Definitions

 Consumer good – the physical and tangible goods sold to the general public – they include
durable consumer goods like cars and washing machines, and non-durable consumer goods
like food, drinks and sweets that can be used only once.
 Consumer services – the non-tangible products sold to the general public – they include
hotel accommodation, insurance services and train journeys.
 Capital goods – the physical goods used by the industry to aid in production of other goods
and services, such as, machines and commercial vehicles. 087
 Creating value – increasing the difference between the cost of purchasing bought-in
materials and the price the finished goods are sold for.
 Added value – the difference between the costs of purchasing bought-in materials and the
price the finished goods are sold for.
 Opportunity cost – the benefit of the next most desired option which is given up.
 Entrepreneur – someone who takes the financial risk of starting and managing a new
venture.
 Social enterprise – a business with mainly social objectives that reinvests most of its profits
into benefiting society rather than maximising returns to owners.
 Triple bottom line – the three objectives of social enterprises: economic, social and
environmental.
 Primary sector business activity – firms engaged in farming, fishing, oil extraction and all
other industries that extract natural resources so that they can be used and processed by
other firms.
 Secondary sector business activity – firms that manufacture and process products from
natural resources including computers, brewing, baking, and clothes-making and
construction.
 Tertiary sector business activity – firms that provide services to consumers and other
businesses such as retailing, transport, insurance, banking, hotels, tourism and
telecommunications.
 Public sector – comprises organisations accountable to and controlled by the central or local
government.
 Private sector – comprises of businesses owned and controlled by individuals or groups of
individuals.
 Mixed economy – economic resources are owned and controlled by both private and public
sector.
 Free-market economy – economic resources are owned largely by the private sector with
little state intervention.
 Command economy – economic resources are owned, planned and controlled by the state.
 Sole trader – a business in which one person provides the permanent finance and, in return,
has full control of the business and is able to keep all of the profits.
 Partnership – a business formed by two or more people to carry on a business together, with
shared capital investment and, usually, shared responsibilities.
 Limited liability – the only liability-or potential loss-a shareholder has if the company fails is
the amount invested in the company, not the total wealth of the shareholder.
 Private limited company – a small to medium-sized business that is owned by shareholders
who are often members of the same family; this company cannot sell shares to the general
public.
 Share – a certificate confirming part ownership of a company and entitling the shareholder
owner to dividends and certain shareholder rights.
 Shareholder – a person or institution owning shares in a limited company.
 Public limited company – a limited company, often a large business, with the legal right to
sell shares to the general public-share prices are quoted on the national stock exchange.
 Memorandum of association – this states the name of the company, the address of the head
office through which it can be contacted, the maximum share capital for which the company
seeks authorisation and the declared aims of the business.
 Articles of association – this document cover the internal working and control of the
business-for example, the names of the directors and the procedures to be followed at
meetings will be detailed.
 Franchise – a business that uses the name, logo and trading systems of an existing successful
business.
 Joint venture – two or more businesses agree to work closely together on a particular
project and create a separate business division to do so.
 Holding company – a business organisation that owns and controls a number of separate
businesses, but does not unite them into one unified company.
 Public corporation – a business enterprise owned and controlled by the state-also known as
nationalised industry.
 Revenue – total value of sales made by a business in a given time period. Capital employed –
the total value of all the long term finance invested in the business.
 Market capitalisation – the total value of a company’s issued shares.
 Market share – sales of the business as a proportion of total market sales.
 Internal growth – expansion of a business by means of opening new branches, hops or
factories (also known as organic growth).
 Mission statement – a statement of the business’s core aims, phrased in a way to motivate
employees and to stimulate interest by outside groups.
 Corporate social responsibility – this concept applies to those businesses that consider the
interests of the society by taking responsibility for their impact of their decisions of
customers, employees, communities and the environment.
 Management by objectives – a method of coordinating and motivating all staff in an
organisation by dividing its overall aim into specific targets for each department, manager
and employee.
 Ethical code (code of conduct) – a document detailing a company’s rules and guidelines on
staff behaviour that must be followed by all employees.
 Stakeholders – people or groups of people who can be affected by – and therefore have an
interest in – any action by an organisation.
 Shareholder concept – the view that businesses and their managers have responsibilities to
a wide range of groups, not just shareholders.
 Corporate social responsibility – the concept that accesses that business should consider the
interests of society in their activities and decisions, beyond the legal obligations that they
have.
 Manager – responsible for setting objectives, organising resources and motivating staff so
that the organisation’s aims are met.
 Leadership – the art of motivating a group of people towards achieving common objectives.
 Autocratic leadership – a style of leadership that keeps all decision-making at the centre of
the organisation.
 Democratic leadership – a leadership style that promotes the active participation of workers
in taking decisions.
 Paternalistic leadership – a leadership style based on the approach that the manager is in a
better position than the workers to know what is best for an organisation.
 Laissez-faire leadership – a leadership style that leaves much of the business decision-
making to the workforce – a ‘hands off’ style approach and the reverse of the autocratic
style.
 Informal leader – a person who has no formal authority but has the respect of colleagues
and some power over them.
 Emotional intelligence (EI) – the ability of managers to understand their own emotions, and
those of the people they work with, to achieve better business performance.
 Motivation – the internal and external factors that stimulate people to take actions that lead
to achieving a goal.
 Self-actualisation – a sense of fulfilment reached by feeling enriched and developed by what
one has learned and achieved.
 Motivating factors (motivators) – aspects of a worker’s job that can lead to positive job
satisfaction, such as achievement, recognition, meaningful and interesting work and
advancement at work.
 Hygiene factor – aspects of a worker’s job that have the potential to cause dissatisfaction,
such as pay, working conditions, status and over-supervision by managers.
 Job enrichment – aims to use the full capabilities of workers by giving them the opportunity
to do more challenging and fulfilling work.
 Time based wage rate – payment to a worker made for each period of time worked, e.g.;
one hour.
 Piece rate – a payment to a worker for each unit produced.
 Salary – annual income that is usually paid on a monthly basis.
 Commission – a payment to a sales person for each sale made.
 Bonus – a payment made in addition to the contracted wage or salary.
 Profit sharing – a bonus for staff based on the profits of the business-usually paid as a
proportion of basic salary.
 Performance related pay – a bonus scheme to reward staff for above-average work
performance.
 Fringe benefits – benefits given, separate from pay, by an employer to same or all
employees.
 Job rotation – increasing the flexibility of employees the variety of work they do by switching
from one job to another.
 Job enlargement – attempting to increase the scope of a job by broadening to deepening the
tasks undertaken.
 Job redesign – involves the restricting of a job-usually with employees’ involvement and
agreement-to make work more interesting, satisfying and challenging.
 Quality circles – voluntary groups of workers who meet regularly to discuss work-related
problems and issues.
 Worker participation – workers are actively encouraged to become involved in decision-
making within the organisation.
 Team working – production is organised so that groups of workers undertake complete units
of work.
 Human resource management (HRM) – the strategic approach to the effective management
of an organisation’s workers so that they help the business gain a competitive advantage.
 Recruitment – the process of identifying the need for a new employee, defining the job to be
filled and the type of person needed to fill it and attracting suitable candidate for the job.
 Selection – involves the series of steps by which the candidates are interviewed, tested and
screened for choosing the most suitable person for the vacant post.
 Job description – a detailed list of the key points about the job to be filled-stating all of its
key tasks and responsibilities.
 Person specification – a detailed list of the qualities, skills and qualifications that a successful
applicant will need to have.
 Employment contract – a legal document that sets out the terms and conditions governing a
worker’s job.
 Labour turnover – measures the rate at which employees are leaving an organisation. It is
measure by: Number of employees leaving in 1 year/average number of people employed *
100
 Training – work-related education to increase workforce skill and efficiency.
 Induction training – introductory training programme to familiarise new recruits with the
systems used in the business and the layout of the business site.
 On-the-job training – instruction at the place of work on how a job should be carried out.
 Off-the-job training – all training undertaken away from the business, e.g. work related
college courses.
 Employee appraisal – the process of assessing the effectiveness of an employee judged
against pre-set objectives.
 Dismissal – being dismissed or sacked from a job due to incompetence of breach or
discipline.
 Unfair dismissal – ending a worker’s employment contract for a reason that the law regards
as being unfair.
 Redundancy – when a job is no longer required, the employee doing this job becomes
unnecessary through no fault of their own.
 Work-life balance – a situation in which employee are able to give the right amount of time
and effort to work and to their personal life outside work, for example to family or other
interests.
 Equality policy – practices and processes aimed at achieving a fair organisation where
everyone is treated in the same way and has the opportunity to fulfil their potential.
 Diversity policy – practices and processes aimed at creating a mixed workforce and placing
positive value on diversity in the workplace.
 Marketing – the management task that links the business to the customer by identifying and
meeting the needs of customers’ profitability-it does this by getting the right product to the
right place at the right time.
 Marketing objectives – the goals set for the marketing department to help the business
achieve its overall objectives.
 Marketing strategy – long-term plan established for achieving marketing objectives.
 Market orientation – an outward-looking approach basing product decisions on consumer
demand, as established by market research.
 Asset-led marketing – an approach to marketing that bases strategy on the firm’s existing
strengths and assets instead of purely on what the customer wants.
 Product orientation – an inward-looking approach that focuses on making products that can
be made-or have been made for a long time-and then trying to sell them.
 Social marketing – this approach considers not only the demands of consumers but also the
effects on all members of the public (society) involved in some way when firms meet these
demands.
 Demand – the quantity of a product that consumers are willing and able to buy at a given
price in a time period.
 Supply – the quantity of a product that firms are prepared to supply at a given price in a time
period.
 Equilibrium price – the market price that equates supply and demand for a product.
 Market size – the total level of sales of all producers within a market.
 Market growth – the percentage change in the total size of a market (volume or value) over
a period of time.
 Market share – the percentage of total sales in the total market sod by one business. This is
calculated by the following formula: Firm’s sales in time period/total market sales in time
period * 100
 Direct competitor – business that provides the same or very similar goods or services.
 USP-unique selling point (or proposition) – the special feature of a product that
differentiates it from competitors’ products.
 Product differentiation – making a product distinctive so that it stands out from competitors’
products in consumers’ perception.
 Niche marketing – identifying and exploiting a small segment of a larger market by
developing products to suit it.
 Mass marketing – selling the same products to the whole market with no attempt to target
groups within it.
 Consumer profile – a quantified picture of consumers of a firm’s products, showing
proportions of age groups, income levels, location, gender and social class.
 Market segment – a sub-group of a whole market in which consumers have similar
characteristics.
 Market segmentation – identifying of different segments within a market and targeting
different products or services to them.
 Market research – this is the process of collecting, recording and analysing data about
customers, competitors and the market.
 Primary research – the collection of first-hand data that is directly related to a firm’s needs.
 Secondary research – collection of data from second hand sources.
 Qualitative research – research into the in-depth motivations behind consumer buying
behaviour or opinions.

 Quantitative research – research that leads to numerical results that can be statistically
analysed.
 Focus groups – a group of people who are asked about their attitude towards a product,
service, advertisement or new style of packaging.
 Sample – the group of people taking part in the market research survey selected to be
representative of the overall target market.
 Random sampling – every member of the target population has an equal chance of being
selected.
 Systematic sampling – every nth item in the target population is selected.
 Stratified sampling – this draws a sample from a specified sub-group or segment of the
population and uses random sampling to select an appropriate number from each stratum.
 Quota sampling – when the population has been stratified and the interviewer selects an
appropriate number from each stratum.
 Cluster sampling – using one or number of specific groups to draw samples from and not
selecting from the whole population, e.g. using one town or region.
 Open questions – those that invite a wide-ranging or imaginative response-the results will be
difficult to collate and present numerically.
 Closed questions – questions to which a limited number of pre-set answers are offered.
 Marketing mix – the four key decisions that must be taken in the effective marketing of a
product.
 Customer relationship management (CRM) – using marketing activities to establish
successful customer relationships so that existing customer loyalty can be maintained.
 Brand – an identifying symbol, image or trademark that distinguishes a product from its
competitors.
 Intangible attributes of a product – subjective opinions of customers about a product that
cannot be measured or compared easily.
 Tangible attributes of a product – measurable features of a product that can be easily
compared with other products.
 Product – the end result of the production process sold on the market to satisfy a customer
need.
 Product positioning – the consumer perception of a product or service as compared to its
competitors.
 Product portfolio analysis – analysing the range of existing products of a business to help
allocate resources effectively between them.
 Product life cycle – the pattern of sales recorded by a product from launch to withdrawal
from the market and is one of the main forms of product portfolio analysis.
 Extension strategy – these are marketing plans to extend the maturity stage of the product
before a brand new one is needed.
 Consumer durable –manufactured process that can be reused and is expected to have a
reasonably long life, such as a car or washing machine.
 Price elasticity of demand (PED) – measures of responsiveness of demand following a change
in price.
 Mark up pricing – adding a fixed mark-up for profit to the unit price of a product.
 Target pricing – setting a price that will give a required rate of return at a certain level of
output/sales.
 Full-cost pricing – setting a price by calculating a unit cost for the product (allocated fixed
and variable costs) and then adding a fixed profit margin.
 Contribution-cost pricing - setting prices based on the variable costs of making a product in
order to make a contribution towards fixed costs and profits.
 Competition-based pricing – a firm will base its price upon the price set by its competitors.
 Penetration pricing – setting a relatively low price often supported by strong promotion in
order to achieve a high volume of sales.
 Dynamic pricing – offering goods at a price that change according to the next level of
demand and the customers’ ability to pay.
 Market skimming – setting a high price for a new product when a firm has a unique or highly
differentiated product with a low price elasticity of demand.
 Promotion – the use of advertising, sales promotion, personal selling, direct mail, trade fairs,
sponsorship and public relations to inform consumers and persuade them to buy.
 Promotion mix – the contribution of promotional techniques that a firm uses to sell a
product.
 Above-the-line promotion – a form of promotion that is undertaken by a business by paying
for communication with consumers.
 Advertising – paid-for communication with consumers to inform and persuade, e.g. TV and
cinema advertising.
 Below-the-line promotion – promotion that is not a directly paid-for means of
communication, but based on short-term incentives to purchase.
 Sales promotion – incentives such as special offers or special deals directed at consumers or
retailers to achieve short-term sales increases and repeat purchases by consumers.
 Personal selling – a member of the sales staff communication with one consumer with the
aim of selling the product and establishing a long-term relationship between consumer and
company.
 Sponsorship – payment by a company to the organisers of an event or team/individuals so
that the company name becomes associated with the event/team/individuals.
 VGNZBPublic relations – the deliberate use of free publicity provided by newspapers, TV
and other media to communicate with and achieve understanding by the public.
 Branding – the strategy of differentiating products from those of competitors by creating an
identifiable image and clear expectations about a product.
 Marketing OR promotional budget – the financial amount made available by a business for
spending on marketing/promotion during a certain time period.
 Channel of distribution – this refers to the chain of intermediary’s product passes through
firm producer to final consumer.
 Internet (online) marketing – refers to advertising and marketing activities that use the
internet, email and mobile communications to encourage direct sales via electronic
commerce.
 E-commerce – the buying and selling of gods and services by businesses and consumers
through an electronic medium.
 Viral marketing – the use of social media sites or text messages to increase brand awareness
or sell products.
 Integrated marketing strategy – the key marketing decisions complement each other and
work together to give customers a consistent message about the products.
 Added value – the difference between the cost of purchasing raw materials and the price the
finished goods are sold for-this is the same as creating value.
 Intellectual capital – intangible capital of the business that includes human capital (well
trained and knowledgeable employees), structural capital (database and information
system) and relational capital (goods links with supplier and customers).
 Production – converting inputs into outputs.
 Level of production – the number of units produced during a time period.
 Productivity – the ratio of outputs to inputs during production, e.g. output per worker per
time period.
 Efficiency – producing output at the highest ratio of output to input.
 Effectiveness – meeting the objectives of the enterprise by using inputs productively to meet
customers’ needs.
 Labour intensive – involving a high level of labour input compared with capital equipment.
 Capital intensive – involving a high quantity of capital equipment compared with labour
output.
 Operations planning – preparing input resources to supply products to meet expected
demand.
 CAD-computer aided design – the use of computer programs to create two-or-three-
dimensional (2D or 3D) graphical representations of physical objects.
 CAM-computer aided manufacturing – the use of computer software to control machine
tools and related machinery in the manufacturing of components or complete products.
 Operational flexibility – the ability of a business to vary both the level of production and the
range of products following changes in consumer demand.
 Process innovation – the use of a new or much improved production method or service
delivery method.
 Job production – producing a one-off item specially designed for the consumer.
 Batch production – producing a limited number of identical products-each item in the batch
passes through one stage of production before passing on to the next stage.
 Flow production – producing items in a continually moving process.
 Mass customisation – the use of flexible computer-aided production systems to produce
items to meet individual customers’ requirements at mass-production cost levels.
 Optional location – a business location that gives the best combination of quantitative and
qualitative factors.
 Quantitative factor – these are measurable in financial terms and will have a direct impact
on either the costs of a site or the revenues from it and its profitability. MH
 Qualitative factors – non-measurable factors that may influence business decisions.
 Multi-site location – a business that operates from more than one location.
 Offshoring – the relocation of a business process done in one country to the same or
another company in another country.
 Multinational – a business with operations or production bases in more than on country.
 Trade barriers – taxes (tariffs) or other limitations on the free international of goods and
services.
 Scale of operations – the maximum output that can be achieved using the available inputs
(resources)-this scale only be increased in the long term by employing more of all inputs.
 Economies of scale – reductions in a firm’s unit (average) costs of production that results
from an increase in the scale of operations.
 Diseconomies of scale – factors that cause average costs of production to rise when the
scale of operation is increased.
 Enterprise resource planning – the use of a single computer application to plan the purchase
and the use of resources in an organisation to improve the efficiency of operations.
 Supply chain – all of the stages in the production process from obtaining raw materials to
selling to the consumer-from point of origin to point of consumption.
 Sustainability – production systems prevent waste by using the minimum of non-renewable
resources so that levels of production can be sustained in the future.
 Inventory (stock) – materials and goods required to allow for the production and supply of
products to the customer.
 Economic order quantity – the optimum or least-cost of stock to re-order taking into account
delivery costs and stock-holding costs.
 Reorder quantity – the number of units ordered each time.
 Lead time – the normal time taken between ordering new stocks and their delivery.
 Inventory record- Inventory records are repositories of data pertaining to each item in a
brand's product line.
 Buffer inventories – the minimum level of inventory level that should be held to ensure that
production could still take place should a delay in delivery occur or should production rates
increase.
 Just-in-time – this inventory-control method aims to avoid holding inventories by requiring
supplies to arrive just as they are needed in production and completed products are
produced to order.
 Start-up capital – the capital needed by an entrepreneur to set up a business
 Working capital – the capital needed to pay for raw materials, day-to-day running costs and
credit offered to customers. In accounting terms, working capital = current assets – current
liabilities.
 Liquidity – the ability of a firm to be able to pay its short-term debts.
 Liquidation – when a firm cases trading and assets are sold for cash to pay suppliers and
other creditors
 Capital expenditure – the purchase of assets that are expected to last for more than one
year, such as building and machinery.
 Revenue expenditure – spending on all costs and assets other than fixed assets and include
wages and salaries and materials bought for stock.
 Overdraft – bank agrees to a business borrowing up to an agreed limit as and when required.
 Factoring – selling of claims over trade receivables to a debt factor in exchange for
immediate liquidity-only a proportion of the value of the debts will be received as cash.
 Hire purchase – an asset is sold to a company that agrees to pay fixed repayments over an
agreed time period-the asset belongs to the company.
 Leasing – obtaining the use of equipment or vehicles and paying a rental or leasing charge
over a fixed period, this avoids the need for the business to raise long-term capital to buy
the asset; ownership remains with the leasing company.
 Equity finance – permanent finance raised by companies through the sale of shares.
 Long-term loans – loans that do not have to be prepaid for at least one year.
 Long term bonds OR debentures – bonds issued by companies to raise debt finance, often
with a fixed rate of interest.
 Right issue – existing shareholders are given the right to buy additional shares at a
discounted price.
 Venture capital – risk capital invested in business start-ups or expanding small businesses
that have good profit potential but do not find it easy to gain finance from other sources.
 Crowd funding – the use of small amounts of capital from a large number of individuals to
finance a new business venture.
 Microfinance – providing financial services for poor and low-income customer who do not
have access to banking services, such as loans and overdrafts offered by traditional banks.
 Business plan – a detailed document giving evidence about a new or existing business, and
that aims to convince external leaders and investors to external finance to the business.
 Direct costs – these costs can be clearly identified with each unit of production and can be
allocated to a cost centre.
 Variable costs – costs that vary with output.
 Fixed costs – costs that do not vary with output in the short run.
 Marginal costs – the extra cost of producing one more unit of output.
 Indirect costs – costs that cannot be identified with a unit of production or allocated
accurately to a cost centre.
 Break-even point of production – the level of output at which total costs equal total
revenue; neither a profit nor a loss is made.
 Margin of safety – the amount by which the sales level exceeds the break-even level of
output.
 Contribution per unit – selling price less variable cost per unit.
 Income statement – records the revenue, costs and profit (or loss) of a business over a given
period of time.
 Gross profit – equal to sales revenue less costs of sales.
 Revenue (formerly called sales turnover) – the total value of sales made during the trading
period = selling price * quantity sold.
 Cost of sales (or cost of goods sold) – this is the direct cost of the goods that were sold
during the financial year.
 Operating profit (formerly referred to as net profit) – gross profit minus overhead expenses.
 Profit for the year (profit after tax) – operating profit minus interest costs and corporation
tax.
 Dividends – the share of the profits paid to shareholders as a return for investing in the
company.
 Retained earnings (profit) – the profit left after all deductions including dividends, have been
made, this is ‘ploughed back’ into the company as a source of finance.
 Low-quality profit – one-off profit that cannot easily be repeated or sustained.
 High-quality profit – profit that can be repeated and sustained.
 Non-current assets – assets to be kept and used by the business for more than one year.
Used to be referred as ‘fixed assets’.
 Intangible assets – items of value that do not have a physical presence, such as patents,
trademarks and current assets.
 Current assets – assets that are likely to be turned into cash before the next balance-sheet
date.
 Inventories – stocks held by the business in the form of materials, work in progress and
finished goods.
 Trade receivables (debtors) – the value of payments to be received from customers who
have bought goods on credit.
 Current liabilities – debts of the business that will usually have to be paid within one year.
 Accounts payable (creditors) – value of debts for goods bought on credit payable to
suppliers, also known as ‘trade payables’.
 Non-current liabilities – value of debts of the business that will be payable after more than
one year.
 Statement of financial position (balance sheet) – an accounting statement that records the
value of a business’s assets, liabilities and shareholders’ equity at one point in time.
 Shareholders’ equity – total value of assets – total value of liabilities
 Asset – an item of monetary value that is owned by a business.
 Liability – a financial obligation of a business that it is required to pay in the future.
 Share capital – the total value of capital rose from shareholders by the issue of shares.
 Intellectual capital OR property – the amount by which the market value of a firm exceeds its
tangible assets less liabilities – an intangible asset.
 Goodwill – arises when a business is valued at or sold for more than the balance-sheet value
of its assets.
 Cash-flow statement – record of the cash received by a business over a period of time and
the cash outflows from the business.
 Gross profit margin – this ratio compares gross profit (profit before deduction of overheads)
with revenue. Gross profit margin % = gross profit/revenue × 100
 Operating profit margin – this ratio compares operating profit (formerly this ratio was
referred to as the net profit margin) revenue. Operating profit margin % = operating
profit/revenue × 100
 Liquidity – the ability of a firm to pay its short-term debts.
 Current ratio – current assets/current liabilities
 Acid-test ratio – liquid assets/current liabilities
 Liquid assets – current assets – inventories (stocks) = liquid assets.
 Window-dressing – presenting the company accounts in a favourable light – to flatter the
business performance.
 Cash flow – the sum of cash payments to a business (inflows) less the sum of cash payments
(outflows).
 Liquidation – when a firm ceases trading and its assets are sold for cash to pay suppliers and
other creditors.
 Insolvent - when a business cannot meet its short-term debts.
 Cash inflows – payments in cash received by a business, such as those from customers (trade
receivables) or from the bank, e.g. receiving a loan.
 Cash outflows – payments in cash made by a business, such as those to suppliers and
workers.
 Cash-flow forecast – estimate of a firm’s future cash inflows and outflows.
 Net monthly cash flow – estimated difference between monthly cash inflows and cash
outflows.
 Opening cash balance – cash held by the business at the start of the month.
 Closing cash balance – cash held at the end of the month becomes next month’s opening
balance.
 Overtrading – expanding a business rapidly without obtaining all of the necessary finance so
that a cash-flow shortage develops.
 Credit control – monitoring of debts to ensure that credit periods are not exceeded.
 Bad debt – unpaid customers’ bills that is now very unlikely to ever be paid.
  Creditors – suppliers who have agreed to supply products on credit and who have not yet
been paid.

Business Objectives
Aims are the long-term goals of a business. They act as a framework for a business to create further
objectives and set a purpose of the business.

Importance of business objectives

An objective helps to direct, control and review any business activity.

For any aim to be achieved successful, there have to be strategies in place which will guide the
business to achieve the goal. These strategies must be reviewed constantly to know if it is effective.

Every business’s aims and strategies change over time.

SMART criteria

Every business objective must meet the SMART criteria

S – SPECIFC: the aim must focus on what the business does and must directly relate to the business’s
activities.

M – MEASUREABLE: every aim must have quantitative values to prove targets are being met
effectively.

A – Achievable: aims which are impossible to achieve in a time period must not be set. Such aims will
demotivate the employees.

R – realistic and relevant: aims should be realistic according to the resources available and must be
relevant to the people carrying it out. 

T – time-specific: there must be time limits to the objectives established.

Benefits of objectives

 They provide a sense of direction

 Helps improve focus of individual employees and departments
 Provides a framework for decision making
 Acts as a motivation tool
 Acts as a means of assess performance, progress and identify training needs
 Helps plan for future in terms of resources required
 Hierarchy of objectives
  This shows the balance and dependencies between the different stages of setting aims and
objectives.

Corporate aims

These are long terms business goals and provides the central purpose of the business.

These are objectives that translate the aims into achievable targets.

Advantages of corporate aims

 Help develop a sense of purpose and direction for the business

 Help check progress
 They help development of successful tactics and strategies
 Vision statement
 Vision statement is the desired future of the company
 It is a company’s road map indicating what the company wants to become in the future.
 Mission statement
 Mission statement is a statement of a business’s core aims, phrased in a way to motivate
employees and to stimulate interests by outside groups.
 It is a summary on how they intend to support/achieve their vision
 Businesses communicate their mission statement through – publishing it in their accounts,
websites, banners, advertising posters, company newsletters, etc.

Benefits –

 Helps inform the external stakeholders about the aims and vision quickly
 It helps attract employees, potential investors, shareholders, etc.
 Help motivate employees
 Help guide and direct individual employee behaviour and conduct

Limitations –

 Can be easily adopted by any business of any size

 It is not specific to a business
 They are too vague and general
 Used as a PR activity
 Impossible to analyse
  Corporate objectives
 These are specific to a business and provide a much clearer guide for management.

Profit maximisation –

 It means producing at the level of output which leads to the greatest difference between
total revenue and total costs.
 The limitations of this corporate objective include:
 If short term profits are high, competitors may enter jeopardizing the long-term survival
 Issues of independence and retaining control maybe of higher importance
 Analysts assess business performance through return on capital employed rather than
profits
 Shareholders may aim for profit maximisation but other stakeholders may want to prioritise
other issues
 Very difficult to assess when the maximised profit has reached
 Negative impact on customers

Profit satisficing –

 It means achieving enough profits to keep the owners happy

 Growth – Growth is measured through value of sales/output
 Benefits – Lesser chances of a takeover
 Economies of scale
 Motivated employees and managers
 If not growing, may lose its appeal to new investors.

Limitations –

 Too rapid expansion may lead to cash flow problems

 Growth may be achieved due to lower profit margins
 Diseconomies of scale
 Using retained earnings to finance profits will reduce dividends
 May lose focus and direction is diversified

Increasing market share –

 It is possible for a company to grow but it’s market share to reduce, if the market is
expanding
 If market share is high, it indicates the marketing mix of the business is successful than most
of its competitors.

Benefits of being the market leader –

 Retailers will be keen to maintain high profile clients, so may provide good quality and low
prices
 Higher profits, due to lower supply prices
 Effective promotional campaigns to attract customers

Survival –

 Mostly an objective for start ups

  Corporate social responsibility (CSR) –
 This concept applies to those businesses that consider the interests of society by taking
responsibility for the impact of their decisions and activities on customers, employees,
communities and the environment

Benefits –

 Helps boost morale of employees as they feel more connected

 Helps attract skilled workers
 Workers have higher productivity and demand low wages
 Helps build reputation as responsible leader, gives competitive advantage
 May help reduce costs and improve profits as consumers will be willing to pay higher prices
for sustainable products
 It increases sales and builds customer loyalty o Helps attract investors
 Maximizing short-term sales revenue

Maximising shareholder value -

 This involves increasing the share price of the company’s stock

 Relationship between mission statements, objectives, strategies and tactics
 Aims and objectives provide basis for business strategies as they are the long-term plans for
the company.
 Strategies and tactics are derived from a company’s corporate objectives.
 Strategy provides the path a business needs to follow in order to achieve a organisations
corporate objective
 Tactics are more concreate and specific smaller steps for shorter time durations to achieve a
strategy.
 Objectives and decision making

Stages in decision making framework:

 Set objectives
 Assess the problem/situation
 Gather data about the problem and find possible solutions
 Consider all solutions and decisions
 Make a strategic decision
 Plan and implement the strategy
 Review its success against original objectives
 Factors that determine the corporate objectives of a business
 Corporate culture
 It is the code of behaviour and attitudes that influence decision making
 Size and legal form of the business

Small businesses – profit satisficing

Public limited companies – growth, increase stock value

Public sector or private sector

Public sector – CSR

Private sector – profits

The number of years the business have been operating

Economic conditions

Ethics

Management by objectives (MBO)

A method of coordinating and motivating all staff in an organisation by dividing its overall aim into
specific targets for each department, manager and employee

Communicating objectives

Benefits of communicating the aims of the business with employees:

May achieve more

Know how their individual goals fit into the overall plan

Creating shared employee responsibility

Easier for managers to stay in touch with employees’ progress

Ethical influences on business objectives and decisions

It is a document detailing a company’s rules and guidelines on staff behaviour that must be followed

It may be expensive in the short term

But, in the long term:

Avoid legal problems

Avoid bad publicity

Avoid pressure groups

May receive grants and subsidies

May attract skilled workers and investors

Advantages and disadvantages of targets

Stakeholders in a business
Stakeholders: People or groups of people that are affected by, and therefore have an interest in the
activities of a business.

Stakeholder concept: The view that businesses and their managers have responsibilities to a wide
range of groups- not just their shareholders

The roles, rights and responsibilities of stakeholders:

Roles Rights Responsibilities

Customers Purchase goods and Receive goods and Honesty
services services that meet local
laws
Provide revenue Offered replacements, Not stealing
repairs, etc- as legally
obligated
Not make false claims
Suppliers Supply goods and On-time payment Supply goods in time and
services condition already decided
Fair treatment
Employees Provide manual and Treated within minimum Honesty
other labour services legal limits
Employment contract Meet employment contract
payment and treatment
Join a trade union Cooperate with
management for reasonable
requests
Observe Ethical code of
conduct.
Local Provide local services Consulted about major Cooperate
Community and infrastructure changes
Not have lives badly Meet reasonable requests
affected
Gov. Laws- restrain Businesses to meet Treat businesses equally
business activity requirements
Law and order- allow Prevent unfair competition
activity to take place
Achieve economic Good trading links
stability internationally- allow
international trade
Lender Provide finance in Repaid on agreed dates Provide agreed finance on
different forms agreed date and time
Paid finance charges
Corporate social responsibility – an evaluation

It is the concept that accepts that businesses should consider the interests on the society in their
activities and decisions, beyond the legal obligations that they have

CSR distracts businesses from their key role of using scare resources to their maximum and produce
goods and services

CSR is a form of WINDOW DRESSING

If it is found that CSR is used as a PR activity, it will lead to bad word of mouth

CSR maybe expensive in the short run, but will help the business raise profits in the future

As it will lead to better reputation, lower regulations, chances of subsidies and grants, customer
loyalty, etc.
Management and Leadership
Functions of management – what managers are responsible for

 Setting objectives and planning

 Future planning and creating departmental and individual objectives for each employee
 Organising resources to meet objectives • They will ensure clear division of work and
delegate tasks to keep everyone motivated
 Directing and motivating staff
 Guiding, leading and overseeing people to ensure corporate objectives are met
 Coordinating activities
 Encourage teamwork between departments and division to lower duplications
 Controlling and measuring performance against targets
 Make sure targets are being met and if they are not, find solutions like training workers,
buying better equipment
 Management roles

According to Henry Mintzberg’s the nature of managerial work, there are 10 different roles of
management.

These 10 can be classified into 3 main groups:

 Interpersonal roles – dealing with people

 Informational roles – receiver, sender of information
 Decisional roles – make decisions and allocate resources
 Interpersonal roles
 Figurehead – symbolic leader of the company
 Leader – motivating subordinates, selecting and training workers
 Liaison – linking managers of one department with others
 Informational roles
 Monitor – collecting data about the operations
 Disseminator – sending information about internal and external factors to relevant people
 Spokesperson – communicating information about the business

Decisional roles

 Entrepreneur – look out for new opportunities

 Disturbance handler – flexible in responding to changes
 Resource allocator – deciding on the spending of the business’s resources
 Negotiator – representing the organisation at all negotiations

Leadership

 It involves setting a clear direction and vision for the company

 The best managers are also leaders

Qualities –

 Desire to succeed
 Self-confidence
 Creative and innovative
  Multitalented
 Incisive mind
 Important leadership positions in business

Directors –

 They are the senior managers elected by shareholders

 Responsible for delegation, assist in recruitment, meeting objectives within their
department

Managers -

 Responsible for people, resources and decision making

 Have authority over people below them
 Direct, motivate, discipline

Supervisors –

 Appointed by management
 Not a decision-making role
 Responsible for working towards pre-set goals
 Workers’ representatives –
 Elected by the workforce
 They discuss areas of common concern with managers
 Leadership styles

Autocratic Democratic Paternalistic Laissez-faire

Decision-making at the Promotes active Believes that manager is It means, let them do
centre participation of in a better position than it
workers the workers to know
what’s best for the
business.
Leader takes all Two-way Some consultation, but Leaves the decision-
decisions communication end decision based on making on workforce
managers after the broad
objectives are set
Little information given Full staff No true participation in Very little input from
to staff involvement decision-making management
Close supervision of Depends on the Workers maybe High level of
workforce level of involvement dissatisfied and delegation
demotivated
One-way Worker feedback is Workers may not
communication taken appreciate lack of
structure and
guidance
Faster decision Better final Lack of feedback
making \n Good for decision \n Better
unskilled workers motivation
May demotivate Time consuming \n
workers \n No staff Not helpful during
 input who have hands emergencies
on experience

McGregor’s theory X and theory Y

Douglas McGregor devised a theory on what factors determine the best leadership

He found that the management attitude is the most important factor

He identified 2 distinct approaches

Theory X and theory Y managers 

Theory X –

Theory X managers believed that workers are lazy, dislike work, will avoid responsibility, not creative

They need to be managed and controlled with close supervision

This encourages autocratic leadership

Theory Y –

Theory Y managers believed that workers enjoy work, are creative, ready to accept responsibility

This led to democratic leadership style

He suggested that theory X and Y are MANAGEMENT OPIONIONS not types of workers.

He believed how managers thought will led to workers becoming like that description

Factors affecting the leadership style

Training and experience of workforce

Amount of time available for discussion

Attitude of management

Culture of firm

Importance of issues

In general, democratic is considered the best

Informal leadership

These are people who have no formal authority but are still respected in the firm

They have the ability to lead due to their personality, experience, knowledge.

Informal leaders help achieve the aims of a business

Informal leaders are a key role of motivation

Emotional intelligence

It is the ability of managers to understand their own emotions as well as others

Daniel Goleman – 4 EI competencies

Self-awareness – knowing our own feeling, having self-confidence and realistic views in our abilities  

Self-management – recover quickly from stress and show self-control

Social awareness – sensing others feelings

Social skills – handling emotions in relationships well.

What is motivation?

It is the desire of workers to do a job quickly and efficiently. 

They are the external and internal factors that stimulate people to take actions to meet a specific
aim. 

Importance of motivation

Help a business achieve its goals

Help remain as cost-effective as possible (lower accidents and wastage)

Helps maintain low labour turnover and absenteeism rates

Impact the productivity and competitiveness of the business

Well-motivated staff will be ready to accept responsibility and will make suggestions to improve
customer service and satisfaction.

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F.W. Taylor – scientific management/theory of an economic man 

His main purpose was to reduce inefficiencies

His approach included 7 steps:

Select group of workers 

Observe them perform tasks 

Record time taken 

Identify the quickest method

Train all employees in that method 

Supervise them 

Pay them accordingly 

He believed that people are only motivated by money 

He believed piece rate method of payment should be used where worker’s output is directly linked
to their wage rates

He believed that autocratic leadership style should be used 

Workers should be closely supervised and no discussion or feedback should be taken

One-way communication 

Theory X manager ideology is adopted

Problems of this method –

Not everyone is motivated by money

Quantity over quality is encouraged – not acceptable in the long run

In modern times, due to advanced education and training, worker participation should be
encouraged and will help the business in the long run

Abraham Maslow – Hierarchy of human needs

He categorised employee needs into 5 levels.

Every employee starts at the lowest level

Physical needs – food, shelter, water, rest

Safety needs – job security, health and safety

Social needs – trust, friendship, teamwork, acceptance

Esteem needs – respect, status, recognition, achievement

Self-actualisation – reach one’s full potential, challenging and creative work

Regression is possible – once one need is satisfied, greater quantity of the same need will not
motivate people

Limitations-

Everyone has different needs

Difficult and impractical to identify for each worker and have separate measures for each

Self-actualisation is never permanently achieved

Frederick Herzberg – Two factor theory 

He conducted interviews and surveys to know and identify factors which give good feelings and the
ones that provide negative feelings 

Job enrichment principles should be adopted 

Complete units of work – workers should be allowed to produce a recognisable part of the
product/service 

Feedback on performance – workers must be given accurate feedback on their work. Good work
must be recognised 

A range of tasks – workers must be given challenging and beyond their current experience tasks 

Team work should be encouraged and adopted

He divided his results into 2 factors –

Hygiene factors –

Salary, working conditions, supervision, social relations 

They DO NOT motivate employees, but their absence DEMOTIVATES them 

They just remove dissatisfaction 

Motivators – 

Achievement, recognition, work itself, responsibility, advancement 

These factors MOTIVATE employees

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David McClelland – Motivational needs theory 

He identified 3 types of motivational needs in his book – The achieving society 

Achievement motivation – 

Have realistic goals 

Seek opportunities of job enrichment and advancement 

Have result driven attitudes

Authority motivation –

Desire to control others 

Need to be influential, effective, make an impact 

Strong leadership instincts 

Affiliation motivation – 

Need for friendly relations 

Teamwork and interaction with others 

Be liked and popular

Achievement motivated people are the ones who give the business the best results.

Vroom – expectancy theory 

Individuals will choose to behave in ways they believe will lead to the best outcome and rewards

People can be motivated if they believe:

There is a positive link between performance and effort

Will result in a favourable reward

Reward will help satisfy important needs

Desire to satisfy the need is strong 

3 beliefs –

Valence – depth of the want of an employee for an extrinsic reward

Expectancy – degree to which people believe hard-work will lead to their desired reward 

Instrumentality – confidence of employees that they will receive the reward they desire 

Even if any 1 belief is missing, motivation will not occur

Motivational theories – evaluation 

They provide the starting point and a framework to defining motivational methods and issues 

They are often criticized due to its lack of rigour and follow up work 

Important to identify the most appropriate theory and identify their relevance in the business

Motivators - Financial rewards

Human resource management
It aims to recruit capable, flexible and committed people, managing and training them and
rewarding them accordingly.

HRM has a major impact on efficiency, flexibility and motivation

Purpose and roles of HRM

Recruit and train workers to ensure maximum productivity so that all corporate objectives are met

In the past, HRM was:

Bureaucratic and had inflexible approach

Focused solely on recruitment and selection rather than development and training

Reluctant to delegate

Not part of the strategic management team

Roles of HRM include:

Workforce planning – identifying future needs in terms of number of employees and skills required

Recruitment and selection – recruiting the most suitable employees

Developing employees – training, appraisal and developing employees

Employment contracts – preparing employment contracts and ensure they are abided by

Ensuring HRM operates across the business – involving managers in development and training of
employees

Employee morale and welfare – monitoring and improving employee morale. Giving guidance and
advice and ensuring appropriate work-life balance

Incentive systems – paying appropriately

Monitoring -measuring and monitoring employee performance

Dismissing employees with inappropriate behaviour

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Recruitment

It is necessary when a business is expanding or employees are leaving the organisation

Job analysis

It involves identifying a vacant position, understanding its roles and responsibilities.

Job description

It provides a complete picture of what the job will entail, its roles, rights and responsibilities.

It helps attract the right type of people to the job

Person specification

It includes analysis of the type of qualities, skills and characteristics needed by any person appointed
to a job. It is based on the job description after assessing the complexity of the job. It is a ‘person
profile’ for the job

Job advertisement

It includes the requirements, personal qualities needed. It can be displayed within the organisation
or outside, depending on the recruitment method chosen.

If external, can advertise in online recruitment services, newspapers, magazines, government

agencies, recruitment agencies, etc.

Types of recruitment

External – outside the organisation 

Bring new ideas

Wider choice of applicants 

Avoids jealousy and resentment 

Standard of applicants maybe higher 

Internal – from within the organisation

Already known to the business, no need for induction training 

Known to the selection team 

Well aware of the organisational culture, ethical code of conduct, etc

Quicker, less time consuming 

Cheaper 

Gives workers a chance to progress, motivates them, Herzberg, Maslow

Management style already known

Selection process

Shortlisting applicants 

After receiving carious applications, the business will shortlist them according to their CV’s,
references, previous work, etc

Selecting between applicants 

The shortlisted candidates are then selected through interviews, aptitude tests, psychometric tests,
trail work, etc

They often use a 7-point plan – achievement, intelligence, skills, interests, personal manner, physical
appearance, personal circumstances

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Employment contracts 

They are legally binding documents to ensure that all policies are fair and in accord with the current
employment laws. 

It includes workers responsibilities, working hours, holiday entitlement, wages, appraisal process, etc

It imposes responsibility on both employers and employees to honour the contract.

Labour turnover 

It measures the rate at which employees leave the organisation 

Number of employees leaving in 1 year/average number of employees employed * 100

High and increasing labour turnover indicates low moral and employee discontent 

It increases costs of recruiting, selecting training new workers

Customer service maybe compromised 

Difficult to establish loyalty and team spirit

Low skilled workers may be replaced by productive ones

New ideas

May reduce costs if business is planning redundancy and rationalisation

Training and development of employees

It is work-related education given to employees to improve their efficient and productive 

Types of training – 

Induction training –

It is an introduction training given to all new employees

It helps the worker understand the customs, procedure, layout of the organisation 

On-the-job training –

Instructions at the place of the work 

Done by watching and working closely with an experienced member 

It is cheaper 

Off-the-job training –

Instructions given away from the work place by experts

It is expensive but more productive 

Training is expensive

But it will increase morale amongst employees as they will feel more valued and secured as it will
increase chances of promotion 

It may encourage poaching which acts as a disincentive for companies to set up expensive training
programmes

Increases productivity and efficiency 

Makes the workforce more flexible 

Better customer service and lower accidents

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Development and appraisal of employees

Development is a continuous process in the form of new challenges and opportunities

It is to help an employee achieve self-actualisation and fulfilment levels 

Appraisal is a process of assessing employee effectiveness. It is a part of the staff-development

programme

The performance is measured against pre-set goals.

It encourages them to work harder

Discipline and dismissal of employees

If a worker fails to meet obligations in the contract of employment, the HR department has to
discipline them 

They can even be dismissed. This is when a worker is asked to leave, due to parts of their job or
behaviour being unsatisfactory 
There maybe chances of unfair dismissal allegations if the organisation can not prove that the
necessary steps have been take to avoid it. 

These may include verbal warnings, written warnings, training sessions, etc

An employee may reach out to an employment tribunal to claim unfair dismissal

Redundancies 

 Redundancy is when a worker loses their job because the job is no longer necessary, through no
fault to their own 

This is done when there is a fall in demand, advances in technology, business is trying to rationalise
and cut costs 

Business must ensure these announcements are made efficiently as they have a major impact on
other employee’s morale and job security.

Employee morale and welfare

HR departments are expected to offer advice, counselling and guidance to employees who are in
need of it. 

Increases morale and sense of loyalty

Work-life balance

 It is where workers are not able to balance time between their work and their personal life.

Workers expected to work long and unsociable hours leads to stress and poor health

HR must work with employees to help them achieve good work-life balance to increase efficiency
and productivity 

Some methods to do this may include:

Flexible working 

Teleworking – work from home facility 

Job sharing – 2 people working as one full time employee

Sabbatical periods – extended period leave from work 

This is mainly due to: 

Consumers expect access to goods and services 24/7

Globalisation and increased competition

Policies for diversity and equality

Equality is when everyone is treated fairly and has equal chances to succeed

Diversity is the process of creating a mixed workforce

Benefits –

Higher reputation 
Higher morale 

Ability to recruit top talent 

Capture a greater consumer market 

Better ideas and greater creativity

What is marketing?

Marketing 

Marketing is the management process responsible for identifying, anticipating and satisfying
consumers’ requirements profitably. 

Marketing is the process of planning and undertaking the conception, pricing, promotion and
distribution of goods and services to create and maintain relationships that will satisfy individual and
organisational objectives.

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Related concepts 

Markets 

It is where a group of consumers purchase goods and services. This may or may not be a physical
space and area

Human needs and wants 

Needs are basic requirements that a person needs in order to survive. 

Wants are items which are not necessary for survival but satisfy certain requirements 

Value and satisfaction 

Value is not equal to cheapness

A product is considered of good value if it provides satisfaction to consumers and is of a reasonable

price 

A business must aim to increase satisfaction and value of a product/service to maintain good long-
term customer relations

Marketing objectives and corporate objectives 

Marketing objective may include – 

Increase market share

Increase number of items purchased per customer visit 

Increase loyalty 

Increase the number of times a customer shops 

Increase customer satisfaction 

Brand identity 
Increase new customers 

In order to be success, marketing objectives must be:

In line with the corporate and long-term goals of the business 

Determined by senior managers 

Must fit into the SMART criteria 

Importance of marketing objectives:

Provide a sense of direction 

Allow progress to be monitored 

Easily broken down into individual targets (motivation by objectives)

Form basis of marketing strategies

Coordination of marketing with other departments 

Marketing department has a central role in coordinating the work of other departments 

Marketing and finance – know the marketing budget and help make cash flow forecasts 

Marketing and HR – devise a workforce plan and help in recruitment and selection of suitable
employees

Marketing and operations – new product development and plan for the spare capacity and raw
materials needed in the future

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Market orientation

They put customers first. They produce what a consumer wants rather than trying to sell them a
product they already developed

Necessary in these fast-changing, volatile consumer markets

Benefits –

Lower risks

Ability to survive longer

Constant feedback from consumers

Product orientation

They invent a product and believe that consumers will want to purchase it. They believe that if a
product is innovative and of good quality, then consumers will purchase it

Market and product-oriented businesses – an evaluation 

If a business tries to change and adapt to every consumer trend it will over stretch it resources

Trying to offer choice and range is expensive. But, researching and then developing a product
reduces risks 
Many companies use ASSET-LED MARKETING 

It is where businesses base the product development on market research but limit it to their own
strengths and weaknesses. They try to take advantage of their resources 

Market orientation does not guarantee success. It depends on the whole marketing process

Societal marketing

It is an approach where the business considers and focuses on other stakeholders like customers,
employees, environment, etc.

It was founded by Kotler in 1972

It is not the cheapest but meets the society’s long-term interests.

Implications:

Attempt to balance 3 concerns – company profits, consumer wants, society interest

Difference between short-term consumer wants (low prices) and long-term social welfare may arise

Gives a competitive advantage (USP)

Allows the firm to charge higher prices

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Demand

It is the quantity consumers are willing to and able to buy at different prices

Movements in a demand curve

 Factors
affecting demand

Changes in consumer income

Changes in prices of related goods

Changes in age and population structure

Fashion, tastes and attitudes 

Advertising and promotion

Supply

Supply is the willingness and ability of a firm to sell/produce a product.

Factors affecting supply

Costs

Taxes

Subsidies

Weather conditions

Advances in technology

Equilibrium

It is the price level where demand = supply

There is no shortage (demand higher than supply) or surplus (supply higher than demand)

Disequilibrium is when demand is not equal to supply (there’s either a surplus or shortage)
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Features of markets

Market location –

Businesses may operate locally, regionally, nationally or internationally

Local markets have limited sales. International markets have the greatest sales potential but it is a
huge strategic step, differences in tastes, cultures, laws must be considered

Market size –

Can be measured by volume of sales or value of goods sold

Reasons to know the size –

Market is worth entering or not

Calculate firm’s market share

Growing or declining market

Market growth –

If markets are growing rapidly, competition may increase, market share may fall and profits may be
negatively affected

The growth pace depends on –

General economic growth

Changes in income

Changes in tastes and preferences

Technological changes
Market share – •

Can be measure by volume or value of sales

If market share is increasing, it indicates that the marketing strategies are effective

Benefits of high market share –

Higher sales

Retailers may not charger higher profit margins to stock up goods

Producers may provide higher discounts

Market leader maybe used in ads, USP

Competitors –

Direct competition is when 2 companies provide similar products

Indirect competition is the substitute of the good itself \

Businesses must be able to respond efficiently to both direct and indirect competition

Important marketing concepts

Creating/adding value

Added value is the difference between the selling price and the cost of bought in raw materials

Higher the added value, higher the profits

Added value can be increased by –

Create an exclusive and luxurious retail environment

High quality packaging

Promote and brand the product

Create a unique selling point (USP) and differentiate the product

Mass and niche marketing

Niche marketing is identifying and exploiting a small segment of a larger market

Mass marketing is selling the same products to the whole market

Niche marketing – advantages –

May survive as are producing customised products

Ability to charge high prices and increase profits

Improves brand image and loyalty

Mass marketing – advantages –

Wider choice for customers

Economies of scale
Fewer risks

Market segmentation

Also known as differentiated marketing

Instead of trying to sell one product to the whole market, businesses identify different consumer
segments are research each of them separately.

Market segmentation – identifying different consumer groups

Businesses create consumer profiles which includes age groups, income levels, gender and social
class

Advantages –

Easy to target marketing strategies to specific consumer groups

Enables identification of gaps in the market

Differentiated marketing strategies can be focused on target market groups

Price discrimination may be used to increase revenue and profits

Allows specialisation

Disadvantages –

High research and development costs

High promotional costs

May not be able to enjoy marketing economies

High stock-holding and production costs

May lead to over-specialisation

Extensive market research may be needed

Market research

Process of Collecting, Recording and Analysing data regarding Customers, Competitors and Markets.

Need for market research

To reduce risks associated with new product launches

Market research helps investigate the potential demand for a product.

It allows firms to check the market conditions before launching a product

It identifies consumer needs and tastes, helps test the product idea, packaging design with potential
customers, pre test the brand positioning and advertising. It even aids during product launch and
after launch periods.

To predict future demand changes

Allows businesses to predict future economical/social changes which might affect demand

It gives businesses time to plan and implement effective strategies to tackle the future demand
changes

To explain patterns in sales of existing products and market trends

Conducting market research for existing products helps firms understand the potential changes in
consumer tastes, preferences, incomes, etc in the future and helps identify demand changes.

To assess the effectiveness of the marketing strategies used

Conducting market research after implementing few marketing strategies like changed promotion,
etc will allow a business to understand the effectiveness of these strategies in achieving the long-
term marketing goal

It helps identify whether or not the business requires to change its strategies and tactics to remain
successful

Know consumer feedback

Investing in market research will allow a firm to know customer feedback regarding the perceived
strengths, weaknesses, packaging preferences, sales and distribution methods, etc

Identify competitors, their USP and differentiate the product

Market research helps identify competitors, their product differentiation strategies. It allows the
business to adapt and modify their USP accordingly

The market research process

Identify problem and define objective

Identify the purpose of the research to ensure unnecessary data is not collected.

After identifying the problem, research objectives are set. These are always in form of questions.

Determine research design

Deciding whether to use primary research or secondary research or a mix of both

Design and prepare research instrument

Identifying the most suitable method of data collection in terms of cost and time.

Sampling and collecting data

Choosing a sample size and method

Analyse data

Visualise and communicate results

Representing the data in forms of bar graphs, pie charts, line graphs, etc.

Primary research

Also known as field research

It is when businesses collect first-hand data for their own needs

Benefits –

Up-to-date information

Relevant information

Confidential

Drawbacks –

Expensive

Time-consuming

Doubts over accuracy and validity (due to sample size)

Types –

Quantitative methods – numerical results that can be statistically analysed

Observations and recording – marker researchers observe and record how consumers behave. It
doesn’t give the opportunity to understand the reasons/ask for explanations for the
behaviour/trend.

Test marketing – when businesses produce a limited quantity before launching the product to the
entire market. They promote and sell the product in a limited area, record customer reactions and
opinions. They then make changes and reduce risks involved before launching it into the market.

Consumer surveys – involves directly asking consumers for their opinions and feedback. Both
qualitative and quantitative.

Qualitative method –

Focus groups –

They are discussion groups where participants are encouraged to actively discuss and give their
feedback/opinions on new products/adverts/etc
They are more accurate and realistic that questionnaires and interviews

There are researches stimulating the discussion so that there is no biased decision made

It is cost effective and quick

Flexible but it is expensive

Subjective and chances of polarizing

Skilled moderator needed

Less control

Not the representative of the entire population

Secondary research

Collection of data from second-hand sources

It is also known as desk research

It is gathering data which has already been collected

Advantages –

Cheap

Assists planning of primary research

Less time consuming

Allows comparison between different sources

Drawbacks –

Maybe outdated

Not available for new products

May not be accurate

May not be suitable to the business

Types –

Government publications

Local libraries and government offices

Trade organisations

Market intelligence reports

Newspapers and specialist magazines and publications

Internal company records

The internet

Every business, first, carries out secondary research and only if the data which exists is not relevant
or no data exists like for newly developed products, primary research should be conducted.

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Sample size

It is impossible to survey every member of the target population

This is because the market is too extensive and it is impractical to contact every member in terms of
time and money                     

Therefore, businesses choose a sample size and choose people accordingly to act as a representative
of that sample

Usually, larger the sample size, more confidence the business has in their results as they are likely to
be more accurately

Major constrains in selecting the sample size – time and money

Sampling methods

Probability sampling

Selection of a sample based on the principle of random choice

It is complex, time-consuming and costly

Methods:

Simple random sampling –

Each member of the target market has an equal chance of being selected

Every member of the target market is given a number and then a computer is used to generate a
random set of numbers

Systematic sampling –

Sample selected by taking every nth term from the population

Stratified sampling –

The target population will include people with different tastes, opinions, preferences, etc.

Each of these groups are divided into different levels and the are known as strata

Random sampling is used to select different people from each stratum

Quota sampling –

The interviewer selects different number of people from each stratum of the target population

Cluster sampling –

Take a sample from one/few groups

For example: one town or region

Non-probability sampling

Convenience sampling –

People chosen on the basis of ease of access.

Ex. sampling friends and family

Snowball sampling –

First respondent refers a friend and the process continues

It is cheap but the sample might be biased as all respondents might have similar lifestyles and
preferences

Judgemental sampling –

Researcher chooses sample based on who they think are appropriate

Experienced researcher required

Ad hoc quotas –
Quota is established and researchers choose from within it

Accuracy of primary research (evaluation points)

Sampling bias

Time and cost constrain make it impossible to question the entire target market which leads to
biased answers

Higher the sample size, more accurate the results are likely to be

Questionnaire bias

This may occur when there are many leading, misunderstood questions asked. This may lead the
respondent to answer in a certain way, leading to inaccurate results

Other forms of bias

The respondent may not be truthful

The Marketing Mix: Product

Marketing Mix

The 4P’s include:

Product – existing product/newly developed product. Includes packaging, quality, features of the
product

Price – amount customers pay

Place – how the product is distributed

Promotion – informing customers about the product and persuading them to buy it

Important for the 4 P’s to be integrated in order to achieve the aims

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The 4C’s

Customer solution – what a firm needs to produce to meet consumer needs

Cost to customer – total cost of the product to consumers

Convenience to customer – how easily accessible is the product to consumers

Communication with customer – providing 2-way communication channels

Customer relationship management

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

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

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

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

Targeted marketing – providing customers with products they prefer (according to market
research/previous purchase)

Customer service and support – providing feedback channels and using them to change the 4P’s

Using social media – businesses can use social media to identify various trends in the market which
allows them to make their products more accurate for customers

Why is product a key part of the marketing mix?

In order to be able to build relations and establish brand loyalty, the product must be right.

This includes the quality, durability, performance and appearance

Customer expectations must be met in terms of these factors

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What is meant by ‘product’?

This includes both consumer and industrial goods and services

The dynamic market makes the New Product Development (NPD) process a crucial part of the
business’s success

NPD is based on market research in attempt to satisfy customer needs

It is expensive and may not be successful

Unique selling point

Features that differentiate a product from its competitors

Benefits of having a USP –

Effective promotion

Free publicity

Chance to charge high prices

Higher sales

Brand loyalty

Products and brands

Product is a general term used to describe what is being sold

Brand is a distinguishing name given to the product, helping establish a USP

It can help create a powerful perception in consumer minds – positive or negative

Tangible and intangible attributes

Meeting the intangible expectations/needs of a customer is achieved through effective branding

These are subjective to customer opinions and can’t be measured or compared

Product positioning

Before launching a product, the firm will try to analyse its relationship with other competitor
products in the market – product positioning

One method – market mapping

Identify features that consumers deem important

Plotting it on a comparison chart

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Product life cycle

The stages a product goes through from its development to its decline

Product portfolio analysis involves making decisions about how to allocate resources effectively
between the range of products. PLC is one form to do so.

Stages of PLC
Introduction

Low sales

Increase slowly

Growth

Significant growth in sales

Few competitors start entering the market

Maturity/saturation

Sales remain constant

Many competitors are in the market

Decline

Sales fall rapidly

May occur due to changes in technology, tastes, etc

Extension strategies

Strategies used to extend the maturity stage of the PLC

Examples –

Selling in new markets

Repackaging and relaunching

Finding new uses

Sales promotion techniques

Adding new features

Uses of PLC

Assisting with marketing mix decisions

Knowing the stage of PLC helps decide the marketing mix of a product (all 4P’s)

Every marketing aspect is changed with a change in the stage of PLC

But the final decisions even depend on competitor actions, economic state, marketing objectives

Identifying how cash flow might depend on PLC

Every business requires cash flow in order to be successful

At the development and decline stage, cash flow is likely to be negative

This may even continue into the introduction stage as promotional expenses will be huge

But, in the growth and maturity stage, cash flow is likely to improve and become positive
Therefore, knowing about the PLC stages of different products, allows a business to plan for its next
project and see its effect on cash flow

Identifying the need for a balanced product portfolio

As one product is in the decline stage, the next product is ready to be launched.

This allows cash flow to remain balanced throughout as positive cash flows of products in the growth
and maturity stage may offset the negative losses by products in decline and development phases.

PLC – evaluation

PLC is an important part of the marketing audit and helps in assessing the marketing departments
position

But it is based on past and present data, which may not be necessarily true for future predictions

Plus, there might be a rapid and quick change in sales, not giving enough time for the marketing
department to implement a strategy to offset such a change

In order to be effective, PLC analysis must be used in relation with sales forecasts and management
experiences.

Product portfolio analysis – evaluation

Having a balanced and managed portfolio allows marketing objectives to be met easily

But product is only one part of the marketing mix, and the other 3 P’s – price, place and promotion
are also essential in achieving success of the business

But without a well-managed product portfolio, the other 3 P’s may not be in use and the objectives
may not, ever, be met
The Marketing Mix: Price
Why is price a key part of the marketing mix

Price is the amount paid by customers

Its impacts:

The demand

Degree of value added by the business

Influence on revenue and profits earned

Reflect on marketing objectives and their success

Establish psychological image of the business

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Price elasticity of demand

It is a numerical measure of responsiveness of demand to a change in price

PED = % change in demand / % change in price

PED is always negative indicating the inverse relation between demand and price

Types of PED

Elastic - % change in demand > % change in price (PED>1)

Inelastic - % change in demand < % change in price (PED<1)

Unitary - % change in demand = % change in price (PED=1)

Perfectly inelastic – demand is the same, irrespective of price (PED=0)

Perfectly elastic – demand is infinite at a particular price, and 0 at all others (PED=infinite)

Factors determining PED

Necessity or not – necessity = inelastic, luxury = elastic

Number of substitutes – many substitutes = elastic, no/few substitutes = inelastic

Level of customer loyalty – high degree of loyalty = inelastic, low level of loyalty = elastic

Proportion of income – high proportion = elastic, small proportion = inelastic

PED – application

Helps make accurate sales forecasts

Assists in pricing decisions

PED – evaluation

PED assumes nothing else changes (ceteris paribus)

Maybe outdated very quickly

Uses past information, may not be accurate considering the dynamic nature of the markets

Factors affecting pricing decisions

Costs of production

A price must cover both variable and fixed costs of a business

Competitive conditions

Monopoly – more freedom in deciding prices

Perfect competition – fix similar prices

Competitors prices

Difficult to set prices too different from competitors unless true USP is shown

Business and marketing objectives

Price must reflect all aspects of the marketing mix and should keep in mind the main goals of the
business

Price elasticity of demand

Elastic – low prices

Inelastic – increase prices

New or existing product

New products – price skimming or penetration pricing

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Pricing methods

Cost based pricing

Mark-up pricing

When a percentage of fixed mark-up is added to the cost of the product

The mark-up size depends on the strength of demand, number of substitutes, stage of PLC, etc

Target pricing

It involves setting a price to achieve a required rate of return

This ensures a specific sales revenue is earned

Full-cost (or absorption-cost) pricing 

It involves setting a price by calculating the unit cost and adding a fixed profit margin

This ensures all costs are met

Easy to calculate

Suitable for firms with high market shares

But, doesn’t take into account external factors like economic conditions

Inflexible method

Contribution-cost (or marginal-cost) pricing

Prices are set based on the variable costs and a contribution amount for fixed costs and profits is
added

Contribution per unit = selling price – variable cost per unit

Break even point = fixed costs/ contribution

Ensures variable costs are covered

Flexible method

Fixed costs may not be covered

If prices are varied too much, consumers maybe discouraged and business will face menu costs

Competition-based pricing

Price is based on that of competitors

Scenarios where it is suitable:

Following the market leader

Avoid a price war

Destroyer pricing – force others out of the market

Based on study of conditions

Market-oriented pricing

Perceived-value pricing

Also known as customer-value pricing

Prices are set based on the value customers place on the product

Used for products with inelastic demand

Price discrimination

It involves charging different prices to different consumer groups for the same product

Dynamic pricing

Changing prices, frequently, to respond to changes in demand

It is based on demand level and ability of consumers to pay

Pricing strategies for new products

Penetration pricing

Involves selling at a low price to attract more customers

Used by firms in the mass market with a aim to capture a large market share

Price skimming

Setting a high price to differentiate it from competitors

Usually for products with inelastic demand (luxury goods)

It creates an exclusive image for the product

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Pricing decisions – some additional issues

Level of competition

It depends on the type of market

Perfect competition

Consumers have complete knowledge

All producers are identical products

Freedom of entry and exit

Equal market share

Here, only competitive pricing will work

Monopoly

Single seller with 100% market share

They are price makers

High barriers to entry and exit

Oligopoly

Price wars to gain market share

Non price competition – competitive promotional campaigns, product differentiation

Collusion – it is illegal and may lead to fines and court cases

Loss leaders

It involves setting relatively low prices for some products, expecting consumers to buy it. • They
hope, the profits earned from other products will cover the losses for the other product

Usually used for complementary goods

Psychological pricing

It involves setting prices just below the whole number

It even involves using market research to avoid setting prices consumers believe is inappropriate

Pricing decisions – evaluation 

A firm will not use the same strategy for all products as there are differences in external market
conditions

Prices have a huge influence on consumer purchasing behaviours so market research must be
carried out to identify consumers ability to pay before setting prices

Low price may not always be considered the best strategy. It may even discourage consumers if they
believe the product is on high value

Price is only one factor. The complete brand image is more important
The Marketing Mix: Promotion

Why is promotion an important part of the marketing mix?

Promotion involves communicating with potential customers 

It helps increase awareness and create an image in consumer minds 

The combination of all promotion techniques used (advertising, direct selling, sales promotion) is
known as promotion mix 

The promotional budget is a key factor when making promotion mix decisions

Promotion objectives 

Aims of having promotional objectives:

Increase sales by new customers

Raise customer awareness 

Remind customers about the USP/product 

Increase purchases by existing customers

Demonstrate USP and product differentiation strategies 

Correct misleading reports/image 

Develop a public image 

Encourage retailers to stock and promote their product

Advertising 

Known as ‘above-the-line’ promotion 

Communicating information about the product through TV, radio, magazine, etc

Effectiveness depends on selecting the appropriate target market and suitable media 

Helps increase awareness and long-term brand loyalty and image 

Types of advertising 

Persuasive – involves creating a distinct image for the product and encouraging repeat purchases. 

Informative – give information about the product’s features, USP, qualities, etc. usually used for new
products. Used to attract new customers

Advertising agencies 

They are firms who advertise businesses in the most effective way possible. 

They are expensive but are specialists and will provide the entire promotional plan for a business 

Stages in creation of a promotional plan:

Research the market 

Identify and advise on the most cost-effective forms of media to use 

Use creative designers to devise ads

Print out the adverts 

Monitor public reactions to improve future ads

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Advertising decisions – which media to use?

Greater the promotional budget, wider media choices available 

Factors to consider when choosing the media to use:

Cost – TV, radio and cinemas are very expensive whereas newspapers emails and leaflets are
cheaper forms 

Size of audience – it will allow the cost per person to be calculated. Larger the size, wider reach
media must be used like national or international newspaper 

Consumer profile of target audience – this will help in designing the advert and identifying which
media to use.

Message to communicate – written forms are most effective as their hard copy can be stored

Other aspects of marketing mix – all marketing mix aspects must be kept in mind to ensure they are
integrated as closely as possible

Legal and other constraints – there maybe constraints as to what ads can contain in different
countries, so these should be kept in mind in order to avoid legal barriers

Sales promotion 

Also known as below-the-line promotion 

It aims to achieve a short-term rise in sales 

Methods of sales promotion

Price reductions –

A temporary reduction in price 

Also known as price discounting 

Reduce the profit margin on each product 

May have a negative impact on reputation

Money-off coupons –

They are focused on offering a price discount. These coupons maybe present in newspapers, leaflets 

Retailers may not have enough stock, leading to customer disappointment 

Effectiveness depends on size of coupon 

Customer loyalty schemes –

Focused on encouraging repeat purchases. They usually involve loyalty cards reduces profit margin
on each product 

High administration costs 

Money refunds –

Offered when receipt is returned to the manufacturer 

Involve customers filling in forms which maybe a disincentive 

Delay in refund may affect brand image 

BOGOF –

Buy one get one free 

Substantial fall in profit margin

If used to sell of stock, may impact brand image 

Current sales may increase, but future sales may fall  

Point-of-sales-display –

Placing products in attractive and informative places

Only offered to market leaders 

New products may struggle

Personal selling 

It involves having a sales staff communicate and sell to each customer individually 

Expensive 

Requires skilled sales staff 

Used for expensive, luxury items 

High success rates 

Direct mail 

Information is directly sent to potential customers, identified by market research 

May provide detailed information 

Well focused on potential customers

Cost effective 

Maybe missed 

Trade fairs and exhibitions 

Used to market to other businesses (retailers and wholesalers)

Used to make contacts and identify potential customers 

Sponsorship 

Involves associating with an event/team

Leads to free publicity

Expensive 

Very effective 

Public relations (PR)

It is used to gain free publicity provided by the media

Tries to arrange positive TV and press coverage 

Maybe used to put forward the company’s views on specific incidents 

Used to improve reputation

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Branding 

It is a distinguishing name given to a product

Aims –

Customer recognition 

Product differentiation 

Giving the product an identity 

Benefits of branding –

Increases chances of consumer recall 

Product differentiation 

Reduces PED 

Increases consumer loyalty 

Brand extension 

Using the same brand name for new/modified products will help make a family of costs.

It will make the brand image even stronger and make advertising easier as the brand can be
advertised as one unit which will improve sales of all products associated with it.

Marketing or promotion expenditure budgets 

Percentage of sales 

Marketing budget varies with sales

Higher sales, higher budget and vice-versa

But, during low sales, promotion budget reduces which is when higher promotion is needed to
persuade customers to buy the product 
Objective-based budgeting 

Involves analysing the level of sales required to meet aims and then identifying the amount of
expenditure in order to gain that sales level. 

Competitor-based budget

Two firms with the same size may try to match each other promotional budgets.

May lead to spiralling promotional costs 

It doesn’t mean both companies promotion is equally effective. 

What the business can afford 

People tend to see marketing and promotion as a luxury

So, in such cases, the budget will only be set after all other expenses have been accounted for 

This method fails to take into account market conditions and marketing objectives when deciding
marketing budget.

Incremental budgeting  B,J

This involves adding a percentage to the last year’s budget, to account for inflation and price
changes 

But, it doesn’t require managers to justify the total market budget for each year so it maybe used
inefficiently

Is the marketing budget well spent?

Viewpoint of society and customer 

Many people may observe marketing and promotion as a wasteful expenditure and money could’ve
been used more effectively, elsewhere 

Some consumers may even believe that the society has to bear the burden of the unreasonable,
excessive advertising each year

Viewpoint of business 

Advertising and promotion may aim to build brand loyalty in the long-run rather than increasing
sales in the short-run 

In such cases, the benefits will be spread across the years

Ways to assess the effectiveness of marketing –

Sales performance before and after the promotion campaign – compare sales and calculate the
promotional elasticity of demand 

Consumer awareness data – identify how well consumers are able to recall the data and
advertisements through a series of questions 

Consumer panels – focus groups may help gain qualitative data about the effectiveness of
promotional strategies 
Response rarest to advertisements – number of calls to gain further information, number of website
check-ins, views on videos, etc

Consumer markets and industrial markets

Industrial products are the ones that are sold to businesses 

Consumer products involves directly selling to the end consumer 

Industrial markets may use trade promotion like trade fairs, specialist magazines

Consumer markets may use consumer promotion like discounts, TV adverts

Promotion and the PLC \n

Packaging 

The quality, design and colour of packaging play an important role in promotion 

Cheap and nasty packaging may destroy the brand image 

Also, wasteful expenditure on packaging will also lead to negative publicity. This will even reduce the
product’s competitiveness 

Packaging decisions must be blended in with the overall objectives of the business 

Functions –

Protect the product 

Give important information 

Support the brand image

Aid customer recognition

The Marketing Mix: Place

Why are place decisions an important part of the marketing mix?

Place is the process through which the product reaches the customer from the manufacturer. 

A correct distribution channel is necessary – 

Consumers need the product to be convenient and accessible 

Manufacturers need their outlet to be in line with their brand image 

Every intermediary will add its profit margin, so it depends on the price the manufacturer wants

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Concept of distribution 

The right product needs to reach the right consumer at the right time in the most convenient way
possible 

Supply chain refers to all the intermediaries involved in getting the product to the end consumer 

Customer service as objective of distribution 

Distribution channels chosen may not always be the cheapest 

Customer service is the main objective of distribution, therefore convenience to customers may also
be a very important factor when deciding the distribution channel 

Businesses even use internet and e-commerce facilities to make it more accessible to customers

Channels of distribution 

Manufacturer → Consumer 

Direct selling to customers 

No intermediaries adding their profit margins to products, lower prices and higher profits

Has complete control of the marketing mix 

Quicker 

Fresher food available to consumers

Direct contact with customers 

Expensive – storage and stock costs 

No retail outlets, limits promotion from physical shop/website 

Not convenient for customers 

No advertising done by intermediaries 

Manufacturer → Retailer → Consumer 

Retailer pays for stock and storage costs 

Retailer offers after sales service and has product displays 

Available in many locations – convenient for customers 

Producers can focus on production 

Retailer promotes and advertises the product 

Intermediary adds profit margin, more expensive to consumers 

Producer loses SOME control over the marketing mix 

No exclusive outlet, may sell competing products 

Producer bares delivery costs 

Manufacturer → Wholesaler → Retailer → Consumer 

Wholesaler buys in bulk, reducing storage costs for producer 

Wholesaler bares transport costs to retailers 

Wholesaler break bulk by selling small quantities to different retailers 

More convenient for customers 

Best way to enter foreign markets 

Higher final prices as more intermediaries add profit margins 

Producer further loses control over marketing mix 

Slow distribution chain 

No direct contact with customers

Factors influencing choice of distribution channel 

Industrial product or consumer product 

Geographical dispersion of target market 

Level of service customers expect 

Technical complexity of the product 

Unit value of product 

Number of potential customers 

Competitors actions

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Internet and 4C’s

Internet is transforming the ways in which businesses market their products and manage
relationships with customers

Selling goods directly to consumers (B2C) or to businesses (B2B) through e-commerce

Online and mobile advertising (pop ups, social media, websites)

Sales contacts are established by visitors leaving their details on sites

Collecting market research data by encouraging visitors on the websites to answer questions

Ability to use dynamic pricing

Advantages Disadvantages

Relatively inexpensive Poorer countries may not have internet access

Reaches a wider target market Consumers can’t touch, smell, feel the product
before – limiting their willingness to buy online
Consumers interact with websites and leave High product returns if customers dissatisfied
their information there, assists in market
research
Easy and convenient for customers High postal costs

Accurate records and quickly measured Postal service may be unreliable, affecting
company’s brand image
Increasing technological usage Website must be kept up-to-date, expensive

Easier dynamic pricing

Lower fixed costs Internet security worries

HU

Viral marketing 

It involves using social media sites to increase brand awareness or increase sales

It encourages people to keep passing on marketing messages to others

They maybe in the form of video clips, interactive flash games, e-books, text messages, social media

An integrated marketing mix integrated, it may confuse customers who will stay away from the
product and find alternating decisions will –

If the marketing mix is not ives. This will lower long-term sales 

The most effective marketing

Based on the marketing objectives 

Affordable within the marketing budget

Integrated and consistent with each other 

Integrated with the 4 C’s of marketing

 The Nature of Operations

Operations 
 The operations department deals with using resources (inputs) to create final products

(outputs) 

 They are aiming to produce goods and service of the right quality and the required quantity,

at the time needed in the most cost-effective method 

 They are concerned with –

 Efficiency of production – produce at the lowest possible cost

 Quality – maintain quality standards and keep improvising 

 Flexibility and innovation – keep adapting to the dynamic business environment

Production process – transformation

 Conversion of inputs into outputs is known as the transformation process

 It involves adding value to the product 

Factors influencing the degree of value added 

1. Design of the product 

2. Efficiency with which the input resources are combined and managed 

3. Ability to convince consumers to pay more than the price of inputs

 Operations stages 
1. Converting a consumer need into a product/service 

2. Organising efficient operations 

3. Deciding on suitable methods of production 

4. Setting quality standards 

5. Ensuring they are maintained

Resources 
1. Land – natural resources businesses require 

2. Labour – both manual and mental labour. Quality of labour highly influences the operational

success and maybe improved through training and motivation 

3. Capital – tools, machinery and other man-made resources required for production 

4. Intellectual capital – intangible assets of the business. Human capital – trained and

knowledgeable employees, structural capital – IT systems, relational capital – relations with

suppliers, customers

Production and productivity 

 Production is the absolute measure of the quantity of output that a firm produces in a given

time period 

 Productivity is a relative measure of how efficiently inputs are converted into outputs. 

 Labour productivity = total output/total employees 

 Capital productivity = output/capital employed

 Ways to raise productivity 
1. Improve training –

i. Increasing training will make the workforce more flexible and efficient. 

ii. But it is expensive and time consuming 

2. Improve motivation – 

i. Using Herzberg’s and Maslow’s theories workers motivation levels can be increased 

ii. This will increase productivity but may also be expensive to implement 

3. Purchase more machinery/technology –

i. Employing more machinery will allow the company to increase output and reduce the

amount of labour employed 

ii. Plus, it will ensure good quality and maximum efficiency 

iii. But it is expensive and labourers may be scared to lose jobs, reducing their motivation to

worker harder 

4. More efficient management –

i. Failure to purchase enough materials, poor schedules will reduce the efficiency of the

business

Is raising productivity always the answer?

 Higher productivity doesn’t guarantee success for a business

 Higher productivity may lead to higher wage demands, raising the firm’s costs of production

 Quality of management will determine the success of the policies implemented and thus the

success of a business 

 Effectiveness and efficiency are different. A product maybe efficient but not effective, leading

to its failure
 Efficiency and effectiveness
 Efficiency is producing output at the highest input to output ratio 

 Effectiveness is producing goods and services that satisfy customer needs and wants 

 Being effective involves meeting business’s corporate aims by satisfying consumer needs,

profitably

Labour intensive and capital intensive 

 Labour intensive is when there are more workers employed than machinery 

 Being labour intensive will allow firms to charge higher prices as it is hand-made and maybe

customised. It enhances brand image and loyalty. 

 But skilled workers are required and low chances for economies of scale

 Capital intensive is when there is more capital equipment employed relative to labourers 

 Being capital intensive will allow opportunities for economies of scale, lower unit costs. 

 But fixed costs will be high, cost of purchasing and maintaining the machinery is high. Also,

skilled employees and engineers will be required to operate the equipment. Also, technology

can quickly become outdated and obsolete

Factors influencing choice of resource

(labour VS capital)

1. Nature of product 

2. Prices of inputs

3. Size and ability of firm 

4. Intended image
 Operations Planning

Operations decisions
1. Link with marketing

i. Operations manager needs to know market demand forecasts to be able to match supply

and demand. This is known as operations planning.

ii. If sales forecasts are accurate:

a. Easily match supply to demand

b. Keep inventory levels to a minimum efficient level

c. Reduce wastage

d. Employee appropriate number of factors of production

e. Produce the right product mix

2. Availability of resources

i. Production of goods and services requires – land, labour, capital, raw materials

ii. Lack of these will influence operations decisions:

a. Location – locate in areas with abundant supply of materials

b. Nature of production method – if labour productivity is high, business may use labour

intensive production method

c. Automation – if technology is cheaper, business may decide to switch to automated

production method.

3. Technology

i. Technological developments like CAD and CAM have changed the production process

ii. They help the process become more efficient and cost effective
 CAD – computer aided design 
 It involves the use of computer programs to create 2D and 3D representations

 Benefits –

 Lower development costs 

 Higher productivity 

 Improved quality 

 Faster time-to-market 

 Good visualisation 

 Great accuracy

 Easy to make changes 

 Problems –

 Complex programs 

 Extensive employee training needed 

 Expensive

CAM – computer aided manufacturer 

 Using computers to control and operate machines

 Benefits –

 Reduced quality problems 

 Faster production 

 Higher productivity

 More flexible 

 Integration with CAD helps widen product portfolio 

 Limitations –
  Cost of machinery 

 Employee training required 

 Poor motivation – loss of job security 

 Hardware failure, halt production 

 Need for quality assurance or TQM

Need for flexibility and innovation 

 Flexibility is the business’s ability to vary production with changes in demand 

 Ways to increase flexibility –

 Increase capacity 

 Hold higher stocks 

 Have a flexible workforce 

 Flexible flow production equipment 

Process innovation
 It involves the use of new, advanced technology to improve production 

 Done through using CAM, CAD, robots, faster machines, computer tracking inventory

system, etc

 Gives a competitive edge

 Better quality

 Higher reputation and brand loyalty 

 Expensive

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Production methods 
1. Job production 

i. Producing a single, one-off item, specifically designed for the customer 

ii. It is labour intensive 

iii. Specific consumer needs are met, higher reputation and loyalty

iv. Specialised products are produced, ability to charge higher prices 

v. Cannot enjoy economies of scale 

vi. Expensive as requires skilled labour and training 

2. Batch production 

i. Producing products in separate groups where the entire groups goes through the production

process together

ii. Enables division of labour and specialisation 

iii. Economies of scale 

iv. Easy to alter batches according to demand and preferences 

v. High storage costs – work in progress inventory 

vi. Workers may get bored and demotivated

3. Flow production 

i. Producing products in a continuous process through the use of technology 

ii. Higher output 

iii. Economies of scale

iv. Consistent and standardised quality 

v. Low labour costs 

vi. High initial costs

vii. Lower job security 

4. Mass customisation 

i. It involves the use of computer aided production to meet specific customer needs at mass

production costs 

ii. Allows businesses to focus on differentiated marketing 

iii. Increases added value 

iv. Low unit costs 

v. Customer needs are met

 Production methods – making the choice 
1. Size of market – if the market is small, flow production can not be used, batch or job

production is more appropriate 

2. Amount of capital available – employing flow production is expensive and requires a high

initial capital investment. Small firms may not be able to afford this and therefore use job or

batch production 

3. Availability of other resources – using flow production requires a high supply of unskilled

workers and huge land area. Job production requires highly skilled workers. The chosen

production method may even depend on whether the company is able to allocate these

resources. 

4. Market demand exists for products adapted to specific customer requirements – if the

company wants low costs but has a differentiated target market, mass customisation is the

best option. 

Problems of changing production methods 

 Job to batch: high equipment costs, need for extra working capital and fall in employee

morale

 Job/batch to flow: high capital cost, costs of employee training, need for accurate demand

forecasts

Location decisions
Benefits of optimum location

 Characteristics of location decisions:

 Strategic (long term) in nature

 Difficult to reverse

 Taken by the highest management level

  The optimal location should help maximise long term profits of a business

 An optimal location:

 Balances fixed costs, customer convenience and potential sales revenue

 Balances quantitative & qualitative factors

Factors influencing location decisions

1. Quantitative factors –

i. Site and other capital costs 

ii. Labour costs – depends on whether it is a labour-intensive or capital-intensive business 

iii. Transport costs 

iv. Sales revenue potential 

v. Government grants 

2. Quantitative factors – 

i. Safety 

ii. Room for further expansion 

iii. Managers preferences

iv. Ethical considerations 

v. Environmental concerns 

vi. Infrastructure

NTechniques to assist location decisions 

1. Profit estimates – compare estimated revenues and costs to choose the location with the

highest profit potential. Only profit forecasts have limited use. They must be compared with

capital costs
 2. Investment appraisal – it involves looking at locations which will provide the highest potential

returns on investment over the years. One method is payback. This helps businesses who

face capital shortage. Need estimates of many years, which may not be accurate and bring

in uncertainty into the decision making  

3. Break-even analysis 

Other locational issues 

1. Pull of the market 

i. A company producing a product must be located near other companies producing similar

products as well 

2. Planning restrictions

3. External economies of scale

i. Cost reductions a business benefits when the industry grows in one area

Multi-site locations 
 A business which operates from more than one location.

International location decisions

 Offshoring is the relocation of a business process to another country to the same or another

business. 
 Reasons for international location decisions 
1. To reduce costs

i. Companies may switch to law wage countries or to countries with low raw material costs 

2. To access global markets 

i. Rapid economic growth in less-developed countries has created huge market potential 

3. Avoid protectionist barriers 

i. To avoid trade barriers like tariffs a company may have to relocate to another country 

4. Other reasons

i. Government grants 

Problems with international locations 

1. Language and communication barriers 

2. Cultural differences 

3. Level-of-service concerns – quality, reliability of delivery and control with suppliers may be

lost with overseas manufacturing 

4. Supply-chain concerns 

5. Ethical considerations

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Scale of operations 
 Scale of operations is the max output a company can achieve using the available inputs 

 Only increased by increasing all inputs (factors of production)

 Factors influencing scale of operations:

 Owner’s objectives

 Capital available 

 Size of market 

 Number of competitors 
  Scope for scale economies

Economies of scale
 Cost benefits arising with increased scale of operations

Types of economies of scale

1. Purchasing economies

i. Bulk buying economies

ii. Suppliers may offer discounts on bulk purchases

iii. They will want to keep large customers happy so may provide good quality goods and on

time delivery

2. Technical economies

i. High output will lower unit costs

ii. Fixed costs are spread across the output, lowering its output

3. Financial economies

i. Banks and other financial institutions will be willing to provide loans to larger businesses

ii. They may be willing to charge lower interest rates to them

4. Marketing economies

i. Costs of advertising and promotion maybe spread over a larger output, lowering unit costs

5. Managerial economies

i. Employing specialists and managers will be easier for large firms as their salary will be

spread over a larger output

Diseconomies of scale
 Factors which lead to a rise in average costs of production arising with increased scale of

operations beyond a certain size.

 Types of diseconomies of scale
1. Communication problems

i. In a large firm, the feedback provided will be poor

ii. The chain of command may be long leading to distortion of messages

iii. This may cause poor decision making

2. Alienation of the workforce

i. The bigger the organisation, the more difficult it becomes to involve every worker.

ii. They may feel demotivated due to lower job satisfaction

3. Poor coordination

How to avoid diseconomies of scale?

1. Management by objectives: This will help avoid coordination problems

2. Decentralisation: This gives divisions a considerable degree of autonomy and

independence.

3. Reduce diversification: Businesses that concentrate on ‘core’ activities may help to reduce

coordination problems and some communication problems.

Inventory Management
Inventory 

Materials needed for the production of goods and services. 

Types:

Raw materials 

Purchased from outside suppliers 

Work in progress 

Work in progress is any product which is not yet converted into finished goods. 

Depends on time period of production and production method used.

Finished goods 

Good ready to be sold to consumers

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Inventory management 

Without effective inventory management, there maybe many problems. 

Insufficient inventories to meet unforeseen changes in demand 

Out-of-date inventories maybe held 

Wastage due to incorrect storage conditions 

High storage and opportunity costs if extra inventory is held  

Poor management may lead to delayed deliveries, ignoring discounts, etc

Inventory holding costs 

Opportunity cost – working capital tied up in inventory could be used elsewhere. Higher interest
rates, higher the opportunity cost of holding inventory. 

Storage cost – inventories must be held in appropriate, safe conditions to avoid wastage. Higher
inventory, higher the storage costs  

Risk of wastage and obsolescence – if inventories are kept unused, they may become obsolete,
lowering the value of such inventories and increasing the business’s expenses 

Costs of not holding inventories

Lost sales – business may not be able to supply all customers, leading to loss of sales and revenue 

Idle production resources – if raw material inventories run out, expensive equipment and workers
will be left idle, leading to loss of output and wasted resources.

Special orders could be expensive – urgent orders given to suppliers may lead to extra delivery,
administration costs 
Small order quantities – higher average costs as the company will not benefit from economies of
scale

Optimum order size 

Operations managers must ensure they have enough stocks to allow for smooth production. 

Operations managers usually order their inventories on the basis of the Economic Order Quantity
(EOQ)

EOQ is the optimum inventory level where the costs incurred are minimum (both re-ordering costs
and stock-holding costs)

The reorder costs decrease as the order size increases, showing a downward sloping graph. 

Whereas, the stock-holding costs increase as the order size rises, showing an upward sloping graph. 

The Economic Order Quantity is shown where the stock-holding costs and re-order costs curves
intersect.

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Inventory control graphs 

Inventory-control graphs record the buffer inventories, maximum inventory.

They help in determining the right order time and quantity.

Buffer inventory – minimum inventory held to deal with delays in delivery and unforeseen demand
changes 

Maximum inventory level – the maximum quantity of inventory the company can hold, space and
financial terms 
Reorder quantity – the number of units ordered each time

Lead time – time taken for the supplier to deliver the raw materials 

Reorder stock level – the level of inventory which will trigger a new order 

The maximum inventory is 60000 units. The buffer inventory level is 10000 units and the reorder
level is 20000 units. The reorder quantity is 50000 units (60000-10000)

Just in time (JIT) inventory control 

It is an inventory control system which avoids the need to hold inventories. They arrive just as and
when required 

Requirements for JIT 

Excellent relations with supplier 

Flexible and multiskilled production staff 

Flexible equipment and machinery 

Accurate demand forecasts 

Latest IT technology 

Excellent employee-employer relations 

Quality must be priority 

Advantages and disadvantages 

JIT evaluation 

JIT requires employees to be accountable for their performance and suppliers to be reliable 

JIT may be unsuitable when:

Costs of halting production exceed inventory holding costs 

Expensive IT systems cannot justify potential cost savings 

Global inflation makes holding inventories cheaper

Business Finance
Why does a business require finance?

To buy machinery, capital equipment while set-up of the business. It is called start-up capital

To fund its day-to-day expenditure. It is called working capital

While business expansion 

Needed to merge/acquire other businesses

Unforeseen expenses and difficulties 

Fund research and development

Capital expenditure 

Long term spending (more than one year) like purchase of assets 

Revenue expenditure 

Short term, day-to-day expenditure like wages, salaries, insurance

Working capital 

It is the finance required to pay for day-to-day expenses

It is the lifeblood of the business 

Without sufficient working capital, a business will become illiquid (cannot repay its short-term
debts) 

Working capital = current assets - current liabilities 

How much working capital is required?

Too high of working capital leads to opportunity cost of too much capital being tied up and can be
used elsewhere 

Working capital requirement of a business is determined by its working capital cycle 

Longer the cycle, greater the amount required

Internal sources 

Profits retained in the business 

The retained earnings of a business can be used as a source of finance to fund expansion, purchase
of assets 

These do not have to be repaid and are a permanent source of finance 

But they may not be enough and new businesses may not have this option

Sale of assets 
Assets which are no longer needed/fully employed can be sold in order to get funds

It will help raise permanent capital for the business

They can be sold to a leasing company and leased back for business use. But, through this fixed cost
will rise 

Also, these assets could have been used as collateral or be used during future expansions

Reductions in working capital  

Lowering the amount tied up in working capital may free up some money to be used elsewhere

It will help reduce the opportunity cost of tying up money in current assets like inventories and trade
receivables 

But this may negatively affect the company’s liquidity position, affecting stakeholders like potential
investors, bankers, etc.

External sources 

Short term sources

Bank overdrafts 

Most flexible 

The bank allows the business to overdraw its account 

High interest rates 

Bank can ask the business to repay anytime 

Trade credit 

The business can lower the credit period provided to trade receivables and ask for greater period
from trade payable 

Customers may switch to competitors if they provide greater credit period 

Suppliers may not provide discounts 

Debt factoring 

This involves selling of a company’s trade receivable claims to a debt factor for immediate money 

Lowers risk for the business 

Full amount is not given

Medium-term sources 

Hire purchase 

It is a way of purchasing an asset for credit where money is paid in instalments over the time 

It helps avoid large initial cash payment 

Ownership of asset is obtained 

Leasing 

It allows a business to obtain the use of an equipment by paying a fixed rental charge, instead of
buying the asset 

Leasing company is responsible for maintenance and repairs 

No ownership is gained, can’t be used as collateral during bank loans 

Medium-term bank loan

Long term sources 

Long-term bank loans 

Maybe given for fixed/varying interest rates 

Fixed provide greater certainty but maybe more expensive

Companies will have to provide collateral/security to obtain the loan 

They require a business plan and cash flow forecast 

Debentures 

A company can issue bonds to potential investors and pay a fixed rate of interest for the life of the
bond

No collateral security is required

Sale of shares – equity finance

Limited companies issue shares when first formed and use it to purchase necessary assets

They can sell shares anytime required up to a limit of their authorised capital

It is a method of permanent finance

Way to sell shares:

Public issue by prospectus: company advertises its share sale and invites interested people to apply
for them. It is very expensive

Arranging a placing of shares with institutional investors without the expense of a full public issue:
this is done by the means of a rights issue. The short-term share price falls which reduce
shareholder’s confidence

Debt or equity capital – evaluation 

Debt finance benefits:

Ownership is not diluted 

No permanent increase in liabilities as the loans will be repaid 

Lenders have no voting rights 

Interest is paid before corporation tax 

Equity benefits:
Never needs to be repaid 

Dividends must be paid whenever the business has enough profits

Other sources of long-term finance 

Grants 

Grants may be given with certain conditions up on number of jobs, location, etc 

They do not need to be repaid 

Venture capital

It is the risk capital invested by wealthy individuals in business start-ups which have good profit
potential but can’t find other sources of finance 

Venture capitalists provide advice for the business owners 

But they may expect a part of ownership in the business

Finance for unincorporated businesses 

Unincorporated = sole trade & partnership 

Cannot raise finance from the sale of shares 

Unsuccessful in raising finance through sale of debentures 

Sources of finance –
 Overdrafts
 Loans 
 Credit from suppliers 
 Borrow from friends and family 
 Own savings 
 Grants 
 Crowdfunding 
 Microfinance
 Microfinance 
 Involves selling financial services to poor, low-income customers or small businesses who do
not get finance from banks 
 High interest rates 
 Crowd-funding 
 Crowdfunding websites allow entrepreneurs to promote their business and encourage
individuals to each invest a small amount 
 Effective form of promotion 
 Investors may expect a return on investment 
 Investors, when the business is successful will receive: initial capital plus interest, equity
stake in the business
 Must keep accurate records of thousands of investors 
 Increased risks of idea being copied
Importance of business plan 
Business plan is a detailed document giving information about a business to convince external
stakeholders to lend money to the business 

Helps gain loans and credit facilities 

Helps lower risks’

Financial Stakeholders

Costs
Uses of cost information

Helps calculate accurate profit and losses, calculate profitability, liquidity 

Helps make informed pricing decisions – marketing department 

Allows comparisons to be made, identify cost cutting techniques and implement required strategies 

Help set future budgets 

Managers can make decisions about resource allocation 

Help in decision making

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Classification of costs 

Direct costs – costs which can directly be identified with one unit of output. Ex. raw materials

Indirect costs – costs which can not be directly identified with one unit of output. Ex. rent

Fixed costs – costs which do not change with output in the short run. Ex. rent, insurance 

Variable costs – costs which vary directly with the output. Ex. raw materials, wages 

Marginal costs – cost of producing one extra unit of output

Break even analysis 

Break even point is where neither profit nor loss is made. Total revenue = total costs 

Below the break even point, a business makes losses and above the break even point the business
makes profits 

Margin of safety 

The amount by which current sales level exceeds the break-even point 

Indicates how much sales could fall without the firm going into losses 

Break even equation 

Break-even level of output = fixed cost/contribution per unit 

Contribution per unit = selling price – variable cost per unit 

Break even analysis – uses 

Easy to construct and interpret 

Managers can redraw the graph to see effect of changes in costs and prices on profits and break-
even points 

Helps in decision making 

Gives information relating the margin of safety 

Break even analysis – evaluation 

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

Not all costs can be classified between fixed & variable 

No allowance for inventory levels 

Unlikely that fixed costs remain unchanged throughout

Accounting Fundamentals

Accounting concepts and conventions

Double-entry principle

Every transaction has 2 effects – debit and credit

Accruals
All prepayments and overdues must be recorded in the books of accounts

Money-measurement principle

Only items with a monetary value should be recorded

Conservatism – prudence concept

Accountants should provide for all losses but never anticipate a gain

Realisation concept

Revenue and profits should only be recorded when the legal title of the goods is transferred.

Income statement 

A record of the company’s profits, revenue and expenses over a given time period 

Trading account – shows gross profit and cost of sales 

Profit and loss account – shows overall profit and overhead expenses 

Appropriation account – shows dividends and retained earnings 

Uses of income statement 

Measure and compare the performance with competitors or over time 

Actual profit can be compared with estimated profit 

Banks & creditors need the information to decide whether or not to lend the business 

Prospective investors assess the level of risk and earnings on investment 

Low quality & high-quality profit is identified

Statement of financial position 

Records a business’s assets, liabilities and capital at a certain point of time 

Sources of shareholder’s equity:

Selling of shares – share capital 

Retained earnings of a company

Non-current assets 

Assets kept for long term use

Ex. land, machinery

Intangible assets – goodwill, copyrights, patents

Current assets 

Short term assets which can easily be turned into cash 

Ex. trade receivables, cash, bank balance, inventory 

Current liabilities 
Short term debts 

Ex. overdrafts, trade payables 

Working capital

Current assets – current liabilities 

Shareholder’s equity 

Share capital + retained earnings 

Non-current liabilities 

Long term debts 

Ex. loans, debentures, bonds

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Other published accounts 

Cash-flow statement – 

Focuses on the cash available in the business

Includes a company’s cash inflows and outflows over the year 

Chairman’s statement –

General report about the company’s major achievements and future plans 

Chief executive’s report –

More detailed analysis of the previous year

Auditor’s report 

Notes to accounts

Profitability ratios

Gross profit margin – compares gross profit with revenue. How successful the company is in
maintaining its cost of sales

Gross profit margin = gross profit/revenue * 100

Operating profit margin – compares operating profit with revenue. How successful is the company in
maintaining its overhead costs?

Operating profit margin = operating profit/revenue * 100

Liquidity ratios 

Current ratio 

Current assets/current liabilities G

Safe ratio between 1.5-2

Depends on the industry 

Acid test ratio/quick ratio 

Current assets – inventory/current liabilities

Safe ratio between 1-
1.5 

Limitations of ratio analysis 

Incomplete analysis 

Limited use on its own. Must be compared with other business or over time 

Some may be window dressed 

Ignored qualitative information 

Only provides the problem, doesn’t suggest solution

Users of accounting information 

Managers 

Measure business performance

Compare against targets, previous time periods and competitors

Assist in decision making 

Control and monitor the operation of each department

To set targets or budgets for the future and review these against actual performance.

Banks:

To decide whether to lend money to the business

To assess whether to allow an increase in overdraft facilities

Creditors, such as suppliers:

To see if the business is secure and liquid enough to pay off its debts

To assess whether the business is a good credit risk

To decide whether to press for early repayment of debts.

Customers:

To assess whether the business is secure

To determine whether they will be assured of future supplies

To establish whether there will be security of spare parts

and service facilities.

Government and tax authorities:

To calculate how much tax is due from the business

To determine whether the business is likely to expand and create more jobs and be of increasing
importance to the country’s economy

To assess whether the business is in danger of closing down,

creating economic problems

To confirm that the business is staying within the law in terms of accounting regulations.

Investors, such as shareholders in the company:

To assess the value of the business and their investment in it

To determine what share of the profit’s investors are receiving

To decide whether the business has potential for growth

If they are potential investors, to compare these details with those from other businesses before
making a decision to buy shares in a company

If they are actual investors, to decide whether to consider selling all or part of their holding.

Workforce:

To assess whether the business is secure enough to pay wages and salaries

To determine whether the business is likely to expand or be reduced in size

To determine whether jobs are secure

To find out whether, if profits are rising, a wage increase can be afforded

Local community:

To see if the business is profitable and likely to expand, which could be good for the local economy

To determine whether the business is making losses and whether this could lead to closure.

Limitations of published accounts 

Future plans 

Performance of each department/division 

Company’s effect on the environment 

Research & development plans 

Accuracy of published accounts 

Window dressed accounts 

Done to influence stakeholders to lend money/invest.

Accounting Fundamentals
Accounting concepts and conventions

Double-entry principle

Every transaction has 2 effects – debit and credit

Accruals- All pre

payments and overdue must be recorded in the books of accounts

Money-measurement principle

Only items with a monetary value should be recorded

Conservatism – prudence concept

Accountants should provide for all losses but never anticipate a gain

Realisation concept

Revenue and profits should only be recorded when the legal title of the goods is transferreI I d.

Income statement 

A record of the company’s profits, revenue and expenses over a given time period 

Trading account – shows gross profit and cost of sales 

Profit and loss account – shows overall profit and overhead expenses 

Appropriation account – shows dividends and retained earnings 

Uses of income statement 

Measure and compare the performance with competitors or over time 

Actual profit can be compared with estimated profit 

Banks & creditors need the information to decide whether or not to lend the business 

Prospective investors assess the level of risk and earnings on investment 

Low quality & high-quality profit is identified

Statement of financial position 

Records a business’s assets, liabilities and capital at a certain point of time 

Sources of shareholder’s equity:

Selling of shares – share capital 

Retained earnings of a company

Non-current assets 

Assets kept for long term use

Ex. land, machinery

Intangible assets – goodwill, copyrights, patents

Current assets 

Short term assets which can easily be turned into cash 

Ex. trade receivables, cash, bank balance, inventory 

Current liabilities 

Short term debts 

Ex. overdrafts, trade payables 

Working capital

Current assets – current liabilities 

Shareholder’s equity 

Share capital + retained earnings 

Non-current liabilities 

Long term debts 

Ex. loans, debentures, bonds

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Other published accounts 

Cash-flow statement – 

Focuses on the cash available in the business

Includes a company’s cash inflows and outflows over the year 

Chairman’s statement –

General report about the company’s major achievements and future plans 

Chief executive’s report –

More detailed analysis of the previous year

Auditor’s report 

Notes to accounts

Profitability ratios

Gross profit margin – compares gross profit with revenue. How successful the company is in
maintaining its cost of sales

Gross profit margin = gross profit/revenue * 100

Operating profit margin – compares operating profit with revenue. How successful is the company in
maintaining its overhead costs?
Operating profit margin = operating profit/revenue * 100

Liquidity ratios 

Current ratio 

Current assets/current liabilities 

Safe ratio between 1.5-2

Depends on the industry 

Acid test ratio/quick ratio 

Current assets – inventory/current liabilities

Safe ratio between 1-1.5 

Limitations of ratio analysis 

Incomplete analysis 

Limited use on its own. Must be compared with other business or over time 

Some may be window dressed 

Ignored qualitative information 

Only provides the problem, doesn’t suggest solution

Users of accounting information 

Managers 

Measure business performance

Compare against targets, previous time periods and competitors

Assist in decision making 

Control and monitor the operation of each department

To set targets or budgets for the future and review these against actual performance.

Banks:

To decide whether to lend money to the business

To assess whether to allow an increase in overdraft facilities

Creditors, such as suppliers:

To see if the business is secure and liquid enough to pay off its debts

To assess whether the business is a good credit risk

To decide whether to press for early repayment of debts.

Customers:

To assess whether the business is secure

To determine whether they will be assured of future supplies

To establish whether there will be security of spare parts

and service facilities.

Government and tax authorities:

To calculate how much tax is due from the business

To determine whether the business is likely to expand and create more jobs and be of increasing
importance to the country’s economy

To assess whether the business is in danger of closing down,

creating economic problems

To confirm that the business is staying within the law in terms of accounting regulations.

Investors, such as shareholders in the company:

To assess the value of the business and their investment in it

To determine what share of the profit’s investors are receiving

To decide whether the business has potential for growth

If they are potential investors, to compare these details with those from other businesses before
making a decision to buy shares in a company

If they are actual investors, to decide whether to consider selling all or part of their holding.

Workforce:

To assess whether the business is secure enough to pay wages and salaries

To determine whether the business is likely to expand or be reduced in size

To determine whether jobs are secure

To find out whether, if profits are rising, a wage increase can be afforded

Local community:

To see if the business is profitable and likely to expand, which could be good for the local economy

To determine whether the business is making losses and whether this could lead to closure.

Limitations of published accounts 

Future plans 

Performance of each department/division 

Company’s effect on the environment 

Research & development plans 

Accuracy of published accounts 

Window dressed accounts 

Done to influence stakeholders to lend money/invest

Enterprise

Purpose of Business Activity

Businesses aim to add value to raw materials and semi-finished goods in order to satisfy needs and
wants. This helps raise living standards of the economy as businesses will employ people for
production.

Factors of production

Land - all natural resources used in production

Return for land is “rent”

Labour - both manual and skilled work

Return for labour is “salary” or “wages”

Capital - finance that is needed to set up and run the business as well as man made goods used in
production (ex. machinery). These are known as capital goods.

Return for capital is “interest”

Enterprise - the driving force that arranges all other factors of productions and takes the risk of the
new business venture

Return for enterprise is “profit”

Added value

Added value = selling price - cost price

Added value is not the same as profit

How to increase added value

Increase selling price by providing higher quality goods (higher quality raw materials), increasing
advertising, changing packaging, making small improvements in the product.

Decrease cost price by reducing wastage through lean production methods, find cheap supplies,
reduce quality of the product, increase efficiency by training workers and using advanced
technology.

 
Scarcity

It occurs as there are limited resources and unlimited wants.

Due to the existence of scarcity, people are forced to make a choice

Opportunity cost is the next best alternative forgone

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Entrepreneur

The role of an entrepreneur

Produce a business idea

Invest their own capital

Accept responsibility of running and managing the business

Accept the risks of failure

Characteristics of an entrepreneur

1.  Innovation

2.   Commitment

3.  Self-motivation

4.  Multiskilled

5.  Leadership skills

6.  Communication skills

7.  Self-confidence

8.  Ability to bounce back

Challenges faced by entrepreneurs

Identifying successful business opportunities:

Entrepreneurs need to find markets which have enough demand in order to be profitable

People get their ideas from:

Own skills

Previous employment
Small-budget market research

Sourcing finance:

Entrepreneurs face financial issues due to:

Lack of own finance

Lack of awareness of grants and subsidies

Lack of trading records in order to receive loans from bank

A poor business plan

Determining a location:

An entrepreneur will have to decide the best location keeping in mind costs, potential target market,
status of area, etc.

Competition

Building a customer base:

For a firm to survive it must build customer loyalty and brand image.

Businesses can do this by:

Offering pre and after sales services

Providing discounts and other sales promotions

Providing goods that meet specific needs (which a large firm will be reluctant to do)

Why do new businesses fail?

Lack of record keeping

Lack of cash and working capital:

Working capital is the capital needed to run the day-to-day business

Ways to avoid working capital shortage:

Make a cash flow forecast

Inject more capital into the business

Establish good relations with bank

Use effective credit control with customers

Poor management skills:

Essential skills to avoid management problems:

Leadership skills

Cash handling and cash management skills

Planning and coordinating skills

Decision-making skills

Communication skills

Marketing, promotion and selling skills

Changes in business environment:

A few changes include:

New competitors

Legal changes

Economic changes

Technological changes

Why may businesses fail in early stages?

Internal problems – 

Weak business idea

Lack of managerial skills 

Lack of suitable employees

Lack of sufficient finance 

Lack of entrepreneurial skills 

Poor initial research

Over ambitious ideas 

Poor decisions 

External problems –

Anticipated customers did not materialize 

Changes in business environment affected customer’s spending patterns 

Unexpected competition

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Types of entrepreneurial businesses

Primary sector – extracting materials like fishing and coal mining 

Secondary sector – manufacturing sector like craft manufacturing 

Tertiary sector – service sector like hairdressing

Impact of enterprise on an economy

Employment creation

Economic growth 
Firm’s survival and growth 

Innovation and technological change 

Exports 

Personal development 

Increased social cohesion

Social enterprise 

Features:

Directly produce goods and services

Have social aims and ethical ways of producing them

Need to make a surplus 

Objectives:

Social 

Economical               

Environmental 

Together known as triple bottom line

Business Structure

Classification of business activity 

Primary sector – extracting natural resources. E.g. fishing, mining 

Secondary sector – manufacturing sector. E.g. car manufacturing, clothes-making 

Tertiary sector – service sector. E.g. banking, transportation

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Changes in business activity 

The importance of each sector changes as the economy develops. The importance of each sector is
measured by employment levels or output levels. 

Industrialisation is when the importance of secondary sector rises. This occurs in developing
countries like India and China 

Advantages Disadvantages
It increases the GDP if the country, helping Causes a huge movement from rural to urban areas,
raise living standards. causing social and housing problems.
It increases the employment opportunities Imports of raw materials will increase, increasing
available import costs.
Increases exports and reduces imports. Manufacturing industries growth is usually occurred
due to growth of MNCs
Firms will be more profitable, increasing
tax revenue
Manufacturing sector goods have more
value than primary sector goods.

De-industrialisation occurs when the importance of secondary sector declines. It occurs in developed
countries like USA, UK.

As a country develops, the average income per person increases. Rising incomes lead to increasing
living standards as consumers will be able to spend more on services than goods, showing demand
for services rises more quickly than physical goods

As the world industrialises, more and more manufacturing businesses enter the market, increasing
the competition and causing prices to fall. This makes it easier for developed countries to buy these
goods rather than producing it themselves.

Public and Private Sector

Public sector – firms controlled and managed by the government/local authority.

Private sector – firms controlled and managed by individuals.

Types of Economies

Free market economy – only private sector and no government intervention.

Mixed economy – both private and public sectors. Governments and individuals make decisions
together. Governments usually offer essentials like health care and education.
Command economy – economies that have only the public sector.

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Sole trader

These are businesses owned by one person

The one person owns and controls the business.

It has no formal legal structure as business and owner are considered one and the same.

Advantages Disadvantages
Easy to set up and manage Limited finance (capital)
Owner has complete control Unlimited liability
Ability to choose working times May face intense competition
Easy to establish relations with employees and customers Unable to specialise
Freedom of making own decisions Lack of continuity
Insufficient skills
Partnership

It is a business owned by a group of individuals

Advantages Disadvantages
Each partner may specialise in different areas Unlimited liability
Shared decision-making Profits are shared
Additional finance (capital) injected by each owner Risk of conflicts
Losses are shared No continuity
Fewer legal formalities
Limited companies 

Features:

Limited liability – each shareholder will only lose the amount invested if the business/idea fails 

Legal personality – the company has a separate legal identity from its owners/shareholders

Continuity – even after the death of a shareholder, there is no need for dissolution.

Private limited companies 

It is a business owned by shareholders who are friends and family

Advantages Disadvantages
Limited liability High legal formalities
Separate legal identity  Can’t sell shares to public 
Continuity Difficult to sell shares
Original owner will be able to retain Have to send accounts to companies’ house – less
control  secrecy 
Ability to raise capital from sale of shares
Higher status 
Public limited company

These are businesses which have legal rights to sell shares to the public. 
 Advantages Disadvantages
Limited liability High legal formalities
Separate legal identity Cost of hiring specialists
Continuity High fluctuation in share prices
Easy to buy and sell shares Less secrecy
Access to substantial capital sources due to the right High risks of takeover
to issue prospectus (flatation)
Directors influenced by short term
objectives of major investors
Legal formalities in setting up a company 

Memorandum of association – name, address, contact number, maximum share capital, declared
aims

Articles of association – name of director, procedures to be followed

These documents must be submitted to the ‘registrar of companies

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Other forms of business organisation 

Cooperatives 

These are organisations owned by their members 

Features:

All members contribute to running and managing 

All members have a say in important matters 

Equally shared profits 

Advantages –

Buying in bulk

Working together to solve problems 

Good motivation 

Disadvantages –

Poor management skills 

Capital and finance shortage 

Slow decision making 

Holding companies 

A business which owns and controls many different companies, but is not unified as one

Joint ventures

When 2 or more businesses agree to join for one project 

Reasons:
Shared costs and risks

Different companies’ different strengths 

Together more powerful 

Risks:

Conflicts 

Errors or mistakes 

Business failure of one partner, risk the whole project.

Franchise

A business which uses the name, logo, trading methods of an existing successful business

They have a legal agreement to do so

To the franchisor

Advantages Disadvantages
Guaranteed income from Poor management of one business, affecting reputation of
franchisee all
Easy, risk-free way of expansion Potential management issues
Easy to manage Difficult to monitor
Still have some control

Advantages Disadvantages
Lower risks as business is established Proportion of revenue sent to
franchisor
Advice, training, supplies and advertising obtained by Rigid business model already made
franchiser
Economies of scale Potential loss of large investment
Access to experts Expensive initial fee
Franchiser won't open another outlet in the same area
Public-sector enterprises – public corporations

Known as public corporation

In the public sector

Profit is not their main aim

Advantages Disadvantages
Managed with social objectives rather than High chances of inefficiencies
profit
Still operate, even if making a loss Subsidies may encourage inefficiency
Finance raised from government Government may interfere in business
decisions
Size of Business
Different methods of measuring size

Number of employees 

The size is measured upon the basis on number of workers employed. 

Problems- a firm may be capital intensive, making this method insubstantial.

Revenue 

Used to compare businesses of same industry

Depends on the total value of sales made. 

Problem – less effective when comparing high-value and low-value firms. 

Capital employed 

Depends on the total value of long-term finance available in the business

Problem – can’t be used to compare firms in different industries

Market capitalisation 

Market capitalisation = current share price * total number of shares issued

Limited to public limited companies 

Problem – share prices change on a daily basis making the comparison unstable

Market share 

Market share = total sales of business/total sales in industry * 100 

Problem – if the total market is small, results will not be accurate

Measuring business size

Best form of measurement

No ‘best’ measure 

To choose which method to use, we need to known if we are interested in absolute size or
comparative size. 

Absolute size – test using at least 2 criteria and make comparison

Problems while measuring businesses:

There are many different methods to measure business size and each method gives us different
answers.

There is no internationally agreed definition on the size of a business.

Small and micro-businesses

Significance of small and micro-businesses

Benefits of encouraging development of small and micro-businesses:

Many jobs created as small businesses won’t have funds to buy capital equipment

Often run by dynamic entrepreneurs. Provides greater variety

Will create competition for large businesses. Discourage monopoly

May provide specialist goods or necessities

Helps them grow and become large

Will have lower costs as no diseconomies of scale

Government assistance for small businesses

Governments may provide assistance to small businesses in the form of:

Reduced rate of tax

Loan guarantee scheme

Information, advice, support

Aid designed to overcome specific problems like:

Lack of specialist management expertise

Problems raising finance

Marketing a limited product range

Finding cost-effective premises

Small and large businesses

Advantages

Small Business Large Business

Managed and controlled by owners Ability to employ specialists
Flexible - adapt quickly to changes in demand Can conduct through market research
Personal contact with employees and Diversified risks
customers
Offer personal service Ability to sell at lower prices
Economies of scale

Disadvantage

Small Business Large Business

Limited access to finance Diseconomies of scale
Not diversifies, high risks Divorce between ownership and management
Few economies of scale Conflicts
Unable to afford Poor communication, slow decision making
specialists
Difficult to manage and control
Business growth

Reasons for growth –

Increased profits

Increased market share

Economies of scale

Lower risks

Increased power and status

Ability to be more competitive

Increase value of business

Easy to access new target groups and markets

Internal growth

It is expansion by expanding the existing operations

It is cheap

Avoids takeover problems

Takes long time for results

Limited extent of growth

May not receive the desired outcome

Ways for internal growth: -

Enter new markets

Increased marketing activities

Increase investment

Use newer techniques to produce more efficiently

Family business
These are businesses which are owned and managed by at-least 2 family members.

Strengths Weaknesses
Commitment - family owners will show more Success/continuity problem - there might
dedication towards their work be failure within the family causing the
failure of the entire business.
Knowledge continuity - families ensure they Informality - there may be many
pass on the business knowledge to the next inefficiencies and internal conflicts as
generation allowing experienced and skilled personal and professional life is not
managers. separate
Reliability and pride - as the family business Nepotism may lead to inefficient
will have their name and reputation, they try management
to improve quality at all times.
Traditional - they are reluctant to change
(inflexibility)
Conflicts - Family problems may affect
business management
9609/22/O/N/20
Q1 Energy Solutions

a)i) Revenue is the total income earned by a business from the sale of goods and services in a given
time period

ii) Unit costs are the expenses incurred by a business to produce a single product.

Unit costs = total costs/output

b)i) Director = 0.25/100*12

= $0.03m

Manager = 0.1/100*12

= $0.012m

Difference = 0.03 - 0.012

= $0.018m

ii) Using a profit sharing scheme will lead to reduced retained earnings for ES as a greater proportion
of the profits is distributed between employees and shareholders. This means that ES will have to
greatly depend on external sources of finance to invest in their expansion plans of opening new
fracking sites and buy licences worth $50m for the same.

Q1 Energy Solutions

c) To purchase a fracking licence, ES can use a variety of internal and external sources of finance like
retained earnings, sale of assets, debentures, equity capital, bank loans, etc.

One internal source of finance may be retained earnings. As ES has been operating for 25 years and
had 12m in 2018 it is likely to have enough retained earnings to invest in buying licences worth 12
million 2018 It is likely to have enough retained earnings to investing buying licences worth 50
million. Using retained earnings means they are available immediately, allowing ES to quickly
increase supply of energy, leading to high sales and profits. Also, ES will not have to repay this
money or pay any interest on it, allowing them to raise finance without increasing their debts and
liabilities. But, doing so, has an opportunity cost. ES could’ve used this money elsewhere, perhaps to
buy machines and other capital equipment which may be required in the new fracking sites.

ES can even sell shares as a source of external finance to raise money to buy licences worth $50m. As
it is a public limited company, ES can sell shares to the general public, making it easier to raise
finance. Also, as it is an already established business, running for 25 years, it may not have to spend
much on advertising about the shares. Furthermore, it is a permanent source of finance and ES does
not have to repay it or pay any interest on it. But, shareholders will expect dividends each year, in
return for investing in the company. Also, there will be a further delusion of ownership in the
company leading to a loss of control for the original owners of ES.

Q1 Energy Solutions 

d) Stakeholders are people who are affected by and therefore have an interest in all activities made
by a business. 

 One stakeholder who will be heavily affected by the continuation of the fracking process is the local
community. As ES is planning to open newer fracking sites, people in the local community may get
more jobs, increasing the average income and living standards in the area. But, they will have to
suffer minor earthquakes, making it difficult for them to live. Furthermore, it  is leading to a fall in
the prices of houses near the fracking sites, meaning their houses are worth less than the actual
rate. It is even causing pollution, worsening the health and living standards of people living near the
fracking sites. 

Another stakeholder that may be affected by the continuation of the fracking process are customers.
As fracking sites are increasing, country X is becoming self-sufficient leading to lower energy prices
for consumers and other businesses. This increases consumer purchasing power and allows them to
increase spending. It even lowers the average cost of living in country X. but, its effectiveness
depends on whether ES and its competitors lower the prices or continue to charge high, premium
prices. 

Overall, the local community will be greatly affected by the continuation of the fracking process.
Unless fracking companies like ES become more sustainable and find ways to reduce pollution and
earthquake problems, the local community will continue to be negatively affected by the process.

Q2 Gemini Theatre (GT)

a)i) Cost based pricing involves adding a fixed mark-up to the total cost of the product, to account
for profit

ii) Cash is the money available to the business to pay for daily expenses, whereas profit is the
difference between revenue and costs. Cash is needed to survive, but a business can survive without
profits

b)i) 40 * 250 = 10000

10000 * 9 = 90000

50% * 90000 = $ 45000

ii) Renting the theatre to other visiting groups allows GT to reduce the total risks of running the
theatre. It allows GT’s fixed costs like rent, insurance to be spread over a wide variety of
performances. This, further, allows GT to remain liquid, if demand for any one of their performances
falls
Q2 Gemini Theatre (GT)

c) Demand is the willingness and ability of a customer to buy a certain quality of a product within a
given time period. One main factor affecting the demand for performances at GT’s theatre may be
the price of each ticket. If the ticket is too expensive when compared to competitors, demand for
NKGT’s performances may fall. For ex. the Wise Owl performance may be of higher price than a
similar performance at competing theatre, due to which it is only 60% sold. One main reason for
GT’s uncompetitive pricing may be its pricing method. They use cost-based pricing and add a 50%
mark-up which may lead to higher prices. 

Another factor affecting demand for GT's performances may be the income of potential customers.
Visiting a theatre may be considered as a luxury service, so even a small fall in incomes will
drastically reduce i

ts demand as consumers' purchasing power will reduce. But, if incomes in the economy are rising,
people will have a greater disposable income for spending on luxury and leisure goods and services,
leading to increased demand for performances at GT’s theatre.

Q2 Gemini Theatre (GT)

d) in order to fill the theatre manager position, GT can employ either Nick or Portia. Recruiting Nick
may be beneficial for GT as he already has experience in working in the theatre business, meaning
GT will not have to spend much on training Nick. Furthermore, Nick has A levels in business, allowing
him to find ways to manage and overcome the cash flow problems GT is facing. Also, it will allow him
to easily take up the accounting task GT requires. Plus, hush A levels in Art and Chinese may further
help Nick talk to and attract a wider variety of customers and performing groups, helping lower risks.
This will further help increase sales and profits and can be used as its USP while promotion and
product differentiation. But, Nick has no management experience so he may require someone to
supervise and guide him. Also, he may make poor decisions which could lead to the failure of GT. he
may not be able to successfully tackle the cash flow problem GT is experiencing. Moreover, Nick has
plans to move abroad in future meaning GT will have to find a replacement for Nick in the near
future, adding to their recruitment and training costs. 

GT can even employ Portia for the theatre manager position. Portia already has 8 years of
experience as a manager making it easier for her to manage GT and overcome its cash flow
problems. Also, as she was the manager of the bank, she is likely to have good people skills, making
it easier for her to attract more customers and performing groups to GT. Also, her good sense of
humour may make it easier for people to work with her, attracting more customers. This will lead to
increased sales and revenue for GT, leading to higher dividends to all shareholders. Furthermore,
unlike Nick she is looking for a long-term career encouraging GT to employ her as they may not have
to find a replacement for her and suffer recruitment costs. But, Portia has no experience in working
at a theatre, due to which training costs will rise GT may have to use induction and off the job
training for Portia so that she’s fully aware about her duties, adding to higher costs for the business.
Also, she was late for the interview, which may indicate that she’s not organised. This may be a
problem for GT as in order to successfully manage the theatre, a person must be organised.
Overall, Nick may be a better employee for GT as he has experience in the industry which is more
important than his personality. Also, he may be a better choice as they do not have enough cash
flow to fund training programs.

9609/12/O/N/20
Section A

1a. Branding is a marketing activity which involves establishing a unique name, logo or symbol of the
product which helps differentiate it from its competitors.

1b. Establishing a brand will help a business establish its USP and add greater value to their product.
This helps the business gain a competitive edge and maximize customer satisfaction, helping
increase sales and profits. Also, establishing a brand aids in customer recognition and perception as
it helps create a distinctive, luxury image in consumer’s minds. This leads to an improvement in the
company’s brand image and loyalty, further helping increase sales and market share.

  

2a. Gross profit margin is a measure of how effective the business is in turning its revenue into gross
profit and maintaining its cost of sales.

Gross profit margin = Gross profit/revenue * 100

2b. A business can improve its profit margin by reducing its costs of sales. This can be done by
finding cheaper raw material sources, helping lower total inventory costs and improving the profits
earned by the business. The business can even improve its profit margin by increasing the price it
charges but ensuring its costs remain constant. This may be done by increasing the quality of the
product by improving customer service. This will help increase total revenue earned, helping
improve profits and profitability margins.

3a. A private limited is a small to medium sized business whose shares can only be sold to friends
and family members. Whereas, a public limited company has the ability to sell shares to the public. A
business may not want to switch to a public limited company as there is greater risk as any business
can easily take over the firm by having enough shares of the company as they are available on the
stock exchange. Also, switching into a public limited company is expensive as the business will have
to issue a prospectus and float on the stock exchange. The business may not have enough finance to
fund this expansion, encouraging them to remain as a private limited company. Furthermore,
switching to a public limited company means that there will be divorce between ownership and
management. This means that the original owners will have a lesser say in the business’s decision
making and may have to forgo its control as a separate board of directors will be appointed. Also,
each shareholder will expect a return on their investment in terms of dividends, which may reduce
the total retained earnings available for the business for future expansion as the number of shares
issued will increase.

  
4a. Effectiveness involves meeting the objectives of the business by using inputs productively to
produce output which meet customers’ needs.

4b. A business can increase its productivity by training its workers. This will help increase the skills of
the workers and their motivation levels, allowing them to become more efficient as their job
satisfaction rises. This allows workers to increase the total output produced, helping raise
productivity. Also, increase in productivity can be done by employing new, more advanced
technology. This will allow the business to increase the total output as the number of mistakes and
accidents will fall, in turn indicating a rise in productivity.

5a. Self-actualisation is a sense of self-fulfilment reached by feeling enriched and developed by what
one has learned and achieved. It involves reaching one’s full potential. 

A business can satisfy an employee’s self-actualisation needs by delegating greater tasks to the
worker. This will allow the employee to make creative and innovative decisions and find unique
solutions, leading to personal growth and development. However, if The business can even train
workers which will help improve their efficiency and skills, making it easier for them to take up more
challenging tasks and helping them reach their full potential. This will give the worker opportunities
to develop and apply new skills in the work, allowing them to increase their potential. The business
can even adopt a job enrichment policy for helping workers achieve their self-actualisation needs.
Job enrichment aims to use the full capabilities of workers by giving them the opportunity to do
more challenging and fulfilling work. This involves complete units of work, variety of tasks and
proper feedback on performance. The business can use a team working policy which will allow
workers to produce complete units of a product, helping improve their job satisfaction and allowing
them to widen the range of skills they have. Also, providing a variety of tasks will allow an employee
to further increase their skills, allowing them to specialise and achieve their full potential.
Furthermore, if the managers provide proper feedback on employee’s work and appreciate and
recognise good work, it will help improve an employee’s self esteem needs and lead to personal
growth, helping in reaching self-actualisation. 

  

7a. Cost information is a record of a firm’s expenses like labour costs, marketing expenses, inventory
costs, etc. 

Accurate cost information will allow a manager to set prices for their goods and services, in a way to
ensure all costs are being covered and a profit is earned. It allows the business to assess their margin
of safety and identify the minimum sales/production they require to ensure all costs are covered and
losses are avoided. Furthermore, information about specific costs in terms of direct costs, indirect
costs, fixed costs, variable costs will allow a manager to identify specific strategies which will help
reach their targeted profit and achieve their corporate objectives. For example, if the business is
facing higher direct costs, the manager may find cheaper suppliers to help lower their inventory
costs, allowing them to increase output and profits. Also, it will allow the manager to compare the
data with previous years to identify the effectiveness of the policies they have implemented in
helping lower costs and raise profits. It will even allow the business to compare information with
competitors to help identify who is more efficient at controlling costs and assess who has a
competitive edge. This may be highly important for a business in a highly competitive market. Having
cost information will allow a senior manager to efficiently allocate resources. For example, it will
allow the manager to identify the marketing budget for each product, which will allow the marketing
department to make more accurate decisions about the promotion and market research.  
  

7b. Cash flow forecast is an estimate of a firm’s future inflows and outflows. Having a cash flow
forecast will allow the new car hire business to identify times it may run out of cash and arrange for
other sources of finance like a bank loan to avoid liquidity problems like insolvency. It will make sure
the business has enough money to pay salaries, rent, insurance, etc and other short term costs of a
business. It will help lower the risk of business failure due to financial problems as it will act as a
warning system and allow the entrepreneur to increase the working capital available. Also, having a
cash flow forecast may make it easier for the new business to get access to sources of  finance like a
bank loan or attract venture capitalists as it will help the bank understand the financial position of
the business and assess its ability to repay money. It will help provide the bank information
regarding the business’s working capital position, helping the bank assess whether the business is a
good credit risk. This will even help the manager plan for the future in terms of expansion by
purchasing new cars or employing more workers, etc. Furthermore, it will allow the manager to
identify ways to lower their total cash outflows to improve the net monthly balance. It will help the
business identify how to deal with cash flow and liquidity problems. They may be able to do this by
leasing out cars rather than purchasing them, lowering the need for a huge capital outflow. The
business can even employ part time workers rather than full time so that they don’t face high cash
outflows during off-peak seasons. 

But, a cash flow forecast is an estimate created based on the market research. It may or may not be
accurate due to the dynamic business environment as there may be increased competition, changes
in economic activity, etc. also, as the new entrepreneur may not be experienced, they may make
wrong sales and cost forecasts for the business and making all decisions on this basis may lead to
business failure as it may not be accurate. The business could have overestimated its sales and
under-estimated its costs, indicating a positive net monthly balance, which may not be true. 

Overall, for a new hire business, cash flow forecast is important for its success, but may not be the
most important factor. Other factors like quality of service, customer relations, level of value added
by the business, profitability may also be necessary factors while determining a company’s success.
For example, even if a business is in a good cash flow position, but is unable to remain flexible and
provide for changing customer needs, it may fail as customers will be dissatisfied. 

But, for a new business, cash flow may be considered as the most important factor in the short run,
as they must ensure they are liquid enough to be able to continue trading as they may face intense
competition. But, in the long run, profitability may be the most important factor of the new car hire
business as it is the main aim of any business activity.
9609/11/O/N/20
Section A 
1a. Market share is the total proportion of sales achieved by one business in the market. 

      Market share = total sales by one business/total market sales * 100 

1b. A retailer can increase their market share by improving the quality of customer service provided.
They may do this by training workers, taking customer feedback and improving customer relations. A
retailer can even increase its market share by providing special offers and discounts like price
reductions and buy one get one free. This will encourage consumers to switch to the business
instead of competitors, helping increase total sales of the business. 

2a. Venture capital is the risk capital invested in new, small and medium-sized businesses who have
good profit potential but find it difficult to raise finance from other sources. 

2b. A venture capitalist will provide advice and guidance to the entrepreneur about how to run and
manage the business. This will help avoid cash flow problems, marketing problems, etc and reduce
the risk of failure. Venture capitalists provide long term finance for a business allowing them to
expand and invest in capital goods and advanced technology, which may not be possible otherwise
as the business found it difficult to raise money from other sources like banks. 

3a. Team-working occurs when production is organised so that groups of workers undertake
complete units of work. Motivation is the internal and external factors that encourage an employee
to work more productively towards achieving a specific aim. Working as a team helps satisfy
employees social and self-esteem needs, as identified by Maslow in his Human needs theory. It
allows workers to undertake complete units of production, increasing job satisfaction derived,
improving their productivity. Also, team working increases the opportunities for job enrichment,
which is a key motivator as identified by Herzberg, in his 2-factor theory. It encourages managers to
delegate greater tasks to the team, increasing the opportunities for empowerment, increasing job
satisfaction. Also, it will allow employees to participate in decision making, which will make the
employee feel more valued and trusted. Furthermore, it will allow employees to develop and
become multiskilled by learning from each other, leading to personal development and allowing a
person to reach their self-actualisation (full potential) level. Working as teams will even reduce
conflicts between workers which will create a more positive work environment. 

 4a. Productivity is the ratio of inputs and outputs during production. It is a measure of how
effectively inputs were converted into outputs. 

4b. Process innovation involves the use of new, more advanced technology and machinery. This will
allow the business to increase its total output and lower the total costs of production as wastage is
minimized. Also, it will ensure the quality of the goods produced is standardised, increasing the
value added by the business, leading to improved competitiveness. Furthermore, using better
inventory control systems like JIT will help lower storage costs and improve the inventory
management system.

Section B 
5a. Laissez-faire leadership is a leadership style that leaves much of the business decision-making to
the workforce. It is a hands-off approach and the reverse of the autocratic style.

It helps improve worker motivation as they feel more trusted and valued. It allows workers to
achieve self-actualisation. This in turn assists in improving worker productivity, helping lower
average costs and increase the quality of goods produced. Also, it leads to lower labour turnover,
reducing recruitment and training costs for a business, increasing their profits. Moreover, using
laissez-faire leadership allows workers to be creative and innovative while making their decisions
which can improve the quality of the good/service produced, helping improve customer satisfaction
and the level of value-added by the business. This in turn increases the business’s competitiveness
and leads to a rise in sales and profits earned by the business.  Also, it reduces the need for a
business to have close supervision of each employee, allowing them to use a delayering policy and
reduce the overall costs of a business. Furthermore, it makes the decision making the process faster.
This is because employees are able to make their own decisions without the need to consult others. 

5b. Democratic leadership is a leadership style which encourages workers to play an active role in
the decision-making process of a business. Using democratic leadership style may delay the decision
making process as all employees may be consulted which may be time taking. This may make the
business less flexible in terms of responding to changes in consumer demand, market conditions,
etc. This will lead to a fall in the business’s competitiveness, reducing its sales and profits. Also, some
workers may not want to get involved in the complicated decision making process. Some workers
may work well with autocratic leadership style where they are directly told what to do. For ex.
factory workers in a manufacturing business may not be interested in being involved in the
company’s decision making process. Forcing them to take part in the decision making process, may
actually demotivate the workers. It can even lead to fall in productivity and increased costs. This may
lead to fall in the company’s profitability.

But, using democratic leadership may actually motivate some workers as they may feel valued and
trusted in the organisation. It is a key part of job enrichment, which as identified by Herzberg and
Maslow are important motivating factors. It may help a business find better solutions to certain
problems as different viewpoints will be heard and taken into account. It may allow a business to
find more creative and innovative ways to respond to problems like increased competition, allowing
them to improve their competitiveness and market share. This will, in the future, lead to increased
profitability and brand loyalty. 

Overall, democratic leadership style may cause businesses to underperform in certain situations as it
is more expensive and timetaking. But, the extent to which the performance of a business is affected
by democratic leadership depends on many reasons like whether it is capital intensive or labour
intensive, the culture of the organisation, which sector it operates in etc. If it is a capital intensive
business, it is likely to employ greater unskilled workers rather than highly trained ones, encouraging
the business to use autocratic leadership. But, if it is a service sector business which requires a
greater level of creativity, democratic or laissez-faire may be more efficient as it will allow
employees to reach their full potential and maximize customer satisfaction. 

But, every business has a level of autocratic leadership as not all information may be shared with
employees. Decisions which require a quick response, for example, a fire emergency in a hotel, a
manager may choose to use an autocratic leadership style as quick solutions are required.

Section B
7a. Price skimming involves setting a high price for a new product when a firm’s product is a highly
differentiated product with a low price elasticity of demand.

Using a price skimming strategy allows a business to quickly cover its research and development
costs and start making a profit. It will ensure the company is able to maintain its cash flow balance
and not A firm may use price skimming strategy to maximise their revenue as demand for their
product is likely to be price inelastic. This will allow the business to increase returns to shareholders
and invest in future growth as profits will rise. Price skimming strategy may even be used to set a
certain perception of the product in consumer minds as consumers may take the price as an
indication of the product’s quality. The business may want to establish their product as a luxury
good, encouraging them to maintain a high price. Moreover, the business may charge a high price as
the price is justified by the uniqueness of the product. Due to the USP of the product, consumers
may be willing to purchase the product with higher prices, encouraging the business to exploit the
market and maximise their revenue. A business may even want to exploit the market and gain a
larger, loyal customer base before other competitors enter the market. This will allow the firm to
maximize their short term profits.  

7b. A brand is an identifiable symbol, name or image that distinguishes a product from its
competitors. Marketing is the management task that links the business to the customer by
identifying and meeting the needs of customers profitably. If a business establishes a brand, it will
allow its restaurant to stand out from its competitors. It will help add greater value to the service
provided by the restaurant, leading to improved sales and increase in long-term loyalty. A new
restaurant may find it difficult to capture a larger market share in such a competitive market as other
competitors may enjoy long term brand loyalty. Building a brand will increase the trust consumers
have in the business in terms of the quality of food served, helping increase the restaurant’s sales
and profits. It will help the business differentiate its service from competitors making it easier for the
new restaurant to attract customers. Furthermore, establishing a brand will help lower the PED of
the product and make customers less responsive to changes in price as they may be willing to pay
higher prices for an exclusive service. This will allow the business to charge higher prices for their
food as customers. Moreover, branding helps improve the ‘product’ part of the marketing mix as it
becomes unique and differentiated. It even helps improve customer relations as the ‘customer
solution’ part of the 4C’s is improving. This helps maximise customer satisfaction, helping improve
the brand image of the new restaurant. 

But, for a new restaurant business, there may be other short term marketing objectives
and activities which may be of greater importance. For example, a new restaurant business may aim
to remain competitive and survive in their first year of trading so that they are able to establish
themselves, rather than aiming to build a brand. Also, they may want to focus on the promotion part
of the marketing mix to make consumers aware about the new restaurant and persuade them to try
it. A new business’s short term goal may even be maintaining a positive, stable cash flow so that
liquidity problems are avoided. 

Overall, branding may not be the most important marketing activity for a new restaurant business at
least in the short run as they may want to focus on other activities like market research. A new
business may want to conduct market research to identify the price consumers are willing to pay,
the type of cuisine they want, etc. 

But, branding may be a long term objective for a business and all the short term objectives like
market research and promotion will contribute in building a strong brand image in the long run.