Business Revision notes:

3.1 Entrepreneurs
Characteristics of an entrepreneur:

Contributes original ideas

Has self-confidence and passion about their venture

Ability to work independently and develop ideas

Committed and willing to make personal sacrifices to benefit business

Creative thinker and shows initiative

Has vision of what the business could become and works towards the goal

Has energy to work hard and to make sure the business receives its full
potential

Willing to take calculated business risks encouraging financiers such as

banks to lend money to enterprise

Good leadership qualities

Can motivate others

Not discouraged by failures

Resources of a business:
There are four resources which are essential to every business. They are known
as the factors of production:
Land: basic need to place the business premises, houses, roads and farms.
However land is used more widely in this economic sense and includes oceans
and all natural and raw materials e.g. oil, gas, fish, coal and minerals. Supplies of
land are limited making it a valuable resource.
Labour: refers to human resource in business- the workers who are employed to
manufacture product or provide the service. The labour may be physical or
manual, depending on nature of firms final product. Supplies of labour with
appropriate skills are also limited.
Capital: is the element contributed by capitalists i.e. the owners, to set up and
maintain the business. Capital includes money which owners have invested but
also includes items which were bought with that original investment e.g.
premises. Capital is also in short supply.
Enterprise: contributed by people known as entrepreneurs. They are the
managers and play the most essential role in the business as they estimate
future demand and ensuring that production is at the correct level to meet the
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demand. It is the role of the entrepreneur to organise the capital, the land and
the labour in the correct proportions to run the business successfully.
Each person who contribute the factors of production has to be rewarded:
Factor of production
Land
Labour
Capital
Enterprise

Contributed by
Landlords
Employees
Capitalists
Entrepreneurs

Rewarded by
Rent
Wages and salaries
Interest
Profit

Business ownership- Private sector

Private organisations are owned, financed and controlled by private individuals.
Their aim is to make a profit.
Private sector form of ownerships:

Sole trader
Partnership
Private limited company (LTD)
Public limited company (PLC)
Franchise

Sole trader: is the most common form of business ownership e.g. hairdressers,
plumber, painter etc. Sole traders are their own bosses and own the business
themselves. This type of business is easy to form as they do not have to provide
a lot of involved legal documentation before they can be established. All sole
traders need a licence to trade from the local authority and perhaps planning
permission if the building has to be altered. The business has to be registered for
VAT with the Revenue and Customs and then it is ready to open.
Advantages
Cheaply & easily formed
Owner keeps profits
Owner makes all decisions and can
make them quickly
Close links with customers and
employees
Financial affairs do not have to be
published.

Disadvantages
Unlimited liability*
Sole traders responsible for all losses
Raise own capital
Amount of capital available is limited
because it is a small business
Banks are less willing to lend money
Harder to compete with larger
business**
Business dependant on one
person***
No-one to discuss problems with
* Unlimited liability If business does not have enough money to pay debts. They
have to use private funds. This could mean, in extreme cases that cars, houses
and other private possessions might have to be sold.
**This is because they cant take advantage of economies of scale

***The sole trader is expected to have expertise in sales, purchasing,

advertising, accounting, window dressing, deliveries and stocktaking. This means
they have to work long hours. If the sole trader is ill or on holidays there is often
no-one to call on.

Partnership: most frequently found in professional businesses such as Doctors,

dentists, veterinary surgeons, solicitors etc. Also found in trades such as
plumbers, hairdressers etc. They are common in such businesses because
expertise can be shared. A partnership consists of a min. of two people and a
max. of twenty who jointly own he business. Sometimes an additional partner
may be brought in to contribute capital but not to work in the business or take
any part in the organisation. This person is known as a sleeping partner.
The partners:

Agree how they will run and organise the business

Are jointly responsible for any debts incurred in the business
Provide entire capital for setting up their business
Aim to make a profit
Entitled to keep all profits made but are also responsible for losses
incurred

Partnership Act, 1890

The partnership is governed by the Partnership Act, 1890, which states that:

Profits or losses made in the business would be equally shared between

them
No partner would be paid a salary

However, this does not take into consideration those who work more than others
and contribute more. In the case interest may be rewarded on capital.
Deed

of Partnership
Tells how profits and losses are to be shared
Amount of capital each partner will contribute
If salaries are to be paid and the amount to be paid
Whether interest on capital is payable
How duties and responsibilities are to be shared
How new partners might be introduced to the firm
How partnership could be dissolved and, in the event of this happening,
how the assets would be shared
Advantages:
1) More capital so able to expand.
2) Different skills enable specialisation
3) Share responsibilities and discuss problems.
4) If one partner is ill or sick the other can carry on.
5) Finical affairs dont have to be published.
Disadvantages:
3

1)
2)
3)
4)
5)
6)

Unlimited liability
All partners held responsible for a dishonest and inefficient partner.
Raise own capital
Difficulty in borrowing money
Possibility of conflict between partners
Lack of continuity

Limited companies
Shares and shareholders

Shares bought on stock exchange to raise capital, which makes them

shareholders.
Company therefore able to raise money.

There are two types of shares:

Ordinary shares:
-not guaranteed dividend at end of year; depends on how successful the
business is
-have voting rights
Preference shares
Less common and safer as they are guaranteed a fixed dividend before
payment to ordinary shareholders
Usually have no voting rights as they are in a safer position than
ordinary shareholders

Divorce of ownership and control refers to the case when the owners of the
company dont run the company where the people who run the company dont
own it.
Main features of limited company:

Limited liability-people who invest money cannot lose any more than
the amount that they put in. Their private possessions cannot be taken.
Increased capital
Separate legal existence (incorporation)- gives creditors right to sue
the company without effecting the owners

Forming a limited company

Is a lengthy and legal procedure:

Documents that need to be completed before formation:

Memorandum of Association
States:
Official name of company
Country where company os situated
Work the company will be doing
Amount of capital with which they are starting
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A liability clause states:

That members liability is limited
An association clause which states:
A declaration by at least two people that they wish to form the
company.

Articles of Association:
Shows
-

Voting rights of shareholders

Method of election of directors
How profits will be divided
How meetings will be conducted and
Duties of directors

Certificate of incorporation
-issued to show company has separate legal existence from owners and
can act independently from them
Prospectus
-gives details of companies plans and hopes for the future
- Possible investors see if it is a worthwhile investment
Trading certificate
- Shows that register is satisfied that company is in position to begin trading
Two types of liability
1. Private limited company (LTD)
2. Public limited company (PLC)
Private limited company:

shares cant be bought by any members of the public (mainly just within
families)
End of year shareholders are entitled to a share of profits which is paid in
direct proportion to number of shares each one holds.
Private limited companies advantage shareholders as hey retain control of
business while they enjoy the benefits of limited liability.

Advantages:
1. More capital
2. Easier to borrow money
3. Benefit from economies of scale, (buy in larger bulk therefore can reduce
price)
4. Limited liability
5. Separate legal identity from its owners and may take legal action on its
own behalf without involving owners
5

6. Continuity (one shareholder dies the business is not affected)

7. Responsibilities and workload shared
8. Opportunities for specialisation and division of labour.

Disadvantages:
1. Financial information must be available for inspection by members of the
general public. This may give competitors valuable insights into the affairs
of the business.
2. Shares not available for wider sale, so expansion may be difficult
3. Shareholders receive shares of the profit on form of dividends
4. Process of forming LTD is more involved than it is in business organisations
such as sole traders and partnerships.
Public Limited Company PLC

Must have a min. capital of 50,000

Shares sold to public of stock exchange
Value of shares change according to hoe successful the company is and
the general economic conditions in the country

Advantages:
1. Very powerful organisations with great influence in the market
2. Shareholders have limited liability
3. Large amount of capital available, which gives business all the benefits of
easier borrowing and economies of scale.
4. Have resources necessary for expansion and growth
5. Take legal action without involving shareholders
6. Continuity. Shareholders may buy and sell shares without affecting the
business
7. Specialisation and division of labour.
Disadvantages:
1. Owners have no real say on how it is run.
2. Formation of PLC is lengthy and a legal procedure
3. Financial information must be published for the information of the general
public
4. In some companies top management and employees feel out of touch with
one another
5. Decision making is frequently slow
Franchise

Gives anyone the opportunity to sell a well-known product(s)

Liability depends wither the business is organised as a sole trader,
partnership or limited company. Especially

Advantages:

The franchisee gains:

1. From having reduced risks and capital investment
2. The sole right to sell well-known set of products and brand in a particular
area
3. Increased sales as consumers know the quality of that particular
established brand
4. Use of brand name
5. Training provided
6. Right to be own boss
7. Benefits of national advertising and promotions
8. Continuous support from franchiser
9. Increased borrowing power from bank because franchised businesses are
usually profitable.
The franchiser gains:
1.
2.
3.
4.
5.

Increased opportunities for expansion

Further benefits from economies of scale
Percentage profit from all sales in that particular shop
Another retail outlet
By having the retail outlet run and managed for them.

Disadvantages:
The franchisee loses:
1.
2.
3.
4.
5.

Any individuality.
Independence
The right to sell the business without approval from the franchiser
Right to buy stock from other sources which may be cheaper
Royalties must be paid annually to franchiser

The franchiser loses:

1. Management of day-to-day running of the shop. If local service is poor, the
reputation of the franchise is damaged.
Other forms of business ownership:- Public sector
We have already looked at ownership in the private sector we are now going to
take a closer look at forms of ownership in the public sector.
Any business which is owned by the country as a whole and run on behalf of the
people if known as a public sector business e.g. education and health services
are run by the public sector
Main features of a business in the public sector are:

They are controlled by the government

Financed by the government
Aim to give a service
Owned by the country
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Ownership
Control
Capital
Use of
profits
Aim

Private sector
Private individuals
Private owner or others working on
their behalf
Raised by private owners
Distributed to owners

To make a profit
Public Corporations

Public sector
Country or state
National government of local
authority
Comes from treasury or rates
Handed back to government

Give a service

The most usual form of public sector ownership is public corporations which are
run by the government, and municipal undertakings which are run by local
authorities. Examples of public corporations include: British Broadcasting
Corporation (BBC), Bank of England and Royal Mint.
These activities are too important to be left to private individuals. There are
several reasons why these industries have been taken over:

Some services are essential and must be provided, but their costs are too
high that a privately-owned firm would not be interested in them because
they would not make a profit
The capital investment needed would be too great for nay privately owned
business to afford
It would be unsafe for private people to run dangerous industries such as
provision of atomic energy.
Nationalisation prevented large, powerful, privately owned monopolies
from existing and being able to set very high prices for their services.
In some instances, the business was failing, so the government took it
over in order to save jobs.
There are examples where it would be wasteful to have several
organisations duplicating services.

Aims of public corporations:

Mainly to give a service and nowadays are expected to make some profit or at
least break even.
Control
The government has overall control of the corporation and appoints a
government minister to take responsibility for it. The minister appoints a
chairman and board of directors to take care of the day-to-day running of the
industry. The chairman of the board of directors must report annually to the
minister who, in turn, presents the report in parliament where it is publically
debated and later published for the information of the general public.
Finance
Public corporations are financed in the following way:

Most of the money comes from grants from the treasury which is the
government department responsible for the countrys finance
8

In addition the corporation may borrow from the treasury

If the corporation makes a profit from its activities some may be ploughed
back into the business
Public corporations get revenue from charging for the services they
provide

Advantages of Public Corporations:

Government ensures that the countrys essential services are provided

Government is in good position to plan the overall provision for the
country
Services are not duplicated and resources are not wasted
Any profits made could benefit taxpayers by reducing the level of taxation.

Disadvantages of public Corporations:

Very large which can lead to inefficiencies

Difficult to motivate employees in an impersonal organisation such as this
The taxpayer has to meet higher tax payments if the corporation makes a
loss
The running of the corporation could be politically influenced.

Municipal undertakings
Each district council has elected representatives who have been voted onto the
council to represent the people and to work with the council staff to provide and
maintain the key services throughout the area.
The services for which local authorities are responsible may vary slightly from
area to area, but all are expected to provide:

Refuse collection and disposal

Street cleaning
Health and environmental issues
Parks and recreational activities
Local housing
Parking areas
Maintenance of local roads

In addition they support:

The arts
Tourism
Economic development

Main sources of finance

1. Government grant
The government gives capital grant to the local authority to assist it with
essential building work.
2. Rates
9

Rates are paid by each householder and each business in the area
according to the size of their property.
3. Charge for the activity
An entrance fee is charged to each person using the facilities provided by
the council in the area e.g. swimming pool
The role of social enterprise: A social enterprise is a business which has
social aims and reinvests a large proportion of its profits into the community or
back into the enterprise. It does not have as its primary aim the need to make
maximum profits for its shareholders or owners. It competes alongside any other
business but uses business principles to achieve social aims and promote ethical
trading. A social enterprise is not confused with a charity. A charity depends on
donations to survive whereas a social-enterprise is self- sustaining. Many social
enterprises have been set up to meet social needs such as unemployment or to
solve an environmental problem. Social enterprises can be of benefit to: longterm unemployed, people with learning disabilities, minority ethnic groups or
disabled people. E.g. Jamie Olivers fifteen caf and fair-trade divine chocolate

3.3 Sources of finance:

The time for which finance is needed may be:
Short term
May be used to:
Buy Christmas
stock
Avail of special
offers
Help when trade is
poor

Medium term
May be used to:
Buy short-life
assets such as
vehicles

Long term
May be used to:
Buy long life assets
such as premises

Types of Capital:
Type of Capital
Start-up Capital
Additional Capital
Working Capital

Used to Finance
Used to get the business started, e.g. to buy or rent premises, to buy
tills, to buy storage units etc.
Used to expand a business
Used to pay for the day-to-day running expenses and to pay bills such
as electricity.

Examples where each type of capital is used:

Money
Money
Money
Money
Money
Money

to
to
to
to
to
to

develop a new market

buy stock to start trading
pay creditors
pay the rates bills
replace the computer
redecorate the offices

Additional capital
Start-up capital
Working capital
Working capital
Additional capital
Additional capital
10

Money to pay the suppliers

Working capital

Sources of finance
There are several methods by which business can raise finance. Money can be
raised both internally and externally.
Internal sources of finance:

11

Source of finance
Owners capitallong term source
of finance

Use
Could be used to fund start-up costs
such as purchase of equipment or as
additional capital throughout the life
of the business or working capital

Advantage
Does not have to be
repaid

Disadvantage
May not have enough
money

Retained Profitscan be long and

medium term
source of finance

Working capital expenditure to

fund Purchase of stock, new
equipment and day to day bills

Remain private and

does not have to be
re-paid

Might not have enoug

profit

Sale of Assetsmedium term

source of finance

Working capital expenditure to e.g.

buy new stock, fund production of
stock

Can give the chance

to buy new stock or
fund the production
of stock.

Might not have any

surplus assets to sell.
This method is slow.
Limit in number of
assets a business can
sell before it affects
production

Sale of Stocksshort term source

of finance

Working capital expenditure to e.g.

buy new stock, fund production of
stock

Raise finance
quickly. Use profit to
manufacture or buy
new stock. Create
space for new stock

Not getting the mone

that you have paid fo
the items

External sources of finance:

Debt Collectionshort term source

Bank Loan- long
and medium term
source of finance
Bank Overdraftshort term source

Additional
Partners- long
term source

Working capital expenditure pay day

to day running costs e.g. electricity
and telephone bills
Additional capital to purchase new
equipment/stock
Used as additional capital to fund
purchase of stock e.g. Christmas
stock or Working capital expenditure
to pay day to day running costs e.g.
electricity and telephone bills
Additional capital - To fund
expansion

Share Issue- long

term source
Leasing Assetsmedium term
source

Additional capital - To fund

expansion
Additional capital - Purchase
company cars

Hire Purchasemedium term

source

Purchase assets/expensive
equipment, machinery

Have to chase after

money
Get money quickly

Cheaper than a
bank loan, as a bank
loan has a fixed rate
of interest.
Contribute more
capital and gives
shared work and
specialization
Extra finance. No
interest is payable.
Dont have to pay a
lump sum.
The business has
the use of the asset
while paying it off.
The business

Expensive way to raise

finance. Bank has the
right to sell an asset of
yours if it is not re-paid
Bank may not agree to
make a bank overdraft
for you.
The partner is entitled
to a share of the
profits.
Entitled to dividends
(share of the profits)
Payments can be very
high. The asset
remains property of the
finance company
The total cost of the
asset is much higher
than if it was bought
with cash.

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Mortgage

Purchase premises/building

Trade Credit

Working capital expenditure pay day

to day running costs e.g. electricity
and telephone bills

Government
Grants

To set up business so used to cover

Start-up costs - to provide
employment in depressed area in
order to regenerate the area.

eventually becomes
the owner of the
asset when all
instalments have
been paid off.
Business can have
very modern
equipment without
having to pay a
large sum in one
lump.
You have the use of
the premises from
the beginning which
means work can
carry on paying off
the mortgage. The
business while
eventually become
the property of the
business.
Advantage to buyers
which might
encourage them to
come to your shop.
Helps working
capital of a small
business. Trade
credit is free
Doesnt have to be
repaid. You are
being helped from
unemployment.

Purchase is more
expensive than if it
were bought with cash.
The premises act as a
collateral which means
that the premises can
be taken and sold if the
instalments are not
paid when due.
Suppliers usually give
discount for cash
payments

It is hard to get a
government grant.

Mission Statement and business aims

Having aims is helpful to a business because they:

Define what a business is and what it aspires to be

Serves as a guide for the firms activity in the future
Provide targets for the business to achieve
Act as a standard against which the business may compare its progress.

In order to be successful, the firms aims have to be SMART:

Smart
Measurable
Attainable
Realistic
Timed
Mission Statement
13

The firms aims are summarised in a short statement known as a mission

statement. The mission statement sets out the purpose of the business. The
mission statement shows members of the public what the business stands for
and what its guiding principles are.

Business aims
The aims of each business will be different according to the size and type of the
organisation, although there are usually some general aims and common ideas in
most of them. The usual aims are:

Survival
Growth
Public service
Corporate image
Concern for the environment
Profit max.

How the aims of a business may be in conflict:

E.g. shareholders are interested in profit improvement and may be unhappy
about the some of the profits being given away to a more worthy cause (charity)
on the other hand the donation would enhance the firms corporate image, which
is another one of its aims
Distinction between public sector and private sector aims
The differences are as follows:
Type of sector
Private sector Sole trader
Partnership
Limited
companies

Aims

Public sector

Social enterprise

Create and
improve profit
Grow and expand
Give customer
satisfaction
Have a good
corporate image
Provide a service
Breakeven
Contribute to the
community
Relieve social
problems

Ethical and moral issues associated with business aims:

14

It is a companys moral duty to deal fairly and honestly with their customers,
employees and suppliers. Business should have a concern for the environment ,
pay employees fair wages, refuse to buy goods which have been made in
countries where workers are exploited, sell fair trade products, use recycled
paper and packaging and dont sell products which have been tested on animals.

Stakeholders
Stakeholders in a business are people who affect, or may be affected by, the
actions of that business. The following are the main stakeholders in a business:

Owners- those who have invested money in it. Owners have the greatest
interest in the progress of their business since a large part of their money
is invested in it. They are rewarded by profit.
Producers-want to see business succeed as they dont want to lose their
customers but want to make sure they are prosperous and able to pay
their accounts. Producers are rewarded by high levels of sales which add
to the profits of their business.
Shareholders- those who invest money in a business which is a limited
company which makes them part owners of the company. Shareholders
are rewarded by dividends.
Consumers- firms customers and therefore are vital for success. Have
interest in seeing the business succeed as they have a greater number of
firms to deal with which improves the competition and variety of goods on
offer.
Trade unions- have an interest in seeing the business succeed because it
ensures the safety of its members jobs. If the business didnt succeed
employees would lose their jobs and would depend on the trade unions to
try and save their jobs.
Directors- responsible for overall running of the company. The directors
reward is in the form of a salary therefore they want to see the business
to succeed
Managers- responsibility of day to day running of the business. Are
rewarded with salary and therefore want to see the business succeed
since their employment depends on it.
Tax payers- want to see general business prosperity. If businesses are
successful, there is a full employment in the country so workers have more
money to spend. This in turn keeps government spending down on items
such as unemployment benefits and therefore the government has less
need to increase taxation

How the aims of stakeholders may be in conflict.

E.g. owners, shareholders and directors want to make maximum profit from the
business. In order to do this, they may try to pay lower wages to their employees
which would bring them into conflict with the trade unions who represent the
employees.
15

They may also hope to buy their stock from producers at min. prices. Such action
would bring them into conflict with the producers.
In another attempt to maximise profits, managers may raise their selling prices
which would bring them into conflict with consumers who do not wish to pay
more for their goods.
Owners may wish to re-invest profits into the business while shareholders may
wish to have the profits shared out to them.
The local authority or taxpayers who live near the business may be in conflict
with the business because of noise, waste pollution or additional traffic.

Customers
All businesses consider customers to be of the greatest importance. Therefore
businesses spend a lot of time and money on customer service to ensure that
customers are satisfied with both their product and their service. Businesses find
it is cheaper retaining existing customers rather than to attract new ones,
because they are more costly to attract (promotion) Keeping existing customers
does not require expense but, instead, it makes the customers feel valued, is
aware of their needs and tries to meet those needs, listens seriously to their
views and rectifies situations where complaints have been made. This is known
as customer service.
Customer Service
Customer service is a value added. Customer service is the responsibility of
every employee in the organisation. From part-time students working on the
shop floor to the managing director must provide customer service and create a
good impression.
An important part of customer service is how businesses deal with complaints. It
is expected that every complaint is investigated seriously and responsibly
admitted. Customers are now much more likely to bring poor products or service
to the attention of the store than once was the case. If the complaint is dealt
with promptly and effectively, the customer will recommend the business to
others. On the other hand, they will also tell others if the complaint has been
handled badly.
Effective customer service is important because:

Gives business a competitive advantage over other businesses

Will be rewarded by customer loyalty
If it deals with complains effectively, customer loyalty is further
strengthened
This will improve sales and profit levels
It will attract new customers
It will make employees more efficient
16

It will improve communication in the business

It will make customers more aware of the needs of all type of customersdifferent age groups etc.

Customer service can be judged in three ways:

1. Timeliness- telephone calls should be answered within 20 seconds
2. Accuracy- customers should always receive the correct order
3. Appropriateness- if the customer has difficulties with the firm, both of
them should be solved

3.4 Market research

Market Research:
Definition: collection of information from consumers and people who may
become customers, finding out their view on the firms products
Advantages:
o
o
o
o
o
o
o
o
o

Providing products consumers want

Price products the way consumers want
Show if packaging is attractive to consumers
Indicates target market
Shows area in which sales should be successful
Gives info. About competitors
Firms aware of changes in customers taste
Gives firm confidence to develop the most appropriate marketing strategy
Prevent firms from making expensive mistakes

Desk/ Secondary research:

Uses published statistics, data and other information which had been collected
previously may come from government publications, newspapers, trade journals,
internet (external sources) etc. or firms own sales and financial records (internal
sources)
Advantages:
The information/data:
o
o
o

is cheap to obtain
is available immediately
is well researched and will be accurate
17

available covers wide range of sources

Disadvantages
The information/data:
o
o
o

is unlikely to have been collected for same purpose as intended so wont

met firms exact needs
may be out-of-date
is available to every other firm on the market

Field/Primary research:
Collection of original information and is carried out by making direct contact with
customers and members of the public who may become consumers
Advantages:
Business can design research in best way to discover particular
information it needs
o Information up-to-date
Disadvantages:
o

o
o

Slow process
Specialist researchers may be need which causes expense

Primary research can be carried out by questionnaires, interviews, consumer

panels, testing and observation.
Questionnaires and interviews:
Can be conducted by phone, post and face-to-face conservation
Advantages:
o
o

Information taken directly from the people who are or will be firms
customers
The questioner can help member of public understand questions

Disadvantages:
o
o
o
o

Some people dont like being stopped

Some people misunderstand questions and give misleading results which
make the results less accurate
Slow
Postal questionnaires not always returned

Observation:

18

Watching/observing peoples reactions to products. E.g. watched making

selection of goods in supermarkets
Advantages:
o
o

Not costly
Consumers not aware its happening

Disadvantages:
o
o

Less accurate and open to interpretation

Not suitable for all products

Consumer panels:
Taking responses from people sitting on panels and give their opinions on given
products or other consumer information.
Advantages:
o
o

Detailed information gathered

Panel members are skilled

Disadvantages:
o

Expensive

Testing
Members of public given samples of product and asked for opinions
Advantages
o
o

Tests are straightforward to organise

First hand opinions from consumers

Disadvantages
o
o

May not test a cross section of people (e.g. only mothers who shop in
supermarket)
Not suitable for all products

Market Segmentation
What is it?
A useful way to study the market for different products/services
19

Markets are commonly segmented according to:

o
o
o
o
o

Age- old and young have different tastes

Gender- males, females have different tastes- i.e. male likes performance
of cars while females like shape and appearance.
Ethnic/cultural background- each group of people has its own taste in
food, music and cloths. Religious beliefs also have an impact.
Geography- consumers who live in different areas of the country like
different foods and have different hobbies.
Socio-economic class jobs i.e. low or high income

Marketing Mix- Price

Choice of pricing policies depends on:
-

The
The
The
The

type of product being marketed

competition in that market
price which people would be willing to pay
costs of production which must be covered

Competitor based pricing:

Charges same or at lower level than competitors, to gain advantage of sales
Cost based:
This involves working out fixed and variable costs and then adding on a
percentage profit. The firm is guaranteed to make a profit as it has covered its
costs; however there is possibility competitors will be charging a lower price for
the same product. It is vital to operate competitors prices and the price which
the market can bear
Skimming:
Used on new products when there is little competition, a low price is set at high
price initially. Some people are willing to pay high price as the product is new and
unique. Later, other firms will have entered the market so the price will be
reduced. The high initial price gives impression of quality and is justified as a
large sum of money has been spent on research and development.
Penetration pricing:
When a low initial price is set in beginning to gain entry into existing market and
prices increase when position has been secured, customers are lured by the
lower prices which will then increase when they have become regular customers.
Destruction:
When price is reduced to an artificial low price and one that probably doesnt
cover the cost of the firm; however once the competitors are driven out of the
market the prices would rise again.
Price wars:
Price of some goods is cut to a very low level to attract customers to their
supermarket and encourage them to buy other products while they are buying
the products at a low price.
20

Factors which affect price:

o
o
o
o
o
o

Cost of Production
Need to make a profit
Competition in the market
Price which market can bear
Season of the year
Quantity of stock in hand

To satisfy consumers demand businesses should get:

The right goods
To
The right place
At the right time
And at
The right place
There are many factors which cause a change in the demand for particular
goods:
o
o
o
o
o
o

The price being charged for the goods

Customers tastes
Level of income
Price of other goods
Advertising
Credit rates

Marketing Mix- Promotion

Process by which businesses inform customers about their products and
encourage them to buy those products
Advertising is important aspect of promotion it is used to
o
o
o
o

Introduce new product to pubic and encourage sales

Remind public about existing product and boost its sales
Target new segment of market therefore increasing market share
Provide information about products or events.

Three types of advertising:

1. Informative advertising.
Factual ands to give information e.g. events
2. Persuasive advertising
Persuade people to buy product
21

3.

advertising.
E.g. milk
advertising why
general- no
should drink milk

Generic

marketing board
people (in
target market!)

Sales promotions:
o Special offers
o Discounts
o Loss-Leaders
o Price reductions
o Money-off coupons
o Competitions
o Customer loyalty Cards
o Free Samples
o Free gifts
o Point-of-sale displays
o Price guarantees
o After-sales service
o Savings Stamps and tokens
o Sponsorship
o Public relations
Advertising methods

22

Marketing Mix- Place

The right goods
To
The right place
At the right time
And at
The right price

Aim to get products in right place where they are going to sell most successfully
e.g. there is no point in placing expensive products in a poor area.
Distribution of goods to the correct place:
Parties involved in distribution;
o
o
o
o

Manufacture/producer
Wholesaler
Retailer
Consumer

Producer

23

Person who produces the product

Wholesaler
Link between manufacture and retailer, buys products in bulk from producer and
then store them in warehouses where they are stored. The goods are then
available to retailer in smaller bulk. Referred to as breaking bulk Retailer will not
need large storage space for goods nor pay for large quantities of goods at one
time
Retailer
Final seller of goods, most frequently done in shops, further breaks bulk as
consumer is able to buy in small quantities
Consumer
Final user of product buys small useable amounts of the product

Channel of distribution of goods:

It is the way in which the goods are passed from producer to consumer
Choice of distribution depends on:
o
o
o
o
o
o

Type of goods
Value of goods
Life span of goods
Costs involved
Demand for the goods
Competition for the goods

The three channels of distributions are:

1. From manufacture to consumer via wholesaler and retailer
2. From manufacture to consumer via retailer
3. From manufacture directly to consumer
Channel 1:
The products are passed through two middle men. Retailers avail of storage,
bulk-breaking, credit and delivery services of wholesaler. Method being replaced
to large retailers to channel 2 distributions
Channel 2:
Growth of pre-packed goods and some retailers who are so large they can act as
there own retailers make this method more common. Because firms deal with
manufactures directly, placing very large orders, they can earn large discounts
24

and as a result they are able to sell the goods at a lower level to final consumer.
Lets manufactures hear views of consumers
Channel 3:
Builds up loyalty to company and its products, distributes goods directly from
manufacture to end user. Only suitable for certain types of businesses e.g.
businesses selling exclusive goods and therefore very expensive goods (bespoke
designs) usually craft industries receive orders such as individually designed
pieces of furniture. Consumer designs product and ask craftsman with skill to
produce it. More popular with growth of e-commerce
Methods of distribution:
Depends on:
o
o
o
o
o

Is the product valuable?

Is the product perishable or breakable?
Weight of product
How quickly the product is required
How much the method of transport costs

Methods of transport:
o
o
o
o
o

Road
Air
Pipeline
Sea
Rail

Road Transport
Mainly by Lorries and vans which are owned by traders and manufacturers
themselves. Suitable for all types of goods
Advantages:
o
o
o
o

Very adaptable system and permits door-to-door delivery

Used at any time- day or night
Return loads can be organised which can reduce costs
More secure as goods accompanied by driver.

Disadvantages:
o
o

Expensive- vehicles, fuel and wages are all very expensive

Congestion can lead to delays.

Rail transport
Advantages:
25

o
o

Cheaper than road

Faster in larger countries where long distances may be travelled

Disadvantages:
o
o

Need road transport to take goods from rail to exact destination

Goods are handled by more people which has implications for their safety
and security.

Air transport
Advantages:
o
o

Fast suitable for small, light products especially if speed is important

Secure

Disadvantages:
o

Expensive- costs passed onto consumer

Sea transport
Advantages:
o
o
o

Cheaper than air

Economy makes it suitable for heavier goods and large quantities which
are not required quickly.
Roll-on roll-off system allows goods to remain undisturbed and their good
condition is assured

Disadvantages:
o

Only works in conjunction with road transport which is essential to

continue the journey of goods to final destination

Pipeline transport
Transportation of oil and gas over long distances
Advantages:
o
o

Cheaper than road

Convenient

Marketing Mix- product

Product lifecycle
26

1.
2.
3.
4.
5.
6.

Research and development

Introduction or launch
Growth
Maturity
Saturation
Decline

Stage1- Research and development

Market research would be carried out and would also be tested, particularly in
case of mechanical or scientific products. Lengthy for expensive products,
research is expensive and no income is being received, so product is in loss
making position.
Stage2- Introduction or launch
Emphasis placed on marketing and promotion in order to make public aware of
product and create a desire for them to buy it. Sales are slow at start but will
increase rapidly for low cost goods if marketing activity has been successful.
Sales slower for expensive goods as people will not spend as much money on a
product which had not received its reliability. Still not in a profit making position
because sales not great enough to cover costs in R and D
Stage3- Growth
Sales grow rapidly as most people would be aware of the product and many have
tried it and would be starting to achieve a degree of customer loyalty. Prices can
be reduced especially if other producers start to provide competition by putting
similar products on the market. In a profit making position
Stage4- Maturity
Sales levels maintained and product has established place on market.
Competition becomes intense and becomes difficult to increase sales further.
Product advertised again, maturity is lengthy for household products but lasts a
short time in fashion products. Sales at highest but need to research and develop
a new product to replace the old one.

Stage5- Saturation
Highest point in life of the product, competition is intense but unlikely to be any
new competitors. Some may be drawn to product because of decreased prices
and extra advertising. Profits good but not growing
Stage6- Decline
Sales have fallen so much that they are not covering manufacturing costs and
product is unprofitable. Product withdrawn from market, second product
introduced to market.
27

Strategies to extend lifecycle

1.
2.
3.
4.
5.
6.

Modify the product

Alter the packaging
Reducing the price
Exporting the product
Increasing the advertising
Introducing new varieties e.g. new flavours, lite versions

Sale and Supply of goods and services Act, 1994

o
o
o

Goods and services supplied by a business must be of satisfactory quality.

This means goods must be properly and safely manufactured and comply
with safety regulations.
Goods must be fit for purpose
Goods must be as described on packaging

Consumer Protection Act, 1987

o

Any person injured by a defective product is entitled to sue the producer

or manufacturer for damages

Food Safety order, 1991

o
o
o

It is an offence for caterers to sell food that is unfit for human

consumption, is contaminated or is falsely or misleadingly presented
All premises used by food businesses must be registered with their local
district council. This includes vehicles selling hot dogs or ice-cream.
People who handle food must have received practical hygiene training
appropriate to their job. This is to ensure that people have the practical
skills and knowledge they need.

Weights and Measures Order, 1981

o

Goods must not be sold which are under weight or in short measure

British standards Institution

Independent organisation carries out tests on products to ensure they meet the
British, European or international standard or public specification for reliability,
quality and safety.
Kite mark is sign of good safety which would encourage customers to buy the
product.
Environmental Health Officers
28

Environmental health is controlled by local councils in N.I. The work of an E.H.O

falls into four areas; pollution and environment protection, food control, housing
and health and safety at work.

Impact of competition on marketing mix

Effect
Product
Price
Promotion

o
o
o

Quality of products may be improved

Better range of products
Prices cant be higher than competitors prices

Constant advertising required

Promotional offers are used
Good customer service to retain customers
Place
Products must be available in store when required
otherwise customer will go to competitor
3.2 Types of Production
o
o
o
o

Production can be divided into three types

Primary- extracting raw materials)

Secondary (manufacturing)
Tertiary (services)

Primary Industry
Primary Industry is getting raw materials from ground or sea and also using
earths resources to grow items such as crops, flowers and trees, e.g. farming,
fishing, mining, foresting and oil drilling.
Secondary Industry
Takes raw material produced by primary industries and works on it to
manufacture finished goods, e.g. wood into chairs

Tertiary industry
Provides services to all other industries and to members of public, e.g. transport
and commercial services
Example of chain production:
Farmers grow potatoes
Potatoes transported to Tayto Factory
29

Potatoes stored, cooked and processed into potato chips

Crisps filled into bags
Bags packed into boxes
Boxes distributed to shops
Crisps sold to general public

Changing trends across types of production

The modern trend is to shift away from primary and secondary sectors towards
employment in tertiary sector. The service sector is the fastest growing. This
trend affects most developed countries.
Methods of Production
Three methods:

Batch
Flow
Job

Job production
Where one single item is made at a time and often produced to the customers
individual specification, each product is unique and a long time would have been
spent on it. For this reason these items are expensive.
Job production is not suitable for factories but would be found in craft shops.
Examples of goods made by job production are:

Designer cloths
Craft goods
Antique furniture
Stained glass windows

Advantages:

Each piece made to customers requirements

High job satisfaction for worker
Quality of goods very high
Design is flexible and can be changed

Disadvantages:

30

Expensive
Time consuming

Batch Production
Used where several of same item are made in batch. All items made in a batch
are the same so production is speeded up. This reduces costs of labour and
results in final product being less expensive.
Suitable for businesses such as bakers which bake the same loaves/cake every
day, and where products do not have to be individual. Examples of goods made
by batch production method are:

Newspapers
Clothing
Furniture
Books

Advantages

Workers may specialise to some degree

Reduced labour costs- reduced final price
Machinery may be used
Production is faster

Disadvantages

Work is less interesting and repetitive

More space required for working and storing
Larger stocks of raw materials must be kept
Machines may have to be re-set between batches which losses time.

Flow Production
Also sometimes known as mass production or assembly line production, in flow
production, one product is made continuously and in large numbers. When the
product moves along the conveyor belt different parts are added by different
people. In this way the item starts at the beginning of the line as raw materials
but reaches the end ready to sell.
Flow production is suitable for use where large numbers of identical products are
being made. This method is very dependent on machinery; therefore a large
amount of capital is needed to establish the factory.
However, since large quantities are being produced in the shortest possible time,
wages and other costs are kept to a minimum and the finished product is usually
not expensive for the customer.
Examples of goods made by the flow production method are:
31

Televisions
Toys
Inexpensive clothing

Advantages

Final product inexpensive

Large quantities can be manufactured
Quality of product standardised
Machinery can be used so labour costs reduced
Unskilled wages further reduce costs
Assembly line can run continuously
Fast production
Full advantage of economies of scale

Disadvantages

Repetitive work and boring

Increased risk of accidents
Employee motivation is low
Products identical
Large capital investments required
Large buildings required
Large stocks or raw materials needed
Machinery breakdown can halt production
Loss of traditional skills

Specialisation
Specialisation occurs when employee concentrates on one particular operation
and does it all the time. It is where each worker undertakes only a small section
of total work and specialises in that particular part of making the product.
Also occurs when country specialises in one type of good e.g. France specialise in
wine because climate is suitable for vineyards and winemaking
There are four types of specialisation

Product
Process
Function
Country

Product: e.g. wedding belles business specialises in the product of wedding

dresses
Process e.g. in wedding belles, hazel and Joyce have specialised in the process
of machining dresses
Function: e.g. Robert has specialised in distribution and clerical work

32

Country: France specialises in production of wine

Advantages

People can work constantly at jobs which suit special skills or training. In
this way each person becomes an expert
The finished product should be of higher quality because of expertise
Resources can be effectively used and concentrated in one place.

Disadvantages

Specialised workers trained in only one area so it may be difficult for them
to find work if they are made redundant
Any firm concentrating on a small range of work becomes very dependent
on other firms
An area concentrating on a single industry is very badly affected if that
industry should fail e.g. areas of France would suffer if poor weather
caused vines not to grow.

Division of Labour
Flow production usually leads to division of labour which is a particular type of
specialisation. The manufacturer of the product is divided into a number of small
stages and each employee is given a single task which may be very narrow.
Advantages in division of labour:

Each worker becomes very practised

Workers only have to be trained for one task
Work is faster so cost per unit of production are reduced
Reduced costs can be reflected in lower prices to the consumer
Lower prices will raise sales and profits
Time saved because workers do not have to move between jobs
Tools and machinery used economically because each worker will only
need the tools which are required for one particular function

Disadvantages of division of labour:

Work is very monotonous and boring

Bored workers cause accidents
Difficult for workers to have pride in work since they do not see finished
product
Delays or strikes in one section can cause stoppages throughout the
production process
Loss of traditional skills
Goods produced by this method lack variety
Workers can feel isolated from each other
Redundant employees would have difficulty finding other work because
they are narrowly trained.
33

Stock control
Very important in any business- whether manufacturing or retailing, a factory will
have to control the levels of two types of stock- raw materials and finished
products ready for sale. Retail shop just has to control level of stock of goods it
has for sale.
In most modern businesses stock control is done by computer. Details of items of
stock are held in system. As goods are sold their barcodes are recorded at the
cash desk and those items are electronically deducted from the number in stock.
When computer records that the stock levels of particular items are low, those
goods are automatically re-ordered. Efficient stock control ensures that the
business is not holding large stocks of goods for long periods because this would
tie up finance which ought to be available for use in the business. Also makes
sure business has enough stock to keep production flowing and meet the needs
of customers.
Good stock control will:

Improve efficiency as production is constant

Enable business to meet demand
Give business competitive edge
Ensure capital is not lying idle.

Poor stock control may:

Mean that consumers demands cannot be met

Lose business and goodwill
Increase warehouse space required
Risk some perishable goods going out-of-date
Use finance inefficiently.

Methods of stock control

Method will depend on type and size of business
Just-in-time-method of stock control
This method originated in Japan. Using the just in time method:

Products are manufactured just in time for them to be sold. This prevents
large stocks of finished goods having to wait to go to market
The raw materials or parts which are needed for making final product are
ordered and arrive just in time for use in its manufacture. Large stocks are
not held in warehouses waiting to be used.

This method saves money being tied up for long periods in unused stocks of raw
materials and unsold finished products.
Advantages

34

Capital used very effectively

Warehousing not needed
If faults occur in supplies, the firm does not have a large number of faulty
items
No waste by having excess stock
Finished product should be cheaper

Disadvantages:

Business dependant on having very efficient ordering system

Production halted if wrong goods were ordered
Puts severe pressure on suppliers
Company and suppliers must work closely together

Minimum stock level method

Simple method where business works out min. amount of stock with which it can
function, stock is re-ordered when that level of stock is reached. A major
difficulty with this method is that here may be a delay between ordering the
goods and having them delivered
Stock review method
Counts all items in stock and then orders new stock to replace the stock which
ahs been sold or used. Usually done manually once a year. Obviously this
method is slow and takes staff away from other duties. Usually only used in small
businesses and they usually close for stocktaking
No matter which method of stock control is used, it is difficult to always work it
out accurately. For this reason, most businesses carry a buffer stock
Buffer stock
Most businesses hold buffer stock because it is difficult to make sure that exactly
the correct amount of stock is being held. Buffer stock is a small amount of stock
left over and above what would probably be required so that there would be no
danger that supplies on supermarket shelves would run out or that production in
a factory would cease just because a delivery of goods was late.

Impact of technology on production

Modern technology has been the cause of the greatest changes in modern
production and businesses invest large amounts of capital in technology in order
to become more successful. The major impacts of technology on production are:

Improved quality and new products

Lower costs, higher profits
35

Improved staff motivation

Redundancies, retraining
Capital costa
Improved systems
Greater customer satisfaction
Increased production

Health and safety at work

Health and safety at work (NI) Order 1978 is the primary piece of legislation
covering occupation health and safety in Northern Ireland.
Responsibilities of employers
Employers are required to:
provide health and safety training, to ensure safe use of substances and
equipment
appoint adequately trained health and safety officer
Provide protective clothing, such as goggles or hard hats where
appropriate
Maintain all equipment and systems in safe working order
Provide safe premises with clear signs and sufficient space for employees
to move around with ease
Provide adequate facilities for rest periods and meal times
Responsibilities of employees
In particular employees are required to:
Undertake health and safety training as provided by firm
Cooperate fully to ensure the firms health and safety requirements are
met
Use equipment carefully and ensure it is maintained in good working
order.
Wear protective clothing and equipment as provided
Report all faults or possible risks to health and safety officer
The cost of health and safety legislation
Health and safety legislation increases cost in three main ways:
Increased purchasing costs (equipment)
Increased administration costs with carrying out risk assessment and
competing relevant documents.
Increased labour costs to provide supervision and training
The benefits of health and safety legislation:
These benefits include:
Reduced staff absentee as lower injury rates
Increased staff motivation
Protection against negligence claims
Cash Inflows and Outflows
Inflows- Money coming into a business is called a CASH INFLOW. Money flows
into business when income is received. Examples of cash inflows are

Sales revenue
Loans
36

New capital from owners

Investment Income such as interest or dividends, government grants and
cash from sale of assets.

Example of a Cash Inflow:

Sales
revenue
5600
Loans
1000

Total cash
inflow8000

Sale of
van
1400

Outflows- Money going out of business called CASH OUTFLOW. Money goes out
of business when payments are made. Examples of cash outflows include:

Payments for materials (equipment)

Wages
Telephone
Electricity
New machinery

Materials and

Loan repayments
Tax payments

equipment
3100

Example of Cash Outflow:

Wages
2800
Total cash
Outflow7000

600

Quick check Formula

To check your closing
balance is correct use this
formula:

Other

37

Interest

Expense
500

Opening balance in first month

e.g. 2000

+ Total of receipts (inflows)

+ 8600

- Total of payments (outflows)

-12090

= Closing balance in final month

= -1490

Why are Cash flows produced?

Importance of cash flows:
Ensures business survival
Ensures there is money coming in
Ensures money is available to pay bills at the right time so shortages dont
occur
Identifies times when the business may need to find a source of finance
Purpose of cash flow forecasts:

Help plan expenditure

To show periods of likely surplus and deficit
To use as a check on spending
To set targets for a business to work towards

Cash flow forecasts are an essential component of a business plan.

Spread sheets and Cash flow forecasts
Cash flow forecasts can be created using a spread sheet.
Column: inflows and outflows for a particular month
Row: Type of inflow out flow e.g.
Jan

Opening
Balance

Feb

Column: Inflows and

Mar

Outflows for particular

month.

8,500

13,200

18,600

12000

13000

14000

1000

1000

1000

13000

14000

15000

Cash inflows
Takings
Rent received
Total

flow

Cash
Outflows
Stock

6000

6500

7000

Wages

1200

1300

1500

500

500

500

Rates

Row: Type of inflow out

38

Other
expenses

600

300

700

Total

8300

8600

9700

Inflow
-Outflow

4700

5400

5300

Closing
balance

13,20
0

18,60
0

23,900

Advantages of using spread sheets are:

Saves time
Fewer mistakes
Totals and balances calculated automatically
Totals and balances adjusted automatically when changes are made
Computer can draw graphs and charts from the information.

How do Businesses use Cash Flow forecasts?

A cash flow forecast allows a business to check their cash position. They dont
want to run out of cash. A cash flow forecast can also be used to help in
planning, for example, to make sure money is available when it is needed. Cash
flow forecasts can help in making the following decisions:
Producing new goods or services:
When a business launches a new product it must be able to predict the likely
cash inflows and outflows. This will help determine whether it will be
successful or not.
Investing in new resources:
A cash flow forecast will help determine whether a business can afford new
equipment. It is best to buy new resources when bank balances are high.
Carrying out new activities:
Many businesses try to sell their products in new markets. Predicting cash
inflows and outflows from a new activity can help a business decide whether
it is going to succeed.
Cash flow problems
TOO MUCH CASH-

OUTFLOWS EXCEED
INFLOWS-

Cash does not earn any income for a business. It should

be used to buy resources or invested in an account that
pays interest

Eventually the business will run out of cash. This mean it

will have to get money from somewhere or close down.
Borrowing money is expensive.
39

UNEXPEXTED BILLS-

Unexpected bills such as tax demand mean that cash will

be used up. This can cause trading difficulties if
important resources, such as materials, cant be bought.

Extra notes on finance- cash flows

A cash flow forecast is a prediction of the money likely to come into and go out of
a business over a period of time.
Consequences of incorrect forecasting
Shortage of working capital
Assets may have to be sold to pay expenses
Targets will not be met
Breakeven
Fixed costs
Costs not affected by the quantity of goods produced or sold. Example of fixed cost =
rent

Costs

Fixed costs

Fixed costs

Do not change with output,

have to be paid regardless of
no. of items produced e.g.
Rent, rates and insurance

Units of production

Variable costs
Costs which vary or change according to the level of work being done in the
business e.g. electricity

Costs

Variable costs Variable costs

Units of production

Change with output and vary

according to no. of items
produced. E.g. Raw
materials, production wages,
Transport of goods

40

Total costs
The total cost is found by adding together the variable and fixed costs
Total costs= Fixed costs +Variable costs

Costs

Total costs

Fixed costs

Units of production

Breakeven
A businesses breakeven point is where its total costs equal the total of its sale
income. It is the min. point at which a business can survive. The business is
neither in a profit or loss making situation- simply covering costs.
If it can sell more goods than the level of breakeven it will make a profit.
However if sales fall below breakeven, they would be in a loss making situation.
Significance of break-even

Shows amount of goods needed to be sold in order to cover costs and go

on to make a profit
Used to set price of product
Assesses the impact of planned price changes
Assesses how changes in fixed and/or variable cost may affect profit.

Break-even calculation

Selling price of product=

(Price x quantity)
Fixed cost=
(Costs do not change with output quantity)
Variable costs per unit=
(Costs which change with output quantity)

Breakeven formula
Fixed costs (f)
Selling price per unit (S) minus
variable costs per unit (V)

41

The margin of safety

Is amount business sells in excess of its breakeven point

The margin of safety is found by subtracting the output at the break-even
point from the current level of out put
The margin of safety can be measured in units and pounds

Actual sales breakeven

point

Example question
Barry Sinclair produces exquisite handmade watches. They sell for 6000 each.
Barrys fixed costs are 10000 a year. His variable costs are 2000 per watch.
a) Complete the table showing Barrys cost and sales revenue for the levels of
sales shown.
Fixed
costs
Variable
costs
Total
costs
Sales
revenue

0
100000

10
100000

20
100000

30
100000

40
100000

20000

40000

60000

80000

100000

120000

140000

160000

180000

60000

120000

180000

240000

His fixed costs have been given to us- 100000

His variable costs are 6000 per watch. Therefore for 10 watchs it will be
6000 x 10 = 20000 etc.
His sales revenue will be 2000 per watch. Therefore for 10 watchs it will be
2000x10= 60000 etc.
b)Identify Barrys breakeven point:

42

3.5 Recruitment
Recruitment is the employment of new workers. Good employers realise the
most important resource in any business is the people who work in it.
Firms need to recruit for several reasons:

Employ extra workers because the business has grown

Bring in people who have skills they need, but do not have, in the business
Replace employees who have left because of retirement, promotion or
dismissal.

Recruitment method
The stages in the procedure may vary from firm to firm but the following is
typical:
1.
2.
3.
4.
5.
6.
7.
8.

Carry out job analysis

Draw up job description
Design Personal specification
Advertise post and invite employees
Sort applicants out and create short list
Interview applicants who met criteria sated in advertisement
Select successful applicant and offer job
Complete the contract of employment

Before all this take place the employer will have to be clear about the following:

What skills and qualifications are required in firm?

How many employees do they need
Are employees required full or part time
Should they be permanent or temporary?
How soon do they need them?

Documents required in recruitment procedure

1. Job analysis
Process of identifying the particular duties and needs of a given post, information
might have to be collected on the tasks and duties of the post, the equipment
needed, and knowledge and skills and abilities required. Purpose of job analysis
is to find an analysis or description of the job.
The information gathered during job analysis is used in planning future training
programmes, in setting wage and salary levels, as well as in recruitment and
selection. Several methods are used in job analysis: interviews, observation and
questionnaires
2. Job description
Purpose: to define main duties and responsibilities of the post. This is essential
so that line manager and employee are clear about what the employee is
43

expected to do. A copy of the job description is sent to each applicant so that
they are clear about what the job requires.
Contents of Job description:

The title of the job

The place where the job will be done
A list of the main duties required in the job
The person to whom the job holder reports (the line manager)
Names of any people who report to the job holder
Details of any equipment or parts of premises for which the job holder is
responsible
Date of first issue of the job description and dates of any up-date

3. Person Specification

Identifies characteristics of an ideal applicant for the job, such as:

Personal qualities (e.g. honest, reliable and good communication)
Knowledge
Qualifications
Skills
Previous work experience

4. Contract of employment
A legally binding document signed by employer and employee
Purpose: set out rights and duties of both employer and employee. It must be
issued within eight weeks of starting of employment. It is an agreement between
the two parties and can be enforced by the law.
Content:

Name of employer and the employee

Date of commencement of the job
Title and description of the job
Hours of work
Agreed rates and method of payment

Main recruitment methods- (internal and external)

Internal: Notice boards, news sheets, sending memos or e-mails to employers
External: Media, internet, job centres, private recruitment agencies
Advantages of internal recruitment

Applicants familiar with business

Existing employees given opportunity to gain promotion within firm
Improves staff morale and provides motivation
Cheaper
Shorter
Simpler

44

Disadvantages of internal recruitment

Range of applicants limited

No new skills/ideas
Lead to staff discontentment if one colleague is promoted over another
Newly promoted have to be trained
Existing job of newly promoted will have to be filled

Advantages of external recruitment

Wide range of applicants

New skills/ideas
Avoids jealousies
Fully trained staff may be appointed so no additional costs
No other external staff vacancies are created

Disadvantages of external recruitment

Applicants not familiar with business

No job opportunities for existing members
Existing staff may feel under valued
Expensive
slower

Factors which influence the choice of recruitment method:

Size of firm
Amount of money available for advertising
Type of work being offered
How many employees required
How quickly the employee is needed

How would a business know that its recruitment is effective:

Response rate
Type of response did method sued attract applications from suitable
candidates
Ease of operation- was method easy to carry out
Successful result- did method used result in good appointment

Legal controls on recruitment

The overall aim of legal controls on recruitment is to prevent discrimination.
There are legal controls on:
Race
Religion
Disability
Gender
Fair employment and Treatment (Northern Ireland) Order 1998
Order was passed to ensure that people of all religious beliefs and political
opinion in Northern Ireland have equal opportunities in employment.
45

In order to comply with fair employment rules employers must:

Register with the Equality Commission if they employ more than ten
people
Annually submit information about the religious composition of the
workforce- including part time employees
Submit information of people who have applied for jobs
Retain all information for three years so that their practices can be
examined over a period
Review their practices at least once every three years
Create neutral area in the workplace. (no flags, banners etc.)
Selection
Testing- Practical tests usual in selection process for manual and practical
jobs.
Psychometric tests are usually used when management level positions are
being filled
Application form- applicant gives exactly the type of information which
the employer needs, making it easier to compare applicants. Application
form should be

- neat and accurate

- completed in blue or black ink
- signed and include date
Interview- give employers opportunity to meet applicants and judge if
they are
suitable. Interviewee should prepare for interview, arrive in time &dress
suitably
Application letter- shows employer level of the applicants
communication skills. Letter should include:
- personal details
- educational background
- qualifications and work experience
Presentation- For applicants in management positions. Shows employer
personality, communication skills, level of preparation and ideas about the
job from applicant.
Curriculum vitae (CV)- list of applicants qualifications, work and
achievements to that date

A Curriculum Vita may include:

Personal details
Educational background
Qualifications
Work experience
Positions of responsibility

Responsibilities of employers and employees in the selection process:

46

Both employers and employees have the same responsibilities in the selection
process. There are four main obligations which are expected from all parties.
They are: honesty, objectivity (fair treatment legislation), fairness and
confidentiality (PG190 AND 191 OF TEXTBOOK)
Training
Employers should realise that their most valuable resource is employees. They
should be anxious to have a highly trained and well-motivated workforce and
should be willing to invest a lot of money into training programmes.
Reasons for staff training:
1. Induction; training of new employees. Induction may include tour of
buildings, introduction to work colleagues and manager, a talk on firms
aims and explanation of health and safety procedures.
2. Change in procedures; may be necessary to train existing staff because of
new technology etc.
3. To become more competitive; with aim to maximise sales and profits they
look for ways to make their product/service better, and in a shorter time,
than the product or service offered by other firms.
Benefits and importance of training:

New employees will be properly inducted into business

Employees will be equipped to cope with changes in technology
Employees will have updated skills
A highly trained workforce is more efficient and effective
Helps keep ahead of competitors
Reduces risk of redundancy of employees
Decreases supervision required for employees

Drawbacks of training:

Expensive
Employees have to take time off work
Risk that employees will leave and work with competitors
Highly trained employees may demand a higher pay

Types of training:
On-the-job training; most common form of training for skilled/semi-skilled
workers. May be done in a variety of ways:
Internal courses: where the content of the course is designed
specifically for firm as the firms own premises, machinery and
equipment is used.
Work shadowing: working alongside one another and the trainee learns
from experienced worker.
Role play: make believe situation is created and the employees have to
work out how to solve the problem.
47

Advantages of on-the-job training:

Content of course is designed specifically for the firm

Usually more economical because the work of the firm is not
interrupted
Training given to each individual
Everyone knows each other
Employees feel at home in own surroundings

Off-the-job training is training provided by specialist and takes place

outside the firm. The training is paid for by the firm. Off-the-job training
may be done in a variety of ways:
Lecture: given information which they can apply later
Demonstrations: effective for showing how tasks should be done. The
trainee watches the expert but then must be given opportunity to
practise the skill.
Role play: undertaken to imitate a real-life situation
Advantages of off-the-job training:

Training is of higher quality as it is done by specialists

Meet people from other organisations and exchange ideas
Employees visit new environment and introduced to new equipment
Can attend evening classes which means they do not miss their
work and this reduces the cost

Motivation
Motivation is the way in which a person can be encouraged to make an effort to
do something.
Maslows five levels of need pyramid:

Selfactualisation
Status

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Importance of motivation:
If employees are highly motivated:

There is likely to be a lower labour turnover- employees less likely to leave

There would probably produce higher quality goods
Fewer accidents
Less likely to take time off work
Methods of motivation:

Financial methods of motivation:

an
others yet gets

Profit sharing: Receive a share of the profit

made in addition to basic salary. This encourages
employees to increase output and profits of which they
can own a share. Employees feel a greater sense of
belonging of the firm and take greater interest in its
success. Profit sharing is most likely found in the service
sector as in this type of work it is easy to estimate
employees amount of work. It is unfair when
employee is not working
the same as
same amount of profit.

Bonus: Extra payment made to employees who work well and is paid in one lump
sum. Bonus payments encourage employees to work harder
Commission: Extra financial award based on the percentage of sales which that
person makes e.g. Avon and car dealers are paid in commission. Commission
payment encourages sales staff to increase sales. In this way the business sells
more goods and gets a higher profit while the sales staffs increase their income.
Non-financial methods of motivation:
Job
gain

rotation: move around different jobs to avoid

boredom. Employees have the opportunity to
more skills- usually used in factory production
Team working: makes employees feel more responsible
for their own decisions and employees feel committed
and anxious to make their own team successful so will
work hard- improves morale in workplace
Quality circles: employees organised into teams and meet
regularly to examine quality of what they are doing and
try to find ways to do the job better.
Fringe benefits: such as company cars, use of houses etc.

Factors affecting job satisfaction:

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Factors that increase job satisfaction:

Wages/salaries
Responsibility
Fulfilment
Enjoyment
Good working conditions
Praise

Appraisal
The process of accessing an employees performance in his/her job
Reasons for appraisal:
To identify;
Staff strengths and weaknesses
The most effective use of employees
Staff promotion possibilities
Training requirements for staff
Appropriate level for staff
Appropriate level of pay
Benefits for employers and employees:
Opportunity for promotion and sets pay levels
Make sure training is achieved
Opportunity to discuss problems
Increase staff competence and overall productivity
Methods of appraisal:
Observation
Interview
Self-appraisal
3.6 Business success or failure
Signs of success;
Increasing profit
Attracting new competitors to market
Expansion
Signs of failure;
Loss of profit or
Poor cash flow
Benefits of growth

Negatives of growth

Increased profits

Poor communication because business becomes

too large

Increased publicity

Lack of motivation as employees dont know

owners

Economies of Scale

Branches of organisation may be difficult to

coordinate

50

Success of a business relies upon a balance between risk and reward. How a
business manages change to ensure that it is successful.
Economies of scale
There

are three main types of economies of scale:

Technical
Financial
Marketing

Marketing economies of scale

Gained when business can save in expenses associated with marketing such as
promotion and distribution.
Technical economies of scale
Gained when a business can cut production costs by introducing upgraded
technology or by altering production methods
Financial economies of scale
Gained when business can borrow money or otherwise gain finance by cheaper
methods
Main ways in which a business can grow
Businesses may grow internally (organically) or externally
Internal growth
Is slow to achieve and is a gradual process, its purpose is to become better and
stronger than other firms in the same type of business
To achieve internal growth a firm will:
Plough back profits
Develop new markets for products
Develop new products
External growth:
Is faster and involves bringing together of a number of organisations to form a
single business. External growth may be achieved through:
Franchising
Merger, amalgamation, integration
Take over
Franchising
Popular method by which companies expand their operations
Takeover:
Takeover is when one business buys over control of another business. To achieve
a takeover a firm would have to buy a large number of shares so that it could
control the voting in the other firm.
Merger/amalgamation
Voluntary and agreed joining of two firms in order to form one larger business
51

In a merger all the capital as well as all resources and assets such as premises,
machinery and personnel are joined together in one organisation.
This arrangement has several benefits:
Savings are made because one merged organisation is able to operate
with less equipment and other resources than two.
No duplication in running costs
Fewer administrative staff and directors are required
The firms will be working together rather than as rivals to one another
Mergers have some drawbacks;
Consumers have less choice
Competition is reduced so there will be higher prices
Integration
Integration is achieved through mergers and takeovers. Three main types are:
Horizontal integration
Vertical integration
Lateral integration
Horizontal integration
Takes place between firms on the same level within the same type of business.

Horizontal
Integration

Confectionary
shop

Confectionary
shop

Vertical integration

Takes place between firms on different levels

within the same type of business.
Backward vertical
Same product but at earlier stage in chain of production
Forward vertical
Same product but at later stage in chain of production
Chocolate
Plantation

Chocolate Factory

Forward
Vertical

Backwa
rd
Vertical
Chocolate Factory

Confectionary
(sweet) Shop

Lateral integration

52

When a firm expands by merging into another firm which is in a related but
different area
Lateral same
level/sector but unrelated

Chocolate
Factory
Conglomerate

Ice Cream
Factory

Totally unrelated and dissimilar:

Chocolate
Factory

Jewellery
Shop

Restaurant

This type of merger is also known as diversification, and it take place because
the firm is expecting a decline in one of its markets and it is branching into other
lines as a safeguard
Implications for a business or the different methods of growth
Internal growth- is a slow and gradual process. Owners may have littler personal
gain from the business for many years as it ploughs back profits. Will have to
look for new market and products in order to gain competitive advantage over
competitors
External growth- will mean there will be a loss of control of the business and
introduction of shared management and decision making
Franchising- business has to accept that policy is dictated by the franchising
company and there is no opportunity for individuality. The main implication is
that it is seen as a large chain rather than a business in its own right.
Takeover- strained relationships at managerial level and enforced control by an
outside company
Merger- increase in business comes from larger operation resulting in economies
of scale and greater profits.
Horizontal- same implications as merger also there is an elimination of a
competitor from the market.
Backward vertical- assured supply or raw materials
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Forward vertical integration- has an outlet for products and has control over sales
of products
Lateral- some economies of scale can take place through joint production and
joint marketing
Conglomerate- if one aspect of the business should prove unprofitable the other
products can compensate
Factors which limit the growth of firms

Lack of finance

Competition

Consumer taste

Lack of entrepreneurial skills

Lack of expertise

Lack of information and poor communication

Social and moral implications of growth

Larger shops are taking over smaller shops in rural areas where jobs and
business are taken over. Also damaging rural community life with traffic
congestion and people are forced to travel to towns to shop- which is a problem
to elderly and those who cant drive.
The competition commission
Was established to investigate mergers and to make sure that mergers between
businesses are fair to consumers
This is because a merger between businesses could make one very large
business and could eliminate competition- which means there could be higher
prices for the consumer
The commission has two functions:

Carries out inquiries into monopolies and mergers

Hears appeals against decisions made on monopolies and mergers and on

the abuse of market power

International trade
Is the selling and buying of goods to and from foreign countries
Benefits:

Increased market and profits- can sell goods in increased quantities

More employment- increased sale- higher level of production- more

employers needed
54

Economies of scale- results in higher profits

Greater variety

Political reasons- government encourages International trade as it

develops good relations

Drawbacks:

Competition

Production- capital investments and more staff- results in increased costs

Distribution- secure and efficient packaging

Documentation

Language

Currency- exchange rates

Promotional activity- must be modified for country

Cultural differences- vital values and traditions are respected

How marketing mix is affected by international trade:

Effect
Product

Price

Promotion

Place

Must suit legal requirements of foreign country

Must suit technical set-up e.g. electrical sockets

Must reflect what the market will be willing to pay

Has to set at a lower level to cover taxes

Consider change rate variations

Has to be quoted in appropriate currency

Appropriate language

Consider cultural differences

Must be a style suitable for product and market

Must be available in places where target market would be

able to buy

Suitable transportation

Suitable packaging

Implications of the global market on local economy

55

The need of cultivation of a wide vision

Businesses need training and practical experience

Local businesses need to be able to use available technology

Stiffer competition for businesses in N.I- could result in closure of small

businesses

Opportunity for N.I. to trade equally with all other counties

Cultural dimension of international marketing

E-commerce
Advantages of e-commerce for a business:

56

Business can be conducted at any time

Provides opportunities for increased sales

Increased productivity

Increased turnover and profits

Business can become better known

Advantages of e-commerce for customers:

Greater choice

Research and compare prices

Product information

Better customers satisfaction

Disadvantages of e-commerce for a business

Increased competition

Not suitable for perishable goods

Business must be aware of differing cultures

Must understand legal requirements

Need to be able to cope with many languages

Disadvantages of e-commerce for customers:

Security issues

Technology restrictions

Product quality

Product delivery

3.7 Business Plan

Why develop a Business Plan:

To show bank- new business needs money from bank so bank need to be
sure they are going to be paid back so they want to see a business plan
Show shareholders- use business plan to gauge the strength of the
business

57

Show other possible investors- potential investors should study business

plan to see if they would receive a worth-while return on their business
plan
Ensure proper planning of business- makes sure everyone thinks about
every detail
Monitor actual performance against the plan- monitor progress against
business plan
Keep a check on spending- accounts produced as part of business plan will
be used to check the monthly figures
Ensure aims are being met- ensure aims are met

Components of a business plan (see textbook for more detail)

Introduction to proposed business

The business and its objectives
Resources plan
Marketing and marketing mix
Production plan
Financial plan
Appendices

3.2 Ratios
A number of people may be interested in business ratios:
The owners-want to know if business will be profitable
Employees- want a secure job
Managers- want to use the rations to make business decisions
Creditors- want to know if they can repay loans
Summary of ratios:
Net profit for year
Return on capital

Net profit percentage-

Working capital-

Capital employed

Net
profit
Sales

X 100

employed-

X 100

Current
assets
Current
liabilities

Stock turnoverCost of sales

Average stock
Average stock=
Opening stock + Closing
stock
2

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Return on capital employed:

Establishes if it is worth while investing in the business
If you invest in a bank you are guaranteed a return however in a business you
are not guaranteed a return so you are taking a greater risk and therefore you
want a better return
Net profit percentage:
Identifies how efficiently a business manages its overheads/costs
The higher the % the better the business is controlling its costs
Causes of fall in net profit:

Increased overheads- costs not being passed onto consumer

Overstaffing- higher wage costs

Causes of a rise in net profit:

Business operating more efficiently

Working capital ratio:

Shows businesses ability to pay its current debts- shown as ___:1 e.g 1.7:1
The normal is 2:1- If below this business will have problems repaying overdraft if
bank demands immediate payment
Stock turnover:
Shows the number of times a business sells its average stock (this depends on
type/nature of business)
-Shown in a number of days
Causes of fall in rate of stock turnover:

Slow trade

Lack of interest in products (products may be of low quality)

Consumers have little disposable income

Sales team not performing well

Causes of a rise in rate of stock turnover

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Good sales team

Increased interest (good quality)

More disposable income

60