BUSINESS ACTIVITY

Understand:

1. The economic problem: needs, wants.

BUSINESS ACTIVITY
 BUSINESS ACTIVITY
A need is a good or service essential for living.
A want is a good or service which people would like to have, but which is
not essential for living. People’s wants are unlimited.
The economic problem – there exist unlimited wants but limited resources
to produce the goods and services to satisfy those wants. This creates
scarcity.
BUSINESS ACTIVITY
BUSINESS ACTIVITY
 LESSON SCENARIO
.
 The economic problem – the real cause
Lesson objectives:

1. Identify factors of production.

2. Understand scarcity.

The real cause of the shortage or scarcity of goods and services is that there
are not enough factors of production to make all of the goods and services that
the population needs and wants.

Factors of production are those resources needed to produce goods or

services. There are four factors of production and they are in limited supply.
 Factors of production
.
Factors of production
Land – cover all of the natural resources provided by nature and includes fields
and forests, oil, gas, metals and other mineral resources.
 Factors of production
Labour – this is the number of people available to make products.
 Factors of production
Capital – this is the finance, machinery and equipment needed for the manufacture of
goods.
 Factors of production
Enterprise – The skill and risk-taking ability of the person who brings the other
resources or factors of production together to produce a good or service, for example,
the owner of a business.

These people are called entrepreneurs.

 Entrepreneurs.
.
 Scarcity.
In any one country, and in the world as a whole, these factors of production are

limited in supply.

As there is never enough land, labour, capital or enterprise to produce all of the
needs and unlimited wants of a whole population, there is an economic problem of
scarcity.

Scarcity is the lack of sufficient products to fulfil the total wants of the
population.
 Scarcity.
.
Opportunity cost and Specialisation.
Lesson objective;

Define opportunity cost with examples.

Define specialisation.
 Opportunity cost
.
Opportunity cost
.
 Opportunity cost
Opportunity cost is the next best alternative given up by choosing another item.

Due to scarcity, people are often forced to make choices. When choices are made it leads to
an opportunity cost

For example;

If Andy Chose to go for movie night and instead of revising for exams, then revising
for examples becomes the opportunity cost.
 Examples of opportunity cost
.
 Opportunity cost
.
 Economic problem summary.
.
Economic problem summary.
NOTES ON ECONOMIC PROBLEM.
Specialisation
Specialisation
 Specialisation
.
Specialisation
Specialization is when a person or organisation concentrates on a task at which they are best at.

Instead of everyone doing every job, the tasks are divided among people who are skilled and efficient
at them.
Lesson Objectives
Understand Division of labour.

Define and identify purpose of businesses.

Division Of Labour
 Division Of Labour
Division of labour is when the production process is split up into different tasks and
each worker performs one of these tasks.

It is a form of specialisation.
Division Of Labour
.
Lesson Activity
.

https://www.dineshbakshi.com/igcse-business-studies/understanding-business-act
ivity/revision-notes/234-specialisation-or-division-of-labour
 The purpose of business activity
» combines scarce factors of production to produce goods and services
» produces goods and services which are needed to satisfy the needs and wants
of the population
» employs people as workers and pays them wages to allow them to consume
products made by other people.

NOTE: Businesses combine factors of production to make products (goods and

services) which satisfy people’s wants.
 Added value
Lesson objectives;

1. Understand added value and its importance.

2. Understand how could a business increase added value.
Added value
.
Added value
All businesses attempt to add value. If value is not added to the materials and
components that a business buys in, then:

» other costs cannot be paid for

» no profit will be made.

Added value is the difference between the selling price of a product and the
cost of bought-in materials and components.
Added value
Added value Why is added value important?

» can pay other costs such as labour costs,

management expenses and costs including
advertising and power

» may be able to make a profit if these

other costs come to a total that is less than
the added value.

NOTES ON ADDED VALUE

How could a business increase added value?
1. Increase selling price but keep the cost of materials the same.

Possible if the business tries to create a higher quality image for its product or
service.

For example A jewellery shop could employ very experienced and knowledgeable
sales staff, decorate the shop to look luxurious and use high-quality packaging.

If consumers are convinced by this then they might be prepared to pay higher
prices and buy the same quantity as before the price rise.

1. Reduce the cost of materials but keep the price the same.
How could a business increase added value?
A building firm could use cheaper wood, bricks and other materials when
constructing a home or shop.

If the price charged to customers stays the same then a higher added value will be
made.

Limitations of Added Value.

1. other costs might increase when trying to create this quality image.
2. lower priced materials might reduce the quality of the product.
1.3 Activity page 18 and Division of labour at McDonald’s
To be done and marked in class.
Class test.
Supervised during the lesson.
Well covered
CLASSIFICATION ON BUSINESSES
Lesson Objective;

1. Classification of business activities with examples.

CLASSIFICATION ON BUSINESSES
.
 CLASSIFICATION ON BUSINESSES
Primary sector: this involves the use/extraction of natural resources of Earth to produce raw
materials used by other businesses.

Examples include agricultural activities, mining, fishing, wood-cutting, oil drilling.

 CLASSIFICATION ON BUSINESSES
Secondary sector: this involves the manufacture of goods using the resources from the primary
sector.

Examples include steel industries, cloth production building and construction, aircraft and car
manufacturing, computer assembly, bread baking.

.
CLASSIFICATION ON BUSINESSES
Tertiary sector: this consist of all the services provided in an economy to consumers
and the other sectors of industry.

These includes;

Transport,

Banking,

Retail,

Insurance,

Hotels and hairdressing.

 CLASSIFICATION ON BUSINESSES
NOTES ON CLASSIFICATION OF BUSINESSES.
Lesson Assignment
VIDEO ON BUSINESS CLASSIFICATION
.
VIDEO ON BUSINESS CLASSIFICATION
.
CLASSIFICATION ON BUSINESSES
Lesson Objectives;

1. Importance of economic sector.

2. Changes in sector importance.
Relative importance of economic sectors
Which sector of industry do you think is most important in our country? And
Why?

Class discussion on this.

In some countries, primary industries such as farming and mining employ

many more people than manufacturing or service industries.

These tend to be countries – often called developing countries – where

manufacturing industry has only recently been established.
 Relative importance of economic sectors
As most people still live in rural areas with low incomes, there is little demand for
services such as transport, hotels and insurance.
The levels of both employment and output in the primary sector in these
countries are likely to be higher than in the other two sectors.
In countries which started up manufacturing industries many years ago, the
secondary and tertiary sectors are likely to employ many more workers than the
primary sector.
The level of output in the primary sector is often small compared to the other two
sectors.
In economically developed countries, it is now common to find that many
manufactured goods are bought in from other countries.
Most of the workers will be employed in the service sector. The output of the
tertiary sector is often higher than the other two sectors combined.
Such countries are often called the most developed countries.
Changes in sector importance
Up until the mid 18th century, the primary sector was the largest sector in the world, as
agriculture was the main profession.

After the industrial revolution, more countries began to become more industrialized and urban,
leading to a rapid increase in the manufacturing sector (industrialization).

Industrialisation occurs when there is an increase in the importance of the secondary,

manufacturing sector of industry in a country.
 Changes in sector importance
Nowadays, as countries are becoming more developed, the importance of tertiary sector is
increasing, while the primary sector is diminishing.

The secondary sector is also slightly reducing in size (de-industrialization) compared to the
growth of the tertiary sector .

This is due to the growing incomes of consumers which raises their demand for more
services like travel, hotels

De-industrialisation occurs when there is a decline in the importance of the secondary,

manufacturing sector of industry in a country.
MIXED ECONOMY
Lesson Objectives.

1. What is mixed economy.

2. Components of mixed economy.
3. Business activities in the public sector.
 MIXED ECONOMY
A mixed economy has both a private sector and public (state)
sector.
Private sector: where private individuals own and run business ventures. Their aim is to make a profit,
and all costs and risks of the business is undertaken by the individual.
Examples, Nike, McDonald’s, Virgin Airlines, Safaricom,

Public sector – government (or state) owned and controlled

businesses and organisations.
The government, or other public sector authority, makes decisions
about what to produce and how much to charge consumers
MIXED ECONOMY

Their aim is to provide essential public goods and services (schools, hospitals, police etc.) in order to
increase the welfare of their citizens, they don’t work to earn a profit.

It is funded by the taxpaying citizens’ money, so they work in the interest of these citizens to provide them
with services.
Business activities in the public sector.

» health
» education
» defence
» public transport
» water supply
» electricity supply.
NOTES ON PUBLIC SECTOR
Recent Changes In Mixed economies
Many governments have changed the balance between the private sector and the
public sector in their economies.

They have done this by selling some public sector businesses – owned and
controlled by government – to private sector businesses. This is called
privatisation.

In many European and Asian countries the water supply, electricity supply and
public transport systems have been privatised.
Recent Changes In Mixed economies

Why have governments done this?

It is often claimed that private sector businesses are more efficient than public sector
businesses.
This might be because their main objective is profit and therefore costs must be
controlled.
Also, private sector owners might invest more capital in the business than the government
can afford.
Competition between private sector businesses can help to improve product quality.
Capital is the money invested into a business by the owners.
Lesson Activity.
Lesson Activity.
Checklist
Enterprise, Business Growth and the Size.
Enterprise and entrepreneurship.

Lesson Objectives;

1. Who an entrepreneur is and advantages and disadvantages of

entrepreneurship.
2. Examples of renown entrepreneurs.
DOCUMENTARY ON REVOLUTION OF SMALL BUSINESS

.
Enterprise, Business Growth and the Size.
Enterprise and entrepreneurship.
 Enterprise, Business Growth and the Size.

Now think of any entrepreneurs in Africa and Kenya?

Enterprise, Business Growth and the Size.
Entrepreneur is An entrepreneur is a risk taker (1) who tries to make a profit (1)
by organising the factors of production (1).

The entrepreneur brings together the various factors of production to produce goods or
services.

Revenue; is the amount of money a business earns from the sale of its products.
Enterprise, Business Growth and the Size.
Characteristics of successful entrepreneurs
.
Characteristics of successful entrepreneurs
Characteristics of successful entrepreneurs
.
Enterprise, Business Growth and the Size.
Lesson Discussion.

Think about why successful entrepreneurs are important to the country they are
based in.

You should be able to explain why governments want to encourage more

entrepreneurs to set up in business.
 BUSINESS PLAN
Lesson Objectives;

1. What a business plan is?

2. Contents of a business plan.
 BUSINESS PLAN
A business plan is a document containing the business objectives and important
details about the operations, finance and owners of the new business.

Contents of a business plan.

Contents of a business plan.
Contents of a business plan.
Contents of a business plan.
Lesson Activity
Lesson Activity
.
 How Business Plans Assist Entrepreneurs
Lesson Objectives;

1. Identify different ways business plan assists new and existing businesses.
2. Identify different reasons why governments support start up businesses.
 How Business Plans Assist Entrepreneurs
Business plan is important to new and existing businesses.

1. Information it contains can be used to persuade lenders i.e banks and investor
to provide finance to the business.

1. The objectives and financial forecasts provide the business with targets to
aim at and enable the business to monitor its progress.

1. Gives the business a sense of purpose and direction. Sets out the resources
required by the business i.e finance, the number and skills of employees
needed.
 How Business Plans Assist Entrepreneurs
4. Having the objectives of the business set down clearly will help motivate the
employees.

Point to note;
Business plan is important for planning and development of existing businesses.
An up-to-date business plan maybe needed when a business wants lenders or
investors to provide finance for expansion or long-term projects.
These plans are known as the corporate plan.
 Why governments support business start-ups
Business start-ups are newly formed businesses and usually start small, but some
might grow to become much bigger.

Documentary on Revolution of small businesses.

Why governments support business start-ups
 Why governments support business start-ups
» To reduce unemployment – new businesses will often create jobs to help reduce

unemployment.

» To increase competition – new businesses give consumers more choice and

compete with already established businesses.

» To increase output – the economy benefits from increased output of goods and

services.
 Why governments support business start-ups
To benefit society – entrepreneurs may create social enterprises which offer

benefits to society other than jobs and profit (for example, supporting

disadvantaged groups in society).

» Can grow further – all large businesses were small once! By supporting today’s

new firms the government may be helping some firms that grow to become very

large and important in the future.

 How Governments support business start-ups
1. Grants and interest-free or low-interest loans.

1. Lower taxation rates on profits in the early years.

1. Rent-free premises for a certain period of time.

1. Free or subsidised training schemes for employees.

1. Information , advice and support from specialist agencies.

TEST

1. Identify two characteristics of an entrepreneur.

2. Explain two features of a business plan.

NOTES ON WHY BUSINESSES FAIL

 Methods of measuring business size
Lesson Objectives;

1. Identify various stakeholders interested in knowing business size.

2. Identify and explain different methods of measuring business size.
 Methods of measuring business size

How can we classify a business as big or small?

 Methods of measuring business size
.
 Methods of measuring business size
Businesses come in many sizes. They can be owned by a single individual or
have up to 50 shareholders.

They can employ thousands of workers or have a mere handful.

Interested stakeholders in comparing business sizes.

» Investors – before deciding which business to put their savings into.

» Governments – often there are different tax rates for small and large
businesses.
 Methods of measuring business size
» Competitors – to compare their size and importance with other firms.
» Workers – to have some idea of how many people they might be working with.
» Banks – to see how important a loan to the business is compared to its overall
size.
Ways of Measuring Business Size.
1.Number of people employed.
2. Value of output.
3. Value of sales.
4. Value of capital employed.
Capital employed is the total value of capital used in the business.
 Methods of measuring business size
5. Market Share.

Number of Employees.
Large businesses need to produce greater output or provide their services to a larger
market than a smaller businesses. They also have more departments and managers.

Therefore larger businesses employ more people than smaller businesses in the same
industry i.e a local general store and a large national supermarket.

Limitations: Some firms use production methods which employ very few people but
produce high output levels i.e automated factories which use the latest
computer-controlled equipment.
 Methods of measuring business size
These are called capital-intensive firms – they use a great deal of capital (high-cost)
equipment to produce their output.

Therefore, a company with high output levels could employ fewer people than a
business which produced less output.

Another problem is: should two part-time workers, who work half of a working week
each, be counted as one employee – or two?
 Methods of measuring business size
Value of output
Limitations: A high level of output does not mean that a business is large when
using the other methods of measurement.
A firm employing few people might produce several very expensive computers
each year.
This might give higher output figures than a firm selling cheaper products but
employing more workers.
The value of output in any time period might not be the same as the value of sales
if some goods are not sold.
 Methods of measuring business size
.
 GROUP WORK LESSON ACTIVITY
.
Why Business owners what to expand their business
Lesson Objectives;

1. Reasons why business owners would like to expand their businesses.

2.
 Why Business owners what to expand their business

.
Why Business owners what to expand their business
Different ways in which businesses can grow
Businesses can expand in two main ways:
1. Internal Growth (organic growth).
Occurs when a business expands its existing operations. For example, a
restaurant owner could open other restaurants in other towns – this growth is
often paid for by profits from the existing business.
This type of growth is often quite slow but easier to manage than external growth.
1. External growth (inorganic growth).
is when a business takes over or merges with another business. It is often called
integration as one business is integrated into another one.
Examples of Internal Growth.
1. Increase in number of employees.
2. Increase in number of outlets or branches.
3. Developing new products or output.
4. Investing in additional production capacity
5. Investing in new markets for its products or services.

NOTES ON BUSINESS GROWTH

Benefits of Internal or organic growth
1. Less risk than external growth (e.g. takeovers)
2. Can be financed through internal funds (e.g. retained profits)
3. Builds on a business’ strengths (e.g. brands, customers)
4. Allows the business to grow at a more sensible rate
Drawbacks of Internal or organic growth
1. Growth achieved may be dependent on the growth of the
overall market
2. Hard to build market share if business is already a leader
3. Slow growth – shareholders may prefer more rapid growth
4. Franchises (if used) can be hard to manage effectively
Examples of external/inorganic growth
1. A takeover or acquisition is when one business buys out the owners of
another business, which then becomes part of the ‘predator’ business (the
business which has taken it over).

1. A merger is when the owners of two businesses agree to join their

businesses together to make one business.
Types of merger/integration.
1. Horizontal merger (horizontal integration) is when one business merges
with or takes over another one in the same industry at the same stage of
production. i.e two wheat farmers (primary sector), or two chocolate
manufacturers (secondary sector), or two banks (tertiary sector).
Click on the link to see more examples of Real examples of horizontal
merger
Example of horizontal merger
.
 Types of merger/integration.
2. Vertical merger (or vertical integration) is when one business merges with or
takes over another one in the same industry but at a different stage of production.
Vertical integration can be forward or backward.
Forward Vertical integration – when a business integrates with another business
which is at a later stage of production (closer to the consumer).

Click here to see examples forward vertical integration

 Types of merger/integration.

Backward Vertical integration – when a business integrates with another

business at an earlier stage of production (closer to the raw material supplies, in
the case of a manufacturing business).

Click to see examples backward vertical integration

 Types of merger/integration.
3. Conglomerate integration (diversification) is when one business merges with or
takes over a business in a completely different industry.

For Example;
 Types of merger/integration.
Illustration video on conglomerate.

Click here for more examples; Examples of Conglomerate

Activity 3.3 page 38. To be done individual work.
Benefits of Integration
Benefits of Integration
Benefits of Integration
Class Activity. Group Work
 Problems Linked to business growth
.
More class work. Individual Work
Summary on how businesses grow
Why some businesses remain small.
Why some businesses remain small
Why some businesses remain small
Why some businesses remain small
.
Class activity
Causes of Business Failure
Page 41. To be written from the textbook.
Causes of Business Failure
Why new businesses are at greater risk of failing
1. lack of finance and other resources,
2. poor planning and inadequate research. In addition,
3. the owner of a new business may lack the experience and decision-making
skills of managers who work for larger businesses.
Exam-style questions
Case Study on How TaTa company grow by mergers and acquisitions.

To be assessed and recorded.

 Type Of Business Organisation
Private sector business organisations;
» sole traders
» partnerships
» private limited companies
» public limited companies
» franchises
» joint ventures.
 Private sector business organisations
Sole traders.

Sole trader is a business owned by one person, the owner is the sole proprietor. One of the
reasons it is such a common form of organisation is because there are so few legal requirements
to set it up.

Legal regulations required by a sole trader.

 Private sector business organisations
» The owner must register with, and send annual accounts to, the Government Tax
Office.
» The name of the business is significant. In some countries the name must be
registered with the Registrar of Business Names. In other countries, such as
the UK, it is sufficient for the owner to put the business name on all of the
business’s documents and to put a notice in the main office stating who owns
the business.
» In some industries, the sole trader must observe laws which apply to all
businesses in that industry. These include health and safety laws and obtaining
a licence, for example, to sell alcohol or operate a taxi.
 Advantages of a sole trading businesses.
.
 Disadvantages of a sole trading businesses.

Limited liability means that the liability of shareholders in a company is

limited to only the amount they invested.
 Disadvantages of a sole trading businesses.
Unlimited liability means that the owners of a business can be held responsible for the
debts of the business they own.

Their liability is not limited to the investment they made in the business.
 General Advantages and disadvantages of sole trader
.
 Partnerships
.
 Partnerships
Partnership is a form of business in which two or more people agree
to jointly own a business.
In some countries, such as India, there is a maximum limit of 20
people.
The partners will contribute to the capital of the business, will usually
have a say in the running of the business and will share any profits
made.
 Partnerships
Partnerships can be set up very easily. Mike could just ask someone he knows to

become his partner in the taxi business.

This would be called a verbal agreement.

Mike would be advised to create a written agreement with a partner called a

partnership agreement or deed of partnership.

Without this document, partners may disagree on who put most capital into the
business or who is entitled to more of the profits.

A written agreement will settle all of these matters.

 Partnerships
A partnership agreement is the written and legal agreement between business
partners. It is not essential for partners to have such an agreement but it is always
recommended.
 Advantages of partnerships
.
 Advantages of partnerships

An unincorporated business is one that does not have a separate legal

identity. Sole traders and partnerships are unincorporated businesses.
 Class group work. To be done in class in groups of two.
.
 Private and Public Limited companies
Sole traders and partnerships are Unincorporated businesses meaning that owners
are responsible for the debts of the business.

Unincorporated business is business that does not have legal identity separate from
its owners. The owners have unlimited liability for business debts.

Sole traders and partnerships also have unlimited liability.

Unlimited liability means that if an unincorporated business business fails, then the
owners might have to use their personal wealth to finance any business debts.

A limited company is owned by its shareholders.

Shareholder is a person or organisation who owns shares in a limited company. These

are investor who invest money in the company in exchange for shares.
 Two main types of limited company
Private limited companies. Often a small to medium sized company; owned by
shareholders who have limited liability. The company cannot sell its shares to the
general public.
Public limited companies. Often a large company; owned by shareholders who have
limited liability. The company can sell its shares to the general public.
Both companies share the following features;
1. Both companies can raise finance by selling shares.
2. Shareholders invest their capital by purchasing shares in the company.
3. The business continues even if one or more shareholders.
4. Ordinary shareholder are the owners of the company. Ordinary shareholder are
owners of a limited company.
5. Shareholders have limited liability. If the business fails, they risk losing the value
of their shares - i.e the amount of money they have invested in the company.
 Two main types of limited company
Limited liability is where shareholders in a limited liability company which fails
only risk losing the amount they have invested in the company and not any of their
personal wealth.

6. Profit is shared between shareholders through the payment of dividends.

Dividends is payment out of profits to shareholders as a reward for their

investment.

Collateral; non-current assets offered as security against borrowing.

The difference between between private and public limited companies.
The difference between between private and public limited companies.
 Advantages of Private limited companies

1. The sale of shares make raising finance

a lot easier.
2. Shareholders have limited liability,
3. Original owners are still able to keep
control of the business by restricting
share distribution.
 Disadvantages of private limited companies.

1. Owners need to deal with many legal formalities before

forming a private limited company.
2. The following documents make starting a private
company take a long process.

oThe Articles of Association

oThe Memorandum of Association

oCertificate of Incorporation: the document issued by the Registrar of Companies that

will allow the Company to start trading.
 Disadvantages of private limited companies.

3. Shares cannot be freely sold without the consent of

all shareholders.

4. The accounts of the company are less secret than

that of sole traders and partnerships. Public
information must be provided to the Registrar of
Companies.

5. Capital is still limited as the company cannot sell

shares to the public.
 Public Limited Companies
Public limited companies are similar to private limited
companies, but they are able to sell shares to the public.

Advantages:
1. Limited liability.
2. Continuity.
3. Potential to raise limitless capital.
4. No restrictions on transfer of shares.
5. High status will attract investors and customers.
Disadvantages:
1. Many & costly legal formalities required to form the business – same as for
private limited companies.
2. Many legal rules and regulations to protect shareholders, including the
publishing of annual accounts – these are much stricter than they are for private
limited companies.
3. Selling shares is expensive, because of the commission paid to stock brokers
(banks and agents) to aid in selling shares and costs of printing the prospectus.
4. Difficult to control since it is so large.
5. Directors’ decision-making is sometimes influenced by major investors who
seek to satisfy their own objectives e.g, they may demand payment of higher
dividends which reduces the profits available for reinvestment into the company.
6. The company is at risk of a takeover by another company because its shares
can be freely bought and sold. Any business that buys 51% of the shares in a
company becomes the new owners.
Control and ownership in a public limited company:

1. The Annual General Meeting (AGM) is held every year and all shareholders
are invited to attend so that they can elect their Board of Directors.
2. When directors are elected, they have power to make important decisions.
However, they must hire managers to attend to day to day decisions.
Therefore:
3. Shareholders own the company
4. Directors and managers control the company
5. Because shareholders invested in the company, they expect dividends -
part/share of profit given to shareholders as returns to their investment.
 Joint ventures
This is a situation where two or more businesses agree to work together on a
project, sharing capital, risks and profits and set up a separate business for this
purpose.

Advantages:
1.Shared/ cutting costs which is good for tackling expensive projects. (e.g aircraft)
2.Pooled knowledge – where each business brings different expertise to the joint venture (e.g
foreign and local business).
3. Risks are shared and thus reduced for each business.

Disadvantages:
1. Profits have to be shared among the businesses.
2.Disagreements might occur due to the businesses in the joint venture having different
business cultures or styles of leadership. This makes decision-making difficult.
3.Any mistakes made by any firm in the JV may ruin/damage the reputation of all the firms.
Examples of joint venture businesses on Pg 52
 Franchises
Franchising is a form of business organisation where a business
buys the rights to use the name, promotional logo and trading
activities (product) of a successful brand name or business.

The owner of a successful business (the franchisor) grants a license

to another person or business (the franchisee) to use their business
idea, product or name/brand – often in a specific geographical area
and for a fee.

The franchisee makes the decision on whether to operate the business

as a sole trader, partnership or as incorporated business organisation.
 Advantages for the franchisor:

1. The franchisor benefits with franchise fees and royalties paid by franchisees for
use of their brand name/logo, products etc.
2. Expansion is much faster because the franchisor does not have to finance all
new outlets – this forms a rapid, low cost method of business expansion.
3. The franchisee manages their own outlets – franchisors can access ideas and
suggestions from franchisee.
4. All products sold must be bought from the franchisor – there’s an assured
market for the product.
 Disadvantages for the franchisor:

1. The failure of one franchise could lead to a bad reputation of the whole business.
2. Loss of control over running of business.
3. Franchisee may not be as skilled and thus not make much profits.

Advantages for the franchisee:

1. The chance of failure is much reduced due to the well know brand image.
2. The franchisor pays for advertising and promotion of the brand through national
advertising.
3. All supplies can be obtained from the franchisor after quality checking thus the
franchisee is guaranteed of high quality supplies.
4. Many business decisions will be made by the franchisor (prices, store layout,
products).
5. Advice and training for staff and management is provided by the franchisor.
 Disadvantages for the franchisee:

1. Less independence - No full control over business- need to strictly follow

franchisor’s standards and rules.
2. May be unable to make decisions that would suit the local area.
3. License fee must be paid annually and a percentage of the turnover must be
paid to the franchisor.
4. Profits have to be shared with franchisor.
5. Need to pay franchisor franchise fees and royalties
6. Need to advertise and promote the business in the region themselves
7. Cost of setting up business is borne by the franchisee
 FACTORS THAT DETERMINE THE TYPE OF BUSINESS ORGANISATION CHOSEN

.
 Business Organisations in the public sector
Business organisation in the public sector are called public corporations.
Public corporations are business organisations that are owned and controlled
by the state.
Features of public corporations are;
1. Owned and controlled by the state.
2. Financed mainly through taxation.
3. Have social objectives rather than profit objectives.
4. Services of public corporations are often provided to the population for free or
at a lower price.
Examples of public corporations in Kenya.
 Business objectives and stakeholder Objectives
Objectives are statements of specific target to be achieved which should be
SMART.

Why set objectives

1.Give worker a clear target, motivates them
2.Helps in decision making
3.Make working towards a common goal possible
4.Comparing objectives ant the achieved results.
 Objectives need to be SMART
•Specific: Well defined, clear, and unambiguous e.g an airline may
set an objective about the level of seat occupancy on its planes.

•Measurable: With specific criteria that measure your progress

toward the accomplishment of the goal e.g achieving an average of
85% seat occupancy across all of its flights.

•Achievable and Agreed: Attainable and not impossible to achieve

e.g what promotional activities need to be implemented to see the
objectives is met for the seat occupancy in the flights?
 Objectives need to be SMART
•Realistic: Within reach, realistic, and relevant to your life
purpose e.g the airline seat occupancy will need financial
resources, perhaps for advertising campaign.

•Timely: With a clearly defined timeline, including a

starting date and a target date.
The purpose is to create urgency e.g achieving a seat
occupancy of 85% within 18 months.
 Different business objectives.

1. Survival. Many new businesses have survival as their very important

short-term objectives. Once established, they focus on long-term objectives.
2. Profit This is every business’s objective to have the highest difference between
revenue and total costs.
This also ensures that the business has high returns to shareholders (for
incorporated businesses).
1. Market share – increased market share helps a business to develop a strong
brand image which makes it easier to sell the products to consumers.
Market share is the revenue of a business expressed as a percentage of total
market revenue.
 Different business objectives.
Market sales = (company sales )/(total market sales ) *100
If its high, it shows that the business is doing well and serving many
customers.
4. Corporate Social Responsibility– Many businesses take an interest in social,
ethical and environmental issues which impacts on the employees, community and
the environment.

CSR- is when businesses taking responsibility for the impact their activities might
have on society and the environment.

This helps businesses in creating a good publicity and avoid legal actions; this
positively affects a business’s reputation, sales, revenue and profits.
Video on CSR IN Turkana Kenya
Video on CSR by Starbucks
 What causes businesses to consider CSR as one of their
objectives?
•The activity of pressure groups.
Pressure groups – organisations of like minded people who put
pressure on businesses and government to change their policies
to reach a predetermined objective.
•The media – which creates a greater awareness of social, ethical
and environmental issues among consumers.
•The role of trade unions and other worker representative groups.
•The role of governments and laws passed at local, national and
international levels.
 What causes businesses to consider CSR as one of their objectives?

5. Growth of the business – Most businesses aim at expanding

in a bid to achieve all the other objectives.
Objectives of social Enterprises.
Social enterprise – A business with social objectives that
reinvests most of its profits back into the business or into
benefiting the society.
Objectives of social enterprises. Watch and make notes.
 Objectives of social Enterprises.
.
Stakeholder groups in a business
Watch video on stakeholders
•A stakeholder is any person or a group with
a direct interest in a business because they
are affected by its performance and activities.
•They include:
1.Internal stakeholders
2.External stakeholders
Stakeholder groups in a business
.
Stakeholder groups in a business
Objectives in the public sector
•Provide important services and facilities to the people.
The facilities they provide must be:
- Accessible – they can be used by everyone regardless of their location
or income
- Affordable – they must be cheaper than if the services was provided
by the private sector; the service may even be free.
- Open to all – they must be available to everyone regardless of their
income, class, religion, culture etc
•Protect and create employment in certain areas.
•Reinvesting any profit to expand on the public sector.
PLEASE WATCH THIS VIDEO ON BUSINESS OBJECTIVES AND
STAKEHOLDERS
 PEOPLE IN ORGANISATION.
Motivating Employees.

Motivation: Are factors that influence the behaviour of employees towards

achieving set business goals.

Factors that influence motivation at work;.

1. Money
2. Job security
3. Promotion
4. Status
5. Fringe benefits
6. Training
7. Friendship.
 PEOPLE IN ORGANISATION.
People work for several reasons:
● Have a better standard of living: by earning incomes they can satisfy
their needs and wants.

● Be secure: having a job means they can always maintain or grow that
standard of living

● Gain experience and status: work allows people to get better at the
job they do and earn a reputable status in society

● Have job satisfaction: people also work for the satisfaction of having a
job
 PEOPLE IN ORGANISATION.
Benefits/Importance of well-motivated workforce.
1. Improved productivity.
2. More competitive.
3. Better quality goods and services.
4. Low rate of absenteeism.
5. Low rate of labour turnover.
Labour productivity - a measure of the efficiency of employees by
calculating the output per employee.
Absenteeism; employees’ non - attendance at work without good reason.
Labour turnover - the rate at which employees leave a business.
 PEOPLE IN ORGANISATION.
The concept of human needs - Maslow’s Hierarchy of needs.
 PEOPLE IN ORGANISATION.

Maslow’s Hierarchy: Abraham Maslow’s hierarchy of needs shows

that employees are motivated by each level of the hierarchy going
from bottom to top.
Managers can identify which level their workers are on and then take
the necessary action to advance them onto the next level.
One limitation of this theory is that it doesn’t apply to every worker.
For some employees, for example, social needs aren’t important but they
would be motivated by recognition and appreciation for their work from
seniors.
 PEOPLE IN ORGANISATION.
Maslow believed that humans have five levels of needs;

1. Physical needs - basic needs we must have to be able to survive. They

include water, food, shelter, clothing and rest.
2. Safety needs - need to be safe from physical danger and individuals need to
know that they have job security.
3. Social needs - most people want to be accepted by others and to feel that
they are loved and trusted.
4. Esteem needs - individuals want to be respected and to have their
achievements recognised by others.
5. Self - actualization - not everyone will reach their full potential, but for some
individuals it is a very important need. Even the most successful people rarely
achieve self-actualization because they will always set themselves another
challenge.
 PEOPLE IN ORGANISATION.
Limitations of Maslow’s theory of motivation.
1. Often difficulty to identify how much of each need has been met and
which level each employee is on.
2. Money might also satisfy esteem needs as well as those lower down the
hierarchy.
3. Not everyone has the same needs as those in Maslow’s hierarchy.
4. Self - actualization is rarely achieved.
 PEOPLE IN ORGANISATION.
Key motivational Theories;

1. F.W. Taylor - scientific management theory.

2. Frederick Herzberg - two - factor theory.

F.W. Taylor - scientific management theory.

F. W. Taylor: Taylor based his ideas on the assumption that workers were motivated by
personal gains, mainly money and that increasing pay would increase productivity
(amount of output produced).

Therefore he proposed the piece-rate system, whereby workers get paid for the
number of output they produce.

Piece-rate system - Is paying employees for each unit produced.

 PEOPLE IN ORGANISATION.
So in order, to gain more money, workers would produce more. He also
suggested a scientific management in production organisation, to break
down labour (essentially division of labour) to maximise output.
However, this theory is not entirely true. There are various other
motivators in the modern workplace, some even more important than
money.
The piece rate system is not very practical in situations where output
cannot be measured (service industries) and also will lead to (high)
output that doesn’t guarantee high quality.
 PEOPLE IN ORGANISATION.
This theory is sometimes referred to us as theory of economic man.
The theory of economic man is the view that human are motivated by only
money.
Herzberg’s Two-Factor Theory:
He wanted to find factors that motivate people to work;
He identified two groups of factors;
1. Hygiene factors.
2. Motivators.
Hygiene factors are factors that must be present in the workplace to prevent
job dissatisfaction.
 PEOPLE IN ORGANISATION.
Herzberg’s Two-Factor Theory:
Hygiene factors include;
1. Work conditions.
2. Relationships with others.
3. Salary or wage.
4. Supervision.
5. Company policy and administration
Motivators; are the factors that influence a person to increase their efforts.
Motivators include;
 PEOPLE IN ORGANISATION.
● achievement
● recognition
● personal growth/development
● promotion
● work itself

According to Herzberg, the hygiene factors need to be satisfied, if not

they will act as de-motivators to the workers.
However hygiene factors don’t act as motivators as their effect quickly
wear off. Motivators will truly motivate workers to work more effectively.

Job dissatisfaction; Is how unhappy and discontent employees are

with their job.
 PEOPLE IN ORGANISATION.
Methods of motivation Employees.
Can be divided into financial rewards and non-financial rewards.
Financial rewards or motivators; Are cash and non-cash rewards paid to employees
which are often used to motivate employees to increase their efforts.
They include;
1.Wages: often paid weekly. They can be calculated in two ways:
2. Time-Rate or hourly wage rate: pay based on the number of hours worked. Although output
may increase, it doesn’t mean that workers will work sincerely use the time to produce more-
they may simply waste time on very few output since their pay is based only on how long they
work.
Hourly wage rate is a payment to employees based on a fixed amount for each hour worked.
The productive and unproductive worker will get paid the same amount, irrespective of their
output.
 PEOPLE IN ORGANISATION.
3. Piece-Rate: pay based on the no. of output produced. Same as time-rate, this
doesn’t ensure that quality output is produced.
Thus, efficient workers may feel demotivated as they’re getting the same pay as
inefficient workers, despite their efficiency.
4. Salary: paid monthly or annually.
Salary; it is a fixed annual payment to certain grades and types of staff not based
on hours worked or output.
5. Commission: paid to salesperson, based on a percentage of sales they’ve
made. The higher the sales, the more the pay.

Commission; is a payment to sales staff based on value of the items they sell.
 PEOPLE IN ORGANISATION.
Although this will encourage salespersons to sell more products and
increase profits, it can be very stressful for them because no sales
made means no pay at all.
6. Bonus: additional amount paid to workers for good work
Bonus is an additional reward paid to employees for achieving
targets set by managers.
7. Performance-related pay: paid based on performance.
Performance-related pay: is a bonus scheme used to reward
employees for performing to the required standard.
 PEOPLE IN ORGANISATION.
An appraisal (assessing the effectiveness of an employee by senior
management through interviews, observations, comments from colleagues etc.)
is used to measure this performance and a pay is given based on this.
8. Profit-sharing: a scheme whereby a proportion of the company’s profits is
distributed to workers. Workers will be motivated to work better so that a higher
profit is made.
9.Share ownership: shares in the firm are given to employees so that they can
become part owners of the company. This will increase employees’ loyalty to
the company, as they feel a sense of belonging.
10. Fringe benefits; Are non-cash rewards often used to recruit or retain
employees and to recognise the status of employees.
 PEOPLE IN ORGANISATION.
They include;

1. Discounts on company products.

2. Company cars.
3. Health insurance.
4. Pensions received by the employees in business.

Fringe benefits help in recruitment and retention of employees though benefits are linked
to status and not performance.
 PEOPLE IN ORGANISATION.
Non - Financial Rewards;
Are methods used to motivate employees that do not involve giving any financial
reward.
They include;
1. Job Satisfaction: the enjoyment derived from the feeling that you’ve done a
good job.
Job Satisfaction is how happy and content a person is with their job.
Employees have different ideas about what motivates them- it could be pay,
promotional opportunities, team involvement, relationship with superiors, level of
responsibility, chances for training, the working hours, status of the job etc.
Responsibility, recognition and satisfaction are in particular very important.
So, how can companies ensure that they’re workers are satisfied with the job, other
 PEOPLE IN ORGANISATION.
2. Job Rotation: This is increasing variety in the workplace by allowing employees to
switch from one task to another.
Involves workers swapping around jobs and doing each specific task for only a limited
time and then changing round again.
This increases the variety in the work itself and will also make it easier for managers to
move around workers to do other jobs if somebody is ill or absent.
The tasks themselves are not made more interesting, but the switching of tasks may
avoid boredom among workers.
This is very common in factories with a huge production line where workers will move
from retrieving products from the machine to labelling the products to packing the
products to putting the products into huge cartons.
 PEOPLE IN ORGANISATION.
3. Job Enlargement:This is increasing or widening tasks to increase variety for employees.

Where extra tasks of similar level of work are added to a worker’s job description. These extra tasks will not add
greater responsibility or work for the employee, but make work more interesting. E.g.: a worker hired to stock shelves
will now, as a result of job enlargement, arrange stock on shelves, label stock, fetch stock etc.

4.Job Enrichment: This is organising work so that employees are encouraged to use their full abilities.

involves adding tasks that require more skill and responsibility to a job. This gives employees a sense of trust from
senior management and motivate them to carry out the extra tasks effectively.

Some additional training may also be given to the employee to do so. E.g.: a receptionist employed to welcome
customers will now, as a result of job enrichment, deal with telephone enquiries, word-process letters etc.

5. Team-working: Is organising production so that groups of employees complete the whole unit of work.

a group of workers is given responsibility for a particular process, product or development. They can decide as a team
how to organize and carry out the tasks. The workers take part in decision making and take responsibility for the
process. It gives them more control over their work and thus a sense of commitment, increasing job satisfaction.
Working as a group will also add to morale, fulfill social needs and lead to job satisfaction.

6. Opportunities for training: providing training will make workers feel that their work is being valued. Training also
provides them opportunities for personal growth and development, thereby attaining job satisfaction
 PEOPLE IN ORGANISATION.
7. Delegation; is passing responsibility to perform tasks to employees lower lower down
in the organisation.

It is often combined with empowerment i.e allowing employees to make decisions about
how tasks are performed.

8. Quality Circles; is groups of employees who meet regularly to discuss work-related

problems.

Employees come up with solutions to problems or suggests how improvements can be

made.

The results are presented to managers and good ideas and solutions are introduced into
the workplace.

This is similar to Herzberg’s responsibility motivator.

 PEOPLE IN ORGANISATION.
Choosing Methods Of Motivation;

1. What is the cost to the business of using a particular method?

2. Some methods of motivation are only used for certain types of employees i.e
piece-rate-system is only suitable for production employees.

Exam practice questions on page 87 and 88. To be done by learners.

How Google motivates its employees

Watch on different ways of motivating employees

 Organisation and Management
Simple organisational Charts.

Organisational structure is the formal, internal framework of a business that shows

how it is managed and organised.
 Organisation and Management
Functional Department: the main activities of business: finance, marketing, operations,
human resources and research and development.
Main Features of organizational structure;
1. Levels of hierarchy.
2. Chain of command.
3. Span of control.
Hierarchy refers to number of levels in an organisational structure.
In larger organisations as you move from the top to the bottom of the hierarchy, there
are more and more people at each level.
Chain of command is the route through which authority is passed down through an
organisation.
The day to day control of all employees becomes the responsibility of managers lower
down the hierarchy.
 Organisation and Management
Each person in the chain of command is directly responsible to the person immediately
above them and directly responsible for the person directly below them.

Span of control; is the number of subordinates reporting to each supervisor or

manager.

Subordinate is an employee who is below another employee in the organization’s

hierarchy.

In the above figure, the managing director’s span of control is four. The marketing
director’s span of control is the number of marketing managers working under him.

A span of control can be described as ‘wide’ or ‘narrow’ depending on how many

subordinates a person is responsible for.
 Organisation and Management
The chain of command is the structure of an organization that allows instructions to
be passed on from senior managers to lower levels of management.

In the above figure, there is a short chain of command since there are only four
levels of management shown.

There is a link between the span of control and chain of command.

The wider the span of control the shorter the chain of command since more
people will appear horizontally aligned on the chart than vertically.

A short span of control often leads to long chain of command.

 Organisation and Management
Advantages of a short chain of command (these are also the disadvantages of a
long chain of command):

● Communication is quicker and more accurate

● Top managers are less remote from lower employees, so employees will be more
motivated and top managers can always stay in touch with the employees
● Spans of control will be wider, This means managers have more people to control
This is beneficial because it will encourage them to delegate responsibility (give
work to subordinates) and so the subordinates will be more motivated and feel
trusted. However there is the risk that managers may lose control over the tasks.
 Organisation and Management
Line Managers have authority over people directly below them in the organizational
structure. Traditional marketing/operations/sales managers are good examples.
Staff Managers are specialists who provide support, information and assistance to line
managers. The IT department manager in most organisations act as staff managers
Functions of Management
● Planning: setting aims and targets for the organisations/department to achieve. It will
give the department and its employees a clear sense of purpose and direction.
Managers should also plan for resources required to achieve these targets – the
number of people required, the finance needed etc.
● Organizing: managers should then organize the resources. This will include allocating
responsibilities to employees, possibly delegating.
● Coordinating: managers should ensure that each department is coordinating with one
another to achieve the organization’s aims. This will involve effective communication
between departments and managers and decision making. For example, the sales
department will need to tell the operations dept. how much they should produce in
order to reach the target sales level.
●
●
 Organisation and Management
The operations dept. will in turn tell the finance dept. how much money they need for
production of those goods. They need to come together regularly and make decisions that
will help achieve each department’s aims as well as the organization’s.

● Commanding: managers need to guide, lead and supervise their employees in the
tasks they do and make sure they are keeping to their deadlines and achieving
targets.
● Controlling: managers must try to assess and evaluate the performance of each of
their employees. If some employees fail to achieve their target, the manager must
see why it has occurred and what he can do to correct it- maybe some training will be
required or better equipment.
 Organisation and Management
Delegation is giving a subordinate the authority to perform some tasks.
Advantages to managers:
● managers cannot do all work by themselves
● managers can measure the efficiency and effectiveness of their subordinates’ work
However, managers may be reluctant to delegate as they may lose their control over
the work.
Advantages to subordinates:
● the work becomes more interesting and rewarding- increased job satisfaction
● employees feel more important and feel trusted– increasing loyalty to firm
● can act as a method of training and opportunities for promotions, if they do a good
job.
 Organisation and Management
Leadership Styles
Leaderships styles refer to the different approaches used when dealing with people when in a
position of authority.
Three styles you need to learn: the autocratic, democratic and laissez-faire styles.
Autocratic style is where the managers expects to be in charge of the business and have
their orders followed. They do all the decision-making, not involving employees at all.
Communication is thus, mainly one way- from top to bottom. This is standard in police and
armed forces organizations.
Democratic style is where managers involve employees in the decision-making and
communication is two-way from top to bottom as well as bottom to top. Information about
future plans is openly communicated and discussed with employees and a final decision is
made by the manager.
Laissez-faire (French phrase for ‘leave to do) style makes the broad objectives of the
business known to employees and leaves them to do their own decision-making and organize
tasks. Communication is rather difficult since a clear direction is not given. The manger has a
very limited role to play.
Organisation and Management
 Organisation and Management
Trade Unions
A trade union is a group of workers who have joined together to ensure their interest are
protected. They negotiate with the employer (firm) for better conditions and treatment and can
threaten to take industrial action if their requests are denied.
Industrial action can include overtime ban (refusing to work overtime), go slow (working at
the slowest speed as is required by the employment contract), strike (refusing to work at all
and protesting instead) etc.
Trade unions can also seek to put forward their views to the media and influence
government decisions relating to employment.
Benefits to workers of joining a trade union:
● strength in number- a sense of belonging and unity
● improved conditions of employment, for example, better pay, holidays, hours of work etc
● improved working conditions, for example, health and safety
 Organisation and Management
● improved benefits for workers who are not working, because they’re sick, retired or
made redundant (dismissed not because of any fault of their own)
● financial support if a member thinks he/she has been unfairly dismissed or treated
● benefits that have been negotiated for union member such as discounts on firm’s
products, provision of health services.

Disadvantages to workers of joining a trade unions:

● costs money to be member- a membership fee will be required

 Recruitment, Selection and Training of Workers
The Role of the H.R. (Human Resource) Department
● Recruitment and selection: attracting and selecting the best candidates for job posts
● Wages and salaries: set wages and salaries that attract and retain employees as well as
motivate them
● Industrial relations: there must be effective communication between management and
workforce to solve complaints and disputes as well as discussing ideas and suggestions
● Training programmes: give employees training to increase their productivity and
efficiency
● Health and safety: all laws on health and safety conditions in the workplace should be
adhered to
● Redundancy and dismissal: the managers should dismiss any
unsatisfactory/misbehaving employees and make them redundant if they are no longer
needed by the business.
 Recruitment, Selection and Training of Workers
Recruitment
Recruitment is the process from identifying that the business needs to employ
someone up to the point where applications have arrived at the business.
When a vacancy arises, a job analysis has to be prepared.
A job analysis identifies and records the tasks and responsibilities relating to the
job. It will tell the managers what the job post is for.
Then a job description is prepared that outlines the responsibilities and duties to
be carried out by someone employed to do the job.
It will have information about the conditions of employment (salary, working
hours, and pension scheme), training offered, opportunities for promotion
etc.
This is given to all prospective candidates so they know what exactly they will be
required and expected to do.
 Recruitment, Selection and Training of Workers
Once this has been done, the H.R. department will draw up a job specification, a
document that outlines the requirements, qualifications, expertise, skills,
physical/personal characteristics etc. required by an employee to be able to
take up the job.
 Recruitment, Selection and Training of Workers
Advertising the vacancy

Internal recruitment is when a vacancy is filled by an existing employee of the

business.
Advantages:
● Saves time and money- no need for advertising and interviewing
● Person already known to business
● Person knows business’ ways of working
● Motivating for other employees to see their colleagues being promoted- urging
them to work hard
Disadvantages:
● No new skills and experience coming into the business
● Jealousy among workers
 Recruitment, Selection and Training of Workers
External recruitment is when a vacancy is filled by someone who is not an
existing employee and will be new to the business.
External recruitment needs to be advertised, unlike internal recruitment.
This can be done in local/national newspapers, specialist magazines and
journals, job centres run by the government (where job vacancies are posted
and given to interested people;
usually for unskilled or semi-skilled jobs) or even recruitment agencies (who will
recruit and send along candidates to the company when they request it).
When a person is interested in a job, they should apply for it by sending in a
curriculum vitae (CV) or resume, this will detail the person’s qualifications,
experience, qualities and skills.
The business will use these to see which candidates match the job specification. It
will also include statements of why the candidate wants the job and why he/she
feels they would be suitable for the job.
 Recruitment, Selection and Training of Workers
Selection
Applicants who are shortlisted will be interviewed by the H.R. manager. They will also call up
the referee provided by the applicant (a referee could be the previous employer or colleagues
who can give a confidential opinion about the applicant’s reliability, honesty and suitability for
the job). Interviews will allow the manager to assess:
● the applicant’s ability to do the job
● personal qualities of the applicant
● character and personality of applicant
In addition to interviews, firms can conduct certain tests to select the best candidate. This
could include skills tests (ability to do the job), aptitude tests (candidate’s potential to gain
additional skills), personality tests (what kind of a personality the candidate has- will it be
suitable for the job?), group situation tests (how they manage and work in teams) etc.
When a successful candidate has been selected the others must be sent a letter of rejection.
 Recruitment, Selection and Training of Workers
Employment contracts can be part-time or full-time.
Part-time employment is often considered to be between 1 and 30-35 hours a week
whereas full-time employment will usually work 35 hours or more a week.
Advantages to employer of part-time employment (disadvantages of full-time
employment to employer):
● more flexible hours of work
● easier to ask employees just to work at busy times
● easier to extend business opening/operating hours by working evenings or at
weekends
● works lesser hours so employee is willing to accept lower pay
● less expensive than employing and paying full-time workers.
 Recruitment, Selection and Training of Workers
Disadvantages to employer of part-time employment (advantages of full-time
employment to employers)

● less likely to be trained because the workers see the job as temporary
● takes longer to recruit two part-time workers than one full-time worker
● can be less committed to the business/ more likely to leave and go get another job
● less likely to be promoted because they will not have gained the skills and
experience as full-time employees
● more difficult to communicate with part-time workers when they are not in work- all
work at different times.
 Recruitment, Selection and Training of Workers
Training

Training is important to a business as it will improve the worker’s skills and knowledge
and help the business be more efficient and productive, especially when new
processes and products are introduced.

The three types of training are:

● Induction training: an introduction given to a new employee, explaining the firm’s

activities, customs and procedures and introducing them to their fellow workers.

Advantages:
● Helps new employees to settle into their job quickly
● May be a legal requirement to give health and safety training before the start of work
● Less likely to make mistakes
 Recruitment, Selection and Training of Workers
Disadvantages:
● Time-consuming
● Wages still have to be paid during training, even though they aren’t working
● Delays the state of the employee starting the job
● On-the-job training: occurs by watching a more experienced worker
doing the job
Advantages:
● It ensures there is some production from worker whilst they are training
● It usually costs less than off-the-job training
● It is training to the specific needs of the business
 Recruitment, Selection and Training of Workers
Disadvantages:
● The trainer will lose some production time as they are taking some time to teach the
new employee
● The trainer may have bad habits that can be passed onto the trainee
● It may not necessarily be recognised training qualifications outside the business

● Off-the-job training: involves being trained away from the workplace, usually by
specialist trainers
Advantages:
● A broad range of skills can be taught using these techniques
● Employees may be taught a variety of skills and they may become multi-skilled that
can allow them to do various jobs in the company when the need arises.
Disadvantages:
● Costs are high
● It means wages are paid but no work is being done by the worker
● The additional qualifications means it is easier for the employee to leave and find
another job
 Recruitment, Selection and Training of Workers
Workforce Planning
Workforce Planning: the establishing of the workforce needed by the business for the foreseeable
future in terms of the number and skills of employees required.
They may have to downsize (reduce the no. of employees) the workforce because of:
● Introduction of automation
● Falling demand for their products
● Factory/shop/office closure
● Relocating factory abroad
● A business has merged or been taken over and some jobs are no longer needed
They can downsize the workforce in two ways:
● Dismissal: where a worker is told to leave their job because their work or behaviour is
unsatisfactory.
● Redundancy: when an employee is no longer needed and so loses their work, through not due to
any fault of theirs. They may be given some money as compensation for the redundancy.
Worker could also resign (they are leaving because they have found another job) and retire (they are
getting old and want to stop working).
 Recruitment, Selection and Training of Workers
Legal Controls over Employment Issues
These are laws requiring businesses to treat their employees equally in the workplace and when
being recruited and selected- there should be no discrimination based on age, gender, religion,
race etc.
Employees are protected in many areas including
● against unfair discrimination
● health and safety at work (protection from dangerous machinery, safety clothing and
equipment, hygiene conditions, medical aid etc.)
● against unfair dismissal
● wage protection (through the contract of employment since it will have listed the pay and
conditions). Many countries have a legal minimum wage– the minimum wage an employer has
to pay its employee. This avoids employers from exploiting its employees, and encourages
more people to find work, but since costs are rising for the business, they may make many
workers redundant- unemployment will rise.
An industrial tribunal is a legal meeting which considers workers’ complaints of unfair dismissal or
discrimination at work. This will hear both sides of the case and may give the worker compensation
if the dismissal was unfair.
 Internal and External Communication
Effective Communication
Communication is the transferring of a message from the sender to the receiver, who
understands the message.
Internal communication is between two members of the same organisations. Example:
communication between departments, notices and circulars to workers, signboards and
labels inside factories and offices etc.
External communication is between the organisation and other organisations or
individuals.
Example: orders of goods to suppliers, advertising of products, sending customers
messages about delivery, offers etc.
Effective communication involves:
● A transmitter/sender of the message
● A medium of communication eg: letter, telephone conversation, text message
● A receiver of the message
 Internal and External Communication
● A feedback/response from the receiver to confirm that the message has
been received and acknowledged.
One-way communication involves a message which does not require a
feedback. Example: signs saying ‘no smoking’ or an instruction saying ‘deliver
these goods to a customer’.
Two-way communication is when the receiver gives a response to the
message received.
Example: a letter from one manager to another about an important matter that
needs to be discussed.
A two-way communication ensures that the person receiving the message
understands it and has acted up on it.
It also makes the receiver feel more a part of the process- could be a way of
motivating employees.
 Internal and External Communication
Downward communication: messages from managers to subordinates i.e. from top to bottom of
an organization structure.
Upward communication: messages/feedback from subordinates to managers i.e. from bottom to
top of an organization structure
Horizontal communication occurs between people on the same level of an organization structure.
Communication Methods

Verbal methods (eg: telephone conversation, face-to-face conversation, video conferencing,

meetings)
Advantages:
● Quick and efficient
● There is an opportunity for immediate feedback
● Speaker can reinforce the message- change his tone, body language etc. to influence the
listeners.
 Internal and External Communication
Disadvantages:
● Can take long if there is feedback and therefore, discussions
● In a meeting, it cannot be guaranteed that everybody is listening or has understood the
message
● No written record of the message can be kept for later reference.

Written methods (eg: letters, memos, text-messages, reports, e-mail, social media,
faxes, notices, signboards)
Advantages:
● There is evidence of the message for later reference.
● Can include details
● Can be copied and sent to many people, especially with e-mail
● E-mail and fax is quick and cheap
 Internal and External Communication
Disadvantages:
● Direct feedback may not always be possible
● Cannot ensure that message has been received and/or acknowledged
● Language could be difficult to understand.
● Long messages may cause disinterest in receivers
● No opportunity for body language to be used to reinforce messages

Visual Methods (eg: diagrams, charts, videos, presentations, photographs, cartoons, posters)
Advantages:
● Can present information in an appealing and attractive way
● Can be used along with written material (eg: reports with diagrams and charts)
Disadvantages:
● No feedback
● May not be understood/ interpreted properly.
 Internal and External Communication
Factors that affect the choice of an appropriate communication method:
● Speed: if the receiver has to get the information quickly, then a telephone call or text
message has to be sent. If speed isn’t important, a letter or e-mail will be more
appropriate.
● Cost: if the company wishes to keep costs down, it may choose to use letters or
face-to-face meetings as a medium of communication. Otherwise, telephone, posters etc.
will be used.
● Message details: if the message is very detailed, then written and visual methods will be
used.
● Leadership style: a democratic style would use two-way communication methods such
as verbal mediums. An autocratic one would use notices and announcements.
● The receiver: if there is only receiver, then a personal face-to-face or telephone call will
be more apt. If all the staff is to be sent a message, a notice or e-mail will be sent.
● Importance of a written record: if the message is one that needs to have a written
record like a legal document or receipts of new customer orders, then written methods will
be used.
● Importance of feedback: if feedback is important, like for a quick query, then a direct
verbal or written method will have to be used.
 Internal and External Communication
Formal communication is when messages are sent through established channels
using professional language. Eg: reports, emails, memos, official meetings.

Informal communication is when information is sent and received casually with the
use of everyday language. Eg: staff briefings.

Managers can sometimes use the ‘grapevine’ (informal communication among

employees- usually where rumours and gossips spread!) to test out the reactions to
new ideas (for example, a new shift system at a factory) before officially deciding
whether or not to make it official.
Internal and External Communication
 Marketing, Competition and the Customer
A market consists of all buyers and sellers of a particular good.
What is marketing?
Marketing is the management process responsible for identifying, anticipating and
satisfying consumers’ requirements profitably.
The role of marketing in a business is as follows:
● Identifying customer needs through market research
● Satisfying customer needs by producing and selling goods and services
● Maintaining customer loyalty: building customer relationships through a
variety of methods that encourage customers to keep buying one firm’s
products instead of their rivals’.
For example, loyalty card schemes, discounts for continuous purchases,
after-sales services, messages that inform past customers of new products
and offers etc.
 Marketing, Competition and the Customer
● Gain information on customers: by understanding why customers buy their
products, a firm can develop and sell better products in the future
● Anticipate changes in customer needs: the business will need to keep looking
for any changes in customer spending patterns and see if they can produce
goods that customers want that are not currently available in the market.
Some objectives the marketing department in a firm may have:
● Raise awareness of their product(s)
● Increase sales revenue and profits
● Increase or maintain market share (this is the proportion of sales a company has
in the overall market sales. For example, if in a market, $1 million worth of toys
were sold in a year and company A’s total sales was $30,000 in that year,
company A’s market share for the year is ($300,000/ $1000000) *100 = 30%)
● Enter new markets at home or abroad
● Develop new products or improve existing products.
 Marketing, Competition and the Customer
Why customer spending patterns may change:
● change in their tastes and preferences
● change in technology: as new technology becomes available, the old versions of
products become outdated and people want more sophisticated features on products
● change in income: the higher the income, the more expensive goods consumers will
buy and vice versa
● ageing population: in many countries, the proportion of older people is increasing and
so demand for products for seniors are increasing (such as anti-ageing creams,
medical assistance etc.)
The power and importance of changing customer needs:
Firms need to always know what their consumers want (and they will need to undertake
lots of research and development to do so) in order to stay ahead of competitors and stay
profitable.
If they don’t produce and sell what customers want, they will buy competitors’ products
and the firm will fail to survive.
 Marketing, Competition and the Customer
Why some markets have become more competitive:
● Globalization: products are being sold in markets all over the world, so there are more
competitors in the market
● Improvement in transportation infrastructures: better transport systems means that it is
easier and cheaper to distribute and sell products everywhere
● Internet/E-Commerce: customers can now buy products over the internet from anywhere in the
world, making the market more competitive.

How business can respond to changing spending patterns and increased competition:
● maintaining good customer relationships: by ensuring that customers keep buying from their
business only, they can keep up their market share.
● keep improving its existing products, so that sales is maintained.
● introduce new products to keep customers coming back, and drive them away from competitors’
products
● keep costs low to maintain profitability: low costs means the firm can afford to charge low prices.
And low prices generally means more demand and sales, and thus market share.
 Marketing, Competition and the Customer
Niche & Mass Marketing

Niche Marketing: identifying and exploiting a small segment of a larger market by

developing products to suit it.

For example, Versace designs and Clique perfumes have niche markets- the rich,
high-status consumer group.

Advantages:

● Small firms can thrive in niche markets where large forms have not yet been
established
● If there are no or very few competitors, firms can sell products at a high price and
gain high profit margins because customers will be willing be willing to pay more
for exclusive products
● Firms can focus on the needs of just one customer group, thereby giving them an
 Marketing, Competition and the Customer
Limitations:

● Lack of economies of scale (can’t benefit from the lower costs that arise from a
larger operations/market)
● Risk of over-dependence on a single product or market: if the demand for the
product falls, the firm won’t have a mass product they can fall back on
● Likely to attract competition if successful

Mass Marketing: selling the same product to the whole market with no attempt to target
groups with in it. For example, the iPhone sold is the same everywhere, there are no
variations in design over location or income.

Advantages:

● Larger amount of sales when compared to a niche market

 Marketing, Competition and the Customer
● Can benefit from economies of scale: a large volume of products are produced and
so the average costs will be low when compared to a niche market
● Risks are spread, unlike in a niche market. If the product isn’t successful in one
market, it’s fine as there are several other markets
● More chances for the business to grow since there is a large market. In niche
markets, this is difficult as the product is only targeted towards a particular group.
Limitations:
● They will have to face more competition
● Can’t charge a higher price than competition because they’re all selling similar
products
Market Segmentation
A market segment is an identifiable subgroup of a larger market in which consumers
have similar characteristics and preferences
 Marketing, Competition and the Customer
Market segmentation is the process of dividing a market of potential customers into
groups, or segments, based on different characteristics.
For example, PepsiCo identified the health-conscious market segment and
targeted/marketed the Diet Coke towards them.
Markets can be segmented on the basis of socio-economic groups (income), age,
location, gender, lifestyle, use of the product (home/ work/ leisure/ business) etc.

Each segment will require different methods of promotion and distribution. For
example, products aimed towards kids would be distributed through popular
retail stores and products for businessmen would be advertised in exclusive
business magazines.
Advantages:
● Makes marketing cost-effective, as it only targets a specific segment and meets
their needs.
● The above leads to higher sales and profitability
● Increased opportunities to increase sales
 Market Research
Product-oriented business: such firms produce the product first and then tries to find
a market for it. Their concentration is on the product – its quality and price.

Firms producing electrical and digital goods such as refrigerators and computers are
examples of product-oriented businesses.

Market-oriented businesses: such firms will conduct market research to see what
consumers want and then produce goods and services to satisfy them.

They will set a marketing budget and undertake the different methods of researching
consumer tastes and spending patterns, as well as market conditions. Example,
mobile phone markets.
 Market Research
Market research is the process of collecting, analysing and interpreting information
about a product.
Why is market research important/needed?
Firms need to conduct market research in order to ensure that they are producing
goods and services that will sell successfully in the market and generate profits. If
they don’t, they could lose a lot of money and fail to survive.
Market research will answer a lot of the business’s questions prior to product
development such as ‘will customers be willing to buy this product?’, ‘what is the
biggest factor that influences customers’ buying preferences- price or quality?’, ‘what
is the competition in the market like?’ and so on.
Market research data can be quantitative (numerical-what percentage of teenagers
in the city have internet access) or qualitative (opinion/ judgement- why do more
women buy the company’s product than men?)
 Market Research
Market research methods can be categorized into two: primary and secondary market
research.
Primary Market Research (Field Research)
The collection of original data. It involves directly collecting information from existing or
potential customers. First-hand data is collected by people who want to use the data (i.e. the
firm).
Examples of primary market research methods include questionnaires, focus groups,
interviews, observation, and online surveys and so on.
Methods of primary research
● Questionnaires: Can be done face-to-face, through telephone, post or the internet.
Online surveys can also be conducted whereby researchers will email the sample
members to go onto a particular website and fill out a questionnaire posted there. These
questions need to be unbiased, clear and easy to answer to ensure that reliable and
accurate answers are logged in.
 Market Research
Advantages:
● Detailed information can be collected
● Customer’s opinions about the product can be obtained
● Online surveys will be cheaper and easier to collate and analyse
● Can be linked to prize draws and prize draw websites to encourage customers
to fill out surveys
Disadvantages:
● If questions are not clear or are misleading, then unreliable answers will be
given
● Time-consuming and expensive to carry out research, collate and analyse
them.

● Interviews: interviewer will have ready-made questions for the interviewee.

Advantages:
● Interviewer is able to explain questions that the interviewee doesn’t
understand and can also ask follow-up questions
 Market Research
● Can gather detailed responses and interpret body-language, allowing interviewer
to come to accurate conclusions about the customer’s opinions.

Disadvantages:
● The interviewer could lead and influence the interviewee to answer a certain way.
For example, by rephrasing a question such as ‘Would you buy this product’ to
‘But, you would definitely buy this product, right?’ to which the customer in order to
appear polite would say yes when in actuality they wouldn’t buy the product.
● Time-consuming and expensive to interview everyone in the sample

Focus Groups: A group of people representative of the target market (a focus group)
agree to provide information about a particular product or general spending patterns
over time. They can also test the company’s products and give opinions on them.
 Market Research
Advantage:
● They can provide detailed information about the consumer’s
opinions
Disadvantages:
● Time-consuming
● Expensive
● Opinions could be influenced by others in the group.

● Observation: This can take the form of recording (eg: meters fitted
to TV screens to see what channels are being watched), watching
(eg: counting how many people enter a shop), auditing (e.g.:
counting of stock in shops to see which products sold well).
 Market Research
Advantage:
● Inexpensive
Disadvantage:
● Only gives basic figures. Does not tell the firm why consumer
buys them.
Secondary Market Research (Desk Research)
The collection of information that has already been made available by
others. Second-hand data about consumers and markets is collected
from already published sources.
Internal sources of information:
● Sales department’s sales records, pricing data, customer
records, sales reports
 Market Research

● Opinions of distributors and public relations officers

● Finance department
● Customer Services department
External sources of information:
● Government statistics: will have information about populations and age structures in the
economy.
● Newspapers: articles about economic conditions and forecast spending patterns.
● Trade associations: if there is a trade association for a particular industry, it will have
several reports on that industry’s markets.
● Market research agencies: these agencies carry out market research on behalf of the
company and provide detailed reports.
● Internet: will have a wide range of articles about companies, government statistics,
newspapers and blogs.
 Market Research
Accuracy of Market Research Data
The reliability and accuracy of market research depends upon:
● How carefully the sample was drawn up, its size, the types of people
selected etc.
● How questions were phrased in questionnaires and surveys
● Who carried out the research: secondary research is likely to be less
reliable since it was drawn up by others for different purpose at an earlier
time.
● Bias: newspaper articles are often biased and may leave out crucial
information deliberately.
● Age of information: researched data shouldn’t be too outdated. Customer
tastes, fashions, economic conditions, technology all move fast and the
old data will be of no use now.
 Market Research
Presentation of Data from Market Research

Different data handling methods can be used to present data from market research.
This will include:

Tally Tables: used to record data in its original form. The tally table below shows the
number and type of vehicles passing by a shop at different times of the day:

Charts: show the total figures for each piece of data (bar/ column charts) or the
proportion of each piece of data in terms of the total number (pie charts). For example
the above tally table data can be recorded in a bar chart as shown below:

Graphs: used to show the relationship between two sets of data. For example how
average temperature varied across the year.
 Marketing Mix
Marketing mix refers to the different elements involved in the marketing of a good or service-
the 4 P’s- Product, Price, Promotion and Place.
Product
Product is the good or service being produced and sold in the market. This includes all the
features of the product as well as its final packaging.
Types of products include: consumer goods, consumer services, producer goods,
producer services.
What makes a successful product?
● It satisfies existing needs and wants of the customers
● It is able to stimulate new wants from the consumers
● Its design – performance, reliability, quality etc. should all be consistent with the product’s
brand image
● It is distinctive from its competitors and stands out
● It is not too expensive to produce, and the price will be able to cover the costs
 Marketing Mix
New Product Development:

Development of a new product by a business Processes.

1. Generate ideas: the firm brainstorms new product concepts, using customer
suggestions, competitors’ products, employees’ ideas, sales department data and the
information provided by the research and development department
2. Select the best ideas for further research: the firm decides which ideas to abandon
and which to research further. If the product is too costly or may not sell well, it will be
abandoned
3. Decide if the firm will be able to sell enough units for the product to be a success:
this research includes looking into forecast sales, size of market share, cost-benefit
analysis etc. for each product idea, undertaken by the marketing department
 Marketing Mix
4. Develop a prototype: by making a prototype of the new product, the
operations department can see how the product can be manufactured, any
problems arising from it and how to fix them.
Computer simulations are usually used to produce 3D prototypes on screen
5. Test launch: the developed product is sold to one section of the market to
see how well it sells, before producing more, and to identify what changes
need to be made to increase sales.
Today a lot of digital products like apps and software run beta versions, which is
basically a market test
6. Full launch of the product: the product is launched to the entire market
 Marketing Mix
Advantages:
● Can create a Unique Selling Point (USP) by developing a new innovative
product for the first time in the market. This USP can be used to charge a high
price for the product as well as be used in advertising.
● Charge higher prices for new products (price skimming as explained later)
● Increase potential sales, revenue and profit
● Helps spreads risks because having more products mean that even if one fails,
the other will keep generating a profit for the company
Disadvantages:
● Market research is expensive and time consuming
● Investment can be very expensive
 Marketing Mix
Advantages:
● Can create a Unique Selling Point (USP) by developing a new innovative product
for the first time in the market. This USP can be used to charge a high price for the
product as well as be used in advertising.
● Charge higher prices for new products (price skimming as explained later)
● Increase potential sales, revenue and profit
● Helps spreads risks because having more products mean that even if one fails, the
other will keep generating a profit for the company
Disadvantages:
● Market research is expensive and time consuming
● Investment can be very expensive
 Marketing Mix
Why is brand image important?
Brand image is an identity given to a product that differentiates it from
competitors’ products.

Brand loyalty is the tendency of customers to keep buying the same brand
continuously instead of switching over to competitors’ products.
● Consumers recognize the firm’s product more easily when looking at
similar products- helps differentiate the company’s product from another.
● Their product can be charged higher than less well-known brands – if
there is an established high brand image, then it is easier to charge high
prices because customers will buy it nonetheless.
● Easier to launch new products into the market if the brand image is
already established. Apple is one such company- their brand image is so
reputed that new products that they launch now become an immediate
success.
 Marketing Mix
Why is packaging important?
● It protects the product
● It provide information about the product (its ingredients, price, manufacturing and
expiry dates etc.)
● To help consumers recognize the product (the brand name and logo on the packaging
will help identify what product it is)
● It keeps the product fresh.
Product Life Cycle (PLC)
The product life cycle refers to the stages a product goes through from it’s introduction to
it’s retirement in terms of sales.

At these different stages, the product will need different marketing decisions/strategies
in terms of the 4Ps.
 Marketing Mix
.
 Marketing Mix
.
 Marketing Mix
Extension strategies: marketing techniques used to extend the maturity stage of a
product (to keep the product in the market):

● Finding new markets for the product

● Finding new uses for the product
● Redesigning the product or the packaging to improve its appeal to
consumers
● Increasing advertising and other promotional activities
 Marketing Mix
Price
Price is the amount of money producers are willing to sell or consumer are willing to buy the
product for.
Different methods of pricing:
● Price skimming: Setting a high price for a new product that is unique or very different
from other products on the market.
Advantages:
● Profit earned is very high
● Helps recover/compensate research and development costs
Disadvantage:
● It may backfire if competitors produce similar products at a lower price

● Penetration pricing: Setting a very low price to attract customers to buy a new product
 Marketing Mix
Advantages:
● Attracts customers more quickly
● Can increase market share quickly

Disadvantages:
● Low revenue due to lower prices
● Cannot recover development costs quickly

● Competitive pricing: Setting a price similar to that of competitors’ products which

are already available in the market
Advantage:
● Business can compete on other matters such as service and quality
 Marketing Mix
Disadvantage:

● Still need to find ways of competing to attract sales.

● Cost plus pricing: Setting price by adding a fixed amount to the cost of making the product

Advantages:

● Quick and easy to work out the price

● Makes sure that the price covers all of the costs

Disadvantage:

● Price might be set higher than competitors or more than customers are willing to pay, which reduces sales and
profits.

● Loss leader pricing/Promotional pricing: Setting the price of a few products at below cost to attract customers into
the shop in the hope that they will buy other products as well
 Marketing Mix
Advantages:
● Helps to sell off unwanted stock before it becomes out of date
● A good way of increasing short term sales and market share

Disadvantage:
● Revenue on each item is lower so profits may also be lower

Factors that affect what pricing method should be used:

● Is it a new or existing product?
If it’s new, then price skimming or penetration pricing will be most
suitable. If it’s an existing product, competitive pricing or promotional
pricing will be appropriate.
 Marketing Mix
● Is the product unique?
If yes, then price skimming will be beneficial, otherwise competitive or
promotional pricing.
● Is there a lot of competition in the market?
If yes, competitive pricing will need to be used.
● Does the business have a well-known brand image?
If yes, price skimming will be highly successful.
● What are the costs of producing and supplying the product?
If there are high costs, costs plus pricing will be needed to cover the
costs. If costs are low, market penetration and promotional pricing will be
appropriate.
● What are the marketing objectives of the business?
If the business objective is to quickly gain a market share and customer
base, then penetration pricing could be used. If the objective is to simply
maintain sales, competitive pricing will be appropriate.
 Marketing Mix
Price Elasticity
The PED of a product refers to the responsiveness of the quantity demanded for it
to changes in its price.
PED (of a product) = % change in quantity demanded / % change in price
When the PED is >1, that is there is a higher % change in demand in response to a
change in price, the PED is said to be elastic.

When the PED is <1, that is there is a lower % change in demand in response to a
change in price, the PED is said to be inelastic.
Producers can calculate the PED of their product and take suitable action to make the
product more profitable.
 Marketing Mix
If the product is found to have an elastic demand, the producer can lower
prices to increase profitability.
The law of demand states that a fall in price increases the demand. And
since it is an elastic product (change in demand is higher than change in
price), the demand of the product will increase highly. The producers get
more profit.

If the product is found to have an inelastic demand, the producer can raise
prices to increase profitability.
Since quantity demanded wouldn’t fall much as it is inelastic, the high
prices will make way for higher revenue and thus higher profits.
 Marketing Mix
Place

Place refers to how the product is distributed from the producer to the final consumer.
There are different distribution channels that a product can be sold through.
Marketing Mix
Marketing Mix
Marketing Mix
 Marketing Mix
Promotion

Promotion: marketing activities used to communicate with customers and potential

customers to inform and persuade them to buy a business’s products.

Aims of promotion:

● Inform customers about a new product

● Persuade customers to buy the product
● Create a brand image
● Increase sales and market share
 Marketing Mix
Types of promotion

● Advertising: Paid-for communication with consumers which uses printed and

visual media like television, radio, newspapers, magazines, billboards, flyers,
cinema etc.

This can be informative (create product awareness) or persuasive (persuade

consumers to buy the product). The process of advertising:
 Marketing Mix
● Sales Promotion: using techniques such as ‘buy one get one free’, occasional
price reductions, free after-sales services, gifts, competitions, point-of–sale
displays (a special display stand for a product in a shop), free samples etc.
to encourage sales.

● Below-the-line promotion: promotion that is not paid for communication but uses
incentives to encourage consumers to buy. Incentives include money-off
coupons or vouchers, loyalty reward schemes, competitions and games with
cash or other prizes.

● Personal selling: sales staff communicate directly with consumer to achieve a

sale and form a long-term relationship between the firm and consumer.
 Marketing Mix
● Direct mail: also known as mailshots, printed materials like flyers,
newsletters and brochures which are sent directly to the addresses of
customers.
● Sponsorship: payment by a business to have its name or products
associated with a particular event.

For example Emirates is Spanish football club Real Madrid’s jersey

sponsor- Emirates pays the club to be its sponsor and gains a high
customer awareness and brand image in return.
 Marketing Mix
What affects promotion decisions?
● Stage of product on the PLC: different stages of the PLC will require different
promotional strategies; see above.
● The nature of the product: If it’s a consumer good, a firm could use persuasive
advertising and use billboards and TV commercials. Producer goods would have
bulk-buy-discounts to encourage more sales. The kind of product it is can affect the type
of advertising, the media of advertising and the method of sales promotion.
● The nature of the target market: a local market would only need small amounts of
advertising while national markets will need TV and billboard advertising. If the product is
sold to a mass market, extensive advertising would be needed. But niche market
products such as water skis would only need advertising in special sports and lifestyle
magazines.
● Cost-effectiveness: the amount of money put into promotion (out of the total marketing
budget) should be not too much that it fails to bring in the sales revenue enough to cover
those costs at least. Promotional activities are highly dependent on the budget.
 Marketing Mix
Technology and the Marketing Mix
It is also worth noting that the internet/ e-commerce is now widely used to distribute
products.
E-Commerce is the use of the internet and other technologies used by businesses
to market and sell goods and services to customers.
Examples of e-commerce include online shopping, internet banking, online
ticket-booking, online hotel reservations etc.
Websites like Amazon and eBay act as online retailers.

Online selling is favoured by producers because it is cheaper in the long-run and

they can sell products to a larger customer base/ market. However there will be
increased competition from lots of producers.
 Marketing Mix
Consumers prefer online shopping because there are wider
choices of detailed products that are also cheaper and they can buy
things at their own convenience 24×7.
However, there is no personal communication with the producer
and online security issues may occur.
However, e-commerce means an entire new type of marketing
strategy is also required – online promotions, new channel of
distribution, new pricing strategies (since price competition in
e-commerce is very high and demand is very price elastic).
It requires a lot of money to set up – online websites, promotions,
web developers and technicians to run and maintain the system
etc.
 Marketing Mix
The internet is also used for promotion and advertising of products in the
form of paid social media ads and sponsors, pop-ups, email
newsletters etc.
It helps reach target customers, is relatively cheap and helps the firm
respond to market changes quicker (since online ads can be easily
altered/updated rather than billboards and TV ads).
But it can alienate and chase customers away if they see it too frequently
and find it annoying.
There is also the risk of the adverts being publicised negatively if it has
annoying or offensive content that customers quickly criticise
 Marketing Strategy
Marketing Strategy

A marketing strategy is a plan to combine the right combination of the four elements
of the marketing mix for a product to achieve its marketing objectives.

Marketing objectives could include;

1. maintaining market shares,

2. increasing sales in a niche market,
3. increasing sale of an existing product by using extension strategies.
 Marketing Strategy
.
 Marketing Strategy
Legal Controls on Marketing

There are various laws that can affect marketing decisions on quality, price and the
contents of advertisements.

● laws that protect consumers from being sold faulty and dangerous goods
● laws that prevent the firms from using misleading information in
advertising Example: Volkswagen falsely advertised environmentally
friendly diesel cars and were legally forced to pull all cars from the
market.
● laws that protect consumers from being exploited in industries where there is
little or no competition, known as monopolising.
 Marketing Strategy
Entering New Markets
Growing business in other countries can increase sales, revenue and
profits. This is because the business is now available to a wider group of
people, which increases potential customers.
If the home markets have saturated (product is in maturity stage), firms
take their products to international markets.
Trade barriers and restrictions have also reduced significantly over the
years, along with new transport infrastructures, so it is now cheaper and
easier to export products to other countries
 Marketing Strategy
Problems of entering foreign markets:

● Difference in language and culture: It may be difficult to communicate with

people in other countries because of language barriers and as for culture, different
images, colors and symbols have different meanings and importance in different
places. For example, McDonald’s had to make its menu more vegetarian in
Indian markets
● Lack of market knowledge: The business won’t know much about the market it is
entering and the customers won’t be familiar with the new business brand, and so
getting established in the market will be difficult and expensive
● Economic differences: The cost and prices may be lower or higher in different
countries so businesses may not be able to sell the product at the price which will
give them a profit
 Marketing Strategy
● High transport costs
● Social differences: Different people will have different needs and wants from
people in other countries, and so the product may not be successful in all countries
● Difference in legal controls to protect consumers: The business may have to
spend more money on producing the products in a way that complies with that
country’s law
How to overcome such problems:
● Joint venture: an agreement between two or more businesses to work
together on a project.
The foreign business will work with a domestic business in the same industry.
Eg: Japan’s Suzuki Motor Corporation created a joint venture with
India’s Maruti Udyog Limited to form Maruti Suzuki, a highly successful
car manufacturing project in India.
 Marketing Strategy
Advantages:
● Reduces risks and cuts costs
● Each business brings different expertise to the joint venture
● The market potential for all the businesses in the joint venture is
increased
● Market and product knowledge can be shared to the benefit of the
businesses
Disadvantages:
● Any mistakes made will reflect on all parties in the joint venture, which
may damage their reputations
● The decision-making process may be ineffective due to different
business culture or different styles of leadership
 Marketing Strategy
Franchise/License: the owner of a business (the franchisor) grants a licence to
another person or business (the franchisee) to use their business idea – often
in a specific geographical area.

Fast food companies such as McDonald’s and Subway operate around the globe
through lots of franchises in different countries.
Marketing Strategy
Marketing Strategy
 Operations Management
Production of Goods and Services
Production is the effective management of resources in producing goods and
services.
 Production of Goods and Services
The operations department in a firm overlooks the production process. They
must:
● Use the resources in a cost-effective and efficient manner
● Manage inventory effectively
● Produce the required output to meet customer demands
● Meet the quality standards expected by customers

Productivity
Productivity is a measure of the efficiency of inputs used in the production process
over a period of time. It is the output measured against the inputs used to produce it.
The formula is:
 Production of Goods and Services
Businesses often measure the labour productivity to see how efficient their employees
are in producing output.

The formula for it is:

Businesses look to increase productivity, as the output will increase per

employee and so the average costs of production will fall.
This way, they will be able to sell more while also being able to lower prices.
 Production of Goods and Services

Ways to increase productivity:

● improving labour skills by training them so they work more productively and
waste lesser resources
● introducing automation (using machinery and IT equipment to control
production) so that production is faster and error-free
● improve employee motivation so that they will be willing to produce more and
efficiently so.
● improved quality control and assurance systems to ensure that there are no
wastage of resources
 Production of Goods and Services
Inventory Management

Firms can hold inventory (stock) of raw materials, goods that are not completed yet (a.k.a
work-in-progress) and finished unsold goods. Finished good stocks are kept so that any
unexpected rise in demand is fulfilled.
● When inventory gets to a certain point (reorder level), they will be reordered by the
firm to bring the level of inventory back up to the maximum level again. The business
has to reorder inventory before they go too low since the reorder supply will take time
to arrive at the firm
● The time it takes for the reorder supply to arrive is known as lead time.
● If too high inventory is held, the costs of holding and maintaining it will be very high.
● The buffer inventory level is the level of inventory the business should hold at the very
minimum to satisfy customer demand at all times.
During the lead time the inventory will have hit the buffer level and as reorder arrives, it
will shoot back up to the maximum level.
Production of Goods and Services
 Production of Goods and Services
Lean Production
Lean production refers to the various techniques a firm can adopt to reduce wastage
and increase efficiency/productivity.
The seven types of wastage that can occur in a firm:
● Overproduction– producing goods before they have been ordered by customers.
This results in too much output and so high inventory costs
● Waiting– when goods are not being moved or processed in any way, then waste
is occurring
● Transportation-moving goods around unnecessarily is simply wasting time. They
also risk damage during movement
● Unnecessary inventory-too much inventory takes up valuable space and incurs
cost
 Production of Goods and Services
● Motion-unnecessary moving about of employees and operation of
machinery is a waste of time and cost respectively.
● Over-processing-using complex machinery and equipment to perform
simple tasks may be unnecessary and is a waste of time, effort and money
● Defects– any fault in equipment can halt production and waste valuable time.
Goods can also turn out to be faulty and need to be fixed- taking up more
money and time
 Production of Goods and Services
Benefits of avoiding wastage;

● less storage of raw materials, components and finished goods- less money
and time tied up in inventory
● quicker production of goods and services
● no need to repair faulty goods- leads to good customer satisfaction
● ultimately, costs will lower, which helps reduce prices, making the business
more competitive and earn higher profits as well
 Production of Goods and Services

Lean production techniques;

Kaizen: it’s a Japanese term meaning ‘continuous improvement’. It aims to

increase efficiency and reduce wastage by getting workers to get together in small
groups and discuss problems and suggest solutions.

Since they’re the ones directly involved in production they will know best to identify
issues.

When kaizen is implemented, the factory floor, for example, is rearranged by

re-positioning machinery and equipment so that production can flow smoothly
through the factory in the least possible time.
Production of Goods and Services
 Production of Goods and Services
Benefits:
● increased productivity
● reduced amount of space needed for production
● improved factory layout may allow some jobs to be combined, so
freeing up employees to do other jobs in the factory
●
Just-in-Time inventory control: this techniques eliminates the need to hold any
kind of inventory by ensuring that supplies arrive just in time they are needed for
production.

The making of any parts is done just in time to be used in the next stage of
production and finished goods are made just in time they are needed for
delivery to the customer/shop.

The firm will need very reliable suppliers and an efficient system for reordering
supplies.
 Production of Goods and Services

Benefits:
Reduces cost of holding inventory
● Warehouse space is not needed any more, so more
space is available for other uses
● Finished goods are immediately sold off, so cash flows
in quickly
Cell Production: the production line is divided into
separate, self-contained units each making a part of the
finished good.
This works because it improves worker morale when they
are put into teams and concentrate on one part alone.
 Production of Goods and Services
Methods of Production

● Job Production: products are made specifically to order, customized for

each customer. Eg: wedding cakes, made-to-measure suits, films etc.
Advantages:Most suitable for one-off products and personal services
● The product meets the exact requirement of the customer
● Workers will have more varied jobs as each order is different, improving
morale
● very flexible method of production

Disadvantages:Skilled labour will often be required which is expensive

● Costs are higher for job production firms because they are usually
labour-intensive
● Production often takes a long time
● Since they are made to order, any errors may be expensive to fix
 Production of Goods and Services

● Batch Production: similar products are made in batches or blocks. A small

quantity of one product is made, then a small quantity of another. Eg: cookies,
building houses of the same design etc.
Advantages:Flexible way of working- production can be easily switched between
products
● Gives some variety to workers
● More variety means more consumer choice
● Even if one product’s machinery breaks down, other products can still be made
●
Disadvantages:Can be expensive since finished and semi-finished goods will
need moving about
● Machines have to be reset between production batches which delays production
● Lots of raw materials will be needed for different product batches, which can be
expensive.
 Production of Goods and Services

● Flow Production: large quantities of products are produced in a

continuous process on the production line. Eg: a soft drinks
factory.
Advantages:There is a high output of standardized (identical)
products
● Costs are low in the long run and so prices can be kept low
● Can benefit from economies of scale in purchasing
● Automated production lines can run 24×7
● Goods are produced quickly and cheaply
● Capital-intensive production, so reduced labour costs and increases
efficiency
 Production of Goods and Services

Disadvantages:A very boring system for the workers, leads to low job satisfaction and
motivation
● Lots of raw materials and finished goods need to be held in inventory- this is expensive
● Capital cost of setting up the flow line is very high
● If one machinery breaks down, entire production will be affected
Factors that affect which production method to use:
● The nature of the product: Whether it is a personal, customized-to-order product, in
which case job production will be used. If it is a standard product, then flow production will
be used
● The size of the market: For a large market, flow production will be required. Small local
and niche markets may make use of batch and flow production. Goods that are highly
demanded but not in very large quantities, batch production is most suitable.
● The nature of demand: If there is a fair and steady demand for the product, it would be
more suitable to run a production line for the product. For less frequent demand, batch and
job will be appropriate.
● The size of the business: Small firms with little capital access will not produce using large
automated production lines, but will use batch and job production.
 Production of Goods and Services
Technology and Production
● Automation: equipment used in the factory is controlled by computers to carry out
mechanical processes, such as spray painting a car body.
● Mechanization: production is done by machines but is operated by people
● CAD (computer aided designing): a computer software that draws items being designed
more quickly and allows them to be rotated, zoomed in and viewed from all angles.
● CAM (computer aided manufacturing): computers monitor the production process and
controls machines and robots-similar to automation
● CIM (computer integrated manufacturing): the integration of CAD and CAM. The
computers that design the product using CAD is connected to the CAM software to
directly produce the physical design.
● EPOS (electronic point-of-sale): used at checkouts/tills where operator scans the
barcode of each item bought by the customer individually. The item details and price
appear on screen and are printed in the receipt. They can also automatically update and
reorder stock as items are bought.
● EFTPOS (electronic funds transfer at point-of-sale): the electronic cash register at the
till will be connected to the retailer’s main computer and different banks. When the
customer swipes the debit card at the till, information is read by the scanner and an
 Production of Goods and Services

Advantages of technology in production

● Greater productivity
● Greater job satisfaction among workers as boring, routine jobs are
done by machines
● Better quality products
● Quicker communication and less paperwork
● More accurate demand levels are forecast since computer monitor
inventory levels
● New products can be introduced as new production methods are
introduced
Disadvantages of technology in production
● Unemployment rises as machines and computers replace human
labour
 Production of Goods and Services

● Expensive to set up
● New technology quickly becomes outdated and frequent updating of
systems will be needed- this is expensive and time-consuming.
● Employees may take time to adjust to new technology or even resist
it as their work practices change.
 Costs, Scale of Production and Break-even Analysis
Costs
Fixed Costs are costs that do not vary with output produced or sold in
the short run.
They are incurred even when the output is 0 and will remain the same
in the short run. In the long-run they may change. Also known as
overhead costs.
E.g.: rent, even if production has not started, the firm still has to pay the
rent.
Variable Costs are costs that directly vary with the output produced or
sold. E.g.: material costs and wage rates that are only paid according
to the output produced.
 Costs, Scale of Production and Break-even Analysis
TOTAL COST = TOTAL FIXED COSTS + TOTAL VARIABLE COSTS
TOTAL COST = AVERAGE COST * OUTPUT
AVERAGE COST (unit cost) = TOTAL COST/ TOTAL OUTPUT
Scale of production
As output increases, a firm’s average cost decreases.
Economies of scale are the factors that lead to a reduction in average costs as a
business increases in size. The five economies of scale are:
● Purchasing economies: For large output, a large amount of components have to
be bought. This will give them some bulk-buying discounts that reduce costs
● Marketing economies: Larger businesses will be able to afford its own vehicles to
distribute goods and advertise on paper and TV. They can cut down on marketing
labour costs. The advertising rates costs also do not rise as much as the size of the
advertisement ordered by the business. Average costs will thus reduce.
 Costs, Scale of Production and Break-even Analysis

● Financial economies: Bank managers will be more willing to lend money

to large businesses as they are more likely to be able to pay off the loan
than small businesses. Thus they will be charged a low rate of interest on
their borrowings, reducing average costs.
● Managerial economies: Large businesses may be able to afford to hire
specialist managers who are very efficient and can reduce the business’
costs.
● Technical economies: Large businesses can afford to buy large
machinery such as a flow production line that can produce a large output
and reduce average costs.
 Costs, Scale of Production and Break-even Analysis
Diseconomies of scale are the factors that lead to an increase the
average costs of a business as it grows beyond a certain size. They are:
● Poor communication: as a business grows large, more departments
and managers and employees will be added and communication can
get difficult. Messages may be inaccurate and slow to receive, leading
to lower efficiency and higher average costs in the business.
● Low morale: when there are lots of workers in the business and they
have non-contact with their senior managers, the workers may feel
unimportant and not valued by management. This would lead to
inefficiency and higher average costs.
● Slow decision-making: As a business grows larger, its chain of
command will get longer. Communication will get very slow and so any
decision-making will also take time, since all employees and
departments may need to be consulted with.
 Costs, Scale of Production and Break-even Analysis
Break-even
Break-even level of output is the output that needs to be
produced and sold in order to start making a profit. So, the
break-even output is the output at which total revenue equals total
costs (neither a profit nor loss is made, all costs are covered).
A break-even chart can be drawn, that shows the costs and
revenues of a business across different levels of output and the
output needed to break even.
Example:
In the chart below, costs and revenues are being calculated over
the output of 2000 units.
 Costs, Scale of Production and Break-even Analysis
The fixed costs is 5000 across all output (since it is fixed!).

The variable cost is $3 per unit so will be $0 at output is 0 and $6000 at

output 2000- so you just draw a straight line from $0 to $6000.
The total costs will then start from the point where fixed cost starts and be
parallel to the variable costs (since T.C.= F.C.+V.C. You can manually
calculate the total cost at output 2000: ($6000+$5000=$11000).

The price per unit is $8 so the total revenue is $16000 at output 2000.
Now the break-even point can be calculated at the point where total revenue
and total cost equals– at an output of 1000. (In order to find the sales
revenue at output 1000, just do $8*1000= $8000. The business needs to
make $8000 in sales revenue to start making a profit).
Costs, Scale of Production and Break-even Analysis
 Costs, Scale of Production and Break-even Analysis
Advantages of break-even charts:
● Managers can look at the graph to find out the profit or loss at each level
of output
● Managers can change the costs and revenues and redraw the
graph to see how that would affect profit and loss, for example, if
the selling price is increased or variable cost is reduced.
● The break-even chart can also help calculate the safety margin- the
amount by which sales exceed break-even point. In the above graph, if
the business decided to sell 2000 units, their margin of safety would be
1000 units. In sales terms, the margin of safety would be 1000*8 =
$8000. They are $8000 safe from making a loss.
Margin of Safety (units) = Units being produced and sold –
Break-even output
 Costs, Scale of Production and Break-even Analysis
Limitations of break-even charts:
● They are constructed assuming that all units being produced are
sold. In practice, there are always inventory of finished goods. Not
everything produced is sold off.
● Fixed costs may not always be fixed if the scale of production
changes. If more output is to be produced, an additional factory or
machinery may be needed that increases fixed costs.
● Break-even charts assume that costs can always be drawn using
straight lines. Costs may increase or decrease due to various
reasons. If more output is produced, workers may be given an overtime
wage that increases the variable cost per unit and cause the variable
cost line to steep upwards.
 Costs, Scale of Production and Break-even Analysis
Break-even can also be calculated without drawing a chart.
A formula can be used:
Break-even level of production =Total fixed costs/ Contribution per
unit
Contribution = Selling price – Variable cost per unit (this is the value
added/contributed to the product when sold)
In the above example, the contribution is $8 -$3 =$5, so the break-even
level is: $5000/$5 = 1000 units!
 Achieving Quality Production
Quality means to produce a good or service which meets customer expectations. The
products should be free of faults or defects. Quality is important because it:
● establishes a brand image
● builds brand loyalty
● maintains good reputation
● increase sales
● attract new customers
If there is no quality, the firm will
● lose customers to other brands
● have to replace faulty products and repeat poor service, increasing costs
● bad reputation leading to low sales and profits
There are three methods a business can implement to achieve quality;
quality control, quality assurance and total quality management.
 Achieving Quality Production
Quality Control
Quality control is the checking for quality at the end of the
production process, whether a good or a service.
Advantages:
● Eliminates the fault or defect before the customer receives it, so
better customer satisfaction
● Not much training required for conducting this quality check
Disadvantages:
● Still expensive to hire employees to check for quality
● Quality control may find faults and errors but doesn’t find out why
the fault has occurred, so the it’s difficult to solve the problem
● if product has to be replaced and reworked, then it is very
expensive for the firm
 Achieving Quality Production
Quality Assurance

Quality assurance is the checking for quality throughout the production process of a
good or service.

Advantages:

● Eliminates the fault or defect before the customer receives it, so better customer
satisfaction
● Since each stage of production is checked for quality, faults and errors can be
easily identified and solved
● Products don’t have to be scrapped or reworked as often, so less expensive than
quality control
 Achieving Quality Production
Disadvantages:
● Expensive to carry out since quality checks have to be carried throughout
the entire process, which will require manpower and appropriate
technology at every stage.
● How well will employees follow quality standards? The firm will have to
ensure that every employee follows quality standards consistently and
prudently, and knows how to address quality issues.
Total Quality Management (TQM)
Total Quality Management or TQM is the continuous improvement of
products and production processes by focusing on quality at each stage of
production.
 Achieving Quality Production
There is great emphasis on ensuring that customers are satisfied. In
TQM, customers just aren’t the consumers of the final product. It is
every worker at each stage of production.
Workers at one stage have to ensure the quality standards are met for
the product in production at their stage before they are passed onto the
next stage and so on. Thus, quality is maintained throughout production
and products are error-free.
TQM also involves quality circles and like Kaizen, workers come
together and discuss issues and solutions, to reduce waste ensure zero
defects.
 Achieving Quality Production
Advantages:
● quality is built into every part of the production process and becomes central to the
workers principles
● eliminates all faults before the product gets to the final customer
● no customer complaints and so improved brand image
● products don’t have to be scrapped or reworked, so lesser costs
● waste is removed and efficiency is improved
Disadvantages:
● Expensive to train employees all employees
● Relies on all employees following TQM– how well are they motivated to follow the
procedures?
How can customers be assured of the quality of a product or service?
They can look for a quality mark on the product like ISO (International Organization for
Standardization). The business with these quality marks would have followed certain quality
procedures to keep the quality mark. For services, a good reputation and positive customer
reviews are good indicators of the service’s quality.
 Location Decisions
Factors that affect the location decisions of a manufacturing firm:
● Production Method: when job production is used, the business will operate on a small scale, so the nearness to
components/raw materials won’t be that important. For flow production, on the other hand, production will be on a large
scale- there will be a huge amount of components and transport costs will be high- so components need to be close by.
● Market: if the product is a consumer good and perishable, the factories need to be close to the markets to sell out
quickly before it perishes.
● Raw Materials/Components: the factories may need to be located close to where raw materials can be acquired,
especially if the raw material is to be processed while still fresh, like fruits for fruit juice.
● External economies: the business may locate near other firms that support the business by provide services- eg:
business that install and maintain factory equipment.
● Availability of labour: Businesses will need to locate near areas where they can get workers of the skills they need in
the factory. If lots of unskilled workers are needed in the factories firms locate in areas of high unemployment. Wage
rates also vary by location and firms will want to set up in locations where wage rates are low.
● Government Influence: the government sometimes gives incentives and grants to firms that set up in low-development,
rural and high-unemployment areas. There may also be govt. rules and restrictions in setting up, e.g.: in some areas of
great natural beauty. The business needs to consider these.
● Transport & Communication infrastructure: the factories need to be located near areas where there are good
road/rail/port/air transport systems. If goods are to be exported, it needs to be set up near ports.
● Power and water supply: factories need water and power to operate and a reliable and steady supply of both should
be ensured by setting up in areas where they are available.
● Climate: not the most important factor but can influence certain sectors. Eg: the dry climate in Silicon Valley aids the
manufacturing of silicon chips.
 Location Decisions
Factors that affect the location decisions of a service-sector firm:
● Customers: service-sector businesses that have direct contact with customers need to
locate in customer-accessible and convenient places. Eg; restaurants, hairdressers, post
offices etc.
● Technology: today, with increasing use of IT to shop and make payments, customers do not
need direct access to services and proximity to the market/customer is not a very important
factor in location decisions. They locate away from customers in places where there are low
rent and wage rates. Eg: banks
● Availability of labour: if large number of workers are required in the firm, then it will need to
locate close to residential areas. If they want certain types of worker skills, they will need to
locate in places where such skilled workers can be found. However, with work-from-home
and technology, this is not that big of a factor nowadays.
● Climate: tourism services need to be located in places of good climate.
● Nearness to other business: some services serve the needs of large companies, such as
firm equipment servicing and so they need to be very close to such businesses. Businesses
may also set up where close competitors are to watch them and snatch away their
customers.
● Rent/taxes
 Location Decisions
Factors that affect the location decisions of a retailing firm:
● Shoppers: retailers need to be located in areas where shoppers frequent, like
malls, to attract as many customers as possible.
● Nearby shops: being located to other shops that are visited regularly will also
attract attention of customers into the shop. Being near competitors also helps
keep an eye on competition and snatch away customers.
● Customer parking availability: when parking is available nearby, more
people will find it convenient to shop in that area.
● Availability of suitable vacant premises: Obviously, there needs to be a
vacant premise available to set up the business. Vacant premises can also
help the business expand their premises in the future.
● Rent/taxes: rents and taxes on the locations need to be affordable.
● Access to delivery vehicles: if the retailer has home delivery services, then
delivery vehicles will be required.
● Security: high rates of crime and theft can happen in shops. Shopping
complexes with security guards will thus be preferred by firms.
 Location Decisions
Why businesses locate in different countries?
● New markets overseas.
● Cheaper or new raw materials available in other countries.
● Cheaper and/or skilled workers are available overseas.
● Rent/ taxes are lower..
● Availability of government grants and other incentives
● Avoid trade barriers and tariffs: when exporting goods to other countries, there will be
some tariffs, rules and regulations to get by. in order to avoid this, firms start operating
in the country itself, since there is no exporting/importing involved now.
The role of legal controls on location decisions
Governments influence location decisions:
● to encourage businesses to set up and expand in areas of high unemployment and
under-development. Grants and subsidies can be given to businesses that set up in
such areas.
● to discourage firms from setting in areas of that are overcrowded or renowned for
natural beauty. Planning restrictions can be put into place to do so.
 Financial Information and Decisions
Finance is the money required in the business. Finance is needed to set up the
business, expand it and increase working capital (the day-to-day running expenses).
Reasons business needs finance.
1. Start-up capital is the initial capital used in the business to buy fixed and
current assets before it can start trading.
2. Working Capital finance needed by a business to pay its day-to-day running
expenses.
3. Capital expenditure is the money spent on fixed assets (assets that will last for
more than a year). Eg: vehicles, machinery, buildings etc. These are
long-term capital needs.
4. Revenue Expenditure (working capital), is the money spent on day-to-day
expenses which does not involve the purchase of long-term assets. Eg: wages,
rent. These are short-term capital needs.
 Financial Information and Decisions
Sources of Finance
Internal finance is obtained from within the business itself.
External finance is obtained from sources outside of the business.
Internal finance
● Retained Profit: profit kept in the business after owners have been given their share
of the profit. Firms can invest this profit back in the businesses.

Advantages:
– Does not have to be repaid, unlike, a loan.
– No interest has to be paid
Disadvantages:
– A new business will not have retained profit
– Profits may be too low to finance
– Keeping more profits to be used as capital will reduce owner’s share of profit and they
may resist the decision.
 Financial Information and Decisions
Internal finance
● Sale of existing unwanted assets: assets that the business doesn’t need anymore, for
example, unused buildings or spare equipment can be sold to raise finance.

Advantages:
– Makes better use of capital tied up in the business
– Does not become debt for the business, unlike a loan.

Disadvantages:
– Surplus assets will not be available with new businesses
– Takes time to sell the asset and the expected amount may not be gained for the asset
● Sale of inventories: sell of finished goods or unwanted components in inventory.

Advantage:
– Reduces costs of inventory holding
 Financial Information and Decisions
Disadvantage:
– If not enough inventory is kept, unexpected increase demand from customers cannot
be fulfilled

● Owner’s savings: For a sole trader and partnership, since they’re unincorporated
(owners and business is not separate), any finance the owner directly invests from
his own saving will be internal finance.

Advantages:
– Will be available to the firm quickly
– No interest has to be paid.
Disadvantages:
– Increases the risk taken by the owners.
 Financial Information and Decisions
External finance.
● Issue of share: only for limited companies.
Advantage:
● A permanent source of capital, no need to repay the money to shareholders
no interest has to be paid

Disadvantages:
● Dividends have to be paid to the shareholders
● If many shares are bought, the ownership of the business will change hands.
(The ownership is decided by who has the highest percentage of shares in
the company)
 Financial Information and Decisions
● Bank loans: money borrowed from banks
Advantages:
● Quick to arrange a loan
● Can be for varying lengths of time
● Large companies can get very low rates of interest on their loans

Disadvantages:
● Need to pay interest on the loan periodically
● It has to be repaid after a specified length of time
● Need to give the bank a collateral security (the bank will ask for some valued
asset, usually some part of the business, as a security they can use if at all the
business cannot repay the loan in the future. For a sole trader, his house might be
collateral. So there is a risk of losing highly valuable assets)
 Financial Information and Decisions
● Debenture issues: debentures are long-term loan certificates issued by
companies.
Like shares, debentures will be issued, people will buy them and the business can
raise money. But this finance acts as a loan- it will have to be repaid after a
specified period of time and interest will have to be paid for it as well.
Advantage:
● Can be used to raise very long-term finance, for example, 25 years
Disadvantage:
● Interest has to be paid and it has to be repaid
Debt factoring: a debtor is a person who owes the business money for the goods
they have bought from the business.

Debt factors are specialist agents that can collect all the business’ debts from
debtors.
 Financial Information and Decisions
Advantages:

● Immediate cash is available to the business

● Business doesn’t have to handle the debt collecting
Disadvantage:

● The debt factor will get a percent of the debts collected as reward. Thus,
the business doesn’t get all of their debts
Grants and subsidies: government agencies and other external
sources can give the business a grant or subsidy
 Financial Information and Decisions
Advantage:
● Do not have to be repaid, is free

Disadvantage:
● There are usually certain conditions to fulfil to get a grant. Example, to locate
in a particular under-developed area.
●
Micro-finance: special institutes are set up in poorly-developed countries where
financially-lacking people looking to start or expand small businesses can get
small sums of money. They provide all sorts of financial services.

Crowdfunding: raises capital by asking small funds from a large pool of people, e.g.
via Kickstarter. These funds are voluntary ‘donations’ and don’t have to be return
or paid a dividend.
 Financial Information and Decisions
Short-term finance provides the working capital a business needs for its
day-to-day operations.
● Overdrafts: similar to loans, the bank can arrange overdrafts by allowing
businesses to spend more than what is in their bank account. The
overdraft will vary with each month, based on how much extra money the
business needs.
Advantages:
● Flexible form of borrowing since overdrawn amounts can be varied each month
● Interest has to be paid only on the amount overdrawn
● Overdrafts are generally cheaper than loans in the long-term

Disadvantages:
● Interest rates can vary periodically, unlike loans which have a fixed interest rate.
● The bank can ask for the overdraft to be repaid at a short-notice.
 Financial Information and Decisions
● Trade Credits: this is when a business delays paying suppliers for
some time, improving their cash position
Advantage:
● No interests, repayments involved

Disadvantage:
● If the payments are not made quickly, suppliers may refuse to give discounts in
the future or refuse to supply at all
Debt Factoring:
 Financial Information and Decisions
Long-term finance is the finance that is available for more than a year.
● Loans: from banks or private individuals.
● Debentures
● Issue of Shares
● Hire Purchase: allows the business to buy a fixed asset and pay for it in monthly
instalments that include interest charges. This is not a method to raise capital but
gives the business time to raise the capital.
Advantage:

● The firms doesn’t need a large sum of cash to acquire the asset
Disadvantage:

● A cash deposit has to be paid in the beginning

● Can carry large interest charges.
 Financial Information and Decisions
Leasing: this allows a business to use an asset without purchasing it. Monthly leasing
payments are instead made to the owner of the asset. The business can decide to
buy the asset at the end of the leasing period.
Some firms sell their assets for cash and then lease them back from a leasing
company.
This is called sale and leaseback.
Advantages:
● The firm doesn’t need a large sum of money to use the asset
● The care and maintenance of the asset is done by the leasing company
Disadvantage:
● The total costs of leasing the asset could finally end up being more than the
cost of purchasing the asset!
 Financial Information and Decisions
Factors that affect choice of source of finance
● Purpose: if a fixed asset is to be bought, hire purchase or leasing will be appropriate,
but if finance is needed to pay off rents and wages, debt factoring, overdrafts will be
used.

● Time-period: for long-term uses of finance, loans, debenture and share issues are
used, but for a short period, overdrafts are more suitable.

● Amount needed: for large amounts, loans and share issues can be used. For smaller
amounts, overdrafts, sale of assets, debt factoring will be used.

● Legal form and size: only a limited company can issue shares and debentures.
Small firms have limited sources of finances available to choose from
 Financial Information and Decisions
● Control: if limited companies issue too many shares, the current owners
may lose control of the business.
They need to decide whether they would risk losing control for business
expansion.
● Risk- gearing: if business has existing loans, borrowing more capital can
increase gearing- risk of the business- as high interests have to be paid
even when there is no profit, loans and debentures need to be repaid etc.
Banks and shareholders will be reluctant to invest in risky businesses.
 Financial Information and Decisions
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Financial Information and Decisions
 Cash-flow forecasting and working capital
Why cash is important to a business
» To pay workers, suppliers, landlord, government
» To produce goods and services – workers will not work for no pay
and suppliers will not supply goods if they are not paid
» To avoid business going into ‘liquidation’ – selling up everything it owns to
pay its debts.
 Cash-flow forecasting and working capital
What is meant by cash flows?
Cash flow of a business is the cash inflows and outflows over a period of
time.
Cash inflows are the sums of money received by a business during a period of
time.
For Example;
» The sale of products for cash.
» Payments made by debtors – debtors are customers who have already
purchased products from the business but did not pay for them at the time.
» Borrowing money from an external source – this will lead to cash flowing into
the business (it will have to be repaid eventually).
 Cash-flow forecasting and working capital
» The sale of assets of the business, for example, unwanted property.
» Investors, for example, shareholders in the case of companies, putting
more
money into the business.
Cash outflows are the sums of money paid out by a business during a
period of time.
For example;
» Purchasing goods or materials for cash.
» Paying wages, salaries and other expenses in cash.
 Cash-flow forecasting and working capital
» Purchasing non-current (fixed) assets.

» Repaying loans.

» By paying creditors of the business – other firms which supplied items to the

business but were not paid immediately.

Lesson Assignment.
A cash flow forecast is an estimate of future cash inflows and outflows of a business,
usually on a month-by-month basis.

This then shows the expected cash balance at the end of each month.