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Business Activity
Resources – the inputs that are used in the production process to produce goods and services. These
are also called Factors of Production:
Capital – the finance needed to set up a business and pay for its continuing operation as well as
all the man-made resources used in production
Enterprise – the driving force, provided by risk-taking individuals known as entrepreneurs, that
combines the other factors of production into a unit that is capable of producing goods and
services. It provides a managing, decision making and co-ordinating role.
Labour – manual and skilled labour make up the workforce of the business
Land – the general term not only includes land itself but all of the renewable and non-renewable
resources of nature
Self-Sufficient – depending on one’s own goods that were personally made or grown by oneself
‘The Economic Problem’ – there are insufficient goods to satisfy all of our needs and wants at any
one time
Opportunity Cost – the benefit of the next most desired option which is given up e.g. if a consumer
were to choose to purchase salad over fries, fries would be the opportunity cost for this consumer
Consumer Goods – these are physical and tangible goods sold to the general public.
Consumer Services – non-tangible products that are sold to the general public e.g. hotel
accommodation, insurance services, train journeys
Capital Goods – physical goods that are used by industry to aid in the production of other goods and
services e.g. machines, commercial vehicles
Primary Sector – those firms engaged in the extraction of natural resources so that they can be used
and processed by other firms
Secondary Sector – those firms that manufacture and process products from natural resources
Tertiary Sector – those firms that provide services to consumers and other businesses
Entrepreneur – someone who takes the financial risk of starting and managing a new business
venture. The characteristics of an entrepreneur include:
Lack of record keeping – they need to ensure they keep up-to-date records (e.g. customer
orders, deliveries) especially financial records to ensure they are making a profit. Without
record keeping, the organisation of the business will be poor, causing poor relationships
with suppliers and customers, as well as making decisions more time consuming and
possibly affecting staff morale.
Lack of cash and working capital – they need to ensure they have enough funds for the day
to day running of the business. This can be done through establishing a relationship with the
bank to ensure short term and long term solutions or by using effective credit control for
customers. Cash flows should be constructed so that the liquidity and working capital needs
of the business can be assessed month by month.
Poor management skills – there may be poor leadership skills, cash handling and cash
management, planning and coordinating, decision making skills, communication skills, or
marketing, promotion and selling skills. Without such skills, there may be issues in several
departments of the new firm.
Changes in the business environment – new competitors, legal changes (e.g. safety
regulations), economic changes (e.g. during a recession) and technological changes may
cause a loss in profits.
Impacts of Enterprise on the Economy
Employment Creation
o Employing workers into business
o If business expands, possibly causes suppliers to employee more workers
o More income for workers to spend; greater circulation of money in the economy
Economic Growth
o Increase in product output means a growth in Gross Domestic Product
o Increased living standards for the population, through larger choice of products
o Increased output and consumption leads to increased tax revenues for government
Firms’ survival and growth
o Expansion leads to important businesses in the business world
o Enhancing the customers, economies and countries needs
o Takes place of declining businesses
Innovation and Technological change
o Dynamism added to economy through innovative businesses
o Businesses become more competitive with more creative products and services
o Increased use of technology in firms, helps to advance businesses and makes more
higher quality products for consumers
Exports
o Through expansion abroad, businesses can bring more international competitiveness
o Increase the value of the export market
Personal Development
o Starting and managing a business aids in developing the skills of the nation
o Will encourage others to set up to help then further benefit the economy
o Successful start-ups will help an individual reach self-actualisation
Increased Social Cohesion
o Unemployment leads to serious social problems
o Enterprises bring jobs and income to achieve social cohesion
o Enterprises provide a good example for others to follow
Industrialisation
Advantages Disadvantages
Total national output (GDP) increases and this The chance of work in manufacturing can
raises standards of living encourage a huge movement of people from the
Increasing output of goods can result in lower countryside to the towns, which leads to housing
imports and higher exports of such products and social problems
Value is added to the countries’ output of raw Imports of raw materials and components are
materials, rather than just exporting these as often much needed, which can increase the
basic, unprocessed products country’s import costs
Expanding and profitable firms will pay more tax Much of the growth of manufacturing industry is
to the government due to the expansion of multinational companies
Expanding manufacturing businesses will result
in more jobs being created
Economies
Economy – the state of a country or region in terms of the production and consumption of goods
and services, and the supply of money
Mixed Economy
Mixed Economy – economic resources are owned and controlled by both private and public sectors
Advantages Disadvantages
It has the advantage of taking the benefits of Since welfare of society is important in a mixed
capitalist nature of private companies and economy, it leads to lower than optimum use of
socialist nature of government. the resources
Less inequality of income because government Private enterprises have to face a lot of difficulty
aims to have a balanced economic growth because of various government regulation
Individuals can run businesses and make profits
Government can break up monopolies
Free Market Economy – economic resources are owned by the private sector with little state
intervention
Advantages Disadvantages
A variety of goods and services produced Businesses will only produce profitable goods
Businesses respond quickly to changes in Businesses will only sell products to customers
consumer demand who can afford to pay most for them
Businesses will innovate due to profit motive Resources will only be employed if profitable
There is no taxation Harmful goods may be produced if profitable
Harmful effects of the products may be ignored
Firms may dominate market supply of a product
Command Economy
Command/Planned Economy – economic resources are owned, planned and controlled by the state
Advantages Disadvantages
Prices are kept under control and thus Consumers cannot choose and only those goods
everybody can afford to consume goods/services and services are produced which are decided by
There is less inequality of wealth the government
There is no duplication as the allocation of Lack of profit motive may lead to firms being
resources is centrally planned inefficient
Low level of unemployment as the government A lot of time and money is wasted in
aims to provide employment to everybody communicating instructions from the
Elimination of waste resulting from competition government to the firms
between firms
Legal Structures
Unlimited Liability – the owners of the business are held responsible for the debts of the business,
meaning their personal assets are at risk.
Limited Liability – the only liability, or potential loss, a shareholder has if the company fails is the
amount invested in the company, not the total wealth of the shareholders.
Sole Trader – a business in which one person provides the permanent finance and, in return, has full
control of the business and is able to keep all of the profits
Advantages Disadvantages
Easy to set up – few legal formalities Unlimited Liability
Owner has complete control Long hours often necessary
Owner keeps all profits Difficult to raise additional capital
Business can be based off of interests and skills Owner is unable to specialise in interesting areas
of the owner, rather than working as an of the business as they are responsible for all
employee for a larger firm aspects of management
Able to choose times and patterns of working Can face intense competition from bigger firms
Able to establish close relationships with staff Lack of continuity – there is no separate legal
and customers status so when the owner dies, the business will
end too
Partnerships – a business formed by two or more people to carry on a business together, with
shared capital investment and, usually, shared responsibility. Partners are bound by the terms of the
Partnership Act 1890.
Advantages Disadvantages
Partners may specialise in different areas of Lack of continuity – the partnership will have to
business management be reformed in the event of a death of a partner
Shared decision making Unlimited Liability for all partners
Additional capital injected by each partner Profits are shared
Greater privacy than corporate organisations Not possible to raise capital from selling shares
Easy to set up as less formalities than limited All partners are bound by the decisions made by
companies any one of them
Shared responsibility so business losses are A sole trader, taking on partners, will lose
shared between the partners independence of decision making
Limited access to capital when compared to
Limited companies
Potential for conflict between partners
Sleeping Partner – a partner who usually supplies the business with capital, however they do not
have an active role in running the business. These have limited liability.
Deed of Partnership – provides agreement issues, such as voting rights, the distribution of profits,
the management role of each partner and who has the authority to sign contracts.
Share – a certificate confirming part ownership of a company and entitling the shareholder owner to
dividends and certain shareholder rights
Limited Companies – incorporated business with limited liability, a separate legal personality and
continuity of a business. In setting up, these must register with the Registrar of Companies at
Companies House. To do this they must complete:
Memorandum of Association
o Details the name of the company
o Details the address of the head office
o Details the maximum share capital for which the company seeks authorisation
o Details the companies declared aims
Articles of Association
o Details the internal workings of the business and control of the business e.g. it
details the names of directors and the procedure to be followed at meetings
Private Limited Companies – an incorporated business that is owned by shareholders but does not
have the legal right to offer shares for sale to the public
Advantages Disadvantages
Shareholders have limited liability Legal formalities involved in establishing the
Separate legal personality business
Continuity in the event of a shareholder’s death Quite difficult for shareholders to sell shares
Able to raise capital from sale of shares to Capital cannot be raised by sale of shares to the
family, friends and employees general public
Original owner is still often able to retain control End of year accounts must be sent to Companies
Greater status than an unincorporated business House – available for public inspection there
Public Limited Companies – an incorporated business that has the legal right to offer shares for sale
to the public. Shares of these companies are listed on the Stock Exchange
Advantages Disadvantages
Limited Liability Legal formalities in formation
Ease of buying and selling of shares for Cost of business consultants and financial
shareholders encourages investment advisers when creating such a company
Separate legal identity Risk of takeover due to the availability of shares
Access to substantial capital sources due to the Legal requirements concerning disclosure of
ability to issue a prospectus to the public and to information to shareholders and the public e.g.
offer shares for sale annual publication of reports and accounts
Continuity Share prices subject to fluctuation – sometimes
for reasons beyond business control
Directors influenced by short-term objectives of
major investors (Short-termism)
Separate Legal Personality/Identity – the company is recognised in law as having a legal identity
separate from that of its owners
Cooperatives – business organisations owned and controlled by a group of people to undertake an
economic activity for mutual benefit.
Consumer Cooperatives – members buy goods in bulk, sell them, and divide the profits between
members
Worker Cooperatives – workers buy the business and run it; decisions and profits are shared by the
members.
Advantages Disadvantages
Good motivation for all members to work hard Poor management skills unless professional
as they will benefit from shared profits managers are employed
Working together to solve problems and take Capital shortages because no sale of shares to
decisions the non-member general public is allowed
Members share responsibilities, decision making Slow decision making if all members are to be
Bulk Buying consulted on important issues
Franchises – a business that uses the name, logo and trading systems of an existing successful
business; based upon the purchase of a franchise licenser from the franchiser. Franchise businesses
have a lower failure rate than non-franchise firms.
Advantages Disadvantages
Fewer chances of new business failing as an Share of profits or revenue has to be paid to
established brand and product are being used franchiser each year
Advice and training offered by franchiser Initial franchise license fee can be expensive
National advertising paid by franchiser Local promotions may be paid by franchisee
Supplies obtained from established suppliers No choice of supplies or suppliers to be used
Franchiser agrees not to open another branch in Strict rules over pricing and layout of outlet
local area reduce owner’s control over their own business
Joint Ventures – where two or more businesses agree to work closely together on a particular
project and create a separate business division to do so.
Advantages Disadvantages
Costs and risks of a new business venture are Errors and mistakes might lead to one blaming
shared the other for mistakes
Different companies might have different The business failure of one of the partners would
strengths and experiences and they therefore fit put the whole project at risk
well together
They might have their major markets in different Styles of management and culture might be so
countries and they could exploit these with the different that the two teams do not blend well
new product more effectively than if they both together
decided to ‘go it alone’
Holding Companies – a business organisation that owns and controls a number of separate
businesses, but does not unite them into one unified company. They often have separate businesses
in different markets altogether. The holding company has diversified interests.
Public Corporations – businesses enterprise owned and controlled by the state. They often do not
have profit as a main objective.
Advantages Disadvantages
Managed with social objectives rather than Tendency towards inefficiency due to lack of
solely with profit objectives strict profit target
Loss-making services might still be kept Government may interfere in business decisions
operating if the social benefit is great enough for political reasons
Finance raised mainly from the government Subsidies can encourage inefficiencies
Family-owned Businesses – businesses actively owned and managed by at least two members of the
same family
Advantages Disadvantages
Commitment/dedication Succession/Continuity problems
Reliability and pride Informality in setting practices and procedures
Knowledge and Continuity; training provided Traditional/Lack of innovation
from young age Family Conflict
Stakeholders
Stakeholders – individuals or groups that have a direct interest in the activities of a business.
Stakeholders can influence what a business does, and as they will be affected by the business, they
will try to get the business to do what they want.
Stakeholder Theory/Concept – the view that businesses and their managers have responsibilities to
a wide range of groups, not just shareholders
Capital Employed – the total value of all long-term finance invested in the business
MARKET SHARE =
External Growth – when a business takes over or merges with another business
Benefits of Business Growth
Increased profits
Increased market share
Increase in economies of scale
Increased power and status
Reduced risk of being a takeover target
Job Creation – the small businesses usually employ a significant proportion of a working
population
Entrepreneurs – the small businesses are normally run by entrepreneurs; creates variety and
choice in the market
Competition – more competition for larger businesses causes an increase in quality of goods
Specialist goods – they may form niche markets
Lower average costs – small firms do not have to pay as much as big firms to produce their
products
Supplier to larger businesses – small firms can supply goods to larger firms
Hierarchy of Objectives – the aims and objectives of a firm are placed in descending order of
strategic importance
Aim
Mission
Corporate objectives
Divisional Objectives
Departmental Objectives
Individual Targets
Strategy – the long-term plans of action of a business that focus on achieving its aims
Tactic – short-term policy or decision aimed at resolving a particular problem or meeting a specific
part of the overall strategy
Mission Statement – a statement of the business’ core aims, phrased in a way to motivate
employees and to stimulate interest by outside groups.
Corporate Objectives – the long-term goals of the corporation that give focus and direction to the
business. These form the foundation for the strategic plans for the business. These are SMART.
Size and Legal Form – Smaller businesses will be more concerned with survival or satisficing,
whereas larger business may be more concerned rapid business growth or profit maximisation.
Corporate Culture – the code of behaviour and attitudes that influence the decision-making
style of the managers and other employees of the business. Culture is about people, how they
perform and deal with others, how aggressive they are in the pursuit of objectives and how
adaptable they are in the face of change.
Sector of Business – state-owned organisations tend not to have profit as a major objective,
instead ‘quality of service’ measures are often used.
Number of Years in Operation – newly formed businesses are likely to be driven by survival.
Once well established, the business may pursue other objectives such as growth and profit.
Profit Maximisation – private sector firms want to gain the highest profit through increasing
revenue and decreasing costs of production
Growth – this is usually measured in terms of sales or value of output; growth can reduce risk of
takeovers, appeal to new competitors, and motivate managers
Maximising shareholder value – helps to direct management action towards taking decisions
that would increase share price and returns to shareholders
Increasing Market share – indicates that the marketing mix of the business is proving to be more
successful than that of its competitors. Becoming the ‘brand leader’ would make customers and
retailers want to be more involved with this product over the competitors.
Maximising short-term sales revenue – would benefit managers and staff when salaries and
bonuses are dependent on sales revenue levels
Survival – likely to be key objective of most new business start-ups. There is a high failure rate of
new business, which means that to survive for the first two years of trading is a very important
aim for entrepreneurs.
Profit Satisficing – aiming to achieve enough profit to keep the owners happy but not aiming to
work flat out to earn as much profit as possible. Once a satisfactory level of profit has been
achieved, the owners consider that other aims take priority – such as more leisure time.
Corporate Social Responsibility
1. Set objectives
2. Assess the problem or situation
3. Gather data about the problem and possible solutions
4. Consider all decision options
5. Make the strategic decision
6. Plan and implement the decision
7. Review its success against the original objectives
Social Enterprises
Social Enterprise – a business with mainly social objectives that reinvests most of its profits into
benefiting society rather than maximising profits. They directly produce goods or resources and use
social aims and ethical ways to achieve them. They need surplus or profit to survive.
Corporate Social Responsibility – the concept that accepts that businesses should consider the
interests of society in its activities and decisions, beyond the legal obligations that they have
Ethical Code – a document detailing a company’s rules and guidelines on staff behaviour that must
be followed by all employees
Social Audit – a report on the impact a business has on society – this can cover pollution levels,
health and safety record, sources of supplies, customer satisfactions and contribution to the
community. Annual targets will be detailed to help improve the businesses activities.
Working Capital – the capital needed to pay for raw materials, day-to-day running costs and credit
offered to customers.
Working Capital Cycle – the longer it takes for this cycle to be completed, the more working capital
needed. It needs to be managed effectively by concentrating on the four main components:
Debtors
o No extending credit to customers
o Debt factoring
o By being careful to discover whether new customers are creditworthy
o By offering discount to clients who pay promptly
Credit
o Increasing the range of goods and services bought on credit
o Extend the time taken to pay
Inventory
o Keeping smaller inventories
o Using technology to enhance re-ordering
o Efficient inventory control
o Use Just in Time (ordering stock just before necessary)
Cash
o Use of cash flow forecasts
o Wise use or investment of excess cash
o Planning for periods where there may be insufficient cash inflows
Sell On
Credit
Production Cash
Materials
and Stock
Liquidity – the ability of a firm to be able to pay its short-term debts
Liquidation – when a firm ceases trading and its assets are sold to pay for suppliers and creditors
Capital Expenditure – the purchase of assets that are expected to last for more than one year, such
as building or machinery
Revenue Expenditure – spending on all costs and assets other than fixed assets and includes wages
and salaries and materials bought for stock
Business Plan – a detailed document giving evidence about a new or existing business, that aims to
convince external lenders and investors to extend finance to the business
Expansion
Purchasing of assets
Special situations – decline in sales, economic downturn
Setting up a business
Working Capital
Takeovers or acquisitions
Equity Finance
Equity Finance – permanent finance raised by companies through the sale of ownership of the
business/shares. This can be done in two ways:
Obtain a listing on the Alternative Investment Market (AIM), which is part of the stock
exchange concerned with smaller companies
Apply for a full listing on the stock exchange by selling at least 50,000 worth of shares and
having a satisfactory record of investment to feel confident. This sale of shares can be
undertaken in two main ways:
o Public issue by prospectus
o Arranging a placing of shares with institutional investors without the expense of a
full public issue. This is often done by means of a rights issue of shares.
Rights Issue – existing shareholders are given the right to buy additional shares at a discounted price
o Retained Profit – earned profit that is not taken as tax or used to pay owners or shareholders
Once invested back into the business the retained earnings will not be paid out
Newly formed companies or ones trading at a loss will not have access
o Sale of Assets
Assets can be sold to leasing company and leased back
Opportunity cost of selling assets that could be used in the future
o Reductions in Working Capital
Money raised through selling assets or reducing debt
Firm’s liquidity may be reduced to risky level
External Sources of Finance
Short-Term
o Bank Overdraft – bank agrees to a business borrowing up to an agreed limit as and when
required
Amount raised can vary from day-to-day
Often High Interest Rates, Bank can ‘call in’ overdraft – force firms to pay back
o Debt Factoring – selling of claims over trade receivables to a debt factor in exchange for
immediate liquidity
Any debts to the business can be received immediately
Only a proportion of the value of the debts will be received as cash
o Trade Credit – delaying the bills for goods and services to suppliers or creditors
Extra existing finance, no interest rates must be paid for this ‘loan’
Supplier confidence lost, quick payment discounts lost
Medium-Term
o Leasing – obtaining the use of equipment or vehicles and paying a rental or leasing
charge over a fixed period
Avoids raising long-term capital to buy assets, leasing company repairs/upgrades
Periodic payments may total more than one payment, asset returned after use
o Hire purchase – when an asset is sold to a company that agrees to pay fixed repayments
over an agreed time period
The asset belongs to the company, purchase made over time
Periodic payments may total more than one payment
o Medium-term Loan
Bank can supply large sum quickly
Interest rates must be paid back to bank, collateral must be provided
Long-Term
o Share Issue – selling some ownership of the business to investors
Nothing needs to be paid back
Ltds cannot sell shares publicly, expensive to join stock exchange, risk of
takeovers, some loss of ownership,
o Debentures – bonds issued by companies to raise debt finance, often with a fixed rate of
interest
Usually not secured on an asset, convertible debentures can be turned into
shares overtime so the company issuing them will not have to pay it back
Company must pay fixed rate of interest each year up to 25 years, if secured on
an asset and the firm ceases trading the investors may sell the asset
o Long-term Loan – loans that do not have to be repaid for at least one year
Bank can supply a large sum quickly that does not have to be paid back for
awhile
Interest rates must be paid back to bank, collateral must be provided
o Grants – money donated to the business by outside agencies
Do not have to be repaid if conditions are met
Difficult to receive – the business has no choice over who gets the grants
Other Sources of Finance
Venture Capital – risk capital invested in business start-ups or expanding businesses that have good
profit potential but do not find it easy to gain finance from other sources
Microfinance – providing financial services for poor and low-income customers who do not have
access to banking services, such as loans and overdrafts offered by traditional commercial banks
Crowd Funding – the use of small amounts of capital from a large number of individuals to finance a
new business venture
Use of finance
Size of existing borrowing
Flexibility of firm’s need for finance
Legal structure and desire to retain control
Amount required
Cost of debt
Time period for which finance is required
Existing assets of the firm
Costs
Fixed Costs – costs which do not change with output. These must be paid even when output is zero
Direct Costs – costs that can be clearly identified with each unit of production and can be allocated
to a cost centre
Indirect Costs – costs that cannot be identified with a unit of production or allocated accurately to a
cost centre
Marginal Costs – the extra cost of producing one more unit of output
Profit/Loss – how much money the firm has made once costs of production have been taken into
account
Breaking Even – the level of output where total revenue is equal to total cost
Contribution – how much per unit a company’s variable cost can contribute to paying the fixed costs.
Once the fixed costs are covered, it can then contribute to profit.
Margin of Safety – the difference in terms of units of production, between the current production
level and the break-even level
Total Revenue
$ Total Costs
Variable Costs
Break Even
Point
Margin of Safety
Fixed Costs
Output
Advantages Disadvantages
Charts are relatively easy to construct and Assumption that costs and revenues are
interpret. represented by straight lines is unrealistic.
Analysis provides useful guidelines to There is no allowance made for inventory levels
management on break-even points, safety on the break-even chart. It is assumed that all
margins and profit/loss levels at different rates units produced are sold. This is unlikely to always
of output. be the case.
Comparisons can be made between different It is unlikely that fixed costs remain unchanged
options by constructing new charts to show at different output levels up to maximum
changed circumstances. capacity.
Break-even analysis can be used to assist Not all costs can be conveniently classified into
managers when taking important decisions. fixed and variable costs e.g. electricity
The equation produces a precise breakeven
result.
Accounting
The Double-Entry Principle: Every time a business engages in a transaction e.g. buying materials,
there are two sides to the transaction. This means that the accounts of the business must include it
twice to ensure the accounts balance
Accruals: These arise when services have been supplied to a business but have not yet been paid for
at the time the accounts are drawn up. If no adjustment was made for this accrued expense, then
the profits in the current accounting period will be overstated. The accruals adjustment add the
unpaid costs to the total costs of the current accounting period
The Money-Measurement principle: Accountants need a common form of measuring the wealth and
performance of the business they work for. All accounting data are converted into money – hence
the principle of money measurement. Only items and transactions that can be measured in
monetary terms are recorded in a business’s account books.
Conservatism/Prudence Concept: Accountants are trained to be realistic about the values used in
accounts. The conservatism principle states that accountants should provide for and record losses as
soon as they are anticipated. Profits, on the other hand, should not be recorded until it is certain
that goods or services have been sold at a profit and not a loss.
The Realisation Concept: The realisation concept states that all revenues and profits should be
recorded in the accounts when the customer is legally bound to pay for them, unless they can be
proven to be faulty. So sales are not recorded when an order is taken or when payment is actually
made – but when the goods or services have been provided to the customer.
Business Accounts
Cash Flow Statement – shows where the firms funds have come from and how they have been used
during the previous financial year
Opening Balance – cash held by the business at the start of the month
Closing Balance – cash held by the business at the end of the month, becoming next month’s
opening balance
Net monthly cash-flow – estimated difference between monthly cash inflow and outflow
Mistakes can be made in preparing the revenue and cost forecasts or they may be drawn up
by inexperienced entrepreneurs or staff
Unexpected cost increases can lead to major inaccuracies in forecasts e.g. fluctuations in oil
prices can lead to the cash-flow forecasts of airlines being misleading
Wrong assumptions can be made in estimating the sales of the business, perhaps based on
poor market research and this will make the cash inflow forecasts inaccurate
Causes of Cash-Flow Problems
Lack of planning
Poor credit control
Allowing customers too long to pay debts
Expanding too rapidly/Overtrading
Unexpected events i.e. equipment breakdowns, weather
Credit Control – monitoring of debts to ensure that credit periods are not exceeded
Bad Debt – unpaid customers’ bills that are now very unlikely to ever be paid
Overtrading – expanding a business rapidly without obtaining all of the necessary finance so that a
cash-flow shortage develops
Cost of Sales/Goods Sold – the direct cost of the goods that were sold during the financial year
2. Profit and Loss Section – calculates the overall level of profit made
PROFIT FOR YEAR (PROFIT AFTER TAX) = Operating Profit – (Interest Costs + Tax)
3. Appropriation Account – shows how any profits made by the business have been distributed
Dividends – the share of the profits paid to shareholders as a return for investing in the company
Retained Earnings/Profit – the profit left after all deductions, including dividends, have been made;
this is ‘ploughed back’ into the company as a source of finance
Balance Sheet (Statement of Financial Position) – shows the value of a business’ assets and
liabilities at a particular time
Non-current Assets (Fixed Assets) – assets to be kept and used by the business for more than one
year
Intangible Assets – items of value that do not have a physics presence, such as patents and
trademarks
Current Assets – assets that are likely to be turned into cash before the next balance-sheet date
Trade Receivables (Debtors) – the value of payments to be received from customers who have
bought goods on credit
Non-Current Liabilities – value of debts of the business that will be parable after more than one year
Current Liabilities – debts of the business that will usually have to be paid within one year
Accounts/Trade Payable (Creditors) – value of debts for goods bought on credit payable to suppliers
Share Capital – the total value of capital raised from shareholders by the issue of shares
Example Income Statement Example Balance Sheet
Sales Revenue 1315860 Non Current Assets
Cost of Sales 48826 Premises 889000
Gross Profit 1267034 Machinery 126000
Expenses Vehicle 200000
Fixtures 15000 Current Assets
Loan Repayments 2500 Stock 9500
Mortgage 750 Cash 2260
Other Expenses 2600 Accounts Receivable 35798
Advertising 2100 Total Assets 1262558
Insurance 1800 Current Liabilities
Wages 42336 Accounts Payable 49000
Total: 67086 Overdraft 7000
Net Profit 1199948 Non Current Liabilities
Interest 10500 Mortgage 300000
Profit Before Tax 1189448 Loan 4000
Tax at 20% 237890 Total Liabilities 360000
Profit After Tax 951558 Share Equity 6000
Dividends 55000 Retained Profit 896558
Retained Profit 896558 Total Equity and Liabilities 1262558
Goodwill – arises when a business is valued at/sold for more than the balance-sheet value of assets
Intellectual Capital/Property – amount by which the market value of a firm exceeds its tangible
assets less liabilities
Details of the sales and profitability of each good or service produced by the company and of
each division or department
The research and development plans of the business and proposed new products
The precise future plans for expansion or rationalisation of the business
The performance of each department or division
Evidence of the company’s impact on the environment and the local community
Future budgets or financial plans
Window Dressing – presenting the company accounts in a favourable light – to flatter the business
performance. Common ways of window dressing include:
Selling assets at the end of the financial year then lease them back
Reduce the amount of depreciation of fixed assets; increase profits and asset value
Ignoring some trade receivables
Giving stock levels a higher value than what they are worth
Delaying the payment of bills or incurring expenses until after they have been published
Users of Accounts
Business Managers
o To measure the performance of the business to compare against targets, previous
time periods and competitors
o To help them take decisions, such as new investments, closing branches and
launching new products
o To control/monitor the operation of each department and division of the business
o To set targets or budgets for the future and review these against actual performance
Banks
o To decide whether to lend money to the business
o To assess whether to allow an increase in overdraft facilities
o To decide whether to continue an overdraft facility or loan
Creditors
o To see if the business is secure and liquid enough to pay off its debts
o To assess whether the business is a good credit risk
o To decide whether to press for early repayment of outstanding debts
Customers
o To assess whether the business is secure
o To determine whether they will be assured of future supplies of the goods they are
purchasing
o To establish whether there will be security of spare parts and service facilities
Government/Tax Authorities
o To calculate how much tax is due from the business
o To determine whether the business is likely to expand and create more jobs
o To assess whether the business is in danger of closing down
o To confirm that the business is staying within the accounting regulations
Investors
o To assess the value of the business and their investment in it
o To establish whether the business is becoming more/less profitable
o To determine what share of the profits investors are receiving
o To decide whether the firm has potential for growth
Workforce
o To assess whether the business is secure enough to pay wages and salaries
o To determine whether the business is likely to expand or be reduced in size
o To determine whether jobs are secure
o To find out whether, if profits are rising, a wage increase can be afforded
o To find out how the average wage in the business compares with the salaries of
directors
Local Community
o To see if the business is profitable and likely to expand, which could be good for the
local economy
o To determine whether the business is making losses and whether this could lead to
closure
Ratio Analysis of Accounts
Gross Profit Margin – shows the relationship between gross profit (before overheads and expenses)
and sales revenue (turnover)
Net Profit Margin – shows the relationship between net profit and sales revenue (turnover)
Current Ratio – measures the relationship between current assets and current liabilities
CURRENT RATIO =
Acid-Test Ratio – measures liquidity but does not take stock into account
ACID-TEST RATIO =
Reducing direct costs – consumers’ perception of quality may be damaged and therefore
affect the product’s reputation or they may expect lower prices. Motivation levels may fall if
wage costs cut, or replaced by machinery which may also require retraining.
Increase selling price – total profit could fall is consumers switch to competitors. Consumers
may consider this to be a ‘profiteering’ decision and the long-term image of the business
may be damaged
Reducing overhead costs – efficient operation may be damaged if fewer managers or lower
salaries. Lower rental costs could mean moving to a cheaper area, which may affect the
company’s image. Promotion costs may be cut which could lead to sales falling.
Sell off fixed assets for cash – if assets are sold quickly, they may not raise their true value. If
assets are still needed by the business, then leasing charges will add to overheads and
reduce operating profit margin
Sell of inventories for cash – this will only improve the current ratio. This will reduce the
gross profit margin if inventories are sold at a discount. Consumers may doubt the image of
the brand if inventories are old off cheaply. Inventories might be needed to meet changing
customer demand levels and therefore JIT may be difficult to adopt in some countries.
Increase loans – There will be an increase in gearing ratio, working capital and interest costs
Low-Quality Profit – one off profit that cannot easily be repeated or sustained
Managers – responsible for setting objectives, organising resources and motivating staff so that the
organisation’s aims are met. Managers must also coordinate activities in the firm, as well as
controlling and measuring performance against targets.
Directors – senior managers elected into office by shareholders in a limited company. They are
usually head of a major functional department, such as marketing.
Supervisors – appointed by management to watch over the work of others. This is usually not a
decision-making role but they will have responsibility for leading a team of people in working
towards pre-set goals
Workers’ Representatives – elected by the workers in order to discuss areas of common concern
with managers
Informal Leader – a person who has no formal authority but has the respect of colleagues and some
power over them
Empowerment – allows workers some degree of control over how their task should be undertaken
Interpersonal Roles – dealing with and motivating staff at all levels of the organisation
o Figurehead – symbolic leader, takes on social or legal nature
o Leader – motivating subordinates, selecting and training staff
o Liaison – linking with managers and leaders of other divisions of the business and
other organisations
Informational Roles – acting as a source, receiver and transmitter of information
o Monitor (receiver) – collecting data relevant to the business operations
o Disseminator – sending information collected from internal and external sources to
the relevant people within the organisation
o Spokesperson – communicating information about the organisation, such as current
position and achievements, to external groups and people
Decisional Roles – taking decisions and allocating resources to meet the organisations’
objectives
o Entrepreneur – looking for new opportunities to develop the business
o Disturbance Handler – responding to changing situations that may put the business
at risk, assuming responsibility when threatening factors develop
o Resource allocator – deciding on the spending of the organisations financial
resources and allocation of physical and human resources
o Negotiator – representing the organisation in all important negotiations
Leadership
Leadership – the art of motivating a group of people towards achieving a common objective
Autocratic – a style of leadership that keeps all decision making at the centre of the organisation.
Lower levels of the hierarchy are given little delegated authority and communication is usually just
one way.
Advantages Disadvantages
Experienced leaders have full control of decision Demotivates staff who want to contribute and
making accept responsibility
Good in crisis situations Decisions do not benefit from staff input
Democratic – a style of leadership that allows the majority opinion of staff to influence decisions. It
involves a great deal of participation from the workforce but can be time consuming.
Advantages Disadvantages
Encourages participation in decision making Consultation with staff can be time consuming
Two-way communication is used which allows Issues may be sensitive to staff e.g. job losses or
feedback from staff too secret for staff to be aware of
Laissez-Faire – a style of leadership that leaves much of the running and decision making of the
business to the workforce. This may be appropriate in research and development departments
staffed by skilled specialists that are self motivated.
Advantages Disadvantages
Gives employees as much freedom as possible Lack of feedback may be demotivating
Managers communicate goals to employees but Workers may not appreciate lack of structure
allow them to choose how they wish to work and direction in their work
Paternalistic – a style of leadership based on the approach that the manager is in a better position
than the workers to know what is best for the organisation
McGregor’s Theory X – managers believe the workers dislike work, will avoid responsibility and are
not creative
McGregor’s Theory Y – managers believe that workers can derive as much enjoyment from work as
from rest and play, will accept responsibility and are creative
Emotional Intelligence – the ability of managers to understand their own emotions, and those of the
people they work with, to achieve better business performance. Emotional Intelligence
competencies should try to develop and improve on:
Self Awareness – knowing what we feel using that to guide decision making
Self Management – being able to recover quickly from stress
Social Awareness – sensing what others are feeling
Social Skills – handling emotions in relationships well and understanding social situations
Motivation
Motivation – the act or process of stimulating an action, providing an incentive or motive, especially
for an act completed. It also defined as what caused people to act or do something in a positive way.
Motivation Theory – the study of factors that influence the behaviour of people in the workplace.
Absenteeism – a deliberate absence for which there is not a satisfactory explanation, often
follows a pattern
Lateness – arriving late may often becomes habitual
Poor Performance – poor-quality work; low levels of work or greater waste of materials
Accidents – poorly motivated workers are often more careless, concentrate less on their
work or distract others which will increase accidents
Labour Turnover – people leave for reasons that are not positive; even if they do not get
other jobs, they spend time trying to get them
Grievances – there are more of them within the workforce and there might be more union
disputes
Poor Response Rate – workers do not respond very well to orders or leadership and any
response is often slow
F.W. Taylor – an American engineer who invented work-study and founded the scientific approach
to management. He considered money to be the main factor that motivated workers, so he
emphasised the benefits of Piece Work.
Scientific Management – business decision making based on data that are researched and tested
quantitatively in order to improve efficiency of an organisation. Higher efficiency would generate
higher profits and thus higher wages to workers.
Division of Labour – breaking a job into small repetitive tasks, each of which can be done at a
speed with little training
Piece work – payment by results e.g. for every unit made they receive a certain amount of
money
Tight Management – ensures workers concentrate on their jobs and follow the correct
processes
Elton Mayo – The Hawthorne Effect
Elton Mayo – motivational theorist based on his studies known as The Hawthorne Effect. He
concluded that:
Changes in work conditions and financial rewards had little or no effect on productivity
When management consulted workers and took an interest, motivation improved
Team work and developing team spirit can improve productivity
When some control over their own working lives is given, there is a positive motivational
effect
Groups can establish their own targets or norms and these can be greatly influenced by
informal leaders of the group
Abraham Maslow – an American psychologist whose work on human needs has had a major
influence of management thinking. His Hierachy of Needs suggests that people have similar types of
needs from low level basic needs to the need for achievement.
Self-
Actualisation
Self-Esteem
Needs
Social Needs
Physiological Needs
Self-Actualisation – the need to fulfil one’s potential through actions and achievements, Maslow did
not believe this need could be filled fully and thought people would always strive to develop further
and achieve more.
Self-Esteem Needs – the need to have self-respect and respect from others, positive feedback, gain
recognition and status for achievement, and opportunities from promotion.
Social Needs – the desire for friendship, love and a sense of belonging, or being part of a team.
Facilities like staff rooms and canteens are important to fulfil this.
Safety Needs – the need for security, a secure job, safe working environment, clear lines of
accountability and responsibility.
Physiological Needs – the requirement for food, clothes and shelter. In relation to work it’s the need
to earn income to acquire these things and to have reasonable working conditions.
Herzberg’s Two Factor Theory
Frederick Herzberg – an American psychologist whose research led him to develop the Two-Factor
theory of job satisfaction and dissatisfaction.
Motivators – aspect of a worker’s job that can lead to positive job satisfaction
Hygiene Factors – aspects of a worker’s job that have the potential to cause dissatisfaction
Achievement Motivation – a person with a strong need to achieve goals and job advancement
Affiliation Motivation – a person with a need for affiliation, friendly relationships and interaction
with other people
Vroom’s Theory – that an employee’s motivation to a complete a task is influenced by their personal
views regarding the possibility of completing the task and the possible outcome or consequence of
completing the task. The theory is based on three beliefs:
‘Valence’ – the depth of the want of an employee for an extrinsic reward, such as money or
an intrinsic reward such as satisfaction
‘Expectancy’ – the degree to which people believe that putting effort into work will lead to a
given level of performance
‘Instrumentality’ – the confidence of employees that they will actually get what they desire,
even if it has been promised by the manager
Financial Motivators
Wages – where staff are paid each week for the level of hours work
Commission – where people are paid a percentage of the value sold
Bonus – where an employer pays a set value to congratulate achievement
Salaries – where staff are paid the same level each month regardless of how little work is put
in
Performance Related Pay – where an employer opts to try and provide set targets to aspire
to
Profit Sharing – where the profits are distributed evenly with employees being given a
percentage of them
Piece Rate – where an employer opts to pay his staff according to their direct productivity
Promotion – where career prospects are enhanced as a result of efforts made
Share Options – where the employee is offered the opportunity to be a shareholder in the
company
Fringe Benefits – benefits given, separate from pay, by an employer to some or all
employees
Non-Financial Rewards
Job Rotation – increasing the flexibility of the workforce and the variety of work they do by
switching from one job to another. There would be a decrease in boredom and an increase
in multiple skills. It does not provide any authority or promotion.
Job Enlargement – attempting to increase the scope of a job by broadening or deepening the
tasks undertaken. There would be an increase in workload and sense of responsibility but a
decrease in job satisfaction.
Job Enrichment – aims to use the full capabilities of workers by giving them the opportunity
to do more challenging and fulfilling work. There is a decrease in direct supervision and an
increase in responsibility, as well as some decision making authority.
Job Redesign – this involves the restructuring of a job, usually with employees’ involvement
and agreement, to make work more interesting, satisfying and challenging. There would be
an increase in chance of promotion and an increase in employee development.
Quality Circles – voluntary groups of workers who meet regularly to discuss work-related
problems and issues. There is an increase in voice for the workers and a hands on approach
to solving problems
Worker Participation – workers actively encouraged to become involved in decision making
within the organisation. There would be an increase in team working, motivation and
responsibility.
Team Working – production is organised so that groups of workers undertake complete
units of work. There is a decrease in labour turnover but an increase in quality and improved
ideas
Human Resource Management
Role of HRM
Strategic Workforce Planning – analysing and forecasting the numbers of workers and the skills of
those workers that will be required by an organisation to achieve its objectives
Workforce Audit – a check on the skills and qualifications of all existing workers and management
Workforce Gap – a forecast of having too few or too many workers. The key HRM activities to
manage the workforce gap comprise:
Recruitment plans
Training plans
Redundancy plans
Staff Retention plans
Recruitment and Selection
Recruitment – the process of identifying the need for a new employee, defining the job to be filled
and the type of person needed to fill it and attracting suitable candidates for the job
Selection – involves the series of steps by which the candidates are interviewed, tested and screened
for choosing the most suitable person for vacant post.
1. Establishing the exact nature of the job vacancy and drawing up a job description
2. Drawing up a person specification
3. Preparing a person specification
4. Drawing up a shortlist of applicants
5. Selecting between the applicants
Job Description – lists the tasks and responsibilities the person appointed will be expected to carry
out. It may also state the job title, location, nature of the business and the salary and conditions.
Person Specification – outlines the ideal profile of the person needed to match the job description. It
may state qualifications, experience, interests and personality.
Advantages Disadvantages
Managers know the internal candidates Internal promotion leaves another job to be
Motivates staff as this can encourage promotion filled
Shorter and less expensive than external It can cause resentment among colleagues who
recruitment are not selected
Internal candidates know the business and its
objectives
Advantages Disadvantages
External recruits bring in fresh ideas External recruits usually need longer induction
Larger pool of applicants to choose from process
They bring in experience from other Managers do not know the applicant
organisations It is usually a long and expensive process
Induction Training – introductory training programme to familiarise new recruits with the systems
used in the business and the layout of the business site
On-the-job training – instruction at the place of work on how a job should be carried out
Employment Contract – a legal document that sets out the terms and conditions governing a
worker’s job. A contract includes:
Employees responsibilities
Working hours
Rate of pay and holiday entitlement
Notice period both employee or employer
Zero-Hours Contract – no minimum hours of work are offered and workers are only called in – and
paid – when work is available
Temporary employment contract – employment contract that lasts for a fixed time period e.g. 6
months.
Part time employment contract – employment contract that is less than the normal full working
week e.g. 37.5 hours per week
Flexitime contract – employment contract that allows the staff to be called in at times most
convenient to employers and employees e.g. busy times of the day
Teleworking – staff working from home but keeping contact with the office by means of modern IT
communications
Outsourcing – not employing staff directly, but using an outside agency or organisation to carry out
some business functions
Core Workers
Core workers – full time and permanent staff (strategists, knowledge and
core processes)
Peripheral workers – temporary, past time and self employed workers
Charles Handy, Shamrock Organisation – shows the trend towards Flexible Workers Outsourced Work
fewer core staff on permanent and salaried contracts. (part-timers, contractors, (IT, marketing, HR,
consultants) training, franchising,
Equality Policy – practices and processes aimed at achieving a fair finance)
organisation where everyone is treated in the same way and has the
opportunity to fulfil their potential
Diversity Policy – practices and processes aimed at creating a mixed workforce and placing positive
value on diversity in the workplace
Work-life Balance – a situation in which employees are able to give the right amount of time and
effort to work and to their personal life outside of work i.e. to family
How is a contract ended?
Dismissal – where an employee’s contract is ended as a result of their actions, such as due to
misconduct or harassment, being incapable, or non-disclosure of a relevant criminal record. Before
dismissing staff they must follow a disciplinary procedure.
Termination by Notice – this might happen because a short-term contract is not going to be renewed
or if an employee wants to leave. Notice can be given by either part and failure to give sufficient
notice will result in financial penalties.
Advantages Disadvantages
Managers can keep control of workforce Employees not used to their full potential
Mistakes are less likely to be made Demotivated staff
Easy to replace workers Due to employees not using their full potential
Increased profits and customer satisfaction they could be missing out on new ideas
Soft HRM – an approach to managing staff that focuses on developing staff so that they reach self-
fulfilment and are motivated to work hard and stay with the business
Advantages Disadvantages
Increase in staff morale and motivation Some staff may not motivated by empowerment
Staff retrained will be easier within the business or development, and if so there will be a waste
Employees ideas and kills will benefit the of time and money
business through their development
Appraisal and Staff Development
Appraisal – the process of assessing the effectiveness of an employee judged against pre-set
objectives. This will:
Be a continuous process
Enable workers to continually achieve self fulfilment at work
Establish a career plan that the individual feels is relevant and realistic
Absenteeism
Absenteeism – measures the rate of workforce absence as a proportion of the employee total.
LABOUR TURNOVER =
Labour Turnover
Labour Turnover – measures the rate at which employees are leaving an organisation
LABOUR TURNOVER =
Benefits Costs
Rationalisation (reduction in wastage) Recruiting, selecting and training new staff
New ideas brought into the workplace Poor output levels and customer service
Low skilled and less productive workers may Loyalty and consistency
leave – replaced by better workers Difficult to establish team spirit
Marketing
Marketing – the management task that links the business to the customer by identifying and
meeting the needs of the customers’ profitability – it does this by getting the right product, at the
right price to the right place at the right time
Industrial Markets – goods or services bought by businesses to be used in the production process of
other products
Marketing Objectives – goals set for the marketing department e.g. increasing market share,
rebranding a product, increasing total sales level, market development. To be effective, marketing
objectives should:
Market Orientation – customer led organisations start the planning process by focusing on the
customers
Product Orientation – production-led organisations start the planning process by focusing on the
firm
Asset-Led Orientation – asset-led organisations match the customer needs to the firms strengths
Direct Competitors – businesses that provide the same or very similar goods or services
Unique Selling Point – the special feature of a product that differentiates it from competitor’s
products
Product Differentiation – making a product distinctive so that it stands out from competitors
products in consumer perceptions
Societal Marketing – this approach considers not only the demands of consumers but also
the effects on all members of the public involved in some way when firms meet these
demands
Demand
Supply
Price
The Market
Market – any situation where buyers and sellers are in contact in order to establish a price
Informal Market – selling goods from a street corner or an advert in a local newspaper
Demand – the quantity that people in a particular market actually can and will purchase at each
price. Demand is affected by:
Income
Advertising, Promotional offers and Public Relations
Taste and Fashion
Demographic Changes
Price of Complementary and Substitute goods
Supply – the quantity of a given product that suppliers are prepared to supply at a given price in a
time period. Supply is affected by:
Equilibrium Price – the market prices that equates supply and demand for a product
Niches
Niche marketing – identifying and exploiting a small segment of a larger market by developing
products to suit it
Mass Marketing
Mass marketing – selling the same products to the whole market with no attempt to target groups
within it
Market Segmentation – identifying different segments within a market and targeting different
products or services to them
Market Segment – sub group of the whole market. Different segments can be identified with:
Geographic Differences
o Consumer tastes may vary between different areas so it may be appropriate to offer
different products and market them in location specific ways
o Different countries have different cultures so some forms of advertising are not
going to be acceptable in different countries
Demographic Differences
o The most common use for segmentation and helps organisations become more
efficient
o Demography is the study of the population data and identifies the following
characteristics: Age, Income, Sex, Religion, Ethnicity, Social Class
Psychographic Differences
o Differences in consumers’ lifestyles, personalities, values and attitudes. These can be
influenced by the consumer social class.
Advantages Disadvantages
Defines target market more precisely Extensive market research
Enables identification of a gap in the market Danger of excessive specialisation
Small firms unable to compete in whole market Costs may be high – R&D, production and
so are specialised marketing (especially advertising)
Differentiated marketing strategies
Price discrimination
Class System
Market Size – the total level of sales of all producers within a market, either in volume or value
Market Growth – the percentage change in the total size of a market over a period of time
Market Research
Market Research – this is the process of collecting, recording and analysing data about customers,
competitors and the market. Businesses need Market Research for:
Primary Data
Advantages Disadvantages
Relevant – collected for a specific purpose – Costly – market research agencies can charge
directly addresses the questions the business thousands of dollars for detailed customer
wants surveys and other market research reports
Up to date and therefore more useful than most Time-consuming – secondary data could be
secondary data obtained from the internet much more quickly
Confidential – no other business has access to Doubts over accuracy and validity – largely
this data because of the need to use sampling and the risk
thst the samples used may not be fully
representative of the population
Sources of Primary Data
Qualitative Data – research into the in-depth motivations behind consumer buying behaviour or
opinions
Quantitative Data – research that leads to numerical results that can be statistically analysed
Focus Groups – a group of people who are asked about their attitude towards a product,
service, advertisement or new style of packaging. Researchers will be part of this discussion
and will have to keep them ‘on target’ as they may get off track, and they may also present a
bias from them leading or influencing the decision too much.
Observing and Recording – market researchers can observe how consumers behave i.e. how
many people will look at a display in their shop, however could be distorted as people will
behave differently if they know they are being watched
Test Marketing – involves promoting and selling the product in a limited geographical area
and then recording consumer reactions and sales figures. The region selected however, must
reflect as closely as possible the social and consumer profiles of the rest of the country.
Consumer Surveys – involves directly asking consumers or potential consumers for their
opinions and preferences. They can obtain both qualitative and quantitative data. The four
important issues for market researchers to be aware of whilst conducting surveys are: Who
to ask? What to ask? How to ask? How accurate is it?
Sampling
Sample – the group of people taking part in a market research survey selected to be representative
of the overall target market. When there is a larger sample, there will be more confidence in results
Random Sampling – every member of the target population has an equal chance of being selected. It
is considered fair and easy to setup and represents the whole population.
Stratified Sampling – this draws a sample from a specified sub group of segment of the population
and uses random sampling to select an appropriate number from each stratum. This may give more
relevant information and may be more cost effective however there is a potential to miss out on
whole population views with the focus of just one group
Quota Sampling – when the population has been stratified and the interviewer selects an
appropriate number of respondents from each stratum. This is a cheaper method, however is not
random and therefore may not be fully representative.
Questionnaire Design
Open Question – invites a wide ranging or imaginative response; very difficult to collate and present
numerically
Advantages Disadvantages
Often obtainable very cheaply – apart from the May not be updated frequently and may
purchase of market intelligence reports therefore be out of date
Identifies the nature of the market and assists As it was originally collected for another
with the planning of primary research purpose, it may not be entirely suitable or
presented in the most effective way for the
business using it
Obtainable quickly without the need to devise Data-collection methods and accuracy of these
complicated data-gathering methods may be unknown
Allows comparison of data from different Might not be available for completely new
sources product developments
Presenting Data
Mean – calculated by totalling all the results and dividing by the number of results
Median – the value of the middle item when data has been ordered of ranked
Product – methods used to improve/differentiate the product and increase sales or target
sales more effectively to gain a competitive advantage e.g.
o Design
o Technology
o Usefulness
o Convenience
o Quality
o Packaging
o Branding
o Accessories
o Warranty
Price
o How much will the business charge customers?
o Is there a link with the perception of quality?
o What pricing strategies could the firm use?
o Importance of knowing the market and keeping an eye on rivals
Promotion - Strategies to make the consumer aware of the existence of a product or service
e.g.
o Special offers
o Advertising
o User trials
o Leaflets
o Posters
o Competitions
Place – the means by which products and services get from producer to consumer and
where they can be accessed by the consumer
o The more places to buy the product and the easier it is made to buy it, the better for
the business and the consumer
o The further the places are the more costs the business will incur
o E.g. retail stores, wholesale, mail order, internet, direct sales, multichannel
Integrated Marketing Mix – the key marketing decisions complement each other and work together
to give customers a consistent message about the product
Customer Solution – what the firm needs to provide to meet customer needs
Cost to Customer – total cost of the product
Communication with Customer – up to fate and easy two way communication
Convenience to Customer – providing easy access for the customer to gain the product
Portfolio Analysis – analysing the range of existing products of a business to help allocate resources
effectively between them. It is linked to:
Market Segmentation
Market Research
Product Development
Product Life Cycle (and extension strategies)
Product – the end result of the production process sold on the market to satisfy a consumer need
Product Life Cycle – shows the stage that products go through from development to withdrawal
from the market; refers to their life span as such
Introduction:
Maturity:
Decline:
Product Extension Strategy – a medium to long-term plan for lengthening a products life cycle. It is
likely implemented during the Maturity stage or early Decline. Extension strategies can include:
Brand – an identifying symbol, name, image or trademark that distinguishes a product from its
competitors because of it’s:
Logo
Packaging
Colour
Taste
Performance
Brands bring sustained high prices and may help the firm become a market leader
Brands may be able to change premium prices
Customers will be loyal to your product and trust it
Brands can be re-invented
In a fast changing world, it is difficult for brands to change and keep customers happy
People are more willing to spend money to get a ‘quality’ product
Market leaders are nearly always brands
Price Elasticity of Demand - measures the responsiveness of the quantity demanded of a good or
service to a change in its price
Elastic Demand – a change in price brings about a large change in the quantity demanded. These
have a coefficient greater than 1
Inelastic Demand – a change in price brings about a small change in the quantity demanded. These
have a coefficient between 0 and 1
% Change in Quantity
Demanded
% Change in Price
Perfectly Elastic - a change in price brings about an infinite response (a tiny price change will cause a
huge change in quantity demanded/supplied) giving a coefficient of infinity (∞)
Perfectly Inelastic – a change in price brings about no response (even if price drastically changes,
Qd/Qs will stay the same) giving a coefficient of 0
Unitary Elasticity - this occurs when a percentage change in the price results in an equal change in
demand giving a coefficient of 1.
Perfectly
Inelastic
Perfectly Elastic
Unitary
Elasticity
Importance of PED
Mark-Up Pricing – adding a fixed mark-up for profit to the unit price of a product
e.g. Total Cost of bought-in materials = $40; Firm wants 50% Mark-Up
Therefore, Selling Price = = $60
Target Pricing – setting a price to give the company a targeted rate of return at certain output levels
e.g. Total costs for 10000 units = $400000; Targeted Rate of Return = 20% of Sales
Therefore, Selling Price = = $48
Full-cost (absorption) pricing – setting a price by calculating a unit cost for the product (allocating
fixed and variable costs) and then adding a fixed profit margin
e.g. Fixed Costs = $10000; Variable Cost for 5000 units = $25000; Profit Margin = 300%
Therefore, Selling Price = = $28
Advantages Disadvantages
Suitable for firms that are ‘price-makers’ due to Inaccurate for multi-product businesses where
market dominance there is doubt over allocation of fixed costs
Easy to calculate for single-product firms where If sales fall, average costs often rise – this could
there is no doubt about fixed cost allocation lead to the price being raised using this method
Price set will cover all costs of production Tends to be inflexible
Doesn’t consider market/competitive conditions
Contribution-cost pricing – setting prices based on the variable cost of making a product in order to
make a contribution towards fixed costs and profit
e.g. Variable Cost = $2; Total Fixed Costs = $40000; Expects to sell 60000 units
If Selling Price = $3, $1 Contribution covers Fixed Costs, plus makes $20000 profit
Advantages Disadvantages
Variable costs covered and contribution to fixed Fixed costs may not be covered
Suitable for firms producing several products – If prices vary too much – due to the flexibility–
fixed costs do not have to be allocated then regular customers may be annoyed
Price can be adapted to suit market condition
Competition Pricing – setting a price based upon what the price competitors set
Advantages Disadvantages
Necessary for firms with little market power Price set may not cover all of the costs
Flexible to market and competitive conditions
Price Discrimination – uses price elasticity knowledge to charge different prices. This takes place in
markets where is possible to charge different groups of consumer’s different prices for the same
product. Examples include:
Advantages Disadvantages
Uses PED knowledge to charge different prices in Costs of having different pricing levels
order to increase total revenue Customers may switch to lower-price rate
Consumers paying higher prices may object
Dynamic Pricing – offering goods at a price that changes according to the level of demand and the
customer’s ability to pay
Penetration Pricing – when a firm enters a new market, it sets its price lower than the competitor’s
Price/Market Skimming – setting a high price for a new product when a firm has a unique or highly
differentiated product with lower price elasticity of demand
Advantages Disadvantages
Help establish a product in the market Potential customers might be put off because of
Consumers may assume it is of good quality the high prices
Promotional Pricing – when the firm sets price lower for a set amount of time, in cases such as:
Psychological Pricing – setting prices as appropriate for the quality of the good e.g. perfume sold at a
high price as to not effect perception of quality. This also refers to making prices appear lower than
actually are e.g. $2.99 instead of $3.00
Loss Leaders – setting prices very low for some goods, knowing that whilst in store they will
purchase other goods at usual prices. The firms hope that the profits earned by these other goods
will exceed the loss made on the lower priced ones
Promotion
Promotion – the use of advertising, sales promotion, personal selling, direct mail, trade fairs,
sponsorship, and public relations to inform consumers and persuade them to buy. Promotional
objectives often include:
Promotion Mix – the combination of promotional techniques that a firm uses to sell a product
Advertising – paid-for communication with consumers to inform and persuade. There are two types:
Cost
Size of audience
Profile of target audience in terms of age/income levels/interests etc.
Message to be communicated
Other aspects of the Marketing Mix
Legal and other constraints
Below-the-Line – promotion that is not a directly-paid for means of communication, but based on
short-term incentives to purchase
Sales Promotion – incentives such as special offers or special deals directed at consumers or retailers
to achieve short term sales increases and repeat purchases by consumers e.g. price deals, loyalty
reward programmes, money-off coupons, ‘buy one get one free’, point-of-sale displays, competitions
Personal Selling – a member of the sales staff communicates with one consumer with the aim of
selling the product and establishing a long-term relationship between company and consumer
Direct Mail/Marketing – directs information to potential customers who have a potential interest in
a type of product e.g. junk mail, pop-up ads, mail shots
Public Relations – the deliberate use of free publicity provided by newspaper, TV, and other media
to communicate with and achieve understanding by the public
Marketing/Promotional Expenditure Budget – the financial amount made available by a business for
spending on marketing promotion during a certain time period. These are set in a number of
different ways:
Competitor-Based – setting the budget based on competitor’s budget. When two or more
firms are of roughly the same size in terms of sales, it is possible that they will attempt to
match each other in terms of spending which can lead to a spiralling of promotion costs.
Objective-Based – analysing what sales are required to meet objectives, then assess how
much support spending is required
Percentage of sales – expenditure will vary dependant on sales
What the business can afford – many managers adopt a view that marketing is a luxury and
may not provide a large amount of budget towards it
Incremental – what was set last year, adding a percentage for inflation of different sales
targets
Benefits Drawbacks
It informs people about new products and thus Waste of resources – could be used to lower
helps increase competition between firms prices instead
By helping create mass markets, promotion can Promotion is powerful – could encourage
assist in reducing average cost per unit purchases that are unwanted
Generates income for TV, radio, and newspaper Promotes consumerism – people are judged by
businesses the amount they own
Encourages consumption – environmentalists
argue that it’s against conserving resources
Internet
Internet Marketing – refers to advertising and marketing activities that use the internet, email and
mobile communications to encourage direct sales via electronic commerce. It involves:
Advantages Disadvantages
Relatively low cost Some countries have low-speed or no internet
Worldwide audience Cannot touch/feel/smell/try-on products
Access to consumers information for research Product returns may increase
Convenience of the internet Cost and unreliability of postal service
Lower fixed costs Must be kept up to date (particularly for apps)
Dynamic Pricing Worries about internet security
E-commerce – the buying and selling of goods and services by businesses and consumers through an
electronic medium
Viral Marketing – the use of social media sites or text messages to increase brand awareness or sell
products
Channel of Distribution
Channel of Distribution – refers to the chain or intermediaries a product passes through from
producer to final consumer. The intermediaries include:
Wholesalers
Breaks down bulk and buys from producers and sell small quantities to retailers
Provides storage facilities
Reduces contact cost between producer and consumer
Wholesaler takes some of the marketing responsibility e.g. sales force, promotions
Agents
Mainly used in international markets, however control is difficult due to cultural differences
Commission agent – does not take the title of the goods
Stockist agent – hold ‘consignment’ stock
Training, motivation etc. is expensive
Retailer
Direct Selling/Zero Intermediary – when no intermediaries are used in the distribution process
Advantages Disadvantages
No mark-up or profit margin by other businesses Producer must pay for storage and stock costs
Producer has full control over marketing mix May not be convenient for consumer
Quicker than other channels Limits chance for consumers to see and try good
May lead to fresher food products No promotion paid for by intermediaries
Direct contact with consumers offers research Can be expensive to deliver goods to consumers
One Intermediary Channel – when one intermediary is used in the distribution process
Advantages Disadvantages
Retailers pay for stock and storage Intermediary takes a profit mark-up
Retailer has product displays Producers lose some control over marketing mix
Retail locations convenient for consumer Retailers may sell competitor’s goods too
Producers can focus on production Producer has delivery cost to retailer
Two Intermediary Channel – when two intermediaries are used in the distribution process
Advantages Disadvantages
Reduces stock-holding costs Another intermediary takes profit mark-up
Wholesaler pays for transport costs to retailer Producer loses most control over marketing mix
May be best way to enter foreign markets where Slows down distribution chain
producer has no direct contact with retailers
Operations
Operations Planning – preparing input resources to supply products to meet expected demand
Production Process/Transformation Process – the inputs of resources, land, capital, labour are
produced into finished goods, services and components for other firms.
Creating Value – increasing the difference between the cost of purchasing bought-in materials and
the price the finished goods are sold for
Adding Value – the difference between the cost of purchasing raw materials and the prices the
finished goods are sold for. The degree of values added will depend on:
Intellectual Capital – intangible capital of a business that includes human capital, structural capital
and relational capital
Productivity – the ratio of outputs to inputs during production. It can be raised through:
Labour-Intensive – involving a high level of labour input compared with capital equipment
Capital-Intensive – involving a high quantity of capital equipment compared with labour input
Effectiveness – meeting the objectives of the enterprise by using inputs productively to meet
consumer needs
Production Methods
Job Production – producing a one-off item specifically designed for the customer; requires a skilled
workforce e.g. personalised wedding cakes
Advantages Disadvantages
Able to undertake specialist projects or jobs, High unit production costs
often with high value added Time-consuming
High levels of worker motivation Wide range of tools and equipment needed
Batch Production – producing a limited number of identical products – each item in the batch passes
through one stage of production before passing onto the next stage
Advantages Disadvantages
Some economies of scale High levels of stocks at each production stage
Faster production with lower unit costs than job Unit costs likely to be higher than with flow
production production
Some flexibility in design of product in each
batch
Flow Production – producing identical items in a continually moving process; used for products with
high steady demand
Advantages Disadvantages
Low unit costs due to constant working of Inflexible – often very difficult and time-
machines, high labour productivity and consuming to switch from one type of product to
economies of scale another
Expensive to set up flow-line machinery
Mass Customisation – the use of flexible computer-aided production systems to produce items to
meet individual customers’ requirements at mass-production cost levels; requires flexible equipment
and workers
Advantages Disadvantages
Combines low unit costs with flexibility to meet Expensive product redesign may be needed to
customers’ individual requirements allow key components to be switched to allow
variety
Expensive flexible capital equipment needed
Size of market
Amount of capital available
Availability of other resources
Market demand exists for products adapted to specific customer requirements
Operational Flexibility – the ability of a business to vary both the level of production and the range of
products following changes in consumer demand
Process Innovation – the use of a new/much improved production method/service delivery method
Technology
Computer Aided Design (CAD) – the use of computer programmes to create two or three
dimensional graphical representations of physics objects
Advantages Disadvantages
Lower product development costs Complexity of programmes
Increased productivity Need for extensive employee training
Improved product quality Large amounts of computer processing power
Faster time-to-market required and this can be expensive
Good visualisation of the final product and its
constituent parts
Great accuracy, so errors are reduced
Computer Aided Manufacturing (CAM) – the use of computer software to control machine tools and
related machinery in the manufacturing of components or complete products
Advantages Disadvantages
Precise manufacturing and reduced quality Cost of hardware, programmes and employee
problems – compared to production methods training – these costs may mean that smaller
controlled by people businesses cannot access the benefits of CAM –
Faster production/increase labour productivity although technology is becoming cheaper
Integrating with CAD, CAM allows more design Hardware failure – breakdowns can and do occur
variants of a product to be produced as well as and they can be complex and time consuming to
mainstream mass market products. solve
More flexible production allowing quick
changeover from one product to another
Location
Optimal Location – a business location that gives the best combination of quantitative and
qualitative factors
Quantitative Factors – these are measureable in financial terms and will have a direct impact on
either the costs of a site or the revenues from it and its profitability
Labour Costs
Transport Costs
Sales Revenue Potential
Government Grants
Safety
Infrastructure
Environmental Concerns
Ethics
Managers Preference
Further Expansion
Economies of Scale
Scale of Operation – the maximum output that can be achieved using available inputs – this scale
can only be increased in the long term by employing more of all inputs
Economies of Scale – when average costs decrease as a result of producing on a large scale
Internal Economies of Scale – average costs per unit decrease as scale of production is expanded
within a firm
Purchasing Economies – larger firms buy their supply in bulk. Suppliers generally offer price
discounts for bulk purchases as delivery is cheaper.
Marketing Economies – larger marketing costs can be spread over high levels of sales of
large firms
Financial Economies – large firms can generally borrow money at lower interest rates as
banks view them as less risky than small firms.
Technical Economies – large firms generally have sufficient finance for investment in new
machinery, training/recruiting skilled workers, and research and development.
Risk-bearing Economies – as larger firms tend to have more customers, they are safe from
being too reliant on one customer. Diversification allows large firms to spread their risk over
a range of products
Managerial Economies – larger firms are able to employ specialist managers who should
operate more efficiently than general managers and make fewer mistakes due to training
External Economies of Scale – when the expansion of an entire industry benefits all firms within that
industry
Access to a skilled workforce – Large firms may have access to a skilled workforce because
they can recruit workers trained by other firms within the industry
Ancillary firms – firms which develop and locate near large firms in particular industries to
provide them with specialised equipment and services
Joint Marketing Benefits – firms locating in the same area well known for producing high
quality produce may benefit from reputation
Shared infrastructure – the growth of one industry may persuade firms in other industries to
invest in new infrastructure
Diseconomies of Scale
Diseconomies of Scale – when firms experience an increase in average costs as they try to increase
production and expand too much and too quickly
Inventory (stock) – materials and goods required to allow for the production and supply of products
to the customer. Stocks include Raw Materials, Work In Progress, or Finished goods. Without
effective management of the stock, several serious problems can arise for the firms:
Lost sales
Idle production resources
Special orders could be expensive
Small order quantities
Stock-Holding Costs
Total Costs
Optimum
Costs ($)
Out-of-Stock Costs
Economic Order Quantity – the optimum or least-cost quantity of stock to re-order taking into
account delivery and stock holding costs
Stock-Holding Costs
Cost per Order ($)
Total Costs
EOQ
Re-order Costs
Order Size
Inventory Control Chart
Buffer Inventories – the minimum inventory level that should be held to ensure that production
could still take place should a delay in delivery occur or should production rates increase
Lead Time – the normal time taken between ordering new stocks and their delivery
Just-In-Time (JIT)
Just-In-Time – an inventory control method that aims to avoid holding inventories by requiring
supplies to arrive just as they are needed in production and completed products are produced to
order
Advantages Disadvantages
Capital invested in inventory is reduced and the The multi-skilled and adaptable staff required for
opportunity cost of inventory holding is reduced JIT to work may gain improved motivation
Costs of storage and inventory holding are Delivery costs will increase as frequent small
reduced. Space released from holding of deliveries are an essential feature of JIT
inventories can be used for a more productive Order-administration costs may rise because so
purpose many small orders need to be processed
The greater flexibility that the system demands There could a reduction in the bulk discounts
leads to quicker response times to changes in offered by suppliers because each order is likely
consumer demand or tastes to be very small
Any failure to receive supplies of materials or The reputation of the business depends
components in time will lead to expensive significantly on outside factors such as the
production delays reliability of supplying firms
Much less chance of inventories becoming
outdated or obsolescent. Fewer goods held in
storage also reduces the risk of damage or
wastage
Multi-Site Locations
Multi-site Location – a business that operates from more than one location. Business decide to
locate internationally to:
Advantages Disadvantages
Greater convenience for consumers Coordination problems between the locations
Lower transport costs Potential lack of control and direction
Reduce risk of supply disruption Different cultural standards and legal systems
Opportunities for delegation
Cost Advantages
Offshoring – the relocation of a business process done in one country to the same or another
company in another country
Multinational – a business with operations or production bases in more than one country
Trade Barriers – taxes or other limitations on the free international movement of goods and services