Business AS Levels - Notes

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CHAPTER 1
Business & Its Environment
1.1 Enterprise
1.2 Business Structure
1.3 Size of Business
1.4 Business Objectives
1.5 Stakeholders in Business

CHAPTER 2
People in Organization
2.1 Human Resource Management
2.2 Management
2.3 Motivation

CHAPTER 3
Marketing
3.1 What is marketing?
3.2 Market Research
3.3 The Marketing Mix – Product & Price
3.4 The Marketing Mix – Promotion & Place

CHAPTER 4
Operations & Project Management
4.1 The Nature of Operations
4.2 Inventory Management
4.3 Capacity Utilization & Outsourcing

CHAPTER 5
Finance & Accounting
5.1 Business Finance
5.2 Forecasting and Managing Cash Flow
5.3 Costs
5.4 Budgets

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Section 1: Business & Business Environment

Business & its Environment

1.1 Enterprise
Purpose of business activity: Business is a major economic activity. It can be defined as the production of
goods and services needed by people in this world to meet their basic needs. Its purpose is to identify and
satisfy the needs and wants of the people with the overall aim of earning profit. To produce the goods and
services the business will be using scarce resources (resources that are limited in supply)

Economic resources: Business enterprises are established where entrepreneurs combine productive
resources (factors of production) to produce an output.

Factors of production: These four factors can be categorised as:

Land: All natural resources provided by nature such as

fields, forests, oil, gas, metals and other mineral
resources. It includes renewable and non-renewable
resources. The reward for land is rent

Labour: The people who are used produce goods and

services. Labour is rewarded with a wage/salary

Capital: Finance, machinery and equipment needed to

produce goods and services. NB there is also
intellectual capital which refers to the intelligence of the
workforce.
Division of Labour/Specialisation
Enterprise: The skill and risk-taking ability of the
Because there are limited resources, we need to use person who brings together all the other factors of
them the most efficient way possible. Therefore, we production together to produce goods and services.
now use production methods that are as fast as Usually the owner or founder of a business. In return,
possible and as efficient (costs less, earns more) as the entrepreneur will make a profit (or a loss).
possible. The main production method that we are
using nowadays is known as specialization, or
division of labour.

Division of Labour is when the production process is split up into different tasks and each task is done by one
person or by one machine

Specialisation: When a person, firm or economy concentrates only on the tasks it is best at.
Advantages Disadvantages
 Specialized workers are good at one task  Boredom from doing the same job lowers
and increases efficiency and output. efficiency.
 Less time is wasted switching jobs by the  No flexibility because workers can only do one
individual. job and cannot do others well if needed.
 If one worker is absent and no-one can replace
 Machinery also helps all jobs and can be him, the production process stops.
operated 24/7.  Breakdown of a machine at one stage will affect
 repeating the same job can make the all successive stages
worker more skilled  Use of machines may lead to unemployment
 the business can enjoy economies of scale

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Goods and services

Goods: are divided into consumer and capital goods
i. Consumer goods: these are the tangible goods which are sold to the general public. This includes
durable and non-durable goods. Durable goods such as machinery, garments and mobiles can
last for a long time while non-durable goods such as edible things soon become damaged.
ii. Capital goods: they are physical products, manufactured specifically to be sold to other industries
for the production of other goods and services like commercial vehicles.

Services: They are intangible products for the public to satisfy their wants. They could be commercial or
personal services. Commercial services include banking, insurance, and transportation which are done on a
large scale. Personal services are one-to-one services such as hairdressing, teaching, lawyer etc.

NEEDS & WANTS

NEEDS: are the things that we cannot survive without -The basic human needs can be classified as:

 Social -entertainment
 Physical -food, warmth, shelter
 Status -a sense of achievement, good job, large house etc.
 Security -privacy, steady job, secure homes etc.

WANTS: are the things that we can survive without e.g. cell phones, radios, jewellery etc. Human wants are
unlimited but the resources to satisfy them are limited in supply. This gives rise to the basic economic problem.

The concept of creating value & Adding value

Creating value: increasing the difference between the cost of purchasing bought-in materials & the price the
finished goods are sold for.

Added value: the difference between the cost of purchasing bought-in materials & the price the finished
goods are sold for.

Value can be added by:

 Creating a brand
 Advertising
 Providing customised services
Nature of economic activity: The nature of the  Providing additional features
economic activity is that there are limited resources  Offering convenience
to satisfy unlimited wants. Due to the limited
resources, everyone has to make choices The benefits of this is:
(individuals, businesses, governments)
 Business can charge more to customers – increasing
Economic Problem: We have unlimited Needs and profitability
wants and there are limited resources. In economic  The product & business can differentiate themselves
terms, we say the resources are scarce. Scarcity from competitors – brand & quality image
refers to the fact that people do not and cannot  Helps cut costs in the long run – customer loyalty &
have enough income, time or other resources to brand image
satisfy every desire. Faced with this problem of
scarcity, human beings, firms and governments
must make a choice.

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Problem of choice: businesses must make a choice on how to use scarce resources to fulfil their wants.
Business must choose on whether to use labour or capital to produce their products. The business must also
choose the types of goods to produce. When something else is chosen, it means something else is given up
(sacrificed). Thus choice leads to opportunity cost.

Opportunity Cost: this is the next best alternative forgone, meaning the next best choice given up in favour of
the alternative chosen from two choices. E.g. If a business has a choice of purchasing new packaging machine
and IT system upgrade. If the business chose to buy new machinery because of its greater utility, then the IT
system will be the opportunity cost.

Business environment is dynamic: Setting up a new business is risky because the business environment is
dynamic (constantly changing)

- The risk of change can make the original business idea much less successful.

- New businesses may turn from successful to loss-making (fail) due to -

- Competitors (other businesses)

- Legal changes-outlaw products, e.g. Outlawing the product altogether
- Market/customers have less to spend (economic)
- Obsolesce (technological), the methods used become old-fashioned & expensive.

Nearly 70% of new business fail to survive in the real world, so the important question is WHY?

Why do businesses fail early on?

 Lack of Experience: Many reports on business failures cite poor management as the number one
reason for failure. New business owners frequently lack relevant business and management expertise
in areas such as finance, purchasing, selling, production, and hiring and managing employees.
 Insufficient Capital/ Finances: A common fatal mistake for many failed businesses is having
insufficient operating funds. Business owners underestimate how much money is needed and they are
forced to close before they even have had a fair chance to succeed. They also may have an unrealistic
expectation of incoming revenues from sales
 Poor Location Choice: Whereas a good business location may enable a struggling business to
ultimately survive and thrive, a bad location could spell disaster to even the best-managed enterprise.
 Poor inventory management: Poor inventory management might lead to too much of cash being
blocked as stock. Excess stock also brings in additional cost burden of maintaining it and the risk of
getting obsolete or damaged.
 Over-investment in fixed assets: Blocking too much cash in fixed assets can again pose danger for the
business and can contribute to business failure.
 Poor credit arrangement management: Business might take too much of debt and might find it difficult
to service them. Poor credit management, forward planning and cash flow problems might contribute
to it.
 Personal use of business funds: Owners of small business usually don’t differentiate between
business funds and their own funds. The risk of utilizing business funds for personal use by the owner
might lead to cash shortage for the business.

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What a business needs to succeed

The Role of the Entrepreneur

Qualities of a successful entrepreneur

 Commitment & self-motivation

 Risk-taking
 Innovation
 Leadership skills
 Multiskilled
 Self-confidence & an ability to
bounce back

The role of the entrepreneur

 Have an idea for a new business

 Invest some of their own savings & capital
 Accept the responsibility of managing the business
 Accept the possible risks of failure.

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Challenges faced by entrepreneurs

- Identifying successful business opportunities

- Sourcing capital
- Determining a location
- Competition
- Building a customer base

Role of business enterprise in the economy of a country

 Provide employment
 Pay taxes
 Increase the GDP of the country
 Satisfy the needs & wants of the people
 Bring foreign currency if the products are sold
outside the country
 Reduce poverty levels
 Increase competition in the industry

1.2 Business Structure

Economic Sectors: Primary, secondary, tertiary & quaternary sector businesses
Primary sector: firms that extract natural resources to be used & processed by other firms.

• E.g. Farming, fishing, oil extraction

Secondary sector: firms that manufacture & process products from natural resources.

• E.g. Computers, brewing, baking, clothes-making & construction

Tertiary sector: firms that provide services to consumers & other businesses.

• E.g. Retailing, transport, insurance, banking, hotels, tourism & telecommunications

Quaternary sector: Firms in IT sector providing IT based services

• E.g. Internet search engine, ad sense, bitcoins etc.

The public & private sectors

Public sector: comprises of organisations accountable to & controlled by central/local government (the state).

Private sector: comprises businesses owned & controlled by individuals/groups of individuals.

Changes in business activity

Industrialisation: a growing importance of the secondary sector manufacturing industries in developing
countries.
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The relative importance of each sector is measured in terms either of employment levels / of output levels as a
proportion of the whole economy.

In developed economies, there is a decline in the importance of secondary-sector activity & an increase in the
tertiary sector. This process is termed deindustrialisation.

 Rising incomes due to higher living standards = consumers spend on services rather than more goods
= growth in tourism, hotels & restaurant services, financial services, etc.
 The rest of the world industrialises making manufacturing businesses in developed countries less
competitive because developing countries are more efficient & use cheaper labour = rising imports of
goods (smaller market for domestic secondary sector firms).

Advantages Disadvantages
 Total GDP = increased Standards of Living  High concentration of people may move to where
(SOL) the industries are located from small towns and
 Increased output of goods can lead to lower villages, leading to social problems and housing
imports and higher exports = Income SOL shortage.
 Country can now export value added goods &  Imports of raw material and component might
services rather than exporting basic, increase producing a deficit in Current Account
unprocessed products.  Much of this growth will be attributed to
 Leading to firm’s expansion and higher profits Multinational companies MNCs
which means higher taxes will be paid to Govt.
 Unemployment will decrease due high demand
of labour.

BUSINESS STRUCTURE

Differences between Private and Public Sector

Private Sector: This sector comprises businesses owned and controlled by individuals or groups of
individuals. Such businesses are commonly found in the free market economy. Their main aim is to make profit
through the sale of private goods. Examples of business found in the private sector include:

 Sole trader
 Partnership
 Private Limited Companies
 Public Limited Companies
 Co-operatives

SOLE TRADER: Refers to a business in which one person provides permanent finance and, in return, has full
control of the business and is able to keep all of the profits. It is owned by one person. However the owner may
employ other people. Examples are hair salons, bus operators, grocery stores etc.
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Formation No legal formalities are required

Ownership owned by one person

Legal status The business is not a recognised as a legal person. It is referred to as an unincorporated
business
Liability The owner of the business suffer from unlimited liability. If the business fails the owner
may lose personal possessions (personal property)
Continuity The business come to an end when the owner dies
Tax Issues it does not pay corporate taxes, but rather the person who organized the business pays
personal income taxes on the profits made, making accounting much simpler

Advantages Disadvantages

 easy to form (less capital and legal  unlimited liability

requirements)  can raise little capital
 owner has direct control of the  limited management expertise
business (makes decisions that best  poor quality decision making
suit his/her conditions  difficulty in attracting qualified
 all profits go to the owner employees
 enjoys major exemptions from  lack of continuity when the owner dies
 Government legislation
 no double taxation
 has personal contact with both customers
and employees
 easy to terminate

Partnerships: A business owned by at least two but not more than twenty people. The partners agree to
carry on business together, with shared capital investment and, usually, shared responsibilities. To enter into a
partnership, partners can have a verbal agreement or otherwise write a Partnership Deed/Agreement which a
document is setting out the following details:

- Amount of capital contributed by each member

- Salaries/wages to be paid to each member
- Rights and obligations of the partners
- Procedure for partnership dissolution) profit/loss sharing ratio
- Name of firm - includes the name of the business entity.
- Date of writing - includes simply the date that the contract was written.
- Duration of partnership - includes how long the partnership should last. It is automatically assumed
that the death of one of the contracting parties breaks the contract, unless otherwise stated.
- Business to be done - includes exactly what will be done in this partnership. This section should be
very particular to avoid confusion and loopholes.

Formation fewer legal formalities are involved

Ownership owned by at least two to a maximum of twenty partners

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Legal status The business is not recognised as a legal person. It is referred to as an unincorporated
business
Liability The partners suffer from unlimited liability. If the business fails the owner may lose
personal possessions (personal property)
Continuity The business come to an end when the key partner dies
Tax Issues it does not pay corporate taxes, but rather the partners who organized the business pays
personal income taxes on the profits made, making accounting much simpler

Advantages Disadvantages

 easy to form (same as sole proprietor)  unlimited liability i.e all of the owner’s
 more capital available assets are potentially at risk
 diversity of skills and expertise  disagreements may easily lead to winding of
 quality decisions are made the business
 personal contact with employees and  all partners responsible for the acts of each
clients other
 risk is spread over a number of people  lack of continuity when the key partner dies
 relative freedom from government control or become insane
 profit/loss sharing ratio not necessarily
equal
 the partnership often face intense
competition from large firms
 the owner , by taking on a partner, will lose
control of the business

Limited Companies: Also known as Joint stock companies. These are businesses where a number of
owners (shareholders) pool in their resources to do a common business and to share the profits and losses
proportionally.

In a limited company, the debts of the company are separate from those of the shareholders. As a result,
should the company experience financial distress because of normal business activity, the personal assets of
shareholders will not be at risk of being seized by creditors. Ownership in the limited company can be easily
transferred, and many of these companies have been passed down through generations.

General features of Joint Stock Companies / limited Companies

1. separate legal entity

2. shareholders have limited liability
3. owners are called shareholders (buy shares)
4. shareholders receive dividends as payments
5. the Board of Directors manages the affairs of the company
6. the company is governed by Memorandum and Articles of Association
7. shareholders hold Annual General Meetings (AGMs)

*A share is defined as a certificate confirming part ownership of a company. This certificate also entitles the
shareholder the right to dividends. Shareholder- a person or institution owning shares in a limited company

Limited Liability must complete:

Memorandum of association

- Name of the company

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- Address of the head office

- Maximum share capital for which the company seeks authorisation
- Companies declared aims

Articles of association

Internal workings of the business & control of the business e.g. It details the names of directors & the
procedure to be followed at meetings

Private Limited Companies: Refers to a small to medium-sized business that is owned by shareholders
who are often member of the same family. This company cannot sell shares to the general public. They have
two but not more than fifty shareholders. The right to transfer shares is limited. The business should submit
financial statements and auditors reports to the Registrar of Companies.

Formation There are complex legal formalities. Two documents should be drafted by the founders of
the company and these documents include the memorandum and articles of association
Ownership owned by at least two to a maximum of fifty shareholder
Legal statusThe business is recognised at law as a legal person. It is referred to as an incorporated
business
Management and it managed and control by the board of directors
Control

Liability The shareholders enjoy limited liability. If the business fails the shareholders’ personal
assets cannot be taken. They only lose the capital they have invested in the business.

Continuity There is continuity even after the death of the founder.

Tax Issues There is double taxation. The shareholders pay tax on their incomes and the business
also pay corporate tax.

Advantages Disadvantages

 shareholders have limited liabilities  not easy to form (up to six months)
 more capital can be raised  has to fill complex tax forms
 greater status than an unincorporated  cannot raise capital through the stock
businesses exchange
 easy to transform into public limited  quite difficult for the shareholders to sell
companies shares
 do not have to publish annual accounts in
the press

Public Limited Companies: A large business, with the right to sell shares to the general public. The share
prices are quoted on the national stock exchange. They have at least two shareholders to no maximum limit.
Shares are freely transferable. The public can be invited to subscribe to shares and debentures through a
prospectus. Can only start business after complying with all the requirements of the Companies Act. Annual
accounting reports (financial statements) are supposed to be published in the press. Must keep a register of
investors and directors’ shareholding

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Formation There are more complex legal formalities. Three documents should be drafted by the founders
of the company and these documents include the memorandum of association, articles of
association and the prospectus

Ownership owned by at least two to no maximum limit of shareholder

Legal status The business is recognised at law as a legal person. It is referred to as an incorporated
business
Management and it managed and control by the board of directors
Control
Liability The shareholders enjoy limited liability. If the business fails the shareholders’ personal
assets cannot be taken. They only lose the capital they have invested in the business.
Continuity There is continuity even after the death of the founder.

Tax Issues There is double taxation. The shareholders pay tax on their incomes and the business also
pay corporate tax.

Advantages Disadvantages

 easy to raise capital through floating shares  difficult to form

on stock exchange  files always open for inspection by members
 can operate on a large scale of the pubic
 unlimited life  decisions take time to make due to large
 employees can become shareholders- size of the company
increases loyalty  no personal touch between employees and
 managers and directors have room to work customers
independently therefore prove their  conflict of interest-shareholders are usually
expertise in their areas of specialization interested in expanding the business
 shareholders enjoy limited liability

Co-operatives: Is an association of persons united voluntarily to meet common economic, social and cultural
needs. Usually members join together to purchase or sell goods that they cannot afford individually.

Main features

1. formed by people who want to work together

2. is voluntary
3. members make equitable contributions
4. risks and benefits are shared equally
5. are democratically controlled
6. the name ends with Co-op

Formation: Members should have a common goal. These members will then draft the constitution and the
management committee is elected usually at an annual general Meeting

There are different types of co-operatives:

 Housing cooperative
 Retailers' cooperative
 Worker cooperative
 Consumers' cooperative
 Agricultural cooperative
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Advantages Disadvantages

 No legal formalities are involved  unable to raise large amount of financial

 Membership is open to everyone resources
 Members enjoy limited liability  It is managed by members who may be
 Members get goods and services at lacking the required management skills
reasonable prices  Can be affected by conflict since it is an
 There is continuity association of people from different social,
 Surplus is shared among members economic and academic background
 government provides special assistance to  Absence of rewards discourage the
the co-operatives to enable them to achieve members to put maximum effort in the
their objectives successfully society
 They are usually tax exempted

Franchising: Refers to an agreement where one party (the franchisor) grants another party (the franchisee)
the right to use its trade mark or trade name as well as certain business systems. The franchisee sells the
franchisor's product or services, trades under the franchisor's trade mark or trade name and benefits from the
franchisor's help and support.

In return, the franchisee usually pays an initial fee to the franchisor and then a percentage of the sales
revenue. The franchisee owns the outlet they run. But the franchisor keeps control over how products are
marketed and sold and how their business idea is used.

Well-known businesses that offer franchises of this kind include: Pizza, Bata, McDonalds, Nandos etc.

Contractual Obligation: A franchise agreement should be drafted and signed by both parties. This is a legal
contract in which the franchisor gives the franchisee the right to use the business’s trade mark.

 The franchisor is not allowed to open a similar business nearby

 It must specify the franchise fee as well as monthly royalty payment
 The agreement lays out details of what duties each party needs to perform
 It also state the duration of the franchise contract

Advantages to the franchisee Disadvantages to the franchisee

 Franchisee benefit from pre-opening  The franchisor might go out of business, or

support e.g. site selection, design, financing change the way they do things.
 Franchisor assist in training staff  The franchise agreement usually includes
 Franchisor advertise goods on behalf of the restrictions on how you run the business.
franchisee ( saves money) You might not be able to make changes to
 Franchisee enters into an existing market suit your local market.
which increases the chances of business  The franchisee must pay initial fee and
success. continuing fees to continue to use the trade
 Risk is reduced and is shared by the mark
franchisor.  The franchisee cannot sell goods from other
 Relationships with suppliers have already suppliers
been established.  Breach of contract can result in a penalty
charge

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Advantages to the franchisor Disadvantages to the franchisor

 It’s a source of income to the franchisor  Other franchisees could give the brand a
(royalties received) bad reputation.
 Risk of the business is spread among  Franchisor must provide the franchisee with
different franchisees on-going support which then requires
 A network of outlets gives the business a far constant research
better chance of success  Setting up a franchise requires a lot of
money

Joint Ventures: It occurs when two or more businesses agree to work closely together on a particular project
and create a separate business division to do so. Joint Venture is not a long term business relationship but a
short term relationship based on a single business project. The business is not a separate legal entity. Once
the joint venture has met its goals, the entity ceases to exist. An example include Sony and Ericson formed
Sonny Ericson to produce handsets.

Joint Venture Agreement should cover:

 The parties involved

 The objectives of the joint venture
 Contributions made by each party
 Dispute resolution procedure
 How the joint venture is terminated
 Non-disclosure agreements
 Day to day management

Advantages Disadvantages

 Provide companies with the opportunity to  The business failure of the partner would
gain new capacity and expertise put the whole project at risk
 Allow companies to have access to new  Styles of management and culture might be
technology so different that the two teams do not blend
 Access to greater resources, including well together
specialised staff and technology  The parties don’t provide enough leadership
 Sharing of risk with a venture partner and support in the early stages
 Errors and mistakes might lead to one
blaming the other for mistakes

Strategic Alliances: A strategic alliance is an agreement between two companies that have decided to share
resources to undertake a specific, mutually beneficial project. A strategic alliance is less involved and less
permanent than a joint venture. The main purpose is to allow two organisations, individuals or other entities to
work toward common or correlating goals. Unlike a joint venture, firms in a strategic alliance do not form a new
entity to further their aims but collaborate while remaining apart and distinct.

Examples of Strategic Alliances

- An agreement with a Local University- finance is provided by the business to allow new specialist
training courses that will increase the supply of suitable staff for the firm
- An agreement with a supplier- to join forces in order to design and produce components and materials
that will be used in a new range of products.
- An agreement with the competitor- to reduce the risk of entering a market that neither firm currently
operates in.
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Holding Companies: Refers to a business organisation that owns and controls a number of separate
businesses, but does not unite them into one unified company. They are not a different legal form of business
organisation, but they are an increasingly common way for business to be owned.

Public Sector: Refers to all the businesses that are owned by the government on behalf of the public. They
can be district councils or public corporations. They are established by an Act of Parliament. They are corporate
bodies with a separate legal entity -they are managed by a Board appointed by the Minister -the Minister can
be questioned by parliament over activities of the corporation.

Advantages Disadvantages

 They provide important goods and services  They are inefficient and very wasteful due to
at reasonable prices the lack of profit motive
 Provide employment to the majority  They tend to provide poor quality goods and
 Implement government policies e.g. charge services due to the absence of stiff
low prices to reduce inflation competition
 They are a source of income to the  Lack of motivation among workers leads to
government inefficiency
 They suffer from excessing political
interference

Family Owned Businesses: Refers to businesses that are actively owned and managed by at-least two
members of the same family. Decision making is influenced by multiple generations of a family related by
blood.

Strengths Weakness

 Stability  Family Feuds

 Commitment  Succession
 Flexibility  Profit sharing
 Long term outlook  Lack of innovation
 Decreased costs  Informal practices

Public Sector and Private Sector contrasted: Usually the aim of public sector business is to provide services to
the community. For example if the transport system is owned by the government and it is running a bus service
to an interior village and it is not getting enough customers, the government might still continue it as its main
objective is to provide service and not to maximise profits. Whereas private sectors business give priority to
profits and may end the service if it does not find it profitable to run the service.

Secondly, the Public sector strives to create employment whereas Private sectors main aim is to become
efficient and cut cost and in this process they might cut jobs.

Public sector business is usually located in regions where there is underdevelopment so as to create jobs and
income for the local population. Private sectors might not keep these things in consideration and will look for
external economies of scale.

SOCIAL ENTERPRISE: Refers to a business with mainly social objectives that reinvests most of its profits
into benefiting society rather than maximising returns to owners. Social enterprises are businesses whose
primary purpose is the common good. They use the methods and disciplines of business and the power of the
marketplace to advance their social, environmental and human justice agendas.

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THE RANGES AND AIMS OF SOCIAL ENTERPRISES: Basically these are the characteristics of social enterprises

 They operate for the wellbeing of the society

 Making profit is not the main aim
 Main aim is to solve social problems faced by people
 Profit is kept to provide more services
 They normally provide education and health
 Generate the majority of their income through trade

Social enterprises have three main objectives. These aims are often referred to as the triple bottom line. Triple
bottom line is used to measure the performance of a business:

 Economic - Profit
 Social - People
 Environment – Planet

Benefits of Social Enterprises

Social enterprises produce higher social returns on investment than other, on one hand, they produce direct,
measurable public benefits. A classic employment-focused social enterprise, for example, might serve at least
four public aims:

- Fiscal responsibility: It reduces the myriad costs of public supports for people facing barriers, by
providing a pathway to economic self-sufficiency for those it employs.
- Public safety: It makes the community in which it operates safer, by disrupting cycles of poverty, crime,
incarceration, chemical dependency and homelessness.
- Economic opportunity: It improves our pool of human capital and creates jobs in communities in need
of economic renewal.
- Social justice: It gives a chance to those most in need

1.3 Size of Business

Measurements of Business Size: different methods of measuring the size of a business (profit is not an
acceptable measure of business size)

Measure Description Limitations

Number of Employees - Easy to calculate - This method does not
- Simple measure take account of capital
- Usually the higher no. of intensive businesses
employees means bigger where even a large firm
the business employees fraction of the
- Labour intensive firms number.
usually
Revenue/ Sales turnover - a larger sales turnover - Less effective if in
Revenue: total value of sales (revenue) represents a different industries e.g.
made by a business in a given larger business High value production i.e.
time period. - It is often used when Previous jewels
comparing industry compared to low value
businesses production i.e. Cleaning
services

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Capital employed - The total value of all long- - Can be misleading when
term finance invested in talking about different
the business. industries e.g. an e-
- Measured by the size of commerce could be
capital invested much larger than regular
shop yet smaller capital
Market capitalisation - businesses with higher - however it can only be
market capitalisation are used with businesses
generally larger that have shares on the
- Market capitalisation = stock exchange
current share price × - Due to the fluctuations, it
current no. of shares can be very unstable to
compare.
Market share -If a business has a high - However, if the total size
Market share: sales of the market share then it of the market is small, a
business as a proportion of total must be among the high market share will
market sales leaders in the industry / not indicate a very large
comparatively large. firm.
Other measure  e.g. Occupied hotel
rooms, number of shops,
total floor space
Evaluation: Use of measure depends on the industry in question, each industry has its own dynamics. Which
one measure will be good enough for one industry and yet not for another.

Why are businesses measured in size?

 Investors can compare businesses & know which to invest in

 Governments can know where to put different tax rates
 Competitors can gain a competitive advantage
 Workers of the business can gain more confidence in financial situation
 Banks know how much loan they should lend to the business

Small business: is a business that is independently owned and operated, with a small number of employees
and relatively low volume of sales.

Different countries have slightly different description for a small business.

For example, in United States a business have less than 100 employees is considered as a ‘small business’,
whereas it is under 50 employees to qualify as a ‘small business’ in European Union.

The importance of small businesses & their role in the economy

 Job creation – small businesses usually employ a significant proportion of a working population
 Entrepreneurs – small businesses are normally run by entrepreneurs; creates variety & 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

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Advantages Disadvantages

 Create jobs: Small businesses employs  Lack of capital: they don’t have enough
majority of the workforce in any country. capital to stock enough goods
 They can grow to become big: Every  They sell inferior goods: they operate usually
business starts small. These small business in the rural communities where they sell
today will become big firms tomorrow poor quality goods and sometimes expired
 Small businesses are flexible and respond food items
easily to changes in demand: They are  Managed and run by employees who are
owned by one or two individuals hence they less skilled: small businesses lack the
are more flexible and adaptable in day-to- resources to hire skilled and experienced
day operations personnel
 Small firms often cater to local demands:  Risk of failure is high: customers are
Local or regular customers can place their unwilling to buy from small firms and the
individual orders. Small firms provide niche skilled employees are reluctant to join small
products and services which a larger firm firms
might overlook.  Difficult for them to raise finance: small
 In difficult economic times, such as a business often struggle to get loans from
recession, small business can be an financial institutions and this will stifle
important source of providing employment. business growth
 Improves efficiency in the economy: Small
firms provide competition to larger firms
through providing customised goods and
services.
 Give informal credit: they offer credit
facilities to well-known customers
 Boost economic growth: they increase the
production of goods and services in the
economy. Thus the Gross Domestic Product
(GDP) of an economy will increase.

Small businesses face the following problems

 Under capitalisation
 Poor debt management
 Lack of managerial skills of the owner
 Cannot retain experienced staff
 Usually find it difficult to attract skilled staff
 Poor stock management

Survival of Small Businesses: Small firms survive by being Product differentiation.

They can survive by:

 Segmenting the market by income. They can target niche market segments of high income customers,
position their product as a ‘premium brand’ at a high ‘premium price’
 Small firms have the advantage of being able to respond quickly to change - they do not have the
bureaucratic procedures often a feature of large firms where decisions are made only after endless
meetings. This means they can be quick to exploit new market trends.
 The Internet also allows small firms direct access to consumers, by passing intermediaries. The web
gives small firms the opportunity of international marketing.
 Small independent firms can join together to form a buying group to negotiate discounts on joint
orders.
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 Small firms can survive by selecting a premium niche and offering an exclusive brand that exactly
meets the customer requirements of their target segment. They will need to be totally customer
orientated.
 Keep good documentation for accounts receivable financing when unexpected expenses arrive.

Government assistance for small businesses

 Reduced rate of tax on profits (corporation tax)

 Loan guarantee scheme
 Information, advice & support
 Financing workshops e.g. Training, unemployment
 Helping particular issues e.g. Specialist management expertise, start-up finance, marketing risks,
finding the correct location

Why some business stay small?

Type of industry the business is operating: in some industries it is not viable for the firms to expand since they
will be offering personal services e.g. hair dressing, plumber, car repairs etc. If they were to grow too large, they
would find it difficult to offer the close and personal service demanded by customers

Market size: the number of customer will determine the size of the firms. If the number of customers is small,
the businesses in that industry will remain small.

Owner’s objectives: some owners prefer to keep their firm small. Owners sometimes wish to avoid the stress
and worry of running a large firm.

Business Growth
Refers to an increase in the scale of operations, expanding production and increasing the sales and profit of a
firm.

Reasons why a business want to grow

To increase profits the chances of business success rises when the business grows both internally
and externally
To reduce risk Business growth where the business introduces new products that are totally
different from the existing ones lowers the risk of failure
To dominate the market a business which is a market leader has the power to set prices

To reduce costs Increasing the output leads to the enjoyment of economies of scale. Economies
of scale refers to the cost saving advantages enjoyed by a business as a result of
large scale operations.
To fulfil the objectives it can be a planned move by the management to spread the wings of its business
of the management into new markets.

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Types of Business Growth

i. Internal Growth
ii. External Growth

Internal Growth: Expanding the business from within by using its own internal resources. It involves
expanding the business through increasing the number of employees, increasing production of existing
products, opening new outlets and increasing quantities of goods sold. It is also referred to as organic growth.
An example of internal growth is where a retail business open more shops in towns and cities where it
previously had none.

Advantages Disadvantages

 It can be financed through internal funds  Slow growth and the shareholders may
e.g. returned profits prefer more rapid growth
 Less risky than taking over other businesses  Growth achieved may be dependent on the
 Allows business to grow at a more sensible growth of the overall market
rate  Harder to build market share if the business
 Builds on a business’ strengths is already a market leader
 The business can be affected by liquidity
problems (cash problems)

External Growth: Refers to growth achieved through integration i.e. mergers and takeovers. Integration can
occur between two firms in the same or different industries. Integration leads to rapid expansion which might
be essential in a competitive and expanding market.

TYPES OF INTEGRATION/ MERGERS

Horizontal Integration: It occurs when two firms which are in exactly the same line of business and at the same
stage of production process join together. It is the joining of competitor or rival firms i.e. firms selling the same
types of goods e.g. Metro supermarket and Hyper star supermarket.

Advantages Disadvantages Impact on stakeholders

 It reduces the risk of failure  Managerial problems will set in  Consumers now have
when the business become less choice and may
very big have to pay higher
prices.
 To enjoy economies of scale  Previous relations with Workers may lose job
suppliers or distributors of one security as a result of
firm might suffer rationalisation:
 Suppliers may have
 Eliminates competition  Horizontal integration leads to to offer lower prices
 To have more power over monopoly and higher prices to the bigger
suppliers integrated business.
 Easy to manage as compared to  Shareholder impact
conglomerate mergers depends on whether
profit rises or not.
 Local communities
 To strengthen financial base may have job losses.
Vertical Integration
It occurs when two firms in the same industry but at different stages of the production process join together to
form one business. For instance, a firm in a primary sector joins with another in the same industry but in the
secondary sector. Vertical integration can be forward or backward

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Forward Vertical Integration: it occurs when a business joins with another which is in the same industry but at a
next stage in the production process ie joining with a customer of existing business. A car manufacturer joining
with a retailer (showrooms) Thus a firm in the secondary sector joining with another firm in the tertiary sector.

Advantages Disadvantages Impact on stakeholders

 Greater control over promotion  Lack of experience in this sector  Workers may have
and pricing of the products of the industry greater job security
 Eliminate the profit margin  Lack of control over the because the business
expected by the firm in the next suppliers has secure outlets.
stage of the production  There may be more
process varied career
 Increases the capital base  Management problems may set opportunities.
in Consumers may resent
the lack of competition in
the retail outlet because
of the withdrawal of
competitor products:
 Shareholder impact
depends on whether
profit rises or not.

Backward Vertical Integration: occurs when a business joins with another business which is operating at a
previous stage of a production process. The business joins with another which used to be the supplier e.g.
retailer merging with the manufacturer. This is a movement from tertiary sector to a secondary sector

Advantages Disadvantages Impact on stakeholders

 Give greater control over the  Lack of experiences of  Workers may have
quality, price and delivery times managing a supplying company more career
of the supplier opportunities.
 Eliminates the profit margin  Supplying business may  Consumers may
demanded by another supplier become complacent due to obtain improved
having a guaranteed customer quality and more
 Increases profitability of the  Lack of control over the innovative products.
business customers  Control over supplies
to competitors may
limit competition and
choice for consumers.
 Profit might rise to
benefit shareholders.

Conglomerate/ Diversification Mergers: this integration is between firms in completely different lines of
business or industries. A firm will be trying to explore different opportunities to minimise or diversify risk. E.g. a
car manufacturer joining with a hotel business.

Advantages Disadvantages Impact on stakeholders

 Reduces risk of losses  Risk of failure might increase  Workers may have
due to lack of experience in the more career
new market opportunities.
 Profit margins can be increased  Entry problems might occur  There may be more
due to other businesses job security because
 Market share can be increased  If the business is new then it’s risks are spread
difficult to lower down the across more than one
prices as compared to industry.
established firms  Profits could rise to
benefit shareholders
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REASONS FOR MERGERS

Expectations of higher profits: synergies usually increases the profitability of the new business formed.
Synergy- literally means that the whole is greater than the sum of individual parts. It means that the two
businesses when they merge, their profitability, efficiency and effectiveness would increase to more than the
combined profitability of the separate businesses

 To reduce competition: The new business formed won’t waste a lot of money on promotion and other
advertising programmes
 Easy and quick way to expand: Businesses can easily increase their market share in a short period of
time
 To enter international markets: Local businesses can join with foreign businesses so that it will be
easy for locals to penetrate foreign ground.
 Asset striping: To get access to an asset of a rival firm at lower price. The asset stripper aims to buy
another company at a market price lower than the firm’s total asset price. After grabbing the asset, the
business will then sell-off profitable parts of the business and shuts down the unprofitable parts of
business
 To comply with the law: Legislations usually in the financial sector may require business to join in
order to comply with the minimum capital requirements
Note: mergers occur when a business sells off a significant part of its existing operations. A company chooses
to break-up to raise cash to invest into the remaining sector. Another reason could be to concentrate its efforts
on a narrow range of activities. Last but not least, to avoid costs and inefficiencies when a firm is very large.

Take overs
Refers to the assumption of control of another (usually smaller) firm through purchase of 51% or more of its
voting shares or stocks. It occurs usually on public limited companies because their shares are traded openly
and anyone can buy them. When a takeover is complete, the company that has been bought loses its identity
and becomes a part of the buying company. The buying company is known as the acquirer (bidder) and the
company which is bought is known as the target.

Joint Venture & Strategic Alliance mentioned earlier, are also key external growth strategies.

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1.4 BUSINESS OBJECTIVES

Refers to stated, measurable targets of how to achieve business aims or the targets that must be achieved in
order to realise the aims of the business. Objectives can be seen as the more specific and quantifiable aims,
designed to assist in the achievement of the goals identified in the mission statement. Objectives must state
what the organisation is trying to achieve, how this can be done, when it must be done and how they will know
that it has succeeded

Importance of business objectives

- They clarify to everyone what the business is working to achieve

- They aid in decision-making and choice of alternative strategies
- They enable checks on progress and corrective action
- They provide means by which performance can be measured
- They motivate employees
- They can be broken down to provide targets for each part of the organisation
- They provide shareholders with a clear idea of the business in which they have invested
- They facilitate the resolution of conflict between departments

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Objectives should be “SMART”

S-SPECIFIC: Objectives should be more precise. Having a bunch of vague statements isn’t very helpful at all.
You must make your project tangible by saying how you are going to go about it. For example, a hotel might
have an objective of filling 60% of its beds a night during October. Thus the issue of accommodation is specific
to Hotels. It answers the questions, ‘What is to be done’. We quickly get to understand what the business is
doing.

M-MEASURABLE: Define your objective using assessable terms. Express it in terms of quantities, frequency,
quality, costs, deadlines etc. It refers to the extent to which something can be evaluated against some
standard. E.g. to increase monthly sale by 15%

A-ACHIEVABLE: It is pointless to have objectives that are impossible to achieve within the time period set.

R-REALISTIC/ RELEVANT: The objective should be challenging, but it should also be able to be achieved by the
person using the available resources. Thus the objectives should be realistic when compared with the
resources of the company and should be expressed in terms relevant to the people who have to carry them
out. E.g. a target of reducing cleaning materials by 15% to a cleaner.

T-TIME FRAMED: An objective should have end points and check points built into it. They must have a time limit
of when the objective should be achieved. Time specific answers the question, “When it will be done?” e.g. by
the end of the month or by the end of the year

HIERARCHY OF OBJECTIVES Aim – where the business wants to go in the

future; its goals.

Mission – the result that an organization is

trying to achieve through its plans / actions

Purpose of the Mission Statement

- Quickly inform groups outside the
business what the central aim and
vision are
- Help to guide and direct individual
employees behaviour at work
- To motivate employees
- They help to establish in the eyes of
other groups what the business is all
about.

Advantages Disadvantages

 quickly inform groups outside the business what  too vague and general, so that they end up
the central aim and vision are saying little that is specific about the business or
 can prove motivating to employees, especially its future plans
where an organisation is looked upon, as a result  based on a public relations exercise to make
of its mission statement, as a caring and stakeholder groups feel good about the
environmentally friendly body – employees will organisation
then be associated with these positive qualities  Virtually impossible to really analyse or disagree
 of en include moral statements or values to be with
worked towards, and these can help to guide and  Often rather woolly and general, so it is common
direct individual employee behaviour at work for two completely different businesses to have
 are not meant to be detailed working objectives, very similar mission statements.
but they help to establish in the eyes of other
groups ‘what the business is about’.

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Corporate objectives – the long-term goals of the corporation that give focus & direction to the business. These
form the foundation for the strategic plans for the business.

Objective Means Limitations

Profit It is the main aim for most of private firms. Profit - Maximising profit may encourage new
maximisation maximisation refers to the greatest positive difference competitors to enter into the industry
between total revenue and total cost. Total revenue is and the chances for business success
obtained by multiplying price per unit and the total number will be reduced
of units sold. Profit is very important for businesses - This objective can conflict with that of
because it is used for rewarding the investors (owners of mangers who aim to maximise sales
the business). Profit is also used for business expansion in - Other stakeholders may give priority to
the future ( ie to finance internal growth) other issues besides profit
maximisation
Profit satisficing The objective will be to achieve enough profit to keep the - The business won’t be having money
owners happy but not to maximise profits. This objective is to grow in the future
pursued by owners of small businesses who wish to have - The business may lack funds to
more leisure time. The business will be satisfied by making implement social responsibility
a certain level of profit. programmes
Growth Growth involves increasing the operation of the business - Rapid growth can lead to
expanding to other regions or countries. It is also measured diseconomies of scale e.g. Financial
by the number of employees, number of products sold etc. diseconomies; managerial
Growth benefits managers in terms of higher salaries. diseconomies etc.
Growth helps the business to avoid takeovers. Furthermore, - Growth can lead to lower short term
the business will benefit from economies of scale and it returns to shareholders since it can be
becomes more appealing to new investors. achieved through lowering prices

Increasing Market share refers to the proportion of a company’s sales

market share to the total sales in the market. Market share is related to
business growth. Thus increasing market share indicates
that the marketing mix of the business is proving to be
more successful than that of its competitors. Increasing
market share reflects to the firm as a brand leader
(customers will be loyal to certain brands offered by the
firm)
Survival The high failure rate of new businesses means that to
survive for the first two years of trading is an important aim
for entrepreneurs. Once the business has become firmly
established, then other longer-term objectives can be
established.
Maximising It is an objective usually for public limited companies. The objective conflicts with the objectives of
Shareholders Management will be concerned about increasing the other stakeholders
Value company’s share prices and dividends paid to
shareholders. Thus the interests of shareholders will be
considered as first priority. Increased shareholders value is
achieved through profit maximisation
Corporate Social Refers to a set of policies designed to demonstrate the Benefits of being socially responsible
Responsibility commitment of a business to the well-being of society and - The business can be given
(CSR) others by taking responsibility for the impact of business government contracts/ tenders
decisions on all stakeholders. Some businesses have - The business can easily attract highly
objectives which are based on their beliefs of how one skilled and experienced personnel
should treat the environment and people. CSR applies to - Business will gain public acceptance
those businesses that considers the interests of society by and reduced risk of negative publicity
taking responsibility for their decisions and activities on - Employees committed to the same
consumers, employees, communities and the environment. values Customer loyalty
Since some business activities are very damaging to other
stakeholders Challenges faced by firms as they pursue this
objective
- It conflicts with the profit maximisation
objective
- Time is wasted on social responsibility
programmes
- The business won’t have enough
money for expansion
- Greater criticism and loss of loyalty if
things go wrong

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Relationship between mission, objectives, strategy and tactics

Mission and Objectives: Mission statements and objectives provides the basis and focus for business strategy
i.e. the long-term plans of action of a business that focus on achieving its aims. Without a clear objective, a
manager will be unable to make important strategic decisions. The setting of clear and realistic objectives is
one of the primary roles of senior management. Before strategy for future action can be established, objectives
are needed. Thus setting mission and objective gives a business a sense of purpose and direction

Strategies and Tactics

Mission statements and objectives alone cannot

guarantee business success. They have to be
developed into actual courses of action known
as strategies and tactics.

Strategy: is a plan setting out how a business

as a whole will achieve its overall long-term
objectives. For example the business objective
of a car manufacturer could be, “To
manufacture 4 million cars by 2025.” The
strategies to achieve such an objective could
include:
Tactics: refer to a short-term course of action for the day-to-day
- Increasing efficiency
management of a business for trying to meet part of an overall
- Building a new factory
strategy - Designing new models of cars
Business Decision making. For strategies to work well in the business they
Objectives not only give a sense of direction to a business, they are need to be complemented with tactics. At tactic
essential for making decisions. Without setting relevant objectives at is a short- term plan for day-to-day operations
of a business with the aim of contributing
the start of this process, effective decision making for the future of
towards the overall strategy. For example, in
the business becomes impossible.
order to achieve productivity improvements the
Stages of Decision Making workforce might get prizes for the teams that
make the biggest improvements to productivity.

Stages in the decision making process

- Set objectives: it is impossible to make decisions in the future if the

objectives are not clear or if they are non-existent.
- Identify and analyse the problem: managers make decisions to solve a
problem. It is imperative that you must understand the problem before
finding a solution for it, otherwise, you might make a wrong decision.
- Collect relevant information: gather data about the problem and
possible solutions. It is always important to analyse all possible solutions
to find which one is the best
- Analyse/Evaluate all options: consider the advantages and
disadvantages of each option or possible solution
- Make the final decision: make a strategic decision. Select the best
option with more advantages and few disadvantages
- Implement a decision: this means that the manager must see to it that
the decision is carried out and is working according to plan
- Review and evaluation of the decision: review its success against the
original objective. If the decision didn’t work.

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How and why objectives might change over time

 Change in owners’ priority: the owners shift from one object to the next as time unfolds
 Change in market conditions: in a recession the business may aim for survival
 Change in size of the business: owners’ objective could be growth in early stages and then profit
maximisation as the business becomes well established
 Change in management: when new management comes in, they can introduce new changes which
could be new objectives
 Change in competitor behaviour: the business can change its objectives in responses to changes
made by the competitors
 Change in legislation: a change in government laws can force a business to come up with new
objectives in a new environment

Factors affecting corporate objectives

This can be defined as the code of behaviour and attitudes that influence the decision-
making style of the managers and other employees of the business. If directors are
Corporate culture aggressive in pursuit of their aims, are keen to take over
or defeat rival businesses and care little about social or environmental factors, then the
objectives of the business will be very different to those of a business owned and
controlled by directors with a more people- or social-oriented culture
Owners of small businesses may be concerned only with a satisfactory level of profit –
The size and legal form called ‘satisficing’. Larger businesses, perhaps controlled by directors rather than owners,
of the business such as most public limited companies, might be more concerned with rapid business
growth in order to increase the status and power of the managers.
Private Public Non-Profit
 To earn high  To create  To provide
profits employment services to
 To maximise  To operate even if members
Public-sector or private- wealth of no profit is  To provide
sector businesses shareholders generated employment
 To fulfil needs and  To provide certain  Operating for the
wants of the products such as welfare of
people electricity, members e.g.
transport, defence schools, hospitals
etc.  To eliminate
 To provide goods poverty in
and services at communities
affordable prices
The number of years Newly formed businesses are likely to be driven by the desire to survive at all costs – the
the business has been failure rate of new firms in the first year of operation is very high. Later, once well
operating established, the business may pursue other objectives, such as growth and profit.

Divisional,
departmental and
individual
objectives

Management by a method of coordinating & motivating all staff in an organisation by dividing its overall
Objectives (MBO) aim into specific targets for each department, manager & employee as shown above.

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The communication of objectives & their likely impact on the workforce

If employees are unaware of the business objectives then how can they contribute to achieving them?

Communication of corporate objectives – & translating these into individual targets – is essential for the
effective setting of aims & objectives.

 If employees are communicated with – & involved in the setting of individual targets – then these
benefits should result in:
 Employees & managers achieving more – through greater understanding of both individual &
companywide goals.
 Employees seeing the overall plan – & understanding how their individual goals fit into the company’s
business objectives.
 Creating shared employee responsibility – by interlinking their goals with others in the company.
 Managers more easily staying in touch with employees’ progress – regular monitoring of employees’
work allows immediate reinforcement / training to keep performance & deadlines on track.

How ethics may influence business objectives & activities

Ethical code (code of conduct): a document detailing a company’s rules & guidelines on staff behaviour that
must be followed by all employees.

Ethics – the moral guidelines that determine decision making

Business ethics - Making the business gains in a proper manner

- Avoiding discrimination on staff and stakeholder groups
- Not linked to political parties
- Being fair to all who have business relationships with the company
- Protecting the environment
Code of - Upholding the principal of honesty and fairness
Conduct - Protecting the properties and reputation of the business
- Conducting business in the best interest of the owners
- Behaving appropriately at all times towards others
Unethical - Buying supplies from businesses that use child labour
business - Exploiting suppliers in poor countries by demanding and paying low prices
activities - Lending to people and businesses who will struggle to repay the loans
- Wilful selling of harmful products to the people
- Not paying a fair wage
- Avoiding paying tax
- Polluting the environment
- Newspapers prying into people’s private lives
- Target advertisements for sweet at children
- Getting business secrets from competitors
- Encouraging top employees to move from a competitor
- Paying bribes to get contracts
- Failure to give correct or accurate information
- Testing cosmetics products on animals
- Over charging tourists
Benefits of - The business will be offered with government contracts
acting ethically - The business may attract qualified and experienced staff
- The business may get more customers
- Avoiding expensive court cases on ethical related crimes
Challenges of - Charging lower prices leads to lower profits
acting ethically - Paying fair wages in harsh economic environments may raise wage costs and this
reduces the firm’s competitiveness
- Not taking bribes may lead to lower sales
- Disposing of waste material can be costly to the business

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For: Against:
Avoid court-cases & fines Increases costs
Good PR & increased sales volume Reduction in pester power
Attract ethical customers No price fixing → reduction in prices & profits
Gov. Contract likely Fair wages increase costs & reduces competitiveness
Attract well qualified staff

1.6 Stakeholders in a Business

Individuals/groups interested in the activities of business

Stakeholders: people/groups of people who can be affected by – & therefore have an interest in – any action
by an organisation.

Stakeholder concept: the view that businesses & their managers have responsibilities to a wide range of
groups, not just shareholders.

Roles, rights & responsibilities of stakeholders

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The Importance & Influence of Stakeholders on Business Activities

How & why a business needs to be accountable to its stakeholders

Stakeholders Benefits of accepting responsibility

- Consumer loyalty
- Repeat purchase
Customers - Good publicity when customers give word of mouth recommendations to others
- Good customer feedback - which helps to improve further goods & services.

- Supplier loyalty – prepared to meet deadlines & requests for special orders
- Reasonable credit terms more likely to be offered.
Suppliers
- Employee loyalty & low labour turnover
- Easier to recruit good staff
Employees - Employee suggestions for improving efficiency & customer service
- Improved motivation & more effective communication.

- More likely to give planning permission to expand the business

- More likely to accept some of the negative effects caused by business operations if they
Local provide financial support for community groups & projects i.e. Children’s playgrounds
community - More likely to give contracts to business

- Success with expansion projects receiving planning permission

- More likely to receive valuable government contracts
Government - Requests for subsidies to expand are more likely to be approved by government
- Licences to set up new operations are more likely to be awarded to businesses

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Corporate Social Responsibility

Corporate social responsibility focuses on what an organization does that affects the society in which it exists.
CSR refers to a set of policies designed to demonstrate the commitment of a business to the well-being of the
society and others by taking responsibility for the impact of business decisions on all stakeholders. CSR
commits a business to a way of operating that goes beyond what is required by law.

A socially responsible firm that operates in an ethical way has concern for the environment and undertakes
philanthropic activity on behalf of the disadvantaged in the society.

Social responsibility programmes

 Making sure the employees receive fair treatment, fair wages, access to health and safety at work,
fund training programmes
 Using environmentally friendly production methods
 Championing community programmes like infrastructural development
 Providing quality goods and services
 Treating other business partners fairly i.e. embracing a fair and responsible approach to procuring
and delivering goods and services
Advantages Disadvantages
 The creation of a better social environment  The primary task of business is to maximize
benefits both society and business profit by concentrating on commercial activities.
 To comply with the law  Social involvement results in higher prices to
customers.
 Encourage more people to look for jobs (it  Company directors have a duty to shareholders.
reduces voluntary unemployment)
 Businesses have the resources to help solve
social problems.
 Businesses and society are interdependent.  Businesses lack the social skills to deal with the
problems of society.
 Social involvement discourages additional
government intervention.
 it reduces the risk of negative publicity
 To respond to the demands from stakeholders,
particularly customers and pressure groups

Social Auditing
This involves a business formally reviewing and accounting for the impact on society of its operations. It can
include its impact on the environment, its effect on the local community, its attitude to such things as human
rights and its attitude to stakeholders including employees. The business is now accounting to non-financial
aspects of the business and deals with social matters that are not necessarily measured in financial terms.

The role of Pressure Groups

These are also stakeholders to the businesses. Pressure groups refers to an organisation created by people
with a common interest or aim who put pressure on business and government to change policies so that an
objective is achieved. They include organisations such as the Friends of the Earth that have been set up to
highlight and sometimes oppose developments that may cause changes to the environment.

International Examples of Pressure Groups

 Friends of the Earth

 Green Peace: campaigns for greater environmental protection by both businesses adopting green
strategies and government passing tighter anti-pollution laws
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 Fair-trade Foundation: aims to achieve a better deal for agricultural producers in low income countries
 Jubilee 2000: campaigns western governments to reduce or eliminate the debt on developing
countries
The ways in which Pressure Groups use to achieve their objectives

 Publicity or campaigns through media i.e. frequent press releases

 Demonstrations and meetings
 Consumer Boycotts: The consumers will stop buying a particular product for a long period of time
 lobbying the government to change the law or to put in place laws

Section 2: People in Organisations

2.1 Human Resource Management

HUMAN RESOURCES: The purpose of human resource management (HRM) is to make sure that the business
has the appropriate workforce to enable it to meet its stated objectives. The workforce must be committed and
physically capable of doing the work required. Aims to ensure that the right workers are available in the right
numbers, in the right place and at the right time. The human resources (HR) function is also responsible for
planning for a business’s future need for labour

Functions: The HR department is responsible for succession planning. Succession planning is the process of
identifying employees who can be trained for future leadership positions

 Recruiting, selecting and appointing employees

 Salary administration and determination
 Skills development
 Appraising and managing workforce performance
 Establishing and maintaining employee wellness
 Responsible for promotions, transfer, demotions and expulsions
 Prepare employment contracts
 Responsible for workforce planning
 Keeping staff records
 Ensure that labour legislations are followed

Recruitment: Refers to all HR activities that are aimed at finding and attracting job candidates who have the
necessary knowledge, experience, qualifications and skills to fill a job. It involves identifying the need for an
employee, devising a job description and finding a person suitable to fulfill the needs of the job.

Reasons why businesses need to recruit people

 To replace those who were dismissed

 To replace employees who resigns or who have passed away
 New employees for expansion
 Employees who are promoted
 Employees who retire

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Two types of recruitment

Internal Recruitment: occurs when in-house employees are promoted.
Advantages Disadvantages

 Saves time and money  No new ideas or experience come into the
 The candidate’s reliability, ability and business
potential are already known.  May create jealousy and rivalry between existing
 The candidate already know the employees
expectations and rules of the company  Can cause line management problems for the
 Motivate other employees to work harder to promoted person if they now supervise former
colleagues.
get promoted too

External Recruitment: Finding and attracting job candidates from outside the organisation. Most vacancies
are filled with external recruitment, which always involve advertising the vacancy. Some of the suitable media
of advertising include:

- Local news paper

- National news paper
- Recruitment agencies
- Government job centres
- Internet

External recruitment also involves headhunting. Headhunting takes place when people who are already
employed by one employer are asked to apply for a job at another employer

Advantages Disadvantages
 New ideas and skills are brought into the  It is time consuming
business  It is very expensive e.g. advertising costs and
 Can prevent conflicts among existing interview expenses
employees  Demotivate existing staff. Internal applicants
 Chances of attracting the best candidate are might be unhappy that a stranger has got
high the job.

Recruitment Agencies: Most agencies keep record of candidates’ CVs and they are able to make a
recommendation quickly. Recruitment agencies usually know a business’s needs. Time is saved as the agency
works through applicant’s CVs.

Problems
- Usually, recruitment agencies are paid a percentage of the new employee’s remuneration package.
- Thus it increases the cost of labour.
- The business doesn’t know what CVs have not been recommended

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Recruitment Procedure
Step no.1: Determine the exact labour needs of the enterprise

The business must carry out job analysis. Job analysis involves determining the exact labour needs of an
enterprise before candidates can be attracted. Job analysis involves coming up with the job description and job
specification.

Job Description: Refers to a written description of the job and its requirements. Provide details as to what
task will the person be expected to undertake.

It includes details such as:

 Job tittle
 Main purpose of the job
 Duties and responsibilities
 Department in which the job is performed
 Pay scale

ADVANTAGES OF PRODUCING A JOB DESCRIPTION

 Provides a clear idea of what a job involves so they can select the best candidate
 Saves time / money / makes selection easier and the business won’t get applications from people
who cannot do the job
 As a basis for drawing up a contract and the business can be sure that all duties will be carried out
on-board
 Helps decide basis for pay
 Help create person specification
 Helps create appropriate job advert
 Helps resolve disputes between managers and subordinates

Job specification: Refers to a written description of the characteristic and qualification required of the person
that will fill the job. It is a person profile which will help in the selection process by eliminating applicants who
do not match up to the necessary requirements.

It includes details such as:

 Qualifications required
 Training required
 Minimum experience required
 Physical requirements

Step no.2: Choose the recruitment Source: Decide on whether to use external or internal recruitment
method

Step no.3: Prepare a job advertisement: This is what a business needs to decide on when drawing up a job
advert

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what a business needs to decide Headings to be included in a job Advert

 What should be included i.e. job description  Job tittle

and job specification  Job location
 Where the advert will be placed i.e.  Essential skills, qualifications and personal
newspapers, internet, notice boards etc. qualities
 Costs associated with the advertising  Brief outline of the job responsibilities
media.  Pay scale
 How to apply (Curriculum Vitae (CVs),
telephone call or online etc.)
 Who to apply to (to the business itself or it
might be through an agency)
 Deadline for the submission of applications

NB: Draw up a job advert for a new business teacher at your school.

Step no.4 Selection: It is known as shortlisting. It refers to the process of determining which applicants will
best suit which specific jobs. Selecting them basing on certain assessment criteria (screen responses). The CVs
of unsuccessful candidates can be kept for future references. Draw up a short list of candidates. Come up with
a short list of potential candidates, usually a list of 5 candidates

Step no.5: provide feedback to candidates: Inform all applicants about the outcome of their applications
so that unsuccessful candidates can look for other employment options. Invite suitable candidates for
interviews.

Step no.6: Employment Interviews: An interview is a conversation between a job candidate and the relevant
managers of a business enterprise. It is used for selecting the best candidate from the short list. Interviews
aim to determine if candidates are suitable for a job by comparing the candidate’s skills, experience,
qualifications with the job requirements.

Roles of Interviewer Roles of Interviewee

 Put the candidate at ease  Prepare for the interview

 Explain the purpose of the interview  Research the business by visiting its
 Allow the candidate time to think about website
each question  Avoid simple yes or no answers
 To answer questions asked by the  Giving a clear picture about oneself
interviewee  Not avoiding difficult questions
 Explain to the candidate how he/she can
benefit from working for the business
 Analyse the candidate by also looking at
his/her non-verbal communication
 Prepare interview questions

Contract of Employment: Once a candidate is appointed, the individual receives a letter of appointment
followed by a contract of employment. The letter of employment is an offer to the chosen candidate to work for
a particular employer. The contract of employment is a written agreement between the employer and the
employee which describes the duties, rights and responsibilities of both parties.

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Contents of an Employment Contract

 Details of the employer
 Details of the employee
 Working hours (ordinary days and hours of work)
 Remuneration
 Job title and job specification
 Date of commencement
 Duration of contract i.e. part-time, temporary or full time
 Termination of contract
 Leave (number of leave days, types of leave days)

Benefits of having an employment contact

 Both parties are clear about the terms and conditions that have been agreed
 The employer and the employee both know what a person has been employed to do because this
would be clearly stated in the contract that would be signed by both parties
 Any dispute about the terms and conditions of employment could be resolved by referring to the
employment contract.
 Avoiding heavy fines or penalties

What employees expect from employers What employers expect from employees
 Fair treatment by managers  Punctuality
 Fair wages  Co-operation from employees
 Reasonable working hours and good  Obedience to instruction
working environment  Appropriate handling of facilities and
 Holidays with pay equipment
 Appropriate training  Loyalty and trustworthiness
 Opportunities for promotion

How can an employment contract be terminated?

 The employee can resign in order to take up employment elsewhere

 The employee might reach retirement age
 The employee might be in breach of contract and therefore the employer might be able to dismiss him
 The employee might have broken the terms of the contract causing the employee to wish to leave his/
her employment
 The term of the contract might have come to an end
 The employee might be promoted, in which case the roles and responsibilities would probably change.

Dismissal and Redundancy

Dismissal: to end the services of an employee due to an act of misconduct. It is the termination of an
employment contract because the employee has not fulfilled the conditions of the contract in some way. An
employee can be sacked from a job due to incompetence. Incompetence refers to the lack of ability to do
something well. Dismissal will deprive a worker of his or her immediate means of financial support and the
worker is likely to lose pension benefits. There should be enough evidence that the HR department has done
all it can to help the employee before dismissing him/her. It is unfair to terminate the contract of employment
for the first offenders

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Reasons for dismissal

 Gross misconduct e.g. stealing
 Incompetence even after sufficient training has been given
 Continuous negative attitude
 Intentional destruction of an employer’s property
 Bulling of other employees
 Failure to disclose relevant details when being offered employment.

Unfair Dismissal

Terminating an employee’s employment contract for a reason that the law regard as being unfair. The affected
employee can report to the civil court so that the court can deal with such unscrupulous employers. When
dismissal is judged to be unfair, the employee will get damages from the firm.

Dismissal is unfair under the following circumstances:

1. Pregnancy
2. A discriminatory reason e.g. based on race, gender, religion, political affiliation etc
3. Employee being a member of a certain trade union
4. For minor cases without giving first or second warning.

Redundancy
It occurs when an employee loses his/her job when the business no longer requires that work to be done. It is
important to note that, it is the job that is no longer needed, not the person doing the job. When the good or
service is no longer required, the employee doing that job becomes unnecessary through no fault from his/her
side. It occurs due to a permanent decrease in demand for a particular product. It also occurs in the mining
sector due to the depletion of mineral resources. It is fair for the employer to give the redundant worker
severance package. The severance pay can be used by the redundant worker to start income generating
project.

Labour Turnover: Measures the rate at which employees are leaving an organisation. It is measured using the
following formula

Labour turnover = number of employees leaving x 100

Average number of people employed

Example: ABC ltd employees 500 employees on average in 2021. 50 workers left the business during 2021.

Labour turnover = 50 workers x 100 / 500 workers = 10%

Interpretation: labour turnover is increasing or is too high then it will be a signal that:
 Employees are not happy i.e. low morale
 The business failing to recruit the right people
 Bad leadership or management
 Availability of better paid jobs elsewhere

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Potential benefits of high labour turnover Problems of high labour turnover

 Low-skilled and less productive staff might  High costs of recruiting, selecting and
be leaving and creating space for highly training new staff
skilled workers  Difficult to establish team spirit as team
 New ideas and practices are brought into members are constantly changing
the business by new workers  Low output level when a new worker is
 Can benefit the business with the plans of introduced and, or when the business is in
reducing staff size i.e. staff that will be the process of finding a suitable
leaving won’t be replaced replacement.
 Loss of customers

Workforce Planning: It is also known as manpower planning. It involves the analysis and forecasting the
number of workers and skills of those workers that will be required by the organisation to achieve its
objectives. Thus, it involves forecasting the future demand for labour in the organisation and planning to meet
it. It is accomplished through analysis of internal factors such as current and expected skills needs, vacancies
and departmental expansions and reductions as well as external factors such as the labour market conditions.
Workforce planning also involves a skills audit (Workforce audit).

Workforce audit involves an assessment of staff capabilities and matching them against future needs. This is
just a check on the skills and qualifications of all existing workers and managers. The HR manager will be
checking on social, intellectual, technical, managerial and administration skills.

Benefits of Workforce planning

 Planning for the future i.e. to calculate the future staffing needs of the business
 To prevent the problems of too few or too many staff at the business
 To avoid many staff with wrong skills
 To achieve the objectives of the business in the future

Factors influencing the number employees required in the future

 Future demand for the firm’s product

 Productivity of existing staff
 The objectives of the business i.e. growth objective will imply that more staff will be required.
 Labour legislations i.e. minimum wage laws from government encourages firms to workers with
machines
 Labour turnover i.e. the higher the rate at which staff leave the business, then the greater will be the
firm’s need to recruit replacement staff.
 Skills of existing staff i.e. HR managers have insatiable appetite for better-qualified employees.

Employee morale and Welfare: Morale and welfare are important to people at work. They affect people’s
attitudes and willingness to work. Thus they influence how much effort workers will exert to their job.

Employee Morale: refers to the feeling of enthusiasm and loyalty that a person has about a task or job.
Employees must feel that what they are doing is worthwhile. If they feel that their work is valued by
management, they are also likely to feel that they are valued both as employees and as individuals. Their
morale will be high and employees tend to have a greater commitment and loyalty to their work.

Employee Welfare: refers to the state of being happy, healthy or successful. Employees are often concerned
about their health and safety at work. A business organisation which cuts corners on welfare is unlikely to get
the best from its employees.

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Ways to maintain or improve staff morale and welfare

 Ensure that health and safety guidelines/ legislation is met. The physical welfare of employees can
partly be assured by following health and safety measure.
 Offering help and guidance to employees who might be experiencing problems in their life outside
work. E.g. when a worker is worrying about her child’s deteriorating health condition.
 Provide medical facilities within the business in order for the employees to get treatment for any
injuries.
 Dealing with issues that are demotivating employees
 Treating employees fairly.

Work-life Balance: Refers to a situation in which employees are able to give the right amount of time and
effort to work and to their personal life outside work. Employees must have enough time to attend to their
private life. Thus employees must get time to spend with their loved ones. Working long hours and also denying
employees breaks can lead to stress and poor health.

Methods that can be used to achieve a better work-life balance

 Flexible working i.e. allowing some employees to come at busy periods of the day but not during slower
periods
 Teleworking i.e. working from home for some of the working week
 Job sharing i.e. allowing two people to fill one full-time job, although each worker will only receive a
proportion of the full-time pay
 Sabbatical period’s i.e. an extended period of leave from work. Some business do not pay employees
during this period.

Policies of Diversity and Equality

Equality Policy: Refers to practices and processes aimed at achieving a fair organisation where everyone is
treated in the same way. People have the right to be treated with equality, respect and dignity. All employees
must have equal opportunities. Equality policy is violated when some employees are discriminated against e.g
denying some employees an opportunity to receive skills training.

Benefits of promoting Equality

 Can improve employee morale

 Greater commitment and effort from employees
 The business can easily attract skilled and experienced personnel from other organisations

Diversity Policy: Diversity refers to variety or mixture. Diversity policy refers to practices and processes aimed
at creating a mixed workforce and placing positive value on diversity in the workplace. Diversity promotes
inclusivity

Diversified workforce include employees:

 Who come from different backgrounds and cultures

 Who speak different languages
 With different levels of education
 Who differ in terms of age and gender

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Advantages of Diversity in business The costs may include

 Creativity increases when diverse team  higher recruitment costs
members work together  longer recruitment process
 When a diverse team pulls together by  greater training needs
focusing on their strengths, increased levels  Communication barriers.
of productivity will be achieved
 Colleagues learn to value and respect one
another even if they do not hold similar
values and beliefs
 A diverse workforce brings different skills to
the workforce, for example language skills
 Can lead to an increase in the customer
base since some customers are attracted by
a diversified sales force

Training: Refers to work-related education to increase workforce skills and efficiency. Training is required for
new as well as existing employees. Training will help prepare new employees for change and to improve the
efficiency of the organisation. The emphasis on quality, competitiveness and the rapid pace of technological
change have increased the need for training.

Reasons for training

 To facilitate the introduction of new technology

 To prepare existing employees for succession purposes
 To develop workers in order to enable them progress
 To provide employees with the skills, knowledge and aptitude
 To improve worker morale

Types of training
Induction Training: involves the introduction of new staff to the firm as they are told about its business and
the way of operation. The HR manager should explain to the new worker the internal organisational structure,
health and safety issues, and also company policy. The employee on the other hand has got the chance to ask
questions.

BENEFITS OF INDUCTION TRAINING

 Helps employees to settle into their job quickly/familiarise workers with the business/provide
information about the business so that he/she can easily cope with flow production
 Aware of health and safety/legal issues in the factory
 the new employee will know who to ask if there is a problem and this helps to prevent wastage of
expensive raw materials
 Help keep productivity/efficiency high so that the business will remain competitive

On-the-job training: training is done at the work station where an employee works. It can take the form of job
training combined with related classroom instruction and apprenticeship. The trainee will be under the
guidance of a highly skilled co-worker. Employees are trained by watching professionals do a job. It is only
suitable for unskilled and semi-skilled employees.

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Advantages Disadvantages
 It can cut travel costs.  The trainer’s productivity is decreased
 The trainee may do some work while on because he/she must attend to the
training. They can actually be contributing to trainee’s problems
production while they are learning.  If mentoring is not paid, the trainer may not
 Can be a motivator the trainers be fully committed
 No special premises to hired or built  Some skilled and experienced employees
 It is cheaper since it uses existing skilled are not good teachers.
and experienced employees  Mistakes made by the trainee may affect
the business’s reputation

Off-the-job Training: It takes place outside the work place. Workers go to another place for training e.g
schools or private training colleges. It involves the use of specialised instructors.

Advantages Disadvantages
 Employees can learn many skills.  outside trainers are very expensive
 Employees can work during the day and  output of the trainee is lost
attend training sessions in the evening.  Trainee can also copy bad behaviours from
 Any mistake that the trainee is going to the trainer.
makes are unlikely to affect the reputation
of the business
 Training can lead to a recognised
qualification

Benefits To the employer Benefits To the employee

 Improves motivation of staff  Employees may feel valued by the
 Reduction of waste and scrap organisation
 Quality services to customers  Training improves promotional prospects
 May reduce labour turnover  May improve job satisfaction
 Helps to develop a positive culture in the  Employees are better able to cope with
organisation change.
 Increases productivity

Staff Development: Employee development is more future oriented i.e. it deals with preparing employees for
future positions that will require higher level skills, knowledge or abilities. Staff development differs with
training because training focuses on the skills needed to do one’s current job. Staff development can help
provide long-term motivation to employees. The business could benefit in the long term if its employees are
better educated and therefore more able to understand some of the more complex aspects of business
activity.

2.2 Management & Leadership

Management & Managers
The functions of management, including Mintzberg’s roles of management

Manager: responsible for setting objectives, organising resources & motivating staff so that the organisation’s
aims are met.

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Mintzberg’s roles of management: Henry Mintzberg identified ten management roles which are then
grouped into three main categories namely interpersonal roles, information roles and decision roles

- Interpersonal Roles
- Information roles
- Decision Roles

Role title Description of role activities

1. Interpersonal roles: dealing with & motivating staff at all levels of the organisation

Figurehead Symbolic leader, takes on social / legal nature

Leader Motivating subordinates, selecting & training staff

Liaison Linking with managers & leaders of other divisions of the business & other organisations

2. Informational roles: acting as a source, receiver & transmitter of information

Monitor (receiver) Collecting data relevant to the business operations

Disseminator Sending information collected from internal & external sources to the relevant people within
the organisation
Spokesperson Communicating information about the organisation, i.e. Current position & achievements, to
external groups & people
3. Decisional roles: taking decisions & allocating resources to meet the organisations’ objectives

Entrepreneur Looking for new opportunities to develop the business

Disturbance handler Responding to changing situations that may put the business at risk, assuming responsibility
when threatening factors develop

Resource allocator Deciding on the spending of the organisation’s financial resources & allocation of physical &
human resources
Negotiator Representing the organisation in all important negotiations

Functions of management:
 Setting objectives & planning – establishing of overall strategic objective translated into tactical
objectives. Planning needed to put the objectives into effect also made.
 Organising resources to meet the objectives – recruitment, giving authority & accept accountability.
Clear division of tasks for each section/dept. To work towards common objectives
 Directing & motivating staff – guiding, leading & overseeing employees to ensure organizational goals
are met. Staff development included.
 Coordinating activities – ensure consistency & coordination between different parts of the firm.
Establish common sense of purpose & ensure resources are used correctly.
 Controlling & measuring performance against targets – appraising performance against targets, take
appropriate action & provide feedback.

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Leadership
Functions, roles & styles

 Leadership: the art of motivating a group of people towards achieving a common objective.
 Delegation: passing authority down the organisational hierarchy
 Empowerment: allows workers some degree of control over how their task should be undertaken

Purpose of leadership: The purpose of leadership is to guide the people in an organization to work towards
the attainment of common organizational goals. The leader brings the people & their efforts together to
achieve common goals.

Leadership roles in business (directors, managers, supervisors, worker representatives)

 Directors – head of major functional department, elected senior members, objective meeting, and
communication
 Manager – manage people, resources, decision making. Direct, motivate & discipline.
 Supervisor – management appointed, responsible for goal achievement, work in a cooperative
manner.
 Worker representative – worker elected, discuss concerns.

Qualities of a good leader

- Desire to succeed & natural self-confidence that they will succeed.
- Ability to think beyond the obvious – to be creative – & to encourage others to do the same.
- Multitalented, so that they can understand discussions about a wide range of issues affecting their
business.
- Have an incisive mind that enables the heart of an issue to be identified rather than unnecessary
details.

Choice of Leadership Style

Leadership styles: autocratic, democratic, laissez-faire

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 & communication is usually just one way.

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.

Laissez-faire: a style of leadership that leaves much of the running & decision making of the business to the
workforce. This may be appropriate in research & development departments staffed by skilled specialists that
are self-motivated.

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Paternalistic leadership: a leadership style based on the approach that the manager is in a better position
than the workers to know what is best for an organisation.

McGregor’s leadership styles

McGregor’s theory x – managers believe the workers dislike work, will avoid responsibility & are not creative

McGregor’s theory y – managers believe that workers can derive as much enjoyment from work as from rest &
play, will accept responsibility & are creative

General view – workers will behave as a result of management attitudes

The ‘best’ leadership style

The style used will depend on many factors:

 The training, experience of the workforce & the degree of responsibility that they are prepared to take
on.
 The amount of time available for consultation & participation.
 The attitude of managers, / management culture – this will be influenced by the personality &
business background of the managers, e.g. whether they have always worked in an autocratically run
organisation.
 The importance of the issues under consideration – different styles may be used in the same business
in different situations. If there is great risk to the business when a poor / slow decision is taken, then it
is more likely that management will make the choice in an autocratic way.

Informal leader: a person who has no formal authority but has the respect of colleagues & some power over
them. In an ideal business situation, where workers & employers work together in a trusting relationship,
managers should attempt to work with the informal leaders to help achieve the aims of the business. This is
best done by attempting to ensure that the aims of the informal leader & the group are common with, / fit in
with, the aims of the business.

Emotional Intelligence/ Emotional Quotient (EQ)

Four competencies of emotional intelligence

Emotional intelligence (EI): the ability of managers to understand their own emotions, & those of the people
they work with, to achieve better business performance. This involves:

 Understanding yourself, your goals, your behaviour & your responses to people
 Understanding others & their feelings.

Goleman’s 4 main EI competencies:

 Self-awareness – knowing what we feel is important & using that to guide decision making. Having a
realistic view of our own abilities & having self-confidence in our abilities.
 Self-management – being able to recover quickly from stress, being trustworthy & conscientious,
showing initiative & self-control.
 Social awareness – sensing what others are feeling, being able to take their views into account &
being able to get along with a wide range of people.

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 Social skills – handling emotions in relationships well & accurately understanding different social
situation using social skills to persuade, negotiate & lead.

2.3 MOTIVATION & MOTIVATIONAL THEORIES

It is defined as a management process of influencing people’s behaviour to achieve stated goals. It also refers
to all forces and influences that employees want to behave in a certain way, i.e. include incentives to exert
effort. When employees are motivated, it means that they are satisfied at work.

Motivation is a tool used by leaders and managers to encourage their employees to work willingly as hard as
they can. Thus motivation refers to the desire to do something or the drive to reach a goal.

What motivates workers?

 Pay
 Promotion
 Working conditions e.g. annual leave, uniforms, working hours, working environment
 Fringe benefits e.g. company house, vacation, school fees, company car, free health care
 Colleagues
 Management style
 Work related achievements

Benefits of motivated staff Indications of poorly motivated staff

 Absenteeism: workers can just decide to be
 Higher levels of productivity: workers will perform absent from work without any justification
their tasks quickly. They work harder and be  Reporting late for duty: the workforce will arrive
more productive late and may be leave their jobs very early before
 Lower labour turnover: employees won’t be the normal knock-off time.
willing to look for other jobs elsewhere. They are  Poor performance: poor quality work and a
satisfied with their current job. greater waste of raw materials
 Lower absenteeism rate: employees won’t  High labour turnover: employees just ‘come and
absent themselves from work for no apparent go’. They won’t take time at the business and
reason. Employees who are not motivated are this will cost the business more in training and
likely to take time off when it is not absolutely recruiting new staff
necessary  Conflicts: there will be a lot of disagreements
 Creativity: employees are more likely to come up within the workforce. Employees have a negative
with new ideas and they will be willing to take on attitude towards work.
responsibilities  Poor response rate: workers do not respond very
 Employee’s loyalty: employees when they feel well to orders and any response is often slow.
trusted or valued, they tend to give their best to  Low worker morale: employees feel as if they are
the business. not needed and this decreases their productivity
 Improved customer service: a motivated
employees will recognise that a happy customer
is likely to be a repeat customer and also that
the reputation of the business rests not only on
the goods produced but on the quality of
aftercare that their customers receive.
 Better quality products: more attention will be
paid to the way in which work is carried out,
whether that is the production of goods or the
provision of services.
 Increased likelihood of achieving business goals:
when employees are work as hard as they can
the business will have the best chance of
achieving any stated objectives. Employees will
even be willing to work for unpaid overtime.

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MOTIVATIONAL THEORIES
Frederick Winslow Taylor (Economic Man): Taylor put forward the idea that workers are motivated mainly
by pay. Taylor believed that people are were motivated by money and that they should be paid according to the
output that they produce. His idea was that employees should be observed in order to identify the most
efficient way of working. Once the best method had been decided, all employees should carry out the required
task in the same way. Taylor wanted to advise management on the best ways to increase worker performance
or productivity. He also argued that workers do not naturally enjoy work and so need close supervision and
control.

Managers were required to breakdown production into series of small tasks. Workers should then be given
appropriate training and tools so that they can work as efficient as possible on one set task. Performance is
then recorded and working conditions will be altered. This approach of detailed recording and analysis of
results is known as scientific management.

Workers are then paid according to the number of items they produce in a set period of time. i.e. piece rate
pay. Piece rate refers to a payment made per unit produced. Piece rates encourages workers to work harder
and maximise productivity. An employee is referred to as an economic man i.e. he/she is driven by the desire
to earn more money. An economic man will work harder to be able to receive the highest pay possible. The
chance of earning extra money stimulate further effort.

How to improve output per worker according to Taylor’s scientific approach

 Select workers to perform a tsk

 Observe them performing the task
 Record the time taken to do each part of the task
 Identify the quickest method and do not allow them to make any changes to it
 Train workers in the quickest method
 Supervise workers to ensure that the best way is being carried out
 Pay workers on the basis of results i.e piece rate (based on theory of economic man)

Application of Taylor’s work: Henry Ford used Taylor’s methods to design the first ever production line, making
ford cars. This was the start of the era of mass production.

Limitations of Taylor’s Theory

- Piece rate payment is not suitable in a service industry where the product itself is invisible
- The theory encourages autocratic style of management which can motivate staff
- Money is not the need at work. Employees have a wide range of needs. Taylor’s theory does not
address the problem of how to motivate employees once their desire for money has been satisfied. i.e.
workers may have the desire for status symbols etc.
- Mass production can lead to repetitive or boring tasks which the demotivate employees
- Mass production involves the use of machines and a lot of workers will be replaced by machines

Abraham Maslow (1908-1970): Maslow based his theory on a series of human needs which he believed
could be placed in order of importance. Human needs are the wants or desires of people that they hope will be
met at their work or in their activities outside the work environment.

Maslow put forward that there are five levels of human needs which employees need to have fulfilled at work.
All of the needs are structured into a hierarchy and only once a level of needs has been fully met, would a
worker be motivated by the opportunity of having the next need up in the hierarchy satisfied. For example, a
person who is dying of hunger will be motivated to achieve a basic wage in order to buy food before worrying
about having a secure job contract or the respect of others. Maslow view. Once a need is satisfied, it no longer
motivates the worker.
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- Basic needs: paying a fair wage which enable

employees to buy essentials for life
- Safety: provide a contract of employment;
follow the health and safety guidelines for a
safety work environment
- Social needs: encourage team work;
encourage social activities and communication
between all levels of employees. E.g. social
activities, hosting parties etc.
- Esteem needs: give recognition for good
work; show appreciation e.g. employee of the
month; motivating job titles,promote people
to give them additional responsibilities
- Self-actualisation: meet the need for feeling
of achievement perhaps through assigning
more difficult and challenging tasks. Allow for
further training and progression within the
business.

Critics of the theory

 Not everyone has the same needs as assumed by the hierarchy. It is possible for a person not to
desire the approval of others and therefore, once their ‘safety needs’ have been met, self-
actualisation might be their next goal
 In the real world, it is very difficult to identify the degree to which each need has been met and which
level a worker is on. Thus it is very difficult for the manager to know for sure which level on the
hierarchy each employee is on
 Money is necessary to satisfy basic needs, yet it might also play a role in satisfying the other levels of
needs such as status and esteem
 Self-actualisation is never permanently achieved as the hierarchy has suggested. In the real world, life
jobs must continually offer challenges and opportunities for fulfilment.

ELTON MAYO (Hawthorne Effect): thought that the work rate (productivity) of employees is affected by
the physical conditions in which they were placed. Mayo introduced the Human Relations Schools of thought
which focused on managers taking more of an interest in the workers, treating them as people who have
worthwhile opinions and realising that workers enjoy interacting together.

Mayo conducted a series of experiments at the Hawthorne Factory of the Western Electric Company in Chicago.
He isolated two groups of women workers and changed factors such as lighting, financial incentives and
working conditions. He expected to see productivity levels declining as lighting and other conditions become
progressively worse. What he actually discovered surprised him. Whatever the change in lighting or working
conditions, the productivity levels of workers improved or remained the same.

These results forced Mayo to conclude that working conditions in themselves were not that important in
determining productivity levels. Other motivational factors should be investigated first before conclusions could
be drawn.

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Mayo’s Conclusion on motivation

 Changes in working conditions and financial rewards have little or no effect on productivity
 Workers are motivated by better communication between managers and workers (i.e Hawthorne
workers were consulted over the experiments and also had the opportunity to give feedback).
 Workers are motivated by working in teams or groups
 Workers are also motivated by a greater manager involvement in employees working lives.
 Hawthorne workers responded very well to increased level of attention they were receiving.
 Mayo concluded that workers are not just concerned with money but could be better motivated by
having their social needs met whilst at work. (Similarities with Taylor and Maslow).

Frederick Herzberg’s Two Factor Theory: Frederick Herzberg (1923) believed in a two factor theory of
motivation. He argued that there are certain factors that a business could introduce that would directly
motivate employees to work harder (motivators). However there are also factors that would demotivate
employees if not present but would not in themselves actually motivate employees to work harder (Hygiene
factors). Thus Herzberg analysed motivational factors by grouping them into two broad categories namely
hygiene factors and motivators

Motivators: drive people to achieve more in their work as these are what lead to employees gaining job
satisfaction. Employees are sometimes concerned about the job itself for instance, how interesting the work is
and how much opportunity it gives for extra responsibility
Motivators How business can satisfy motivators
 Give positive feedback to employees
 Recognition of work done  Involve employees in decision making
 Promotion  Allow delegation of tasks
 Being given responsibility  Ensure that the work is stimulating and
 Nature of work rewarding good performance
 Implement things like job rotation, job
enlargement and job enrichment etc.

Hygiene Factors: Refers to the aspects of work that do not motivate but, if not present, cause dissatisfaction.
These are factors which surrounds the job rather than the job itself. E.g a comfortable working temperature. It
is believed that a worker will only turn up to work if a business has provided a reasonable level of pay and safe
working conditions but these factors will not make him work harder at this job once hi/she is there.
Hygiene Factors How business can satisfy hygiene factors
 Pay a fair wage / salaries
 Pay (wages and salaries)  Make sure that the working conditions are as
 Fringe benefits good as possible e.g. suitable temperature
 Relationship with co-workers  Company rules should be reasonable and not too
rigid
 Status and security
 Encourage two-way communication and team
 Company policy work
 Limited supervision
NB: Herzberg argued that people do not work harder if the hygiene factors are present at work, but their output
can decline if conditions deteriorate. Motivators on the other hand are intrinsic in nature, and produce job
satisfaction and higher output.

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Ways to improve the nature and content of the actual Job

a) Job enlargement: workers being given a variety of tasks to perform which would make the work more
interesting. The tasks are not necessarily challenging. Additional tasks are given to broaden the
employee’s skills and experience.
b) Job Enrichment: involves workers being given a wider range of more complex, interesting and
challenging tasks surrounding a complete unit of work. This would give a greater sense of
achievement
c) Job Rotation: This involves changing a worker’s tasks more regularly to overcome potential boredom
d) Empowerment: delegating more power to employees to make their own decisions over areas of their
working life.

David McClelland – motivational needs theory: David McClelland pioneered workplace motivational
thinking, developed achievement, based motivational theory and promoted improvements in employee
assessment methods

 Achievement motivation (n-ach) – a person with a strong need to achieve goals & job advancement.
There is a constant need for feedback & achievement (result driven).
 Authority/power motivation (n-pow) – a person with a dominant need is ‘authority motivated’. Desire to
control others, be influential, effective & make an impact.
 Affiliation motivation (n-afill) – a person with a need for affiliation, friendly relationships & interaction
with other people. Good team members. Tend to be liked & popular.

Vector Vroom – expectancy theory

 Individuals chose to behave in ways they believe will lead to outcomes that they value.
 Employees can be motivated if they believe that:
 There is a positive link between effort & performance
 Favourable performance will result in desirable rewards
 The reward satisfies an important need
 Desire of need is enough to make the effort worthwhile.

The theory is based on three beliefs:

 ‘Valence’ – the depth of the want of an employee for an extrinsic reward, i.e. Money / an intrinsic
reward i.e. 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

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Motivation Methods in Practice: Financial Motivators, Nonfinancial

Motivators: Different payment methods

Wages: payment to a worker made for each period of time worked, e.g. One hour

Promotion: where career prospects are enhanced as a result of efforts made

Commission: a payment to a sales person for each sale made

Advantages Disadvantages
 No job security especially if there is no basic
 The method is cost effective i.e. no need for salary
a supervisor  Team work is discouraged since individual
 Employees are motivated to exert more salespersons will be keen to maximise their
effort in order to get a higher commission personal sales
 Employees are time conscious

Bonus: a payment made in addition to the contracted wage / salary.

Advantages Disadvantages
 Some employees are not driven by the need
 Staff are motivated to improve performance to earn additional financial rewards
if they are seeking for an increase in  Team spirit can be damaged by the rivalry/
financial rewards competition between employees
 Target setting can help to give purpose and  Favouritism can harm manager-employee
direction to work of an individual relationships
 Annual appraisal offers the opportunity for
feedback on the performance of an
individual

Salaries: annual income that is usually paid on a monthly basis Status and security of income are important
motivators in managerial or non-manual jobs.

Advantages Disadvantages
 It is not directly linked to output so
 It offers the security of a pay level to complacency may be a problem.
employees.  It may lead to low achievement/motivation if
 There are different salary levels for different the effort and achievement of the employee
grades of workers. are not regularly checked with appraisal.
 It is suitable for jobs where output is not
measurable.
 It is often fixed for one year, so labour costs
are easier to forecast.

Performance-related pay: a bonus scheme to reward staff for above-average work performance.

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Advantages Disadvantages
 Individual bonuses for meeting pre-  It requires frequent target setting and
determined targets may encourage workers appraisal interviews.
to work hard to meet these targets.  If the bonus is low, it may not lead to greater
 Target setting can form part of the hierarchy effort as motivation will not be increased.
of objectives to meet the company’s aims.  Managers might show favouritism to some
employees by giving generous bonus
payments.

Profit sharing: a bonus for staff based on the profits of the business – usually paid as a proportion of basic
salary.
Advantages Disadvantages
 It aims to increase the commitment of the  It might only be a very small proportion of
workforce to make the business profitable. total profits so is not motivating.
 It might lead to suggestions for cost cutting  Shareholders might object as it could
and ways to increase sales reduce profit for them.
 It reduces profit retained for expansion.

Share options: where the employee is offered the opportunity to be a shareholder in the company

Advantages Disadvantages
 It reduces the conflict of objectives between  It may be a very small number of shares so
owners and workers. is not motivating.
 It encourages an increased Sense of  Shares might just be sold so there is no
belonging and commitment. long-term commitment.
 Workers are more likely to participate in  Managers often receive more shares so the
decision making aimed at business success. workforce may feel resentment towards the
managers.

Piece rate: a payment to a worker for each unit produced

Advantages Disadvantages
 It motivates workers to increase output.  Quality might fall.
 It is easy to calculate the labour cost per  In many jobs, individual worker output
unit. cannot be calculated.
 There is no security over the level of pay
(e.g. in the event of production delays).
 Workers may become stressed and unwell
by trying to earn more.

Time based wage rate: payment to a worker made for each period of time worked,

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Advantages Disadvantages
 Less harmful to quality  Pay is not related to effort or output but
 Less harmful to health of employees merely to the time spend at work
 Simple and easy to understand  Can encourage time wasting
 Appropriate in most circumstances  Does not provide incentive for increased
effort
 Tasks not completed on time
 Close monitoring is required

Fringe Benefits: refers to benefits or perks given to an employee which have a financial benefit to them.
These are non-cash forms of rewards. They include:
Advantages Disadvantages
 Company house  Some employees are motivated by cash and
 Company car cash alone
 Education for children  Fringe benefits add on to the costs of the
 Discounts on company products business
 Pension schemes
 Low interest on company loans

The business is able to recruit and retain skilled and experienced staff > Leads to higher productivity and
profitability of the business > Can help to reduce the employees’ financial burden e.g. free transport and
accommodation > It can motivate staff to work harder

Non-Financial Motivators/ Rewards

Job Enlargement: involves adding tasks of a similar level to a worker’s job. It simply gives more variety to
employees’ work which makes it more enjoyable. Job enlargement can lead to job satisfaction in the short-
term. It also used to reduce absenteeism. Additional tasks are given to broaden the employee’s skills and
experience.

Job Enrichment: adding tasks of a higher level to a worker’s job. Workers may need training, but they will be
taking a step closer to their potential. Workers become more committed to their job which gives them more
satisfaction. Involves workers being given a wider range of more complex, interesting and challenging tasks
surrounding a complete unit of work. This would give a greater sense of achievement. Job enrichment allows
for two-way communication and workers must be given complete units or work so that individual contribution
can be identified.

Job Rotation: Workers in a production line can now change jobs with each other and making their jobs not so
boring. It can help train employees in different aspects of their jobs so that they can cover for other employees
of they do not show up in future. Worker’s tasks are changed more regularly to overcome potential boredom.

Job redesigning: Involves the restructuring of a job. It can be inform of adding and sometimes removing certain
tasks and functions on a worker’s job description. It encompasses job enlargement, enrichment and rotation.
Employees should be part and parcel of the job redesigning exercise. The job can be made more challenging
and interesting. A bored employee is more likely to lose concentration and can easily make costly mistakes.

Training: The business can encourage the development and improvement of employee’s skills. The business
can achieve this by offering educational leaves or educational loans at favourable interest rates. Sometimes
trainers can be invited to the business to reduce transport costs to the employees. Training can increase the

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status of employees and gives them a better chance of promotion to better paid jobs. It can also lead to
employee loyalty. Training leads to long-term job satisfaction. There are two types of training i.e on-the-job and
off-the-job training.

Worker participation: workers are actively encouraged to be part of the decision making process. Employee
participation recognises that employees are likely to have some worthwhile ideas to contribute to the business
and that, in some instances, they might have a better solution to a problem than their managers. Managers
can allow the employees to elect their own worker representative. The worker representative will represent
employees at council meetings. The business can be using an open-door policy. Worker participation will lead
to quality decisions. It can lead to greater commitment since management considers employee feelings and
opinions

Team Working: Employees are organised into groups and each group is given a certain task to perform. A team
is a group of people who work together to achieve a common goal. e.g. management team, financial team,
production team, quality circles etc. Business will not be able to achieve its objective if employees fail to work
together in teams. Team working involves cell production. Cell production occurs when employees are given
the responsibility to produce a certain product or to complete a certain process

Empowerment: delegating more power to employees to make their own decisions over areas of their working
life. Workers are allowed some degree of control over how the task should be undertaken.

Delegation: refers to the passing of authority down the organisational hierarchy. Subordinates are given the
responsibility and authority to do a given task. It is done to enable top managers to concentrate on major
issues especially as the organisation grows in size. The subordinates will feel valued and more trusted.

Ways in which employees can participate in the management & control of business activity
Workshop/factory – decisions on break times, job allocations to different workers, job redesign, ways to
improve quality & ways to cut down wastage & improve productivity.

Strategic decision-making – electing a ‘worker director’ to the board of directors / selecting worker
representatives to speak for employees at works council meetings.

Benefits Limitations
Job enrichment Time-consuming
Improved motivation Autocratic managers find it hard to adapt – they may
Greater opportunities for workers to show responsibility set up a participation system but have no intention of
actually responding to workers’ input
Worker involvement – they have in-depth knowledge of
operations

Section 3: Marketing
MARKETING: Refers to a process or system of researching into identifying customer needs and applying
suitable prices, products, places and promotion strategies in order to satisfy those needs profitably. It is a
business function which aims to link the business to the consumer and aims to get the right product having the
right price to the right place at the right time.

Marketing is not only advertising and selling of goods and services. Market research is done to find out what
customers want or might want and what price they are prepared to pay for a product. Marketing will then
involve making sure that the design and production teams produce what consumers want at a cost that will
enable a price to be set so that the business can make a profit.

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 Market: place/mechanism where buyers & sellers meet to engage in exchange; the group of
consumers that is interested in a product, has the resources to purchase the product & is permitted by
law to purchase it.
 Human needs & wants: a human need is a basic requirement that an individual wish to satisfy &
wants are things we do not need for our survival as biological creatures, but they do satisfy certain
requirements / individual needs of most human beings.
 Creating/ adding value
 USP: unique selling point: the special feature of a product that differentiates it from competitors'
products.
 Product differentiation: making a product distinctive so that it stands out from competitors’ products
in consumers’ perception.

Value & satisfaction

Co-ordination of marketing with other departments

Marketing → finance

 Use sales forecasts to construct cash-flow forecasts & operational budgets.

 Ensure that the necessary capital is available for the agreed marketing budget, e.g. for promotion
expenditure.

Marketing → human resources

 Use the sales forecast to devise a workforce plan, e.g. Staff may be needed in sales & production.
 Ensure the recruitment & selection of appropriately qualified & experienced staff

Marketing → operations

 Market research data will play a key role in new product development.
 Use the sales forecasts to plan for the capacity needed, the purchase of machinery & the stocks of
raw materials required for the new output level.

Marketing Objectives: Refers to the goals or targets a business has that are concerned with marketing
methods or issues. They specify the results expected from marketing efforts and should be consistent with
overall organisational/ corporate objectives. Basically, they are goals set for the marketing department.
Effective marketing needs to have a clear sense of direction.

Criteria for good marketing objectives

 Must express realistic expectations

 Must be expressed in clear, simple terms so that all marketing personnel understand exactly what
they want to achieve

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 Must be measurable
 Must be time framed

Examples of marketing objectives

 Increasing sales revenue or sales turnover by 5% by December 2022

 To increase market share by 10% by end of 2022
 To increase promotional budget by 7% by end of 2022

Relationship between corporate objective and marketing objectives

In Nestlé’s case, marketing objectives support the corporate objectives and all of them work together

Importance of marketing objectives

 They provide a sense of direction for the marketing department
 Progress can be monitored against these targets
 Assist in decision making
 Can be used in making marketing strategies (long-term plans established for achieving marketing
objectives

Demand and Supply

The primary goal for the marketing department is to meet customer wants profitably. Marketing staff must be
aware of how the free market works to determine the price.

In a free market economy, price is determined by the forces of demand and supply. Market is a place or
system that enables producers of a product or service to meet potential buyers and exchange these for money.

Demand: the quantity of a product that consumers are willing & able to buy at a given price in a time period.

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

Equilibrium price: the market price that equates supply & demand for a product

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Interactions between price, supply & demand

 As the price increases, the demand of a
product decreases
 As the price increases, the supply of a product
increases
 As the supply increases, the price decreases
 As the demand increases, the price increases

Factors Influencing Demand Factors affecting Supply

Price of the product: price of the product is a key factor Price of the commodity: A rise in price will result in more
determining the demand. If the price falls then demand of the commodity being supplied to the market and vice
will rise as the product becomes more affordable to versa. A change in the price of the product will lead to a
customers so they buy more of it. When products increase movement along the same supply curve.
in price people will buy less of them and demand falls
Price of other Products: some products are Other factors leading to shifts
substitutes and others are complements. Substitutes
include butter and margarine. When the price of butter Prices of other commodities: For example if it is more
increases, people will buy more margarine and less butter. profitable to produce LCD TVs then producers will produce
There is a positive relationship between the price of one more LCD TVs as compared to PLASMA TVs. Thus the
product and the demand for a substitute good. When they supply curve for PLASMA TVs will shift inwards (leftward
are complements like Printer and Ink, a rise in the price of shift) i.e. a fall in supply.
Ink will lead to a decrease in demand for Printers. Change in cost of production: Increase in the cost of
Advertising and promotion: a successful advertising any factor of production may result in the decrease in
campaign will create new customers and remind existing supply as reduced profits might see producers less willing
customers to buy the product. The demand for the product to produce that commodity. (Leftward shift)
will increase due to promotional activities like by-one-get- Technological advancement: Improvement in
one-free. technology results in lowering of cost of production and
Income level: as people gain higher incomes they will more profits for the producer and thus more supply of that
demand more of most products. People will buy more of commodity.(rightward shift)
normal goods when income increases e.g. meat. Demand Climate: Climate and weather conditions affect the supply
for inferior goods decreases as income increases e.g. of commodities especially agricultural goods. Favourable
second-hand clothes. weather will lead to an increase in supply (rightward shift).
Change in the size and composition of population: a Unfavourable weather will lead to a decrease in supply
rise in the population size will lead to an increase the (leftward shift)
demand for goods and services. Number of firms: when the number of firms increases,
Weather conditions: in a hot day people will buy more the industry’s supply curve will shift to the right (increase
ice creams and less of them on a cold day in supply). Conversely when the number of firms decreases
Change in fashion and taste: Commodities for which the supply curve will shift to the left( decrease in supply)
the fashion is out are less in demand as compared to Government policy: Taxation can be regarded as an
commodities which are in fashion. In the same way, a increase in the cost of production and hence shifts the
change in the taste of people affects the demand for a supply curve to the left. On the other hand, subsidies are
commodity. seen as a reduction of the cost of production thereby they
Changes in Income Tax: An increase in income tax will shift the supply curve to the right.
see a fall in demand as people will have less money left in
their pockets to spend whereas a decrease in income tax
will result in the increase in demand for products and
services because people now have more disposable
income.

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Features of Markets
 Consumer markets: markets for goods & services bought by the final user of them.
 Industrial products: goods & services sold to industry; market for products bought by other producers
 National markets/ local markets: they sell products to consumers in the area where the business is
located; e.g. Laundries, florist shops, hairdressers & bicycle-repair shops.
 Regional markets: cover a larger geographical area & businesses that have been successful locally
often expand into the region / country so that they can increase sales; e.g. Banking firms,
supermarket chains & large clothing retailers.
 International markets: multinationals that operate & sell in many different national markets
 Formal market: a shop / financial market i.e. The stock exchange
 Informal market: selling goods from a street corner / an advert in a local newspaper

Difference between product & customer (market) orientation

- Market orientation: an outward-looking approach basing product decisions on consumer demand, as
established by market research.
- Product orientation: an inward-looking approach that focuses on making products that can be made –
/ have been made for a long time – & then trying to sell them.
- Asset-led marketing: an approach to marketing that bases strategy on the firm’s existing strengths &
assets instead of purely on what the customer wants.
Benefits of Product Orientation Limitations of Product
- The approach saves market research costs - More risk than customer orientation
- The business is also using its strength - Resources will be wasted when customers are
not buying the product

Advantages of customer orientation

 The firm will be more confident of a successful launch of a new product as effective market research
has been undertaken to determine customer requirements
 Appropriate products that meet customer needs are likely to survive longer and give higher profits that
those built with a product-led approach.
 Firms can respond quickly to changes in the market information as constant feedback from customers
is given
 Due to continuous market research, firms will be better able to anticipate changes and will be in a
strong position to meet the challenge of new competitors entering the market.

Problems associated with measuring market share & market growth

Market size: the total level of sales of all producers within a market.

The size of a market is important for three reasons:

 A marketing manager can assess whether a market is worth entering / not.

 Firms can calculate their own market share.
 Growth / decline of the market can be identified.

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Market growth: the percentage change in the total size of a market (volume / value) over a period of time.

The pace of growth will depend on several factors: overall economic growth, changes in consumer incomes,
development of new markets, development of products that take sales away from existing ones, changes in
consumer tastes, technological change, whether the market is ‘saturated’ / not.

Market share: the percentage of sales in the total market sold by one business. Implications of changes in
market share & growth

It is not always easy to measure market growth / market share in a reliable way. Different results may be
obtained depending on whether the growth & share rates are measured in volume / value terms. E.g. If total
sales in the market for jeans rose from 24 million pairs at an average price of $32 to 26 million pairs at an
average price of $36, then market growth can be measured in two ways:

 By volume – the market has risen from 24 to 26 million units, an increase of 8.33%.
 By value – the revenue has risen from $768 million to $936 million, an increase of 21.88%.

Competition
Competitors – businesses that sell similar / identical goods / services in the market

Direct competitor: businesses that provide the same / very similar goods / services.

Indirect competitor – businesses that are in a different market of sector i.e. A bus operator can experience
indirect competition from rail transport operators.

Industrial & Consumer Markets

Classification of products

Consumer market: a market whose customers are final users of the product i.e. Members of the public. They
are ultimate/ final consumers who consume either by themselves / for family use. They do not buy a product to
make another product for resale.

Industrial market: a market for which customers are other businesses & they buy products as inputs to their
own processes. It is also known as a business market. It consists of individuals / groups who purchase a
specific kind of product for any of the following purposes:

 Resale
 Direct use in producing other products
 General use in daily operation e.g. lighting in schools, stationery for organisations’ offices etc.

Niche and Mass Marketing

Niche Marketing: involves identifying and exploiting one segment of a larger market. This segment can be
one that has not been identified and filled by competitors. It is a very small section of the market and that
section has got specific requirements e.g. the market for professional divers’ watches or high status
products. It is suitable for small firms and the goods are produced in small quantities. This segment is also
known as the target market. Target market refers to a specific group of customers to which a business has
decided to sell its products or services. A target market can be defined according to age, gender, income,
taste, location etc. Allows businesses to develop products/services to meet the needs of this specific group.

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Benefits of Niche Marketing Limitations of Niche Marketing

 Enables small firms to avoid competition  Niche markets are small and can therefore
from larger firms only support a small business
 By targeting niche markets, firms can focus  It is not suitable for a business selling many
on the needs of customers in these products
markets  It is more risk than mass marketing
 Direct marketing is possible
 There is little competition on those markets

Mass Marketing: involves selling the same products to the whole market with no attempt to target separate
groups. Mass marketing produces a product that appeals to the whole market, so that everyone becomes a
customer, no matter what their age, job, income, wealth or gender. Mass markets consists of a large number of
customers for a standardised product such as markets for food and grocery. Goods are produced in large
quantities.

Benefits of Mass Marketing Limitations of Mass Marketing

 Enables a firm to operate in a large scale  The business can lose customers who will
and enjoy economies of scale (economies be looking for specialised products
of scale refers to a decrease in the average  Direct marketing is not possible. Thus mass
costs experienced when a firm operate on a marketing is likely to require very high
large scale.) advertising, promotion and distribution
 It is less risk than niche marketing since costs and failure to succeed will be very
the business will be selling to a lot of expensive.
consumers  There is a lot of competition as the needs
 A strong brand image and customer loyalty and wants of the large market can be seen
is reinforced and these act as barriers to by many businesses.
entry making if difficult for competitors

Market Segmentation: Refers to the process of dividing the whole market into different sub-groups
according to their respective similar or homogeneous characteristics. It is the process of identifying particular
groups that have similar needs and wants in the market. Market segmentation is also known as differentiated
marketing. A sub-group of the whole market is referred to as a market segment. A market segment consists of
consumers who have similar characteristics. Segmenting a market means that marketing activities are focused
on people who are more likely to buy, meaning they are more cost effective and less likely to be a waste of
time.

Identification of Consumer Groups

The business should be able to determine the different consumer groups in the market. To have a clear picture
of the type of consumers in a given market, the business must come up with a consumer profile. Consumer
profile refers to a quantified picture of consumers for a firm’s products. Thus the consumers can be grouped
according to age, income levels, gender, social class, religion and region.

Methods of Market Segmentation

Geographical Differences: refers to area wise market segmentation. Consumers in different locations demand
different types of goods and services. Thus it will be ideal to offer different goods in these areas. Markets can
be divided into districts, towns, provinces, rural etc. For example Woollen and thick garments are not
demanded in hot cities while the demand is very high in Polar Regions.

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Demographic Differences: segmentation can be based on the vital characteristic of population. e.g. gender,
age, income distribution, religion, education etc.

Social class is usually determined by the levels of income earned by an individual. Basically there are three
categories of social classes and these are:

 Upper Class: skilled and experienced professional e.g. C.E.Os Directors, Managers, Lawyers, Doctors
etc. They buy expensive goods for prestigious reasons
 Middle Class: Lower managerial workers e.g. Teachers, Nurses etc. They want quality goods at
affordable prices
 Lower Class: unemployed, pensioners, part-time workers etc. The want inferior goods at low prices
 Age: Some products are purchased by particular age groups e.g. Walking frames, coke zero

Psychographic Factors: refers to market segmentation according to mental status of the people. It includes
culture, personality attributes, motives, life style of the consumer. Life style refer to the way in which one lives.
Attitude refers to a settled way of thinking or feeling or a position of the body indicating a particular mental
state. Personality refers to the combination of characteristic or qualities that form an individual’s distinctive
character.

Brands are generally segmented according to the psychograph. Segmentation is decided according to the
advertisements and content shown. A celebrity can be used for an AUDI car to make the advert more appealing
to the middle and upper classes.

Behavioural Segmentation: market segmentation according to the utilisation of the product. Thus consumers
are grouped according to the volume of usage, purchase occasions, brand loyalty, price sensitivity etc

Benefits of Mass Marketing Limitations of Mass Marketing

 Increased sales since products are  Firms may appeal to segments that are too
produced for a specific group of consumers small to be profitable
 Enables the business to identify consumer  Firms may not be able to use certain media
needs and wants which are not currently die to small size of the segment
satisfied  Costly and extensive market research is
 Enables small firms to avoid competition needed
from big firms by targeting a specific group  Firms may misinterpret consumer
of customers similarities and differences
 Enables the business to implement price  Promotional costs might be high as
discrimination to increase revenue and different advertisements and promotions
profits might be needed for different segments
 Money and time is not wasted in trying to
sell products to the whole market

Market Research: Refers to the collection, collation and analysis of data relating to the marketing and
consumption of goods. It is the process of gathering information about markets, customers, competitors and
the effectiveness of marketing methods. It is every day information about developments in the marketing
environment that mangers use to prepare and adjust marketing plans. The information is used to identify and
define marketing opportunities and problems, generate and evaluate marketing actions, monitor marketing
performances and improve understanding of marketing as a process.

Qualitative and Quantitate Information

Quantitative Information: information will be in the form of numerical data. Data can be obtained by carrying
observations and some experiments e.g. test marketing or field experiments. The results can be distorted if the
person is aware that he/she is being observed.
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Qualitative Information: information is non-numerical e.g. attitudes, opinions, ideas etc. The researcher may
want to find the reasons why consumers will or will not buy a particular product. The data can obtained through
personal interviews and in-depth discussions among groups e.g. focused groups and consumer panels

Reasons for conducting Market Research

 To eliminate the risk associated with new products: the company needs to obtain information about
potential demand before launching a new product.
 To predict future changes in demand: information should be gathered which will enable the firm to
predict all the likely changes in future demand.
 To help in decision making: market research provides vital information which is needed for decision
making purposes
 To gain a competitive edge: to assess the most popular designs, styles, brands, promotions and
packages
 To explain patterns in sales of existing products and market trends: market research is required for
both new and existing products. If the sales figures for an existing product are declining then
marketing managers must implement new measures to reverse the negative trend.

Types of Market Research

Primary research: the collection of first-hand data that is directly related to a firm’s needs.

Primary Research Methods

Observation: market researchers can observe how people behave. Observations can take the form of audit
(stock checks) or using recording devices like security cameras and Televisions. It can give you the answer of
what is happening but not why as you just observe and see through cameras. It involves seeing how much time
they spend at a shelf and the type of products they were looking at. Thus the results can be distorted if the
customer knows that he/she is being observed.

Experimental Methods/ Test marketing: basically there are two types which include:-

 Laboratory Method: - this occurs when people are invited to a particular artificial setting and ask them
to taste a product or try it at their own place.
 Field Experimentation: - the marketing manager will select a particular geographic area and launch a
product in that location to see the reaction of the people. This is cheaper as the loss is less if the
product is not successful.

Survey Method: It includes telephone surveys, mall intercepts, internet surveys, simple questionnaire surveys
and door-to-door surveys. Mall-intercepts occur when people are stopped in malls and are then asked about a
product. Questionnaire surveys are most common when people are given out forms with questions that could
be either open-ended or closed-ended.

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Quantitative research include the use of closed questions e.g. a yes or no question and or a multiple choice
question. Qualitative research include the use of open-ended questions where the responded is allowed to give
his or her point of view (space is provided for respondent to give his/her point of view)

Questions to ask when using surveys

a) Who to ask: it involves population, sample size and sampling method. Population includes current or
potential customers.
b) What to ask: the types of questions and the required information
c) How to ask: the layout of the questionnaire, questionnaire techniques (i.e complex or simple)
d) How accurate the result is: likely limitations of market research. Accuracy depends on the intelligence
and cleverness with which questions are being asked.

Sampling Method
What is a sample: is that part of the whole population whose characteristics are studied to give insights into
the characteristics of the population as a whole. Statistical theory can be used to calculate the minimum size
of the sample necessary to give the required degree of accuracy. Sample size refers to the number of people
selected from the population in which marketing research is conducted. Generally speaking, the larger the
sample size the more accurate can be the results.

The sample must be more representative of the population, it should be balanced in terms of age, sex, type of
occupation, social class etc. A carefully chosen sample should produce similar results to those that would be
achieved by asking everyone in the population.

However one needs to take into consideration time and cost factors. Bias will also exist especially if the
samples are poorly selected or too small, or if questionnaires have complex interview questions.

Two types of Sampling Methods

Probability Samples: a sample is selected randomly and the probability of each member’s inclusion in the
sample can be calculated and reliable conclusions about the whole population can also be made. Probability
sampling methods are more complex, costly and also time consuming.

Non-Probability Samples: it excludes estimating the probability of any particular item being included.

Reliable conclusions from these samples for the whole population are not possible. However it saves time and
money. It is also very easy.

Probability Sampling Methods

- Random Sampling: every member of the population has an equal chance of being selected. Names
and addresses for respondents may be chosen at random from the electoral register and then visited
for an interview.
- Systematic Random Sampling: every nth member in the target population is selected. For example,
selecting every 10th name in the telephone directory until the required sample size had been reached.
- Stratified Random Sampling: it divides the population into groups (strata) by age, sex, occupation,
social class etc. It provides a more representative cross-section of the whole population. Each selected
sub-group is then randomly sampled i.e. people in each stratum should be randomly chosen.
- Quota sampling: when the population has been stratified and then the interviewer selects an
appropriate number of respondents from each stratum. It is commonly used for street interviews e.g. a
quota may be used to interview 25 males and 25 females for each selected age group.
- Cluster sampling: cluster refers to a group of similar things positioned or occurring closely together. A
random group is selected from a particular area or region where they are concentrated e.g. choosing
the CBD in a town. It is used to reduce costs of interviewing and travelling.
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Non-Probability Sampling Methods

- Convenience Sampling: involves the gathering of information from whoever is available when the
survey takes place, regardless of their age, sex, background etc. It also involves stopping by-passers,
asking shoppers in just one location. It is less costly. However the results are less reliable
- Snowball Sampling: it is a much specialised form of sampling in that, a first group of people is selected
as the first sample. The selected people are then asked for one more contact (friend) who is then
added into the sample. Sample size continue to increase hence snow ball effect. Businesses in
secretive markets use this and also those firms that produces highly specialised and expensive
products for a very limited range of customers. It is less costly. However sampling in this way is not
representative. Thus the results may be biased since a person’s friend is likely to have a similar
lifestyle.
- Judgemental Sampling: the researcher chooses the respondents based on what they think is
appropriate for their study. This could be used by an experienced researcher who may be short of time
as they have been asked to produce a report quickly.

Focus Groups:It is a selected group of 15-20 people who are shown a product or allowed to taste it and then
asked about what they feel or think about it. These people must comment on its taste, design and colour
depending on what the product is. Once they are interviewed they won’t be asked again. It is used to obtain
feedback especially for new brands. During the interview, members are allowed to discuss with each other.
Information to be obtained is more reliable.

Limitations

- It can be time consuming

- The data collected can be difficult to analyse and present to senior managers
- The presence of the researcher may influence the discussions

Consumer Panels: It is to a great extent similar to focus group. The difference is that, after an interview, the
focus group is dismissed and another group is selected. In a consumer panel, the same group is asked for
opinions at a certain point in time after some changes have been introduced. It is more accurate as asking the
same people give a better idea of how consumer thoughts and feelings are changed.

SECONDARY RESEARCH: It is also known as desk research. It involves the collection, analysis and evaluation
of second-hand information. Second-hand information refers to data that already exists. This information was
originally collected by another person or organisation for a different purpose. It is the secondary research that
should be initially done as it has lower costs, saves time and helps in giving directions for primary research.

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Sources of data for Secondary Research

Internal Sources External Sources

 Internal company records or annual reports  Newspapers e.g. the business section
 Sales trends  Magazines
 Stock movements  Government publications (population census)
 Supplier and customer records  Libraries (number of households in an area)
 Economic surveys (economic trends)
 Information from competitors
 Internet (feedback from customers)
 Prepared research report by other firms

Factors affecting choice of the research method

 Budget available: if the researcher has more money available for market research to be conducted
then primary research can be necessary. The organisation can afford expensive primary research
methods such stratified random sampling, quota sampling etc. If the organisation is experiencing
cash problems the secondary research can be the best option.
 Accuracy required: primary research provides more accurate results than secondary research.
Secondary research provides misleading results since the research was done for a different purpose
and is often out-dated.
 How quickly the information is required: secondary information is ideal when the marketing data is
required quickly since the data is readily available. Primary research method can be employed when
the data is not required quickly.
 Accessibility to the old sample: if the researcher doesn’t have access to the sampled population then
primary research won’t be possible. The researcher will then depend on the data provided by other
organisations.

Cost effectiveness of market research

The business should not just spend large sums of money on market research for the sake of it. The marketing
managers should ask themselves questions such as: Is it worth it? Is it cost effective? These questions implies
that money should not be wasted.

A well designed and focused market research pays for itself in form of higher sales and increased profits. If
very little amounts are spent on market research then the validity and reliability of the results will be
compromised. By spending more on market research the more the data can be obtained leading to better
results.

Nowadays the internet and mobile phones have made it easy to contact a wide range of potential customers
within a short period of time as compared to home surveys. The key way to maximise the likelihood of cost-
effectiveness is to plan thoroughly.

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According to the Marketing Association: an existing business must set a marketing budget not exceeding 1% of
its gross sales and 10% for a new product or business. Factors to consider when deciding how much to spend
on market research

 Likely returns: The marketing manager should consider the potential increase in sales or profits
 Method to be used: More money is required if they are planning to use a primary research method.
 Budget available: resources available can be a constraint to the amount of money a business can
spend on market research.
 Emergence with which the data is required: If the data is required quickly then more is required so that
more data collectors can be hired.

Reliability of data collection: different factors should be considered before concluding on whether the
data is reliable or not.

Market research data may be unreliable due to the following reasons:

 Questionnaires used may have had misleading or leading questions

 Interviews or focus group leaders may guide responders or may not fully under stood the question they
are asking.
 Interviewers or focus group leaders may complete the forms themselves
 Respondents to questionnaires, interviews and discussions may deliberately not give their real views
in order to get the process finished quickly or just for fun.
 People in focus groups may say what they think other people in the group would like to hear
 The sample size may be too small and so not represent the whole population
 Different statistical methods of treating data will often result in different conclusions

Analysis and Interpretation of the results of market research

Most market research reports will be presented in writing, though there may be meetings where the findings
are orally presented. The writing may be supported by graphs, charts, tables and diagrams. The information
must be presented clearly and in an organised way. There may be recommendations, though these may be left
to those who the report was produced for.

Interpretation of information

 Tables – these allow ease of reference can be used to present a mass of data in a precise way.
 Pie graphs/charts – used to display data in which the proportions of the total need to be clearly
shown. Each section of the sector shows how relatively significant that part of the data is of the whole.
They allow easy comparison. This is calculated in the following way:
 Line graphs – most commonly used for showing changes in a variable, i.e. Sales over time in time-
series graphs. The graph allows easy reference to trends & shows fluctuations clearly.
 Bar charts – these use bands of equal width but of varying height to represent values. They allow easy
comparison over-time / between different items.
 Histograms – often confused with bar charts but the main difference is that the area of each bar
represents relative values
 Pictograph – A pictograph uses icons or pictures to present the information. It is visually appealing and
it is easy to see variables. A key is required for the reader to easily understand value of an icon. Use
the following data to draw a pictograph.

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Analysis of results obtained from market research

Averages
Mean: calculated by totalling all the results & dividing by the number of results.

Mode: the value that occurs most frequently in a set of data.

Median: the value of the middle item when data have been ordered / ranked.

- Grouped frequency data

 Range: the difference between the highest & lowest value.

 Inter-quartile range: the range of the middle 50% of the data.

Average type Use Advantages Disadvantages

 When the range of results is small, the mean can be

 It includes all of the data in its  It is affected by one / two
a useful indicator of likely sales levels per period of
calculation extreme results
Mean time.  It is widely used & easily  It is commonly not a whole
 Often used for making comparisons between sets of understood number.
data

 It is easily observed & no  The mode does not consider

 As the most frequently occurring, the result could be
calculation is necessary all of the data
used for stock-ordering purposes. E.g. The shoe
Mode  The result is easily  There can be more than one
shop would need to hold more pairs of size 6 shoes
understood since it is a whole modal result which could
than any other size.
number cause confusion

 It cannot be used for further

 Could be used in wage negotiations, e.g. ‘half of our
statistical analysis
union members earn less than $xx per week.’  It is less influenced by
 When there is an even
Median  Often used in advertising, e.g. ‘the reliability records extreme results than the
number of items in the
show that our products are always in the best- mean
results, its value is
performing 50% of all brands.’ approximated

MARKETING MIX: Marketing Mix is defined as a combination of elements that influence a customer’s
decision whether or not to buy a product. It is also defined as the combination of product, price, promotion and
place that is used to make sure that the customer’s requirements are met. It is a marketing tool that combines
a number of components in order to strengthen and solidify a product’s brand and to help sell the product or
service.

The marketing mix is often simplified and is commonly described as the 4 P’s. This approach identifies four
elements in the mix (all beginning with the letter P)

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 P - Product: Include the many different aspects of a product such as design, quality, reliability as well
as its features and functions. A product is an item that is built or produced to satisfy the needs of a
certain group of people. The product can be intangible or tangible as it can be in the form of services
or goods.
 P – Price: Refers to how much the customers are charged for the product and other terms of payment
involved. This is what a business is asking consumers to pay for a product or service. The price can be
related to the cost of production or sometimes related to the prices charged by competitors
 P – Promotion: This is the way a firm communicates information about the product to the customer. It
may use advertising or a sales force to highlight its strength. The promotion of a product will affect the
image that customer have of it and their awareness and understanding of the benefits of the product.
Promotion includes advertising, special offers, sponsorship and public relations activities
 P – Place: Refers to the way the product is distributed. Is the product sold directly to the customer or
through retail outlets? Can you buy online or do you have to travel some distance to get to a shop
where it is sold. Place refers to the points of sale such as store or websites as well as Lorries that
distribute products. Packaging is also part of promotion. Packaging refers to the technology of
enclosing or protecting product for distribution, storage, sale and use.

The Role of the Customer (The 4Cs)

Relationship between the customer & the business (the 4cs)

Customer relationship management (CRM): using marketing activities to establish successful customer
relationships so that existing customer loyalty can be maintained.

 Customer solution – what the firm needs to provide to meet the customer’s needs & wants.
 Cost to customer – the total cost of the product
 Communication with customer – providing up-to-date & easily accessible two-way communication links
withcustomers – to promote the product & gain back important consumer market research
information.
 Convenience to customer – accessible pre-sales information & demonstrations, & convenient
locations for buying the product.

Relationship between 4 C’s and 4 P’s

Customer relationship management

It involves using the 4 C’s and the ideology of putting customers first in order to maintain customer relations
and loyalty.

It has been proven that maintaining existing relations is cheaper than attracting new ones

CRM’s main policy is customer information. It believes in gaining as much information about the target market
as possible and then adapting the 4P’s to it

Developing long-term relations with customers can be achieved by:

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 Targeted marketing – providing customers with products they prefer (according to market
research/previous purchase)
 Customer service and support – providing feedback channels and using them to change the 4P’s
 Using social media – businesses can use social media to identify various trends in the market which
allows them to make their products more accurate for customers

Product Differentiation: refers to the degree to which customers perceive a product or brand to be different.
The main focus for most of the businesses is to make customers see that the brand or product is the only one
that meets their wants.

Ways to achieve product differentiation:

 Advertising and marketing campaigns to make the product stand out e.g Nike
 Branding and packaging e.g. Coca Cola
 After sale services and guarantees
 New designs

Unique Selling Point / Unique Selling Proposition

A unique selling proposition (USP, also seen as unique selling point) is a factor that differentiates a product
from its competitors, such as the lowest cost, the highest quality or the first-ever product of its kind. A USP
could be thought of as “what you have that competitors don’t.” A successful USP promises a clearly articulated
benefit to consumers, offers them something that competitive products can’t or don’t offer, and is compelling
enough to attract new customers. The USP may be something unique to the product, the distribution
arrangements or the marketing methods.

Here are a few famous examples of USPs:

 Domino’s Pizza deliveries“it arrives in 30 minutes or it’s free” promise.

 FedEx’s “When it absolutely, positively has to be there overnight.” Southwest’s claim to be the lowest-
priced airline

Benefits of Unique Selling Point (USP)

 The business is able to charge high prices

 Positive publicity from customers
 Increase in market share

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 Leads to Brand loyalty. Brand refers to an identifying symbol, name or trade mark that distinguishes a
product from its competitors

What is the product life cycle?

The product life cycle is an important concept in marketing. It describes the stages a product goes through
from when it was first thought of until it finally is removed from the market. Not all products reach this final
stage. Some continue to grow and others rise and fall. This can be illustrated by looking at the sales during the
time period of the product

What are the main stages of the product life cycle?

Development stage - At this stage, you should not worry about sales or introducing the product. Your focus
should be on working with a team of designers, manufacturers or product development experts on:

 producing prototypes
 testing prototyped product
 sourcing and pricing materials
 intellectual property issues

To further develop your product, you should:

 consult team members on development plans

 speak to suppliers and other business associates
 communicate with customers about your plans
 consider the environmental impacts of your product
 ask a group of potential customers to test your product and give feedback - you can use this to
develop the product

When developing your product or service you need to establish the level of quality you are aiming for, and how
many different versions you want to develop to generate interest at launch. You should also take steps to
protect all your intellectual property rights - e.g. patents and trademarks - before you launch the product or
service. Doing this protects you from other competitors copying the idea and hurrying through an alternative.
See how to protect your intellectual property.

Introduction stage of a product life cycle

The introduction stage of a product's life cycle is when you can build an awareness of your product or service in
certain markets.

Introduction stage - objectives

You should concentrate on building a base for your product at this stage, and focus on the following marketing
factors:

 pricing
 distribution
 promotion

Price your product or service: You should initially start pricing at the highest point you believe it is possible
to achieve. You can also consider a skimming price strategy: charging a relatively high price for a short time
when a new, innovative, or much- improved product is launched onto a market. The aim with skimming is to
skim off customers who are willing to pay more to be one of the first to have a new product. You can lower the
prices later when demand from the early adopters falls.

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A penetration pricing strategy may work best for businesses entering a new market or building on a relatively
small market share. It involves the setting of lower, rather than higher prices to achieve a large, if not dominant
market share. See how to price your product or service.

Distribution: Your distribution should be selective and limited to a specific type of consumer, until your
product is accepted. Also, you should consider different distribution models during different periods of the
product life cycle, e.g. new products for different seasons in a clothes shop.

Promotion: You should try to build brand awareness at an early stage. It is worth working with a brand design or
communications agency as you develop a product to establish a strong brand.

You can use samples or trial incentives to capture early adopters of the product or service. Introductory
promotions can also help convince potential resellers to carry your lines. See more on branding: the basics.

Profitability during the introduction stage of product life cycle

It is likely that, at the introduction stage, your sales will be low until customers become aware of your product
or your service's benefits. Due to the high cost of advertising and low initial sales, it is possible that you won't
make immediate profits or you may even find that the product is producing negative profits. However, you
should make up for this with increasing revenue generated at the growth and maturity stage of a product life
cycle

Growth and maturity stage of a product life cycle

At this point in your product's life cycle, you should be putting your efforts into:

 increasing your product's market share

 creating a brand preference for your customers

Product growth stage

This should be a period of rapid growth in both sales and profits for your product or service. Your profits should
rise through an increase in output and more competitive pricing.

You should also consider:

 maintaining product quality, adding features or support services

 maintaining pricing to increase demand for the product
 increasing distribution channels to cope with demand
 aiming promotion at a wider audience

If your profits are still low, consider reducing the price of the product or service to increase the volume of sales.

Product maturity stage: If your product or service makes it to the maturity stage, this should be the longest part
of its product life cycle. Sales are near their highest, but the rate of growth is slowing down, e.g. new
competitors in market or saturation

At this stage, you will probably notice that:

 you may need to enhance product features to make it more appealing than competitors'
 you may need to lower your pricing due to increased competition
 distribution is becoming more intensive and you may need to offer incentives
 you may need to focus your promotion on the difference between existing products

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At this point, the market has often reached saturation as a result of competitors releasing their own version of
your product. Your product or service may experience a decreasing rate of sales, which should eventually
stabilise.

During this stage, you should aim to differentiate your product or service from others that your competitors
offer. You can do this by focusing and highlighting any branding, trademarks, or customer testimonials that
may give you an advantage. Read about designing a successful brand.

Decline Stage: The last of the product life cycle stages is

the Decline stage, which as you might expect is often the
beginning of the end for a product. When you look at the
classic product life cycle curve, the Decline stage is very
clearly demonstrated by the fall in both sales and profits.
Despite the obvious challenges of this decline, there may still
be opportunities for manufacturers to continue making a
profit from their product. The product/service either comes
to its natural end or is re-developed

Extending the Product Life Cycle

What can businesses do to extend the product life cycle?

Extension strategies extend the life of the product before it goes into decline. Again businesses use marketing
techniques to improve sales. Examples of the techniques are:

 Advertising – try to gain a new audience or remind the current audience

 Price reduction – more attractive to customers
 Adding value – add new features to the current product, e.g. improving the specifications on a
smartphone
 Explore new markets – selling the product into new geographical areas or creating a version targeted
at different segments

Challenges of the Decline Stage

Market in Decline: During this final phase of the product life cycle, the market for a product will start to decline.
Consumers will typically stop buying this product in favour of something newer and better, and there’s
generally not much a manufacturer will be able to do to prevent this.

Falling Sales and Profits: As a result of the declining market, sales will start to fall, and the overall profit that is
available to the manufacturers in the market will start to decrease. One way for companies to slow this fall in
sales and profits is to try and increase their market share which, while challenging enough during the Maturity
stage of the cycle, can be even harder when a market is in decline.

Product Withdrawal: Ultimately, for a lot of manufacturers it could get to a point where they are no longer
making a profit from their product. As there may be no way to reverse this decline, the only option many
business will have is to withdraw their product before it starts to lose them money.

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Uses of the PCL Limitations of the PLC

 The position of a product in the PLC gives some  It is based on past or current data as such it
indications to a business about how the cannot be used to predict the future
elements of the marketing mix might be used  Some products can come back after the decline
 It is also used to check progress against the stage
marketing objectives of the business  Sales of some products continue to grow
 It is used to identify how cash flow might depend
on the cycle
 To decide on whether to withdraw or to re-
launch a product

PLC – evaluation
 PLC is an important part of the marketing audit and helps in assessing the marketing departments
position
 But it is based on past and present data, which may not be necessarily true for future predictions
 Plus, there might be a rapid and quick change in sales, not giving enough time for the marketing
department to implement a strategy to offset such a change
 In order to be effective, PLC analysis must be used in relation with sales forecasts and management
experiences.

Product portfolio analysis – evaluation

 Having a balanced and managed portfolio allows marketing objectives to be met easily
 But product is only one part of the marketing mix, and the other 3 P’s – price, place and promotion are
also essential in achieving success of the business

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 But without a well-managed product portfolio, the other 3 P’s may not be in use and the objectives
may not, ever, be met

New Product Development: An ability to develop new products [or services] can help to breathe new life into
a business. The primary advantage of product development is that it can help a brand and business stay
relevant with its consumer base. By continually striving to solve new problems that consumers face, an
organization is continually creating the chance to create revenues.

New Product Development: the creation of products with mew or different characteristics that offer new or
additional benefits to the customer. Product development may involve modification of an existing product or its
presentation, or formation of an entirely new product that satisfies a newly defined customer want or niche
market.

Advantages Disadvantages
 Unique selling point (USP)  It can be easy to set unrealistic expectations for
 Higher selling price a product. Without quality benchmarks in place,
 Higher profits (due to higher selling price) the product development process can create
 Better publicity (due to USP) unrealistic future expectations for a brand and
business. Just because a prototype works as
 Increased sales (due to publicity)
intended does not mean that it can provide an
 Increase in market share expected value.
 Products can fail unexpectedly. Even with
thousands of hours of testing, it is possible for a
product to fail unexpectedly. The Samsung
Galaxy Note 7 battery issues and subsequent
recall are example of this.
 External sources can change procedures, which
can alter your product development. There are a
number of external sources which are involved
in the product development process but fall
outside of the direct sphere of influence for a
brand and business. Shipping vendors may
change delivery dates. Off-shore manufacturers
might change procedures. Manufacturing
materials may decline in quality. These all can
affect the final product under development.
 Product testing can result in a failed idea. A
brand and business can put a lot of time and
effort into the product development process,
only to see an idea fail when tested within a
market. There will always be a risk with product
development because the costs of a failed idea
must be absorbed.
 The primary disadvantage of product
development is that changing consumer
preferences can cause a valuable product to
actually be seen as worthless.

Product Portfolio Analysis: Refers to analysing products of a business to help allocate resources effectively
between them. Considers the range of product a business offers, using market sales, market share, position of
the product life cycle and segmentation in order to plan the most appropriate product mix to meet objectives. It
focuses on how to achieve the optimum (best) product mix that means getting a range of products that are
going to achieve long-lasting sales. It helps the business to pinpoint exactly what marketing activities need to
be employed for each product in the mix

Benefits of product portfolio analysis

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 Allows businesses to ensure that it always has a product ready to replace products that might be
losing market share or sales
 It enables a business to have a range of products so that if one fails the others can provide revenue to
cover
 It allows planning to take place over time so that the business will always be in a position to maintain
revenue.

Promotion (Promotional Strategy)

Promotion is the marketing activity that communicates to customers in order to change their attitudes or
buying behaviour. It is an attempt to draw attention of the customer to the product. Promotion is the part of
marketing where you advertise and market your product, also known as a promotional strategy. Through it, you
let potential customers know what you are selling.

In order to convince them to buy your product, you need to explain what it is, how to use it, and why they
should buy. The trick in promoting is letting consumers feel that their needs can be satisfied by what you are
selling.

An effective promotional effort contains a clear message that is targeted to a certain audience and is done
through appropriate channels. The target customers are people who will use, as well as influence or decide the
purchase of the product. Identifying these people is an important part of your market research. The marketing
image that you’re trying to project must match the advertisement’s message. It should catch your target
customers’ attention and either convince them to buy or at least state their opinion about the product. The
promotional method you choose in order to convey your message to the target customers may probably involve
more than one marketing channels

Objectives of Promotion

 To increase customer awareness

 To reach targeted clients which might be geographically dispersed
 To remind customers about the existing product and its quality
 To show the superiority of a product over its competitors
 To increase sales
 To give information about the product and the company

Types of Promotion
 Above the line promotion: it occurs through an independent media such as advertising using
television, magazine, newspaper, radio, and internet. Thus it involves using mass media space that is
paid for, often through an advertising agency. The main aim is to inform, raise awareness and build
brand positioning. Communication is targeted to the whole market not to specific individuals
 Below the line promotion: marketing methods that communicate with the customer without paying for
the media. These are promotional activities that pushes customers into buying e,g buy one get one
free (BOGOF). These are promotional activities where the business has direct control over the target or
intended audience. It is designed and produced by a business in-house. It is more of one-on-one
approach. It is designed to achieve short term sales increases and repeat purchases.

Elements of below the lime promotion include:

 Sales promotion
 Personal selling
 Public relations
 Exhibitions and Trade fairs

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Promotional Mix: Refers to all the elements of promotion that a business can pursue which include
advertising, public relations and sales promotions. In other words, it is defined as the combination of
promotional techniques that a firm uses to sell a product.

Elements of Promotional Mix

Advertising: it is a controlled impersonal conveyance of a message regarding a need-satisfactory product or

service by a business to a specific audience with the objective of informing, reminding or persuading them to
take a specific action.

Four Types of Advertising

1. Informative Advertising: it is done to inform the public about the existence of a product. Provides
precise details of goods to the public on new products, prices, where to buy and how to buy the
product.
2. Persuasive Advertising: it is undertaken by an individual company to promote its own products using
brand names at the expense of other manufacturers.
3. Competitive Advertising: advertising only gives the good points about the product and they use
attractive devices or techniques
4. Collective or Generic Advertising (Collaborative): producers in the same industry will jointly advertise a
product in general. They don’t use brand names e.g. ‘Take a lot of milk for good health’.

Types advertising Media

 Print Media: newspapers; magazines; pamphlets
 Electronic Media: Radio; internet; television
 Outdoor Media: Billboards; posters

Factors influencing choice of Media

 Size of targeted audience: national coverage requires Television; national newspapers. Local level
requires posters and Billboards
 Cost involved: television is more expensive nut more expensive
 Urgency of message: if speed is required to spread the information then radio and television is the
best
 Expected profit or revenue: revenue to be collected should be able to cover all the advertising
expenses

Benefits of advertising Problems of advertising

 Enables consumers to make informed decisions  Leads to higher prices
 Increase in sales and profitability  Encourages impulse buying
 Fights competition  Adverts interrupt TV and radio programmes
 Improves image of the business
 Informs customers about promotions and sales
taking place

Elements of Below-the-line promotion

 Sales promotion
 Personal selling
 Public relations
 Exhibitions and trade fairs

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Sales Promotions: This promotional strategy is done through special offers with a plan to attract people to
buy the product. Sales promotions can include coupons, free samples, incentives, contests, prizes, loyalty
programs, and rebates. You might also want to educate potential and current customers by holding trainings
and seminars, or reach them via trade shows. Some of the target audience may be more receptive to a certain
promotional method than another. You can also do sales promotions by setting up product displays during a
public event or through social networking at business and civic gatherings.

Sales promotion is divided into two:-

 Trade Promotions: These are aimed at distributors like wholesalers and retailers. It includes special
discounts and bonuses such as free extra product per case.
 Consumer promotions: are used to create interest and tempt potential customers to make a purchase.
It includes free gifts, coupons, special offers, free samples, competitions, buy-one-get-one (BOGOF).

Public Relations or PR: Public relations is usually focused on building a favourable image of your business.
You can do this by doing something good for the neighbourhood and the community like holding an open
house or being involved in community activities. It also involves sponsorship. Sponsorship refers to a financial
contribution to an event in return for publicity. You can engage the local media and hold press conferences as
part of your promotional strategy. In this case the business is not going to pay for the message to be run on the
media. Thus PR is the cheapest method of promotion

Personal Selling: You can employ salespersons to promote and sell your products as part of the business
communication plans. These salespersons play an important part in building customer relationships through
tailored communication. Personal selling can be a bit costly, though, because you will need to hire professional
sales people to do the promotion for you. But done right, the profit gained could. It is an action oriented
approach and it is often used by insurance companies.

Sales promotion
Limitations
method

Price deals ▪ Reduced gross profit

▪ Negative impact on the brand’s reputation
▪ Reduced gross profit
Loyalty rewards ▪ There are administration costs to inform consumers of loyalty points earned
▪ Loyalty cards have become common, so their loyalty impact is reduced.
▪ They may simply encourage consumers to buy what they would have bought anyway.
Money-off ▪ Retailers may be surprised by the increase in demand & not hold enough
coupons stocks, leading to consumer disappointment.
▪ The proportion of consumers using the coupon might be low if the reduction it offers is
too small.
▪ The best display points are usually offered to the market leaders – products with high
POS displays market share.
▪ New products may struggle for best positions in stores – unless big discounts
are offered to retailers.
▪ Reduction in gross profit margin.
▪ Consumers may consider are they paying a ‘normal’ price that is too high?
BOGOF ▪ Is the scheme being used to sell off stock that cannot be sold at normal prices
– impact on reputation?
▪ Future sales could fall as consumers have stocked up on the product.
Games &
competitions

Money refunds ▪ These involve the consumer filling in & posting off a form, & this might be a
disincentive.
▪ Delay before a refund is received may act as a disincentive.

Exhibitions and Trade fairs: Some businesses attend trade fares and exhibitions to promote their products. The
business setup a stall and promote their products face-to-face.

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Factors to consider when choosing a method of promotion

a. Cost: many businesses are forced to use cheaper promotions because advertising is too expensive
b. Stage in the product life cycle: promotional methods change as a product gets older e.g PR is used
during the introduction stages aggressive advertising on maturity and decline stage.
c. Competitors’ promotion: it is common for business to copy the method of promotion used by a rival
firm. Once one business come up with a successful promotional method, others will quickly take
advantage of it and modify a little bit.
d. Legal factors: in the E.U, tobacco product cannot be advertised on T.V.

Price (Pricing Strategy): Price is the amount of money that your customers have to pay in exchange for your
product or service. Determining the right price for your product can be a bit tricky.

A common strategy for beginning small businesses is creating a bargain pricing impression by pricing their
product lower than their competitors. Although this may boost initial sales, low price usually equates to low
quality and this may not be what customers to see in your product.

Pricing Objectives: They include the following:

1. Profitability -prices should increase overall profitability of the firm
2. Rate of return –a specified return on capital employed (ROCE)
3. Growth –the price should provide a steady profit over a period of years to enable the firm to survive
and grow.
4. Competition –should be competitive and attractive to customers
5. Market share –a price must be set which enables a firm to at least maintain its market share.
6. Utilization of capacity –it should cover fixed costs and enable the firm to fully utilize capacity, thus
spreading unit costs over a larger output.

Pricing Policies/Strategies
1. Price Skimming –It uses high prices to obtain high profit margins and a quick recovery of development costs.
It is useful for products with a short life cycle and fashion items e.g. computers, videos, toys etc. It is ideal for
technological goods and where there is less competition

Advantages Disadvantages
 High prices give appearance of quality and a  High prices may discourage buyers
must have ‘factor’  Early buyers at high prices may be discouraged
 Some customers pay high prices for a new when price falls and they will not buy again
unique product  Buyers may wait as they know price will fall
 High prices covers development and marketing  Attract new competitors
costs
 More profits to the business

2. Penetration Pricing –The main objective is to capture a large share of the market as quickly as possible. It
depends on the expected product life. It is mainly used for products with longer life. Low prices are set in the
initial stages of the product and gradually increased as it gains market share. Consumer products are often
introduced this way. It is suitable where there is stiff competition.

Advantages Disadvantages
 High sales volumes and low prices stop entry of  Consumer resistance when prices are increased
competitors in the future
 High sales volume reduces average costs  May result in brand seen as low quality
(economies of scale)  Low profit margins
 Increase in brand awareness

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 High market share

3. Differentiated/Discrimination Pricing –It involves the use of different prices for the same product when it
is sold in different locations or market segments e.g. wholesalers may receive trade discounts while small
buyers in remote areas may be charged a higher price due to additional distribution costs.

Can be used where:

 Supply of the product is controlled only by one firm

 Markets are geographically separated
 Reselling of the product is not possible e.g. when the business is selling a service

4. Promotional Pricing –Involves the use of a lower and normal price either to launch a new product or to
periodically boost sales of existing products.

5. Negotiable Pricing –It is common in industrial markets and building trade. The price is individually calculated
to take account of costs, demand and any specific customer requirements.

6. Market Pricing –Prices are quoted ‘at market’. They are determined by forces of supply and demand.
Common for commodity markets e.g. gold, silver, stock exchange etc.

7. Premium Pricing –Involves charging a higher price than competitors to strengthen the image perceived by
consumers of a certain brand.

8. Cost-based pricing: firms will assess the cost of producing each unit of the product and add a certain
amount on top of the calculated cost. It also includes mark-up pricing which involves adding a fixed mark-up for
profit to the unit price of a product. It takes into account all the relevant costs. But the problem is that it can
lead to higher prices.

9. Predatory Pricing: charging a low price to drive competitors out of the market. When the rival firms had
closed down the business will then increase price.

10. Psychological Pricing: setting a price at just below a whole number e.g $99,99, making customers feel they
are paying much less than $2.00, so they more likely to buy than if the price were

$2.00

11. Bait and hook pricing: selling a product at a low price but charging a high price for associated products, for
example selling a printer cheaply but the cartridges are expensive. It can only work if the products are
complementary goods.

12. Loss leader pricing: products are sold below cost at a loss to attract customers who might then buy other
products. When customers enter into a shop, full price products will also be bought. Customers have a
tendency of buying more than what they planned for. The loss on the loss leader will be more than made up for
by extra spending on the full-price items. It is used in most cases by supermarkets.

13. Competitor based pricing: involves researching the price competitors charge and then setting a price based
on this. The price can be similar, slightly higher or lower than that which is charged by competitors. It is suitable
where there is large number of competitors. If the firm is selling a differentiated product, they can charge a
higher price. Differentiated product is that where customers see as being different from any other similar

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products. If they are selling the same type of product, they can charge the same price and then offer after sale
services to attract more customers.

Factors to consider when setting prices

 cost : fixed and variable costs
 price charged by the competitors
 stage of the product in the product life cycle
 Objectives of the business
 Customer perceptions
 Government policy
 Price elasticity of demand

Price elasticity of demand (PED): Refers to the responsiveness of quantity demanded for a product due
to a change in its price. It measures the extent to which units demanded respond to a decrease or increase in
price

Price Elasticity of demand (PED) = % change in quantity demanded

% Change in price
Negative sign means the inverse relation between price and quantity demanded

PED is inelastic: increase the price to maximise profits. A given increase in price will lead to a less than
proportionate decrease in quantity demanded. The product has very few substitutes PED < 1

PED is said to be unitary elastic: maintain the price, PED = 1 price change wouldn’t affect the total revenue.

PED is said to be elastic: reduce the price to maximise sales. A given decrease in price will lead to a more than
proportionate increase in quantity demanded. The product will be having a lot of substitutes. PED>1

Factors that affect Price elasticity of demand:

 The number of substitutes: goods that have a lot of substitutes have elastic demand e.g margarine.
Those with very few substitute have inelastic demand e.g pills to a patient
 The period of time: in the short run the demand for goods is generally inelastic while it becomes
elastic in the long run
 The proportion of income spent on the commodity: products which take up a small proportion of an
individual’s income have inelastic demand e.g. sweets. On the other hand products which take up a
larger fraction of a person’s income have elastic demand e.g. wardrobes
 The necessity of the product: products that are basic necessities have inelastic demand while luxury
products have elastic demand.
 Advertising: Makes consumer more inelastic towards the product e.g. coca cola use heavy
advertisement to differentiate the product from pepsi

DISTRIBUTION: It is concerned with getting the product from the producer to the customer at the right quantity,
to the right place, at the right time and in the right condition.

Channel of distribution: Refers to the chain of intermediaries a product passes through from producers to the
final consumer. It involves the links between the manufacturer and the consumer. A Channel of Distribution for
a product is the route taken by the product as it moves from the producer to ultimate consumer

The 3 type’s intermediaries are:

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Agents -An agent works on behalf of another firm to perform certain specified services. They are usually used in
importing and exporting and also in domestic trade.

Wholesalers -A wholesaler buys goods for resale to someone other than the eventual customer. They usually
supply goods to retailers who in turn sell to the public or to the manufacturers who use the goods in the
production process.

Functions of Wholesalers

 they break down bulk purchases and repack them into smaller lots to retailers
 they offer warehousing for products for the manufacturer
 they provide financial service to manufacturer (pay cash) and extend credit to the retailer d) they
handle publicity and promotion on behalf of the manufacturer

Retailers -Retailing refers to all activities that are related directly to the sale of goods/services to the ultimate
consumer.

Types of Distribution Channels

Zero –level Channel/ direct selling

The product is passed directly from manufacturer to the final consumer e.g. dentist.

Advantages Disadvantages
 Quicker than other channels  All storage costs are paid for by the producer
 Producer has complete control over the  It may not be convenient for consumers
marketing mix i.e. how the product is sold  It can be expensive to deliver each item to the
 Direct contact with customers offers the consumer
business with useful information  Consumers may not be able to see and try the
 Products will be cheaper to consumers product before they buy

One-level Channel: There is only one intermediary. The retailers buy the product from the manufacturer and
sell it to the final consumers

Advantages Disadvantages
 Producers can focus on production and selling is  Profit mark-up imposed by retailers could make
done by retailers the product more expensive
 Retailers are often in locations that are near to  Producers lose some control over the marketing
customers mix
 When goods are bought by retailers, the risk is  Retailers may sell products from other
reduced on the part of the manufacturer competitors too i.e there is no exclusive outlet
 Storage costs are reduced

Two-intermediary channel

 Two-intermediaries channel. Wholesaler buys goods from producer & sells to retailer.
 For instance, in a large country with great distances to each retailer − many consumer goods are
distributed this way, e.g. Soft drinks, electrical goods & books

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Factors Affecting Choice of Distribution Channel

 The desired degree of control wanted by the manufacturer: More is gained on a zero-channel of
distribution
 The number of potential customers: If they are too many then a 2-level or 3-level channel can be used
 Type of products: some goods are perishable hence they require a zero-level channel of distribution.
 Storage costs: if storage costs are very high then the goods must be quickly sold to wholesalers or
retailers
 Availability of intermediaries like the agent; wholesalers or retailers. If they are not there , the
manufacturer will have to sell the goods directly

The role of Branding in Promotion

Branding: Brand is a name/term/design or symbol or a combination of these which is intended to identify the
goods/services of one business from others, usually offering similar products.

Brand Image is a perception a person has of a particular brand.

Brand Extension is a strategy by which an established brand name is applied to new products from the same
manufacturer.

Brand Loyalty is a consumer’s decision to consistently repurchase a brand continually because he/she
perceives that the brand has the right product features or quality at the right price.

With brand loyalty, consumers can reduce purchasing time, thought and risk, therefore, developing brand
loyalty as the long-term objective of all marketing organizations and the major reason for their continued study
of consumer behaviour.

Types of Brands
1. Family Brands: the brand name is used to cover all the products of a business, even if they are widely
different and indifferent markets e.g. Willard, Heinz, Kellogg, and Unilever

2. Retail Brands: the retailer, not the manufacturer is the one guaranteeing quality and consistency e.g. Zara,
Levis, Khadi etc.

3. Corporate Brands -the name of the business is incorporated into the brand name of the product e.g. Uniliver,
MCB Bank

4. Individual Brand -each product is given its own brand name

Factors to consider when selecting a brand

 easy to spell, say or recall

 should allude to the product uses, benefits or special characteristics
 should be distinctive and recognizable
 should be sufficiently versatile to be applicable to new products
 should be capable of being registered and legally protected under The Trade Marks Act

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 should be adaptable to packaging and labelling requirements

Benefits of Branding Reasons for Not Branding

 to avoid the high initial costs of promoting a
 protects quantity brand
 it aids in shelf selection (case of identity)  the physical nature of some goods may prevent
 it differentiates similar goods branding e.g. vegetables
 for prestige  to maintain a consistent quality of output
 it facilitates product diversification  it may be difficult to differentiate products of
 it hampers price comparisons one firm from another e.g. safety pins, coal,
 it facilitates promotional effort wheat etc.

The role of packaging in promotion: Packaging is what the consumers see as they consider buying a product.
Packaging act as protection and security, enables grouping of several items, convenience and is used for
transmitting information and marketing communications

 Packaging is used to develop brand image by making it distinct and easily recognizable.
 It is termed the ‘silent salesman’ in marketing.
 It is often an integral part of a product designed to add to its appeal through the use of colour, shape,
size, logos etc., all of which can have a significant effect on sales.
 Packaging is useful in successful advertising and promotion as it can encourage impulse buying.

A package should have:

1. brand (product) name

2. quantity
3. expiry date
4. ingredients/nutritional information
5. guarantee
6. directions for use
7. address and contact number of manufacturer
8. health information e.g. ‘do not litter’

Internet Marketing (Online Marketing): Refers to the advertising and marketing activities that use the internet,
instagram, facebook, snapchat, email and mobile communication to encourage direct sales via electronic
commerce

E-commerce: refers to the buying and selling of goods and services by business to consumers through
electronic medium. It involves the trading of products or services using computer networks, particularly the
internet and mobile phones.

Benefits of Internet Marketing Problems of internet marketing

 Internet connectivity problems
 It is relatively cheap  Consumers can not touch, smell, fell or try the
 World coverage goods before buying it
 Accurate data can be kept about the number of  It is more risk.ie dealing with someone whom
visitors you doesn’t know
 Convenient for consumers since they can shop  Problem of hackers especially for telegraphic
in the comfort of their homes funds transfer.

Viral Marketing: Refers to the use of social media sites or text messages to increase brand awareness or sell
products. It is type of marketing in which users of social networks act as advertisers for products by spreading
knowledge of them to other users of the network. It describes any strategy that encourages individuals to pass

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on a marketing message to others, creating the potential for exponential growth in the number of people
getting the message. A viral message must be created and then passed to the influences.

Dynamic pricing – using online data about consumers to charge different prices to different consumers over
the internet, often these prices are much lower (cost to customer).

Consistency in the Marketing Mix

The need for the marketing mix to be consistent with the business, the product type & the market

Integrated marketing mix: the key marketing decisions complement each other & work together to give
customers a consistent message about the product.

The impact a product has on consumers is explained by human psychology – as complex beings we are
influenced by a range of different messages before we decide on buying a product.

Confused consumers will steer clear of the product & this will result in lower long-term sales than if a clear
message about the product is conveyed through all aspects of the mix – although everyone can be misled
once.

The best-laid marketing plans can be destroyed by just one part of the marketing mix not being consistent /
working with the rest. The most effective marketing-mix decisions will, therefore, be:

 Based on marketing objectives & affordable within the marketing budget

 Integrated & consistent with each other & targeted at the appropriate consumers.

Section 4: OPERATIONS AND PROJECT MANAGEMENT

The nature of operations: It is also referred to as production management. Production is the transformation
of inputs into outputs. It is the conversion of resources such as raw materials or components into goods or
services. Operations management decisions involve making effective use of resources (inputs), land, labour
and capital to provide outputs in the form of goods and services.

Production can be done at primary, secondary or tertiary levels. The inputs of production differ from one
organisation to another. The outputs of one organisation can be the inputs of another firm.

Operations management seeks to ensure that goods/ services are made with the required quantity, required
standard and at the right time and in the most efficient manner. Thus it is concerned with acquiring the
necessary inputs, allocating and utilising them in such a way as to maximise output.

Operations management and planning is concerned with:

 Which resources are needed to complete the production/service process?

 How the work/process will be organised and scheduled.
 Who will perform the work?

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Objectives of an operations management department

 To design, create, and produce goods and services for an organisation and its customers effectively.
 To direct and control the transformation process so that it is efficient and effective and adds value.
 To procure appropriate inputs in a cost-effective way.
 To effectively manage an appropriate inventory level.
 To focus on quality, speed of response, flexibility, type cost of the production process.
 Achieve an effective labour/capital production mix.
 To incorporate the latest technological approaches into the production process.

THE DIAGRAM BELOW SUMMARIES PRODUCTION

Transformation process: An activity (process) or group of activities that takes inputs and converts them into
outputs.

INPUTS

 Raw materials
 Land
 Labour
 Capital

Intellectual Capital: is defined as the amount by which the market value of a company exceeds its tangible
assets (physical and financial) – the collective knowledge and skills of a company. Intellectual capital is the
intangible bank of expertise, skills and competencies within a business that can give the production process a
distinctive competitive edge.

INTELLECTUAL CAPITAL: total market value of business asset- total net book value of assets

Effectiveness, efficiency & productivity

Difference between effectiveness & efficiency

 Efficiency: producing output at the highest ratio of output to input.

 Effectiveness: meeting the objectives of the enterprise by using inputs productively to produce outputs
that meet customers’ needs.
 Productivity: measuring efficiency
 Production: converting inputs into outputs.
 Level of production: the number of units produced during a time period.

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 Productivity: the ratio of outputs to inputs during production, e.g. Output per worker per time period.

Productivity can be raised by:

 Improve the training of staff to raise skills level:- employees with relevant skills are more productive
 Improve worker motivation- use financial and non-financial motivators to encourage employees to
work extra harder.
 Purchase more technologically advanced equipment- the firm can introduce new machinery and latest
production systems i.e. robot-controlled production systems.
 More efficient management- good leadership improves the overall efficiency of the business

VALUE-ADDITION & OPERATIONS DECISIONS

Refers to the differences between the cost of purchasing raw materials and the price at which finished goods
are sold. In other words, it is an increase in value a business adds from one stage of production to another.
When inputs are transformed into outputs, they will end up with a higher value than their starting point. As
each stage of the production process takes place, value is added to the starting inputs because these have to
be transformed, adding value.

The role of operations decisions is to achieve the desired value-added, in terms of productive efficiency in
reducing unit costs (minimising inputs in relation to outputs) and in terms of financial value (sales revenue and
profit). The operations decisions should lead to efficiency and effectiveness so that customers’ needs are met
by the value added through the productive process

Value added & Marketing: Value addition can be looked at from the point of view of customers. Marketing is
the process of meeting customers’ needs, and the process of adding value is making sure that that production
process is effective in doing this. Adding value in marketing is giving something to customers that are of high
value to them but is low cost to the producer. Added value marketing gives customers what they really want by
making the product have improved performance or better looks, giving advice on using it, making it more easily
available to the customer, providing discounts as well as quality assurance.

Differences between Labour intensive and Capital intensive method of production

Labour intensive Capital intensive

 Costs of labour are a higher  Costs of capital are a higher
proportion of total costs than costs proportion of total costs than costs
of capital e.g. hand worked farm of labour e.g. an oil refinery
Benefits Benefits
 Can produce one-off unique products  Mass production requires large
 Well suited to deliver personal services scale output using the repeated
 Lower productions costs especially task. Machines can deliver this
when labour is cheaper in that area much more quickly than labour
 Low start-up costs  Enables the business to enjoy
economies of scale
 Relatively easy to vary labour force
 Increased labour productivity
(recruit/retrench)
 Skills level may be lower so costs are
less and it is easier to recruit
employees.
Limitations Limitations

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 Cannot produce large-scale output  Difficult to produce a range of varied

quickly one-off products
 Limited economies of scale  Difficult to deliver personal services
 Employees can disrupt production  High start-up costs. Cost of capital
easily due to industrial action or may be too high for a business to buy
absence machinery
 Legal constraints may make it  Machine breakdown can be
difficult to vary the labour force a big challenge to the
 Training costs may be very high business
 Employees using machines can be
bored

Job production = labour intensive | Flow production = capital intensive

Economies of scale = decreased average costs from increased production

Factors that could influence a decision to change to more capital intensive production methods.

 Relative prices of the two inputs may change – labour costs significantly increase.
 Cost of capital machinery may reduce.
 Technological development may allow production process (or parts of it) to be mechanised.
 Competitors may force a business into capital intensive approach.
 Business may become large enough/profitable enough to purchase capital machinery.

Benefits of operations management: Operations management is concerned with orchestrating all

resources to produce a final product or service and as such, it is constantly seeking to make the
transformation process of inputs into outputs more efficient.

 Reducing costs.
 Reducing wastage.
 Increasing productivity.
 Taking out activities that do not add value.
 Improving design.
 Improving quality.
 Designing more efficient work methods.
 Better product development.
 More efficient inventory management.

Operations planning: Operations planning: preparing input resources to supply products to meet expected
demand.

Operations decisions: decisions taken by operations managers that have a significant impact on the success
of the business.

The role of operations decisions is to achieve the desired value-added, in terms of productive efficiency in
reducing unit costs (minimising inputs in relation to outputs) & in terms of financial value (sales revenue &
profit).

These decisions are often influenced by:

 Marketing factors – planning future production levels requires estimated/forecast market demand
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 Availability of resources
 Technology – e.g. The availability of CAD/CAM

COMPUTER-AIDED DESIGN (CAD): involves the use of computer programs to create 2 or 3-dimensional
graphical representations of physical objects. It is mostly used in architectural designs and on computer
animations. It can provide special effects on movies and advertising.

CAD is also used in furniture manufacturing and the software is used to calculate the optimal size or shape of
the product. The engineering department also uses CAD to analyse the components of various structures.

BENEFITS OF CAD

 Lower product development costs

 Increased productivity
 Improved product quality
 Good visualisation of the final product and its constituent parts
 Errors are minimised i.e. it is more accurate

LIMITATIONS OF CAD

 Complexity of programs
 Need for extensive employee training
 It is more expensive i.e. computer software used are very expensive
 Computer programs can be affected by virus

COMPUTER-AIDED MANUFACTURING (CAM): involves the use of computer software to control machine tools
and related machinery in the manufacturing of components or complete products. Processes in a CAM process
are controlled by computers. Thus a high degree of precision and consistency can be achieved than a machine
controlled by men.

BENEFITS OF CAM LIMITATIONS OF CAM

 High costs of hardware, programs and employee
 Quality products are produced training
 Faster production and increased labour  Hardware failure can be time-consuming to
productivity solve
 CAM can be combined with CAD to produce a  Computer systems can be easily affected by
wide range of products viruses
 More flexible production allowing quick  Small firms cannot afford it
changeover from one product to another.

Flexibility & innovation: Need for flexibility with regard to volume, delivery time & specification

 Operational flexibility: the ability of a business to vary both the level of production & the range of
products following changes in customer demand.
 The level of demand is not constant, it may increase/decrease. Thus, the business must be able to
respond quickly to changes in demand.

This flexibility can be achieved in a number of ways:

- Increase capacity by extending buildings & buying more equipment – this is an expensive option
- Hold high stocks – but these can be damaged & there is an opportunity cost to the capital tied up

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- Have a flexible & adaptable labour force – using temporary, part-time contracts reduces fixed salary
costs but may reduce worker motivation
- Have flexible flow-line production equipment – mass customisation

Process innovation: the use of a new / much-improved production method/service delivery method.
Some recent examples will help to show the extent & importance of some of these new methods:

- Robots in manufacturing.
- Faster machines to manufacture microchips for computers.
- Computer tracking of inventories, e.g. by using bar codes & scanners, to reduce the chances of
customers finding businesses out of stock.
- Using the Internet to track the exact location of parcels being delivered worldwide & improve the
speed of delivery.

PRODUCTION METHODS (OPERATION METHODS): Each firm must carry out production designing.
Production design refers to the scheduling of production which involves organising the activities in a
manufacturing plant or service industry to ensure that the product or service is completed at the expected
time. There are four basic ways of production design namely job, batch, flow production and mass
customisation.

The method chosen will depend on the following factors:-

1. Nature of product- unique products require jobbing, group of identical products require batch and
identical products require flow production
2. Size of business- small businesses use jobbing and batch while large firms use flow. This is because
flow production is expensive to set up.
3. Size and location of the market- the firm must take into cognizance the volume of output required. If
the demand is high but not in large quantities, the batch is used. Mass marketing requires flow
production.
4. Demand of the product- less frequent demand requires jobbing while larger and fairly steady demand
requires flow production.

PRODUCTION METHODS
Job production: producing a one-off item specially designed for the customer

Batch production: producing a limited number of identical products – each item in the batch passes through
one stage of production before passing on to the next stage.

Flow production: producing items in a continually moving process

Mass customisation: the use of flexible computer-aided production systems to produce items to meet
individual customers’ requirements at mass-production cost levels

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Problems of changing from one method to another

Job to batch Job/batch to flow
 Cost of capital equipment needed for flow
 Cost of equipment needed to handle large production.
numbers in each batch.  Staff training to be flexible & multiskilled – if this
 Additional working capital needed to finance approach is not adopted, then workers may end
stocks & work in progress. up on one boring repetitive task, which could be
 Staff demotivation – less emphasis placed on demotivating.
an individual’s craft skills  Accurate estimates of future demand to ensure
that output matches demand.

FACTORS AFFECTING CHOICE OF LOCATION

1. Market: a factory must be closer to its customers to reduce transport costs. Perishable goods must
reach the market as fast as possible. Heavy products must also be manufactured near customers
2. Raw materials and Components: if the raw materials are heavier to transport than the final product,
the firm must locate near raw material source to reduce transport cost. E.g sugar cane is heavier than
the manufactured sugar. Where mineral is processed from ore, the ore is much heavier than the final
product.
3. Availability of Labour: Workers operate machine and do all of the management and manual work. If a
process requires skilled labour, it is best to locate near people with the required skills. If the
manufacturing requires more unskilled labour, it is best to locate where there is high unemployment
4. Infrastructure and communication: business need to be located near to transport system such as
roads, rail, inland water ways, sea-ports and air-ports. Good transport system enables the business to
be easily accessible by suppliers and customers
5. Power and Water supply: uninterrupted supplies of water and electricity can be a competitive
advantage to some industries where power and water are critical inputs e.g steel manufacturing
6. Government Influence: Land is allocated to businesses by the government. It may also offer grants to
businesses to encourage them to locate in certain areas. On the other hand, the government can also
refuse businesses to locate in a certain area or may put restriction in certain areas. Governments
have planning regulations which determine where to build and what to build.
7. The costs of a particular location relative to other options: the cost of land, for example, will vary from
area to area. The cost of land in major towns is very high than in small towns. Thus locating in small
towns can be a better option for small firms.

BENEFITS OF THE BEST (OPTIMAL) LOCATION

 Lower costs- decrease in transport costs leads to higher profits

 Improves the firm’s competitiveness- being closer to customers may boost sales and profits since the
firm is able to sale at lower prices
 Overcoming trade barriers- to overcome trade restriction a firm may locate itself in a particular country
rather than exporting goods to that country.
 Attracting suitable job candidates- the firm will have access to the right job candidates at the right
time.
 Lower taxes- by locating itself in the designated areas, the firm may be exempted from paying taxes or
pay taxes at concessionary rates

BUSINESS RELOCATION: Relocation can be defined as a change in the physical location of a business OR the
movement of a business from one area/region to another. Relocation can occur within or between countries

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Reasons why a business may want to change its location

 Infrastructural development in other locations

 Cheaper labour costs in other locations
 Changing objectives and strategies of the business
 Changing of location of suppliers or customers
 Change in government policies
 Relocation costs

Changing location may involve costs such as:

 Finding and training new employees

 Finding new customers and suppliers
 Administrative costs of the change
 Redundancy payments
 Adjusting to the new set-up

Industrial Inertia: occurs when a business stays in its current location even though the factors that led to its
original location no longer apply. The costs of moving will be exceeding the costs of staying. Large-scale
industries like iron and steel production often display industrial inertia.

THE OPPORTUNITIES ENTERING NEW MARKETS Problems of entering foreign markets

ABROAD

 Cultural differences- different countries have

 Sales growth- new markets increases a firm’s different cultures. The firm needs to understand
sales. This may boost company sales revenue as the culture of the country they intent to enter for
new customers are buying the product them to be successful.
 Increased profits- The new markets abroad may  Lack of knowledge- the business may lack
result in more profits to the business. Increased marketing knowledge of the new country or
sales volumes mean more profits to the market e.g. consumer preferences, goods
business offered by competitors, advertising methods and
 Improved business image- a good image locally distribution methods
and internationally may result because the  Lack of foreign currency- the business may not
business is selling in foreign and competitive have sufficient foreign currency to pay for
markets, the business products will be seen as workers, taxes, rentals and advertising
of high quality
 Earn foreign currency- foreign currency obtained
can be used to acquire new machinery in foreign
countries

How to overcome such challenges

a) Form joint ventures- the business can join with an existing local business. The business will have
knowledge from the local business who understands the local market.
b) Use local agents and local dealers- the business can engage local dealers to distribute and market the
goods for business. The local agents have local marketing information and they know the best
methods to distribute the goods
c) Primary and Secondary research- essential information about the products, customers, markets is
obtained through conducting market research.

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ECONOMIES AND DISECONOMIES OF SCALE

 Businesses can expand by employing more of a few or all of the factors of production.
 Scale of production is changed when all the factors of production are changed.
 Large scale operation leads to a fall in the average total cost (cost per unit). On the other hand, when
the organisation continues to grow beyond a certain optimal level, unit cost may begin to increase
 Thus large scale operations may result in a decrease (economies of scale) or increase (diseconomies
of scale) in the unit cost

ECONOMIES OF SCALE: refers to the cost saving advantages that a business can exploit by expanding their
scale of production. Thus making things cheaper because they are bigger. The effect is to reduce the long run
average cost of production over a range of output.

-economies are divided into internal and external economies of scale

INTERNAL ECONOMIES OF SCALE: internal economies of scale arises from the growth of the firm itself. Thus
the average cost will decrease as the firm employees more capital and labour

SOURCES OF INTERNAL ECONOMIES OF SCALE

1. Purchasing Economies of Scale: Large firms receive discounts when they buy raw materials in bulk.
Thus the cost of acquiring raw materials will decrease leading to a fall in the unit cost/ average cost. A
5% trade discount will lead to a 5% decrease in the cost of production and the cost per unit
2. Marketing Economies of Scale: A large firm can spread its advertising and marketing budget over a
large output. Advertising is charged per total time on airplay (TV/ Radio) or space (Newspaper) not on
the size of the business. As the firm grows in size, the average marketing cost will decrease
3. Financial Economies of Scale: Large businesses may be able to access finance at lower interest rates
because of the growth of the business. Large businesses are usually rated by the financial markets to
be more ‘credit worth’ and have access to credit facilities with favourable rates of borrowing
4. Managerial Economies of Scale: Large scale manufacturers can afford to employ skilled workers to
supervise and to carry out production. Effective leadership can also lead to an improvement in worker
motivation. Skilled workers will also help reduce wastages. Employees also become experts due to the
length of experience in a market and the cost per unit will decrease
5. Technical Economies of Scale: Large scale businesses can afford to invest in very expensive and
specialist capital machinery. For example, a National Chain Supermarket can invest in technology that
improves stock control and helps to control costs. It would not be viable or cost efficient for a small
corner shop to buy this technology.
6. The LAW of increased dimensions: this is linked to the cubic law where doubling the height and width
of a tanker or building leads to a more than proportionate increase in the cubic capacity. It is an
important aspect in the distribution and transport industries
7. Risk Bearing Economies of Scale: A large firm is able to provide a wide range of products in different
markets. This lowers the risk of putting all eggs in one basket. McDonalds burgers and French fries
share the use of food storage and preparation facilities.

EXTERNAL ECONOMIES OF SCALE: External economies of scale exist when the long term expansion of an
industry leads to the development of ancillary (something additional) services which benefit all or some of the
businesses in the industry. External economies partly explain the tendency for firms to cluster geographically.

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SOURCES OF EXTERNAL ECONOMIES OF SCALE

1. Supply of raw materials- as the industry grows, suppliers of raw materials will be willing to locate
themselves close to the manufacturers. This will reduce transport costs to the manufacturers in a
given industry.
2. Better transport network- as the industry grows, there will be massive infrastructural development in
the area. The development of transport networks cut costs and also saves time.
3. Research and Development Facilities- businesses can benefit from researches done by local
universities Economies of information- business in the same industry may share vital information
about the market or about the economy in general. This reduces the cost of acquiring information to a
single business.
4. Trade Magazines- enables all firms in an industry to advertise and disseminate information cheaply.

DISECONOMIES OF SCALE: leads to a rise in the long run average cost. Average cost rises due to firms
expanding beyond their optimum scale (Optimum-right size)

SOURCES OF INTERNAL DISECONOMIES OF SCALE

1. Managerial Diseconomies of Scale- monitoring the productivity and quality of output from thousands
of employees in big corporations is imperfect and costly.
2. Administrative Diseconomies of Scale- these are associated with the bureaucratic structures of large
firms where long channels of communication and complex administrative procedures delay effective
action. Instructions from the top management may be partly or completely distorted if they are to
follow a long channel of communication down the organogram.
3. Over-specialisation- workers in large firms my feels a sense of alienation and subsequent loss of
morale. If they do not consider themselves to be an integral part of the business, their productivity
may fall leading to wastage of factor inputs and higher costs.

EXTERNAL DISECONOMIES OF SCALE: refers to a rise in the average costs which is independent of the firm’s
output. They arise due to the growth of the whole industry. These occur when too many firms have located in
one area.

SOURCES OF EXTERNAL DISECONOMIES OF SCALE

1. Shortage of Labour- as the industry grows, shortage .of labour may crop up. Firms have to bid wages
higher to attract and retain new workers as the wage rises due to labour shortages, the cost of
production to all firms in an industry will increase.
2. Formation of Trade Unions- growth of an industry may lead to the formation of industrial unions. Such
Trade unions may ask for higher wages for their members which then increases the production costs.
3. Pressure on Raw materials- increased demand on raw materials and other components may lead to a
rise in the unit cost. Geographical concentration of firms in an area may lead to a rise in the rentals,
interest rates.
4. Disposal of Waste material becomes costly- when the industry grows, dumping sites will be shifted to
the peripheries of a town or business centre. Firms can also be forced to acquire more advanced
equipment to reduce and dispose waste. The government can also increase pollution taxes as the
industry grows

Purpose, costs & benefits of inventory

Purpose of inventory within a business

Inventory (stock): materials & goods required to allow for the production & supply of products to the customer.

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Raw materials – the basic materials from which a product is made & they are usually bought from outside.

 These inventories can be drawn upon at any time & allow the firm to meet increases in demand by
increasing the rate of production quickly.

Work-in-progress – unfinished project that is still being added to / developed / partially completed goods

Finished products – goods that have completed the manufacturing process

 These inventories can be displayed to potential customers & increase the chances of sales.
 They are also held to cope w/ sudden, unpredicted increases in demand so that customers can be
satisfied without delay.
 Firms will also stock completed goods to meet anticipated increases in demand as w/ seasonal
goods/products, i.e. Toys at festival times.

Costs of holding inventory

 Opportunity cost – working capital tied up in goods in storage which could be put to another use, i.e.
pay off loans, buy new equipment / pay off suppliers early to gain an early-payment discount.
 Storage costs – the overhead costs of storing inventories in secure warehouses.
 Risk of wastage & obsolescence – goods often become damaged while held in storage / while being
moved, they can then be sold only for a much lower price.

Cost of not holding enough inventory

 Lost sales – if a firm is unable to supply customers from goods held in storage, then sales could be
lost to firms that hold higher inventory levels.
 Idle production resources – if inventories of raw materials run out, expensive equipment & labour will
be left idle, of which the costs could be considerable.
 Special orders could be expensive – if an urgent order is given to a supplier to deliver additional
materials, then extra costs might be incurred
 Small order quantities – the firm may lose out on bulk discounts, & transport costs could be higher as
so many more deliveries have to be made.

Why inventories need to be managed effectively

 There might be insufficient inventories to meet unforeseen changes in demand.

 Out-of-date inventories might be held if an appropriate rotation system is not used, e.g. fresh foods /
fast- changing technological products, i.e. Tablet computers.
 Inventory wastage might occur due to mishandling / incorrect storage conditions.
 Very high inventory levels may result in excessive storage
costs & a high opportunity cost for tied-up capital.
 Poor management of the supplies purchasing function can
result in late deliveries, low discounts from suppliers/too
large a delivery for the warehouse to cope with.

Managing inventory - Buffer inventory, reorder level & lead time

 Buffer inventories: the minimum inventory level that
should be held to ensure that production could still take
place should a delay in delivery occur / should production
rates increase.
 Re-order quantity: the number of units ordered each time.

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 Lead time: the normal time taken between ordering new stocks & their delivery

Optimum inventory size & economic order quantity

Optimum stock level – refers to the right quality & quantity of stocks to be kept at the business to promote the
smooth running of production.

Economic order quantity: the optimum / least-cost quantity of stock to re-order taking into account delivery
costs & stock-holding costs.

EOQ depends on

 Interest on credit
 Storage costs
 Wastage costs
 Insurance costs

Inventory control methods including buffer inventory & just in

time (JIT)

Just-in-time: this inventory-control method aims to avoid holding inventories by requiring supplies to arrive just
as they are needed in production & completed products are produced to order

The factors that influence the success of JIT stock control

 Employee flexibility – employees should be multi-skilled & able to switch jobs quickly so that excess
stocks of raw materials won’t build up.
 Flexibility of machinery – modern, computerised machinery is required to produce a wide range of
products just by changing a single software
 Excellent relationships with suppliers – it should be possible for suppliers to be able to supply raw
materials at short notice.
 Accurate demand forecast – enables the business to produce a reliable production schedule used in
the calculation of precise number of goods to be produced over a certain time
 Extensive use of IT – computerised records of sales & stock levels would allow minimum stocks to be
held & e-communication w/ suppliers would enable accurate delivery of supplies
 Strict quality control/zero defect – as there are no spare stocks, goods have to be produced correctly
the first-time otherwise customer orders will not be completed on time.

The appropriateness of JIT stock control in given situations

 The costs resulting from production being halted when supplies do not arrive may far exceed the costs
of holding buffer inventories of key components.
 Small firms could argue that the expensive IT systems needed to operate JIT effectively cannot be
justified by the potential cost savings.
 In addition, rising global inflation makes holding inventories of raw materials more beneficial as it may
be cheaper to buy a large quantity now than smaller quantities in the future when prices have risen.
Similarly, higher oil prices will make frequent & small deliveries of materials & components more
expensive.

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Section 5: Finance & accounting

The need for business finance
Start-up capital, capital for expansion

Why businesses need finance to start up & to grow

 Start-up – initial purchase of capital, land & payments for marketing, production, etc.
 Working capital – day-to-day finance to pay for bills, stocks, etc.
 Expanding capital – new premises / takeover, etc.
 Special situations – decline in sales, economic downturn

How the purpose of finance affects the source of finance

chosen
Working capital

The meaning & significance of working capital as a source of

finance

Working capital: the capital needed to pay for raw materials, day-
to-day running costs & credit offered to customers. In accounting
terms working capital = current assets – current liabilities.

Significance of the distinction between revenue expenditure &

capital expenditure

Capital expenditure: the purchase of assets that are expected to

last for more than one year, i.e. Building & machinery.

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Revenue expenditure: spending on all costs & assets other than fixed assets, includes wages, salaries &
materials bought for stock.

Sources of finance
Legal structure & sources of finance

The relationship between the legal structure of a business & its sources of finance

 Share issues can only be used by limited companies – & only public limited companies can sell shares
directly to the public. Doing this runs the risk of the current owners losing some control – except if a
rights issue is used.
 If the owners want to retain control of the business at all costs, then a sale of shares might be unwise.

Short term finance & long-term finance: distinction between short- & long-term sources of finance

Short-term finance Long-term finance

 Within a year  More than a year

 Used to meet working capital needs  Used to acquire fixed assets
 Bank overdraft, debt factoring, trade  Share issue, debentures, long-term loan,
credit grants

Internal sources of finance: Internal Sources of Finance – internal money raised from the business’s own
assets / from profits left in the business (ploughed-back / retained earnings)

Source of Finance Explanation Advantage Disadvantage

Retained profit Earned profit that is not taken Once invested back into the Newly formed companies /
as tax / used to pay owners / business the retained ones trading at a loss will not
shareholders earnings will not be paid out have access

Sale of Assets Use of assets that are no Assets can be sold to leasing Opportunity cost of selling
longer fully employed to raise company & leased back assets that could be used in
cash the future

Reductions in Working Firm’s liquidity may be

Capital reduced to risky level
Money raised through selling assets / reducing debt

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External sources: debt finance / equity capital?

Debt finance Equity capital
 Lenders have no voting rights at the annual  It never has to be repaid; it is permanent
general meetings. capital.
 Loans will be repaid eventually (apart from  Dividends do not have to be paid every year;
convertible debentures), so there is no in contrast, interest on loans must be paid
permanent increase in the liabilities of the when demanded by the lender.
business.
 As no shares are sold, the ownership of the
company does not change / is not ‘diluted’ by
the issue of additional shares.
 Interest charges are an expense of the
business & are paid out before corporation
tax is deducted, while dividends on shares
have to be paid from profits after tax.
 The gearing of the company increases & this
gives shareholders the chance of higher
returns in the future.

External sources of finance: external money raised from sources outside the business
Source of Finance Explanation Advantage Disadvantage
Bank agrees to a business Amount raised can vary from Often High Interest Rates, Bank
borrowing up to an agreed limit day-to-day can ‘call in’ overdraft – force
Bank overdraft as & when required. firms to pay back

Selling of claims over trade

receivables to a debt factor in
Short term

exchange for immediate Any debts to the business can Only a proportion of the value of
liquidity – only a proportion of be received immediately the debts will be received as
Debt factoring the value of the debts will be cash
received as cash.

Delaying the bills for goods & Extra existing finance, no Supplier confidence lost; quick
services to suppliers / creditors interest rates must be paid for payment discounts lost
Trade credit this ‘loan’

Obtaining the use of equipment

/ vehicles & paying a rental /
leasing charge over a fixed
period. This avoids the need for
Avoids raising long-term capital Periodic payments may total
the business to raise long- term
Medium term

to buy assets, leasing company more than one payment, asset

capital to buy the asset.
Leasing repairs/upgrades returned after use
Ownership remains w/ the
leasing company.
An asset is sold to a company
which agrees to pay fixed
Hire purchase repayments over an agreed The asset belongs to the Periodic payments may total
time period – the asset belongs company, purchase made over more than one payment
to the company time

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Interest rates must be paid

back to bank, collateral must be
Medium- term Bank can supply large sum provided
loan quickly

Ltd. Cannot sell shares publicly,

expensive to join stock
Share issue Permanent finance raised by exchange, risk of takeovers,
companies through the sale of some loss of ownership
/ equity finance shares. Nothing needs to be paid back

Usually not secured on an Company must pay fixed rate of

asset, convertible debentures interest each year up to 25
Long-term Bonds issued by companies to can be turned into shares years, if secured on an asset &
bonds / raise debt finance, often w/ a overtime so the company the firm ceases trading the
fixed rate of interest issuing them will not have to investors may sell the asset
debentures
pay it back

Bank can supply a large sum Interest rates must be paid

quickly that does not have to be back to bank, collateral must be
Long term

Long-term loan Loans that do not have to be paid back for awhile provided
repaid for at least one year

Mortgage A legal agreement by which a financer, lends finance by taking title of the debtor's property.

Difficult to receive – the

business has no choice over
Grants Money donated to the business Do not have to be repaid if who gets the grants
by outside agencies conditions are met

They usually invest in small to

medium-sized businesses &
Risk capital invested in risky businesses (technology / Venture capitalists generally
business start- ups / expanding expect a share of the future
Venture capital small businesses that have research) that may find it profits / a sizeable stake in the
good profit potential but do not difficult to raise capital from business in return for their
find it easy to gain finance from other sources investment.
other sources.

Finance for unincorporated businesses

Microfinance: providing financial services for poor & low-income customers who do not have access to banking
services, i.e. Loans & 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. In business ventures that are successful, the crowd funding investors will receive either:

 Their initial capital back plus interest – this is sometimes known as peer-to-peer lending
 An equity stake in the business & a share in profits – when these are eventually made!

Factors influencing the sources of finance

 Use of finance
 Size of existing borrowing
 Flexibility of firm’s need for finance
 Legal structure & desire to retain control
 Amount required
 Cost of debt
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 Time period for which finance is required

 Existing assets of the firm

Selecting the source of finance: the appropriateness of each possible source in a given situation
Forecasting & managing cash flows
Purposes of cash flow forecasts

Need for cash flow planning for entrepreneurs

 New businesses have less credit time

 Banks may not be willing to lend
 Limited finance at the beginning

Cash inflows are the sums of money received by the Cash outflows are the sums of money paid out by
business over a period of time. E.g.: the business over a period of time. Eg:
 purchasing goods and materials for cash
 sales revenue from sale of products  paying wages, salaries and other expenses in
 payment from debtors– debtors are customers cash
who have already purchased goods from the  purchasing fixed assets
business but didn’t pay for them at that time  repaying loans (cash is going out of the
 money borrowed from external sources, like business)
loans  by paying creditors of the business- creditors are
 the money from the sale of business assets suppliers who supplied items to the business
 investors putting more money into the business but were not paid at the time of supply.

Difference between cash & profits

 Profit does not pay the bills & expenses of

running a business – but cash does. Of
course, profit is important – especially in
the long term when investors expect
rewards & the business needs additional
finance for investment.
 Cash is always important – short & long
term. Cash flow relates to the timing of
payments to workers & suppliers & receipts
from customers.
 If a business does not plan the timing of
these payments & receipts carefully it may
run out of cash even though it is operating
Cash flow forecasts in practice: uses of cash flow
profitably. If suppliers & creditors are not
forecasts
paid in time, they can force business
 Preparing for areas of negative cash-flow owners into liquidation of the business’s
– new business start-ups are often assets if it appears to be insolvent.
offered much less time to pay suppliers
than larger, well-established firms – they
are given shorter credit periods
 Required for investors & banks – banks & other lenders may not believe the promises of new business
owners as they have no trading record, they will expect payment at the agreed time
 Planning to reduce negative cash-flow – finance is often very tight at start-up, so not planning
accurately is of even more significance for new businesses.
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Construction of cash flow forecasts, including recognising the uncertainty of cash flows
A cash flow forecast is an estimate of future cash inflows and outflows of a business, usually on a month-by-month basis.
This then shows the expected cash balance at the end of each month. It can help tell the manager:

 how much cash is available for paying bills, purchasing fixed assets or repaying loans
 how much cash the bank will need to lend to the business to avoid insolvency (running out of liquid cash)
 whether the business has too much cash that can be put to a profitable use in the business

The opening cash/bank balance is the amount of cash held by the business at the start of the month

Net Cash Flow = Total Cash Inflow – Total Cash Outflow

The net cash flow is added to opening cash balance to find the closing cash/bank balance– the amount of
cash held by the business at the end of the month. Remember, the closing cash/bank balance for one month
is the opening cash/bank balance for the next month!

Benefits of cash flow forecasting Limitations of cash flow forecasts:

 Mistakes can be made in preparing the revenue
 They show negative closing cash flows. This & cost forecasts / they may be drawn up by
means that plans can be made to source inexperienced entrepreneurs / staff.
additional finance, such as a bank overdraft or  Unexpected cost increases can lead to major
the injection of more capital from the owner. inaccuracies in forecasts. Fluctuations in oil
 They indicate periods of time when negative net prices can lead to the cash-flow forecasts of
cash flows are excessive. The business can plan even major airlines being misleading.
to reduce these by taking measures to improve  Wrong assumptions can be made in estimating
cash flow. the sales of the business, perhaps based on
 They are essential to all business plans. A poor market research, & this will make the cash
business start-up will never gain finance unless inflow forecasts inaccurate
investors and bankers have access to a cash
flow forecast and the assumptions behind it.

Causes of cash flow problems

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 Lack of planning – cash flow forecasts help us plan for the future in terms of the amount of cash
needed. Without planning a business may have insufficient cash reserves.
 Poor credit control – inefficient management of trade receivables. A business must keep reminding its
credit customers about the amount they owe, if not they may become bad debts.
 Allowing customers too long to pay debts – the business may offer too long credit periods when
compared to what it receives from suppliers
 Expanding too rapidly – overtrading will increase cash outflows causing cash flow shortage
 Unexpected events – only estimates, not 100% accurate. There may be unforeseen rise in outflows or
fall in inflows

Methods of improving cash flow

How reducing costs / improving the management of trade receivables & trade payables can improve cash flow

Particular How it can be managed

 Not extending credit to customers – / extending it for shorter time periods

 Selling claims on trade receivables to specialist financial institutions acting as
Trade receivables
debt factors
 By being careful to discover whether new customers are creditworthy
 By offering a discount to clients who pay promptly

Trade payables  Increasing the range of goods & services bought on credit
 Extend the period of time taken to pay

 Keeping smaller inventory levels

 Using computer systems to record sales & inventory levels – thus ordering as
Inventory
required
 Efficient inventory control, inventory use & inventory handling so as to reduce
losses through damage, wastage & shrinkage
 Just-in-time inventory ordering – by producing only when orders have been
received, working capital tied up in inventories will be minimised.

 Use of cash-flow forecasts – as identified above, these can help the

management of cash flows &
Cash
 working capital needs
 Wise use / investment of excess cash
 Planning for periods when there might be too little cash & arranging for
overdraft facilities from the bank to avoid a liquidity crisis.

Further methods of improving cash flows: debt factoring, sale & leaseback, leasing, hire purchase

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Management of trade receivables

 Not providing credit to customers. May lead to fall in competitiveness and loss of sales
 Selling claims to a debt factor. May not receive full payment
 Identify credit worthiness of customers
 Offer discounts for prompt payments

Management of trade payables

 Increasing the range of goods bought on credit. Suppliers may not provide discount or may refuse to
provide further supplies
 Extend the period of time taken to pay. Suppliers may be reluctant to supply

Management of inventory

 Maintain small inventory levels

 Using computer systems to record inventory
 JIT inventory system

Cash management

 Use cash flow forecast

 Plan for future and range external finance when needed

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Working Capital: Working capital the capital required by the business to pay its short-term day-to-day expenses.
Working capital is all of the liquid assets of the business– the assets that can be quickly converted to cash to
pay off the business’ debts. Working capital can be in the form of:

- cash needed to pay expenses

- cash due from debtors – debtors/credit customers can be asked to quickly pay off what they owe to
the business in order for the business to raise cash
- cash in the form of inventory – Inventory of finished goods can be quickly sold off to build cash
inflows. Too much inventory results in high costs, too low inventory may cause production to stop.

Recognition of situations in which the various methods of improving cash flow can be used & working capital

1. There is no ‘correct’ level of working capital for all businesses. Business requirements for working
capital will depend on a number of factors, especially the length of the working capital cycle. For
example, supermarkets can manage on a much lower level of working capital than a shipbuilding
business.
- Too much liquidity is wasteful.
- Too little liquidity can lead to business failure.
2. Managing working capital is not just about looking after cash. Clearly the timings of cash received &
spent are important but other features of management are important too – efficient operations
management will reduce wastage of resources (& money) & cut inventory levels. Efficient marketing
will help to speed up the sale of goods – &, therefore, the cash inflows from this.
3. When businesses expand, they generally need higher inventory levels & will sell a higher value of
products on credit. This increase in working capital is likely to be permanent, so long-term /
permanent sources of finance will be needed, i.e. Long-term loans / even share capital.

Budgets: A budget is a document that translates plans into money - money that will need to be spent to get
your planned activities done (expenditure) and money that will need to be generated to cover the costs of
getting the work done (income).

 Planning for future provides a sense of direction and purpose

 Budget is a detailed financial plan for the future
 Budgets help measure performance of each department/division

Purpose of budgets:
 Planning
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 Effective resource allocation

 Setting targets to be achieved
 Coordination
 Monitoring and controlling
 Modifying
 Measuring and assessing performance

Key Features of Budgeting

 Not a forecast
 Budgets are plans that the business wants to fulfil. Forecasts are predictions made for the future,
given certain conditions
 Can be made for any measurable operation
 Coordination between departments is essential
 Must be made while coordinating with employees who will be directly responsible to meet the targets
 Delegated budget involves giving some delegated authority over the setting and achievement of
budgets to junior managers. This will improve worker motivation

Stages in preparing budgets Setting budgets

1. Objectives and strategies for the coming Incremental budgets
year  Uses last year’s budget as a basis and an
 This is based on previous performance, adjustment is made for the coming year,
external environment and market research specifically for inflation
Zero budgeting
2. Identifying the key or limiting factor  Setting budgets to zero each year and budget
 This is sales – prepared first holder have to argue their case to receive any
 No errors and mistakes can be made here finance
3. Prepare sales budget  Time consuming
 Consult all department managers  Provides incentive for managers to defend their
4. Prepare subsidiary budgets work
 Cost, labour, admin, cash Flexible budgeting
5. Coordinate the budgets to ensure  Cost budgets for each expense are allowed to
consistency vary if sales or production vary from budgeted
levels
6. Prepare a master budget  Helps variance calculation
7. Present to board of directors  If budgeted cost > actual = Favourable variance
 If budgeted cost < actual = Adverse variance

Advantages of budgeting Potential limitations of budgeting

 A means of controlling income and expenditure.  Lack of flexibilities
 Regulate the spending of money and highlight  Focused on short term
losses, waste and inefficiency.  May lead to unnecessary spending
 They act as a review and allow time for  Training needs must be met
corrective action to take place.  Setting budgets for new projects – time taking,
 They allow delegation without loss of control – not realistic
subordinates can be set their own targets.
 They help in the co-ordination of a business and
improve communication between different
sections of the business.
 Budgets provide clear targets to be met and
should help employees to focus on costs.
 Can act as a motivator for staff if budget is met.

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Variance analysis
Variance is the difference between budgeted and actual figures

Important as:

 Measures differences from planned and actual

 Assists in analysing causes of deviations from the budget
 Help make more accurate budgets
 Budgeted costs less than actual – adverse
 Budgeted revenue less than actual – favourable
 Budgeted costs more than actual – favourable
 Budgeted revenue more than actual – adverse

Budgets – evaluation

 Time consuming
 Fails to reflect changes – inflexible
 Helps assess performance
 Provides a sense of direction
 All businesses undertake some form of financial planning

Costs: Cost information

1. The need for accurate cost data

- Accurate profits / losses will allow a business to take effective & profitable decisions, i.e. Where to
locate.
- Cost data are useful to other departments, e.g. marketing managers will use cost data to help inform
their pricing decisions.
- It allows comparisons to be made w/ past periods of time & the efficiency of a department / the
profitability of a product may be measured & assessed over time.
- They can help set budgets for the future which will act as targets to work towards for the departments
concerned & actual cost levels can then be compared w/ budgets.
- Comparing cost data can help a manager make decisions about resource use, e.g. If wage rates are
very low, then labour-intensive methods of production may be preferred over capital-intensive ones.
- Calculating the costs of different options can assist managers in their decision-making & help improve
business performance.

2. Types of costs: fixed, variable, marginal; direct & indirect

- Direct costs: these costs can be clearly identified w/ each unit of production & can be allocated to a
cost centre.
- Indirect costs: costs that cannot be identified w/ a unit of production / allocated accurately to a cost
centre.
- Fixed costs: costs that do not vary w/ output in the short run.
- Variable costs: costs that vary w/ output.
- Marginal costs: the extra cost of producing one more unit of output.

3. Problems of trying to allocate costs in given situations

- Time – allocations take a lot of time for big complex organizations, this drags out the time for financial
close, which is so critical for timely internal & external reporting.

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- Accuracy – without Reciprocal Allocation & without sufficient flexibility, allocations are not as accurate
as they should be.
- Transparency – it is difficult to understand where allocations come from & how they are derived.
- Trust – sometimes people take the position that cost figures are not accurate so there is no point in
making decisions based on cost. Neither attitude is helpful in a corporate setting.

Uses of cost information

 cost information for decision making purposes, e.g. average, marginal, total costs
 how costs can be used for pricing decisions
 how costs can be used to monitor & improve business performance, including using cost information
to calculate profits

Full costing technique

Full costing allocates all costs to each product. If the business is only producing one type of product, then this
is not a problem. In this case, the stages in full costing are:

 Identify and add up all of the direct costs.

 Calculate the total overheads of the business for a given time period.
 Add the total direct costs of making the product.
 Calculate the average cost of producing each product by dividing total costs by output

Contribution & Marginal Costing

Contribution: Contribution is the total revenue – variable costs

It measures how much is being contributed the fixed costs by the units that have been sold

Contribution – Fixed costs = Profit

Can calculate contribution per unit or contribution for all units of output

Marginal costing and decision-making

The difference between unit selling price and unit variable cost is the contribution made by the individual
product towards the firm’s fixed costs. When enough individual contributions have been made, the firm’s total
costs will be covered and it is at break-even point, making neither a profit nor a loss.

Contribution analysis therefore divides costs into their fixed and variable elements. Traditional absorption
costing takes all costs into account when making decisions. A marginal costing approach can be used in
decision-making, based on the argument that factors having no bearing on a decision are ignored. In this
context, we ignore fixed costs on the argument that:

 they have to be paid regardless of income

 the apportionment of these fixed costs between different product lines is often arbitrary.

Discontinuing products

Another area of decision-making involves whether to discontinue an apparently unprofitable product or line.
For example:
A company makes three products, A, B and C. Costs are split one-third fixed and two-thirds variable. Figures
are:

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A B C Total

Sales ($000) 32 50 45 127

Total costs ($000) 36 39 33 108

Profit/(loss) (4) 11 12 19

Should product A be dropped?

Apparently, the overall profit of $19 000 masks a loss of $4000 for product A. Since fixed costs are
apportioned without certainty, we can remove them from the calculations and display the information as a
marginal costing statement:

A B C Total

Sales 32 50 45 127

Variable costs 24 26 22 72

Contribution 8 24 23 55

Less fixed costs 36

Profit 19

Total profit remains the same, but by calculating individual product contributions we can see that each product
makes a contribution towards total fixed costs. On this argument, therefore, product A should be retained.

KEY POINT - Marginal costing approaches take account of contribution made towards total fixed costs, and
avoid the arbitrary apportionment of fixed (indirect) costs to individual products.

Break-even analysis: determining the minimum level of production needed to break-even / the profit made
- The graphical method

The equation method

Contribution per unit: selling price less variable cost per unit.

Contribution= Selling price – total variable cost

Break-even level of output
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Define, calculate & interpret the margin of safety

Margin of safety: the amount by which the sales level exceeds the break-even level of output.

Margin of safety = Current output in units – breakeven output

Margin of safety

 The amount by which current sales level exceeds the break-even point
 Indicates how much sales could fall without the firm going into losses

Uses & limitations of break-even analysis

The benefits of break-even analysis The limitations of break-even analysis

 The assumption that costs and revenues are
 Charts are relatively easy to construct and always represented by straight lines is
interpret. unrealistic. Some variable costs do not change
 Analysis provides useful guidelines to directly with output. For example, labour costs
management on break-even points, safety may increase as output reaches its maximum
margins and profit/loss levels at different rates due to higher shift payments or overtime rates.
of output.  The revenue line could be influenced by the
 Comparisons can be made between different price reductions needed to sell a high level of
options by constructing new charts to show output. The combined effects of these changing
changed circumstances. Charts could be assumptions could create two break-even points
amended to show the possible impact on profit in practice.
and break-even point of a change in the  Not all costs can be easily classified into fixed
product’s selling price. and variable costs. The introduction of semi-
 The equation produces a precise break-even variable costs will make the technique much
result. more complicated.
 Break-even analysis can be used to assist  The break-even chart makes no allowance for
managers when taking important decisions, inventory levels. It is assumed that all units
such as location decisions, whether to buy new produced are sold. This is unlikely to always be
equipment and which project to invest in. the case in practice.
 It is also unlikely that fixed costs will remain
unchanged at different output levels up to
maximum capacity.
 For new businesses, break-even data will be
based on forecasts and these could be
inaccurate.
Break even analysis – uses

 Easy to construct and interpret

 Managers can redraw the graph to see effect of changes in costs and prices on profits and break-even
points
 Helps in decision making
 Gives information relating the margin of safety

Break even analysis – evaluation

 Assumption that costs and revenue is represented by straight lines is unrealistic

 Not all costs can be classified between fixed & variable
 No allowance for inventory levels
 Unlikely that fixed costs remain unchanged throughout

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