BUSINESS

AS 9609

CAMBRIDGE
INTERNATIONAL
NOTES FOR

2023, 2024 AND 2025

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BUSINESS AND ITS ENVIRONMENT (AS LEVEL)
The foundation of Business is to understand what happens within a business. At AS Level
candidates develop an understanding of what a business is, what it wants to achieve and who is
involved. Candidates develop the vocabulary to understand how a business operates and learn how
to analyse what the business does. Every business is different, understanding its context is
important to be able to understand the decisions that it makes and the motivations of those
involved.

Business
- is an organisation formed to provides goods and services to consumers
- is an organisation or economic unit were goods and services are exchanged for one another
or for money
- require resources for them to be able to achieve their aims
- All businesses are formed for a reason; the reason why they are formed is termed the aim.
- In other words aims are that what the business organisation seeks to achieve
- The main reason for establishing a business organisation is to make profit.

The nature of business activity

• Business activity refers to what is undertaken by the business in order to make profit.
• Business activity is regarded as to all economic activities carried out by business during its
course of action.
• Involves creating and adding value to resources.
• Includes all activities that are undertaken in order to produce goods and services.
• There are three business activities, namely; manufacturing, trading and rendering of services.

The purpose of business activity

• To provide goods and services to consumers
• To earn profit from sale of goods and services
• To satisfy human needs and wants
• To achieve customer’s satisfaction
• To contribute to economic development and growth
• To maximise profits
• To create employment opportunities
• To foster innovation
• To use resources to meet customers’ needs
• Enables consumers to enjoy much higher of standard of living
• To use scarce resources to produce goods and services

Factors of production
• are inputs available and needed to supply goods and services

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• are resources available and required to produce goods and services.
• Four factors of production are land, labour, capital, entrepreneurship (enterprise)
• There are four factors of production needed for business activity
• The concept of factors of production is central to understanding how businesses operate.
• These are the resources needed for the creation of goods and services.

Land
• Refers to original and irreplaceable resources from nature.
• Includes all of the renewable and non-renewable resources of nature.
• The role of land is to provide essential raw materials; the quality and availability of land
resources can significantly impact business operations.
• Include; buildings, minerals, oil and forests
• The reward for land is rent

Labour
• Is the skilled and unskilled human effort directed towards the creation of goods and services
• Human effort, both physical and intellectual are used in production.
• Some firms are labour intensive, that is, they have a high proportion of labour inputs to other
factors of production, e.g. house cleaning services.
• Labour Market influences business strategies, with implications for wages, training, and
employment practices.

Capital
• This consists of the finance needed to set up a business and pay for its continuing operations
as well as all of the man-made resources used in production.
• These include capital goods such as computers, machines, factories, offices and vehicles
• Some firms are capital intensive, that is, they have a high proportion of capital to other
factors of production, e.g. power stations.
• The reward for capital is interest.

Enterprise
• An organisation or an individual that takes risk to start a business by initial investment.
• It is any organisation that uses resources to meet the needs of customers by providing a
product or services that they demand.
• Combines the other factors of production into a unit capable of producing goods and
services.
• It provides a managing, decision-making and coordinating role.
• Without this essential input, even very high-quality land, labour and capital inputs will fail to
provide the goods and services that customers need.
• The reward for enterprise is profit.

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 Factor Explanation
1. Land Land refers to all natural resources found on earth together with space
required to set up factories for production take place.
2. Capital Capital refers to money, machinery, equipment and buildings
required for production to take place.
3. Labour Labour refers to the human effort involved when goods and services
are produced. People who produce goods and services are paid wages
and salaries.
4. Entrepreneurship Entrepreneurship refers to people who take the risk to start businesses.
(enterprise) These people are rewarded through profit earned from their businesses.

The concept of adding value

• Adding value is the process of increasing the worth of a product or service
• Occurs when a customer is prepared to pay a price that is greater than the cost of materials
used in making or providing a good or service.
• Added value is the difference between the selling price of the product and the cost of
materials used in the production of goods.
• Methods of Adding Value is done through USPs (Unique Selling Points), quality
improvement, branding, and customer service.
• Leads to higher profits, customer loyalty, and competitive advantage.

Ways of increasing the value of product or service

Method Explanation
1 Increasing the selling If the business has the opportunity to increase selling prices while
. price costs remain unchanged, it can do so. This means more revenue
(income) is earned, increasing added value.
2 Buying cheaper raw The business can look for cheaper suppliers who can provide the
. materials same raw materials at a lower price.
3 Using cheaper labour If the business is able to employ workers at a lower wage rate, it can
. do so. The worker employed should be able to maintain the same
quality of the product.
4 Branding Branding involves the business coming up with a unique name,
. colour or packaging for its product. Branded products can be sold at
a higher price leading to added value.

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5 Reducing waste Reducing waste means saving on cost of production. This means the
. business produces the goods or services at a lower cost, increasing
added value.
6 Adding extra features to The business can include extra features or services that customers
. the product. can pay for as they buy the product. This further increases the selling
price for the product.
7 Advertising Through advertising the business can create a strong brand loyalty
. among its customers and in the process charge more for its goods or
services. Advertising the product or service is a tool to spread
information, persuade customers and convince customer to buy a
product. The business that advertises their product or service have
higher chances of having higher sales and profits.
8 Offering convenience This involves making sure that product is near the customers who
. demand them and this is done by locating near customers or the
strategic location where customers can access the product. If the
product is produced outside the country, they should be imported or
exported to make sure that consumers will access the product or
service. Consumers love convenience. If you get a product or service
without much effort then you might happily pay a premium for it.
For example, free home delivery of your weekly grocery.
9 Creating band Brands represent quality and sometimes status. Consumers are
. prepared to pay more for products which have a strong brand
attached to it. Why does a pair of Nike sell costlier than its
counterpart Puma, though the cost of production may not be much
different.

Benefits of adding value

• Increase sales and profits
• A business can differentiate itself from competitors
• Reduce marketing and advertising costs
• Create brand loyalty
• Enables the business to charge more to its customers

The nature of economic activity, the problem of choice and opportunity cost
- At the heart of economic activity are the concepts of choice and opportunity cost, which are
crucial in business decision-making.

The nature of economic activity

• Refers to the process of business producing and customers buying what the business have
produced.

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• Occurs the business produces goods and the consumers acquire the goods for use.
• The main aim of economic activity is to produce goods and services to make them available
to consumers

The problem of choice

• The problem of choice emanates when they are many choices
• The reasons why choices have to be made is because resources are always limited in relation
to needs and wants.
• Best choices should be made and should serve the interests of the organisation.
• Constraints that the businesses often face constraints like budget, time, and resources that
influence their choices.

Opportunity cost
• Refers to the real cost of making a decision about using resources.
• It is the next best alternative given up when a choice is made.
• It is regarded as the value of the next best opportunity that is lost by taking a particular
decision.
• Businesses need to be aware of the opportunity cost any action before they make final
decision.

The dynamic business environment

• Business environments are not static; they evolve with changes in various external factors.
• Business must monitor their environments and be ready to face any changes.
• The business must be able and willing to change on what they do in order to adapt to market
changes.
• Business environment is dynamic and businesses must adapt to the challenges and formulate
strategies to cope with these challenges.
• The changes that may take place in the business environment include; the actions of other
businesses (competitors), the labour market, new competitors entering the market,
government and economic policies, consumer tastes and demand, the legal framework,
political factors, social and demographic factors and changing technology.

Impact on Businesses
Adaptation and Innovation
- Businesses must continually adapt their strategies to remain relevant and competitive.
Risk Management
- Understanding and managing risks associated with environmental changes is critical.

Why business succeed or fail

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- Identifying the key factors behind business success or failure provides valuable insights for
budding entrepreneurs and business managers.

Reasons why businesses fail

• Poor record keeping
• Lack of cash
• Insufficient capital
• Poor management skills
• Too much borrowing, leading to high interest payments
• Unplanned for competition
• Lack of market knowledge
• Lack of proper research
• Lack of experience and underestimation of time and money pressure
• Not enough passion, commitment and risk assessment
• Lack of well researched objectives and business plan
• Unexpected growth too soon, which stretches resources
• Poor marketing skills
• Poor location
• Poor inventory management
• Over investment in fixed assets
• Personal use of business funds
• Poor credit arrangements
• Weak business idea
• Lack of suitable employees
• Poor initial research
• Over ambiguous
• Poor decisions

Reasons why business succeed

• Proper record keeping
• Suitable location
• Effective management
• Work force with appropriate skills
• Good relationship with customers
• Ability to compete with competitors
• Availability of cash resource
• Quality management skills
• Proper marketing skills

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• Experienced employees
• Proper planning for competition
• Enough passion, commitment and risk assessment
• Market knowledge
• Luck
• Entrepreneurial skills, usually the desire to make profits

Difference between local, national, international and multinational businesses

Local business
• Operates in a small and well-defined parts of a country
• Operate within a specific geographic area
• Their owners do not aim to expand their businesses
• They do not attempt to attract consumers across the whole country
• They serve a small customer base.
• May have limited resources and may struggle to compete with larger companies.
• Have a stronger connection to their community and may be able to offer more personalised
service.
• Have no branches in other cities
• Provides goods and services to the local community.
• Face competition from other local businesses.
• Have strong connection with local customers, flexibility, and lower operational costs

National businesses
• Operate within a single country
• Have a larger customer base than local businesses
• They attempt to attract customers across the whole country
• They have no attempt to establish operations in other countries or to sell internationally
• Have potentially multiple locations.
• Have several branches within the country.
• May have more resources than local businesses
• Face competition from other national companies.

International businesses
• Operate across multiple countries.
• Sell their products and services in more than one country.
• They use foreign agents and online selling
• They focus on exporting goods or services to foreign markets.

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• They face challenges such as language barriers, cultural differences, and varying regulations
in different countries.

Multinational businesses
• Have a presence in multiple countries
• They establish base for either producing or selling products outside their own domestic
economy
• Have operations and management teams in each country.
• Must navigate complex legal and regulatory environments in multiple countries, as well as
cultural differences and language barriers.
• Operate in multiple countries, often with a substantial market influence.
• Have more resources and economies of scale, allowing them to offer lower prices and invest
in research and development.
• Complexities in managing international supply chains, diverse workforces, and complying
with various regulatory environments.

The role of entrepreneurs and entrepreneurs

• An entrepreneur is a person willing to take a risk and start a new business by bringing
together all the resources necessary for success.
• Is a person prepared to take the risk of engaging in a business enterprise
• Is a person who gathers factors of production to produce goods and services
• Is regarded as an individual who establish a new business.

Intrapreneurs
• Intrapreneurs are self-motivated, proactive, and action-oriented people who take the initiative
to pursue an innovative product or service in an organisation.
• referring to employees within a company who apply entrepreneurial skills like creativity,
initiative and risk-taking to their roles.

The qualities entrepreneurs and intrepreneurs need for success

• Self-motivation
• Positive attitude
• Risk taker
• Excellent leadership qualities
• Innovative
• Resourceful
• Low fear of failure
• Good leadership styles
• Good network
• Achievement oriented

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• Desire to achieve
• Ability to solve problems
• Time consciousness
• Independence and self confidence
• Independence and self confidence
• Persistence and patience
• Persuasive
• Seek information
• Desire to feedback
• Concern for customer satisfaction
• Concern for high quality products and services

The role of entrepreneurship in creating value and starting up a business

• Injecting creativity and innovation into business
• Developing new ways of doing business
• Driving innovation and change within the business
• Creating a competitive advantage
• Encouraging original thinkers and innovators to stay in the business
• Provides initial capital

The role of entrepreneurship in the on-going success of a business

Barriers to entrepreneurship
• Identifying successful business opportunities
• Sourcing capital due to lack of collateral security
• Determining suitable location
• Competition from established firms
• Building customer base
• Lack of business opportunity
• Costs of good location
• Lack of customer base

Business risk and uncertainty

• To establish a business is to take a risk
• The risks are in form of business risk and business uncertainty

Business risk
• can be studied through statistical records before establish a business
• can be foreseen, measured and calculated

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• the enterprise has capacity to reduce the business risk such as business failure through
studying what caused some business to fail in the past two or three years
• the enterpriser should come up with some solutions to reduce the business failure
• the business planning is used to reduce risk

Business uncertainty
• cannot be foreseen, measured and calculated
• they are impossible to predict eg the COVID 19 for the year 2020
• they are very difficult for the business to prepare for it
• they cause a fall in spending by customers
• they may cause newly set up businesses to close

The role of business enterprise in the development of a country

• For Creation of employment
• Encourages the use of local resources
• Reducing foreign dominance of the economy
• They pay taxes
• They increase the GDP of the country
• They satisfy the needs and wants of the people
• They bring foreign currency if the products are sold outside the country
• Reducing poverty levels
• Promotion of entrepreneurial culture
• It promotes economic growth
• Business survival and growth
• Innovational and technological change
• Bring foreign currency through exporting to foreign markets
• Increase social cohesion

Business plans
• This is a written document that highlights the objectives of the business and steps to be
followed in order to achieve these objectives
• Is a road-map, an outline, a document that explains business goals and how to achieve them
• It indicates where the business is, where it wants to move to, how and when.
• A business plan is done before the business starts operating

Key elements of business plan

1. Executive summary
• an overview of the new business and its strategies
• is the first section of the business plan
• is summary of the whole business plan

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• provides a short, concise and optimistic overview to capture the attention of the reader
• gives readers a high-level view of the business and the market before enter into details

2. Description of the business opportunity

• details of the entrepreneur’s skills
• experience
• nature of the product
• the target market at which the product is aimed

3. Marketing and sales strategy

• details of why the entrepreneur thinks customers will buy the product and how the business
will sell to them
• includes how the business will make its product or service
• includes how to make the product or service known by customers
• identify the geographical location of the targeted market
• identify the demographic of the targeted market
• identify where your target market spends most of the time; that is whether on social media or
physical location
• identify how market research will be conducted to get some feedback

4. management team and personnel

• details of the entrepreneur’s skills and experience and the people they intend to recruit
• The section introduces the leaders and management of the business
• Identifies who will manage the business
• Identify the qualifications of the management and their responsibilities in business
• Shows organisational chart that shows the hierarchy of the organisation
• Identifies the one who is responsible for key functions and decision making
• Indicates the position of board of directors, an accountant and management

5. Operations
• premises to be used, production facilities, IT systems
• It outlines how the product will be made and the resources required.

6. Financial forecasts
• The future projections of sales, profit and cash flow for at least one year ahead.
• is the most crucial part of the section of the business plan to the financiers and investors
• involves the initial capital and expenses
• shows the budgeted or projected financial statements such as income statement, statement of
financial position and statement of cash flows
• also shows the break-even determination

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• It shows the source of finance for the business, the cash flow forecast and the profit forecast.

The benefits of business plan

• forces the owner to think seriously about the proposal, its strengths and any potential
weaknesses
• Gives the owner and managers a clear plan of action to guide their actions and decisions in the
early months and years of the business.
• Gives the entrepreneur a planning culture
• provides a guide on a business intends to achieve
• provides a timeline of when a business can expect to achieve its goals
• provides a clear way to track progress as the business grows
• enables the business to predict and plan for any potential risk
• provides investors with information for decision making
• facilitates loan application and overdrafts
• acts as a future map of the business
• helps to attracts investors and finance providers
• helps to monitor the progress of the business organisation
• provides organisational structure of the business

Limitations of the business plan

• It creates a false sense of certainty in business owners.
• It is based on forecast and predictions
• The plan might lead entrepreneurs to be inflexible.

Business structure
Businesses operating in a country can be in any one of the following sectors of industry:
1. Primary sectors
• Is the first stage of production
• The primary sector is made up of businesses involved in extraction of resources from
nature, growing crops rearing animals and harvesting raw materials.
• Activities involved in the primary sector are: mining, fishing, farming and harvesting crops
and forests.
• Raw materials obtained from the primary sector are transferred to the secondary sector.

2. Secondary sector
• Is the second stage of production
• is made up of businesses involved in changing raw materials into finished goods
• They convert raw materials into finished or semi-finished goods.
• Activities involved in the secondary sector are: manufacturing, processing, construction and
assembly.

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• Materials used in production are obtained from primary production

3. Tertiary sector quaternary sectors

• The tertiary sector is made up of businesses that provide services to individuals.
• These are called personal services.
• Services are also provided to businesses.
• These are called commercial services.
• Assist both primary and secondary sector
• Activities involved in the tertiary sector are: transport, banking, insurance, education, health
care, catering, retailing, training and communication.

The public and private sectors and businesses within those sectors
- The business organisations are classified into public and private sectors.
- Their main aim is to make profit through the sale of private goods.
- Business in private sector businesses include:
• Sole trader
• Partnership
• Private Limited Companies
• Public Limited Companies
• Co-operatives

Public sector
- Public sector business refers to all the businesses that are owned by the government on behalf
of the public.
- They are owned and controlled by the state. 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.
- Public-sector organisations do not often have profit as a major objective.

Advantages of public sector

• They are managed with social objectives rather than solely with profit objectives.
• Loss-making services might still be kept operating if the social benefit is great enough.
• Finance is raised mainly from the government.
• They provide important goods and services at reasonable prices
• Provide employment to the majority
• Implement government policies e.g charge low prices to reduce inflation
• They are a source of income to the government

Disadvantages of public sector

• There can be a tendency towards inefficiency due to lack of strict profit targets.

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• Subsidies from government can also encourage inefficiencies.
• Government may interfere in business decisions for political reasons, for example by opening
a new branch in a certain area to gain popularity.
• They are inefficient and very wasteful due to the lack of profit motive
• They tend to provide poor quality goods and services due to the absence of stiff competition
• Lack of motivation among workers leads to inefficiency
• They suffer from excessing political interference

The reasons for and consequences of the changing relative importance of these sectors

(a) Changing from primary to secondary sector.

Businesses may shift from the primary sector to the secondary sector because of the following
reasons:
• There is reduction of raw materials such that it is becoming expensive or difficult for
businesses to continue extracting raw materials. This is common in mining where it may
become expensive or risky to continue mining.
• Laws have changed in a country. New laws to protect the natural environment make it difficult
for businesses to continue extracting resources from nature.
• Cheaper raw materials have been found in another country leading to loss of market for the
local businesses.

Consequences of industrialisation: benefits

• Total national output (gross domestic product) increases and this raises average standards of
living.
• Increasing output of goods can result in lower imports and higher exports of such products.
• Expanding manufacturing businesses will result in more jobs being created.
• Expanding and profitable firms will pay more tax to the government.
• Value is added to the country’s output of raw materials, rather than just exporting these as
basic, unprocessed products.

Consequences of industrialisation: problems

• The chance of work in manufacturing can encourage a huge movement of people from the
countryside to towns, which leads to housing and social problems.
• Imports of raw materials and components are often needed, which can increase the country’s
import costs.
• Much of the growth of manufacturing industry is due to the expansion of multinational
companies. These can have a negative impact on the economy too.

(b) Changing from secondary to tertiary sector.

Businesses may shift from secondary to tertiary sector because of the following reasons:

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• As the standard of living of people improves in developed countries, they focus prefer personal
services rather than physical products. People are more interested in entertainment, internet
and online shopping.
• Manufacturing businesses in developed countries are losing market to cheap products from
developing countries.
• Tertiary sectors employ more people that primary and secondary sectors. In secondary sectors,
labour is being substituted by robots and automation.

Consequences of deindustrialization
The consequences of the decline in the relative importance of the primary and secondary sectors
and the increase in relative importance of the tertiary and quaternary sectors include:
• Job losses in agriculture, mining and manufacturing industries
• movement of people towards towns and cities
• Job opportunities in service industries – tertiary and quaternary sectors
• Increased need for retraining programmes to allow workers to find employment in service
industries.

Business ownership
- The ownership is classified into private and public sector
- Private sector comprises businesses owned and controlled by individuals or groups of
individuals
- Public sector comprises organisations accountable to and controlled by central or local
government (the state).

Limited liability
- The term limited liability means that, in the event that the company fail to pay its debts, each
shareholder can only lose their original investment into the company.
- In companies, shareholders’ liability is limited to their investment. This protects personal
assets but often involves more regulation.
- The liability of the shareholders is limited to the shares that they own in the company.
- So a company is fully liable on its debts.
- The limited liability distinguishes limited company from the sole trade and partnership
business.
- Partnership and sole trade businesses have unlimited liability and this means if the business
fails to pay its debts, owners are forced to sell their properties to pay the business debts.

Importance of Limited Liability to the success of the business

- Gives confidence to the shareholders on protection of their personal assets, and therefore
investors can invest more into business without fear of losing their personal assets.

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Unlimited Liability
- This means investors or owners of the business are liable to pay the debts of the business in
the event that the business fails to settle the debts.
- In sole traders and partnerships, owners are personally responsible for all business debts,
risking personal assets.
- There is no protection of personal assets of the owners and this therefore, they have capacity
to lose them in the event that the business has failed to the settle the debt.

Private sector
- refers to the segment of the economy that is owned and run by private entrepreneurs
- comprised by organisations that operate in pursuit of profit, therefore it only provides goods
and services to people who can afford them.
- Include sole traders, partnership, limited (public and private) companies, cooperatives,
franchises, ventures and social enterprises

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.

Advantages
- easy to form (less capital and legal requirements)
- owner has direct control of the business (makes decisions that best suit his/her conditions
- all profits go to the owner
- enjoys major exemptions from Government legislation
- no double taxation
- has personal contact with both customers and employees
- easy to terminate

Disadvantages
- unlimited liability
- can raise little capital
- limited management expertise
- poor quality decision making
- difficulty in attracting qualified employees
- lack of continuity when the owner dies

Partnerships

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- a business owned by at least two but not more than twenty people with the common objective
of maximising profit.
- 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
- The formation and control of the partnership is governed by the document known as
partnership deed.
- The partnership deed is the document drafted by partners showing their agreements in terms
of the formation and how the partnership will be operated.

The partnership agreement has the following contents:

• The name and address of the business
• The amount of capital contributed by each partner
• The rate of interest on partners’ loans
• The rate of interest on partners’ drawings
• The rate of interest allowed on partners’ capital
• The profit or loss sharing ratio
• The salary, bonuses and commission entitled to active partners
• Circumstances in which partnership is dissolved

Partnership Act 1890

- This is a document which was drafted by parliament on behalf of the government.
- The Act governs the partnership when there is no partnership agreement.
- The Act has the following contents;
• No interest is charged on partners’ drawings
• No interest is allowed on partners’ capital
• Profits and losses are to be shared equally
• All partners contribute equal capital
• No salaries to partners
• Interest on partners’ loan is 5%
• Equal duties and responsibilities, therefore no active and sleeping partners.

Advantages
- easy to form (same as sole proprietor)
- more capital available
- diversity of skills and expertise
- quality decisions are made
- personal contact with employees and clients

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- risk is spread over a number of people
- relative freedom from government control

Disadvantages
- unlimited liability i.e all of the owner’s assets are potentially at risk
- disagreements may easily lead to winding of the business
- all partners responsible for the acts of each other
- lack of continuity when the key partner dies 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 owner(shareholder) 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.

Features of Joint Stock Companies / limited Companies

- separate legal entity
- shareholders have limited liability
- owners are called shareholders (buy shares)
- shareholders receive dividends as return on investment
- the Board of Directors manages the affairs of the company
- the company is governed by Memorandum and Articles of Association
- shareholders hold Annual General Meetings (AGMs)

Private Limited
- 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

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Advantages
- shareholders have limited liabilities
- more capital can be raised
- greater status than an unincorporated businesses
- easy to transform into public limited companies
- do not have to publish annual accounts in the press

Disadvantages
- not easy to form (up to six months)
- has to fill complex tax forms
- cannot raise capital through the stock exchange
- quite difficult for the shareholders to sell shares

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.

Advantages
- easy to raise capital through floating shares on ZSE
- can operate on a large scale
- unlimited life
- employees can become shareholders-increases loyalty
- managers and directors have room to work independently therefore prove their expertise in
their areas of specialization
- shareholders enjoy limited liability

Disadvantages
- difficult to form
- files always open for inspection by members of the pubic
- decisions take time to make due to large size of the company
- no personal touch between employees and customers
- conflict of interest-shareholders are usually interested in expanding the business

Franchising

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- 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.

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 states the duration of the franchise contract

Advantages to the franchisee

- Franchisee benefit from pre-opening support e.g site selection, design, financing
- Franchisor assist in training staff
- Franchisor advertise goods on behalf of the franchisee (saves money)
- Franchisee enters into an existing market which increases the chances of business success.
- Risk is reduced and is shared by the franchisor.
- Relationships with suppliers have already been established.

Disadvantages to the franchisee

- The franchisor might go out of business, or change the way they do things.
- The franchise agreement usually includes restrictions on how you run the business. You might
not be able to make changes to suit your local market.
- The franchisee must pay initial fee and continuing fees to continue to use the trade mark
- The franchisee cannot sell goods from other suppliers
- Breach of contract can result in a penalty charge

Advantages to the franchisor

- It’s a source of income to the franchisor (royalties received)
- Risk of the business is spread among different franchisees
- A network of outlets gives the business a far better chance of success

Disadvantages to the franchisor

- Other franchisees could give the brand a bad reputation.

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- Franchisor must provide the franchisee with on-going support which then requires constant
research
- Setting up a franchise requires a lot of money

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

Advantages
- It is easy to form e.g any ten adults form a co-operative
- No legal formalities are involved
- Membership is open to everyone
- Members enjoy limited liability
- Members get goods and services at reasonable prices
- There is continuity
- Surplus is shared among members
- State patronage (government provides special assistance to the co-operatives to enable them to
achieve their objectives successfully
- They are usually tax exempted

Disadvantages
- unable to raise large amount of financial resources
- It is managed by members who may be lacking the required management skills
- Can be affected by conflict since it is an association of people from different social, economic
and academic background
- Absence of rewards discourage the members to put maximum effort in the society

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.
- 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 Sonny and Ericson formed Sonny Ericson to produce handsets.

Joint Venture Agreement Should cover:

- The parties involved
- The objectives of the joint venture

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

Advantages
- Provide companies with the opportunity to gain new capacity and expertise
- Allow companies to have access to new technology
- Access to greater resources, including specialised staff and technology
- Sharing of risk with a venture partner

Disadvantages
- The business failure of the partner would put the whole project at risk
- Styles of management and culture might be so different that the two teams do not blend well
together
- The parties don’t provide enough leadership and support in the early stages
- Errors and mistakes might lead to one blaming the other for mistakes

Social enterprise
- A business with mainly social objectives that reinvests most of its profits into benefiting
society rather than maximising returns to owners.
- 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.
- are not charities, but they do have objectives that are often different from those of an
entrepreneur who is only profit motivated.
- is a proper business that makes its money in socially responsible ways and uses most of any
surplus made to benefit society.
- Social entrepreneurs are not running a charity, however, they can and often do keep some of
any profit they have made.
- Social enterprises compete with other businesses in the same market or industry.
- They use business principles to achieve social objectives.

Social Enterprises
Social enterprises are businesses that operate with the primary goal of achieving social objectives.
Characteristics:
- Social or Environmental Objectives - Committed to achieving specific social,
environmental, or community objectives.

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- Commercial Strategies - Uses business methods and practices to generate revenue.
- Reinvestment of Profits: Profits are primarily reinvested to support their social mission.
- Diverse Ownership Forms: Can be owned and operated by a wide range of entities, including
non-profits, charities, or community groups.
- Suitability: Ideal for entrepreneurs and organizations focused on creating social value, often
blending innovative business models with social goals.
- They directly produce goods or provide services.
- They have social aims and use thical ways of achieving them.
- They need to make a surplus or profit to survive as they cannot rely on donations as charities
do.
- They operate for the well-being 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

The objective of social enterprise (The triple bottom line)

- Social enterprises often have three main aims.
- These aims are often referred to as the triple bottom line.
- Triple bottom line is used to measure the performance of a business:
- These aims are often referred to as the triple bottom line.
- This means that profit is not the sole objective of these enterprises.
- These are:

Economic
- make a profit to reinvest back into the business and provide some return to owners

Social
- provide jobs or support for local, often disadvantaged, communities

Environmental
- to protect the environment and to manage the business in an environmentally sustainable way.

Advantages
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:

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- 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.

Size of business
• This refers the scale of organisation and operations of a business enterprise
• Thus, refers to the scale which the business operates
• There is no objective way to measure the size of a business organisation

Measurements of business size

- There are several ways of measuring the size of the business.

Number of employees
• This refers to number of workers of the business organisation
• This is the simplest measure and is easy to understand.
• It is clear that a business employing many employees is likely to be large.
• This method involves comparing the number of workers employed by each business
• This method assumes that the more employees the organisation employs the bigger the
business.
• A business with thousands of employees is considered large
• A firm employing few numbers of people is considered small
• The method is suitable on measuring service-oriented businesses such as restaurant which
labour intensive

However
• The method is not suitable for measuring the capital intensive and labour-intensive businesses.
This is because a highly mechanised process will employ fewer workers than a business using
labour intensive methods.
• business which uses more machinery and technology may have few employees but they still
might be big.

Capital employed
• This refers to the total value of long-term finance used in business

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• is the total value of long term capital invested in a business organisation. It includes the
funds provided by the owners of the business (equity capital) and long term borrowings e.g.
loans and debentures.
• The greater the capital employed is the greater the business enterprise
• The more the capital that is invested in a business the bigger the organisations’ size.
• Businesses with greater capital employed have more assets to its name because the capital
employed is used to finance the acquisition of assets.
• A business with higher capital employed is considered to be a large business for instance, a
sole trade may need $14 000 for investment whilst a limited company may require $400 000.
• The business with less capital employed is considered small.

However
• Comparisons between firms in different industries may give greater misleading picture
• Two different firms employing the same number of people might have different capital needs
• This method is however biased against labour intensive organisations.

Value of output
• This method involves comparing businesses basing on value of their annual production.
• A business that produces goods with more value in a year is considered large
• A business that produces goods less value in a year is considered small
• The method is suitable to measure businesses in the same industry

However
• not all goods produced by a business are sold
• A business may produce more but fail to sell all goods produced
• This makes it to be a smaller business when value of sales is used

Sales turnover
- refers to the total amount of money a business generates from sale of its goods or services
- This can give an indication of the overall size of the business
- The larger the sales, the larger the business
- A business with low turnover is regarded as a small business
- The method is suitable when measuring business in the same industry

However
- The comparison is compromised as some firms sell high value items while others sell low
value items
- Can be high due to the sale of only few high value items
- A business may be going through a bad phase and may not have huge sales

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- It does not take into account the pricing strategies or changes in market conditions, which may
not reflect the actual size of the business

Market share
- Is the total proportion of the market that a business control
- This can give an indication of the business’s size in relation to its competitors
- It provides an indication of the business’s relative size compared to its competitors in market
- Market share is easy to calculate and widely used in business, making it easy to compare a
company's size with other in its industry
- The greater the market shares the bigger the size of the firm.
- This method is fair on both capital and labour-intensive businesses.

However
- A business may not be a market leader but still may be huge
- It only considers the company's performance in specific market and doesn’t take into account
other markets or industries
- may not reflect the size of the business in industries where market size is small or declining
- Some businesses operate in a multiple-markets or have diverse range of products or services

Stock market capitalisation

- This refers to the total value of company’s outstanding shares of stock
- Is the company's value based on current share prices on the stock exchange
- It provides an indication of the size business based on its stock market value, which reflects
the market's perception of the company's future
- The bigger the market capitalisation is the bigger the business
- A business with low value of shares is considered small
- The method is suitable on measuring the size of the businesses listed on stock exchange

However
• The method is not suitable to measure the size of business not listed on stock exchange. This
is because they do not trade their shares at the stock exchange.
• Markets are very volatile and share prices changes every-day which does not change the size
of the business

Physical size
• This refers to the total area of land or floor space occupied by a business
• This can give an indication of the size of the business in terms of its physical presence
• It provides a tangible and concrete indication of the business’s size in terms of its physical
footprint and infrastructure

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• Can give an insight into the business’s ability to acquire and use resources, such as land,
buildings, or equipment, which is important for its operations and competitiveness
• Is easy to measure and can be used to compare a company’s size with others in its industry

However
• It ignores other factors such as revenue, profitability and market share
• In some industries, such as technological or software, the physical size of a business may not
be an accurate indicator of its size as it may have high proportion of digital or intangible assets

Profits
• This refers to profits obtained from normal operations of the business
• A business with higher profits is considered large
• A business with lower profits is considered small

However
• A large business may have problems and make only small profits over a period of time
• different businesses may have different way of determining profits
• Different policies are adopted by different businesses when determining profits
• For instance, depreciation, methods of inventory valuation which have effects on profits

1.3.2 Small businesses

• A small business is a business which functions on a small-scale level
• involves less capital investment and few number of labour and fewer machines operate
• Are small scale industries or small businesses that operates in small scale
• Is a privately owned corporation, that is partnership and sole trader operates in small scale

Advantages of being a small business

• The owner of small business is able to retain more power and control over the business than if
they grew larger and involve more people in management or ownership of the business
• employees in small business might all be known to the owner of the business, leading a better
working relationship that can in turn lead to more loyalty from employees
• Small businesses offer personal services to customers
• can be managed and controlled by the owners that is a little risk of losing control
• often able to adapt quickly to meet changing customer needs – especially if the owner deals
directly with customers
• offer personal service to customers to help build customer loyalty
• if family-owned, the business culture is often informal, employees are well-motivated and
family members perform multiple roles
• can usually be started up and operated with low capital investment

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Disadvantages of being a small business
• Sometimes find it difficult for them to obtain loans from banks due to lack of collateral security
• Stiff competition from large businesses
• may have limited access to sources of finance
• the owner has to carry a large burden of responsibility and is usually unable to afford to employ
specialist managers
• if the owner or important workers are absent/ill, other employees may not have the necessary
skills to operate the business
• may not be diversified, so there is a greater risk of external change having a negative impact
• few opportunities for economies of scale – average costs could be high
• Lack of reasonable premises
• Limited capital which hinders the growth of the small business
• Smaller number of employees might mean that the business lacks opportunity to employ a
range of specialists
• Due to not enjoying economies of scale, the cost of goods and materials might be higher than
those paid by larger businesses. This could mean that a small business must charge a higher
price and therefore could struggle to remain competitive with large businesses
• The business might have to specialise on one product or small range. This could expose it to
larger businesses, who can offer variety

Family businesses
• These are businesses in which all the owners are related members of one family

The strengths of family businesses

• A business has a better sense of direction when strategy has been agreed by family
• There is a common sense of purpose
• They are often able to take longer term view, in contrast to most shareholders who often want
quick returns
• Family members will work hard to avoid problems which might, in some cultures, lead to
shame on the family
• The family bonds should lead to a stronger working relationship
• The family employees will all know how to approach one another when discussion is needed

The weaknesses of family business

• Family feuds might affect the working relationship
• Nepotism can lead to inappropriate appointments to key positions
• It is easier to misappropriate profits and resources

The importance of small businesses and their role in the economy

• They create employment

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• They can be important suppliers to larger businesses
• Improves efficiency in the economy
• Contribute to government revenue through paying tax
• Acts as suppliers to large organisations
• Might be bigger in future
• Often cater for local demand
• Small businesses are flexible and respond easily to changes in demand
• They create competition for larger businesses
• Bring foreign currency through international trade

The role of small businesses as part of industrial structure in some industries

• are often a crucial part of the supply chain, such as small manufacturers supplying various car
parts to a large car manufacturer
• Small businesses might provide some specialist services for the large businesses
• Recruitment of staff is often undertaken by small businesses working to meet the needs of
large businesses in many industries situations

Business growth
• Refers to an increase in the scale of operations, expanding production and increasing the sales
and profit of a firm
• Is the process of improving or enhancing one or more areas of business enterprise success
• Is the process used to expand the operations of the business
• Businesses do this in order to improve their chances of increasing their customers, revenues
and profits

Limitations of Growth to Business

- Expansion that is too rapid can lead to cash flow problems.
- Sales growth might be achieved at the expense of lower profit margins.
- Large businesses can experience diseconomies of scale.
- Using profits to finance growth, “retained earnings”, can lead to lower short-term returns to
shareholders.
- Growth into new business areas and activities away from the firm’s core activities can result
in a loss of focus and direction for the whole organisation.

Internal growth
• Is when a business expands without involving other businesses
• Expansion of a business by means of opening new branches, shops and factories.
• Is the expansion of 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

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• It is also known as organic growth.
• This can be quite slow.
• It avoids the problems of excessively fast growth, which tend to lead to inadequate capital
(overtrading) and management problems associated with bringing two businesses together.
• An example of internal growth is where a retail business open more shops in towns and cities
where it previously had none

Why a business might grow internally (organic growth)

• to gain benefits of economies of scale
• To increase the potential for sales and hopeful profits
• To become more influential business in the market and therefore perhaps have more power
over the price of the goods or services sold
• To gain more bargaining power with its suppliers
• To gain a larger market share and therefore more influence in the market
• To avoid takeovers by other hostile companies
• To create larger public profile
• To increase potential value of the business
• To ensure there is less chances of being squeezed out by larger businesses
• To be able to access new markets and new customers
• Greater security arising from a stronger market position

How a business might grow internally

• Purchase more equipment and premises
• Seek more orders for its products or services
• Diversify into other products or services
• Sell more by entering into new markets
• Expands production capacity
• Develop better production techniques to produce more products and services
• Opening new branches

External growth
• Is the growth of a business by buying other companies rather than by expanding existing sales
or products
• is also referred to as integration as it involves the joining of two or more firms, it takes different
forms of integration.
• This can be acquisition or takeover of other business or merging with them

horizontal integration
• it occurs when two firms which are in exactly the same line of business and at the same stage
of production process joined together

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• This involves the merging of firms operating in the same industry and at the same stage of
production.

Merits of horizontal integration

• It reduces the risk of failure
• Enjoy economies of scale
• Eliminates competition
• Increase power over suppliers
• Easy to manage as compared to conglomerate mergers
• It increases the financial strength of an enterprise
• Increased market share and profits
• Prevents price wars
• Lead to rationalisation of the business operations
• Reduce competition and market domination
• possibilities of cutting costs
• Access to different markets
• There is possibility of greater market strength

Demerits of horizontal integration

• It may create monopoly
• May bring publicity because of issue of rationalisation
• Needs higher level of responsibility

Vertical integration
• It rises when two or more firms merging together but a different stages of production
• This involves the integration of businesses operating in the same industry but at different
levels of activity.
• Is categorised into backward and forward integration

Backward 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.

Advantages of backward integration

• Give greater control over the quality, price and delivery times of the supplier
• Eliminates the profit margin demanded by another supplier
• Greater control over suppliers
• Better cost, inventory and quality control

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• Increases profitability of the business

Disadvantages of backward integration

• Lack of experiences of managing a supplying company
• Supplying business may become complacent due to having a guaranteed customer
• Lack of control over the customers
• May limit competition in supplies

The impact on stakeholders

• May limit competition in supplies
• Customers may get reduced prices and better quality
• Easier for management to monitor and control processes

Forward integration
• it occurs when a business joins with another which is in the same industry, but at a next stage
in the production process i.e 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 of forward integration

• It gives control over quality and delivery times of supplies
• It encourages joint research and development into improved quality of components
• The business may now control supplies of materials to competitors
• Greater control over promotion and pricing of the products
• Eliminate the profit margin expected by the firm in the next stage of the production process
• Increases the capital base of the business
• Increased financial strength of the business organisation

Disadvantages of forward integration

• The business may lack experience of managing a supplying company – a successful steel
producer will not necessarily make a good manager of a coal mine
• The supplying business may become complacent due to having a guaranteed customer
• Lack of experience in this sector of the industry
• Lack of control over the suppliers
• Management problems may set in

The impact of forward integration to stakeholders

• Workers may have more career opportunities
• Closer relationship with customers
• More job opportunities

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• Customers may have less choice as competitors may no longer have prominence
• Managers have greater control but less experience
• Consumers may obtain improved quality and more innovative products
• Control over supplies to competitors may limit competition and choice for consumers
• Profit might rise to benefit shareholders

Conglomerate diversification
• 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. Eg a car
manufacturer joining with a hotel business
• Is also called diversification

Advantages of conglomerate diversification

• Reduces risk of losses
• Profit margins can be increased due to other businesses
• There is increased market share. Conglomerates are very large businesses that are able to reach
customers in different parts of the world.
• Producing and selling a wide range of products allow conglomerates to spread risk. If demand
is not high in one sector, they rely on the other sectors.
• Companies in a conglomerate are able to share ideas and technology since they are coordinated
by the same parent company.
• The conglomerate enjoys economies of scale by buying inputs in bulk at reduced prices for all
companies and also advertising for all companies under the same brand name.

Disadvantages of conglomerate diversification

• Risk of failure might increase due to lack of experience in the new market
• Entry problems might occur
• If the business is new then it’s difficult to lower down the prices as compared to established
firms

Impact of conglomerate
• Risk for all stakeholders will change
• Management more difficult to co-ordinate
• corporate objectives may become diverse
• Wider customer base
• New job opportunities new skills needed

Takeover
• is the purchase of a company (the target) by another company (the acquirer or bidder).

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• Whether the takeover is friendly or hostile, the resulting transaction results in the merging of
the two companies into one.

Friendly takeover or merger

• In a friendly takeover, the target company’s management and board of directors approve the
takeover proposal and help to implement it
• The management advises shareholders to vote in favour of the deal

Hostile takeover
• in a hostile takeover, the management and board of directors of the targeted company oppose
the intended takeover.

Why a merger/ takeover may achieve its objectives

• The integrated businesses will be able to share research facilities and pool ideas that achieve
better results than the two separate businesses.
• The economies of operating a larger scale of business, such as buying supplies in large
quantities, should cut average costs and increase efficiency.
• The larger combined business can save on marketing costs and distribution costs by using the
same sales outlets and sales teams.
• Rationalisation of property and other assets will reduce duplication and costs.

Why a merger or takeover may not achieve objectives

• The integrated firm is too big to manage and control effectively. This is a diseconomy of scale.
• A different business and management culture. For example, the approach each company takes
to environmental issues may be so different that the two sets of managers and workers may
find it very difficult to work effectively and cooperatively together.
• There may be little benefit from combined research departments or marketing/distribution
facilities if the original businesses produced different products.
• The rate of growth is too rapid for the directors to manage effectively.

Financial problems of merger or take over

• Takeovers can be very costly, stretching the financial resources of the business.
• Additional fixed capital and working capital will be required quickly
• A merger/takeover could lead to negative cash flow and an increase in long-term borrowing
and interest payments

Possible strategies to overcome financial problems of merger or take over

• Uses internal sources when possible, for example retained earnings
• Raise finance from share issues
• Offer shares, not cash, to pay for a takeover

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Managerial problems of merger and takeovers
• Existing management may be unable to cope with problems of controlling an operation which
may have doubled in size overnight.
• There may be a lack of coordination between the divisions of an expanding business – a real
problem for integrating businesses.
• The culture clash between the two management teams may be very great.

Possible solutions for management problems

• New management systems and structures are required: a policy of delegation and employee
empowerment should reduce the pressure on senior managers.
• A decentralisation policy could provide motivated managers with a clear local focus.
• A new management culture needs to be put in place rapidly

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.

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.
- 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 Sonny and Ericson formed Sonny Ericson to produce handsets.

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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
- Provide companies with the opportunity to gain new capacity and expertise
- Allow companies to have access to new technology
- Access to greater resources, including specialised staff and technology
- Sharing of risk with a venture partner

Disadvantages
- The business failure of the partner would put the whole project at risk
- Styles of management and culture might be so different that the two teams do not blend well
together
- The parties don’t provide enough leadership and support in the early stages
- Errors and mistakes might lead to one blaming the other for mistakes

Business objectives
• A business objective is an aim, target or goal that a business wants to achieve
• Business objectives act as the backbone of an organisation, influencing every aspect of its
operations, from strategic planning to daily activities.
• Refers to stated, measurable targets of how to achieve business aims or the targets that must
be achieved to in order to realise the aims of the business
• The aims and mission statements of a business share the same problems, they lack specific
detail for operational decisions and they are rarely expressed in quantitative terms.
• Corporate or strategic objectives are much more specific.
• They are based upon the business’s central aim or mission, but they are expressed in terms
that provide a much clearer guide for management action or strategy.

The 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

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• 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

Limitations to Business Objectives

- They can demotivate workers if they are unattainable.
- Formulation of objectives can be time consuming.
- Objectives might change over time leading to constant review of the objectives from time to
time.
- They show what is to be achieved not how it will be achieved.

SMART OBJECTIVES
- These are clear ideas of what the business is trying to achieve.
- They are set goals and principles that a business seeks to achieve.
- The most effective business objectives usually meet the following SMART criteria:

S - Objectives should focus on what the business does and should apply directly
to that business.
- They must be precise and concise implying that a good objective should be
brief and straight to the point.
- It must clearly state what has to be achieved, eg increased profits
- The objective is specific to this business.
M - Objectives that have a quantitative value are likely to prove to be more
effective targets for directors and staff to work towards
- The objective be capable of being measured objectively, this implies the
desired outcome should be quantifiable implying it should be expressed in a
number value such that can be measured, e.g. increase profits by 10%.
A - Objectives must be achievable.
- Setting objectives that are almost impossible to achieve in a given time will
be pointless.
- They will demotivate staff who have the task of trying to reach these targets.
R - 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.
- For example, informing a factory cleaner about ‘increasing market share’ is
less relevant than a target of reducing usage of cleaning materials by 20%.
T - A time limit should be set when an objective is established. For example, by
when does the business expect to increase profits by 5%?
- Without a time limit it will be impossible to assess whether the objective has
actually been met.

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Corporate Objectives include:
• Profit maximisation
• Profit satisfying
• Growth
• Increasing market share
• Survival
• Corporate social responsibility (CSR)
• Maximising shareholders value

a) Profit maximisation
• It is the main aim for most of private firms.
• The primary aim is to increase profitability, ensuring shareholder returns and business growth.
• Profits are essential for rewarding investors in a business and for financing further growth, and
are necessary to persuade business owners and entrepreneurs to take risks.
• Profit maximisation means producing at the level of output where the greatest positive
difference between total revenue and total costs is achieved.
• Profit maximisation refers to the greatest positive difference between total revenue and total
cost.
• Total revenue is obtained by multiplying price per unit and the total number of units sold.
• Profit is very important for businesses because it is used for rewarding the investors (owners
of the business).
• Profit is also used for business expansion in the future (ie to finance internal growth)

Weaknesses of profit maximisation

• The focus on high short-term profits may encourage competitors to enter the market.
• Many businesses seek to maximise sales to gain higher market share, rather than to maximise
profits.
• The owners of smaller businesses may be more concerned with ensuring that leisure time,
independence and work–life balance are protected rather than just earning more money.
• Most business analysts assess the performance of a business through return on capital
employed rather than through total profit figures.
• Profit maximisation may be the preferred objective of the owners and shareholders, but other
stakeholders will prioritise other objectives. Managers’ concerns over workers’ job security or
environmental protection may force profitable business decisions to be modified, yielding
lower profit levels.
• In practice, it is very difficult to assess whether the point of profit maximisation has been
reached.
• Constant pricing changes to increase profit may lead to negative consumer reactions.

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b) Growth
- The growth of a business in terms of sales or value of output has many potential benefits for
the managers and owners.
- Larger firms will be less likely to be taken over and should be able to benefit from economies
of scale.
- Managers may gain higher salaries and fringe bene- fits. Businesses that do not attempt to
grow may cease to be competitive and, eventually, will lose their appeal to new investors.

Disadvantages of growth
- Over-rapid expansion can lead to cash-flow problems.
- Sales growth might be achieved at the expense of lower profit margins.
- Larger businesses can experience diseconomies of scale.
- Using profits to finance growth, retained profits, can lead to lower short-term returns to
shareholders.
- Growth into new business areas and activities that is away from the firm’s ‘core’ activities –
can result in a loss of focus and direction for the whole organisation.

c) Increasing market share

- Closely linked to overall growth of a business is the market share it enjoys within its main
market.
- It is possible for an expanding business to suffer a loss of market share if the market is
growing at a faster rate than the business itself.
- Increasing market share indicates that the marketing mix of the business is proving to be
more successful than that of its competitors.

d) Profit satisficing
- This means aiming to achieve enough profit to keep the owners happy but not aiming to work
flat out to make as much profit as possible.
- This is often the objective of owners of small businesses who wish to live comfort- ably but
do not want to work very long hours in order to earn more profit.
- Once a ‘satisfactory’ level of profit has been achieved, the owners consider that other aims
take priority, such as more leisure time.

e) Corporate social responsibility (CSR)

- this concept applies to those businesses that consider the interests of society by taking
responsibility for the impact of their decisions and activities on customers, employees,
communities and the environment.
- refers to a set of policies designed to demonstrate the commitment of a business to the well-
being of society and others by taking responsibility for the impact of business decisions on
all stakeholders.

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- Some businesses have objectives which are based on their beliefs of how one should treat the
environment and people.
- CSR applies to those businesses that considers the interests of society by taking
responsibility for their decisions and activities on consumers, employees, communities and
the environment.
- Some business activities are very damaging to other stakeholders.
- Thus governments and some international organisations like European Union (EU) must
ensure that businesses take responsibility of their actions on people and the planet.

Benefits of being socially responsible

- The business can be given government contracts/ tenders
- The business can easily attract highly skilled and experienced personnel
- Business will gain public acceptance and reduced risk of negative publicity
- Employees committed to the same values
- Customer loyalty

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

f) Survival
- This is likely to be the key objective of most new business start-ups.
- 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.

Social enterprise
- A business with mainly social objectives that reinvests most of its profits into benefiting
society rather than maximising returns to owners.
- are not charities, but they do have objectives that are often different from those of an
entrepreneur who is only profit motivated.
- is a proper business that makes its money in socially responsible ways and uses most of any
surplus made to benefit society.
- Social entrepreneurs are not running a charity, however, they can and often do keep some of
any profit they have made.
- Social enterprises compete with other businesses in the same market or industry.
- They use business principles to achieve social objectives.

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Features of social enterprises
- They directly produce goods or provide services.
- They have social aims and use ethical ways of achieving them.
- They need to make a surplus or profit to survive as they cannot rely on donations as charities
do.

The objective of social enterprise (The triple bottom line)

- Social enterprises often have three main aims.
- These aims are often referred to as the triple bottom line.
- This means that profit is not the sole objective of these enterprises.
- These are:

Economic
- make a profit to reinvest back into the business and provide some return to owners

Social
- provide jobs or support for local, often disadvantaged, communities

Environmental
- to protect the environment and to manage the business in an environmentally sustainable way.

Corporate aim
- These are long term goals that a business seeks to fulfil.
- The core business activities of the business are expressed in the aims.
- They are the starting point of all the business planning activities and they continue to guide the
planning and evaluation process.
- Aims are formulated by senior management e.g. directors and subject to the approval of
shareholders.
- Examples of corporate aims are maximising returns to ordinary shareholders, being a market
leader or to venture in international markets.
- Such aims will guide all the organisational activities i.e. all business activities should be
aligned to the aim.

Mission
- A mission statement is a concise explanation of an organisation's reason for existence.
- It describes what the organisation does, who it serves, and how it does it.
- It's a reflection of the organisation's identity and its core purpose.
- The mission of a business is what the business seeks to achieve by its existence.

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- It is stated as a statement, a mission statement is a brief statement of the business’s core aims
which are phrased in a manner that motivates internal stakeholders to work toward achieving
them and stimulate interest by external stakeholders to do business with the entity.
- The mission is derived directly from the organisational vision i.e. the vision stipulates what the
business aims to achieve and the mission briefly outlines the means of achieving them.

Purpose of the Mission Statement

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

Benefits of the mission statement

• inform groups outside the business what the central aim and vision are
• motivate employees, as they are associated with the positive qualities the statement refers to
• often include moral statements or values to be worked towards, which might help to guide
and direct individual employees’ behaviour at work
• help to establish what the business is about, for the benefit of other groups.

Limitations of the mission statement

• too vague and general, so that they end up saying little that is specific about the business and
cannot be used as actual targets
• just a public relations exercise to make stakeholder groups feel good about the organisation
• virtually impossible to really analyse or disagree with
• too general and lacking in specific detail, so two completely different businesses could have
very similar mission statements.

Vision
- a statement of what the organisation would like to achieve or accomplish in the long term
- a vision statement is a forward-looking declaration of the organisation's future goals and where
it sees itself in the long term.
- It's an inspirational and aspirational statement that provides a clear picture of the future that
the organisation is aiming to create.

Business 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 2023.”
- The strategies to achieve such an objective could include:

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- Business organisations do not operate in an isolated environment therefore management has to
assess the impact of the external environmental factors to the business activities.
- Management has to analyse the environmental pressures so as to come up with an effective
business strategy which can enable the business to achieve its objectives in an efficient way.
- Research has concluded that businesses which are quick to adapt to environmental changes
usually do well and most businesses fail partially because they have failed to adapt to the ever-
changing environment.
- For strategies to work well in the business they need to be complemented with tactics.

Tactic
- is a short-term plan for day-to-day operations of a business with the aim of contributing
towards the overall strategy.
- For example, in order to achieve productivity improvements the workforce might get prizes
for the teams that make the biggest improvements to productivity.

The relationship between mission statement, aims, objectives, strategy and tactics
- goals that an organisation sets to achieve its mission and vision.
- They are the concrete steps that an organisation plans to take to move towards its envisioned
future.
- The relationship between mission and vision statements and objectives is therefore one of
guidance and direction.
- The mission and vision statements serve as the compass that points the organisation in the
right direction, while the objectives are the roadmap that outlines the path to get there.
- For example, if an organisation's mission is to provide high-quality educational resources to
underprivileged children and its vision is to eradicate illiteracy, its objectives might include
distributing a certain number of textbooks to schools in low-income areas by a specific date
or implementing literacy programmes in a certain number of schools within a given
timeframe.

Objective setting and business decisions

- Setting objectives is the starting point of business decision- making.
- Without having a clear sense of direction, it is impossible to take effective business
decisions.
- Business managers cannot decide on future plans of action or strategies if they are uncertain
of which direction they want to take the business in.

The role of objectives in the stages of business decision-making

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.

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- 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, then a corrective action must be done for the objectives to be achieved

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

The translation of objectives into targets and budgets

- This statement simply means a process by which objectives are translated into targets and
budgets.
- Thus corporate objectives should be broken down into individual targets.
- Target or key performance indicators (KPIs) refers to a detailed operational objective for a
specific area of a business to be achieved by a specific date.
- Once targets have been set for individuals or groups they can be monitored and adjusted to
increase the chances of achieving overall objectives, and can be used as a motivational tool.
- Communication is very important to make the employees aware of the business objectives.
Targets can also be used in the budgeting process.
- Employees must be involved in the setting of targets.
- Unrealistic targets will, however, lead to unobtainable and misleading budgets.

Targets

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- These are objectives set for each member of the organisation, these objectives are set at lower
levels of the hierarchy e.g. by supervisors and forepersons.

Advantages of targets
- Employees will be motivated to work harder
- Productivity of employees and managers will improve
- Encourages team work which then reduces mistakes at the business
- Managers will always be in touch with employees and this helps employees to meet deadlines
- Help managers to identify problem areas
- An easy way to translate corporate objectives into individual and other subsidiary objectives

Disadvantages of targets
- Can be demotivation especially if they cannot be achieved or an employee fails to achieve
them. There can be many reasons for failing to reach a target.
- Can dehumanise a job. People are treated like machines rather than as humans
- Can lead to ‘blame culture’
- Difficult and expensive to monitor

Budget
- A budget refers to a plan expressed in financial terms for targets to be achieved, financial
resources to be made available.

Importance of Budgets
- Reviewing past activities
- Controlling current activities i.e helping the business to stick to the objectives
- Planning for the future

Business ethics
- Are moral principles that guide the business the it conducts its activities.
- are standards that guides how a business serves its customers and treats its employees
- 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

Benefits of acting ethically

- The business will be offered with government contracts
- The business may attract qualified and experienced staff
- The business may get more customers

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- Avoiding expensive court cases on ethical related crimes
- Improve customer loyalty
- Attracts customers
- Gives credibility to the business
- Builds the reputation of the business
- Increase sales and profit making of the business
- Promotes integrity among employees and management
- Increase customer retention because of good work environment
- Minimise costs such as those spend on recruitment of new employees since most of the
employees are retained in the business
- Helps to avoid fines through obeying government laws
- Encourage team work as employees trust each other
- Motivates employees because business ethics involves rewarding of the employees
- Build the brand image of the business
- Enables the business to product quality products
- Reduce complaints from customers

Challenges of acting ethically

- Charging lower prices leads to lower profits
- 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

Unethical business activities

- Buying supplies from businesses that use child labour
- Exploiting suppliers in poor countries by demanding and paying low prices
- 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

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Code of Conduct
- Upholding the principal of honesty and fairness
- Protecting the properties and reputation of the business
- Conducting business in the best interest of the owners
- Behaving appropriately at all times towards others

1.5 Stakeholders in a business

Business stakeholders
- are individuals or groups who have an interest in the success or failure of a company.
- They can be categorised into primary and secondary stakeholders based on their direct or
indirect involvement with the business.

The Difference between a Stakeholder and a Shareholder

- A stakeholder is anyone with an interest in the business and affected either directly or indirectly
by the business activities, whereas a shareholder is one of the stakeholder who is a part owner
of the company and affected directly by the business activities.
- Examples of stakeholders include: owners, workers, customers, suppliers, local community,
banks and government.

Primary stakeholders
- also known as direct stakeholders
- are those who have a direct relationship with the business and are often involved in its day-to-
day operations.
- This group typically includes the owners or shareholders who have invested capital into the
business, the employees who work for the business, and the customers who purchase its
products or services.
- These stakeholders have a significant interest in the business as its performance directly affects
their financial wellbeing or satisfaction.

Secondary stakeholders
- also known as indirect stakeholders
- are those who have an indirect relationship with the business.
- They are not involved in the daily operations of the business but are affected by its activities.
- This group may include suppliers who provide the business with goods or services, creditors
who have lent money to the business, and the local community where the business operates.

The roles, rights and responsibilities of stakeholders

Stakeholder Roles Rights Responsibilities

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Customer • Purchase goods and • To receive goods and • Honesty, to pay for goods
services. services that meet local bought or services
• Provide revenue from laws regarding health received.
sales which allow the and safety design. • Not to steal.
business to function and • To be offered • Not to make false claims
expand. replacements, repairs, about poor service,
compensation in the underperforming goods or
event of the product failed items.
failure.
Suppliers • Supply goods and • To be paid on time. • Supply goods and services
services to allow the • To be treated fairly by ordered by the business as
business to offer products the purchasing firm, in the purchase contract.
to customers. for example, not to be
forced to charge low
prices.
Employees • Provide manual and other • To be treated within • To be honest.
labour services to the the minimum limits as • To meet the conditions
business to allow goods established by a and requirements of the
and services to be national law, for employment contract.
provided to consumers. example, minimum • To cooperate with
wage rates. management in all
• To be paid the way reasonable requests.
described in the • To observe the ethical
employment contract. code of conduct.
• To be able to belong to
a trade union.
Local • Provide local service and • To be consulted about • To cooperate with the
Community infrastructure to the major changes that business where reasonable
business to allow it to affect it, for example, to do so, on expansion and
operate, produce, sell expansion plan or other plans.
within legal limits. changing method of • To meet reasonable
production. requests from business for
• Not to have the local services such as,
community lives badly public transport, for
affected by the example, to allow staff to
business activities. get to work
Government • Passes laws that restrain • Businesses have the • To treat businesses
many aspects of business duty to government to equally under the law.
activities. meet all legal • To prevent unfair
• Provides law and order to constrains, such as competition that could
allow legal business producing only legal damage business’
activities to take place. goods and to pay taxes survival.
• Achieves economic on time. • To establish good tracking
stability to encourage links with other countries
business activities.

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 to allow international
trade.

Impact of Business Decisions on Stakeholders

Business Impact on Employees Impact on Local Impact on Customer
Decision Community
Large • More jobs and career • More jobs for • Better service provided
expansion of opportunities. local residents by bigger business with
the business by • Disruption during and increased more staff.
building a new building and more spending in other • Larger business could be
head office complex lines of local business. less personal and
communication after • Disruption therefore offer inferior
expansion. caused by customer service.
increased traffic
and lose of green
field for amenity
use.
Takeover of a • The larger business • If the business • The larger business may
competing firm may be more secure expands on the benefit from economies of
(horizontal and offer career existing size, local scale, which could lead to
integration) promotion job vacancies and lower prices.
opportunities. income might • Reduced competition
• Rationalization may increase. could have the opposite
occur to avoid waste • Rationalization of effect.
and cut costs. duplicated offices • Less consumer choice
• Jobs might be lost. or factories might might result in high prices.
lead to some
closure and job
losses.
Significant • Training and promotion • Local business • More efficient and flexible
application of opportunities might be providing IT production methods might
IT into offered. services could improve quality.
production • Fewer untrained staff benefit from
methods will be required and increased orders.
those unable to learn • Specialist workers
new skill may be made may not be
redundant. available locally
so more
commuting by
staff in cars might
be necessary.

How and why a business needs to be accountable to its stakeholders?

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Benefits to the business for being responsible to customers
- The business will benefit from customer loyalty
- The business will enjoy good publicity when customers give word of mouth recommendations
to others
- Good customer feedback which helps to improve further goods and services

Way in which a business can become responsible to customers

- Business must offer quality goods
- Businesses to offer well designed and durable goods
- To sell goods at reasonable prices
- Businesses not to take advantages of vulnerable customers e.g high-pressure selling tactics

Benefits to the business for being responsible to suppliers

- Benefits from supplier loyalty
- Suppliers may be willing to open credit lines
- Suppliers will be prepared to meet deadlines and requests for special orders

Way in which a business can become responsible to suppliers

- Prompt payments to suppliers
- Giving suppliers clear guidance on what is required
- Offering suppliers long-term contracts
- Buy stock regularly

Benefits to the business for being responsible to employees

- There is employee loyalty
- Low labour turnover
- The business can easily attract highly qualified staff’
- Employees will be motivated and their productivity will increase

Way in which a business can become responsible to employees

- Business to provide training opportunities
- To give employees fair wages
- Involve employees in decision making
- Give employees fringe benefits e.g company house, company car etc

Benefits to the business for being responsible to community

- Local communities are more likely to accept some of the negative effects caused by business
operations

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- Local councils often give contracts to business with a record of good behaviour towards the
community and its environment

Way in which a business can become responsible to community

- Offer secure employment
- Avoid adverse environment effects such as pollution
- Employing local people

Benefits to the business for being responsible to the government

- Business may receive valuable government contracts
- Business may benefit from government subsidies
- Licences to set up new operations are more likely to be awarded to business that meet their
responsibilities

How conflict might arise from stakeholders having different aims and objectives?

Conflicting Objectives of Stakeholders

Different stakeholders in a business have different objectives.

1. Owners (shareholders)
- When owners play no part in the running of the business, their objective is to maximise their
returns.
- Investors may push for lower costs to increase their profits and rewards and this may lead to
fewer or lower pay increases for employees.
- Typically this occurs when the business is a medium to large sized company owned by
shareholders.
- This might conflict with managers’ objectives who might want to retain profit for growth rather
than pay them out as dividends.

2. Workers
- Ordinary workers from middle management have little interest in the objectives of the owner.
- They want pay and job satisfaction.
- They want the highest possible wages and this might conflict with the owners’ objectives of
cutting costs and increasing profits.

3. Customers
- They want the best prices with the best quality.
- They want good service.
- This may conflict with other stakeholders’ interests, for example, spending more on research
and development to create new products might lower the amount payable as dividends to
shareholders.

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- In order to meet customer demands for cheaper products, the business may relocate to cheaper
production facilities overseas, thus upsetting the local community.
- Improving quality might lead to high costs.

4. The Community and the Government

- The community in which a business operates tends to welcome jobs, taxes and prosperity
which the business can bring to the area.
- The government might insist on costly developments, for example, to avoid pollution by
insisting on pollution-free equipment.
- In order to meet government demands for more environmentally friendly operations
processes, the business may change its production system, leading to higher costs and higher
prices for customers.
- This might conflict with the firm as it increases costs.

how changing business objectives might affect its stakeholders?

- As the objectives of a business change, this may well affect the way it treats its stakeholders.
- For example a greater emphasis on environmental issues may lead to more concern for
society as a whole and future generations, in addition to a focus on recycling, reusing and
less waste and pollution.
- A focus on better quality might lead to better treatment of suppliers.
- On the other hand, greater pressure for profits may mean managers start to cut back on
training, career development and wage increases in order to reduce costs; they might also
bargain hard to push down suppliers’ prices.
- It is very difficult for managers to take decisions to satisfy all stakeholders simultaneously,
especially at a time of change when major strategic decisions may be forced upon them.
- It may be that the best they can do is to satisfy as many stakeholders as possible.

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HUMAN RESOURCES MANAGEMENT (AS level)
The focus of this topic is on how a business can effectively manage its workforce to achieve its
objectives. Candidates will develop an understanding of the human resource management process
from planning and recruiting workers through to their dismissal. Candidates will learn about
motivation in management. They will learn about the theory behind motivation as well as how to
implement it in practice.

2.1 Human resource management (HRM)

- is the practice of recruiting, hiring, deploying and managing an organization's employees.
- Comprises the recruiting, hiring, training, motivation, retaining and reward of human
resources within the business.
- Is the organising, coordinating, and managing an organisation’s current employees to carry
out an organisation’s mission, vision and goals.
- the purpose of HRM is to make sure that the business has the appropriate human resources to
enable it to meet the business objectives.

The role of HRM in meeting organisational objectives

- Train employees to ensure maximum productivity
- Salary administration and determination
- recruit new staff when additional personnel are required
- Select the most suitable employees
- preparing contracts of employment for all staff and deciding on whether these should be
permanent or temporary, full or part time workers
- Ensuring HRM operates across the business through involving managers in the development
and training of employees
- Improving workforce morale and welfare
- Developing appropriate pay systems for different categories of workforce
- Giving guidance and advice and ensuring appropriate work-life balance
- Measuring and monitoring workforce performance
- dealing with disciplinary and grievance procedures
- giving advice to employees who want to know what training and skills they need to acquire if
they are to progress to a higher level within the business.
- negotiating with different stakeholders involved in the business, eg employees, management
and trade unions.
- dismissing employees when appropriate
- carrying out the process of redundancy procedure when necessary
- responsible for workforce planning
- Ensure that labour legislations are followed

Workforce planning

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- is to assess the number of employees and skills required to meet the future needs of the
business.
- is the process of analyzing, forecasting, and planning workforce supply and demand,
assessing gaps, and determining target talent management interventions to ensure that an
organization has the right people with the right skills in the right places at the right time to
fulfill its mandate and strategic objectives.
- 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.
- means thinking ahead to establish the number of employees and the skills required in the
future to meet the business’s planned objectives.
- It is also known as manpower planning.

The reasons for a workforce plan

- It helps organizations identify future human resource needs. This is done by looking at factors
such as the organisation's strategic plans, business plans, and future goals. This information is
used to identify the number and type of employees that will be needed to achieve the
organisation's objectives.
- it ensures that the right people are in the right jobs at the right time. This is done by matching
employees' skills and abilities to the job's requirements. This helps to ensure that employees
can contribute to the organisation's success and that the organisation can meet its goals.
- helps to avoid or minimise surplus staff and associated costs. This is done by ensuring that the
organisation has the right number of employees with the right skills and abilities. This helps to
avoid the need to lay off employees or to hire new employees when the organisation's needs
change.
- helps to develop a pool of potential candidates for future vacancies. This is done by identifying
the skills and abilities that will be needed in the future and by developing plans to ensure that
employees acquire these skills. Further, it helps to ensure that the organisation has a pool of
qualified candidates to choose from when vacancies arise.
- helps to ensure that the organisation has necessary skills and competencies to meet its future
goals and objectives. Human resource management can evaluate skills and abilities for future
development plans. It is all about helping to bring people and organizations together. Coming
together helps to accomplish and meet a certain set of goals.
- 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

The role of workforce plan

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- They help businesses to deal with changes (such as the impact of new technology or changes
in consumers’ tastes) by ensuring that they have the right employees in terms of numbers, work
locations and skills.
- Workforce plans help businesses to prepare for changes in the workforce, such as the
introduction of new production-line machinery or a significant proportion of employees
leaving through retirement.

Measurement of labour turnover

- labour turnover refers to the ratio of a number of employees who leave a company through
attrition, dismissal or resignation to the total number of employees on the payroll in that
period.
- This ratio measures the proportion of a workforce leaving their employment at a business
over some period of time, usually one year.
- It's used for measuring employee retention.
- also known as staffing turnover
- is calculated as follows;

Turnover = Number of staff leaving during the year x 100%

Average number of staff

Example:
ABC limited employees 100 employees on average in 2024. 54 workers left the business during
2024.
REQUIRED
Calculate labour turnover

Solution
Labour Turnover = Number of staff leaving during the year x 100%
Average number of staff

= 54 x 100%
100

= 54%

Reasons for high labour turnover

- Low wages
- inadequate training
- lack of motivation

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- poor working conditions
- ineffective recruitment procedures, resulting in the appointment of inappropriate staff.
- redundancy (organisational down-sizing)
- retirement.
- dismissal of some of the employees
- Availability of better paid jobs elsewhere
- employee relocation
- employee dissatisfaction
- poor company culture
- negative view of management
- unfavourable leadership style

The implications of high and low labour turnover for a business

- Negative impact on high labour turnover

- reduced productivity
- increased time on recruiting and training new employees
- decrease morale on remaining employees
- loss of company and brand knowledge
- difficult to establish customer loyalty due to a lack of regular, familiar contact
- difficult to establish team spirit
- loss of customers
- Difficult to establish team spirit as team members are constantly changing
- higher costs of training and recruitment
- talent and experience drain
- loss of revenue
- Reputation suffers so business becomes less attractive

Positive impact of high labour turnover

- low-skilled and less-productive staff might be leaving and could be replaced with more
carefully selected workers
- new ideas and practices brought into an organisation by new workers
- high labour turnover can help a business plan to reduce employee numbers, as workers who
leave will not be replaced

Assignment question
Discuss the impact of low labour turnover to the business organisation. [20]

Short answer questions

1. Define the term ‘human resource management’. [2]

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2. Define the term ‘workforce plan’. [2]
3. Explain one importance of workforce plan to the business organization. [3]
4. Explain two possible benefits to a business of an effective system of human resource
management. [6]
5. Explain one possible effect of a high level of labour turnover in a business. [3]
6. A business has 2 000 employees. During the year, 700 leave its employment. Calculate its rate
of labour turnover. [3]

2.1.3 Recruitment and selection

Recruitment
- is the process of identifying the need for a new employee, defining the job to be filled and the
type of person needed to fill it, attracting suitable candidates for the job to be filled and
selecting the best.
- is the process of finding, screening, hiring and eventually on boarding qualified job
candidates.

NB
- Recruitment and selection will be necessary when the business is expanding and needs a
bigger workforce employees leave and need to be replaced.

The recruitment process

- is defined as a process that provides the organization with a pool of qualified job candidates
from which to choose.

1. the human resources department use the HR plan to decide number and type of employees
needed. the nature of the vacancy is established.
2. preparations of job adverts, job descriptions and person specifications
3. advertise the job ( inside or outside the business)
4. Receive job applications
5. prepare short list for selection, matching applications and person specifications
6. select employees using interviews

Job description
- list the duties and responsibilities associated with a particular job.
- contain the following information:
ü the title of the post
ü employment conditions
ü some idea of tasks and duties

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 ü the key aims and responsibilities of the job
ü where the job fits into the organization.

Advantages of job description

- Provides a clear idea of what a job involves so that 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
- It assists in manpower planning.
- It also helps in performance appraisal.
- It identifies the need for training.
- It helps in recruitment and selection.
- Both management and employees have a statement of what is expected of a successful
applicant.
- Employees have strong case for refusing to do tasks that were not included in the job
description.
- It can also be used in job evaluation to establish pay structure and helps in identifying
training needs.
- Helps decide basis for pay
- Help create person specification
- Helps create appropriate job advert
- Helps resolve disputes between managers and subordinates

Disadvantages of a Job Description

- In a rapidly changing environment, rigid adherence to a job description could stifle innovation
and the much needed change.
- If they are poorly written using vague rather than specific they might provide little guidance to
workers.
- Sometimes job descriptions are not updated as the duties change.

Person (job) specification

- is a description of the qualifications, skills, experience, knowledge and other attributes
(selection criteria) which a candidate must possess to perform the job duties.
- it describes the skills, knowledge, and qualities needed to perform a particular job.

Recruitment methods
- Once managers have prepared job descriptions and person specifications, a decision has to be
made as to how to recruit the necessary employees.
- There are a number of recruitment methods which the HRM can adopt;

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Job advertisements
- is when the job or vacant is advertised in newspapers, radios and other social media
platforms.
- The advert needs to be targeted so as to attract suitable applicants while dissuading
unsuitable candidates from applying.
- An effective job advertisement should contain sufficient information to attract and engage
potential employees but not too much so as to discourage them from applying.

Employment agencies
- this is where the task of advertising a job role and identifying suitable candidates for
interview is outsourced to an experienced external recruiter.
- provide employers with details of suitable applicants for posts they may have vacant.
- they charge considerable fees for bringing together employers and potential candidates.
- Businesses may use employment agencies to recruit highly specialist employees or those
with skills that are scarce.
- Although this is a costly method of recruitment, agencies often have skills and contacts that
many businesses do not possess.

Online recruitment
- allows businesses and other organisations to use their websites to recruit potential employees
cheaply and from any part of the world.
- This method of recruitment can increase the number of applicants and the quality of
employees who are eventually employed.
- Online advertising can reach much larger audiences, increasing the number of applicants.
- Equally, this form of advertising can be targeted, as relevant groups help to improve the
quality of applicants.
- Websites operated by both businesses and governments bring together those seeking work
and businesses intending to recruit.

Other methods of recruitment

- Firms headhunt employees who are currently working for other organisations in order to
offer them employment.
- Those employees who are headhunted are usually either senior managers or people with
specialist skills, perhaps in short supply.
- Specialist executive recruitment agencies exist which can target precisely the right type of
candidates, but they normally charge high fees.

Internal recruitment
- is when the selected candidate already works for the organisation

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- involves filling job vacancies from within the organization.
- This can be done through internal job postings, employee referrals, promotions, or transfers.

Advantages of internal recruitment

- Applicants may already be known to the selection team.
- Applicants will already know the organisation and its internal methods so there is no need for
induction training.
- The culture of the organisation will be well understood by the applicants.
- It is often quicker than external recruitment.
- helps in recognizing and utilizing the existing talent pool, fostering employee growth and
retention, and boosting employee morale.
- It is likely to be cheaper than using external advertising and recruitment agencies.
- It gives internal staff a career structure and a chance to progress.
- If the vacancy is for a senior post, workers will not have to get used to a new style of
management.

Disadvantages of internal recruitment

- can cause dissatisfaction for those not promoted
- can cause line management problems for the promoted person if they now supervise former
colleagues
- there might be a better applicant externally

External recruitment
- is when the successful applicant does not currently work for the business.
- is the process of sourcing candidates from outside the organization

Advantages of external recruitment

- External applicants will bring new ideas and practices to the business, which helps to keep
existing employees focused on the future rather than the past.
- There is a wider choice of potential applicants, not just limited to internal staff.
- It avoids the resentment sometimes felt by existing staff if one of their colleagues is
promoted above them.
- The standard of applicants could be higher than if the job is open only to internal applicants.

Disadvantages of external recruitment

- the new employee does not know the internal structure of the business as well as someone
who already works there
- internal applicants might be unhappy that a stranger has got the job. they might feel
undervalued by the business.

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Selection methods
- Selection is the process of determining the most suitable candidate for the job among which
would have been attracted through the recruitment exercises.
- It involves the picking of candidates from a group of applicants.
- The selection method used within the company is important as it should not be relatively
expensive compared to the importance of the job.
- It should be non-discriminatory in terms of ability, personality intelligent, race and other
factors.
- A number of selection techniques exist.

Curriculum vitae
- take various forms but are all designed to record key information about potential employees,
such as their education, professional qualifications and experience in previous employment.
- This is designed to help managers to match employees to person specifications which detail
the requirements of the job.
- Thus, they can form an important element of the early stages of the selection process.

Résumé
- are very similar to the CV.
- it normally summarises the applicant’s relevant job experience, education and training.
- is usually sent to employers with a covering letter which may contain additional information.

Application forms
- Some businesses supply application forms for prospective employees to complete.
- These are normally used in place of CVs and résumés.
- They offer the advantage that businesses can ensure that all applicants have the chance to
supply the information that is required to make the selection decision
- Also, because the application forms are in a standard format, it can be easier to compare
candidates’ applications.

NB
• CVs, résumés and application forms all tend to be used early in the selection process, and
they can be a useful means of screening candidates and deciding which to invite to interview
or other method of selection.
• They are particularly valuable if a business receives a large number of applications for a
position.

Interviews
- These remain a popular form of selection technique and are the most common in different
countries.

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- Interviews can involve one or two interviewers or even a panel.
- Candidates can be asked a series of questions designed to test their knowledge of, and
suitability for, the job.
- Some interviews (sometimes called competency-based interviews) may require candidates to
undertake specific job-related tasks to assess their skills.
- They are relatively cheap and allow the two-way exchange of information, but are unreliable
as a method of selection.
- Some people perform well at interview, but that does not necessarily mean they will perform
well at work.

References
- Many employers ask candidates to supply references at some stage in the recruitment and
selection process.
- These are written by former employers or by other people in a position of authority who may
know the candidate well.
- They will set out the candidate’s strengths and possibly their weaknesses and provide
potential employers with a further indication of the applicant’s suitability for the post.
- References are not always accurate.
- For instance, an employer may give an employee an undeservedly good reference if they
want to get rid of them.

Testing
- Testing as part of the selection process can take a variety of forms.
- Psychometric tests are very common; these can take two forms.
- An aptitude test provides candidates with opportunities to demonstrate their skills and
abilities in relation to the job.
- Personality tests examine the likely behaviour of potential employees and how they might
respond to certain situations in the workplace.
- They involve numerical and written questions and can help to assess how well the applicant
might fit in with existing employees.

Assessment centres
- Managers are aware of the high costs of poor selection decisions and this has led to the heavy
use of assessment centres.
- Many managers believe that this is a more reliable method of selection.
- In such centres, a number of candidates are subjected to a variety of selection techniques over
a period of between two and four days.
- is used to describe a collection of assessment methods applied to a cohort entry where
specifically designed tests and exercises are worked through by all applicants.
- the activities span several days and include a series of tests, group activities and interviews.

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- at the end of the process, assessors meet for a final discussion to determine an overall
weighting of candidates.

Employment contracts
- is a legal agreement between an employer and an employee, setting forth the terms and
conditions of the employment arrangement.
- It is a legally binding agreement designed to protect the rights of employers and employees
- does not have to be issued immediately upon an employee starting work, but its conditions
are in force from the time an employee commences employment.

Contents of employment contract

- the employee’s and employer’s names
- date when employment began
- the scale (and rate) at which the employee will be paid and the frequency of payment
- the employee’s usual hours of work
- holiday entitlement and other benefits such as pensions
- the job title and a summary of duties
- the location or locations of the work
- details of any trade union agreements relating to the job
- disciplinary procedures
- grievance procedures
- the notice from either side to terminate the employment contract.

Redundancy
- refers to a process of terminating employees from their employment due to different business
reasons.
- occurs when workers’ jobs are no longer required, perhaps because of a fall in demand, a
change in technology or the need to cut costs.
- Occurs when an employee volunteers to be dismissed for reasons of redundancy.
- this is part of a company policy of retrenchment to save on costs to remain competitive.
- is a legal reason for an employer to dismiss an employee, but it can only occur if a job no
longer exists.
- If redundancies are to take place, then guidelines are normally followed to ensure that the
correct person or people are made redundant.

Reasons for redundancy

- A business closes down and all its employees are made redundant.
- The jobs of some employees are replaced by new technology.
- A business moves some of its operations overseas and some jobs are lost as a consequence.
(relocation of the business)

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- the economic status
- When a business, or part of it, shuts down completely.
- The work of an employee is being completed by others.
- poor human resources planning
- falling demand for the product
- insolvency of the business

Voluntary redundancy
- is the process of an employee choosing to take redundancy.
- occurs when an employer, wishing
- to make redundancies, invites employees to apply for redundancy in return for a financial
compensation package.
- This is meant to terminate employment in exchange for some kind of redundancy payout.
- This form of redundancy can help to maintain the morale of a workforce at what can be a
very difficult time for a business.
- normally offers a greater financial payment to employees

Involuntary redundancy
- is the temporary suspension or permanent termination of the employment of an employee or,
more commonly, a group of employees (collective involuntary redundancy) for business
reasons, such as personnel management or downsizing (reducing the size of) an organization.
- is where employees are selected for redundancy and they have no choice in the matter.
- This is likely to occur when a large number of employees are to be made redundant and
insufficient people are willing to take voluntary redundancy.
- often damage the morale and performance of the workforce.
- has remained the most efficient means for a company to cut costs.

The differences between voluntary and involuntary redundancy

Voluntary redundancy Involuntary redundancy
- offered to a specific age group and - is not age specific and can affect any
experience level employee irrespective of their age and the
number of years they have spent in the
organization.
- voluntary redundancy program allows - Involuntary redundancy programs target
eligible employees to choose whether or not employees for job loss despite their own
to participate’ in the redundancy campaign. wishes.
- occurs when the job still exists but one of - occurs when the job no longer exists
the other conditions may apply.
- voluntary redundancy packages offer more - Whereas it is not so with involuntary
in terms of financial compensation than redundancy because sometimes what

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 compulsory redundancy. leads to the redundancy is beyond the
control of the employer.
- when an employer invites employees to put - the employee doesn’t have a choice as
themselves forward for voluntary regards accepting the redundancy or
redundancy, the employee reserves the right declining.
to refuse applications.

Dismissal
- is when the employment contract of worker is terminated by the employer because of
inappropriate actions of the employees.
- is the terminating a contract of employment because an employee has not fulfilled the
conditions of the contract in some way.

Reasons for dismissal

- stealing goods or property from the business
- 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.

Fair dismissal
- is where an employee or member of staff is dismissed from their employment for a justifiable
reason.
- It is the type of dismissal in which the employer terminates the employment relationship by
proving the reason for termination.

Reasons for fair dismissal

- inability to do the job even after sufficient training has been given
- continuous negative attitude at work
- disregard of required health and safety procedures
- deliberate destruction of an employer’s property
- bullying of other employees.

Unfair dismissal
- is the terminating of the 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.

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- When dismissal is judged to be unfair, the employee will get damages from the firm.

Reasons for unfair dismissal

- pregnancy
- a discriminatory reason, for example the race, gender or religion of a worker
- being a member of a union.
- Family reasons
- For minor cases without giving first or second warning.
- a non-relevant criminal record, if the employer has previously been aware of criminal record

Assignment
Explain the differences between unfair and fair dismissal [6]

Morale
- is the satisfaction felt by employees within the workplace.
- refers to the feeling of enthusiasm and loyalty that a person has about a task or job

Welfare
- is a broad term covering a wide range of facilities that are essential for the well-being of a
business’ employees.
- 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.
- Improving the working conditions with excellent hygiene facilities and safety equipment is
another effective way of improving employee welfare.
- Low levels of staff morale and welfare can result in poor standard of work and can also cause
an increase in absenteeism and labour turnover as well as poor punctuality.
- The welfare of workers is important because if an employee is experiencing problems in their
private life, this can negatively affect their ability to work well

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.

The relationship between HRM, employee morale and welfare in a business

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- Human resource management can play a central role in developing and improving the morale
and welfare of employees.
- Recruiting people with the intention of developing their skills and improving their
performance throughout a long-term relationship is at the heart of what is called ‘soft’ human
resource management.
- Such an approach to HRM may well seek to develop the skills of employees and to
encourage them to work with the business for long periods of time.
- Using this ‘soft’ approach to HRM also offers benefits to the business of providing good
facilities for employees.

The concept of 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.
- The term work–life balance refers to the time an employee spends on work-related duties
compared with time spent on non-work activities.
- 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.
- The management must assist employees to achieve a better work-life balance.
- The aim is to maintain a sensible balance that allows career and ambition needs to met as
well as family and friendship needs and commitments.

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 periods i.e an extended period of leave from work. Some business do not pay
employees during this period.

The impact of diversity and equality in the workplace on a business

Diversity policy
- in a workplace context, refers to recognizing the differences between individual employees
and also the differences that may exist between different groups of employees.
- refers to practices and processes aimed at creating a mixed workforce and placing positive
value on diversity in the workplace.
- Businesses that operate diversity policies will treat people as individuals and will value the
benefits that diverse individuals and groups in a workplace may offer to a business.

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- Employee diversity could be based upon gender, race and ethnicity, disability, religion,
sexuality, class and age.
- Diversified workforce include employees:
ü Who come from different backgrounds and cultures
ü Who speak different languages
ü With different levels of education
ü Who differ in terms of age and gender

Promoting diversity in the workplace impacts on business by:

- capturing a bigger market share as consumers are attracted by a diverse sales force
- employing a more qualified workforce as selection is based on merit and not on
discrimination
- increasing creativity because individuals from different backgrounds approach problem-
solving in different ways
- achieving cultural awareness, leading to improved knowledge about foreign markets
- promoting diverse language skills, which allows businesses to provide products and services
internationally.
- Colleagues learn to value and respect one another even if they do not hold similar values and
beliefs
- Can lead to an increase in the customer base since some customers are attracted by a
diversified sales force.

The costs may include:

- higher recruitment costs
- longer recruitment process
- greater training needs
- communication barriers.

Equality
- policies related to equality are intended to create a fairer society where all employees can
contribute and fulfil their potential.
- Businesses that promote equality in the workplace do not base recruitment and dismissal
decisions, pay, promotions and other benefits on employees’ race, sexuality, gender, age,
religion or national origin.
- One key aspect of this is to operate policies that allow all employees the opportunity to reach
senior positions in a business, irrespective of their age, gender, ethnicity or sexual
orientation.
- This is considered necessary as many groups, such as women and minority ethnic groups, are
under-represented in senior positions in businesses.
- This can mean that the skills and abilities of such employees are wasted.

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- By including such groups, businesses can become more competitive and successful.

Promoting equality in the workplace impacts on business by:

- creating an environment with high employee morale and motivation
- developing a good reputation and the ability to recruit top talent based on fairness
- measuring employee performance by their achievements at work, not by any discriminatory
factor.
- Greater commitment and effort from employees
- The business can easily attract skilled and experienced personnel from other organisations

2.1.6 Training and development

- Training refers to work-related education to increase workforce skills and efficiency.
- Training is a process whereby an individual acquires job- related skills and knowledge.

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

Different types of training:

induction
- 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.
- is a form of introduction that allows employees and new hires “learn the ropes” of their new
job or position and get started easily.
- It is a good opportunity for any organization to welcome on boarding employees and help
them settle into their roles
- Employees may receive training when commencing a new job.
- This is known as induction training and is intended to introduce an employee to the business.

Benefits of induction training

- Helps employees to settle into their job quickly/familiarize 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

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On-the-job training
- This form of training does not require the employee to leave the workplace.
- They learn from experienced employees through observation and work shadowing.
- This is often conducted by either the HR managers or departmental training officers.
- The trainee may work through instruction manuals or receive guidance from senior
employees.
- Watching or working closely with existing experienced members of staff is a frequent
component of this form of training.
- It is cheaper than sending recruits on external training courses and the content of the training
is controlled by the business itself.

Advantages
- It can cut travel costs.
- The trainee may do some work while on training. They can actually be contributing to
production while they are learning.
- Can be a motivator the trainers
- No special premises to hired or built
- It is cheaper since it uses existing skilled and experienced employees

Disadvantages
- The trainer’s productivity is decreased because he/she must attend to the trainee’s problems
- If mentoring is not paid, the trainer may not be fully committed
- Some skilled and experienced employees are not good teachers.
- Mistakes made by the trainee may affect the business’s reputation

Off-the-job
- This involves training outside the workplace, at a college, university or some other training
agency.
- can take the form of a range of activities in which job-related skills and knowledge are
acquired.
- These activities can include external courses such as lectures and seminars, self-study or
open learning.

Advantages
- Employees can learn many skills.
- Employees can work during the day and attend training sessions in the evening.
- Any mistake that the trainee is going to makes are unlikely to affect the reputation of the
business
- Training can lead to a recognised qualification

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Disadvantages
- outside trainers are very expensive
- output of the trainee is lost
- Trainee can also copy bad behaviours from the trainer.

Benefits of training
To the employer
- Improves motivation of staff
- Reduction of waste and scrap
- Quality services to customers
- May reduce labour turnover
- Helps to develop a positive culture in the organisation
- Increases productivity

To the employee
- Employees may feel valued by the organisation
- Training improves promotional prospects
- May improve job satisfaction
- Employees are better able to cope with change.

the impact of training and development on a business

Positive impact of training
- It can improve employee performance, and hence the competitive position of the business, by
developing new skills and knowledge.
- Training and development should improve employee morale and productivity.
- Training and development are core components of HRM and assist organisations in having
the right workforce to achieve strategic objectives.
- A reputation for training and developing employees will assist businesses in attracting and
retaining high- quality, creative and productive employees.

Negative impact of training

- training and development activities use up valuable resources that could be utilised elsewhere
in the organisation.
- Attendance at training and development activities may mean that employees are unavailable
to the organisation for a period of time. Production may suffer as a consequence.
- It can also lead to well-qualified employees leaving for a better-paid job once they have
gained qualifications from a business with a good training programme.

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- The beneficial effects of these activities may vary because some managers might seek to
avoid training and developing their staff as it can lessen the degree of control they have over
their subordinates.

Development of employees
- Development refers to activities designed to increase employees’ skills, education,
knowledge and abilities in the workplace.
- 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.

Employee development to encourage intrapreneurship

- some larger organisations attempt to encourage entrepreneurial approaches among their
employees to improve the organisation’s performance.
- Such organisations encourage individuals to develop ideas for new products or ways of
producing goods and services within their own departments or sections of the business.

Employee development to encourage multi-skilling and flexibility

- exists when employees have the skills to carry out several roles within an organisation.
- Multi-skilled workers have the skills to perform roles in more than one area of a business’
activities.
- For example, in a manufacturing business, multi-skilled workers may receive training in all
aspects of constructing the product, as well as the ability to perform inspections to ensure
products are of suitable quality. Having multi-skilled employees allows a business to switch
workers to where they are needed over time.
- A company with multi-skilled employees has the potential to have a flexible workforce.
- This enables managers to use workers where needed to match the business’ needs.

Benefits
- meeting unexpected increases in demand for their products
- covering for employees who are absent
- dealing with crises ,such as delays in production.

Management and workforce relations

- Co-operation between management and the workforce can reduce the number of disputes that
may occur between the two sides.

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- Disputes can result in strikes (where workers withdraw their labour) or other measures, such
as banning overtime working.

The benefits to employers

Employers benefit in a range of ways from co-operation with employees.
- Helping to develop a strong employer brand Employers who avoid disputes with employees
and who have effective mechanisms to resolve any disputes quickly will be viewed more
favourably by potential employees. This will assist them in attracting more able and
productive employees.
- Enhancing employee morale Having a workforce with high morale is a valuable asset for any
business. Poor employer relations are likely to lead to employees believing they are not
valued and will reduce their sense of well-being and morale. Such factors can damage
employee performance severely.
- Improving the business’ corporate image Avoiding disputes or settling them quickly helps a
business to develop or maintain a reputation as a fair and reasonable employer. This can have
positive effects on a range of stakeholders, including customers and investors.
- Strengthening competitiveness Good employer– employee relations can be a powerful
competitive weapon. They can reduce costs by eliminating lost

Costs to employers
- The business may lose revenue from selling its products if the dispute results in industrial
action, such as a strike, and production is halted.
- The business may lose future sales if its customers believe that it is an unreliable supplier.
- The business’ relationship with its employees may be damaged in the long term, with
negative implications for morale and productivity.
- The business may be regarded as a more risky investment and may encounter more difficulty
in raising finance, or it may be expected to pay higher interest rates for loans
- The business’ image may be damaged if it is involved in a dispute with its employees and
this may result in the loss of some of its customers.

How cooperation between management and the workforce can be of benefit to both

Cooperation
- refers to the process of management and the workforce working together to achieve common
goals in the organisation.
- involves the process of sharing information, making joint decisions, and collaborative
problem-solving to enhance efficiency and effectiveness.
- The level of cooperation between management and the workforce can significantly impact
productivity, employee engagement, and job satisfaction.

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Benefits to employees
- Financial benefits Employees avoid loss of pay during periods of industrial disputes if good
relations are maintained. However, because the employer may also be financially stronger as
a result of avoiding wasteful disputes, there is a greater possibility of future improvements in
pay and conditions.
- Job security An employer is less likely to consider replacing employees with technology or
moving overseas to locations where industrial action rarely or never occurs.
- The possibility of greater participation in decision- making Involving employees in decision-
making is one way of helping to maintain good relations, but it is also a possible benefit to
employees from doing their part in maintaining a positive relationship. Where amicable
relationships exist, employers may be more willing to offer opportunities for employee
involvement in decision-making.

Benefits to the employers

- Helping to develop a strong employer brand- Employers who avoid disputes with employees
and who have effective mechanisms to resolve any disputes quickly will be viewed more
favourably by potential employees. This will assist them in attracting more able and
productive employees.
- Enhancing employee morale- Having a workforce with high morale is a valuable asset for
any business. Poor employer relations are likely to lead to employees believing they are not
valued and will reduce their sense of well-being and morale. Such factors can damage
employee performance severely.
- Improving the business’ corporate image- Avoiding disputes or settling them quickly helps a
business to develop or maintain a reputation as a fair and reasonable employer. This can have
positive effects on a range of stakeholders, including customers and investors.
- Strengthening competitiveness Good employer– employee relations can be a powerful
competitive weapon. They can reduce costs by eliminating lost production, adding to a
business’ reliability as a supplier as its production is not interrupted, and can enhance labour
productivity (thereby lowering labour costs), as workers are motivated by what they regard as
fair pay and working conditions.

Challenges to Effective Cooperation

- Conflicting interests can stand in the way of effective cooperation. Disagreements may arise
from differing objectives or opinions between management and the workforce.
- Cooperation can also become challenging if there are significant communication barriers,
such as language differences or hierarchical impediments.
- Lack of trust between management and the workforce can also hinder cooperation. Trust can
be eroded by past experiences of deception or mismanagement.

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The impact on employers and employees of trade union involvement in the workplace
including their role in collective bargaining

Trade Unions
- are the organisation that works on behalf of group of employees by seeking to improve their
pay and conditions of service as well as acting on the behalf on individual members, who are
in dispute with their employers.
- are organisations that represent the interests of workers or employees in a particular industry
or occupation.
- They play a significant role in Human Resource Management (HRM), influencing various
aspects like wage negotiation, working conditions, and dispute resolution.
- The key objective of a trade union is to protect and advance the economic, social, and
working conditions of its members.

Key Functions of Trade Unions

- Collective Bargaining: Negotiation on behalf of members with employers over employment
terms and conditions.
- Legal Representation: Providing advice and representation to members in legal matters
related to their employment.
- Member Services: Offering benefits to members such as training, education, and social
activities.
- Lobbying and Advocacy: Campaigning for changes in legislation and public policy that
benefit members and workers more generally.

Collective bargaining
- is when needs or demands of a group of employees are discussed by management and a
representative speaking on behalf of all the workforce rather than individual basis

Forms of industrial action during a dispute with employers over improvements in pay and
conditions:
- Go slow – a form of industrial action in which workers keep working but at the minimum
pace demanded by their contract of employment.
- Work-to-rule – a form of industrial action in which employees refuse to do any work outside
the precise terms of the employment contract. Overtime will not be worked and all non-
contractual cooperation will be withdrawn.
- Overtime bans – industrial action in which workers refuse to work more than the contracted
number of hours each week. During busy periods, this could lead to lost output for the
employer.

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- Strike action – the most extreme form of industrial action in which employees totally
withdraw their labour for a period of time. Strike action leads to production stopping and the
business shutting down during the industrial action.

Various methods the employers to resolve an industrial dispute:

- negotiations to reach a compromise solution with the aim of avoiding industrial action
- public relations campaign to gain public support for the employer during a dispute and put
pressure on the union to settle for a compromise
- threats of redundancies to pressurise unions to agree to settle the dispute
- changes of contract, which require workers to work overtime, accept more flexible working
or agree not to take industrial action
- lock-outs – short-term closure of the business or factory to prevent employees from working
and being paid
- closure of the business, leading to the redundancy of all workers. This extreme measure
would clearly damage the long-term interests of both workers and business owners.

Assignment
1. Outline the impact on employers and employees on trade union involvement in the workplace.
[20]
2. Outline the role of trade unions in the collective bargaining [20]

2.2 Motivation
- is the desire that pushes an individual to work well.
- a management process of influencing people’s behaviour to achieve stated goals.
- is set of processes that arouse human behaviour towards attaining certain goals.
- Is considered as the influence that causes workers to behave in a particular way.
- refers to anything that influence employees to work willingly.

The need to motivate employees to achieve the objectives of a business

- Higher productivity (outputs).
- Improved quality of goods with less wastage.
- Improves efficiency (doing the right thing).
- Low rate of accidents at work place.
- Prepared to accept responsibility
- Lower rate of labour turn over (employees leaving the enterprise).
- Lower absenteeism rate.
- Less resistance to change.
- Higher punctuality.
- They accept responsibilities.
- They will often work hard to seek promotion and responsibility.

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- They show a higher levels of commitment.
- They also able to participate and makes suggestions for improvement.

Indications of poorly motivated staff

- Absenteeism: workers can just decide to be absent from work without any justification
- Reporting late for duty: the workforce will arrive late and may be leave their jobs very early
before the normal knock-off time.
- Poor performance: poor quality work and a greater waste of raw materials
- High labour turnover: employees just ‘come and go’. They won’t take time at the business
and this will cost the business more in training and recruiting new staff
- Conflicts: there will be a lot of disagreements within the workforce. Employees have a
negative attitude towards work.
- Poor response rate: workers do not respond very well to orders and any response is often
slow.
- Low worker morale: employees feel as if they are not needed and this decreases their
productivity

Human needs
- can be defined as the elements required for survival and good mental and physical health.
- A list of human needs is likely to include the following:
• physical needs. For example, having enough in come to meet essential needs e.g. food, drink
and shelter
• safety needs e.g.jobs security, contract of employment, reduced uncertainty, health and safety
policies, and good working conditions
• social needs e.g. team or group working, good communication and involvement
• esteem needs e.g. recognition, status, responsibility, respect and feedback on performance
• self-actualisation needs e.g. fulfilment of potential, challenging work, sense of achievement
and development of new skills.

How human needs may or may not be satisfied at work?

Subsistence Employment
- can provide an income sufficient to allow people to have shelter, food and clothes so that
their lives are not threatened by the lack of these basic items.
- However, this need is only met if employees have an employment contract that offers them
regular and sufficient hours of work to meet their basic needs.

Protection
- Work can satisfy this need in a number of ways.
- A permanent employment contract may provide the security of knowing that the income
from employment will be received for the foreseeable future.

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- Some forms of employment also provide health care and pensions to give employees an
income in old age.
- However, many forms of employment do not offer much in the way of protection.
- Some employees have no guaranteed hours of work and no pensions.

Participation
- This can be achieved through working in teams, from teams of shop assistants through to
membership of the board of directors of a large public company.
- Participation can also take the form of responsibilities within an organisation.

Creation
- Many working environments offer opportunities for creativity and some may require this as
an integral part of employment.
- Others may offer few opportunities.
- Working in advertising or architecture requires creativity but this can also be an important
part of manual work, such as constructing houses.
- Creativity can take other forms, including developing teams and building brands.

Freedom
- Working in an organisation does offer surprising numbers of opportunities for freedom.
- In a democratically managed business, managers may empower employees.
- This gives them control over their working lives and a high degree of freedom not only to
take decisions but to decide which decisions to take.
- It is important to remember that the extent to which this need may be met at work depends on
the way that the business is managed.
- Some managers may opt to retain control and offer little freedom to more junior employees.

2.2.2 Motivational theories

- Motivational theories are theories that explain what drives employees to work towards
attainment of organisational goals.
- can be classified broadly into two namely; content theories and process theories.

Content theories
- These theories focus on what motivates people, that is, a need that must be satisfied.
- The need may be satisfied by a reward that is either extrinsic to the task, for example, money
or intrinsic, for example, job satisfaction.
- focus on what motivates people
- motivation theorists whose work focuses on the nature of the work itself and or the terms and
conditions of employment.

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- These theories are also based on the idea that individuals are motivated by their desire to
fulfil their human needs (inner needs).
- Thus their human needs energises them to work harder.
- also focuses on how the managers can create favourable conditions that allow workers to
satisfy their human needs.
- include; Taylor, Mayo, Maslow, Herzberg and McClelland studied motivation from a content
perspective.

1. Taylor's scientific management theory

- Taylor's theory stresses that employees should be assigned to perform one specific task,
scientific methods are used to find one best way to perform a task, managers directly supervise
employees and employees are paid based on their performance.
- His theory is based on the study of employees and the work they performed within the
manufacturing industries.
- He believed that economic efficiency is obtained through improving labour and productivity
through establishing workflow processes and he believed that employees are best motivated
by money.
- Taylor put forward the idea that workers are motivated mainly by pay and he believed that
people are motivated by money and that they should be paid according to the output that they
produce.
- He said managers should identify most productive workers and make all staff use their
methods, setting a standard for the rest of the workforce. He devised a piece rate system that
is workers should be paid according to the number of items they produce in a set period of
time.

Taylor did lots of work in factories and believed that workers should be told how to do a job
quickly

• He believed they should be closely monitored & told what to do

• He devised a piece rate system
• He believed workers could only be motivated by money
• Division of labour - jobs should be broken down into small tasks to keep employees
motivated
• Identify most productive workers and make all staff use their methods, setting a standard for
the rest of the workforce
• Workers should be given everything they need to complete the job to a decent standard,
therefore giving no excuses for low productivity
• His main aim was to improve productivity by reducing wastage.
• Workers should then be given appropriate training and tools so that they can work as
efficient as possible on one set task.

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• This approach of detailed recording and analysis of results is known as scientific
management.

- Frederick Taylor's Scientific Management, emerging in the early 20th century, introduced a
systematic approach to improving worker productivity.
- Key elements include:

Task Simplification:
- Breaking down complex tasks into simpler, smaller steps, making them more manageable
and less time-consuming.

Specialised Training
- Providing workers with specific training to enhance efficiency in their designated tasks.

Monetary Incentives:
- Proposing wage incentives based on output to encourage higher productivity.

Time and Motion Studies:

- Analysing work procedures and times to identify the most efficient ways of performing tasks.

Taylor's approach to increase productivity

- The quickest method is identified and all the workers are trained to use the quickest method.
- Employees’ personal skills should not be the basis for assigning the job to individual
workers.
- As they do their job, each employee is supervised to make sure that the methods are carried
out correctly.
- The workers must be paid according to how much they produce; this means that if they
produce less they earn less, if they produce more they earn more.
- Those who exceed targets must be given bonus.
- Select workers to perform a task
- 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)

Advantages of Taylor’s Approach

• Division of work thus specialization will increase the productivity and increase quality since
each worker will be doing what he knows best and have skills in.

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• Fairness to payee since it supports the use of piece rate system, thus if a worker produces
more units, he is given more as payee because there will be no conflict between workers.
• Motivates the workers to work hard (piece rate system), more products will increase the
firm’s productivity.
• It leads to improvements in the working methods resulting in economic gains in productivity.
• Taylor’s approach has close links with the concept of autocratic management. That makes the
theory more useful since it is supported by other management styles.
• Management will become more involved with production activities and thus encouraged to
show leadership.

Limitations of Taylor’s Theory

• Taylor treated employees like machines which needed to be programmed on what to do.
• His theory did not cater for individual differences.
• The theory does not promote innovation at the work place.
• Not every worker is motivated by financial rewards; some employees are motivated by
internal factors.
• The theory is not practical for the type of jobs where output is not measurable, for
example, human resources and some administrative functions.
• The tasks become monotonous since employees do the same activities every day.
• 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 demotivate 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

2. ELTON MAYO (Hawthorne Effect)

• Elton Mayo (1880–1949) is best known for his Hawthorne effect conclusions.
• These were based on a series of experiments he conducted at the Hawthorne factory of
Western Electric Co in the USA.
• He initially assumed that working conditions, such as lighting, heating and rest periods, had a
significant effect on workers’ productivity.
• Experiments were undertaken with groups of workers to establish the best working
conditions.
• The output of a control group was also recorded.
• This group experienced no changes in working conditions at all.

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• 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.
• 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.

The Hawthorne effect: the conclusions of Mayo’s work.

Mayo drew the following conclusions from his work:
• Changes in working conditions and pay levels have little or no effect on productivity.
• Consultation with workers improves motivation.
• Working in teams and developing a team spirit can improve productivity.
• Giving workers some control over their own working lives, such as deciding when to take
breaks, improves motivation.
• Groups can establish their own targets, and these can be greatly influenced by the informal
leaders of the group.

Evaluation of Mayo’s research for today’s businesses

• Since Mayo’s findings were published, there has been a trend towards giving workers more
of a role in business decision-making and this is called worker participation.
• Human Resources departments have been established to try to put the Hawthorne effect into
practice.
• Team or group working is applied in many types of modern business organisation.
• It offers the greatest opportunities for workers and businesses to benefit from the Hawthorne
effect.
• The idea of involving workers, taking an interest in their welfare and finding out their
individual goals, has opened up new fields of research for industrial psychologists.

Weaknesses of Mayo’s theory

• Some critics argue that Mayo’s approach is largely subjective because workers are usually
manipulated to work hard by managers (views of theory x).
• Others viewed the approach as a way of reducing union power.

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• The assumption that workers and management share the same goals is not realistic.
• The idea of workplace concerns may not always exist as it may take time to agree due to
variations in ideas and thinking.
• Informal groups may end up negatively affecting the goals of the organization, for example,
extending their meetings by twenty minutes which ends up affecting productivity.

3. Maslow’s hierarchy of needs

• Is based on successive human needs
• He arranged these needs in the form of a pyramid with their order indicating the priority that
they would take in the eyes of most employees
• The basic needs must be satisfied first, then a series of needs arranged in a hierarchy.
• Satisfying these needs can be used to motivate employees
• Needs lower down in the hierarchy must be satisfied before individuals can attend to needs
higher up.
• From the bottom of the hierarchy upwards, the needs are: physiological, safety, love and
belonging, esteem and self-actualization.

Physiological needs
• These needs are necessary to sustain life e.g water, shelter and food.
• If such needs are not satisfied then one’s motivation will arise from the quest to satisfy these
needs.
• The theory suggests that the absence of higher needs is not felt when such needs are not
satisfied.
• Such needs can be provided at the workplace situation by financial rewards which enable the
person to satisfy these needs.
• these are the essentials people need for physical survival.
• Examples include air, food, drink, shelter, clothing, warmth, sleep, and health
• These are basic human needs that must be met in order for a person to survive, such as air,
water, food, clothes, shelter and rest.
• Maslow asserts that every employee seeks to satisfy these physiological needs first before
other needs.
• Managers can motivate workers by paying them adequate salaries so that they will be
able to meet their physiological needs.
• This can be satisfied by providing employees high income enough to meet essential needs
• Employees must work for a reasonable number of working hours per day with breaks during
the day so that they have periods to rest

Safety needs

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• After their physiological needs have been met, workers would like to have their safety and
security needs satisfied.
• Safety and security needs are concerned with how safe the employees are while at work.
• The employees must feel protected; they need to have a sense of personal and financial
security.
• The working environment must be free from threats such as accidents or harm.
• The manager must ensure that there is a safe working environment by providing safety
clothes like helmets, work suits or safety shoes if there is need for these.
• The company must provide fringe benefits such as medical benefits or retirement fund so
that employees feel a sense of security.
• These first two levels are important to the physical survival of the person.
• Implementing a proper health and safety policy and providing employees with employment
contracts
• This can be satisfied by providing employees:
- a contract of employment with some job security;
- a structured organisation that gives clear lines of authority to reduce uncertainty;
- ensuring health and safety conditions are met

Social needs
• These refer to social needs like friendships, intimacy and family.
• Employees want to feel loved and accepted in the organisation so that they don't feel isolated
and depressed at work.
• Managers need to promote social interaction in the organisation, so that employees interact as
they work.
• this can be satisfied by working in teams or groups and ensuring good communication to
make workers feel involved
• This can be achieved by making sure that employees know each other.
• Management must encourage team work.
• Opportunities for workers to participate in decision making must be provided so that they
feel being part of the organisation.
• Managers must ensure that social events such as games, end of year parties, dinner parties
become part of the organisational culture.

Self-esteem needs
• All employees have a need to feel respected, accepted and valued by others at work.
• Maslow states that employees seek to boost their self-esteem through acquiring high status,
recognition or prestige at work.
• Managers need to offer promotion to deserving employee so that they feel respected.

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• Hardworking and loyal employees must be praised for job well done if they have performed
well.
• Managers can also give more responsibilities to experienced and hardworking employees in
order to make them feel valued.
• Workers become motivated when they feel a sense of achievement and self-respect.

Self-actualisation
• Once all the lower needs of employees have been met, the workers seek to achieve self-
fulfilment or self-actualisation.
• takes place when a person achieves his/her full potential at work or in life.
• Full potential means that a person has reached a stage where one is able to do the best that
one can in a special area or at work.
• It is concerned with personal growth; employees can be given more challenging task or
holding a higher position so that they will be able to reach the point of self-fulfilment.

Criticism of Maslow's hierarchy of needs

• Not everyone has the same needs as assumed by Maslow.
• Maslow's assumption that every worker seeks to satisfy the physiological needs first before
any other needs is questionable. Other employees would want to satisfy higher needs before
physiological needs are met.
• Therefore the fulfilment of the needs may not necessarily be in a hierarchical order.
• It is difficult for managers to measure the level at which every employee is at in the
hierarchy.
• Money is necessary to satisfy physiological needs and might also play a bigger role in trying
to satisfy other higher needs such as status and esteem needs.
• In reality, self-actualisation stage may not be reached as people's needs tend to change and
become more complex as they move up the social ladder.

4. Herzberg
• Herzberg theory had close links with Maslow’s needs theory.
• His main aim was to find out what satisfies employees and what causes dissatisfaction.
• He assumed that there are two sets of factors that influence motivation at work:
- Motivators (directly motivates employees to work harder)
- Hygiene factors (factors that cause dissatisfaction)
• There is interrelationship between hygiene factors and motivating factors because the
absence of one or more of these factors may lead to de-motivation at work.
• Herzberg believed that these approaches (hygiene and motivation) must be used
simultaneously.

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Hygiene / maintenance factors
• are a group of influences that may result in employee dissatisfaction at work.
• These are extrinsic factors, for example, salary, working conditions, company policies or
security.
• Herzberg believed that these do not motivate workers but their absence causes dissatisfaction
at work.
• These factors are all around the job but are not a part of the job itself
• according to Herzberg, an employee cannot be motivated by pay, but they might be
dissatisfied by inadequate financial rewards
• Such factors include:
- Pay - pay should be adequate so that employees are not dissatisfied.
- Company Policies - company policies should be fair and clear. Company policies, which
include procedures, rules and regulations, must be written down and employees must access
them at will.
- Good working conditions. These include flexible working hours, holidays and existence of an
appropriate dress code, etc.
- Fringe benefits - employees should be given additional benefits such as health care facilities
or pension benefits.
- Safe working conditions–there should be safe working conditions. Also, there must be safe
work processes and safety clothing, tools and equipment, when necessary.
- Relationships/social needs - managers should create friendly environment for the employees
to interact, as they work together in teams, so as to reduce conflicts within the organisation.
- Job Security – employees must be aware of terms and conditions of their contracts so that
they feel secure about their jobs.
- Supervision- this refers to the extent to which managers control and monitor their
subordinates. Managers must not control employees excessively as this makes them to feel
mistrusted and this lowers their self-esteem.
• Managers need to ensure that these hygiene factors are improved so that employees are not
de-motivated.

Motivators
• are a series of factors, such as promotion, that may have positive influences on employee
performance at work.
• Employees have intrinsic needs that must be satisfied.
• Employees seek the fulfilment of the human needs that Maslow termed higher order needs
such as self-esteem and self-actualisation.
• Motivators give workers job satisfaction.
• Herzberg asserts that motivators include giving workers more responsibilities, challenging
work and promotions.
• Sound work relationships and personal growth opportunities lead to intrinsic motivation.

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• Herzberg believes that these factors are the ones that drive employees to work willingly.
• He identified the following factors as motivators:
- Personal achievement of goals and targets
- Recognition for achievement
- Interest in the work itself
- Responsibility for greater and more complex duties
- Personal growth and advancement.

Motivating factors and how they can be satisfied.

• Recognition- managers must praise and recognise employees who have excelled in their jobs.
• Sense of achievement- employees must have a sense of achievement. Setting achievable
work targets is important in order to make employees feel a sense of achievement.
• Growth and promotion- managers should create opportunities for employees to advance in
the organisation, for example, through training and promotion.
• Responsibility- giving employees more responsibilities would give them satisfaction as they
will feel challenged and trusted.

Limitations of Herzberg's two factor theory

• Herzberg did not take into account individual differences; people are motivated by different
factors.
• Other workers may not aim at achieving high order needs such as job enrichment.
• Not all hygiene factors lead to dissatisfaction, for example, other employees may not bother
much about rigid company policies as long as they get paid.
• Herzberg may not be correct to say that money does not motivate employees; other
employees may be motivated by pay.

5. David McClelland’s theory of needs

• argued that an individual’s motivation depends upon their needs and that these needs are
determined by the individual’s experience.
• McClelland identified three types of motivational need:
- Achievement motivation
- authority/power motivation
- affiliation motivation
• These motivators are not inherent; we develop them through our culture and life experiences.

The need for achievement

• People who have a high need for achievement aim for excellence.
• This means that they are likely to avoid low-risk situations as they derive little satisfaction
from meeting targets that are not challenging.
• Equally, they tend to avoid high-risk situations as they fear not achieving.

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• Therefore, this type of person aims to attain realistic but challenging goals – ideally those in
which they have a 50 per cent chance of success.
• This type of employee has a strong need for feedback on achievement and progress, and they
have a need for a sense of accomplishment.

The need for authority and power

• A need for power (n-pow) can fall into one of two categories:
- A need for personal power and to director control other employees – this is a need which
may be considered undesirable
- A need for institutional power–this is a need to organise other employees to attain the
organisation’s objectives.
• Managers and leaders with a need for institutional power are likely to contribute more to a
business enterprise than someone whose need for power is a personal one.
• The employee with a need for authority and power wants to have an effect on an organisation
and to have some degree of control.
• They may also want to have more status within the organisation.
• A person with this dominant need is motivated by having authority.
• The desire to control others is a powerful motivating force.
• This includes the need to be influential, to be effective and to make an impact.
• Such a person has a strong leadership instinct and when they have authority over others, they
value the personal status and prestige gained.

The need for affiliation

• Employees who have a need for affiliation (n-aff) generally seek harmonious relationships
with other people in the organisation.
• They need to feel accepted and are motivated to work with other people.
• This type of employee works well as a member of a team and enjoys social interaction.
• Employees who are motivated by the need for affiliation often work successfully and
effectively in marketing, sales and customer service.

The implications of McClelland’s work

• McClelland’s work has clear implications for leaders and managers.
• The principle is that employees with different needs require different roles and tasks if they
are to be motivated effectively.

An employee with a high need for achievement

• Such employees should be given tasks which are demanding but which can be reasonably
expected to be achieved.
• Such employees require regular feedback, especially of a positive nature.

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An employee with a high need for authority and power
• This type of employee is most likely to flourish and perform well when controlling others.
• For a junior employee this could be a supervisory role, while more senior employees may
fulfil this need by managing large teams of employees.

An employee with a high need for affiliation

• Working as part of a team, especially a co-operative one, is likely to allow employees to meet
their needs for affiliation.
• Equally, this type of employee is likely to perform best when interacting with other
employees, and they should be provided with opportunities to do this whenever possible.

Process theories
- They suggest that people are motivated towards rewards that they want and that they believe
they have a reasonable chance or expectance of obtaining.
- They focus on effort and reason required to accomplish certain set objectives.
- examine the process of motivation and are concerned with ‘how’ motivation occurs.
- are motivation theories whose work focuses on the psychological drivers that can encourage
employees to work harder.
- Basically they focus on how and why individuals choose certain behaviours in order to meet
their personal goals.
- Process theories study what people are thinking about when they decide whether or not to put
effort into a particular activity.
- Vroom studied motivation from a process perspective.

Victor Vroom’s expectancy theory

• This theory, developed by Vroom in the early 1960s, argues that motivation depends on
employees’ expectations of the results of their efforts.
• If employees know what they want from an outcome and believe they can achieve that
particular outcome, they will be motivated.
• In brief, Vroom’s theory argues that the behaviour of individuals is such as to maximise
pleasure and to minimise pain in whatever form it may occur.
• Vroom discovered that an employee's performance depends on personality, skills,
knowledge, experience and skills.

Expectancy
• This refers to the confidence that employees may have in their ability to complete a particular
activity or task to an acceptable standard.
• Demotivation will result if an employee believes that they are not capable of completing the
task in question satisfactorily.

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How can managers help employees get the results they expect?
- Make sure the employee has the tools and time
- Assign an employee that already has or will gain useful skills
- Be available to provide support and encouragement

Instrumentality
• This is the belief of employees that the completion of a particular activity will lead to a
desired outcome.
• In a situation of high instrumentality, the employee has confidence that specific activities will
result in the achievement of a valued reward.
• Instrumentality will be greater if employees recognise a clear link between actions and
rewards and have confidence that they will receive the promised rewards for achieving their
targets.

How can managers help employees understand that the result is instrumental in getting a
satisfactory outcome?
- Be clear about what the reward is and how to achieve it
- give staff an outcome they value so they can trust that their effort is important
- Be open about how rewards are allocated

Valence
• This represents the strength of a person’s desire to achieve a specific outcome.
• Valence is positive if a person prefers the outcome to not achieving it.
• If the person is indifferent to the outcome then the valence will be zero.
• High values of valence mean that an outcome is highly attractive to employees and has great
potential to motivate.
• In such circumstances, managers can use the possibility of attaining this outcome as a means
of motivation.
• For example, a salesperson may find the prospect of a monetary bonus for achieving an
agreed sales target very desirable.
• The salesperson must have confidence in their ability to achieve the number of sales
necessary to receive the bonus.

Advantages and disadvantages of using Expectancy Theory

Advantages:
- There is a connection between motivation and satisfaction
- The expectation of a reward increases motivation, even if the outcome differs slightly from
the original reward

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- The theory focuses on rewards and achieving goals
- It promotes the idea that more effort should lead to increased performance, meaning the
desired outcomes are met

Disadvantages:
- It assumes that effort and performance will result in the desired reward
- The theory does not account for factors like an employee’s learning and workload capacity
- If either the task is unachievable, the reward is not delivered or the outcome isn’t valuable,
that is enough for employees to lose motivation

Qn:
What are the practical implications of Victor Vroom's Expectancy Theory for employee
motivation in a business context?
Victor Vroom's Expectancy Theory, focusing on the mental processes involved in motivation, has
several practical implications for businesses:

• Clear Goals and Expectations: Ensure that employees have a clear understanding of their
role and responsibilities and the expected outcomes.
• Performance Feedback: Provide regular feedback to employees so they can assess their own
performance in relation to their goals.
• Rewards Alignment: Link rewards directly to performance outcomes to reinforce the belief
that effort leads to reward.
• Employee Input: Involve employees in setting their own goals and expectations to increase
their sense of control.
• Training and Skill Development: Offer training and skill development opportunities to
enhance employees' capabilities and confidence in achieving their goals.
• Open Communication: Encourage open communication to address any obstacles or
challenges that may hinder goal attainment.

By implementing these strategies, businesses can align with Vroom's theory, creating a
motivating environment where employees believe their efforts will lead to desired performance
and rewards.

Qn:
How can businesses practically apply David McClelland's Theory of Needs in their
management strategies?

David McClelland's Theory of Needs, which includes the need for Achievement, Affiliation, and
Power (nAch, nAff, and nPow), offers practical insights for businesses. To apply this theory
effectively:

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• Identify Individual Needs: Assess employees' dominant needs through interviews,
assessments, or self-reporting to tailor motivation strategies.
• Assign Challenging Tasks: For individuals with a high need for Achievement, delegate
challenging projects with clear goals and provide regular feedback.
• Promote Teamwork: Encourage social activities, team-building exercises, and collaborative
projects to satisfy the Affiliation need.
• Leadership Opportunities: Offer leadership roles and responsibilities to individuals with a
strong need for Power.
• Feedback and Recognition: Continuously acknowledge and reward achievements and
contributions to fulfil all three needs.
• Training and Development: Provide opportunities for skill development and career
advancement to support employees' growth in line with their needs.

By recognising and catering to these diverse needs, businesses can create a motivating work
environment that aligns with McClelland's theory.

2.2.4 Motivation methods in practice: financial motivators, non-financial motivators

The theories in practical situations

• All motivational theorists recognise that very few people would be prepared to work without
financial reward.
• Pay is necessary to encourage work effort – all theorists understand this.
• They can, however, disagree over whether pay is sufficient to generate motivation and how
pay should be calculated.

Different payment methods:

Time based
- under this system, earnings are calculated by multiplying the hourly time rate by the number
of hours at work.
- It is a payment based on the number of hours worked.
- Unsocial hours or overtime raise the pay rate

Advantages of time based

- Less harmful to quality
- Less harmful to health of employees
- Simple and easy to understand
- Appropriate in most circumstances

Disadvantages of time based

- Pay is not related to effort or output but merely to the time spend at work

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- Can encourage time wasting
- Does not provide incentive for increased effort
- Tasks not completed on time
- Close monitoring is required
- There is no incentive to increase output as pay level is not directly linked to output.

Salary
- Refers to an agreed amount paid monthly in return for work undertaken.
- A salary is the most common form of payment for professional, supervisory and management
staff.
- It is paid to those in the white collar sector i.e professionals like Doctors, teachers, lawyers
etc.
- Salary doesn’t depend on the number of hours worked or units produced.
- Salaried employees are not normally required to work a set number of hours per week,
though their employment contract may state a minimum number of hours. Eg 8 hours per day
- Each organisation uses different salary bands or grades

Advantages
- The employee will be certain about what he/she is going to get at the end of the month
- Enables the management and the employee to plan in advance
- It is suitable for management positions where staff are expected to put extra time to complete
task
- It offers the security of a pay level to employees.
- There are different salary levels for different grades of workers.
- It is suitable for jobs where output is not measurable.
- It is often fixed for one year, so labour costs are easier to forecast.

Disadvantages
- Can encourage time wasting
- It can only work when individuals are closely monitored
- Does not provide incentive for increased effort.

Piece rates
- A piece rate is fixed for the production of each unit.
- The earnings of an individual worker or group of workers are related to the quantity of items
produced.
- The workers’ wages therefore depend on the quantity of output produced.
- The piece rate can be adjusted to reflect the difficulty of the job and the standard time needed
to complete it.

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- It can be combined with a low basic wage and then the piece rate is paid if output rises above
a set level.
- The pay is based on the number of units produced.
- The focus will be on the quantity rather than quality
- The method is appropriate where output is standardised, measurable, where there is a link
between effort and output and where output can be attributed to an individual work

Advantages
- Stimulates effort
- Encourages workers to devise improved methods
- No need for supervision i.e cut on costs
- Targets are surpassed
- There is no time wasting

Disadvantages
- Encourages more output at the expense of quality
- Production breakdowns can affect employees at a next stage of production
- More harmful on employees’ health i.e employees overwork themselves

Commission
- An individual is paid according to the sales he/she has made in a given period.
- Business usually give a basic salary plus a commission based payment on top.
- It is appropriate for salespersons.
- The basic salary will improve job security.
- This method will inspire employees to achieve the highest possible level of sales.

Advantages
- The method is cost effective i.e no need for a supervisor
- Employees are motivated to exert more effort in order to get a higher commission
- Employees are time conscious

Disadvantages
- No job security especially if there is no basic salary
- Team work is discouraged since individual salespersons will be keen to maximise their
personal sales

Bonuses
- A bonus payment is one that is made to employees in addition to their contracted wage or
salary.
- It is given to employees when they have reached and surpassed the targets set.

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- It is a thank you given to employees so that the can maintain the status quo.
- Is suitable when the business wants to reward employees for good performance.

Advantages
- It is paid to individuals for outstanding work or to teams for reaching targets.
- It creates the incentive for employees to do well.
- It is in addition to basic salary, so it offers some security too.

Disadvantages
- It can cause resentment if the bonus is not received.
- It damages team spirit if some members receive a bonus and others do not.
- It reduces motivation if no bonuses are paid, e.g. if sales are falling.

Profit sharing
- a bonus for staff based on the profits made by the business.
- It is usually paid as a proportion of basic salary.
- It is paid to encourage employees to identify with the company.
- Thus the employees and owners will be working towards the same goal.
- also provide an incentive for increased effort and staff turnover is greatly reduced.

Advantages
- Potential conflict between owners and workers is reduced
- The business can attract highly qualified and experienced workers from rival firms it is not a
burden to the firm since it is paid out of the profits made.
- Workers will be motivated to work harder
- Employees will be profit and cost conscious

Disadvantages
- The scheme can be costly to set up especially in large organisations with a lot of employees
- When the business made a loss or small profits, workers won’t be motivated
- Can lead to lower dividends to the owners of the business
- The reward is not closely related to individual effort hence it may not effectively increase
motivation.

Performance-related pay
- exists where some part of an employee’s pay is linked to the achievement of targets at work.
- These targets might include sales figures or achieving certain grades in an annual appraisal.
- a bonus scheme to reward staff for above –average work performance.
- It is used for many groups of managerial, administrative and professional workers.

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- If performance standards are not visible in terms of quality produced, a system of staff
appraisal is established for PRP to be introduced.
- Workers are paid a bonus according to the degree to which the targets have been exceeded.
- It is widely used for those workers whose output is not measurable in quantitative terms, such
as management, supervisory and clerical posts.

Advantages
- Staff are motivated to improve performance if they are seeking for an increase in financial
rewards
- Target setting can help to give purpose and direction to work of an individual
- Annual appraisal offers the opportunity for feedback on the performance of an individual

Disadvantages
- Some employees are not driven by the need to earn additional financial rewards
- Team spirit can be damaged by the rivalry/ competition between employees
- Favouritism can harm manager-employee relationships

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:
• Company house
• Company car
• Education for children
• Discounts on company products
• Pension schemes
• Low interest on company loans

Advantages
- 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

Disadvantages
- Some employees are motivated by cash and cash alone
- Fringe benefits add on to the costs of the business

Different types of non-financial motivators:

Training and development

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- 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.

Benefits
• Improving and widening the skills of employees can increase the productivity and flexibility
of the workforce and its ability to deal with change.
• Training and development increase the status of workers and give them access to more
challenging, and probably better-paid, jobs within the business.
• Developing employees and encouraging them to reach their full potential increase the
opportunities for self-actualisation.
• Training and development are often important incentives for employees to stay with a
business as they feel that they are being fully recognised and appreciated by the company.

Limitations:
• Training can be expensive as trainers and training facilities are needed or off-the-job courses
must be paid for.
• Training and development programmes can take employees away from their work for some
time so other employees will need to cover for them.
• Training can lead to employees leaving a business as they become better qualified to gain
employment within other companies. This discourages some businesses from paying for
training programmes in case competitors benefit from the people they have trained.

Opportunities for promotion and status

- Employee promotion to a higher-level job is seen as a reward for hard work.
- Promotion results in increased employee status, which satisfies a key human need.
- Promoting an employee to a more senior position within the business is likely to prove
motivational.
- If employees think there is no career structure and no opportunity for promotion, they will
not be motivated to perform to the best of their abilities.
- Businesses that do not recognise hard work and exceptional performance through promotion
always risk losing a talented employee.

Job re-design
• 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.

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• The job can be made more challenging and interesting.
• A bored employee is more likely to lose concentration and can easily make costly mistakes.

Team working
• exists when an organisation breaks down its production processes into large units instead of
relying upon the use of the division of labour.
• Teams are then given responsibility for completing the large units of work.
• Team members carry out a variety of duties including planning, problem-solving and target-
setting.

Empowerment
- involves redesigning employees’ jobs to allow them greater control over their working lives.
- Empowerment gives employees the opportunity to decide how to carry out their duties and
how to organise their work.
- Empowerment can make work more interesting as it offers opportunities to meet a number of
individual needs.
- Empowered workers can propose and implement new methods of working as they bring a
new perspective to decision-making.
- They may spend a part of their working lives considering the problems they face and
proposing solutions.
- Empowerment would receive the approval of Maslow and Herzberg.
- It provides motivators, as well as offering employees the opportunity to fulfil higher needs.

Benefits:
• Empowerment leads to quicker problem-solving. Employees are able to respond to problems
immediately and not take time referring them to managers. Workers often have more relevant
experience than managers in solving work-related problems.
• Higher levels of motivation and morale result as workers are given more challenging work
and are recognised for it.
• Higher levels of involvement and commitment improve two-way communication and help to
reduce labour turnover.
• Managers are able to focus on bigger strategic issues as they are released from more routine
issues and problem-solving.

Limitations:
• Lack of experience increases risk, which is why employees must be trained in accepting the
additional authority that comes with empowerment.
• Reduced supervision and control might lead to poor decisions.
• There may be lack of coordination between teams as, for example, one manager is no longer
making

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• consistent decisions and different groups might take different approaches to problems.
• Some employees may be reluctant to accept more accountability but feel that they have to in
order to keep their job secure.

Participation
- is the involvement of employees in the process of decision-making within a business,
possibly through the appointment of worker directors.
- Many businesses recognise the motivational and other benefits of involving employees in
decision-making within an organisation.

Job enrichment
- Is the 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.
- ways in which employees can participate in the management and control of business activity

Job enlargement
• does not increase the complexity of tasks carried out by an employee; instead it increases the
number of similar duties.
• It is also termed horizontal loading.
• A number of firms operating a policy of job enlargement simply require employees to carry
out a number of similar tasks.
• Thus, a receptionist might be asked to carry out a number of duties in addition to dealing
with telephone and personal enquiries from customers.
• The receptionist may also be asked to maintain records of petty cash and update customer
records.

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.

Benefits of delegation

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- Work becomes more interesting and rewarding
- Employees feel important and trusted
- Helps train workers, giving them better career opportunities

Problems of delegation
- Inexperienced employees may fail and this may tarnish the manager’s good name
- Managers may lose management control
- When subordinates perform better than managers, the managers may feel insecure.

Job rotation
- Job rotation allows workers to do several different jobs, increasing their skills and the range
of work they can do.
- There are various benefits and limitations of job rotation.

Advantages:
- Rotation may relieve the boredom of doing one task.
- It can give the worker several skills, which makes the workforce more flexible.
- Workers are more able to cover for a colleague’s absence.

Disadvantages:
- Job rotation is more limited in scope than job enrichment (see below).
- It does not increase empowerment or responsibility for the work being performed.
- It does not necessarily give a worker a complete unit of work to produce, but just a series of
separate tasks of a similar degree of difficulty.

Job enrichment
• The process of job enrichment often involves a reduction of direct supervision as workers
take more responsibility for their own work and are allowed some degree of decision-making
authority.
• Herzberg’s findings formed the basis of the job-enrichment principle.
• Applying the three key features of his theory can result in considerable benefits to
businesses.

Benefits:
• Complete units of work are produced so that the worker’s contribution can be identified and
more challenging work can be offered – for example, by using team (or cell) production.
• Direct feedback on performance, for example by two-way communication, allows each
worker to have an awareness of their own progress.
• Challenging tasks are offered as part of a range of activities, some of which are beyond the
worker’s recent experience. These tasks will require training and the learning of new skills.

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 Obtaining further skills and qualifications is a form of gaining status and recognition (see
Maslow’s hierarchy of human needs).

Limitations:
• Lack of employee training or experience to cope with the greater depth of tasks can result in
lower productivity. It is important not to take a worker too far from the type of work they are
comfortable with.
• Employees may see the enrichment process as just an attempt to get them to do more work.
Enrichment must be planned carefully with the employees involved so that the benefits to
both individuals and the business can be understood.
• If employees are just not able to cope with the additional challenges imposed by job
enrichment, then this can lead to frustration and demotivation.
• Managers must accept reduced control and supervision over the work of employees, which
they might find difficult.

Ways in which employees can participate in the management and control of business
activity
a) Quality circles
- A quality circle (QC) is a group of five to ten employees who have experience in a
particular work area.
- They meet regularly to identify, analyse and solve the problems arising in their area of
operation.
- Quality circles are used to identify problem areas in business processes and members work
on these to improve product quality and productivity.

Benefits:
- Workers have hands-on experience of work problems and they often suggest the best
solutions.
- The results of the quality circle meetings are presented to management. The most successful
ideas are often adopted, not just in that location, but across the whole organisation.
- Quality circles are an effective method of allowing the participation of all employees. They
fit in well with Herzberg’s ideas of workers accepting responsibility and being offered
challenging tasks.

Limitations:
• Quality circle meetings can be time-consuming and reduce the time available for production.
• Not all employees will want to be involved in quality circles, preferring to get on with their
own job.

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• Quality circles may not have the management power to make the changes that they
recommend. If management ignores the proposals from quality circles too often, employees
will become discouraged and unwilling to participate.

b) Works councils
• Managers and employees meet within works councils to discuss issues such as working
conditions, pay and training .
• They are popular in many countries, especially Germany.
• Employee representatives on works councils are normally elected by the workforce and
works council representatives may also be appointed to a company’s board of directors.

c) Employee shareholders
• Firms across the world operate schemes whereby their employees can buy shares in the
company, often at discounted rates.
• Because employee shareholders have a financial interest in the business’ performance, it may
be that their motivation levels and performance will improve as a consequence.
• If the business performs well, its share prices should increase, giving financial benefits to the
employee.

d) Autonomous workgroups
• These are teams of employees who are given a high level of control over their working lives
– in effect, another form of empowerment.
• Some such groups elect their own leaders and can appoint new staff, as well as having
considerable authority over what tasks to complete and in what sequence.

2.3 Management

2.3.1 Management and managers

traditional manager functions:

Planning
- refers to a systematic development of action programs aimed at reaching agreed business
objectives.
- Thus planning involves setting goals.
- Good mangers think ahead and they ensure that necessary resources are made available
before it’s too late.
- Plans can be short term, medium term and long term.
- It is believed that ‘failing to plan, is planning to fail’

Organising

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- includes the assigning of the tasks identified or developed during planning to various
individuals within the organisation in order to achieve set targets.
- It also includes giving instructions to individuals. i.e delegation of tasks.
- Each department or unit is given a clearly defined list of duties and the name of a person to
whom the report to.

Directing
- refers to the process of leading, guiding, instructing, supervising, and motivating employees
in order to achieve the goals of an organization.

Controlling
- the manger must ensure that the tasks are carried out as planned.
- ensuring that the original plan is being followed.
- It involves comparing actual results with the planned results.
- Corrective measure are taken if there is big anomaly between actual results and the aimed
result.

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.

1. Interpersonal Roles
- involves dealing with and motivating staff at all levels of an organisation

Figurehead
- these are duties that are symbolic or ceremonial in nature e.g guest of honour at a function
like a Prize Giving Day

Leader
- involves directing and co-ordinating the activities of all employees in the business.
- Thus the manager will provide direction for the team or business by making clear what is
required of everyone in the business. It also involves staffing and monitoring staff.

Liaison
- It involves the mangers’ interpersonal relationships outside of their area of command.
- Thus the manager should be able to make contacts both inside and outside the organisation.
- The main aim is to establish good relationships e.g participating in meetings with other
businesses.

2. Information Roles

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Monitor
- involves examining the environment to gather information, changes, opportunities and
problems that may affect the business.
- It also involves the processing of information related to those internal or external changes
which might the business.

Disseminator
- involves providing important or privileged information to the subordinates.
- Information needs to be passed to the appropriate people as and when required. This must be
at a suitable time and must use an appropriate medium

Spokesperson
- the mangers represents the business to other people outside the business.
- As a spokesperson, the manager will have to pass information to interested parties e.g
informing the Local authorities about planned changes and also communicating with trade
unions for any proposed changes to the conditions of work.

3. Decision Roles
Entrepreneur
- it involves the process of continually looking for new ideas or new methods to improve the
organisation’s performance.
- For example, an effective marketing manager continually seeks to develop new products.

Disturbance handler:
- it involves the manager making decisions to take corrective in response to situations out of
control.
- The main aim will be to bring about peace and harmony. E.g the responding to emergences
like strikes, disasters etc.

Resource allocator:
- effectively allocating resources whether they are funds, equipment or people in the business
organisation.
- The manger must bear in mind that the resources are always scarce.
- The manager will make decisions on who will get what resources.

Negotiator
- involves negotiating agreements between employees or between departments.
- Negotiating agreements with other businesses e.g suppliers or customers.
- Negotiating with trade unions to obtain advantages for his business etc.

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Fayol: the functions of management
- Henri Fayol (1841–1925) was one of the first management theorists.
- He defined five functions of management and these are still seen as relevant to businesses
and other organisations today.
- These five functions are necessary to facilitate the management process.
- They focus on the relationship between employees and managers.

Planning
- Is the process of setting goals and creating steps that are followed to achieve those goals
- All managers need to think ahead.
- Senior management will establish overall objectives and these will be translated into tactical
objectives for less senior managers.
- The planning needed to put these objectives into effect is also important.
- For example, new production or marketing objectives will require the planning and
preparation of sufficient resources.

Organising resources to meet objectives

- Employees need to be recruited carefully and encouraged, via delegation, to take some
authority and accept some accountability.
- Senior managers should ensure that the structure of the business allows for a clear division of
tasks.
- Each functional department, such as marketing, is organised to allow employees to work
towards the common objectives.

Commanding, directing and motivating employees

- This means guiding, leading and overseeing employees to ensure that business objectives are
being met.
- Employee development will help motivate employees to use all of their abilities at work.
- Managers should be capable of motivating a team and encouraging employees to show
initiative.

Coordinating activities
- As businesses grow there is a greater need to ensure consistency and coordination between
different parts of the business.
- The goals of each branch, division, region and employee must be welded together to achieve
a common sense of purpose.
- At a practical level, this avoids the situation where, for example, two divisions of the same
company both spend money on researching into the same new product, resulting in wasteful
duplication of effort.

Controlling and measuring performance against targets

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- Establishing clear objectives for the business, and for each section within it, establishes
targets for all groups, divisions and individuals.
- It is management’s responsibility to appraise performance against targets and to take action if
underperformance occurs.
- It is just as important to provide positive feedback when things go right.

The contribution of managers to business performance

- The functions and roles of managers, as outlined above, show how significant their work is.
- Effective managers lead successful businesses.
- The part managers play in the performance of the businesses they control cannot be
underestimated.

The key indicators that managers are having a positive impact on business performance
are:
• the business regularly meets its objectives
• high levels of both within customer satisfaction
• high employee motivation levels and low labour turnover
• a respected brand image
• high regard from external stakeholders such as environmental and social pressure groups
• excellent communication the business and with external stakeholders.

Managerial Effectiveness
- It is defined in terms of resource utilisation in relation to organisational goal attainment.
- A manger has the responsibility of selecting the right goal and appropriate means of
achieving that goal.
- If organisations are using their resources to attain their goals, the managers are effective

Managerial Efficiency
- it is defined as ‘doing the thing right’.
- It measures the cost of attaining a given goal.
- The higher the proportion of organisational resources that contribute to productivity, the
more efficient is the manager.
- If minimum cost is spend to obtain the desired goal, the manager is being efficient.

Leadership
- Refers to the process of influencing other people to work harder for the business to achieve
its objectives.
- The leader must inspire other employees to put more effort in whatever task they have to
perform.

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- Thus a leader is someone who can inspire and drive a group of people towards a target or
goal.

Management styles
Autocratic
- Is a management style wherein one person controls all the decisions and takes very little
inputs from other group members.

Advantages of autocratic leadership style

- Quick decisions are made since the leader does not consult anyone.
- The leader can easily control subordinates and maintain discipline and order.
- This style is mostly suitable when dealing with less experienced and lazy workers as
supported by McGregor's theory X and Y.
- Work can be done fast, subordinates will aim at achieving the goals set by the leader because
they may be consequences if they fail to do so.
- Quick solutions to emergence cases
- Enables new policies to be implemented
- Close supervision for employees who are lazy or irresponsible.
- Appropriate on new employees who are unsure about company policies

Disadvantages of autocratic leadership style

- Workers may end up resisting orders given by the manager as they may feel oppressed.
- There can be low morale among the workers because the leader does not involve them in
running the company; as a result the employees do not feel that they are an important part of
the organisation.
- Loss of initiative among the employees. Some experienced and knowledgeable workers may
be innovative since the leader does not involve them, new ideas may be lost which may help
the organisation to be successful.
- It de-motivates employees who are willing to accept responsibility.
- Not concerned about the opinions of employees
- Brilliant ideas can be lost from experienced employees
- Low staff morale since workers are not trusted and also not consulted (morale refers to the
feeling of enthusiasm and loyalty that a person of group has about a job)
- High labour turnover

Democratic leadership style

- Refers to a leadership style that involves all employees in the decision making process. It is
also known as participative leadership style.
- The majority view is often accepted although the senior managers will make the final
decision.

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- The leaders believes in consulting employees and allowing them to share in decision making.
- There is two-way communication and the employees are usually given more information
about the business and the direction it is taking

Laissez-faire
- Employees are given a lot of control over their own work while management will have a
reduced input into decisions that have a direct effect on the way in which work is done.
- It is usually used with for highly skilled and self-motivated employees.
- It is also referred to as a non-authoritarian leadership style.
- The leader only set goals for subordinates and clear parameters within which they work but
gives them the freedom and responsibility to achieve their objectives.
- It is also argued that, a very lazy manager might adopt a laissez faire because they are too
lazy to manage activities of their department themselves.

Advantages
- This gives employees freedom and flexibility about how they organise their work
- It shows that the employees are trusted, and can therefore be motivating
- Encourages creativity since the subordinates are encouraged to find their own solutions to
problems
- It can help employees to develop self-discipline

Disadvantages
- It can be used by lazy managers to avoid making decisions about work matters
- Provides employees with little direction and its difficult for employees to complete tasks on
time
- It can lead to too much control being in the hands of the employees
- Managers might lose touch with the way in which work is being done
- Its success depends on the competence and integrity of employees

Paternalistic
- The word ‘paternalistic’ means father-like.
- a managerial approach that involves a dominant authority figure who acts as a patriarch or
matriarch and treats employees and partners as though they were members of a large,
extended family.
- In exchange, the leader expects loyalty and trust from employees, as well as obedience.
- Paternalistic managers listen, explain issues and consult with workers, but do not allow
them to take decisions.
- The paternalistic manager decides what is best for the business and the workforce, but
delegation of decision-making is unlikely.

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- These managers are less concerned with Herzberg’s motivators than with satisfying the
safety and security needs of the workers
- This style could be suitable in a business with unskilled, untrained or newly appointed
workers.
- It may lead to the demotivation of more experienced workers who would prefer to be given
responsibility for decision-making and opportunities for participation.

McGregor’s Theory X and Theory Y managers

- Douglas McGregor developed this theory in 1960 at the MIT Sloan School of Management.
- His work was based upon Maslow’s Hierarchy of Needs.
- He grouped lower order needs (theory X) and higher order needs (theory Y).
- His assumption was that there are two types of workers, the ones that are willing to work and
others that need to be pushed to do their work.
- He developed two theories in trying to explain why people work: theory X and theory Y.

Theory X workers
- This theory assumes that workers have a negative attitude towards work.
- Workers dislike work and avoid responsibility as much as possible.
- They are self-centred, meaning that they are driven to work to achieve their own personal
goals rather than organisational goals.
- They are motivated by external factors such as money or job security.
- Managers need to closely supervise such workers when they are doing work.
- Authoritarian leaders are required to lead such people so that they will be pushed to do their
job and be punished for performing below standard.
- Managers are responsible for making all the decisions in the organisation since theory X
workers dislike working and don't want to take responsibility.

Theory Y workers
- The assumption is that theory Y workers, naturally like working and they are not pushed to
do their work.
- They are self-directed and self-controlled; they do not need managers to supervise them.
- They accept and seek responsibility.
- They are willing to work towards achievement of organisational goals.
- They aim to satisfy their intrinsic needs such as self-esteem and self-fulfilment.
- Theory Y workers are capable of promoting innovation at work as they enjoy doing their
work.
- Managers need to delegate some of the duties to these workers and give them authority as
they are willing to take responsibility.
- Managers should involve such workers in decision making.

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MARKETING MANAGEMENT (AS level)
The focus of this topic is on how a business finds out the needs of potential customers, and provides
for their needs. Candidates will develop an understanding of the marketing mix. Candidates will
have the opportunity to study in further depth one or more of the elements of the marketing mix,
and to develop the skills to be able to recommend a suitable marketing mix for a business in a
specific context.

3.1 The nature of marketing

3.1.1 The role of marketing and its relationship with other business activities

Marketing management
- refers to an integrated process that encompasses identification, anticipation and satisfaction
of consumer needs and wants.
- It is a management process that involves identifying what consumers need and want, to
provide goods and services that satisfy these needs and wants.
- It can be identified as the process by which companies create value for customers and build
strong relationships in order to capture value from customers in return.
- Is the management process responsible for identifying, anticipating and satisfying customer
requirements profitably.
- is the function of the business that is responsible for understanding customer needs and
developing the right products, setting the right price and promoting and distributing products
in the right way.
- Refers to a process or system of researching into identifying customer needs and applying
suitable prices, product, place 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.
- These are activities the business conduct to promote the buying and selling of a product or
service
- It is a process of getting potential customer or interested customers in the business’ product
or service
- Marketing is not only advertising and selling of goods and services.

The need for marketing

• to educates customers about the company’s product
• helps to satisfy the customer’s needs
• helps to gain information about consumers
• to establish revenue
• to promote product awareness to the public

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• helps to anticipates changes in the customer’s needs
• helps to identify the customers’ needs
• to keep pace with changes on customer’s preferences, tastes, fashion and so on
• to increase revenue
• to ensures that there is long run on revenue
• to builds the reputation of the company
• to enables customers to get the best products and services at the market
• to develop the economy of the country
• to create employment through marketing managers, sales personnel and advertising agents

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.
• Marketing objectives include;
- the share of the market, perhaps to gain market leadership
- total sales (value or volume, or both)
- average number of items purchased per customer visit
- frequency of shopping by loyal customers
- percentage of customers who return (customer loyalty)
- number of new customers
- customer satisfaction
- brand identity.

The link between marketing objectives and corporate objectives

- Marketing objectives are tailored to support the overarching corporate objectives of a
business, ensuring a strategic alignment.
- For example, if a corporate objective is to expand the business internationally, the marketing
objectives will include strategies to increase brand awareness and market penetration in
targeted global markets.
- Similarly, if the corporate goal is to enhance profitability, marketing objectives might focus
on increasing sales volumes or launching high-margin products.
- This alignment ensures that all marketing activities contribute directly towards the company's
broader strategic goals, creating a unified approach to business growth and sustainability.

To be effective, marketing objectives should:

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• be linked to corporate objectives and be focused on helping the business achieve those
overall targets
• be determined by senior management, because the key marketing objectives will impact on
the markets and products a business trades in for years to come
• be realistic, motivating, achievable, measurable and clearly communicated to other
departments.

Importance of marketing objectives

- They provide 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
- is the quantity of a product that customers are able/willing to buy at a given price (in a
specific period of time).
- According to the law of demand, more units of a good are bought hen the product’s own
price decreases, ceteris paribus.
- Ceteris paribus means that ‘other things remaining constant’ Consumers’ demand determines
what producers should produce.

A demand curve
- shows the quantity of a product demanded at each and every price, with all other things
unchanged. The demand curve can shift if, at each price, the quantity demanded changes.
- This may be because of:
• A change in consumer incomes
• A change in the price of rivals’ products
• A change in the price of complementary products
• A change in customers’ tastes and social values
• A change in the marketing activities of the business.

Factors Influencing Demand of a product

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a) Price of the product
- price of the product is a key factor determining the demand.
- If the price falls then demand will rise as the product becomes more affordable to customers
so they buy more of it.
- When products increase in price people will buy less of them and demand falls

b) Price of other Products:

- some products are substitutes and others are complements.
- Substitutes include butter and margarine.
- When the price of butter increases, people will buy more margarine and less butter.
- There is a positive relationship between the price of one product and the demand for a
substitute good.
- When they are complements like tennis balls and tennis rackets, a rise in the price of tennis
balls will lead to a decrease in demand for tennis rackets

c) Advertising and promotion

- a successful advertising campaign will create new customers and remind existing customers
to buy the product.
- The demand for the product will increase due to promotional activities like by-one-get-one-
free.
d) Income level
- as people gain higher income they will demand more of most products.
- People will buy more of normal goods when income increases e.g meat.
- Demand for inferior goods decreases as income increases e.g second-hand clothes.

e) Change in the size and composition of population

- a rise in the population size will lead to an increase the demand for goods and services.

f) Weather conditions
- in a hot day people will buy more ice creams and less of them on a cold day

g) Change in fashion and taste

- Commodities for which the fashion is out are less in demand as compared to commodities
which are in fashion. In the same way, change in taste of people affects the demand of a
commodity.

h) Changes in Income Tax:

- An increase in income tax will 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 increase of demand for
products and services because people now have more disposable income.

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Supply
- refers to the amount of goods and services firms or producers are willing and able to sell in
the market at a possible price.
- The law of supply states that when the price of a commodity rises, the supply for it also
increases. The higher the price for the good or service the more it will be supplied in the
market.
- The reason behind it is that more and more suppliers will be interested in supplying those
good or service whose prices are rising.

Supply Curve
- Represents the relationship between the quantity supplied and the price if the product in form
of a graph.
- A supply schedule represents this relationship in form of a table. Supply curve plots the
quantity of a product supplied against its price.

Factors affecting Supply

a) Price of the commodity
- A rise in price will result in more of the commodity being supplied to the market and vice
versa.
- A change in the price of the product will lead to a movement along the same

b) Prices of other commodities

- For example if it is more profitable to produce LCD TVs then producers will produce more
LCD TVs as compared to PLASMA TVs.
- Thus the supply curve for PLASMA TVs will shift inwards (leftward shift) i.e. a fall in
supply.

c) Change in cost of production:

- Increase in the cost of any factor of production may result in the decrease in supply as
reduced profits might see producers less willing to produce that commodity.

d) Technological advancement:
- Improvement in technology results in lowering of cost of production and more profits for the
producer and thus more supply of that commodity.

e) Climate:
- Climate and weather conditions affect the supply of commodities especially agricultural
goods.
- Favourable weather will lead to an increase in supply

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- Unfavourable weather will lead to a decrease in supply

f) Number of firms:
- when the number of firms increases, the industry’s supply curve will shift to the right
(increase in supply).
- Conversely when the number of firms decreases the supply curve will shift to the left
(decrease in supply)

g) Government policy:
- Taxation can be regarded as an increase in the cost of production and hence shifts the supply
curve to the left.
- On the other hand, subsidies are seen as a reduction of the cost of production thereby they
shift the supply curve to the right.
Interactions between demand, supply and price

Market Price-Equilibrium Price

- Equilibrium refers to a situation of balance where, at least under the present circumstances,
there is no tendency for change to occur.
- Demand will be equal to the supply. Thus the plans of consumers ( as represented by the
demand curve) match the plans of suppliers (as represented by market supply curve).
- Consumers are willing and able to buy more when price decreases and the producers are
willing and able to supply more for sale when price increases.
- Thus the consumers’ wishes and Sellers’s wishes are combined and that interaction of
demand and supply will force them to settle on a compromise price at a point where demand
is equal to the supply.
- Equilibrium price can be defined as the price at which the quantity demanded is equal to the
quantity supplied.
- Equilibrium price can be defined as the price which the demand is equal to the supply. Prices
are determined by supply and demand forces.
- Equilibrium quantity is defined as the level of output where demand is equal to supply

Disequilibrium
- refers to a situation where demand and supply are not equal.
- Supply may be greater than demand or the demand may be exceeding the supply.
- Shortage : This refers to a situation where the demand is greater than the available supply.
- There will be an upward pressure on prices. Price will continue to increase until demand is
equal to supply.
- This condition is also known as excess demand.
- Surplus: It occurs when the demand is less than supply. There will be a down ward pressure
in prices.

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- The sellers will find themselves with unsold stock. To avoid an unnecessary loss they reduce
the price to clear stock.
- This condition is also referred to as excess supply

TYPES OF MARKETS
a) Consumer Market
• a market whose customers are final users of the product such as members of the public.
• They are ultimate/ final consumers who consume either by themselves or for family use.
• They do not buy a product to make another product for resale.

b) Industrial Market
• a market for which customers are other businesses and they buy products as inputs to their
own processes.
• It is also known as a business market.
• It consists of individuals or groups who purchase a specific kind of product for any of the
following purposes; resale, direct use in producing other products and general use in daily
operation e.g lighting in schools, stationery for organisations’ offices etc

Local, national and international market

Local market
• the firm will sell its products to customers in the area where the business is located e.g
hairdressers, motor-repair garages, restaurants.
• Local media is used to advertise the products.

National Markets:
• Firms will sell its products to consumers in the area where the business is located and also
outside its geographical location.
• National markets are larger and will require more research.
• The business must be able to get what they offer known to potential buyers across a country
so mass media is often used for advertising. A firm may service national markets to increase
sales.
• Examples include Banking sector firms, large retail shops.

International Markets:
• A firm that sell its products to customers located in different countries in different continents.
• It is done to increase sales and also profitability.
• Companies that operate in different countries are known as Multinational Companies
(MNCs).
• International markets are increasingly important as globalization continues.

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• Globalisation refers to the growing integration and interdependence of economies and
cultures involving increased trade, movement of capital and people.

Customer (or market) orientation and product orientation

Product Orientation:
• It holds that customers favour products that are available and highly affordable.
• Therefore, management should focus on improving production efficiency.
• It is believed that once a product is cheap, customers will want it.
• It focuses on making continuous product improvements.
• It assumes that producers know the best.
• is concerned on company’s products and refining them to be superior at the market
• it is centred on the quality of the product
• the firms produce what they think are quality goods in their point of view
• they assumes that consumers don’t know what is good until they see something which has
been designed
• The business will supply products it thinks will be attractive to customers.
• The business will be making unique products without keeping customer needs in mind.
• It is also referred to as inward-looking approach where businesses just invent and develop
products in the hope that they will find customers who will buy their products.
• Much emphasis is placed on the production of quality goods.
• They think that customers are always looking for high quality goods. It is ideal when there is
no or little competition.
• A good example is the iPhone, which was designed by Apple and then sold worldwide on the
strength of its design and technical features.
• However, although useful in some situations, the production concept can lead to marketing
myopia.
• Companies adopting this concept run a major risk of focusing too narrowly on their own
operations and losing sight of real objectives, that is, satisfying customer needs and building
customer relationships.
• It holds that consumers will favour products that offer the most in quality performance and
innovative features.

Benefits of Product Orientation

• The approach saves market research costs
• The business is also using its strength

Limitations of Product
• More risk than customer orientation

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• Resources will be wasted when customers are not buying the product

Customer Orientation:
• An approach used by businesses that researches what consumers want and designs and
supplies these to the market.
• It is also referred to as market orientation or outward- looking approach.
• The business pays more attention to customers and their satisfaction needs.
• The business will produce goods that are wanted by customers.
• This approach requires the business to carryout market research and market analysis to
indicate present and future customer needs.
• It is ideal where there is stiff competition in the market.

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.

Measurement of market share and market growth

Market Share:
• it is the proportion or percentage of sales of one firm as compared to the whole market size.
• It is the percentage of the total market held by a business or product.
• Two variables are used and these include firm’s sales and total market sales.
• Market share can be by value or by volume.
• It is calculated using the following formulas.

Market Share by value = Firm’s sales x 100%

Total sales of all firms

Market Share by Volume = Units sold by the firm x 100

Total units sold by all firms

• Market share measures the relative success of one business’s marketing strategy against that
of its competitors.
• A product with the highest market share is known as a brand leader and a business with the
highest markets share is known as a market leader.

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Benefits of high market share
• Higher market share usually translate into high profits
• Small scale shops will be willing to buy from the business since it will be offering best-
selling brands
• Customers are more willing to buy from a market leader ( a business with a higher market
share)

Limitations of market share

• Different results can be obtained if two methods are used which makes it difficult to interpret
the results
• Markets can change rapidly especially in services or technology-based industries, making it
difficult to track changes over time
• Data on sales or profits can be hard to obtain

The implications of changes in market share

Implications of a fall in market share
• Sales are likely to fall unless there is rapid market growth.
• Retailers will be less keen to stock and promote the product.
• Larger discounts to retailers might have to be offered.
• The product may no longer be a brand leader, so promotions will not be able to state this.

Implications of an increase in market share

• Sales are rising faster than those of competing businesses in the same market and this could
also lead to higher profits.
• Retailers will be keen to stock and promote the best-selling brands. These brands may be
given the most prominent position in shops.
• The business producing the brand leader may be able to reduce the discount rate to retailers
(for example, 10% instead of 15%), below that offered by the smaller, competing brands. The
combination of this factor and the higher sales level should lead to higher profitability for the
producer of the leading brand.
• The fact that an item or brand is the market leader can be used in advertising and other
promotional material. Consumers are often keen to buy the most popular brands.

Market Growth:
• It refers to the rate at which total sales in the market are rising each year or falling (if growth
is negative)
• It is also defined as the percentage increase in the size of the whole market.
• Marketing managers will be more willing to venture into markets which are growing rapidly.

Factors affecting market growth

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• Economic growth: The rate at which GDP of a country is growing will also affect the rate of
market growth.
• Incomes of consumers: increases in income increases the consumers’ willingness and ability
to pay for the product.
• Changes in consumer tastes and preferences: Consumer tastes can change in favour or
against the product.
• Technological Advancement: inventions and innovations like on-line buying and selling can
lead to growth in the market

Benefits of calculating Market Growth

• It enables the business to plan ahead by looking at the market growth trend
• Growing market indicates opportunities

The implications of changes in market growth

Increased market growth
• Sales will increase if the business’s market share remains the same.
• It may be possible to increase prices and profit per unit.
• Increased sales could lead to cost savings
• More businesses might be attracted to the market, increasing the level of competition.

Reduced market growth

• Sales will increase more slowly even if the business’s market share remains the same.
• Competitors might reduce prices to increase sales in a slow-growing (or shrinking) market.
• Lower prices might result in lower profit per unit.
• Businesses might consider expanding into faster-growing markets (e.g. in other countries).

Consumer and industrial marketing

The classification of products
a) Consumer products
• This refers to items bought the final user.

Convenience items
• These are usually relatively cheap items and distribution is the key to marketing here; for
example, newspapers and milk.
• Customers will not spend much time searching for them in different stores; they pick up what
is convenient in the nearest shop.
• This means producers have to get them distributed in many different places and displayed in
a way that attracts attention.
• This is important because some convenience items are bought on impulse (for example,
chewing gum) when they are seen in the store.

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Shopping items
• These are products such as clothes or electrical goods which are more expensive than
convenience items.
• When customers go to buy them, they shop around, comparing prices and features; they may
go and look several times before actually buying.
• Customers may go to a retail area where they can quickly move from one store to another to
compare.
• The producer has to clearly demonstrate value for money; for example, by stressing a unique
selling point (USP) to show why its product is better than the competition’s.

Specialist products
• are products that customers have probably thought about for a long time and for which they
are willing to travel to find the right item; for example, Rolex watches or Ferrari cars.
• Specialist products may be distributed to relatively few locations, but the nature of the outlet
is very important to the overall brand image.
• These products are probably not very price-sensitive because people want them for their
status and their uniqueness.

b) Industrial products
• These are products which are bought by businesses to use in their production process to
produce the consumer goods.

Installations
• These are big items of expenditure, such as production lines and new office space.
• Buyers will take a lot of care over the precise features of the item, especially any technical
features, because it is a major item of spending.

Materials
• These are materials used in the production process.
• There may be several possible suppliers, so buyers will shop around.
• The quality, reliability and flexibility of supply will be very important when buying these
products.

Supplies
• These are basic items such as paper and light bulbs; there will be many suppliers and the
buyer will look for good prices.

Qn
Outline the difference between consumer and industrial products [10]

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How marketing might differ for consumer products?

Mass marketing and niche marketing

Mass marketing
• Is the selling the same products to the whole market with no attempt to target groups within it

Features of mass marketing

• Serves large market as compared to niche market
• There is mass production in order to satisfy large market it serves
• There is low production costs due to mass marketing
• Ignores the segments
• It is suitable for large firms
• Goods are sold at low prices due to low costs of production
• The firm has capacity to dominate at the market
• Have high sales volume
• There is mass distribution of product
• It assumes that all customers need the same product
• Promotes one product to all customers
• Use advertising media with high coverage
• takes place when the product life cycle is at maturity phase
• It ignores the existence of segments and offers a single mix to the heterogeneous market.

Advantages of mass marketing

• Enables the firms to maximize profits
• mainly concerned with low costs and high sales volume
• reduces the production cost per unit due to mass production
• it is suitable for large firms
• reduces the shortage of the product at the market

Disadvantages of mass marketing

• there is stiff competition
• failure might lead to wastages of resources and loss of sales
• there is high development and promotional expenditures

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.

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• 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.

Features of niche marketing

• Serves small market
• There is less competition
• It targets a particular segment
• It is usually served by small scale retailers
• There are few sales on the product
• Designed to carter customers with similar needs
• There are small markets in nature

Benefits of Niche Marketing

• Enables small firms to avoid competition from larger firms
• By targeting niche markets, firms can focus on the needs of customers in these markets
• Direct marketing is possible
• There is little competition on those markets

Limitations of Niche Marketing

• Niche markets are small and can therefore only support a small business
• It is not suitable for a business selling many products
• It is more risk than mass marketing the features of mass and niche markets

Market segmentation
• is the process of dividing up the market of potential customers into their own unique groups
• Is the process of classifying consumers into groups based on geographic, demographic,
psychographic and behaviour difference
• It is the practice of dividing target market into approachable groups

Reasons for market segmentation

• to identify competitors at the market
• to enable the firm to conduct effective advertising
• to enable the firm to conduct different promotional activities

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• for the business to concentrate on producing high quality goods
• helps the firm to target its potential customers

Methods of segmenting a market

a) Geographic segmentation
• The market is divided by locations
• It is based on the belief that consumers who live in the same region share some common
human needs and wants
• The reason behind is that, consumer tastes may vary between geographic areas and it is
appropriate to offer different products in different geographical areas

b) Demographical segmentation
• Is a market segmentation technique where an organisation’s target market is segmented based
on demographic factors such as age, gender, education, income and so on
• This refers to the categorization of consumers into segment based on their characteristics

c) Psychographic segmentation
• This refers into breakdown of the customer groups into segments that influence buying
behaviour
• The buying behaviour include beliefs, occupation, values, life style, social status, opinions
and activities

d) Behavioral segmentation
• Divides people into groups who share common behavioral patterns
• It is based on lifestyle, purchasing power, customer loyalty, customer satisfaction, customer
benefits and reasons for purchase

Customer relationship marketing (CRM)

• The objective of customer relationship marketing (CRM) is to develop customer loyalty to
ensure that customers buy from the business in the future.
• If a business can secure the loyalty of many customers, it means that there will be fewer
customers buying products from competitors.
• Customer retention is a measure of customer loyalty and can be measured by
the proportion of customers who continue to buy from the business over a period of time.

Benefits of CRM
- Establish Trust and Loyalty with Customers
- Improve Customer Retention Rates
- Increase Word-of-Mouth Marketing
- Gain a Competitive Advantage

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- Enhance Customer Lifetime Value
- Improve Customer Satisfaction Levels
- Boost Brand Awareness and Equity
- Reduce Marketing Costs
- Increase Sales and Revenue
- Facilitates discovery of new customers
- Increases engagement

Disadvantages of CRM
-
Identification of main features of a market: size, growth, competitors
Competitors:
• are businesses that sell similar or identical goods or services in the market.
• There are two main types of competition and these include price competition and non-price
competition.
• Price competition involves charging price different from the competitor’s price.
• Non-price competition include offering quality goods, after-sale services, hire purchase
facilities etc.
• Competition can be direct or indirect.
• Direct competition: refers to competition from the business that provide the same or very
similar goods and services.
• Goods may be slightly differentiated. Goods can be differentiated by size, colour, packaging
etc
• Indirect Competition: competition is from businesses that are in a different market of sector
i.e a bus operator can experience indirect competition from rail transport operators.

Market Size:
• is the measurement of all the sales of businesses that are supplying to the market.
• Size of market can be estimated or calculated by the local market sales of all businesses in
the market.
• There are two methods that can be used to determine market size

Value of goods sold:

• the total amount spend by customers buying products for all sellers in the market (total
revenue/ total sales)

Volume of sales:
• refers to the total physical quantity of products which were sold by all firms in the market i.e
total number of units sold by all firms

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Importance of Market size:-
• Firms can be able to calculate its own market share
• The firm can easily see if the market is growing or declining
• Marketing manager can assess whether a market is worth entering or not

Market Growth:
• It refers to the rate at which total sales in the market are rising each year or falling (if growth
is negative)
• It is also defined as the percentage increase in the size of the whole market.
• Marketing managers will be more willing to venture into markets which are growing rapidly.

Factors affecting market growth

• Economic growth: The rate at which GDP of a country is growing will also affect the rate of
market growth.
• Incomes of consumers: increases in income increases the consumers’ willingness and ability
to pay for the product.
• Changes in consumer tastes and preferences: Consumer tastes can change in favour or
against the product.
• Technological Advancement: inventions and innovations like on-line buying and selling can
lead to growth in the market

Benefits of calculating Market Growth

• It enables the business to plan ahead by looking at the market growth trend
• Growing market indicates opportunities

Identification of customer and consumer characteristics, profiles, wants and needs

Market research
• Refers to the collection, collation and analysis of data relating to the marketing and
consumption of goods.
• Research is a systematic process of collecting, analysing and interpreting data relating to a
specific problem.
• It is the process of gathering information about markets, customers, competitors and the
effectiveness of marketing methods.
• 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.

Market research can be used to measure customer reactions to:

• new products

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• different price levels
• alternative forms of promotion
• new types of packaging
• online distribution.

Reasons for conducting Market Research

• To reduce the risk associated with new products that is 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.

Primary Research:
• Is the collection of first hand data that is directly related to a firm’s needs
• it is also known as field research.
• It is the gathering of information for the first time directly from sources in the market.
• Information which is collected by the researcher and the information gathered is new.
• An example of primary research is asking people what is their favourite chocolate.

Characteristics of Primary Research

• The data collected has never been published in any form
• The data will be directly related to a firm’s specific needs. Thus a consumer survey will be
designed to discover specific aspects of consumer needs relevant to the firm.
• Primary research is typically expensive to collect. This is because it requires significant
labour input and expertise of the results are to be trusted.

Primary Research Methods

Observations
- is a process of analyzing the actions and behaviour of the respondents in their natural setting.
- is the systematic viewing of people’s actions and the recording, analysis and interpretation of
their behaviour.
- market researcher can observe how people behave.

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- Rather than asking people about their behaviour or their views, market researchers can
observe how people behave.
- Observations take the form of audits (such as stock take), recording things and watching.
- Observers can be employed to watch the behaviour in shops and how people use the product
after purchase.

Advantages of Observations
- It allows the researcher to record behaviour as it occurs and it does not rely on people’s
memories and previous reports of their behaviours.
- Observations provides very large amounts of data and because of the number of observations
techniques, they can be used to provide validity checks on one another, that is, if different
techniques lead to similar results then each individual method can be used with greater
confidence.
- Observations also allow collection of data from certain groups who would not be able to give
verbal reports of their behaviour or feelings because they cannot speak, for example, infants
or animals.

Disadvantages of Observations
- People under observations sometimes try to create a particular impression if they know they
are being observed.
- It is not always possible to predict when a certain activity is going to take place and
therefore, a researcher cannot record behaviour as it actually happens.
- It is only limited to certain situations, for example, you cannot obtain the life history of an
individual through observations.
- It creates many unanswerable questions, for example, the reasons why a customer is acting
the way he is.

Experiments
- Are used to test and assess the response of consumers to changes in marketing mix. This
might involve changes in the product or packaging, advertising, price and distribution
arrangements.

Advantages of experiments
- It reduces the risk of product failure, for example, if the product is introduced to test
consumer reaction and the consumers accept the product, then the company can go on to
launch the product on a national sale (commercialization).
- More reliable data is gathered which is more objective since the consumer reaction provides
a guideline to the sources of the product.

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- It is the only technique that explains why consumers behave in a certain way or why the
product of company fails/succeed, for example, a product may fail as a result of price
increases, lack of effective advertising etc.
- More abundant information may be gathered and the technique is less costly compared to
observation.

Disadvantages of Experiments
- It requires employment, hiring highly experienced researchers who are good at carrying out
field experiments. These researchers cannot be easily available and they are expensive to
hire.
- Most of the information collected is mainly quantitative and therefore qualitative information
can be ignored if experiments are not properly implemented.
- Experiments usually record information about what will happen and may not account for
what has happened.
- The problem with experiments is to control other factors and this means we may not know
what actually causes certain consumer behaviour or what causes a change in the marketing of
the product, for example, a decline in sales might have been caused by other factors like
inflation.
- Experiments are also time-consuming meaning that in order to gather accurate data, there is
need for more time to carry out field experiments.

Test Marketing
- This can take place after a decision has been made to produce a limited quantity of a new
product but before-scale, national launch is made.
- Involves promoting and selling the product in a limited geographical area and then recording
consumer reactions and sales figures.

Advantages of Test Marketing

- It reduces marketing costs since it is tested on a small sample of the population.
- Reduces the risks of a new product launch failing completely.

Disadvantages of Test Marketing

- Its accuracy depends on the choice of participants.
- There is also a difficulty of controlling random variables such as weather conditions or the
mood of participants.

The questionnaire
- It is an instrument that involves the use of well-structured questions to collect data.
- It involves designing questions which will help in collection of data.
- The questions are normally arranged in order and there are spaces left for the interviewee to
give some information.

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- The interviewee is left alone to complete the questionnaire for assessment.

Advantages of questionnaires
- They can be sent to many respondents at the same time.
- Questionnaires are easy to use when collecting data.
- They enable the researcher to obtain information quickly.
- It is less expensive to collect data through questionnaires.
- Respondents may fill the questionnaires during their spare time.
- There is less biased on both sides of the researcher and the respondents when using a
questionnaire.
- Questionnaires are more suitable to the respondents who are very busy.
- Enable the researcher to have short and precise answers as they do not provide an
opportunity for unnecessary reasoning.

Disadvantages of questionnaires
- Questionnaires may be thrown away especially posted questionnaires.
- Many questions may not be answered as the respondents may fail to understand some of the
questions.
- They may provide misleading information especially if they are poorly designed.
- Questionnaires limit the respondents to provide many answers and broad reasoning.
- The response rate may be low as the respondents may not shoulder the burden to answer the
questions as the researcher is away.
- Questionnaires are not flexible as they provide fixed questions. Unlike in face to face
interviews in which the researcher may ask questions based on the level of reasoning of the
respondents.
- The researcher does not have adequate control over the questionnaires since most of the
respondents answer the questions during their spare time.
- The respondents cannot be able to ask the researcher if faced with challenges if the
researcher is absent.

Surveys
- It involves gathering of data by use of surveys questions.
- The researcher asks questions about a certain marketing problem and the consumer responds
to the questions.
- The researcher has to record all the answers to the question asked.
- Surveys can be delivered in any of the following ways:
a) Personal interviewing.
b) Telephone survey.
c) Postal survey.
d) Panel survey.
e) Group interviewing.

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Face To Face (Interview Survey)
- It is a face to face research in which the researcher collects the data directly from the target
source of information.
- The researcher asks questions directly to the consumers who then provide immediate
answers.
- It is more like a discussion which involves an interview between two people at one time, that
is, interviewer and the interviewee.

Advantages of Face To Face

- Firsthand information is gathered since it is collected from the field.
- Immediate responses are obtained and this means it may be quick to implement.
- It is cheaper compared to telephone and postal surveys.
- The interviewee can ask for unclear areas to be clarified by the researcher if the questions are
ambiguous.
- Quantitative information can be gathered which is important when making marketing
decisions.
- Observation of reactions is possible.
- It is flexible.
- Visual materials can be used.

Disadvantages of Face To Face

- Biased information can be collected since the researcher can ask questions in a way that he
will be expecting.
- Some interviewees have a tendency of exaggerating information asked in order to please the
interviewer and get a positive expression.
- It is time-consuming if the researcher lacks skills to control the responses.
- Surveys at times limit the amount of quantifiable data to be collected.
- It is a laborious process since it takes time and is more demanding in terms of research
technique.
- It is a difficult to sample a scattered population.

Postal Surveys
- It is when questions are asked and responded to by means of the post.
- The researcher collects data by preparing questions which are sent to the consumers by post.
- The researcher may send a self-addressed stamped envelope which may be used by the
respondent.
- It is a survey method which is normally used by companies who have well-known consumers
and those who buy gods on credit.

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Advantages of Postal Surveys
- There is the elimination of the interviewer bias since the interviewer will be absent when the
interviewee will be answering questions.
- There are higher chances of gathering accurate information since most people are
comfortable with giving correct answers in the absence of the interviewer.
- It reduces the researcher’s workload.
- It may reduce costs such as transport costs.
- More information is likely to be obtained given that the interviewer has freedom to give as
much information as they can.
- Anonymity.
- Give respondents the time to check data.
- Reaches scattered populations.

Disadvantages of Postal Surveys

- There is a high degree of cheating/exaggeration since the interviewer will be alone.
- Some interviewees may not even respond to the questions.
- Too little information can be collected because it depends on the spaces provided.
- It might be difficult when dealing with unknown customers.
- Not all interviewers have time to respond to the questions posted.
- Expensive in terms of post.
- Low response rate.
- No control over respondent.

Telephone Surveys
- The interview is carried over the phone.
- The researcher asks questions to the interviewer through telephone and the interviewee gives
an immediate feedback.
- This is normally carried out on radio or when the researcher has well-known customers.

Advantages of Telephone Surveys

- It is less time-consuming as compared to postal survey.
- There is immediate response from the interviewee and this quickens marketing decisions.
- Firsthand information is collected.
- It is very flexible and more convenient.
- Wide geographical spread.
- Less inhibited than the face to face surveys.
- Better response rate than postal surveys.
- Undemanding of respondents.

Disadvantages of Telephone Surveys

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- It is more complicated to use that we might not reach the targets as their telephone numbers
may not be available
- Costly in terms of telephone bills.
- Telephone surveys may lead to the collection of false information since the interviewee has a
high chance to lie given that the interviewer is absent.
- Some interviewees have a tendency of not responding to a telephone call, meaning that
collection of information may be difficult.
- Telephones are affected by a number of factors such as electric power cuts, bad weather etc.
and this makes it difficult.
- Biased because it excludes those without phones.
- No visual stimuli.

Panel Surveys
- This is where the opinions and behaviour of a representative group of people is obtained.

Advantages of Panel Surveys

- Members are cooperative.
- Panel members know procedures and time is saved.
- Trends over time can be reviewed.
- Appointments avoid the expense of retails.
- Control groups can be formed.

Disadvantages of Panel Surveys

- Panel members tend to be atypical.
- Panel sophistication develops.
- Panel surveys may lead to the collection of false information since the interviewees have
high chances to lie given that the interviewer is absent.

Advantages of Primary Research

- Targeted issues are addressed: thus the investigator collects data specific to the problem
under study
- Data is up-to-date: the data is current and as such it is specific to the place and situation the
researcher is targeting.
- The researcher enjoys privacy: collector of information is the owner of that information and
he need not share it with other companies and competitors. This gives an edge over
competitors relying on secondary data
- Data interpretation is better: the collected data can be examined and interpreted by the
marketers depending on their needs rather than relying on the interpretation made by
collectors of secondary data.

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- The researcher may get more information: if required, it may be possible to obtain additional
information during study.

Disadvantages of primary research

- High costs: collecting data using primary research is a costly proposition as the more people
are required to carry out surveys and collect data
- Time consuming: the time required to do the research accurately is very long as compared to
secondary data, which can be collected in much lesser time duration
- In accurate feedback: in case the research involves getting feedback from the targeted
audience, there are high chances that feedback given is not accurate. Feedback by its basic
nature is usually biased and given just for the sake of it.
- Usually characterised by a low response rate.
- Not suitable for research problems that need to be addressed within a short period of time.

Focus group
- This involves a group discussion in which people are free to express views and opinions on a
selected subject.
- The technique is used as a means of determining both overt and subconscious attitude and
motivations.
- This means the researcher becomes the leader of the group while consumers contribute their
views and participate in provision of marketing data.
- The researcher selects a specific marketing topic, for example, issues about the product
quality.
- The researcher also participates and contributes his opinions.

Advantages of Focus Groups

- A lot of data is collected since a focus group becomes a source of different views from
consumer.
- There is elimination of bias given that the researcher is also a participant and collects
information from the actual target source.
- They are very cheap to administer and easy to use when gathering data compared to other
research techniques such as observation.
- The research gets actual and more reliable information from the consumer.

Disadvantages of Focus Groups

- It is time-consuming.
- It may result in high levels of conflicts between different consumers which may affect the
results.
- It may result in limited views which may affect the reliability of information since there is no
guarantee that each and every individual will participate.

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- This can be ineffective as some consumers may not contribute their views because of
shyness.
- The element of bias will not be eliminated since the researcher as a group leader, controls the
discussions and will draw conclusions.
- It may be expensive for the organization because it requires refreshments and a well-
furnished room.
- One customer may dominate the discussion and this may affect the results.
- It may be a source of demotivation to consumers whose ideas are not implemented.

Secondary research
- Is the collection of data from second hand sources
- 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.

Sources of secondary data

a) Government publications
- Population census
- Social trends
- Economic needs
- Annual abstract of statistics
- Family expenditure survey

b) Local libraries and local government offices

- Local population census returns with details of total numbers and age and occupation
distribution
- Number of households
- The proportions of the local from different ethnic and culture groups

c) Internal Sources
- Internal company records or annual reports
- Sales trends
- Stock movements
- Supplier and customer records

d) Internal company records

- If the business has been trading for some time, a large quantity of secondary data will already
be available for further analysis from:

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• Customer sales records
• Guarantee claims
• Daily, weekly and monthly sales records
• Feedback from customers on product, service, delivery and quality

a) Internet
- The internet has transformed secondary data collection.
- There is a great range of secondary data available both to existing business planning a new
market development and a newly formed business.

Advantages of internet
- Often obtainable very cheaply – apart from the purchase of market intelligence reports.
- Identifies the nature of the market and assists with the planning of primary research.
- Obtainable quickly without the need to devise complicated data-gathering methods.
- Allows comparison of data from different sources.

Disadvantages of internet
- May not be updated frequently and may therefore be out of date.
- As it was originally collected for another purpose, it may not be entirely suitable or presented
in the most effective way for the business using it.
- Data-collection methods and accuracy of these may be unknown.
- Might not be available for completely new product developments.

b) Market intelligence reports

- These are extremely detailed reports on individual markets and industries produced by
specialist market research agencies.
- They are very expensive, but they are usually available at local business libraries.
- They include; mintel reports, key Note reports and euromonitor

Advantages of Secondary Research

- Secondary research materials are usually cheaper to obtain as costs of conducting the
research do not have to be borne by the organisation
- Data is obtained quickly since the data is already there. There are no hassles of data
collection
- Data from several different sources can be compared and important competitor details
obtained
- Basic information like population structures can be obtained which then provide a foundation
for primary research. Thus secondary research makes primary research easier.

Disadvantages of Secondary Research

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• Data may be out of date as not all sources update every year. This could lead to inaccurate
conclusions based on old data.
• Data is unlikely to have been collected for the specific needs of the business. It might not be
directly relevant or may not use the population samples that the business really wants.
• Not all secondary data is available to all potential users. Even if it is available, it can be
expensive to obtain, for example, from market research agencies.
• Secondary data might indicate the potential for a new market, but primary research will be
needed to gather specific information for potential consumer profiles and their product
preferences.
• Big data is so vast that it is not easy to analyse and to make useful for an individual business.
Data analysis businesses will do this, but at a high cost.

Qn
Outline the differences between primary and secondary research [10]

Sampling
- is a process of selecting part of the population whereas a sample is a part of the population.
- is the selection of few units or elements from a large population.
- involves the selection of a number of units from a target population.

The need for sampling

- to reduces costs of having to survey the whole population.
- to saves time.
- allows researchers to use a small group from a larger population to make observations and
determinations.

Limitations of sampling
1. Sampling error – a sample is always likely to differ from the population to some extent.
2. Substitution problem – what can the investigator do when a certain element in a sample is
not available for investigation.
3. The researcher may not use most appropriate sampling method
4. The sample may be too small

Sampling methods
Probability Sampling methods
- 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.

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a) 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.
b) 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.
c) 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.
d) 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.
e) 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.

Non-Probability Sampling methods

- 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.

a) 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.

b) Snowball Sampling:
- it is a very 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.

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- 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.

c) 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.

The reliability of the data collected

- Reliability in data collection refers to the consistency and dependability of the data collected.
- It assesses the extent to which the measurement or data collection process produces
consistent and stable results
- Reliability is crucial because it ensures that data collection methods and instruments
consistently measure what they are intended to measure, without significant fluctuations or
random errors.
- refers to the extent to which the same results would be received if the research was conducted
again.

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 of quantitative and qualitative data

Qualitative research
- Qualitative research aims to understand why consumers behave in a certain way or how
consumers might react to the launch of a new product.
- The answers to qualitative research are based on opinions, attitudes and beliefs. For that
reason, qualitative data cannot be analysed using statistical techniques.
- is based on the opinions, values and beliefs of people.
- It is usually undertaken using a small focus group or in-depth one-to-one interviews.

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- 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 amoung groups
e.g focused groups and consumer panels.

Quantitative research
- Quantitative market research is based on relatively large samples and is therefore more
statistically valid.
- 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.

Interpretation of information presented in tables, charts and graphs

Methods of presenting market research results
a) Tables
- a table shows the rows and columns which show any connection between the two variables.
- It is important to choose appropriate headings for the rows and columns.
- It is an effective way of organising large quantities of data.

Most useful when

- When a range of results needs to be recorded
- When the results needs to be analysed by statistical means and is essential to have the
numbers themselves
- When there is a lot of text to include with the results, such as detailed headings for each
column.

Problems
- Not attractive in most cases
- The reader may take more time to interpret the data

b) Pie chart
- They are visually attractive and present the data in an easy-to-see way.
- The data is broken down into categories.
- The area of each circle/sector occupied by each category is in proportion to the percentage
that category is of the total.

c) Bar Graph
- Show data in the form of vertical or horizontal bars.
- A bar graph displays data in separate columns. They may show absolute values or
percentages.

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- They are also visually attractive.

d) 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.

e) Line Graph
- A line graph is used for showing the way a variable changes over time.
- A line graph plots data as points and joints the points with a line.
- It is simple and clear and more than one line can be shown on the same axis to enable a
comparison.

Measures of the central tendency

- There are three measures of central tendency, namely; mean, mode and median.

Mean
- Is the sum of observations divided by number of observations
- Is used as an indicator of likely sales levels per period of time. This could be used to help
determine re- order levels.
- Used for making comparisons between sets of data such as attendance at football clubs.

Advantages of using a mean

- It includes all of the data in its calculation
- It is widely used and easily understood

Disadvantages of using the mean

- It is affected by one or two extreme results
- It is commonly not a whole number.

Mode
- refers to the number which appears most
- Could be used for inventory ordering purposes (e.g. a shoe shop would order more pairs of
size 7 shoes than any other size if this is the modal size).

Advantages of using the mode

- It is easily observed and no calculation is necessary
- The result is easily understood since it is a whole number

Disadvantages of using a mode

- The mode does not consider all of the data

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- There can be more than one modal result which could cause confusion

Median
- refers to the middle term in the range of ordered data.
- The median divides the data into 2 equal parts
- Could be used in wage negotiations (e.g. ‘Half of union members earn less than $50 per
week’).
- Often used in advertising (e.g. ‘our products are always in the best-performing 50% of all
brands’).

Advantages of using the median

- It is less influenced by extreme results than the mean

Disadvantages of using the median

- It cannot be used for further statistical analysis
- When there is an even number of items in the results, its value is approximated

The marketing mix

- This refers to controllable variables that are considered by the organization when coming up
with ways of responding to the market’s demand.
- These are key decisions that must be taken in the effective marketing of a product
- It is the total assortment of product, place, price and promotion.

The elements of the marketing mix (the 4Ps)

• the 4Ps: Product, Price, Promotion, Place (distribution channels)

Product
• Is what the company can offer to customers at the market
• It is anything that can be offered by the business at the market
• It is the product or service which the company offers to the target market
• It is the total set of characteristics designed to provide quality to the customers
• Has appearance, quality, design, colour, use, time of use and physical existence
• High quality product is needed at the market

Tangible products
- This is a product with a physical existence
- Have colour, uses, design, brand and a package

Types of tangible products

• Goods are classified into consumer and capital goods

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Consumer products
• are those goods that are made for people to use
• they do not need any further process for them to be used
• they are ready for use
• include sugar, bed, bread, pen, books, shoes, clothes
• they are classified into durable and non-durable goods
• durable consumer goods are those made for use by consumers for long period of time
• non-durable consumer goods are made to use for short period of time eg bread

Producer or capital products

• are goods used to produce another goods
• include, milk, tractors, cranes, production machineries, sugar and so on
• can be classified into durable capital goods and non - durable goods
• durable goods are those with long life in production of goods and services, eg tractors
• non-durable goods are those used for short life of time, eg milk

Intangible products
- the products are offered by service rendering businesses
- these are products without physical appearance
- they are services in nature which the business offer to other businesses

Importance of product development

• Changing consumer tastes and preferences. For example, the trend towards home cinemas
means that a TV manufacturer has to consider developing new products in this market
segment to remain competitive.
• Increasing competition. Apple started the smartphone revolution, yet it cannot stand still as
competition is greater than ever in this market. The iPhone 11 Pro had just been launched
when this book was written. What is the latest version now?
• Technological advancement. It took Dyson 15 years, with thousands of failed attempts, to
make a bagless vacuum cleaner operate successfully. Now all vacuum manufacturers have
adopted similar technology.
• New opportunities for growth. If the existing markets a business operates in are mature and
no longer growing, then developing products for new markets is essential for further growth.
IKEA now offers complete kitchen design and installation services. The demand for its
traditional flatpack furniture is now only growing slowly.
• Risk diversification. Climate change pressure groups are succeeding in forcing governments
to place limits on carbon emissions. Oil and gas companies are investing in new forms of
renewable energies to create sources of revenue and profit to address the risk of falling
demand for oil.

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• Improved brand image. For example, by developing the Lexus brand of luxury cars, Toyota
has taken the strategic move to improve the overall image of the company.
• Use of excess capacity. For example, hotels increasingly offer spa and beauty treatments to
increase demand for empty hotel rooms (excess capacity).

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.
- The differentiation may be through an actual advantage in design, performance, or price, or
an imaginary but real process in which the customer is convinced that the product or brand
has something over and above its physical characteristics.

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.
Benefits of Unique Selling Point (USP)
- The business is able to charge high prices
- Positive publicity from customers
- Increase in market share
- Leads to Brand loyalty. Brand refers to an identifying symbol, name or trade mark that
distinguishes a product from its competitors.

Product Portfolio Analysis

- Refers to analysing products of a business to help allocate resources effectively between
them.

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- 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
- The product Portfolio Analyses uses the product life cycle and Boston matrix

Benefits of product portfolio analysis

- 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.

The product life cycle

• Refers to the stages of product goes through from time is developed to the time it is removed
on the market.
• Is the length of time from a product introduced at the market until it is removed
• It begins when in the development and ends after the product is removed at the market
• Shows the stages that a product will go through from its introduction to its decline
• The product has to pass the following stages;

Uses of product life cycle

- Assists with planning marketing mix decisions, such as a new product launches and price or
promotional changes.
- Identifying how cash flow might depend on the cycle
- Recognising the need for the balanced product portfolio

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a) Product development
• is the first stage the product life cycle.
• starts with planning where the marketing department defines objectives as why it needs to
develop the product.
• at this stage there market research for the product.
• no sales are made at this stage of the product life cycle.
• the market research will used to decide for the product to be launched or not.
• the product will be launched just after market research and developments.

b) Introduction
• Is the second stage of the product life cycle
• At this stage the product is launched at the market
• Low sales are made at this stage because the product is not yet known at the market
• Thus where the company will decide to use penetration or skimming pricing strategy
• The company covers the research and development costs
• The company get information about how their product responds at the market

c) Growth
• Is the third stage of the product at the market
• At this stage customers start to buy and use the product
• The product start to be known at the market
• The product start to draw attention of the customers

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• Sales and profits begin to increase

d) Maturity or saturation
• Is when the product is well established at the market
• Sales continue to rise but at a slow pace
• Sales promotion may be used to target specific areas of interests
• The product is dominated at the market
• The majority of the customer buy the product

e) Decline
• The demand of the product declines at the market at this stage
• Sales level off and profits fall.
• The reason behind is that the product become obsolete or it has failed altogether
• There is price reductions at this stage

Extending the Product Life Cycle

Qn: 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

Boston Matrix analysis

• This method of analysing the market standing of a firm’s products and the product portfolio
of a business was developed by the Boston Consulting Group.
• It highlights the position of the products of a business when measured by market share and
market growth
• The Boston Matrix allows an analysis, not only of the existing product portfolio, but also of
what future marketing strategies the business could take next.
• The size of each circle on the matrix represents the total revenue earned by each product. The
four sectors created by the matrix can be analysed in the following way:

Low market growth, high market share: product A: cash cow

- This is a well-established product in a mature market.

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- Typically, this type of product is profitable and creates a high positive cash flow.
- Sales are high relative to the market and promotional costs are likely to be low, as a result of
high consumer awareness.
- The cash from this product can be ‘milked’ and injected into some of the other products in
the portfolio. Hence, this product is often referred to as a cash cow.
- The business will want to maintain cash cows for as long as possible.

High market growth, high market share: product B: star

- This is clearly a successful product as it is performing well in an expanding market.
- It is often referred to as a star.
- The business will be keen to maintain the market position of this product in what may be a
fast- changing market.
- Therefore, promotion costs will be high to help differentiate the product and reinforce its
brand image.
- Despite these costs, a star is likely to generate high amounts of income.

High market growth, low market share: product C: question mark

- The question mark consumes resources but generates little return.
- If it is a newly launched product it is going to need heavy promotion costs to help become
established.
- This finance could come from the cash cow.
- The future of the product may be uncertain, so quick decisions may need to be taken if sales
do not improve.
- These could include revising the design, relaunching with a new brand image or even
withdrawal from the market.
- It should, however, have potential as it is selling in a market sector that is growing fast.

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Low market growth, low market share: product D: dog
- The dog seems to offer little to the business in terms of either existing sales and cash flow or
future prospects, because the market is not growing.
- It may need to be replaced shortly with a new product development.
- The business could decide to withdraw from this market sector altogether and position itself
into faster-growing sectors.

- By identifying the position of all products of the business, a full analysis of the portfolio is
possible.
- This should help focus on which products need marketing support or which need corrective
action.
- This action could include the following marketing decisions:

• Building – supporting question mark products with additional advertising or further

distribution outlets. The finance for this could be obtained from the established cash cow
products.
• Holding – continuing support for star products so that they maintain their good market
position. Work may be needed to freshen the product in the eyes of the consumers so that
high sales growth can be sustained.
• Milking – taking the positive cash flow from established products and investing it in other
products in the portfolio.

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• Divesting – identifying the worst-performing dogs and stopping the production and supply of
these products. This strategic decision should not be taken lightly as it will involve other
issues, such as the impact on the workforce and whether the spare capacity freed up by
stopping production can be used profitably on another product.

Price
• is the value pegged on a product
• It is what the product worthy at the market
• All cost of production and mark-up makes a price of product
• It is the monetary value which product is exchanged at the market

There are many determinants of the pricing decision for any product. Here are the main ones:
• Costs of production: If the business is to make a profit on the sale of a product, then, at least
in the long term, the price must cover all of the costs of producing it and of bringing it to the
market.
• Competitive conditions in the market: If the business is a monopolist, it is the only seller
of a product. It is likely to have more freedom in price setting than if it is one of many
businesses selling the same type of product.
• Competitors’ prices: It may be difficult to set a price that is very different from that of the
market leader, unless true product differentiation (see above) can be established.
• Business and marketing objectives: If the aim is to become market leader through mass
marketing, this will require a different price level to that set by a business aiming for select
niche marketing. If the marketing objective is to establish a premium-branded product, then
this will not be achieved with very low prices.
• Price elasticity of demand: This measures the responsiveness of demand following a change
in price.
• Whether it is a new or an existing product: For a new product, a decision will have to be
made as to whether a skimming strategy or a penetration strategy is to be adopted.

Price strategies
• Are methods or ways which a firm can use when pegging the price of product

Importance of price strategies

• Helps to maximize sales revenue
• Helps to achieve a target level of profits
• Helps to increase the market share
• Helps to maximize profits

Forms of price strategies

a) Penetration pricing strategy

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• The strategy involves the setting a relatively low price often supported by strong promotion
in order to achieve a high volume of sales
• It helps the firm to deep penetrate into market
• The price of the product increases as the sales volume increases
• It is used to fight competition
• It is suitable where customers are more sensitive on the prices of the product
• It increases the market share of the product

Advantages
- High sales volumes and low prices stop entry of competitors
- High sales volume reduces average costs ( economies of scale)
- Increase in brand awareness
- High market share

Disadvantages
- Consumer resistance when prices are increased in the future
- May result in brand seen as low quality
- Low profit margins

b) Skimming pricing strategy

• This involves charging a higher price when a product is being introduced at the market and
later reduces the price when sales volume increases
• The strategy helps early recovering of research and development costs
• High price of the product enables the firm to earn high profit margin
• high profit margin earned on each unit of product reduces the need to product large volumes
• high prices on product helps on product positioning since high prices are associated with
quality

Advantages
- High prices give appearance of quality and a must have ‘factor’
- Some customers pay high prices for a new unique product
- High prices covers development and marketing costs
- More profits to the business

Disadvantages
- High prices may discourage buyers
- Early buyers at high prices may be discouraged when price falls and they will not buy again
- Buyers may wait as they know price will fall
- Attract new competitors

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c) Price discrimination
• Involves the charging of different prices in different segments of the market
• It takes place in markets where the segmentation of consumers exist
• The same product is charged the different price to each segment
• High prices are charged where there is higher demand of the product and low prices where
there is lower demand of the product

Advantages
- This uses price elasticity (the responsiveness of demand to price changes) to charge different
prices to increase total revenue.

Disadvantages
- There are administrative costs of having different pricing levels.
- Customers may switch to lower- priced markets.
- Consumers paying higher prices may object and look for alternatives.
- The strategy leads to bad publicity of the company

d) Mark-up pricing
• Involves the charging of price of product basing on the production costs
• The production costs are first determined and then a mark-up percentage is added
• Higher mark-up percentage will result in higher price on the product
• The mark-up depends on the demand of the product, phase of the product life cycle and the
number of suppliers interested to be supplied goods

Advantages
• The price set covers all costs of production.
• This is easy to calculate for single- product firms where there is no doubt about fixed cost
allocation.
• It is suitable for businesses that are price-makers due to market dominance.

Disadvantages
• It is inaccurate for businesses with several products where there is doubt over the allocation
of fixed costs.
• It does not take market/competitive conditions into account.
• It tends to be inflexible (e.g. there might be opportunities to increase price even higher).
• If sales fall, average costs often rise and this could lead to the price being raised using this
method.

e) Destroyer pricing

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• Is the strategy that charges lower price to chase away other competitors in the industry
• It is the deliberately undercutting competitors’ prices in order to try to force them out of the
market
• It is also known as predatory pricing

f) Psychological pricing
• Is the pricing strategy used by firms to capture the minds of the customers, for example
instead of $15.00, then $14.99 is charged on a product
• It is used on market research so as to avoid setting prices that consumers consider to be
inappropriate for the style and quality of the product
• It is the setting prices that take account of customers’ perception of value of the product

g) Loss leading pricing

• Is the strategy where a product is sold at a very low price to encourage consumers to buy
other products
• The strategy is mainly used in supermarkets
• The loss made from loss leader product is covered by the other product which is being sold at
higher price.

h) Competitor based pricing

• Is the strategy which charges the price of the product basing on what other firms are offering
at the market
• The strategy is suitable where there is stiff competition at the market

Promotion
• Refers to the entire set of activities which communicates the product, brand or service to user
• It is about communicating with actual or potential customers.
• Effective promotion not only increases awareness of products, but also creates images and
product personalities that consumers can identify with.
• It is used to encourage customers to buy a product

Objectives of promotion
• Increasing sales by raising consumer awareness of a product, which is especially important
for newly launched ones.
• Increasing consumer recall of an existing product and its distinctive qualities.
• Increasing purchases by existing consumers or attracting new consumers to the brand.
• Demonstrating the superior specification or qualities of a product compared with those of
competitors, often used when the product has been updated or adapted in some way.

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• Creating or reinforcing the brand image or personality of the product. This is becoming
increasingly important in consumer markets where it is often claimed that all products look
the same.
• Correcting misleading reports about the product or the business to reassure the public after a
scare or an accident involving the product.
• Improving the public image of the business, rather than the product, through corporate
advertising.
• Encouraging retailers to hold inventories of the product and actively promote products to the
final consumer.

Importance of promotion
• Helps to persuade customers
• Helps to build the reputation of the company
• Helps to increase sales
• It a tool to increase the profit of the company
• Improves the brand image of the product
• It is a tool to fight competition
• Helps to introduce a new product at the market

Types of promotions
• There are four types of promotion, namely;

1. Sales promotion
• Is the market strategy where the firm use temporary campaign to stimulate interest and
demand of the product and increase in sales revenue
• They include:
ü Free samples
ü Buy one and get free
ü Cash discounts
ü Point of sale displays
ü Trade shows
ü Push money
ü Trade discounts
ü Loyalty reward awards

Importance of the sales promotion

• Boost the sales revenue
• Enables the firm to meet the target profit
• It acts as a supplementary advertising and personal selling
• It is defence against competition
• Improves the brand of the product

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• Increase the market share of the product

2. Public relations
• Refers to the variety of activities conducted by the firm to promote and protect the image of
the company, its products and its policies in the eye of the public
• It is the continuous communicating with market to increase the awareness of the product
• It helps to build the brand loyalty and good reputation of the product and the company itself
• It is the process of maintaining the favourable image through maintaining relations between
the firm and the public community
• It is used to distribute and communicate all the necessary information to build up good
reputation in the minds of the public

3. Personal selling
• Is face to face selling in which the sales person tries to convince the customer to buy the
firm’s product
• The sales person meet the potential customers face to face with the aim of selling a product
or service
• It is the art of face to face communication for persuading prospects or consumers in the sales
process

Importance of personal selling

• Helps the demonstrate on how the product is used direct to customers
• Helps to remove the doubts and confusion of consumers about the product
• Helps to provide after sale service to consumers
• Helps consumers to give instructions on how to use the product
• Helps to increase the sales revenue and profits
• Helps to break or penetrate into new market

4. Direct promotion
• Is the marketing strategy that relies on direct communication or distribution to individual
consumers rather than through a third party such as mass media
• Involves the use of mail, email, social media and texting campaigns on communicating to
directly to consumers
• It aims to achieve a specific action among selected group of consumers
• It eliminates the use of middlemen on advertising of the products of the company
• There is direct contact between producers and consumers
• It is customer oriented

5. Advertising promotion

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- is the is communicating information about a product or business through the media, such as
radio, TV and newspapers.
- These advertisements should be directed towards the appropriate target market by selecting
the right media.
- Successful advertising campaigns have led to substantial increases in consumer awareness
and sales.
- This effect can last for a considerable length of time if brand loyalty is established.

Reasons for advertising

- to increase sales revenue
- to increase profit
- to launch a new product
- to increase market share
- to penetrate new market
- to increase brand loyalty
- to improve the brand image of the company
- to fight competition
- to give information about changes on a product
- to locate potential suppliers of goods or services
- to persuade consumers to buy a product

Advertising agents
- These are specialists that advise businesses on the most effective way to promote products.
- Advertising agencies can offer a complete promotional strategy.

Duties of the advertising agents

• research the market, establish consumer tastes and preferences, and identify the typical
consumer profile
• advise on the most cost-effective forms of advertising media to be used
• use their own creative designers to design adverts appropriate for each medium
• film or print the adverts to be used in the campaign
• monitor public reaction to the campaign and feed this data back to the client.

Types of advertising
• There are three types advertising, namely;

a) Persuasive advertising
• Is the advertising used to persuade customers to buy the firm’s product
• It is used to fight competition between other companies in the same industry
• It is used to create the brand preference

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• It encourages customers to shift from other brands and use the firm’s brand
• Helps the firm to increase sales and profits
• It promotes the firm’s product
• The manufacturer fund himself in all advertisements he/she conducts
• Attractive devices are used to convince customers
• It is also known as competitive advertising

b) Informative advertising
• Is used to inform the market about the firm’s product
• It provides knowledge to customers about the product of the firm
• It explains how a product is used and how it works
• It informs the customers about changes in price, where customers get the product and what
the product is made of
• It provides information about the events to take place in future in the organisation eg OK
GRANT CHALLENGE on 25 September
• It gives facts and leave people to make their own decisions

c) Collective advertising
• It is known as generic advertising
• It is used by two or more firms who join together to advertise their products
• The firms who combine together are in the same industry
• There is no promotion of brand of the company
• There is no competition
• There is mentioning of the brand of the firm
• It is funded by trade associations which manufacturers has formed

Advertising methods
The following seven advertising methods are the most frequently used:

Print advertising
This includes advertising in newspapers, magazines and specialist publications.
• It can be directed at particular towns or regions, or consumers who read particular special
interest magazines.
• It provides hard copy, which can be cut out and kept by the consumer for future reference.

Print advertising has limitations:

• It is expensive to gain national coverage.
• Evidence suggests that it is now much less effective with younger consumers than digital
communications.

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Broadcast advertising
This is advertising on TV and radio, and in cinemas.
• Adverts have visual appeal and can create a brand image through the actors used.
• National or even international coverage is possible.
• It can linger in the memory of consumers for a long time if visually dramatic. Broadcast
advertising has limitations:
• It is expensive to buy media time.
• It is expensive to design and produce the adverts.
• There is no permanent hard copy.

Outdoor advertising
This includes advertising on billboards and bus shelter posters.
• It is low cost compared to other media.
• It can be located in prime positions with many potential consumers passing by.
• It can be read/seen more than once. Outdoor advertising has limitations:
• The best locations are the most expensive.
• It can be damaged or vandalised.
• Many passers-by will not notice this type of advertising.

Product placement advertising

Products are featured in TV shows and films.
• The chosen shows or films will be targeted at a particular type of consumer.
• This creates a desirable image if the product is associated with famous actors or shows.
• It is not explicit advertising. Some consumers assume the product is being used because it is
desirable, not because a business has paid for the placement.

Product placement advertising has limitations:

• The show, film or actors may become less popular.
• It is very expensive if the show or film is well known.

Guerrilla advertising
Products are advertised at surprising and unconventional events to make the public take notice.
• It is low cost: graffiti paint on walls is low cost, but it is best to gain permission first!
• It can be creative, inventive and can appeal to young consumers.
• It encourages word-of-mouth communication between potential consumers.
• A staged event can receive free publicity from the media. Guerrilla advertising has

Limitations:
• The message may be misunderstood.
• It may be considered irresponsible and lead to a negative backlash.
• It may be remembered for the wrong reasons.

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Sponsorship
This involves payment by a business to become associated with an event, an individual or a
sports team. It could lead to the business logo appearing on a team’s shirts, for example.

Advantages include:
• the good publicity of being associated with big sporting and other events
• global press and TV coverage of the largest events
• the success of the team or individual can lead to greatly increased interest in the brand.

Sponsorship has limitations:

• It can be very expensive, for example, it costs up to $15m to sponsor a Tour de France team.
• Failure of the event, team or individual can reflect badly on the brand.

Benefits of digital promotion

• Worldwide coverage – a website allows businesses to find new markets and trade globally,
increasing potential market size.
• Relatively low cost – a well-planned and well-targeted digital marketing campaign can reach
the right customers at a much lower cost than traditional forms of advertising.
• Easy to track and measure results – web analytics and other techniques of measuring
response rates make it easy to establish how effective a promotion campaign has been.
Detailed information about how customers use a website or respond to advertising is
available, which helps to improve the effectiveness of future campaigns.
• Personalisation – this is a very important benefit of digital promotion. Each customer can be
made to feel that only they are being sent a special offer. The business’s customer database
needs to be linked to the website, then whenever someone visits the site, the business can
greet them with targeted offers.
• Social media communication builds customer loyalty – involvement with social media and
quick responses to customers’ messages can build customer loyalty and create a reputation
for being easy to converse with.
• Content marketing – digital marketing allows a business to create engaging campaigns using
content marketing. This means producing varied content such as images, videos and articles,
which can help a business gain social currency, especially if it goes viral.
• Website convenience increases sales – the conversion rate of visits to websites (when
customers buy something) is higher than with other forms of selling. It is more convenient
too, unlike other forms of media which require people to get up and make a phone call or go
to a shop.

Limitations of digital promotion

• Time-consuming – unless a digital promotion agency is used (which can be high cost), tasks
such as optimising online advertising campaigns and creating marketing content can be time-
consuming. The success of promotions needs to be judged against the cost of preparing them.

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• Skills and training – employees must have up-to-date knowledge and expertise to carry out
digital marketing with success. Tools, platforms and trends change rapidly. Employees may
need training to keep their skills at the right level.
• Global competition – reaching a worldwide audience is easy but this means competitors can
do so too! Standing out clearly against a large number of competitors can be difficult and
costly. Search engine optimisation is one way of trying to do this.
• Complaints and feedback – unhappy customers can quickly send out negative messages
about a business or its products. Any negative feedback or criticism of a brand can be visible
to the target audience through social media and review websites. It is essential for a business
to respond quickly and effectively to such criticism.

Extension: Measuring success of promotions

It is vital that marketing managers gather as much evidence as possible about the success (or
failure) of existing promotion campaigns to allow them to take better decisions in the future. The
best ways of assessing the success of promotions are:

• Sales performance before and after the promotion campaign: By comparing the sales of the
product before the campaign was launched, with the daily and weekly sales during and after
the campaign.
• Consumer awareness data: Each week, market research agencies publish results of consumer
recall or awareness tests, based on answers to a series of questions concerning the
advertisements they have seen and responded to. This gives businesses rapid feedback on the
progress of a promotion campaign.
• Consumer panels: These are useful for giving qualitative feedback on the impact of
promotions and the effectiveness of advertisements.
• Response rates to advertisements: Newspaper and magazine adverts often have tear-off slips
for consumers to request more details. Even TV adverts can ask for consumers to ring in,
perhaps with the chance of winning a competition. Websites can record the number of hits
and video-sharing sites can record the number of times an uploaded advert has been viewed.
• Social media feedback: The rapid response rate of social media users to new products or new
promotions is perhaps now the most widely used measure of marketing success or failure.

Branding
• Is the process of identifying a product with a name or image that communicates the product
• It is the process of giving a differential and unique label or mark to the product

Importance of branding
• helps the product to be easily identified
• promotes self service
• enables the product to look different

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• facilitates advertising
• goods looks attractive
• makes easier for customers on shopping

Packaging
• is the process of putting physical container for a product or the outside wrapping of a product
• it is usually done by manufacturers

Advantages of packaging
• product look attractive
• provide space for instructions to use a product
• prevents a product from getting spoilt
• Enables price to be tagged individual goods.
• Provides space for bar code of the product
• Goods becomes easy to handle
• Makes easier on displaying goods
• Enables self-service
• Promotes hygiene on the products offered by the business
• Prevents deteriorating of product
• Facilitates advertising to take place.
• Goods becomes easier to store
• Goods becomes easier to identify

Disadvantages of packaging
• Goods becomes more expensive
• Causes air pollution due to waste of packaging materials

Place
• Is referred to where the product will be sold
• It is concerned on how the product of the firm will reach to the market place
• it is also concerned with how products should pass from the manufacturer to the final user,
the consumer

Channel of distribution
• is the route taken by a product as it moves from the producer to the consumer
• it is the path taken by goods or services as they move from the producer to the consumer
• the manufacturers must ensure that the product must reach to the consumers easily which
does not attract too much costs
• there are four types of channel of distribution

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• the channels are as follows;

• Channel 1: producer – wholesaler – retailer – consumer

• Channel 2: producer – retailer – consumer
• Channel 3: producer – wholesaler – consumer
• Channel 4: producer – consumer

Channel 1: producer to wholesaler to retailer to consumer

• This is a traditional channel of distribution
• It is the longest channel of distribution
• The producer produce goods in large quantities and supply them to wholesalers
• Wholesalers will buy goods from several producers and keep them under one roof
• Retailers will then buy goods in bulk from wholesalers
• The retailers will then sell the goods in small quantities to consumers
• On this channel, consumers relies on retailers
• This route is suitable to small and medium enterprises
• Wholesaler remains with a risk of not selling the product
• Goods takes too long to reach to the consumers

Channel 2: producer to retailer to consumer

• On this route, the wholesaler is eliminated in the channel of distribution
• The producer sell goods directly to the retailer
• The retailer is then sell goods to the final users, the consumers
• The large scale retailers goods buy goods directly from manufacturers
• Retailers enjoy low prices and discounts
• This also enables the consumers to get the goods at low prices
• the products do not takes long for the product to reach to consumers

Channel 3: producer to wholesaler to consumer

• the route eliminates the retailer from the channel of distribution
• producers supply wholesalers goods in large quantities to wholesalers
• the wholesalers will sell goods directly to consumers without first sell them to retailers
• the wholesaler breaks the bulk and sell goods to consumers in small quantities

Channel 4: producer to consumer

• is the shortest channel of distribution
• the producer sells goods directly to the consumers
• both retailers and wholesalers are eliminated from the channel of distribution
• Examples are Bata sells shoes directly to consumers, mail order and online selling

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Factors considered when choosing the channel of distribution of a product
• The cost of transport and administration
• The urgency need of the product at the market
• the nature of the product
• the technical complex of the product
• the unit value of the product
• the demand and supply of the product
• The size of the market

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OPERATIONS MANAGEMENT (AS Level)
The focus of this topic is on operations management from the production of physical products to
managing the process of creating services. There are different ways a business can produce a
product, with a range of aspects to consider in its production. Candidates are provided with the
opportunity to apply their understanding of production methods in a variety of business contexts.

The nature of operations

- Operations management is responsible for managing resources efficiently in the production
of goods and services.

Operations management
- oversees the planning, co- ordination and control of the transformation process, turning
resources (inputs) into outputs.
- It is also referred to as production management.
- Operations management decisions involve making effective use of resources (inputs), land,
labour and capital to provide outputs in the form of goods and services.

Objectives of an operations management department

- To design, create, 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 latest technological approaches into the production process.

Production
- Production refers to the process of converting inputs or raw materials into semi/ finished
goods and services.
- Thus production takes place when a business takes inputs, carries out a production process
and produces output.
- In other words, it is the conversion of resources such as raw materials or components into
goods or services.

The use of factors of production: land, labour, capital and enterprise

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Land
- All businesses need somewhere to operate from, even if it is the bedroom of a sole trader
operating an internet-based website design service.
- Some businesses, of course, require large sites for the extraction of minerals or the
manufacture of finished products.
- This will include location decisions and finding the right base for a business, while
considering issues such as the cost and ease of access to supplies.
- In some operations processes, such as farming, managing the land is a key part of the
transformation process.
- On the other hand, choosing the right site is essential to a retail operation. Being close to
transport links is essential to exporters.

Labour
- Labour refers to the work force in an enterprise.
- This refers to the number and the skills of people you employ;
- for example, in sectors such as sport, music and computer programming
- the skills of employees are absolutely critical.
- Human effort can be physical or mental effort used to produce goods and services.
- The quality of the labour input will have a significant impact on the operational success of a
business.
- The effectiveness of labour can usually be improved by training in specific skills, although
trained workers will become sought after by other businesses and may leave.

Capital
- This refers to the tools, machinery, computers and other equipment that businesses use to
produce the goods and services they sell.
- Intellectual capital is becoming increasingly important too in knowledge-based economies.
- Efficient operations often depend on capital equipment and, in competitive markets, the more
productive and advanced the capital, the greater the chance of business success.
- These are vitally important in sectors such as online businesses, where the technology is at
the centre of the business, or car production, where production-line technology determines
output, quality and flexibility.

Enterprise
- This refers to the ability of employees to come up with new ideas, to find solutions to
problems and be creative.
- This determines what other resources are used and what the business offers.
- Enterprise is very important in sectors such as advertising and consultancy.

The transformational process

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- The way businesses change factors of production into finished goods is called the
transformational process.
- The process of transforming inputs into outputs is the responsibility of operations managers.
- They are there to make sure that the process occurs in the way that the business wants and
that particular operations targets are met.
- For example, operations managers may be concerned with achieving a particular level of
quality and ensuring that costs are not too high.

The stages of the transformational process

- The starting points of this process are the factors of production or inputs.
- These are converted, by an operations department, into outputs.
- This process applies to both manufacturing and service industries.
- By production, we mean the making of tangible goods, such as computers, and the provision
of intangible services, such as banking.
- The aim, in all cases, is to achieve added value.
- This means selling the finished products for a higher value than the cost of the inputs.

Inputs (factors of Outputs (goods

Conversion
production) and services)

The contribution of operations to added value

Operations managers can increase added value by effectively managing:
• Efficiency of production: keeping costs as low as possible will help to give competitive
advantage
• Quality: the goods or services must be suitable for the purpose intended
• Flexibility and innovation: the need to develop and adapt to new processes and new products
is increasingly important in today’s dynamic business environment.

VALUE-ADDITION and OPERATIONS DECISIONS

- Value addition refers to the differences between the cost of purchasing raw materials and the
price at which finished goods are sold.
- The role of operations decisions is to achieve a 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

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Role of Operations in Adding Value

- Operations management is central in adding value through the transformational process.

Value addition can be observed in several forms:

Enhancing Product Quality:

- Improving the product's features, durability, appearance, or user experience.

Increasing Efficiency:
- Reducing the waste, time, or costs involved in the production process through lean
management techniques or process optimisation.

Innovation:
- Implementing new ideas, methods, or products to meet changing market demands or
technological advancements.

Meeting Customer Needs:

- Aligning the products or services with consumer preferences, customisation, or market
trends.

PRODUCTIVITY
- It is a measure of efficiency of production.
- is concerned with how efficiently inputs are converted into outputs.
- It shows the relationship between output of a system and factor inputs.
- It is also defined as the ratio of outputs to inputs during production.
- Productivity is important because it is one of the main factors that determine the
competitiveness of a business.
- Raising the level of productivity will reduce the average cost of making each unit of output.
- This lower cost might allow the business to reduce prices to customers.
- It is important to be able to measure productivity levels.
- There are two types of productivity:-

Labour Productivity
- refers to the number of units produced per worker
- is calculated as total units produced/ total workers involved
- it measures the output of a business in relation to the number of employees.

Capital Productivity
- units of output produced per unit of capital resources employed.
- Is calculated as total output produced/ capital employed

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

EFFICIENCY
- it is defined as doing the right thing.
- It involves the production of output at the highest ratio of output to input.
- It is a measure of how well the production or transformation process is performing.
- Efficiency in production is generally assessed by reduction in wastage e.g. reduced number
of scraped items
- Efficiency is measured by the productivity of the factors of production. E.g total output /
units of inputs.
- Is measured by productivity.
- This measures the output produced given the inputs used up.

EFFECTIVENESS
- is defined as doing the thing right.
- It involves meeting business objectives by using inputs appropriately to meet customer
needs. Efficiency is one part of effectiveness.
- For any business the relationship between efficiency and effectiveness depends on the market
segment it is aiming at e.g volume, exclusive designer range etc

Sustainability of operations
- Sustainability involves operating in an environmentally and socially responsible way,
ensuring the business's activities can be maintained over the long term.
- Sustainable activities are those that meet the needs of the business or of society without
compromising on the ability to meet future needs.

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Impact of Sustainability Measures
Environmental Benefits:
- Reduced Environmental Footprint: Lower emissions and waste.
- Resource Conservation: Efficient use of resources to preserve them for future use.

Economic Benefits:
- Cost Savings: Sustainable practices often lead to reduced operational costs.
- New Market Opportunities: Attracting eco-conscious consumers.

Social Benefits:
- Brand Image Enhancement: Positive public perception.
- Customer Loyalty: Building a loyal customer base through responsible practices.

Balancing Efficiency and Sustainability

- While efficiency typically focuses on immediate gains, sustainability considers long-term
impacts.
- Businesses often face the challenge of integrating these concepts harmoniously.

Strategies for Integration:

- Sustainable Technologies: Investing in technologies that offer both efficiency and
sustainability benefits.
- Process Reengineering: Redesigning processes to be both efficient and sustainable.

The importance of sustainability of operations

- Sustainability is one of the key business issues of the twenty-first century.
- Growing global concern about pollution and climate change has put pressure on businesses to
clean up their operations.
- Businesses are becoming increasingly focused on achieving sustainability of operations.

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They can do this in a number of ways, by:
• reducing energy use and carbon emissions
• reducing the use of plastic and other non-biodegradable materials
• using recycled materials
• manufacturing products that are recyclable

In summary, efficiency, effectiveness, productivity, and sustainability are foundational elements

in modern business operations. Their integration and application are crucial for achieving
operational excellence, market competitiveness, and long-term business sustainability. By
focusing on these areas, businesses can not only improve their operational performance but also
contribute positively to environmental and social sustainability, thereby securing a robust and
respected position in the market.

Capital and labour intensive

- In the realm of business operations, the distinction between capital and labour intensive
practices is pivotal.
- These methodologies not only define the production approach of a business but also have far-
reaching implications on efficiency, cost, and output quality.

Capital Intensive Operations

- Capital intensive operations are heavily reliant on machinery and technology, often seen in
industries like manufacturing and mining.
- Capital intensive refers to the production that requires higher capital investment such as
financial resources, sophisticated machinery, more automated machines, the latest
equipment, etc.
- process is one that involves a relatively high proportion of machinery and equipment relative
to other resources.
- means there is a high proportion of capital (for example, machinery) used relative to other
factors of production.
- Costs of capital are a higher proportion of total costs than costs of labour
- These operations are marked by their high investment in equipment.

Advantages of capital intensive operations

High Efficiency and Productivity
- The use of advanced machinery facilitates faster production rates and greater output,
significantly enhancing efficiency.

Consistency and Quality Control

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- Machines provide a uniform quality, reducing the risks associated with human error and
ensuring a consistent product quality.

Economies of Scale
- With machinery handling bulk production, companies can achieve economies of scale,
lowering the cost per unit and boosting profitability.

Reduced Labour Costs

- By relying more on machinery, these operations can minimise the costs associated with
hiring and training staff.

Enhanced Safety:
- Automated processes can undertake hazardous tasks, reducing workplace accidents and
improving safety.

Other benefits of capital intensive operations

- Mass production requires large scale output using repeated task. Machine can deliver this
much more quickly than labour
- Enables the business to enjoy economies of scale
- Increased labour productivity
- Skills level may be lower so costs are less and it is easier to recruit employees.
- Acts as a barrier to potential entrants, thus protecting the business competition
- The use of machinery improves efficiency in operations
- Machinery has lower day to day operating costs than labour
- Machinery is more consistent in its operations than labour

Limitations of Capital Intensive Operations

High Initial Investment:
- The requirement for sophisticated machinery and technology demands a substantial initial
capital outlay.

Technological Obsolescence:
- The rapid pace of technological advancement can render existing machinery obsolete,
necessitating further investment.

Reduced Flexibility:
- Machinery and automated processes are often designed for specific tasks, making them less
adaptable to changes in product design or market demand.

Dependence on Technology:

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- Heavy reliance on machinery can make operations vulnerable to technical malfunctions and
breakdowns.

Environmental Impact:
- The extensive use of machinery may lead to higher energy consumption and environmental
footprint.

Other limitations of capital intensive operations

- Difficult to produce a range of varied one- off products
- Difficult to deliver personal services
- High start-up costs. Cost of capital may be too high for a business to buy machinery
- Machine break down can be a big challenge to the business
- Employees using machines can be bored

Labour Intensive Operations

- Labour intensive operations, prevalent in industries like handicrafts and personalised
services, primarily depend on human labour.
- refers to the production that requires a higher labour input to carry out production activities
in comparison to the amount of capital required.
- means there is a relatively high proportion of labour (employees) used relative to other
factors of production.
- Examples of labour intensive industries include agriculture, restaurants, hotel industry, and
other industries that require much manpower to produce goods and services.

Benefits of labour intensive operations

Flexibility and Adaptability:
- Human workforce can adapt to diverse tasks and changes in production requirements more
readily than machines.

Lower Initial Costs:

- These operations usually require lesser investment in machinery and technology, making
them accessible for smaller businesses.

Employment Opportunities:
- By requiring a larger workforce, they contribute significantly to employment, particularly in
regions with abundant labour.

Customisation and Craftsmanship:

- Human skill and expertise facilitate a high degree of customisation and craftsmanship,
appealing to niche markets.

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Human Touch:
- Labour intensive operations can provide a personal touch, which can be a unique selling
point in certain industries.

Other benefits of labour intensive operations

- Can produce one-off unique products
- Well suited to deliver personal services
- Lower productions costs especially when labour is cheaper in that area
- Low start-up costs
- Relatively easy to vary labour force (recruit/ retrench)

Limitations of Labour Intensive Operations

Lower Efficiency:
- Compared to machines, human labour is often less efficient, leading to lower overall
productivity.

Inconsistency and Quality Issues:

- Variability in human performance can lead to fluctuations in product quality.

Higher Long-Term Costs:

- Ongoing labour costs, including wages, benefits, and training, can accumulate significantly
over time.

Vulnerability to Labour Issues:

- Such operations are susceptible to issues like strikes, labour shortages, and changes in labour
laws.

Scaling Challenges:
- Increasing production often means proportionally increasing the workforce, which can be
logistically challenging and expensive.

Comparisons Capital vs. Labour Intensive Operations

- Comparing these two types of operations highlights their contrasting features:

Cost Implications:
- Capital intensive operations bear high initial costs but potentially lower ongoing expenses,
whereas labour intensive operations have lower initial but higher long-term costs.

Scalability:

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- Capital intensive operations can scale up more easily, as increasing production doesn't
necessarily require a proportional increase in labour.

Quality and Consistency

- Machines typically ensure higher consistency, whereas human labour offers customisation
but with potential variations in quality.

Employment and Skills:

- Labour intensive operations are more labour-centric, requiring different skills and offering
more employment opportunities, but potentially at lower wages.

Other Limitations of labour intensive operations

- Cannot produce large-scale output quickly
- Limited economies of scale
- Employees can disrupt production easily due to industrial action or absence
- Legal constrains may make it difficult to vary labour force
- Training costs may be very high

In conclusion, understanding the nuances of capital and labour intensive operations is vital for
strategic decision-making in business. Both approaches have their unique benefits and
limitations, and the choice largely depends on the company's specific context, market dynamics,
and long-term strategic goals. By evaluating these factors, businesses can optimise their
operations for maximum efficiency, quality, and sustainability.

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 (production) methods

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- Operations methods are usually classified as follows:

a) Job production
- This is normally used for the production of single, one-off products.
- This is a production method where a product is made specifically for an individual.
- Each customer’s order is different from another customer’s order.
- A single worker or group of workers handles the task.
- Job production requires highly skilled labour.
- Examples of job production are dress making, hairdressing and decorating.
- It is usually labour intensive.
- Job production is often expensive.
- It can take a long time to complete each unit.
- The labour force also needs to be highly skilled and this is not always easy to achieve.

Advantages of job production

- Customers’ specific requirements are met.
- Goods produced are unique.
- Different products are produced hence there is flexibility.
- There is production of high quality goods.
- It suits personal service .Personal service entails service offered directly to a customers.

Limitations
- It requires use of highly skilled labour.
- High costs incurred on materials because each customer has own specifications.
- Time taken to produce can be long.
- It may be expensive to correct errors per specific order.
- Reduced profits as opposed to mass production.

b) Batch production
- Batch production involves the production of identical products in groups.
- The products in the batch go through the whole production process together.
- The production process involves a number of stages.
- This is where a product is produced stage by stage in different batches.
- Products are made in such a way that if one batch finishes, the next batch starts.
- The process is not continuous hence there is need of changing over.
- Examples of batch production include: clothing production, furniture production, baking and
car assembly.
- This occurs when items move together from one stage of a process to another.
- This approach is cheaper per unit than job production because you are producing products in
groups.

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- At the same time, you have some flexibility to change the recipe or approach from one batch
to another.

Advantages Of Batch Production

- Materials are bought in bulk which becomes cheaper for the enterprise.
- It reduces unit cost since a large amount of output is produced.
- Specific customer needs are met for instance size, weight and style.

Disadvantages Of batch Production

- There is delay in production, when switching from one batch to another.
- Space is needed for storing raw materials.
- Goods have to be stored until they are sold which is very expensive (high storage cost).
- Work become boring because of repetition of work.
- Different specialised machinery may be required.
- Cost of production is relatively high.

c) Flow production
- It can also be referred as mass production or line production.
- In flow production, it is a continuous movement of items from one stage to another until
completion without stopping or interruption.
- Flow production systems are capable of producing large quantities of output in a relatively
short time.
- It suits industries where the demand for the product is high and consistent.
- It also suits the production of large numbers of a standardised item.
- This is why it is often referred to as mass production.
- Units are worked in each stage and then passed straight to the next work stage without
waiting for the batch to be completed.
- Examples of flow production is used in the production of packaged food, beverages, cars and
televisions.

Advantages of flow production

- High quality products are produced.
- Lower cost of labour due to high use of machinery, leading to lower prices products.
- Time is saved because there is no need to switch to other batches.
- Labour costs are low because much of the process is mechanised.
- There is little physical handling of the products.
- The constant output rate should make the planning of inputs relatively simple.
- This makes inventory control easier and minimises inventory levels.
- Quality tends to be consistent and high.
- It is easy to check the quality of products at various points throughout the process.

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- There is easy control of production process.
- Waste is eliminated leading to lower costs.
- It requires a minimal storage space.

Disadvantages Of Flow Production

- The system may be boring for workers.
- Setting up production line can be expensive.
- If there is breakdown of one machine, it will affect the whole production line.
- Contributes to unemployment because of great use of machinery.

d) Mass customisation.
- Is large-scale production with the flexibility to produce a number of different models
- It’s a flexible mass production system enabling customers to specify what features of a
product/ service they want.
- This process combines the latest technology with multi-skilled labour force to use production
lines to make a range of varied products.
- This allows the business to move away from the mass- marketing approach with high output
of identical products.
- This is a relatively new development made possible by technological advances.
- This type of process is on a large scale but, whereas mass production usually lacks flexibility,
this technology enables a variety of models to be produced on the same production line.
- The businesses will now use focused or differentiated marketing which allows for higher
added value.
- Few changes to the products are made using flexible computer aided production systems to
produce items to meet individual customers’ requirements at mass production cost levels.

Strengths of mass customisation manufacturing

• Accurate records are kept. This is because of the use of computers to keep records
• Greater job satisfaction as boring and routine tasks are now being done by computers
• New products are produced as new methods of production are introduced
• Better quality products are produced due to better production methods
• Higher customer retention since products have options and are tailored to personal tastes
• Fewer unfinished goods need to be stored, reducing overhead costs
• Quick, efficient production process from start to finish
• A higher price point for customized products, which means higher profits
• More flexible software and systems to handle highly customized orders

Weaknesses of Mass Customization Manufacturing

• It is very expensive to set up. Computers, robots and machine are very expensive
• Technology will become out-dated. Technology keeps on changing

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• Employees may need to be retrained to use the new technology. This adds to business costs
• Increased unemployment as workers will be replaced with machines
• Impossible to build up stock ahead of time

Problems of changing operations methods

- Setting up an operation method takes time, planning and capital.
- To change from one method to another would mean taking apart the machinery and
equipment and redesigning the whole production system.
- It would also mean that it might be necessary to redesign the product.
- It would be extremely difficult and very expensive to produce some batch produced products
by flow production
- Changing from job to batch to mass production will depend on the nature of demand.
- Mass production requires high volumes and therefore is not appropriate for job production,
where each item is unique.
- Batch production enables relatively high outputs and some flexibility (for example, printing
batches of different magazine titles) but is not appropriate if a customer wants something
unique.
- Moving from job to batch to mass production will require investment in capital equipment.
- It will enable higher volumes (assuming the demand is there) but there will be less flexibility
in terms of tailoring the product to customer needs.

Exam Tip
When recommending a suitable method of production, carefully consider the needs of the
customers. Where the selling price is a key driver of consumer demand, flow production
(where unit costs are minimised) is likely to be very suitable. Where demand is driven by quality
or where customisation is required, job or batch production are likely to be better choices.

Inventory management
- Stock management occurs when the purchasing department aims to minimise cost of stock by
maintaining adequate levels of stock.
- Thus the purchasing department must obtain the right quality at the right time in the right
quantity, from the right source at the right price.
- It is also known as stock control.

Reasons for holding stock ( or purpose of stock control)

- Stock of raw materials is kept in order to meet production requirement
- Stock of work-in-progress is maintained in order to continue the production process and
allowing greater flexibility and better utilisation of time and machinery.
- Stocks of finished goods are maintained in order to meet customers’ demand on time
- Stocks of equipment and spares are kept in order to support sales and production

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- To control cash tied up in stocks
- To control wastage and pilferage (stealing of small items/amounts at a time)

TYPES OF INVENTORY
Raw materials
- the basic materials from which a product is made and they are usually bought from outside.
- These will have been purchased from outside suppliers.
- They will be held in storage until they are used in the production process.
- These inventories can be sent to the production line quickly.
- The business can meet increases in demand by increasing the rate of production quickly.

Work-in-progress
- unfinished project that is still being added to or developed or partially completed goods
- At any one time, the production process will be converting raw materials and components
into finished goods.
- During this process there will be work in progress and for some businesses, such as building
and construction businesses, this will be the main form of inventories held.
- The value of work in progress depends on the length of time needed to complete production
and on the method of production.
- Batch production tends to have high work-in-progress levels.

Finished products
- Are goods that have completed the manufacturing process.
- Having been through the complete production process, goods may then be held in storage
until sold and dispatched to the customer.
- These inventories can be displayed to potential customers and increase the chances of sales.
- They are also held to cope with sudden unpredicted increases in demand, so that customers
can be satisfied without delay.
- Firms will also stockpile completed goods to meet anticipated increases in demand, for
example seasonal goods or products such as toys or fireworks at festival times.

COSTS OF HOLDING HIGH LEVEL STOCK

- Opportunity cost as capital is tied up in stored stocks
- Storage costs will increase
- Increase in spoilage
- Rise in administrative and finance costs e.g insurance
- Wastage of resources in a period of lower demand in the market
- Risk of theft

COSTS OF HOLDING INADQUATE / LOW LEVEL OF STOCK

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- Lost sales which are known as out-of-sale costs
- Idle production resources i.e the machines will be operating below capacity
- Ordering costs will increase since the firm places more number of orders in a given period
- The advantage of bulk buying cannot be achieved

BENEFITS OF HOLDING HIGH LEVEL STOCK

- The firm can enjoy the benefit of bulk buying
- There is production flexibility since the business will be having enough stock at any given
time
- Machine and factory plant will be operating at full capacity at all times
- Enough stock will be available to support production and sales

BENEFITS OF HOLDING LOW LEVEL STOCK

- Storage costs are reduced
- Insurance costs are minimised
- Capital is not unnecessarily held or kept in stocks
- Minimum wastages in a period of reduced demand
- Risk of theft and spoilage is reduced

Buffer inventory, reorder level and lead time

a) BUFFER STOCK
- Buffer inventory is the minimum amount of inventory a business wants to hold just in case of
problems.
- refers to the reserves of stock kept to cater for eventual stock out or uncertainties.
- Is also known as minimum stock.
- This is the minimum number of stock that should be held to ensure that production still
continue in case of delay in the delivery of raw materials
- To avoid the risk of running out of stock, the business must have reserved stock
- this technique is used to avoid stock out costs which are, lost production, lost contribution
from lost sales, loss of customer good will, high unit costs associated with urgent purchases
and loss of bulk buying discounts

b) RE-ORDER LEVEL
- refers to the level of stock at which a new order is placed with the supplier.
- The reorder level is the amount of inventory left at which a business needs to place an order
so that the new inventories arrive before the business goes below its buffer level.
- The quantity of this order or the re-order quantity will be influenced by the economic order
quantity (EOQ).
- The reorder quantity is the amount ordered each time.

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ECONOMIC ORDER QUANTITY
- refers to the quantity of materials ordered at cash point to minimise the total annual stocking
costs or the least cost quantity of stock to re-order taking into account delivery costs and
stock holding costs.
- EOQ depends on interest on capital, storage costs, wastage costs and insurance costs

OPTIMUM STOCK LEVEL TO BE HELD

- refers to the right quality and quantity of stocks to be kept at the business to promote the
smooth running of production.

TOTAL STOCK COSTS= stock holding costs + out of stock costs

MAXIMUM STOCK
- refers to the highest amount of stock kept and it is limited by space and the financial costs of
holding higher levels.

Maximum stock = EOQ + Buffer Stock

c) LEAD TIME
- is how long it takes from ordering the supplies from a supplier to them arriving at the
business.
- it is the amount of time it takes for a stock purchased to be received, inspected and made
ready for use.
- If more time is required between ordering new stocks and their delivery then a higher
minimum stock is needed.

Inventory control charts

- Inventory control charts or graphs are widely used to monitor a firm’s inventory position.
- These charts record, over time, the numbers of goods held, inventory deliveries, buffer levels
and maximum inventory.
- Inventory control charts can highlight how much inventory is being used up, how much to
reorder and when.
- They help an inventory manager to determine the appropriate order time and order quantity.
- They also allow an analysis of what would happen to inventory levels if an unusual event
occurred, such as a competitor operating a very successful promotion campaign.

A stock control diagram illustrates the flow of stock (inventory) into and out of a business over
time

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 An example of a stock control diagram

Diagram Analysis
• The maximum stock level is the maximum amount of stock a business is able to hold in
normal circumstances (1 600)
• The reorder level is the level at which a business places a new order with its supplier (800)
• The minimum stock level is also known as the buffer stock level and is the lowest level to
which a business is willing to allow stock levels to fall (400)
• The lead time is the length of time from the point of stock being ordered from the supplier to
it being delivered (1 week)
• The stock level line shows how stock levels change over the given time period
o As stock is used up a downwards slope is plotted
o When an order is delivered by a supplier the stock level line shoots upwards

Worked example
The diagram below shows stock movements of kitchen shelving units sold by ABC Ltd.

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Identify the following points:
a) the minimum stock level
b) the re-order level
c) the re-order quantity
d) the lead time for kitchen shelving units [4]

Solution
Step 1 - Identify the minimum stock level
The minimum stock level is identified by the bottom-most dotted line - in this case it shows that
the minimum stock level is 200 units (1 mark)

Step 2 - Identify the reorder level

The reorder level is clearly identified on the diagram - in this case it shows that the reorder level
is 500 units (1 mark)

Step 3 - Identify the reorder quantity

The reorder quantity is the difference between the maximum stock level (shown by the topmost
dotted line) and the minimum stock level

1000 units - 200 units = 800 units

The reorder quantity is therefore 800 units (1 mark)

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Step 4 - Identify the lead time for kitchen shelving units
The lead time is the difference in time between an order for stock being placed and its delivery.
In this case, assuming a five-day working week, the lead time for shelving units is two days (1
mark)

Advantages of Stock Control Chart

- It makes it easier to run and control stock simply because stock control charts specify the
amount and the time when the quality of raw materials should be ordered.
- It makes it easy for the business to make necessary arrangements because it specifies the
amount of the lead time. This refers to the time interval between placing an order and
receiving the order.
- It helps the business to avoid stock-outs given that raw materials are re-ordered when stock
has declined and a reserve stock is kept to cater for any unexpected demand increases.
- It helps the company to efficiently and effectively utilize resources through minimization of
resources wastage.
- It is a technique which is most suitable for large businesses that operate on a larger scale.

Disadvantages of Stock Control Chart

- It requires some research meaning that it is a costly technique.
- A stock control chart requires continuous motivation and evaluation meaning that it is a more
laborious technique.
- It can result in an increase in warehousing costs such as insurance costs, damages and
obsolescence.
- It requires experienced production managers and stock contribution which are very expensive
to hire or employ.
- Stock control chart is difficult to implement in an unstable economic environment where it
might be difficult to determine the quantity to order, time and delivery of stock.
- It is difficult to estimate the lead time.

Supply chain management

- involves managing the flow of goods and services, and includes the different processes that
transform raw materials into final products.
- is the management of the flow of goods and services, including all the processes of turning
raw materials into final products.
- supply chain refers to all the different stages involved in making, distributing and selling a
good or service, beginning with the material through to the production of parts, through to
the distribution and sale of the product.

Supply chain management aims to reduce this time period by:

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• establishing excellent communications with supplier companies, which helps to ensure the
right number of goods of the right quality are received exactly when needed
• cutting the time taken to deliver all materials required for production by improving transport
systems
• speeding up the new product development process to improve the competitiveness of the
business
• speeding up the production process with technology and flexible workforces
• minimising waste at all production stages to cut costs.

The importance of Supply Chain Management

• Improves customer service: Customers expect products to be delivered quickly and on
time. Good supply chain management ensures that customers receive products more quickly
and of the appropriate quality. This increases customer satisfaction.
• Reduces operating costs: Effective supply chain management allows a business to reduce
costs. In particular, purchasing costs and inventory costs should fall. Also, production costs
are cut as time is saved in converting raw materials into finished products.
• Improves profitability: By reducing wasted time, improving inventory management and
creating a low-cost but efficient supply chain, business profits should increase.

Just in time
- Just in Time (JIT) stock management is a process in which raw materials are not stored
onsite but ordered as required and delivered by suppliers 'just in time' for production
- Careful coordination is required to ensure that raw materials and components are delivered
by suppliers at the moment that they are to be used
- Components and other supplies arrive just as they are needed on the production line.
- Finished goods are delivered to customers as soon as they are completed.
- it is a stock control system in which material is scheduled to arrive exactly when it is needed
for production and in the exact quantity.
- Raw materials are reduced to zero and finished goods inventories are minimised by matching
production to demand.
- Thus JIT does not require any Buffer Stocks to be held.
- The components arrive just at the time that they are needed and the finished goods are
delivered to customers as soon as they are completed

NB- JIT is basically a Japanese approach towards production

BENEFITS OF JIT
- The right quantities are produced or purchased at the right time
- Improvements on product quality
- Improved customer service

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- Reduction in storage costs
- Less chance of stock being out-dated or obsolescent
- Less stock reduce the risk of damage and wastage
- Higher profits due to overall decrease in costs
- Stockholding costs including storage costs are minimised
- Close working relationships are developed with a small number of trusted suppliers
- Cash flow is improved as money is not tied up in stocks
- Unused storage space is available for productive use
- Teamwork is encouraged so employee motivation is likely to be improved

DISADVANTAGES OF JIT
- It is associated with high start-up cost
- Advantages of bulk buying are lost
- Delivery costs rises as frequent small orders are delivered
- Administration costs rises as so many small orders need to be processed
- Doesn’t work when demand is unpredictable
- The ability to respond to unexpected increases in demand is reduced
- Administrative costs related to frequent ordering are increased
- Unreliable suppliers (e.g. late or poor quality deliveries) can quickly halt production
- Significant changes to organisational structure and production controls are required
- Bulk buying economies of scale are not generally possible

Capacity utilisation
- refers to the proportion of full capacity being produced by the business.
- Capacity utilisation is measure of the level to which a businesses assets are being used to
produce output
- Capacity measures the maximum amount of output a firm can produce at a given moment
with its existing resources.
- It compares current output to the maximum possible output a business can produce using
all of its assets and is expressed as a percentage
- The maximum capacity means the total possible level of sustained output a business can
achieve in a given time period.

Measurement of capacity utilisation

The measurement of capacity utilisation

- Is calculated by the formular

Capacity Utilisation = Current output x 100%

Maximum output

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Worked example
Baby Bakery produces specialist breads which are sold to restaurants in the Midlands. Batch
production is used in the factory to manufacture the range of breads and the factory can produce
a maximum of 68 400 units per month. In May factory output was 51 420 units.

REQUIRED
Calculate Baby Bakery’s capacity utilisation in May. [2]

Solution

= 51 420 units x 100%

68 400 units

= 75%

Example
Baby Bakery produces specialist breads which are sold to restaurants in the Midlands. Batch
production is used in the factory to manufacture the range of breads and the factory can produce
a maximum of 68 400 units per month. In August, capacity utilisation increased to 92%.

REQUIRED
Calculate the number of units produced by Baby Bakery in August. [2]

Solution
= 92% x 68 400 units
= 62 928 units

NB
Capacity utilisation rates are used by analysts to compare how one business or factory is
performing compared to the average, or how capacity utilisation differs from previous periods.

The impact of operating under or over maximum capacity on a business

Under-utilisation
- If a business has a low level of capacity utilisation it will not be making the most of its
resources and is likely to have increased unit costs
- Fixed costs are spread over fewer units of output resulting in higher average total costs
- Workers may be under-deployed leading to fears of redundancy
- Operating under capacity does provide a business with flexibility

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- There may be the opportunity to engage workers in maintenance tasks
- The business can respond to sudden increases in demand

Over-utilisation
• If a business has a high level of capacity utilisation it may not have the flexibility to respond
to new orders from customers
- Staff will be under a lot of pressure to produce high levels of output
- Overworked staff may be inclined to leave increasing staff turnover
- Machinery may be pushed to its limits and prone to breakdowns which disrupts production
and increase costs

• High capacity utilisation will minimise average total costs and increase
business competitiveness
- If workers are busy they are likely to feel secure in their employment
- A business that is busy is likely to be well thought-of and is likely to attract customers who
are willing to wait for products to be delivered

Ways of Improving Capacity Utilisation

• Achieving an optimum level of capacity utilisation is a key production objective
• A business has several options available to improve its capacity utilisation

Outsourcing

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- using another business (third party) to undertake a part of the production process rather than
doing it within the business using the firm’s own employees.
- Outsourcing is a special type of subcontracting.
- Subcontracting involves the transfer of a task to another business while outsourcing involves
the transfer of functions to another business.

Advantages of outsourcing
- It enables the business to focus on its core activities
- Offer more flexibility than expansion of facilities
- Greater scope for growth without high capital investments
- Possibility of reduced operating costs
- Third party may do the job better

Disadvantages of outsourcing
- Third parties may have access to sensitive information which may put the business at risk
- Quality may be more difficult to control
- May be uncertainty over delivery times and reliability of delivery
- Could be difficult and expensive to reverse the process if circumstances change
- Loss of jobs within the business

The impact (effects) of outsourcing on business operations

Positive Aspects
Cost Management
- Significant savings in operational and labour costs.

Enhanced Efficiency
- Expertise from outsourced providers can streamline processes.

Business Growth Potential

- Outsourcing non-core tasks can free up resources, paving the way for business expansion.

Market Reach Expansion

- It can facilitate penetration into new markets, especially when outsourcing to local providers
in those markets.

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Potential Negatives
Quality Control Issues
- Risk of compromised product or service quality.

Reduced Operational Control

- Outsourcing may lead to less control over certain business functions.

Supplier Dependency
- Over-reliance on third-party providers can be problematic.

Data Security Concerns

- Sharing sensitive information with vendors poses confidentiality and security risks.

Outsourcing is a complex yet potentially rewarding strategy that can offer myriad benefits to
businesses. These benefits range from cost savings and access to specialised expertise to an
increased focus on core business activities. However, it's accompanied by challenges such as
potential quality degradation, loss of control, and security risks. Businesses need to undertake
comprehensive evaluations, considering both short-term and long-term implications, and
conduct thorough cost-benefit analyses and risk assessments. The success of an outsourcing
venture also heavily relies on selecting an appropriate vendor and maintaining an effective
outsourcing relationship.

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FINANCE AND ACCOUNTING (AS Level)
The focus of this topic is on the areas more traditionally associated with finance such as how a
business can fund itself and where that money goes. Candidates will learn why a business requires
finance to operate, and the importance for businesses to successfully manage their finance.

Introduction
Finance acts as the blood of the business which enables the business to survive from different
situations, therefore, the business needs finance in order for it to grow, survive, and to meet long-
term and short-term requirements. Finance is the money or money equivalents that are required
to run a business. It is the capital needed to fund for the firm’s activities.

Accounting is a process of identifying, measuring and communicating economic information to

permit informed decisions by users. It is a systematic recording of business transactions so that
the state of the business is fully revealed.

The need for business finance

• Setting up a business will require cash injections from the owner(s) to purchase essential
capital equipment and, possibly, premises. This is called start-up capital.
• All businesses need to finance their working capital, the day-to-day finance needed to pay
bills and expenses and to build up inventories. In accounting terms, working capital = current
assets – current liabilities.
• When businesses grow, further finance will be needed to buy more assets and to pay for
higher working capital needs. Growth through developing new products will require finance
for research and development.
• Growth can be achieved by taking over other businesses. Finance is then needed to buy out
the owners of the other firm.
• Special situations may lead to a need for finance. A decline in sales, possibly as a result of
economic recession, could lead to the need for additional finance so that the business can pay
its debts. If a large customer fails to pay for goods, finance will quickly be needed to pay for
essential expenses. In these cases, finance is needed for the survival of the business.

Short-term vs Long-term Financial Needs

Short term financial needs
- A business may need short-term finance to pay its bills and to keep its suppliers happy.
- This is an important part of the management of cash flow.
- Managing cash flow can be difficult if a firm’s customers are late in making payments for
goods and services they have purchased or if sales are unexpectedly low.
- In either case the firm is likely to be short of funds needed to purchase raw materials, pay
wages and salaries, and it will need short-term finance to continue trading.

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- management of trade credit, both in terms of receivables and payables, is essential for
maintaining liquidity.

Long-term financial needs

• Long-term sources of finance are those that are needed over a longer period of time, usually
over a year.
• When a business is expanding by buying more buildings and equipment, a short-term loan of
less than one year would be inappropriate.
• The chances of being able to pay back a short-term loan from the income earned on these
assets in just one year would be small.
• This is a good example of the need for long-term finance.
• Acquiring other companies or significant assets to enhance the business's market position and
capabilities.

Cash vs Profits
- Many business failures result from owners and managers not understanding the difference
between cash and profit.
- In contrast, all successful entrepreneurs and managers understand that these two financial
concepts do not have the same meaning or significance.
- It is very common for profitable businesses to run short of cash.
- On the other hand, loss-making businesses can have high business inflows of cash in the short
term. Cash is the lifeblood that ensures operational liquidity.
- Without sufficient cash, businesses can struggle to meet immediate expenses.
- Effective cash flow management is vital for maintaining the solvency of the business.
- Profits signify the financial success of a business over a given period.
- Profits are often reinvested into the business for growth and development purposes.
- A business can be profitable but still face cash shortages due to delayed receivables or high
levels of inventory.
- Conversely, a business can have cash through loans or other means without actually being
profitable.

Administration, bankruptcy and liquidation

Lack of finance is the single most common cause of business failure. If a business fails due to
lack of finance, it is often placed in administration. Specialist administration accountants are
appointed to try to keep the business operational and to find a buyer for it. If this proves
impossible, then bankruptcy will result. This means that a legal process begins which will lead
to liquidation of the assets of the business. The aim of liquidation is to raise as much finance as
possible to pay back those people and companies the bankrupt business owes money to

Bankruptcy

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• occurs when an individual, a sole trader or a partnership is judged unable to pay its debts by a
court of law.
• When a business cannot pay its debts, it may file for bankruptcy, leading to legal
proceedings.
• can affect employees, creditors, and investors, leading to job losses and financial losses.
• The assets owned by the bankrupt business will be sold; this can include the private
possessions of the business’ owners, such as property and savings.
• The money raised from this sale will be shared between the individuals and organisations
who are owed money (known as the creditors).

Liquidation
• is the dissolution of a company by selling its assets to settle its liabilities
• a company's assets are sold off to pay creditors.
• The business ceases to operate, often leading to a loss of brand and company value.

Compulsory liquidation.
- This occurs when a creditor seeks an order from a court of law to have the business’ assets
sold as it has not received payment of a debt.
- In such circumstances the court will appoint a receiver.
- A receiver is a business that specialises in taking control of an insolvent company and
making arrangements for creditors to be paid.
- A receiver may be able to keep the business going if its finances are not too weak.
- However, it is very common for receivers to close the business down and to sell all its assets.

Voluntary liquidation
- This is when the owners of the company decide to enter liquidation.
- This might be because they recognise the weakness of the business’ financial position.
- It can also occur when the owners of a company want to retire and are unable to sell the
business as a growing concern.

Administration
• is a process available to a company to protect itself while it attempts to pay its debts and to
escape insolvency.
• Administration aims to rescue the company as a going concern.
• Involves renegotiating terms with creditors to provide the company with a chance to recover.
• By entering administration, a company receives legal protection from the threat of immediate
liquidation.
• It is usual for an administrator to be appointed with the responsibility of protecting
shareholders’ interests.

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• Administrators attempt to keep the business trading, though they may have to sell some
assets to do so.
• If the administrator is not able to keep the business trading by renegotiating and settling its
debts, the company will face liquidation.

Working Capital
- This represents the funds available to a business for its day-to-day operations.
- It is calculated as current assets minus current liabilities.
- measures the amount of money available to a business to pay its day-to-day expenses, such as
bills for fuel and raw materials, wages and business rates.
- Much attention is given to the capital firms choose to invest in non-current assets, but of
equal importance to the success of a business is the capital set aside to finance regular
transactions.

Current Assets
- These are assets that a business expects to convert into cash within one financial year.
- are items owned by a business that can be readily turned into cash.
- Examples include cash, money owed by customers (trade receivables) and inventories
(stocks).

Current Liabilities
- These are obligations that a business needs to settle within a year, such as creditors, short-
term loans, overdrafts, and other short-term financial obligations.

Significance in Business
a) Liquidity Measurement:
- Working capital is a critical measure of a company's liquidity.
- It indicates the company's capacity to pay off its short-term liabilities with its short-term
assets.

- Operational Efficiency
- Sufficient working capital ensures that a business can maintain its operations without
interruptions.
- This includes paying suppliers, employees, and other operational costs on time.

- Indicator of Financial Health:

- It reflects the short-term financial health of a business.
- A lack of working capital can lead to financial difficulties, potentially leading to bankruptcy
or liquidation.

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Inventory can be managed in the following ways:
• keeping smaller inventory levels
• using computer systems to record sales and inventory levels, and to order inventory as
required
• efficient inventory control, inventory use and inventory handling so as to reduce losses
through damage, wastage and shrinkage
• minimise the working capital tied up in inventories by producing only when orders have been
received (just-in-time inventory ordering)
• getting goods to customers as quickly as possible to speed up payments from them.

Trade Receivables
- These are amounts owed to the business by customers who have purchased goods or services
on credit.
- is the amount of money owed by a business to its suppliers for goods and services that have
been received but which have not been paid for.

Management Strategies on managing trade receivables:

- Developing clear credit terms and limits for customers.
- Ensuring invoices are issued immediately after a sale to encourage timely payment.
- Regularly reviewing the age of receivables to identify and address overdue accounts.
- Implementing effective debt collection strategies for overdue accounts.
- Conducting credit checks on new customers to assess their creditworthiness.

Trade Payables
- These are amounts a business owes to its suppliers for goods or services it has received but
not yet paid for.
- is the amount owed by a business’ customers for products that have been supplied but for
which payment has not yet been made.

Management Strategies:
- Working with suppliers to negotiate favourable payment terms.
- Organising payments to suppliers in a timely manner to maintain good relationships and
credit standing.
- Taking advantage of discounts for early payment to reduce overall costs.
- Aligning payments with the business's cash flow to ensure smooth operations.

Capital Expenditure vs Revenue Expenditure

Capital Expenditure
- These are investments in assets that will benefit the business over several years, reflecting
long-term financial planning.

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- Examples are purchases of machinery, property, or vehicles.
- These assets are subject to depreciation, which spreads their cost over their useful life.
- Typically financed through long-term sources, such as loans or equity investments.
- Requires careful budgeting and planning due to its significant impact on a company's
finances.

Revenue Expenditure
- This includes spending on expenses that are used up within the financial year.
- Examples are expenditures such as rent, wages, utilities, and raw materials.

Revenue expenditure Capital expenditure

This is spending on non-current assets
This is spending on assets that are used
Explanation that will be used by the business for a
up in a relatively short period of time.
long period of time.
Spending on fuel, components and raw Expenditure to purchase property,
Examples
materials. vehicles and production equipment.
Revenue expenditure is essential to This type of spending has no immediate
Possible effects production but, if not controlled, can effect on profits. However, capital
on profits have an immediate and damaging expenditure is essential if a firm is to
effect on a business’ profits. generate long-term profits.

Distinguishing between capital and revenue expenditure is crucial for accurate financial
reporting and effective financial management. Capital expenditures represent significant
investments that influence a company's long-term strategy and financial planning. In contrast,
revenue expenditures are part of the routine operational costs of a business, directly impacting
its working capital and day-to-day financial decisions.

Business ownership and source of finance

- Understanding the different forms of business ownership is essential, as each type has unique
characteristics that influence their financial strategies and options.
- Business ownership has a big impact on the sources of finance available to any particular
firm.
- Eg, sole traders and partnerships cannot sell shares to raise capital.
- This section deals initially with sources of finance for limited companies and then considers
sole traders and partnerships.

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Legal form of
Possible sources of finance Key issues for consideration
business
• Difficulty in providing security for those
lending funds to ensure repayment (known
as collateral)
Owner’s savings, banks,
Sole trader or • Loss of control by owner
suppliers, government grants and
proprietor • Businesses must provide evidence that
loans
they
have potential to develop
• Financial history of business/owner
• Problems of introducing new partner
Partners’ savings, banks, • Lack of collateral
Partnership suppliers, government grants and • Potential expense of raising large sums of
loans money
• Should it form a limited company?
Dependent upon the size of the - Disagreement among existing shareholders
private limited company: - Difficulty finding suitable shareholders
Private limited
suppliers, banks, government - Loss of control by existing shareholders
company (ltd)
grants and loans, venture capital - Lack of collateral for those lending funds
institutions, private share issues - Element of risk in a loan
- State of economy and stock market
Suppliers, banks, government - Ability to move to an area receiving
Public limited grants and loans, venture capital government aid
company (plc) institutions, public share issues - Recent financial performance
via the stock exchange - Reputation of company and senior
managers

INTERNAL AND EXTERNAL SOURCES OF FINANCE

Internal Sources of Finance
- An internal source of finance is one that exists within the business.
- The internal sources of finance include; owners investment, retained earnings, sale of
unwanted assets, sale and leaseback of non-current assets and working capital

Owners’ investments
- One source of finance is for the owners of the business to provide the funds from their own
resources.
- This may involve the use of savings.
- Alternatively, the owners of a business may take out a personal loan using their house (or
other assets) as security and invest this money into their business.

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- They may also persuade friends and family to invest in their business, perhaps in return for
part-ownership.
- Owners investing in their own business can be helpful in persuading others to invest.
- Banks and other financial institutions will often want to see evidence that business owners
are willing to risk some of their personal capital in the enterprise before agreeing to make a
loan or other investment.
- If the owners are not willing to risk investment in their own business, it will be more difficult
to raise finance from other sources.

Retained earnings
- This refers to the profit reinvested by the company at the end of the accounting period.
- represent a portion of the equity which is ploughed back into the firm to reinvest.
- This profit is the one which the company could have paid to shareholders as dividends.

Advantages of retained earnings as a source of finance

• The use of retained earnings as a source of finance does not attract any costs.
• They are readily available, and the firm is not required to seek help from shareholders or
lenders.
• They are very flexible. This gives management complete control over how they reinvest and
what proportion is kept rather than paid as dividends.
• They do not dilute the ownership of the company.
• They avoid the possibility of change of control resulting from an issue of new shares.

Disadvantages of retained earnings as a source of finance

• This demotivates shareholders. This is because when the company continues to utilise
retained earnings to finance projects, shareholders would not get more dividends.
• May lead to over-capitalization. This is because if the company uses more retained earnings,
it leads to insufficient source of finance.

Sale of Unwanted Assets

- Is the money which comes from selling old fixed assets, such as motor vehicles, machinery
and buildings which are no longer needed (public auctions).

Advantages Of Sale Of Fixed Assets

- Easy way to raise finance from an asset that is no longer needed.
- Capital tied in assets will be used for other important things.
- No interest to be paid as it is an internal source of finance.
- Avoiding further depreciation of assets.

Disadvantages Of Sale Of Fixed Assets

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- Not all businesses have fixed assets which they no longer use.
- There is a limit to the number of fixed assets a firm can sell off.
- Assets can take time to be sold.
- Reduction of the net worth of the enterprises.

Sale and leaseback of non-current assets

- In addition, some businesses will sell non-current assets that they still intend to use, but
which they do not need to own.
- This means that they have the capital from the sale of the assets as well as the continuing use
of these assets, so that their business is not disrupted.
- The assets could be sold to a specialist financial institution and leased back by the company.
This will raise capital, but the lease payment becomes an additional fixed cost.

Advantages of Sale and Leasebacks

- It releases capital for use in the business.
- It can be used to finance huge projects.
- It does not increase the long-term debts of the company.
- The firm can continue to use the asset under lease.

Disadvantages of Sale and Leaseback

- The business no longer owns the property and rent must be paid.
- Lease payments are cash outflows.
- Over time the lease payments will exceed the amount of the sale.
- The major drawback is that the business now has to pay for the use of assets which
previously were freely available.
- This may have a negative impact on long-term profits.

Working capital
- When companies reduce the finance held as working capital, finance is released for other
uses.
- So, reducing the level of inventory releases cash into the business.
- There are risks in cutting down on working capital, however.
- Cutting back on current assets by selling inventories or reducing trade receivables may
reduce the liquidity of the business – its ability to pay short-term debts – to risky levels.

External Sources of Finance

- An external source of finance is an injection of funds into the business from individuals,
other businesses or financial institutions.

Debt factoring

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- This occurs when the company sells its trade receivables to a factoring company at a
discount.
- Factoring company recovers the debts from the trade receivables at a future date.
- It is a source of finance in the sense that the business gets its immediate cash from the debt
factoring company, while the factoring company is not yet collected funds from trade
receivables.

Advantages of debt factoring as a source of finance

• The business gets its cash from trade receivables on time
• Credit control and management expenses are transferred to the factoring company
• Provides management more time for other duties than collecting trade receivables
• Reduces the bad debts as risks are taken by the factoring company

Disadvantages of debt factoring as a source of finance

- Trade receivables are disposed below their book value
- The relationship between company and customers may be frustrated by the factor’s conduct
- It does not raise a lot of cash as part of the cash will be offered as discounts on selling of the
trade receivables
- Control of trade receivables database may be lost to the factoring company
- Company may lose customers due to legal action taken by factoring company

Leasing
• This is similar to a hire purchase but does not involve the payment of a deposit.
• Leasing involves the acquisition of an asset but ownership does not pass to the user.
• A lease is a means of financing the use of an asset rather than its purchase.

Advantages of Leasing
- It minimizes initial outlay.
- Maintenance is provided with the package.
- The equipment can claim tax against lease payments.
- It is a form of pay as you use.

Disadvantages of Leasing
- All payments are outgoings.
- Payment is greater in the long run.
- The lease might place limitations on use or compel the use of a specified complementary
product.
- The user does not benefit from residual value when the equipment is upgraded.
- The assets under lease cannot be used as collateral for loans.
- The firm does not own the asset.

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Mortgages
- This is a long-term loan secured on property.
- It is finance to purchase assets obtained from the commercial banks, insurance houses and
buildings.

Debentures
- This is a long term source of finance issued by companies to raise large amounts of funds.
- The debentures are certificates issued to members of the public who lend funds to the company.
- The loans may be secured or naked (not secured) on the business' assets.
- The debenture holders earn fixed interest rate in return for the funds they lend the company
regardless of whether or not the company has made profit.

Advantages of debentures as a source of finance

- Interest rates do not change with level of profits, so it is a benefit where higher profits are
made.
- Gives the company an opportunity to plan since the interest and repayment period of the
debenture is known.
- It is repayable and thereby relieving the company from interest burden.
- Debentures can be redeemed at the future period.
- Holders of the debentures are not entitled to voting rights at an annual general meeting.
- Help the company to improve its cash flows.
- Holders do not interfere with benefits accruing to equity shareholders in periods of increasing
profits.
- It is a long-term source of finance
- Help to reduce tax burden

Disadvantages of debentures as source of finance

- Interests are paid on whether or not the company has made profit.
- Debentures will have to be redeemed at some future date which may cause liquidity
problems.
- Holders of the debentures have first priority on repayment of their loan on the winding up of
the company.
- Carries fixed rate of interests, and this disadvantages the company when low profits are
made.
- May force the company into liquidation if interests and obligations are not met.
- They are long term sources of finance but not permanent source of finance

Hire purchase
- This occurs when a business purchases non-current asset using hire purchase agreement.

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- The source of finance is used for the purchase of equipment, machinery, furniture and other
expensive assets.
- Hire purchase is regarded as a credit facility whereby the business purchases an asset by paying
instalments.
- The cost of asset is spread over the agreed repayment period, after a deposit is made.
- The monthly instalments paid by the business consist of cash price and an element of the
finance charges.
- The ownership of the asset is transferred to the business when final payment is made.
- However, although the transfer is made after all payments, the asset is still included in the
financial statements of the business (buyer) from the date the first instalment is paid.

Advantages of hire purchase as a source of finance

- The asset is available for use before full payment
- Payments in installment enable the business to maintain and manage its cash flows than once
off payment which strain the business funds
- Helps to acquire expensive assets
- Payment by instalments increases company’s liquidity
- The method is good when the business does not have enough funds to acquire an asset
- The method enables the assets to pay for themselves
- The business does not need to raise large sums in order to buy assets.

Disadvantages of hire purchase as a source of finance

- The source of finance is very expensive to acquire assets
- It attracts high interest charges which makes the asset too expensive
- The seller (lender) may take back the asset if the business (buyer) defaults payments

Trade credit
- This is a short term source of finance for a company.
- It is a source of finance in the sense that, the company will delay to pay its credit suppliers.
- Instead of paying its suppliers on time, the business will delay to pay them and hold cash.
- During the period before payments to suppliers, the business enjoys free interest short term
loan and this delay is an advantage in an economy with inflation.
- However, delays in paying suppliers destroy the relations with suppliers.
- It also results in loss of cash discounts offered by suppliers as a result of early payments.

Advantages of trade credit as a source of finance

- Improves cash flows through holding cash
- Enables the business to enjoy a free interest short term loan
- Is suitable especially when there is inflation

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Disadvantages of trade credit as a source of finance
- There is loss of settlement discounts earned as a benefit of early payments made to suppliers
- There is loss of credit facilities as suppliers will reject to offer them to businesses which do
not pay their debts on agreed period
- There is risk of losing suppliers
- There is risk of legal action taken by the suppliers demanding their delayed funds
- Destroys the reputation of the business

Bank overdraft
- This refers to an arrangement between business (borrower) and the bank (lender) for the
business to withdraw more money than it actually has in the bank account.
- The source of finance is used to finance working capital or revenue expenditure, and
therefore is used to fund the daily operations of the business.

Advantages
- The source of finance does not require collateral security
- It does not affect financial gearing of the company
- Interests are paid only when the account is overdrawn
- The bank (lender) is flexible to review the facility periodically

Disadvantages
- Interests are too high
- Banks may cancel the overdraft facility anytime without notice. This exposes the business
(borrower) to the risk of financial embarrassment
- It has a short repayment period
- The source of finance raises a limited amount of capital
- It is expensive to use overdraft as a source of finance
- It does not disclose the interest rates since interests are charged on daily balance. This does
not give the business (borrower) to plan about the interest rates
- Are paid on demand

Share Capital
- Raising funds by issuing new shares to investors, applicable for companies.
- Particularly relevant for public limited companies.
- Can dilute existing ownership, but provides significant funding without debt.
- It never has to be repaid. It is permanent capital, unlike loans which must eventually be
repaid.
- Dividends do not have to be paid every year. Directors can decide to retain more earnings by
reducing dividend payments. In contrast, loan interest must be paid even if the profit of the
business is low or a loss is made.

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- It lowers the indebtedness of the business, so debt finance becomes a lower proportion of
total long-term finance.

New Partners
- Introducing new partners can bring additional capital into the business.
- While it brings in new funds, it also means sharing control and profits.
- This is an option for small and medium-sized enterprises.
- A partnership (whether it has limited liability or not) can take on a new partner who will
invest into the enterprise in return for becoming a partner and owning a share of the business.
- Similarly, a private limited company can decide to sell more shares, as long as the existing
shareholders support the decision.
- In return for the ownership of a share of the business, the new partner(s) or shareholder(s)
will provide an injection of capital.

Venture Capital
- Funds invested by firms or individuals in high-growth companies in exchange for equity.
- Targeted towards businesses with strong growth potential.
- Involves relinquishing a portion of control and ownership.

Micro-finance
- Aimed at small businesses and entrepreneurs, particularly in developing countries.
- Typically offered by specialized micro-finance institutions.
- Characterised by small loan amounts, higher interest rates, but more accessible to those with
limited collateral.

Crowd funding
- is a source of finance that entails collecting relatively small amounts of money from a large
number of supporters (the ‘crowd’).
- Crowdfunding in a business context usually involves members of the ‘crowd’ each lending a
small sum of money to the business.
- Occasionally, these small sums may be given as donations or represent early payment for the
business’ goods or services.
- Online businesses (such as Kickstarter) exist to bring together entrepreneurs and large
numbers of investors offering small sums of capital.
- The activities of businesses such as Kickstarter have helped to make crowdfunding a viable
and popular source of finance for businesses, especially small ones.

Government Grants
- Provided by government bodies, often for specific projects or sectors.
- Non-repayable funds, but highly competitive and subject to strict eligibility criteria.

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- Requires comprehensive proposals and adherence to specific guidelines.

Factors affecting the sources of finance

1. Type and Size of the Business
• In small firms, most of the capital is provided by the owner, for example, sole traders
whereas large firms usually depend on shares, debentures and long-term loans.
2. Costs
- Obtaining loans is not for free. Loans may become expensive during period of using interest
rates.
- Internal finances have opportunity cost.
- Therefore, a source with low costs is needed most.

3. The Need to Control the Business

• Share issue can be used by limited companies selling shares to the public.
• Issue of shares dilutes ownership unless it is a right issue. For firms who desire to retain
control sale of shares might not be appropriate.
4. Amount Required
• Some sources like credits, retained profits and borrowings from friends and relatives cannot
finance huge projects but some sources such as mortgages, shares, are used for large sums of
money hence, if a firm requires more money, it is likely to consider medium to long-term
sources.

5. Gearing
• This is the extent to which a firm is financed by debt capital. For a firm that is already highly
geared, there is a chance of choosing equity finance and if it is low the firm can go on and
use loan finances.

6. Current Financial Position

• If a business has cash flow problems and is making losses, then internal sources will not help
but it can turn to short-term sources.

7. Purpose of Source of Finance

• This determines the amount required.

8. Repayment period
• It can be long and a firm can choose depending on its objective.

Forecasting and managing cash flows

Cash flow forecasts

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- Cash flow forecasts are a fundamental aspect of financial management in any business. They
provide a detailed projection of a business's cash inflows and outflows over a certain period,
typically monthly or quarterly.
- This forecast is vital for ensuring that a business can meet its financial obligations and make
informed decisions about investments, expenses, and growth strategies.

Purpose of Cash Flow Forecasts

The primary purpose of cash flow forecasts is to help businesses plan their financial activities
and ensure stable operations.
- Forecasts enable businesses to anticipate periods of cash shortages or surpluses, which is
crucial for maintaining financial stability.
- They provide a solid foundation for making informed decisions about investments, managing
expenses, and determining funding requirements.
- A critical aspect of financial health is maintaining enough liquidity to meet short-term
obligations.
- Forecasts can be instrumental in loan applications, showing lenders that the business has a
solid plan for managing its finances.

Interpreting and Amending Cash Flow Forecasts

- Effective interpretation and timely amendment of cash flow forecasts are crucial for their
accuracy and usefulness.

Interpreting Cash Flow Forecasts

a) Trend Analysis
- This involves looking for patterns or trends in the cash flow over multiple periods.

b) Variance Analysis
- It's vital to compare forecasted figures with actual results to identify and understand any
discrepancies.

c) Ratio Analysis
- Financial ratios like the quick ratio or cash ratio are useful for assessing a company's
liquidity.

d) Scenario Analysis
- Considering different 'what-if' scenarios (e.g., a significant drop in sales) and understanding
their impact on cash flow.

Strategies for Improving Cash Flow

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- A robust strategy for managing cash flow involves a balanced approach to managing both
inflows and outflows.

a) Accelerating Inflows
Early Payment Incentives
Offer discounts or benefits for early payments to encourage quicker inflows.

Efficient Invoicing Systems

- Implement electronic invoicing systems for faster processing.

Credit Checks
Conduct thorough credit checks on new customers to mitigate the risk of late payments.

b) Managing Outflows
Negotiating Payment Terms
- Work with suppliers to negotiate longer payment terms.

Prioritising Payments
- Prioritise payments based on their importance and due dates.

Leasing Equipment
- Consider leasing rather than purchasing to spread out the financial burden.

c) Inventory Management
Optimal Inventory Levels
- Maintain inventory levels that meet demand without tying up excessive capital.

Just-in-Time Inventory
- Implement just-in-time inventory systems to minimise holding costs.

d) Cost Control
Expense Review and Reduction
- Regularly review expenses and identify areas where costs can be cut without compromising
on quality.

Operational Efficiency
- Improve operational processes to reduce costs.

b) Financial Planning

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Regular Forecasting
- Regularly update cash flow forecasts to reflect the current financial position and plan for
future cash needs.

Cash Reserves
- Establish and maintain a cash reserve for unexpected shortfalls.

In summary, understanding and managing cash flow forecasts is a critical skill for A-Level
Business Studies students. These forecasts are not merely financial statements but essential
tools for strategic decision-making. Through careful analysis, regular updates, and strategic
actions, businesses can ensure they have the necessary cash flow to support their operations
and growth.

Cost information
Accurate cost information is the backbone of effective business management. It influences
several key areas:

a) Informed Decision Making

- Precise cost data is crucial for strategic decision-making.
- It guides choices in pricing strategies, budget allocations, and long-term financial planning.
- For instance, understanding the cost implications can determine whether a business should
expand into new markets or invest in new technology.

b) Performance Monitoring and Control

- Businesses use cost information to monitor operational efficiency.
- By comparing actual costs to budgeted figures, managers can identify areas where the
business is over-spending or under-performing, facilitating timely corrective actions.

c) Profit Maximisation and Cost Control

- Accurate cost information helps in setting prices that cover all expenses while yielding a
reasonable profit margin.
- It's also pivotal in cost control strategies, where businesses aim to reduce unnecessary
spending without compromising quality or performance.

d) Regulatory Compliance and Reporting

- Accurate financial reporting, which includes cost information, is mandated for regulatory
compliance.
- Misreporting can lead to legal consequences and damage to business reputation.

e) Stakeholder Confidence

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- Investors and creditors assess the financial health of a business based on its cost structure and
management.
- Accurate cost information builds confidence among these stakeholders, impacting their
decisions regarding investment and credit.

Categories of Costs
Fixed Costs
- Fixed costs remain constant regardless of the business's level of production or sales.
- This predictability aids in budgeting and financial planning.
- However, during periods of low business activity, fixed costs can strain financial resources.

Variable Costs
- Variable costs change in proportion to the level of business activity.
- They provide flexibility in managing expenses according to business volume.

Direct Costs
- Direct costs are explicitly associated with the production of goods or services.
- They are critical in determining the cost of goods sold (COGS) and assessing the profitability
of individual products or services.

Indirect Costs
- Indirect costs, also known as overheads, cannot be directly linked to a specific product or
service.
- They are essential for overall operational functionality but challenging to allocate precisely.

Costing methods
a) Absorption Costing
- Full costing, often referred to as absorption costing, is a comprehensive approach that
includes all costs associated with the production of goods or services.

• This method encompasses direct costs (materials, labour) and indirect costs (overheads), both
fixed and variable.
• It assigns a portion of total costs to each product, offering a detailed cost per unit.

Uses of absorption Costing

• It is more realistic on the cost of the product because it includes both fixed and variable
manufacturing costs into the cost of the product.
• Helps on strategic decision making.
• Is good for product pricing for long term period.
• Fixed production overheads are included in the finished goods inventory.

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• It is most useful on the preparation of the financial statements and is accepted by GAAP.
• It reveals any inefficient use of production resources through the analysis of over/under
absorbed overheads.
• It enables the apportionment and allocation of fixed manufacturing overheads to cost centres
which helps management concerning costs incurred and the respective services rendered.

Limitations of absorption costing

1) Complex Allocation Process:
The allocation of overheads can be arbitrary and complex, leading to potential inaccuracies.

2) Not Ideal for Short-term Decisions:

It might not be effective for immediate decision-making scenarios, like competitive pricing
strategies.

3) Risk of Misleading Information:

- Incorrect overhead absorption can lead to distorted product cost information.

b) Contribution (marginal) Costing

- Marginal cost is the cost of producing one extra unit of output
- To help with short-term decision-making, costs are classified by their behaviour as either
variable costs or fixed costs.
- Such a classification of costs is used in marginal costing to work out how much it costs to
produce each extra unit of output.
- Marginal cost is often – but not always – the total of the variable costs of producing a unit of
output.
- Contribution costing, also known as variable or marginal costing, focuses solely on the
variable costs related to production.
- It considers only variable costs in the costing of products.
- The difference between sales revenue and variable costs, known as the contribution margin,
is a key focus for management decisions.

Uses of Contribution (marginal) Costing

• Marginal cost per unit is constant from period to period within a short span of time, firm
decisions on pricing policy can be taken. This will make decision making task less difficult.
• Overheads are recovered in costing on the basis of pre-determined rates. Marginal costing
avoids such under or over recovery of overheads.
• Helps in the preparation of break-even analysis which shows the effect of increasing or
decreasing production activity on the profitability of the company.
• Classification of expenses as fixed and variable helps the management to exercise control
over expenditure and take corrective action through analysis of variances.

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• Helps the management in taking a number of business decisions like make or buy,
discontinuance of a particular product and so on.
• It helps in short term profit planning by break -even charts.
• The method helps on optimum allocation of scarce resources to the profitable activities.
• The method enables firms to face competition.
• Helps management in taking short term decisions

Limitations
1) Incompatibility with Financial Reporting Standards:
- It does not align with certain accounting standards for external reporting.

2) Neglect of Fixed Costs:

- May promote a short-term perspective by not accounting for fixed costs.

3) Limited in Long-term Strategic Planning:

- Not ideal for decisions where fixed costs play a significant role.

Other weaknesses of contribution costing

• It is difficult to classify exactly the expenses into fixed and variable category. Most of the
expenses are neither totally variable nor wholly fixed. For example, various amenities
provided to workers may have no relation either to volume of production or time factor.
• Contribution of a product itself is not a guide for optimum profitability unless it is linked
with the key factor.
• Fixed cost may change from one period to another. For example, salaries bill may go up
because of annual increments or due to change in pay rate etc. The variable costs do not
remain constant per unit of output.
• Under marginal costing, inventories and work in progress are understated.

Comparing Full Costing and Contribution Costing

Understanding the differences between these methods is crucial for effective business
management.

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Distinctive Characteristics
Scope of Costs:
- Full costing includes all costs, while contribution costing only considers variable costs.

Decision-making Utility:
- Full costing is better for strategic, long-term decisions, whereas contribution costing is suited
for short-term operational decisions.

Profit Calculation Variance:

- Under full costing, profit is sales minus all costs. In contribution costing, profit is the surplus
of the contribution margin over fixed costs.

Contribution vs Profit
Contribution:
- This is the amount remaining after deducting variable costs from sales revenue, helping cover
fixed costs and contribute to profit.

Profit:
- The residual amount after covering all types of costs, indicating the financial success of the
enterprise.

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Strategic Applications
Full Costing:
- More suitable for long-term pricing, budget planning, and financial reporting.

Contribution Costing:
- Ideal for operational decision-making, such as short-term pricing strategies and assessing the
financial impact of changing sales volumes.

In summary, the understanding of both full and contribution costing methods is essential for
effective business management and decision-making. Each method offers unique perspectives
and is tailored to different managerial needs, contributing to a holistic understanding of the
operational and financial aspects of a business. The choice between these methods depends on
the specific requirements of the decision at hand, whether it's for short-term operational
purposes or long-term strategic planning.

Uses of cost information

Decision-Making
- Effective decision-making in business is heavily reliant on accurate and detailed cost
information.

Strategic Planning:
- Businesses use cost data for long-term strategic planning.
- This involves assessing the viability of new projects, determining potential expansion areas,
and evaluating investment opportunities.
- Accurate cost information ensures that the resources are allocated efficiently and effectively.

Resource Allocation:
- Accurate cost data guides the allocation of resources.
- Companies need to identify areas that necessitate more investment and areas where costs can
be minimised without compromising on quality or productivity.

Risk Assessment:
- Understanding the costs associated with different business activities aids in assessing the
potential financial risks.
- This is crucial in sectors where there is a high upfront cost or in projects with long gestation
periods.

Pricing Decisions

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- The determination of product or service pricing is a complex process, significantly
influenced by the understanding of cost structures.

Cost-Plus Pricing
- This straightforward pricing strategy involves adding a standard markup to the cost of
production. It ensures that all costs are covered and a profit margin is maintained.

Competitive Pricing
- To stay competitive in the market, businesses must understand their cost structure in relation
to their competitors.
- This allows them to set prices that are competitive yet profitable.

Dynamic Pricing
- In dynamic markets, prices may need to be adjusted frequently in response to changes in
costs, such as fluctuating raw material prices or changes in labour costs.

Monitoring and Improving Business Performance

Cost information plays a vital role in assessing and enhancing the overall performance of a
business.

Performance Metrics
- Through cost analysis, businesses can develop KPIs for various departments.
- These metrics can include cost per unit of production, cost per lead in marketing, or cost per
hire in HR.

Cost Reduction Strategies

- Regular analysis of cost information can reveal inefficiencies and areas where expenses can
be reduced without impacting the quality of goods or services.

Investment Decisions
- Understanding the fixed and variable costs involved in new investments is crucial.
- This informs decisions on whether to pursue new ventures, expand operations, or upgrade
technology and equipment.

Calculating Profits
Profit calculation is a fundamental application of cost information.

Revenue Minus Costs

- The basic profit calculation involves subtracting the total costs from the total revenue
generated.

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- This includes both direct costs like raw materials and indirect costs like overheads.

Gross and Net Profit:

- Distinguishing between gross and net profit is essential.
- Gross profit is calculated as sales minus the cost of goods sold (COGS), whereas net profit
considers all expenses, including operating and non-operating costs.

Profit Trends
- Analysing cost and revenue data over time helps in identifying trends.
- This analysis is crucial for forecasting future profits and making informed financial
decisions.

Contribution Costing for Special Order Decisions

Contribution costing is a valuable tool in decision-making for special orders.
Understanding Contribution Margin
- This is a key concept where the selling price per unit minus the variable cost per unit is
considered.
- It helps in understanding how much each unit contributes to covering fixed costs and
generating profit.

Special Order Analysis

- When receiving a special order, a business must decide whether to accept it based on whether
the contribution margin will cover the fixed costs and contribute to profit.

Short-term Decision Making

- This approach is particularly useful in short-term decision-making, especially when the
business is capacity-constrained.

Break-Even Analysis
This is a crucial application of cost information, particularly in understanding the financial
viability of a business or a project.

Calculating Break-Even Point

- This is the level of production at which total revenues equal total costs. Understanding the
break-even point is vital for new businesses or when launching new products.

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Margin of Safety
- This concept represents how much sales can fall before a business starts incurring a loss. It is
a critical measure for assessing the risk level of a business.

Margin of safety = Projected sales - Break-even sales

Target profit
When the company has a targeted profit which they expect to meet, the following formula should
be used. The formula determines the estimated number of units to be produced in order to meet
the targeted profits.

Estimated Sales (units) = Fixed Costs + Target Profit

Contribution per unit

Or

Targeted contribution
Contribution per unit

Example
Legends Ltd produces Breakfast cereal. The company has a normal production of 10 000 boxes
of cereal.
$
Fixed costs (Total) 12 000
Variable costs for each cereal box 3
Selling price of each cereal box 5

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Required:
a) Contribution per unit
b) The break-even point in units
c) Break-even point in sales
d) Margin of safety in units
e) Margin of safety in revenue
f) The number of units to be produced when the company is targeting a profit of $18 000.

Solution
a) Contribution per unit = selling price – variable cost
= $(5 – 3)
= $2

b) Break – even point in units = total fixed costs

Contribution per unit

= $12 000
$2

= 6 000 units

c) Break – even in sales = BEP in units x selling price

= (6 000 units x $5)
= $30 000

d) Margin of safety in units = Normal production – BEP in units

= (10 000 – 6 000) units
= 4 000 units

e) Margin of safety in revenue = (Normal production – BEP in units) x selling price

= (10 000 – 6 000) units x $5
= $20 000

f) Estimated sales in units = fixed cost + targeted profit

Contribution per unit

= $(12 000 + 18 000)

$2

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 = 15 000 units

Graphic presentations
- Under graphic presentation, a break-even chart is drawn.
- The chart is prepared by plotting the revenue from the sale of various volumes of a product
against the total cost of production.
- The break-even point is where the sales line intersects the total cost line.
- This is a point where the business makes neither profit nor loss.

Using the above question of Legends Limited,

Required:
Draw a break-even chart showing:
a) the break-even point in units
b) break-even point in sales
c) the margin of safety in sales
d) the margin of safety in units

Solution

The break-even point is where the total sales line intersects with the total cost line.
a) Break-even point in units is 5 000
b) Break-even point in sales is $15 000
c) Margin of safety in sales is the difference between the total revenue and break-even point in
sales. In this case, margin of safety is $(30 000 – 15 000) which is $15 000
d) Margin of safety in units is 10 000 units minus the break-even point in units which gives us 5
000 units.

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Usefulness of break-even chart
• Helps to determine the profit or loss at different levels of activities.
• Helps to measure the relationship between cost, volume and profit.
• Helps to determine the break-even units.
• Helps to measure the profitability of various products.
• Helps to determine the most profitable product mix to be adopted.
• Assists in future planning and forecasting.
• Useful for effective cost control.
• It helps to achieve a target profit.
• It shows the level of output where profits are maximized.
• Helps firms in making pricing decisions, for example, to increase sales volume it is necessary
to reduce prices.
• Helps firms to understand the behaviour of costs, for example, as output rises beyond a
certain point, costs rise disproportionately.
• It is a distinct and simple way of calculating profit.
• It helps the firm to avoid losses.

The limitations of break-even charts

• Not all costs are easily classified as fixed or variable.
• Many fixed costs are 'stepped' meaning they are fixed within certain limits and may increase
with the level of activity.
• Discounts may affect both revenue and costs which may suggest that the notion of straight
lines may be an inaccurate representation on the graphs but rather curves are a more correct
representation of revenue and costs.
• Some costs are semi-variable, that is, they have both an element of fixed cost and an element
of variable cost included in the total.

In conclusion, cost information is a versatile tool in the arsenal of a business. It informs

decisions, shapes pricing strategies, aids in performance assessment, and is integral in profit
calculation and special order decision-making. For A-Level Business Studies students, an
understanding of these concepts is not just academically important but also essential for
practical business acumen.

Budgeting
• A budget is a quantitative expression of a plan for a defined period of time.
• It is an estimation of the revenue and the expenses over a specified period of time.
• It is the way an organization attempts to anticipate the future and see if the future is planned
for.

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• It can also be defined as a financial or quantitative statement prepared and approved prior to
a defined period of time.

Budgets in Business
- A budget is a detailed financial plan that forecasts revenue and expenses over a specified
period.
- It is a crucial tool for several aspects of business management.
1) Performance Measurement
- Budgets provide a standard against which actual performance is measured.
- This enables managers to identify and analyse areas where the business is performing well or
underperforming.
- By comparing budgeted figures with actual results, businesses can assess their financial
health and operational efficiency.

2) Resource Allocation:
- Budgets play a critical role in how resources are distributed across an organisation.
- By estimating the income and expenditures, they provide a framework for allocating funds to
various departments, projects, or initiatives, ensuring that resources are used optimally and
aligned with strategic goals.

3) Control
- One of the primary purposes of a budget is to exercise control over an organisation’s
finances.
- They set financial boundaries and help prevent overspending by establishing limits on certain
expenditures.
- This control mechanism is crucial for maintaining financial discipline within the
organisation.

4) Monitoring
- Regular monitoring of budgets is vital for successful financial management.
- It involves consistently reviewing and comparing budgeted figures with actual figures.
- This process helps in early detection of any deviations, enabling timely corrective actions to
be taken, ensuring the organisation stays on track with its financial objectives.

Benefits of Using Budgets

Forecasting and Planning
- They are essential for predicting future financial conditions and preparing for them.
- Budgets help businesses anticipate revenues, plan for expenses, and prepare for potential
financial challenges.

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Coordination and Communication
- Effective budgeting improves coordination among different departments.
- It ensures that all departments work towards common financial goals, enhancing overall
organisational efficiency.

Motivation
- Budgets can act as a motivational tool by setting financial targets for employees.
- Achieving these targets can be linked to performance evaluations and incentives,
encouraging employees to work efficiently.

Performance Evaluation:
- They provide a foundation for evaluating the performance of different departments and
managers.
- By comparing actual performance against budgeted targets, businesses can identify areas that
need improvement.

Drawbacks of Budget Use

Time-Consuming Process
- Preparing a comprehensive budget is often time-consuming, requiring significant effort and
resources.

Inflexibility
- Some budgets, especially those that are very rigid, may not adapt well to changes in the
market or unforeseen circumstances, leading to inefficiencies.

Short-Term Focus
- Budgets, particularly those prepared annually, may inadvertently encourage a focus on short-
term goals at the expense of long-term strategic planning.

Potential for Misuse

- Budgets can sometimes be misused as a tool for imposing excessive control, which could
negatively impact employee morale and creativity.

Types of Budgets
Flexible budget
- This refers to the budget which adjusts to the activity or volumes levels of a company.
- The budget recognises different cost behaviour patterns and is designed to change as the
volume of activity changes.
- Flexible budget provides detailed information about budgeted expenses and revenues at
various levels of output.

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- The budget uses the revenues and expenses produced in the current production as a baseline to
estimate how revenues and expenses will change in the output.
- When preparing a flexible budget, the cost behaviour of the different items in the original
budget should be identified.

Advantages of Flexible Budget

- Allows the business to adapt the budget to changes in the business environment.
- It gives adjustments for predictions.
- The business may easily adapt to change.

Disadvantages of Flexible Budget

- Requires continuous monitoring. This is time-consuming.
- May suffer from inaccurate adjustments.
- Requires relevant information. This means it may be affected by lack of information.
- Highly complex, for example, categories’ costs.

Incremental Budgeting
- This is a budget prepared using a previous period’s budget or actual performance as a basic
with incremental amount added for the new budget period.
- This refers to a type of budgeting which uses budgets prepared in the previous period as the
starting point for preparing budgets.
- It is called incremental budget because it takes into account the changes of amounts as a
result of inflation.
- Therefore, the preparation of a new budget makes some marginal changes to the current
budget.
- The allocation of resources is based upon allocations from previous periods.
- This approach is not recommended as it fails to take into account changing circumstances.
- Moreover, it encourages spending up to the budget to ensure a reasonable allocation in the
next budget.
- It uses a spend-it or lose-it mentality.

Advantages of Incremental Budgets

- Assume activities and methods of working will continue in the same way.
- No incentive for developing new idea.
- No incentive to reduce costs.
- Encourages spending up to the budget so that the budget is maintained next year.
- The budget may become out-of-date and no longer relate to the level of activity being carried
out.
- The priority for resources may have changed since the budgets were set originally.

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- There may be budgetary slack built into the budget which is never reviewed. Managers might
have overestimated their requirements in the past in order to obtain a budget which is easier
to work to and which allows them to achieve favourable results.

Disadvantages:
- Incremental budgeting may perpetuate past inefficiencies
- does not encourage innovation or cost reduction.

Zero Based Budgets

• These are budgets prepared on the principle that each item included in the budget must be
justified by the benefits which will accrue before it is included in the budget.
• These budgets start from scratch and not from previous budgets.
• Involves preparing a budget from scratch with zero base.
• It avoids the defects of perpetuating previous ineffective and inaccuracy of old budgets.
• The figure can be adjusted for inflation.

Advantages of Zero Based Budgets

- Accuracy – This helps in costs reduction as it gives an ideal picture of costs against the
desired performance.
- Efficiency – Helps in efficient allocation of resources (department wise) as it does not look at
the historical numbers but looks at the actual number.
- Reduction in redundant activities – It leads to the identification of opportunities and more
cost effective ways of doing things by removing all the unproductive or redundant activities.
- Budget inflation – since every line of item is to be justified, zero based budgeting overcomes
the weaknesses of incremental budgeting of budget inflation.

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In summary, budgets are vital tools in the arsenal of business management. They guide
decision-making, aid in strategic planning, and ensure that resources are used efficiently.
Understanding the benefits and limitations of different types of budgets is crucial for selecting
the one that best aligns with an organisation's specific needs and goals.

Variances
- Variances in budgeting are key indicators of a business's financial health.
- They reveal differences between actual results and budgeted plans, providing a basis for
performance assessment, strategy refinement, and future budgeting processes.

Adverse Variance
- Occurs when actual figures are worse than those budgeted.
- Indicates lower revenues or higher costs than expected, often signalling inefficiencies or
unexpected challenges.

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Favourable Variance
- Arises when actual figures are better than those budgeted.
- Signifies higher revenues or lower costs, often indicating efficient operations or favourable
market conditions.
- Actual production costs being lower than budgeted, improving profitability.

Calculating Variances
Basic Formula

Variance = Actual Figure - Budgeted Figure.

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Interpretation:
- Positive values indicate favourable variances, while negative values show adverse variances.

Revenue Variance
• Sales variance is found by comparing actual sales to budgeted sales.

Formula: Sales Variance = Actual Sales - Budgeted Sales.

Interpretation:
- Positive indicates higher sales
- negative means lower sales than planned.

Cost Variance
- Involves comparing actual and budgeted costs.
- Cost Variance = Actual Cost - Budgeted Cost.
- Negative suggests higher costs, positive points to cost savings.

Detailed Interpretation of Variances

Short-Term Implications
• Immediate Action: Identifying variances prompts quick actions to rectify issues.
• Budget Adjustments: Necessary adjustments are made to budgets in response to identified
variances.

Long-Term Strategic Implications

• Strategic Planning: Variances feed into strategic planning, affecting future decisions.

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• Performance Evaluation: Helps evaluate departmental and managerial efficiency and
effectiveness.

Types of Variances and Their Implications

Sales Volume Variance
- Is the difference between budgeted and actual quantity of sales.
- Directly affects revenue and profitability metrics.

Cost Volume Variance

- Variances due to differences in actual versus budgeted activity levels.
- Influences production costs and overall financial performance.

Price Variance
- Occurs due to differences in actual and budgeted prices.
- Affects both cost and sales variances, impacting margins.

Causes and Analysis of Variances

Internal Factors
• Operational Efficiency: Variances may result from changes in productivity or efficiency
levels.
• Management Decisions: Decisions that diverge from initial budget assumptions can lead to
variances.

External Factors
• Market Conditions: Fluctuations in market demand or supply can significantly affect sales
and costs.
• Economic Changes: Economic factors like inflation or recession can impact costs and
revenues.

Responding to Variances: Strategies and Actions

Corrective Actions for Adverse Variances
• Analysis and Action: Investigate causes and take steps to realign with budget expectations.
• Example: If sales are lower than budgeted, a review of marketing strategies may be
necessary.

Leveraging Favourable Variances

• Understanding Success: Analyse reasons behind favourable variances to replicate success.
• Example: If production costs are lower due to efficiency, consider implementing similar
strategies in other departments.

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Continuous Improvement and Learning
• Learning from Variances: Use variances as a tool for learning and improving future
budgeting.
• Adaptation and Strategy Modification: Modify business strategies based on insights
gained from variance analysis.

Grasping the concept of variances is fundamental for students studying A-Level Business
Studies. It not only enhances their understanding of budget management but also equips them
with analytical skills crucial for assessing business performance. This knowledge is invaluable
for future roles in finance, management, and strategic planning. Understanding variances
allows for a comprehensive view of a business’s financial health, guiding better decision-
making and fostering a culture of continuous improvement.

END OF CAMBRDIDGE AS BUSSINESS STUDIES NOTES

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