming more popular
nowadays because many employees are becoming multi-skilled, and
do not know which union to join. This makes the employees more
flexible and the business can use them in different areas of
production as and where needed.
Advantages to the employee of a single-union agreement:
Discussions are clearer if there is only one union to deal with.
Most employees are in one unionand not spread across several
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Workers refuse to work with any new rules or follow any new
practices they do not approve of.
OVERTIME BAN: Employess refuses to work longer than their
normal working hours.
Workers refuse to do any overtime. This might damage the business
if they need to complete some orders quickly.
Possible harmful consequences of industrial action:
For employers:
Loss of output.
Loss of profit.
Loss of customers.
Poor reputation.
Bad image.
For employees:
Loss of wages.
They might lose their jobs if the company suffers low profits.
For customers:
They need to find another supplier which might cost more
(production is stopped)
Shortage of products.
Deliveries not made.
For other businesses:
May lose income.
May not have materials to produce goods.
For the economy:
Workers have less money to spend.
Less tax revenue.
Country gain bad reputation for late deliveries.
Workers may be made redundant.
Exports may be lost and imports increased.
Strengths (internal)
Weaknesses (internal)
Opportunities (external)
Threats (external)
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research:
Primary research or field research.
Secondary research or desk research.
PRIMARY RESEARCH is gathering original data which may require
direct contact with potential or existing customers. Also called field
research. There are several ways to do primary research:
- Questionnaires: set of questions to be answered as a means of
collecting data.
- Interviews
- Consumer panels: groups of people who agree to provide
information about specific product or general spending patterns
over a period of time.
- Observation:
- Experiments
Note: Questionnaires, interviews and consumer panels are all
types of surveys.
THE PROCESS OF PRIMARY RESEARCH
1 Identify the purpose of the market research.
1. Decide on the best method of research. (primary, secondary or
both)
2. Decide on the size and type of sample (group of people who will
be asked)
3. Carry out the research.
4. Collate data and analyze results.
5. Produce a report (may include recommendations of action paths
to take)
METHODS OF PRIMARY RESEARCH
Questionnaires: involve asking people questions. Deciding
what questions to ask since sometimes questions may mislead
people and make them answer what they don't really think.
Advantages:
Detailed qualitative information can be gathered.
Customers' opinions can be gathered.
Disadvantages:
If the questions are not well thought, the answers will not be
very accurate.
Takes time and money to collate and analyze the results.
Interviews: Interviews are face-to-face conversations with
customers where the interviewer has a set of prepared
questions.
Advantages:
The interviewer can explain any questions the interviewee does
not understand.
Detailed information about customers' opinions.
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Disadvantages:
Interviewer bias. The interviewer might unconsciously lead the
interviewee to answer in a certain way.
Time consuming and expensive.
Interviews can be carried with one person or they can be done
in groups where there is a single interviewer putting the
questions to a group of people. This is less expensive but some
people may be influenced by other opinions or they may be in
silenced because of shyness.
When deciding who to ask to fill in the questionnarie or who to
interview , a sample whould have to be selected as it would bee
too expensive and impractical to try to include all the relevant
population.
SAMPLES: A group of people who are chosen to do market
research on. There could be:
o Random sample: When people are sleected at random as a
source of information for market research. Every member of
population has an even chance of being selected.
o Quota sample: People are selected on the basis of certain
characteristics (eg: age, gender, income) as a source of
information for market research. By this way, the
researchers can find out the views of specific groups.
Consumer panels: Are groups of people who agree to provide
information about a specific product or general spending
patterns over a period of time. They may even test it and give
feedback on likes and dislikes.
Advantages:
They provide detailed information about a product.
Disadvantages:
They can be time consuming, expensive, and biased if opinions
of some is influenced by others.
Observation: It involves:
Recording: e.g. meters can be fitted to a monitor to see what
people are watching.
Watching: e.g. see how many people go into a shop and
actually buy something.
Audits: e.g. counting inventory to see what has sold well.
(inspecting)
Advantages:
It is inexpensive.d
Disadvantages:
Only provide basic figures and not reasons why people do
things.
Experiments: involves giving products to consumers to see
what they think about it.
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Advantages:
Easy to set up, carry out, and gather consumer opinions.
Disadvantages:
People might give wrong feelings to avoid offence.
Representatives of samples may not be asked, just people who
shop in an area.
Many potential customers may not be asked.
SECONDARY RESEARCH: Is the use of information that has already
been collected and is aveilable for use by others. Also called: desk
research.
INTERNAL SOURCES OF INFORMATION
Data collected from past researches could easily be used again if it is
needed. Examples of internal sources of information include:
- Sales department: sales records, pricing data, customer
records, sales records.
- Distribution and public relations personnel.
- Finance department.
- Customer service department.
EXTERNAL SOURCES OF INFORMATION
Data collected from sources outside the business. The data may still
be useful but there are many limitations since it has been gathered
for other purposes. Sources include:
- Internet: gives all sorts of information, but the info must be
validated.
- Trade and employer associations: gives info about things in an
industry.
- Specialist journals.
- Research reports.
- Newspapers: about the economy and disposable income of
workers.
- Government reports and statistics: contains things such as age
groups and culture.
- Media reports.
- Market research agencies' reports: detailed reports on the
economy. Expensive to buy.
Secondary research is often a much cheaper way of obtaining
information. It also gains access to data which cannot be gathered by
primary research such as government issues or the economy.
WHO CARRIES OUT MARKET RESEARCH?
Normally, research is done by any business that needs it. In smaller
businesses, owners use secondary research since they cannot afford
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Unit 18
REMEMBER:
Tittle
Keys
88
Labeled axes
Only use a pie chart when the total is 100%
Unit 19
THE ROLE OF PRODUCT IN THE MARKETING MIX
The product itself is the most important element in the marketing
mix. Without it, the other three wouldn't exist. Most companies today
are market oriented, and will identify a suitable product for the
market before moving on to determine the other 3 elements. Large
companies have R&Ddepartments which spends all its time
developing new product and analyzing the pros and cons of
competitors' products.
TYPES OF PRODUCTS:
Consumer goods: Goods that are consumed by people. (e.g.
food, cake)
Consumer services: Services that are produced for people. (e.g.
education)
Producer goods: Goods produced for businesses. They are
bought to help with the production process (e.g. machinery)
Producer services: Services to help other businesses. (e.g.
accounting, insurance)
Each type of product determines the price, promotion and place to
sell the product. Producing the right product at the right price is an
important part of the marketing mix.
What makes a product successful?
- Products need to satisfy consumer wants/needs to be
successful.
- The product must be at the right quality so that customers are
willing to pay for it.
- Costs should be low enough to make a profit. Not too expensive
to produce (relative to the price that could be charged)
- Design of a product is important. This means that its quality
and durability should meet expectations and match the price of
the product. The design should also enhance the products
brand image. Performance, reliability and quality should be
consistent with the products brand image
- The first business to produce the new product or introduce new
change to the original product before its competitors.
- Products can stimulate new wants from the customers.
- Has something very distinctive that makes it appear different.
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PRODUCT DEVELOPMENT
Most businesses use a general process to develop any product:
1. Generate ideas: Ideas can be generated by:
Employees.
Customers.
Competitor's products.
R&D department.
Sales department.
1 Select the best ideas for further research: The best ideas are
selected and further research is done to see their pros and
cons.
2. Decide if the company will be able to sell enough for the
product to be a success: To see whether there will be enough
sales of the product to break-even (development costs
included). How large they think the sales would be and the
likely size of the market share. Break-even analysis.
3. Develop a prototype: Allows the Production department to see
how a product could be manufactured and identify its problems.
4. Launch the product in one part of the country to test the
market: The product is launched on to one small part of the
market. To see if the product can sell or not.
5. Full launch of the product to the whole market.
THE IMPORTANCE OF BRANDING
Traditionally, a product's unique features and quality were explained
by the sellers who made the product. However, since products are
usually sold in private retail shops nowadays, these points need to be
projected differently. Products therefore need to be branded with an
unique brand name and the products features and quality will be
projected with advertisement. The prices of branded goods are
usually higher, since customers are more confident to buy them.
Businesses use brands for their products to encourage consumers to
keep buying their products and not those of their competitors.
The brand name is the unique name of a product that distinguishes
it from other brands.
Brand loyalty is when consumers keep buying the same brand again
and again instead of choosing a competitors brand.
Brand image is an image or identity given to a product which gives
it a personality of its own and distinguishes it from its competitors
brands.
Here are things that are involved with branding:
Unique name (brand name)
Unique packaging.
Needs advertising to enforce the brand's qualities.
Higher price than unbranded products.
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The length of each stage varies with products. The business needs to
identify which stage their products are in so that they can use a
suitable marketing strategy for it.
EXTENDING THE PRODUCT LIFE CYCLE
When a product has reached its maturity or saturation stage a
business may adopt extension strategies to stop sales from falling
which extends the product life cycle. Sales are given a boost by these
strategies.
o Introducing new variations of the product.
Sell into new markets.
Make small changes to the products design and packaging.
Sell through additional, different retail outlets.
Update the product (make it better)
Use a new advertising campaign.
Extension strategies aim to prolong the maturity stage of a product.
Successful extension strategies may result in something like this:
Nevertheless,
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ADVERTISING
The advertising process
1 Set objectives: A business needs to determine the purpose of
advertising.
Decide the advertising budget: Set a limit on how much the
business can spend on advertising. It can be decided based on:
A percentage of predicted sales revenue.
Objectives.
1 Select the media: Using the suitable media for advertising that
is the most cost effective. E.g. TV, newspaper. Determined by
the target audience and the budget. The business will also
decide how often the adverts will appear. Exaples of media:
Evaluate the effectiveness of the campaign: Has the advertising
met objectives? See if sales have increased or if the products
brand image has improved.
Different types of advertising
Informative advertising: The emphasis of advertising is to give
full information about the product. (e.g. computer)
Persuasive advertising: Involves persuading consumers that
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Bags
Adv: Can reach many people - Cheap for local newspapers A lot of info can be put into the ad - Adverts are permanent*
Dis: Not eye-catching if they are in black and white - Does
not grab readers attention.
E.G: Local products Cars - Banks
Leaflets
Adv: Cheap - Given to a wide range of people. - Delivered to
peoples houses. - May contain vouchers to encourage
readers to keep the advert. - Permanent*
Dis: May not be read
E.G: Local events - Retail stores like Seven-Eleven
Cinemas:
Adv: Visual image shows product in a positive way - Fairly
cheap - Effective if target audience goes to see particular
films.
Dis: Only seen by people who go to watch films.
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Magazines:
Adv: Can use specialist magazines to reach only target
audience - Magazine ads are in color and are more
attractive. - adverts can be cut down and kept. - more
information can be put on here than in a tv or in the radio.
Dis:They are only published once per month/week - More
expensive than newspapers. - less attention grabging
E.G: Perfume - Golf equipment - Fashion clothes
Internet (e-commerce):
E.G: Shops put their names on plastic bags - Coca cola use
neon signs.
**Permanent: Adverts can be kept for future references.
Design of adverts
Businesses usually use the AIDA model:
Awareness:Informs consumers that the product exists
everything which calls people attention.
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PROMOTION
Different types of promotion
Promotion is usually used to support advertising and to encourage
new or existing customers to buy the product. Its main function is to
boost sales in the short-term, but not in the long term. It is used to
attract new customers so that they can try out items with the hope
that they will like it and continue to buy it after the promotion has
ended. Here are some ways in which promotion is used:
- Price reductions: Involves reduced prices and money-off
coupons.
o 2x1
- Gifts: Gifts are placed in the packaging of the product to
encourage consumers to buy it. (E.g. toys in McDonald's happy
meal). Sometimes the product comes with some coupons that
the customer has to collect and then change it to get a gift. The
aim is that the costumer may continue buying the product
during and after the promotion.
- Competitions: A card may be put in the packaging allowing the
consumer to enter contests such as the lottery.
- Point-of sale displays and demonstrations: Can be put near the
window and displayed attractively. It could also encourage
people to buy it if they can see how it works (demonstrated by
sales staff)
- After sales service: e.g. warranty services. It reassures the
customers that if the product has a problem then they can go
and fix it for free. This makes the product more attractive than
others without warranty.
- Free samples: Encourages people to try the product and then
buy it. It can be included in other products as well. E.g.
washing machine comes with free washing powder.
- Brandings: Helps to make a difference.
- Sponsorships
The advantages of promotion
Can promote sales during the year when sales are traditionally
low (encourage off-season purchases)
Encourages new customers to try an existing product.
Encourages costumers to try a new product.
Encourages people to buy a product more often or the product
in greater quantities.
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Public relations
o Good for improving the brand/company's image.
o These activities raise public awareness of the company.
o Includes:
- Sponsoring events such as football matches.
- Giving products to charity.
- Employees take part in an activity for a good cause.
- Donating a percentage of products.
Customer service
Customer service is used to retain existing customers (which is
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METHODS OF DISTRIBUTION
Methods of distribution for different channels of distribution can
include:
Department stores: A large store, usually in the centre of town
that sells a wide range of goods from many producers.
Chain stores: Two or more stores which have the same
name/characteristics.
Discount stores: Offers a wide range of products, including
branded products, at discount prices. Often all the products are
similar.
Superstores: Very large out-of-town stores that sell a wide
range of products.
Supermarkets: Retail grocery stores with dairy produce, fresh
meat, packaged food and non-food departments.
Direct sales: Goods are sold directly to the consumer (first
channel of distribution).
Mail order: Customers order via the post by looking at the
catalogue.
Internet/e-commerce: Customers order via the internet by
looking at the website.
E-commerce: Use of the internet and electronic communications to
carry out business transactions.
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Disadvantages:
More expensive for small retailers to buy from a wholesaler.
May not have the full range of products to sell.
Takes longer for perishable products to reach the retailer so
quality decreases.
Wholesaler may be far from small shops.
SELECTING THE CHANNEL OF DISTRIBUTION TO USE
When selecting the channel of distribution to use producers need to
consider a few things:
- What type of product is it? Is it sold to other producers or to
customers?
- Is the product very technical? Will you need to explain how to
use the product? If yes, Channel 1 should be selected (e.g.
airplanes)
- How often is the product purchased? If it is bought every day, it
should be available in many retail outlets, otherwise people
might not bother to buy it at all.
- How expensive is the product? If it is expensive and has an
image of being expensive, then it will be sold in a limited
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Pipelines:
o Is capital intensive.
Advantages:
Cheaper. Low costs. Low prices. High sales.
Increased efficiency.
Little training is needed.
Goods are produced quickly and cheaply.
Goods do not need to be moved around like batch production.
Saves time.
Quality is high and standardized
Disadvantages:
Boring for the workers. Little job satisfaction.
Needs a lot of capital to set up.
If one machine breaks down then the whole production process
stops.
Which type of production should be used?
The type of production that should be used varies with the demand:
Job production: Unique and individual service is required.
Batch production: Demand is higher but products will not be
sold in large quantities. Batches are made to orders.
Flow production: Demand for the product is high and steady.
STOCK CONTROL
Stock control is important so that a business will not run out of stock
and be unable to satisfy demands. When stock levels get to a certain
point (reorder point), more goods need to be reordered for the stock
level to reach its maximum again. If more goods are not reordered,
stocks could run out because of an unexpected surge in demand.
However, keeping a lot of stock costs money, so the level of stock in a
company should always be balanced.
In the other hand, stock has to be control since it can be broken, or
stollen. In addition, knowing the quantity permits you know how
much you have to sell. In the other hand, if you run out of stock in a
complicate situation it means that you are giving an opportunity to
your costumers to get to know the competition.
As a concequence, in a business, tock must be aveilable with
sufficient lead time to meet the needs of the production department.
This is particulary in batch or flow production where the production
must be stopped if there are not raw materials at hand.
Lead time is the margin of time between the date when stock is
obtained and the date when it is sold on
There are two ways of controlling the stock:
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Just in case:
Lead time: You are receiving stock. Time you recorder
Minimum level: Minimum stock available. Stock you have just in
case = butter stock.
You have to know the amount of units you need.
Just in time:
No stock avoiding (you reduce the space needed) some costs
(same fix costs and no costs of insurance)
Important a trust worded supplier stable demand.
Eliminate the waste no butter stock
You reduce cost no insuring.
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Kaizen.
JIT production.
Cell production.
Kanban.
KAIZEN
Continuous improvement through the elimination of waste.
Ideas of workers
Regular meetings of workers to discuss how to increase
efficiency.
Advantages:
Increased productivity.
Reduced amount of space needed for the production process.
Work-in-progress is reduced.
Improved layout of the factory floor may combine jobs of some
employees, freeing others to do other things.
JUST IN TIME PRODUCTION
o Eliminating the need to hold stocks of raw materials or
unsold
stocks of the finished product.
o Goods are delivered to the selling point just when they
are needed.
o Warehouse space is not needed and no extra stock is
ordered.
o JIT production needs:
** Reliable suppliers.
** Efficient system of ordering raw
materials.
CELL PRODUCTION
Production line is divided into separate, self-contained units
called cells.
Each cell makes an identifiable part of the finished product.
Improves the morale of the employees and makes them work
harder so they become more efficient. The employees feel more
valued.
KANBAN
A system of ordering used with JIT production.
Operates with two component bins: one on the production line
and one being made ready. When the first is empty it is
wheeled to the section of the factory that produces those
components. This triggers the production of the components
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Unit 24
LOCATION OF INDUSTRY
The location of a business is considered when it starts-up or when its
present location is unsatisfactory. The business's objectives as well as
the conditions of the environment change, so the business may need
to look for a new location once in a while.
FACTORS AFFECTING THE LOCATION OF A MANUFACTURING
BUSINESS
Production methods and location decisions
Small scale (job production) transport and location of
suppliers is less important.
Large scale (flow production) transport and location of
suppliers are more important.
Market
The product gained weight and its heavier than the
components Need to be near to cut transportation expenses.
Need to be near to transport fresh goods.
Raw materials/components
Components may be heavier or more expensive to transport
than the product Need to be near to cut transportation
expenses.
Need to be near to transport perishable goods.
External economies of scale
How good near by businesses are
- Support services: for maintenance of equipment.
- For training workers
- Local education establishments: research departments.
Availability of labour
Skills required
How skilled they are.
Government influence
Grants/subsidies.
Regulations and restrictions
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Do shoppers go there?
What kind of shoppers go there?
Nearby shops
Visited shops.
Competitors.
Mass market.
Gap in the market.
Customer parking available/nearby: Convenience for the
customer.
Availability of suitable vacant premises: Goods sites (e.g. in
shopping centres) are in short supply. A suitable vacant shop needs
to be available.
Rent/taxes: The more popular the site, the higher the rent and
taxes.
Access for delivery vehicles: For delivering goods.
Security: If the area is insecure:
- Goods will be stolen.
- Insurance will be reluctant to insure the shop.
Legislation: Laws restricting the trade of goods in certain areas.
FACTORS THAT INFLUENCE A BUSINESS TO RELOCATE EITHER
AT HOME OR ABROAD
The present site is not large enough for expansion: If a
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- Tariffs
- Quotas
FACTORS AFFECTING THE LOCATION OF A SERVICE SECTOR
BUSINESS
Customers
Direct contact required:
- Is it convenient for customers to go the business?
- Will the service arrive at customers' houses in time?
Rent/taxes: If the business does not need direct contact with the
customer, then it could locate in cheaper areas.
Unit 25
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