Unit 1: Business Activity and Influences on Business

1: What is Business Activity?

A business is an organisation that provides goods and services.
1. Business activity produces an output - a good or service.
2. Goods and services are consumed.
3. Resources are used
4. A number of business functions are carried out. Production, marketing,
human resources and financial control are examples of these functions.
5. External factors affect businesses. Things that they cannot control have an
impact on businesses, such as government laws, change in consumer
tastes and actions of competitors.
6. Businesses aim to make profit.

Consumer goods:
Goods and services sold to ordinary people (consumers) rather than businesses.

Producer goods:
Goods and services produced by one business for another.

Needs are the requirements for human survival. Some are physical such as water, food,
warmth, shelter and clothing. If these needs cannot be satisfied, humans will die.

Humans also have desires. These are called wants and include holidays, a better house, a
bigger car, a better education and a cleaner environment. These wants are infinite
however the resources available are finite.

Private Enterprise:
Most businesses are owned privately by individuals or groups of individuals. They are
private sector businesses. The objective of a private enterprise is often to make profit
for the owners.

Social Enterprise:
Some organisations in the private sector are non-profit making. Organisations, such as
charities, pressure groups, clubs and societies exist for reasons other than profit like to
raise money for good causes or provide opportunities and facilities.
Public Enterprise:
Some goods and services are provided by organisations owned by the central or local
government. These are public sector organisations. In many countries public sector
organisations provide health care, education, mail delivery, policing, the fire and
environmental services.

Stakeholder:
Any individual or group that has interest in the operation of a business

Owners:
Many small businesses are owned by individuals, families or small groups of people.
They are called entrepreneurs. They are responsible for setting up and running the
business. Larger businesses are owned by shareholders that invest the money in the
business and gain dividend

Customers:
Customers buy the goods and services the business sells. Customers want a good quality
product at a fair price.

Employees:
Employees work businesses. They depend on businesses for their salary. They want good
working conditions, fair pay and benefits, job security, and opportunities for promotion.

Managers:
Managers are employed to run different departments in businesses. Managers have to
lead teams, solve problems, make decisions, settle disputes and motivate workers.
Managers are likely to help plan the direction of the business and they are accountable to
owners. They also have to control resources such as finance, time and people.

Financiers:
Financiers lend money to the businesses. They could be a bank or individuals such as
family members or private investors such as venture capitalists.

Suppliers:
Businesses that provide raw materials, parts, commercial services, and utilities, such as
electricity and water to other businesses.Businesses want good quality resources at
reasonable prices. In return suppliers will require prompt payment and regular orders.
The Local Community:
Most businesses are likely to have an impact on the local community. If the business
does well the local community may benefit. There may be more jobs, more overtime and
possibly higher pay. In contrast a business may be criticised by the local community.

The Government:
The government has an interest in all businesses. They provide employment, generate
wealth and pay taxes. Taxes from businesses and their employers are used to finance
government spending.

Business may be affected by external factors like strength of competition, the economic
climate, government legislation, population trends, demand patterns, world affairs and
social factors.

To survive, businesses must produce goods and services that satisfy people’s needs and
wants. They must have clear objectives and be aware that the changing environment can
bring new opportunities and impose new limitations.
 2: Business Objectives
Businesses need to have objectives for:
- Employees work towards something and it helps motivate them.
- Owners may allow their businesses to drift without a clear objective which may
result in business failure
- Objectives help to decide where to take a business and what steps are necessary
to get there
- It helps assess the performance of a business if objectives are set.

Financial Objectives:
Survival: All businesses will consider survival as important and sometimes the most important
objective. The survival of a business might be threatened when trading conditions become
difficult or if a strong competitor emerges.

Profit: Most businesses aim to make profit because their owners want a financial return. Soe
businesses try to reach profit maximisation.

Sales: Businesses with large volumes of sales may enjoy lower costs, have large market share,
enjoy a higher public profile and generate more wealth for the owners. The growth of business
might also benefit a wide range of stakeholders linked to the business.

Increase market share: They are able to increase market share if they can win customers from
competitors and then they can be able to dominate the market.

Financial Security: Many business owners aim to make enough profit to give them financial
security (profit satisficing).

Non-financial Objectives:
Social Objectives:
In the public sector, the objectives are designed to improve human well-being. Most businesses
aim to provide a public service and the objectives will be linked to quality of service and
reducing costs. And some non-profit organisations like charities aim to improve human and
environmental well-being.
Personal Satisfaction:
Many people set up their own business as they will feel they will be happier working
independently instead of working for an employer. Some take risks to see their idea develop and
some owners like to see their hobbies develop into a business which brings personal satisfaction

Challenge:
Some people start up businesses for the challenge and motivate them to develop skills like being
committed, hard working and multi-skilled as a challenge to make the business successful and
later on they receive more challenges in keeping it up to motivate them.

Independence and control:

These are entrepreneurs that are driven by the desire to be independent and in control of their
own future. The freedom to make all decisions is very appealing to many people than working
for an employer

SMART objectives:
Specific - stating clearly what is to be achieved
Measurable - an outcome that can be measured in numbers
Achievable - possible to complete by the people involved
Realistic - able to be achieved with the resources available
Time specific - stating a period of time to achieve it in

Why might objectives change as businesses evolve?

Market Conditions:
Businesses operate in dynamic markets. So when new changes happen in the market, like a new
rival or the economy starts to decline, It is necessary for the business to set new objectives.

Technology:
As the pace of technological change increases businesses may have to adjust their objectives. A
business may introduce new technology that changes the business and may want to exploit the
economies of scale. Or they might start e-commerce.

Performance:
The performance of a business can not stay constant. Periods of sustained profitability may be
interrupted by less successful periods. As the performance levels of a business changes, they
might have to set new ones in order to manage with its performance.
Legislation:
New laws and legislation might impact a business’s objectives. In recent years, businesses had to
become more socially responsible. This might be a reaction to new environmental, employment
or consumer legislation. New legislation pressures businesses to become considerate to the wider
community.

Internal reasons:
Sometimes businesses can change their objectives for internal reasons like a new ownership or
management.
 3: Sole traders, Partnerships, Social enterprises, and
Franchises
Entrepreneurs:
● Innovators: they try to make money out of business ideas. Such ideas can
come from spotting a gap in the market, a new invention or market
research.
● Organisers: they are responsible for organising other factors of
production. They hire or buy resources such as materials, labour or
equipment. Organising involves giving instructions, making
arrangements, and setting up systems.
● Risk takers: they risk any money put in the business and possibly more if
it fails. However, if the business succeeds, they earn profit.
● Decision makers: they make decisions on how to raise finance, product
design, choice of production method, prices, recruitment, and wages.

Unincorporated and incorporated business:

Unincorporated:
These are businesses where there is no legal distinction between the owner and the
business. Everything is carried out in the name of the owner. These tend to be small and
owned by one person or a small group of people.

Incorporated:
One that has a separate legal identity from that of its owners. The business can sue, be
sued, taken over or liquidated. They are often called limited companies and are owned by
shareholders

Features of a sole trader:

It has one owner but can employ any number of people. They are involved in a wide
range of business activities (in the primary, secondary and tertiary sector).
Features of a partnership:
It exists when between 2 and 20 people own a business together. The owners share
responsibility for running the business as well as profits.

Deed of partnership:
- How much capital each partner will contribute
- How profit (and losses) will be shared among partners
- The procedure for ending the partnership
- How much control each partner has
- Rules for taking on new partners.

Limited partnership:
This is where some partners provide capital but take no part in management of the
business. Such partner will have a limited liability

Features of Franchises:
Owners of franchises are called franchisors. They have developed a successful business
and are prepared to allow others, the franchisees, to trade under their name.

What does the franchisor offer the franchisee?

- A licence to trade under the recognised brand name of the franchisor
- A start-up package including help, advice and essential equipment
- Training in how to run a business and operate the systems used by the
franchise.
- Materials, equipment and support services that are needed to run the
business
- Marketing support that is organised on behalf of all franchisees
- An exclusive geographical area in which to operate.
Franchisees have to pay certain fees:
- A one-off start-up fee
- An ongoing fee (usually based on sales)
- Contribution to marketing costs
- Franchisors may make a profit on some of the materials, equipment and
merchandise supplied to Franchisees

Features of social enterprises:

Non-profit organisations. They aim to improve human and environmental well-being
rather than make profit for the owners.
- They have a clear social and/or environmental mission
- Generate most of their income through trade or donations
- Reinvest most of their profits
- Are majority controlled in the interests of the social mission
- Are accountable and transparent
Cooperatives:
They usually operate as consumer or retail cooperatives. They are owned and controlled
by their members. Members can buy shares which entitles them to elect directors to
make key decisions. Any profit made is given to the members.

Work Cooperatives:
Businesses in which its employees share ownership. Workers will contribute to
production and be involved in decision making, share in the profit and provide some
capital when buying a share in the business.

Charities:
They exist to raise money for ‘good’ causes and draw attention to the needs of
disadvantaged groups in society and raise awareness about issues. Charities rely on
donations for their revenue. May also organise fundraising events to raise money.
 4: Limited Companies and Multinationals
Features of a Limited Company:
They are incorporated which means they have a separate legal identity from their
owners. They can own resources, form contracts, employ people, sue and be sued.
- The owners have limited liability. If a limited company has debts, the
owners can only lose the money they originally invested
- The business raises capital by selling shares. Each shareholder owns a
number of these shares
- They are joint owners of the company and they are entitled to vote on
important matters and make key decisions
- They also get dividend paid from profits, those with more shares will
receive more control and profit
- The shareholders elect directors to run the company. The board of
directors headed by a chairperson is accountable to the shareholders
- If the company performs badly, directors can be voted out in the annual
general meeting (AGM)
- Companies pay corporation tax on profits

Forming a limited company:

- Must have a minimum of two members
- Some important documents must be sent to the Registrar of companies
- If documents are acceptable, the company will get a certificate of
incorporation, this allows it to trade.
Private limited companies:
- Tend to be small or medium sized
- Their business name ends in Limited or Ltd
- Shares can only be transferred ‘privately’ and can not be traded in the
stock market
- They are often family businesses owned by family or close friends
- The directors tend to be shareholders and are involved in the running of
the business

Public limited companies:

- They tend to be larger than private limited companies
- The shares can be bought and sold by the public on the stock exchange
- It is expensive because it needs lawyers to ensure the prospectus is legally
correct
- There is advertising and administrative fees as well
Features of Multinationals:
It is a large business with significant production or service operations in at least two
different countries. Ex: Mcdonalds, and Coca-Cola.
- Huge assets (land, buildings, plant, machinery and money) and turnover,
they are extremely well-resourced and can often afford to take on
large-scale contracts and projects
- Highly qualified and experienced professional executives and managers
- Powerful advertising and marketing capability
- Highly advanced and up-to-date technology
- Highly influential both economically and politically
- Very efficient since they can exploit huge economies of scale
- Ownership and control is centred in the host country
 5: Public Corporations
Features of Public Corporations:
- State-owned corporations: the government appoints the people who run
the organisations. The government is also responsible for its policies
- Created by law: they are created by an act of parliament. The powers and
duties of each organisation are specified clearly in the act
- Incorporation: They are incorporated businesses. They have a separate
legal identity. They can sue, be sued and enter into contracts under their
own name
- State-funded: the government provides capital needed. The money mainly
comes from taxes. All the assets and liabilities belong to the state but they
can also borrow money and are free to re-use revenue from sale of any
goods and services
- Provide public services: do not aim to make profit. Their main objective
is to provide a public service
- Public accountability: they have to produce annual reports which are
submitted to the government minister in charge of the corporation. They
are accountable to tax-payers. Money made is reinvested or handed over
to the government.

Reasons for the public ownership of businesses:

- Avoid wasteful duplication: natural monopoly exists. It is more efficient
to have just one business providing a service for the whole market
- Maintain control of strategic industries: considered desirable for the
government to maintain control so that a reliable supply and quality can
be guaranteed. Prevents ‘outsiders’ from exploiting the nation.
- Save jobs: businesses have been taken in public ownership to save jobs. It
may take control of private businesses with large employment if they fail
- Fill the gaps left by private sector: offers free sources like education for
those who can not pay to private sector
- Serve unprofitable regions: delivers important services to unprofitable
areas. Is prepared to face the costs because profit is not a key objective.
Reasons against the public ownership of businesses:
- Costs to government: If losses get bigger, and more frequent, taxpayers
might object to financial burden.
- Inefficiency: lack of efficiency is blamed on the lack of competitors and
the absence of profit as an objective which reduces productivity
- Political interference: corporations are subject to policy changes every
time a new government is elected
- Difficult to control: difficult to coordinate different parts of the business
and run it effectively due to the large number of workers and different
operational locations and huge quantities of physical assets.

Privatisation:
The process of transferring public sector resources to the private sector. Can take many
types of forms:
- Sale of public corporations: selling shares in the business to any one that
wants them, in some cases it is over a period of time
- Deregulation: this involves lifting legal restrictions that prevented private
sector competition
- Contracting out: contractors are given a chance to bid for services
previously supplied by the public sector
- The sale of land and property

Why does privatisation take place?

- To generate income: the sale of state assets generates income for the
government
- To reduce inefficiency in the public sector: in the private sector they
would have to cut costs, improve services and return profit for
shareholders which would make them more accountable and productive
- As a result of deregulation: legal barriers were removed that allowed new
businesses in some markets and existing firms were privatised so new
firms are encouraged to join the market
- To reduce political interference: the government could not use these
organisations for political aims.
 6: Appropriateness of different forms of ownership
Factors affecting the appropriateness of different forms of ownership:
- Growth: Most businesses change their legal status as they grow. In case
they need to raise more capital. More owners can regenerate more capital.
- Size: Many small businesses are sole traders or partnerships. Public
limited companies are much larger. It can be argued that a very large
business could run effectively only if it is a limited company.
- The need for finance: Businesses change their legal status to get more
money as bigger types of businesses receive more money.
- Control: Many businesses remain sole traders as they prefer
independence and full control. Larger businesses are harder to control.
- Limited liability: Owners can protect their own financial position if the
business is a limited company as sole trader and partnerships have
unlimited liability.
- Different stakeholders might influence the choice of organisation
- The way the businesses operates its profits is important
- The type of business activity might influence the type of organisation

Objectives and the type of organisation:

- Profit satisficing: sole traders are mostly happy to make modest amounts
of profit to fund a comfortable lifestyle.
- Medium-sized and family businesses that own limited companies usually
do not go public due to the fear of losing control. Their growth is limited.
- Most multinationals main objective is to grow until they dominate global
markets
 7: Classification of Businesses
Primary sector:
Production involving the extraction of raw materials from the earth
- Agriculture: involves a range of farming activities. Most agriculture is
concerned with food production
- Fishing: involves netting, trapping, angling, and trawling for fish. It also
includes gathering and catching all types of seafood.
- Forestry: involves managing forests to provide timber for wood products.
Modern forestry involves protecting the natural environment, providing
access and facilities to the public and managing areas for wildlife.
- Mining and quarrying: is the extraction of raw materials such as coal,
iron ore and tin from the ground as well as the extraction of oil and gases.

Secondary sector:
Business activity involves converting raw materials into finished or semi-finished goods.
All manufacturing, processing and construction lie within this sector. Some businesses
focus on the production of semi-finished goods (producer or intermediate goods). These
goods are sold to other businesses and used as inputs for the production of final goods.

Tertiary sector:
Involves the provision of a wide variety of services: Commercial services, financial
services, household services, leisure services, professional services and transport.

Interdependence:
Businesses in each sector are likely to be interdependent. This means that they rely on
each other. In modern developed economies, the interdependence is huge. Example:
Bakers may depend on the tertiary sector advertising agencies to produce adverts.
As countries develop, the public sector grows. Since the public sector mainly provides
services this adds to the growth of the tertiary sector.
 8: Decisions on location
Factors affecting location:
● Proximity to market
● Proximity to labour
● Proximity to materials
● Proximity to competitors

Proximity to market:
Many businesses that make large products should be located close to customers to keep transport
costs down. Service providers also have to locate close to the market as their services are directly
provided to consumers.

Proximity to labour:
Businesses needing large numbers of workers need to consider wage costs and labour skills.
Labour skills aren’t evenly distributed throughout the country, and wage rates may vary in some
regions, which the businesses have to consider.

Proximity to materials:
Some businesses that use raw materials may locate close to their source due to transport costs.
Some businesses may need large areas to set up and look to minimise land and property costs.
These may want to set up where:
● Premises are cheap
● Business rates are low
● Land has been allocated for business development

Proximity to competitors:
Most service providers prefer locating where competition is minimised. Some may choose to
locate where competitors are closely concentrated to fulfil excess demand.

The Nature of business activity:

Services:
Businesses have to take into account the ease of access and parking facilities. Traffic congestion
is a growing problem and businesses need to choose locations with less chances of delay

Office-based businesses:
Some fields of business activity are office-based and companies will need to ensure there are
sufficient facilities nearby. Locating in a high profile city also improves the image of businesses
Manufacturing and processing:
Locations chosen by manufacturers differ because of varying needs. Different types of
manufacturing have different needs.

Agriculture:
Most farmers require large areas of land for their businesses, however not all businesses might
use the same type of land. In the fishing industry, businesses are usually located on the coast.
However, different types of fish might live in different environments.

Impact of the internet:

Many people are switching to shopping online rather than visiting shops. A growth in
e-commerce has had a massive impact on business locations.
● Entrepreneurs can be flexible when choosing locations.
● Retailers can serve national markets.
● Businesses can be located far from customers.
● Businesses do not need to have fixed premises.

Legal controls and trade blocs:

Governments may try to influence business locations because:
● To avoid congestion
● Minimise impact of business on suburban areas
● To encourage manufacturers to locate in high unemployment areas
● They may use financial incentives to influence business choice
● To attract foreign manufacturers
Trade blocs:
● Trade barriers help control level of imports and have an impact on location
decisions
● Businesses may locate inside trade blocs due to tariffs.
● Trade blocs are a group of countries situated in the same region that join together
to enjoy trade free of barriers.
 9: Globalisation
The concept of Globalisation:
Some firms expect to sell their products anywhere in the world. Firms and people are
behaving as if there is just one market or one economy in the whole world. Globalisation
which is often defined as the growing integration of the world’s economies.
- Goods and services are traded freely across international borders
- People are free to live and work in any country they choose which has
resulted in an increase in multicultural societies
- There are high levels of interdependence between nations. The events in
one economy are likely to affect other economies
- Capital can flow freely between different countries
- There is a free exchange of technology and intellectual property across
borders

Reasons for Globalisation:

- Developments in technology have helped globalisation gather pace. Modern computing
allows firms to transform complex data instantly to any part of the world and consumers
are able to buy products from anywhere
- International transport networks have improved which means people can travel to
business meetings more easily and goods can be transported cheaply
- There has been a huge amount of deregulation and privatisation has allowed more
competition in many industries as many economies opened up and many government
simplified their legal system to make international trade easier
- An increase in tourism has helped globalisation thrive as consumer’s tastes changed
from their experience abroad which led them to be more willing to try goods and
services from other countries
- Many firms want to sell abroad due to domestic markets becoming saturated. Some
markets are dominated by large multinationals, they benefit from having international
markets are producing goods anywhere at lower costs

Government and Globalisation:

- Countries can’t trade if the government keeps international borders closed
- International trade will be so limited if governments put up trade barriers
- People cannot be free to live and work in overseas countries unless
borders are kept open
- Firms can develop their businesses overseas if planning permission is
denied
Opportunities of Globalisation for businesses:
Access to larger markets:
One of the most important benefits is the access to huge markets. This provides a huge
opportunity to increase sales. As well it provides growth opportunities and higher sales
revenue and an increase in profit.

Lower costs:
If businesses are able to grow by selling more output to larger markets, they may be able
to lower their costs. As they can exploit economies of scales. This way businesses will
become more competitive which helps them increase sales and raise profit margins.

Access to labour:
Free movement of labour. This means that people are free to move around the world and
find employment in other countries. As a result the business will have larger labour
- Globalisation helps boost domestic labour by the help of labour from
overseas. As well it means they have more options to recruit from and
they are able to recruit high quality workers which improves productivity.
- A rising labour supply might help prevent wages from rising - lower costs
- Can recruit highly skilled staff from anywhere in the world

Reduced taxation:
They can reduce the amount of tax they pay by locating their head office in a country
where business taxes are low

Threats of Globalisation to businesses:

Competition:
Businesses will face increased competition. As more companies try to sell their products
across the world some businesses will have their survival threatened. Often the
companies that are able to exploit globalisation are strong, well-resourced and influential

International takeovers:
With the free movement of capital, it is possible for a business to take over a business in
another country. Some companies feel vulnerable to takeovers due to other predator
companies existing and some experience hostile takeover.

Increased risk of external shocks:

This means that the events in one economy are likely to affect other economies.
10: The importance and growth of multinational companies
How have multinationals developed:
Economies of scale:
● Many companies have developed into MNCs because larger companies enjoy
lower costs.
● They can then exploit economies of scale as they sell to global markets and
produce more, meaning they have lower costs.
● MNCs are powerful and can put pressure on suppliers to lower prices.
● MNCs have access to cheap global resources: labour, capital and commodities.

Marketing:
● Some firms become MNCs by relying on effective marketing.
● They protect brands with patents and use heavy advertising and innovative
marketing to attract customers globally.

Technical and financial superiority:

● MNCs develop into large businesses and enjoy superiority using advanced
technologies and a huge bank of knowledge.
● They can afford to invest heavily in research and development.
● They can also afford specialised and talented employees and take risks, hence
exploring business ventures.

Benefits to a business of becoming a MNC:

MNCs enjoy higher revenues and lower costs.
● Larger customer base: MNCs access wider markets and boost sales revenue,
increase profit and win market share by selling globally.
● Lower costs: MNCs enjoy lower costs and rates by exploiting economies of scale.
● Higher profile: encourages existing customers and attracts new ones.
● Avoiding trade barriers
● Lower taxes: MNCs can base head offices in countries with low tax rates.
Minimised tax = higher dividends.
Benefits of multinationals to the economy :
● Increased income and employment: overseas operations leads to increased income
in a particular country and new jobs in developing countries. Extra output and
employment increases economic growth.
● Increase in tax revenue: profit by MNCs are taxed by the host nation which
increases government tax revenue.
● Increased exports: MNC output is regarded as output for the country and helps
increase foreign currency reserves in that country.
● Transfer of technology: MNCs help foreign suppliers with technical help and
modernise production facilities.
● Improved quality of human capital: MNCs provide training and work experience
for works which may otherwise be unavailable.
● Enterprise development: arrival of MNCs has encouraged more people to set up
businesses in less developed countries.

Drawbacks of multinationals to the economy :

● Environmental damage
● Exploitation of less developed countries: low wages, child labour, poor working
conditions, minimal taxes, reliance on producing primary products
● Repatriation of profits: profit is often returned to the country where a MNC is
based and the host country loses it
● Lack of accountability: may evade the law especially in developing countries and
where the government is weak.
 11: International trade and exchange rates
International trade:
- Creates opportunities for business growth, increases competition and
provides more consumer choice
- Allows countries to obtain goods that cannot be produced domestically
- Allows countries to obtain goods that can be bought more cheaply
overseas
- Helps to improve consumer choice
- Provides opportunities for countries to sell off surplus commodities

Visible and invisible trade:

Goods and services sold overseas are called exports. Those bought from other countries
are called imports. Visible trade involves trade in physical goods. Invisible trade involves
trade in services. The difference between total visible exports and imports is called the
visible balance or balance of trade.

What is an exchange rate?

When countries use different currencies, transactions between people and firms in
different countries are affected. Exchange rate is the value of one currency in terms of
another.

The impact of changes in the exchange rate on importers and exporters:

International competitiveness and exchange rates:

If the exchange falls sharply for a long period of time, all exporters can sell their goods
more cheaply abroad which has a positive impact on the country’s economy. Higher
exports sales means more employment, income and tax revenues for that country.
However this means that import prices will rise and consumers would have to pay more
for overseas goods and businesses have to meet the rising costs of imported raw
materials. Constantly varying exchange rates cause uncertainty.
 12: Government objectives and policies
Government spending:
One of the roles of most governments is to provide a range of public services. These
include health care, education, defence, care for elderly, child protection, policing, refuse
collection, a judicial system and transport networks. Money spent on these services vary
in different countries. Government spending levels will influence businesses.

Taxation:
The money raised from taxation is used by a government to help fund its spending on
public services. Direct taxes are charged on income like corporation and income taxes.
Indirect taxes are levied on spending like VAT. Fiscal policy is using changes in taxation
and government expenditure to manage the economy.
- If income tax were lowered, there would be more spending in the
economy, businesses respond by increasing production and expanding.
- Businesses respond to higher corporation tax by cutting investments or
reducing dividends
- Governments cut rates of corporation tax to attract foregin businesses into
their countries which helps create jobs and improve living standards.

Constraints on public spending:

- Public sector organisations that supply services may get their funding cut.
They may be forced to lay off staff to cope with the funding cuts. People
will have lower incomes which leads to fall of demands and businesses
not producing as much
- Private sector businesses that rely on public sector contracts will be hit
- Pensions and social security payments will be frozen or cut. People who
rely on state benefits will have their spending power reduced which
lowers demand in economy

How can governments affect business activity?

- It can change the law
- It can influence rate of interest and exchange rates in the economy
- It can change the levels of government expenditure and taxation
- It can introduce policies that have a direct impact on businesses such as
giving subsidies to farmers
Infrastructure provision:
In most countries, the government is responsible for developing and maintaining the
nation’s key infrastructure. Heavy expenditure on large-scale projects can have big
benefits for businesses. This is because construction private companies and suppliers
would be hired for the job. However the multiplier effect means that employees will
spend some of the money received by these businesses from the government.

Legislation:
Without government intervention, some businesses may not meet the needs of
stakeholders or some might exploit vulnerable stakeholders. The government provides a
legal framework in which businesses can operate and protect vulnerable groups.

Consumer protection:
Legislation exists to prevent businesses from making false claims about the performance
of their products, selling goods that are not fit for human consumption or not fit for
purpose. Without government regulation, some firms may exploit consumers by using
anti-competitive practices or restrictive practices such as:
- Increasing prices to higher levels than would be in a competitive market
- Price fixing, where a group of firms agree to fix the price of a product to
avoid price competition
- Restricting consumer choice by market sharing
- Raising barriers to entry by spending huge amounts of money on things
smaller companies can not afford
Competition policy:
Governments should try to promote competition. This helps prevent anti-competitive
practices and consumer exploitation.
- Encourage the growth of small firms: the market is less likely to be
dominated by one very large firm and increase competition.
- Lower barriers to entry: more firms will join the market
- Introduce anti-competitive legislation: laws designed to protect
consumers from exploitation by monopolies, mergers and restrictive
practices. Countries have special agencies to manage these policies.

Environmental legislation:
Governments pass laws to minimise the damage done by businesses to the environment
such as air pollution caused by businesses releasing waste and gases into the air. Pressure
on environmental legislation has grown due to the threat of global warming and
businesses failing to comply get fined or forced to close down.

Trade Policy:
Governments believe in protectionism in which the use of trade barriers protects
domestic producers and is used to to:
- Protect jobs if foreign competitors threaten the survival of domestic
producers
- Protect infant industries
- Prevent dumping
- Raise revenue from tariffs
Governments can use trade barriers to restrict trade:
- Tariffs: a tax on imports making them more expensive
- Quota: a physical limit on the amount of imports allowed into the country
- Subsidy: the giving of financial support to exporters or domestic
producers that face fierce competition from imports
- Administrative barriers: the use of strict health and safety or
environmental regulations to make importing more strict
Governments also influence businesses by forming a trade bloc in which a group of
countries in the same geographical region sign a trade agreement to reduce or remove
trade barriers. Its benefits include:
- Specialise in the production of goods and services in which they can
produce more expertly or at a lower cost
- Access to wider markets
- Lower costs, if economies of scale can be exploited when sales and
output rise
- Protection from large predatory multinationals from outside the bloc

Effects of interest rates on businesses:

Monetary policy is the use of changing interest rates by authorities to help control the
economy. Higher interest rates means it is more expensive to borrow money so demand
in the economy falls while lower interest rates increase the demand in economy
- Higher interest rates will reduce profits which will cut rewards of
business for owners and shrink funds available for new investments
- The purchase of capitals goods funded by borrowing is expensive so the
business has to invest in new goods or they may fail to keep up with
changes in technology affecting their competitiveness
- Higher interest rates leads to demand in the economy falling as
consumers are less willing to borrow money to fund spending

Effects of interest rates on consumer spending:

- House-owners with mortgages will be affected negatively when interest
rates rise as people’s mortgage payments will rise. The cut in consumer
spending will hit the construction industry and housing market hard
- When interest rates rise, funding expenditure with borrowed money
becomes less affordable which leads to their demand for certain goods
and services to fall
- Savers will be hit if interest rates are low as they will receive less interest
on their savings and consumers who lie heavily on income from savings
like the retired community will have less to spend.
 13: External Factors
The Nature of External factors:
Social:
Businesses have to adapt to any changes that occur in society.
- Increased consumer awareness: Consumers have high expectations due
to the access to the internet so many businesses became customer-focused
- Changing demand patterns: Changes in society and lifestyle bring in
changes of demand for products like the growth of online shopping
- Increased numbers of women at work: This has increased the supply of
labour and helped increase the number of new businesses
- More part-time workers: Helped improve flexibility in business
organisations because part-time labour is more adaptive
- Urbanisation: More people moved to rural areas which provided business
with more labour and created additional markets

Technology:
New technology results in new products and production becomes more capital intensive.
- In the primary sector, the use of tractors, mechanical harvesters, grain
drying machines and automatic feeding systems helped to lower
agriculture costs as well chemicals and pesticides increase crop yields
- In the secondary sector, robots have reduced costs as computers are used
to design products with information fed to CNC machines that carry out
tasks. Some factories are now entirely automated
- The use of IT helped reduce administration and communication costs in
business. Huge amounts of data can be gathered, processed, analysed and
stored and accessed using computer databases.
Technological developments help provide product opportunities and improve efficiency
- Changes in technology shorten the amount of time products are marketed
for because new products are quickly developed to replace old ones
- Developments in technology replaces labour with capital which is
welcomed as Human resources is difficult to manage
- New technology lowers unit costs
- The development of social media has helped improve communications
between business and customers.
Environment:
Businesses are blamed for pollution and congestion as environmental damage increases
Global Warming:
Many governments are becoming increasingly concerned about global warming as
greenhouse gases in factories contribute to it as well as emissions from cars and aircraft.

Habitat Destruction:
Some business development destroys wildlife habitats and spoils the natural
environment. Forests are important for the survival of the planet and many species.

Resource Depletion:
Oil, coal, gas, and minerals are non-renewable resources, as business development
gathers pace they are depleted. As well, fish stocks are failing and fertile soil is lost due
to deforestation, and the increasing size of urban areas and land pollution.

Sustainable Development:
Many governments are promoting sustainable development which will lead to the
satisfaction of consumer’s needs without reducing the quality of life for future
generations. Businesses taking the sustainable approach, it will be easier to comply with
regulations, reduce costs, improve their image, and increase profits.

Businesses can respond to environmental issues by:

- Designing packaging that can be reused or recycled
- Using more energy-efficient equipment or renewable energy sources
- Exploring ways of selling waste to other businesses as a by-product
- Reducing business travel and use video conferencing for meetings

Political:
Businesses need to be cautious if they develop interests in politically unstable countries.
The activities of pressure groups can also influence business activity.
- If measures designed to improve national security restrict the movement
of goods, people and capital it will have a negative impact on businesses
- Pressure groups to eliminate a certain product affects the industry
- A new government elected might be pro-business which will encourage
more people to become entrepreneurs and foreign investment is attracted
 14: Measuring success in business
Revenue:
The amount of revenue that is made by a business is a guide to its success. If revenues increased
each year, business owners will feel like they are making a success of their venture. (a business
enterprise or speculation in which something is risked in the hope of profit)

Market share:
Some businesses increase their market share each year. A business should have a larger market
share than a smaller share. With a large market share, the business can be able to dominate the
market.

Customer satisfaction:
Businesses need to acknowledge the needs and wants of a business. If the customer service is
good a successful business will find loyal customers and a growing customer base.
Businesses use customer surveys to gather information about customer satisfaction.

Customers are important to a business as they are the people who buy the goods or services it
provides. If customers are not satisfied the business will not be able to sell its goods or services,
therefore no profit will be made and the company may go out of business.

Profit
Most private sector businesses aim to make a profit. The more profit you make for the business,
the more revenue you are making which leads to a successful business. Profit can only be used to
measure the success of a business if the objective is to maximise profit.

Growth
Many businesses aim to grow, the size of the business is important when measuring success.
There are many ways to measure the size of a business:
Turnover revenue: the revenue of the business can be used to measure size.
The number of employees
Market share: the larger the business’s market share is the more successful it is
The amount of capital employed: the amount of money invested. The more the money invested
the larger it is.
EU definitions of size: defines the size of firms
A growing business is most likely to be successful.
Owner/stakeholder satisfaction
Shareholders/owners are the most important stakeholders as they control the business. If they are
unhappy then they can sack its directors or managers, or even sell the business to someone else.
No business can ignore its customers. If it can't sell its products, it won't make a profit and will
go bankrupt.

Employee success
Employees rely on the business for their income. If a business is growing employees are most
likely to get higher wages or bonuses. Employees have other needs too, they want to work in
good working conditions, opportunities for promotion, safety at work.
 15: Reasons for Business Failure
1) Overtrading
This occurs when a business is attempting to fund a large volume of production with insufficient
cash. This can even happen if the business is profitable. Businesses can run out of money
2) Investing too many fixed assets
Spending a large amount on equipment for the business. It is better for them to lease some of
these fixed assets to protects cash reserves
3) Allowing too much credit
Many businesses rely on credit. This means that goods and services are sold and the customer
pays for them later.
4) Over-borrowing
Businesses may borrow money from lenders for financial growth. As more loans are taken out,
the interest rate is also added up. To avoid over-borrowing a business may sell its shares.
5) Seasonal factors
Trade varies depending on seasonal factors.
6) Unexpected expenditure
Businesses need to prepare for extra expenditure which they may not expect. Equipment
breaking down, an increase of tax rate.
7) External factors
Sometimes events that are outside the control of the business can cause cash flow problems.
8) Poor financial management
Inexperience in managing cash or poor understanding of the way cash flows into and out of a
business may lead to cash flow problems.
9) New entrants
A business may run successfully and then fail because a new rival enters the market and takes
away its trade. Many small businesses collapse because they are ‘overrun’ by larger competitors
in the market. For ex:
- Bringing out superior products
- Read market conditions more effectively
- Charge lower prices because their costs are lower
- Use of high discount prices
10) Ineffective cost control
Sometimes businesses cannot keep their costs down. If the costs are too high the business needs
to increase their prices to make a profit. This might in a result of loss of trade to low-cost
competitors
11) Ineffective marketing
Businesses may struggle to compete if their marketing is ineffective.
- A business might launch a product that fails to take off
- A business might use inappropriate pricing strategies
- A business might invest too heavily in overpriced or inappropriate advertising or
campaigns,
- A business might use an inappropriate marketing strategy.
12) Lack of business skills
Some businesses lack competitiveness and fail because their owners are not sufficiently skilled.
Running a business can be difficult and requires a lot of skills. Entrepreneurs have to be
innovative.
13) Poor leadership
A business might lose its competitive edge in the market because a leader makes a mistake. This
could be a result of poor decision making or failure to make urgent changes.

Some businesses collapse because they fail to be innovative, they may have failed to adapt to the
new trends and fail to adopt the latest available technology because of higher costs.
Unit 2: People in Business
16: The Importance of Good Communication in Business
Communication is about sending and receiving information.
Inside a business, messages can be passed vertically or horizontally (upwards and downwards).
These routes are called communication channels.

Downwards communication usually involves managers giving information or instructions to

their subordinates.
Downwards communication is important because:
- Subordinates look to their managers for leadership and guidance
- It allows decisions made by management to be carried out by employees
- It allows managers to command, control and organise.
Upwardly communication often involves workers giving feedback to managers; however it
also involves requests by workers.
Upwards communication is important because:
- Helps managers to understand the views and needs of the subordinates
- Helps staff to feel that they are valued
- Provides managers with information to help make decisions
Horizontal communication occurs when on the same level in the organisation exchanges
information. Horizontal communication is common within a department.

Internal communication takes place inside a business between employees

External communication occurs when businesses exchange information with people and
organisations outside the business.

Formal communication in business is when people use recognised channels.

Informal communication is through non-approved channels. Most informal communication is
done 'on the grapevine'. This means that unofficial information is passed on through gossip and
rumours.

Face to face communication

Written Communication:
Businesses can communicate information using a variety of methods.

Letters: are a common way to send written information. They are flexible because they can be
sent to a variety of different people, such as customers, employees and suppliers. Letters can also
be used for private information and provide a record of the communication. However, letter
writing can take time and effort and some employees may have relatively poor written skills.

Reports: are used to communicate important information in a formal manner. They may be
short, or complex and detailed. However, reports should be concise and carefully structured and
presented. Reports can contain numerical data and graphics. The main disadvantage of reports is
that they take time to research.
Memorandums (short written notes): are used for internal communications only. They contain
brief messages and are flexible. They are often used to remind people of events, confirm
telephone conversations or pass on simple instructions.

Forms: are used to communicate routine information. Application forms are used to collect
information for jobs, loans or licences. Claim forms for expenses and other allowances, order
forms and timesheets are all examples of different types of forms. However, forms may be
inflexible and can become out of date.

Notice Boards: are cheap to use and can pass on information to a large number of people.
However, they can become untidy, are open to abuse and are often overlooked.

Electronic communication:
Most businesses use electronic communication it is possible to deliver messages instantly all
over the world and to a number of people at the same time using electronic methods
-Email
-Internet
-Mobile phones
-social media
-Intranets
-Public address pa systems
-Electronic notice boards
 17: Barriers to Communication in Business
Communication is only effective if the receiver understands the message sent. Things that get in
the way of good communication are called communication barriers. Some examples are given
below.

Lack of Clarity:
If a message is not clear, it may be misunderstood or ignored. Unclear communication may be
the result of poorly written or poorly expressed messages.

Technological Breakdown:
A lot of business communication is done electronically. If technology is faulty, communication
may become unclear or break down. More recently, the websites of some businesses have been
taken out of service by computer hackers.

Poor Communication Skills:

When communicating verbally, some people may have a limited vocabulary or may not be able
to make themselves understood. They speak with very strong accents or use informal language.
Some people may be poor listeners and may 'switch off' during the communication process.

Written messages may contain poor spelling or weak grammar, errors that can make a message
appear untrustworthy. Some messages might be completely ignored if they are poorly written.

Jargon:
Sometimes people use jargon when communicating. Jargon is vocabulary that is used and
understood by people in a specific group.

Distractions:
Communications may break down if there are distractions in the communication process. An
obvious distraction is noise. Distractions may also occur when people are under stress as they
may be insufficiently focused on their jobs as a result.

Business Culture:
Some businesses may develop a culture of poor communication. This can be quite a serious issue
and occurs when there is a general lack of communication throughout the whole organisation. If
a business fails to keep its employees fully informed of important events, it can lead to doubt and
uncertainty. This may result in rumours, gossip, suspicion and anger.
Long Chain of Command:
This means messages take longer to pass through the chain and may become unclear or
inaccurate on the way. This is more likely to happen in large organisations where thousands of
staff are employed. A shorter chain of command means that information can pass through an
organisation more quickly. Flatter organisations might also lead to more upward communication,
which means that managers might have a better understanding of employee ideas and morale.

Different Countries, Languages and Cultures:

In multinational companies people may be working in different countries where languages and
cultures vary. Such differences may make communication more challenging. Employees may be
in different time zones from one another, which can delay responses or make real time
communication by telephone or video call difficult.

Recruitment:
The quality of people's written communication in job applications may provide a guide to their
ability. Also, people's verbal communication skills can be assessed in interviews. If a job
applicant is unable to communicate effectively during an interview, they should not be likely to
get the job. In some cases, businesses might use formal tests to assess the communication skills
of potential recruits.

Training:
One way to overcome barriers of communication is to train staff in communication skills.For
example, staff can be trained to improve verbal communication skills when dealing with
customers on the telephone.

Written Communication:
One way of removing the barriers created by poorly written communication is to provide
standard company letters, which can be used by all staff. Templates can be stored easily in IT
systems for letters to customers, suppliers and other regular receivers.

Technology:
If communication barriers result from faulty technology, a business may have to repair or replace
equipment. The pace of technology is very fast and businesses will be under competitive
pressure to keep up to date with new developments. Barriers sometimes exist because some
employees do not understand how IT systems work, or they are not aware of the systems' full
capabilities.
Social Events:
Internal communication may improve if social events are organised for staff.

Culture Change:
If a business has a culture of poor communication, it will be important to make changes.
A business might need to introduce some formal communication systems. It might need to
remove physical barriers, such as partitions between workstations, provide larger and more open
workspaces, end the separation of workers according to job status and perhaps introduce an 'open
door policy, through which staff are encouraged to communicate with their seniors.
A business must also avoid withholding important information and encourage upward
communication. Generally, a business will need to work towards a climate of openness and trust.
 18: Recruitment and Selection
Full-time employment:
Employees work full time - usually five working days, and the number of hours usually varies
based on region. Full-time employees are usually entitled to extra benefits such as health
insurance and overtime pay.

Part-time employment:
Part-time employees work fewer hours than full-time employees and are helpful for business
flexibility. Part-time work helps businesses employ workers when needed and it is also better
suited to people such as students.

Job share:
Job sharing is where two part-time employees share the work and are paid for a single full-time
position, although many businesses don’t provide this opportunity. This arrangement usually
suits employees who want to reduce work hours, but will require the employees to communicate
and interact effectively. For a business, this can also mean better innovation and ideas, reduced
stress and workload, and more motivation.

Casual employment:
There is no guarantee of work from the employer and there are uncertain work hours because of
peak timings. ‘On call’ duty means employees come into work at very short notice and although
this provides great flexibility for the business, it might not accommodate the employees’
schedule.

Season employment:
Some businesses need work at particular times of the year, and although it is regular, it is
short-lived. Season employment is flexible for businesses as workers are laid off when the
season ends, and for some workers, it may be preferable to their lifestyle.

Temporary employment:
Sometimes businesses need to take on staff for a short period of time to cover for absent
workers. The work is most likely full-time but the length of the contract varies. This is usually
opted for by those looking to earn income while looking for a permanent post, and may also be a
doorway for a permanent post.
A business needs new staff because:
● They are expanding and need more labour
● People are leaving
● Positions have become vacant due to promotion
● Positions for temporary staff for people in the absence

Recruitment process:
1. Identify the type and number of staff needed
2. Prepare a job description and person specification.
3. Advertise using appropriate media
4. Evaluate applicants and select shortlist
5. Carry out interviews
6. Evaluate interviews and appoint best candidate/s
7. Provide feedback for unsuccessful applicants

Recruitment documents:
● Job description: title of job, tasks, duties and responsibilities
● Person specification: qualifications, experience, skills, attitudes and any other
characteristics
● Application form: full name, address, personal numbers, education, employment
history, hobbies and interests, referees, declaration of health issues
● CV/Resume: personalised by the job seeker to express individuality

Internal recruitment:
Recruiting someone who already works for the business.
● Cheaper
● Recruits familiar with the company
● Staff motivation because of promotion
● Predictable employee

External recruitment:
New staff recruitment from outside the business.
● A larger pool of potential employees
● Fresh ideas and talent
Attracting applicants:
● Advertising
● Headhunting
● Word of mouth
● Jobcentres
● Direct applicants
● Employment agencies

Job advertisements:
● Includes important job information
● Targets certain types of workers
● Place ads in media which the position is required for
● Advertising online is cheap and attracts global applicants

Shortlisting:
Selecting a small group of candidates suitable for interviewing from the application forms speeds
up the selection process.

Interviewing:
Shortlisted candidates are invited for an interview where interviewers find out more about the
candidates and the candidate about the job and business. All candidates should be asked the same
questions for fairness and can help all parties involved clarify information.
 19: Legal Controls over Employment
Governments pass legislation to protect workers so businesses don’t exploit workers. They can
be exploited through low wages, long hours, denial of employment rights, danger exposure and
discrimination. Employee selection based on race, gender, religion, etc. is illegal in most
countries.

Gender:
Gender discrimination occurs usually when women in the workplace don’t recieve equal
treatment because of their gender. Laws have been put in place to combat this through being
genderless with work titles and limitations.

Race and religion:

Businesses must ensure that there is no discrimination based on colour, race, ethnic origin,
religion or nationality. Ethnic groups suffer more than whites and governments around the world
are aware, so laws have passed to reduce the imbalance, such as in clothing, selection tests,
religious holidays and harassment in the workplace.

Disability:
There is protection in the workplace for disabled workers, but their unemployment rates are also
high. Employers are obliged to make reasonable adjustments for working practices and work
environment to accommodate disabled employees and improve access.

Sexual preferences:
Discrimination based on sexual preference is illegal in some countries. People may face
harassment based on sexual preferences and businesses should combat any discrimination in the
workforce.

Age:
Discrimination occurs when a business decision is made on the grounds of a person's age
regardless of their qualification and experience. Many countries do not have a specific
discrimination legislation protection but it is mostly illegal to offer job to someone based on the
age and businesses take measures to prevent harassment in the workplace based on age of
promotion and years of experience.
Minimum wage:
Countries have established a minimum wage which is a legislation that demands that employees
be paid no less than a certain amount. Some workers are excluded from this, and employers face
a penalty if they pay lower than the minimum wage. Minimum wages reduce poverty and help
disadvantaged workers.

Effects of minimum wage on businesses’:

It is argued that if the wage bill rises, employment will decrease. However, there are benefits to
minimum wage such as motivation and productivity, disposable income means demand rises, and
businesses may experience lower rates of staff absence and better reliability.
 20: Training
Training is important and increases the knowledge and skills to do jobs effectively. Also
motivation to increase productivity, but it can be expensive. No training might endanger workers.

Induction training:
● Health and safety training
● Company policies
● Company aims and objectives
● Introduction to job and direct colleagues
● Complete tour
● Introduction to senior staff

On-the-job training:
Advantages:
Output is being produced
Relevant - employees learn by doing the job
Cheaper
Easy to organise
Disadvantages:
Output may be lost through mistakes
May be stressful for worker
Staff may get frustrated for being unpaid trainers
Could be an external danger
Common methods:
Watching another worker
Mentoring
Job rotation

Off-the-job training:
Advantages:
Output is not affected throughout training
Learning is not distracted by work
Training can take place outside work hours
Customers and external parties are not put at risk
Disadvantages:
No output - employees do not contribute to work
Can be expensive
Some aspects cannot be taught off-the-job
May take time and effort to organise

Benefits of training:
● Keeping workers up to date
● Improved labour flexibility
● Improved job satisfaction and motivation
● New jobs in the business
● Training for promotion

Limitations of training:
● High cost
● Learning by doing
● Loss of output
● Employees leaving
 21: Importance of Motivation in the Workplace
A motivated workforce performs better as people are happier and the working environment is
more agreeable. Labour productivity and business profits also increase.
Importance of employee motivation:
● Easier to attract employees
● Easier to retain employees
● Higher labour productivity

Herzberg’s two-factor theory:

Psychologist: Frederick Herzberg (1960)
Motivators: (motivates workers)
● Promotion
● Responsibility
● Recognition
● Personal development
● Job enrichment
Hygiene factors: (doesn’t motivate employees)
● Pay
● Working conditions
● Job security
● Staff relationships

Maslow’s hierarchy of needs:

Psychologist: Abraham Maslow (1943)
Taylor’s theory of scientific management:
Psychologist: Frederick Taylor (1911)
● Argued that workers were motivated by money
● Pay system wasn;t motivating workers
● Idea of piece-rate system
● ‘Fair day’s pay for a fair day’s work’
 22: Methods of motivation at work
Remuneration:
Money paid to employees based on work or services.

Time rates:
Money paid according to the amount of time spent at work (time rate). Workers are also paid
overtime. Salaried workers aren’t usually paid overtime.

Piece rates:
Workers are paid according to how much they produce. This encourages workers and helps
motivate them. However, work cannot always be measured, and quality might be affected if
workers work too fast.

Performance-related pay:
Is used to motivate non-manual workers to reward those whose output is difficult to measure.
Targets are set, and if they’re achieved, workers get paid more. However, workers might feel like
this is unfair because of biasness and there is also a lack of financial incentives. Some workers
might think targets are too demanding, some may blame other factors.

Bonus payments:
Some firms have bonus payments, where bonuses are paid to basic wages if targets are met. A
weekly production target is set and workers must complete them to achieve bonuses. This is
good for a business, as money is only earned when the target is met. It also motivates workers.

Commission:
This is a payment for reaching a target and rewards sales staff based on record.

Promotion:
Many people want to develop careers at work and move up the hierarchy. A business rewards
workers as they move towards the top and this is motivating. Employee has increased motivation
and responsibility.
Fringe benefits:
● Free counselling
● Discounts on employer’s products
● Subsidised meals
● Free of subsidised accommodation
● Free private health insurance
● Employee pension
● Company car
● Use of company facilities

Autonomy:
Businesses allow its workers improved autonomy to improve motivation. This means they can
make their own decisions and are trusted.
 23: Organisation Structure and Employees
Organisational charts:
The internal structure of a business is known as its formal organisation. The formal
organisation is represented by an organisation chart which shows:
- How business is split into functions or departments
- The roles of employees and their job titles
- Who has responsibility
- To whom people are accountable
- Communication channels
- The relationships between different positions in the business

Employee roles and responsibilities:

Directors:
They are appointed by the owner and they make all the important decisions for the
departments they are responsible for. They have authority over the managers.

Managers:
They are responsible for planning, controlling, organising, motivating, problem solving
and decision making. Their overall role is to achieve the objectives of the owners.

Supervisors:
They monitor the work in their particular area and have authority over operatives and
general workers. They may carry out managerial duties but at a lower level.

Operatives:
They are skilled workers that are involved in the production process. They are
accountable to supervisors or managers. Have more status than general staff.

General staff:
They are staff that do not have any specific skills but with training they can perform a
variety of tasks and gain promotion to other positions. Do not have any authority.

Professional staff:
They are skilled and highly trained like lawyers and doctors. In places where lots of
professional staff are employed, organisation charts are different.
Features of organisational structures:
Chain of command:
This is the route through which orders are passed down in the hierarchy. Orders will pass
down through layers from top to bottom. If the chain of command is too long: messages
may get lost or confused as they pass up or down the chain and changes might not be
accepted lower down the chain so risk of instructions not implemented is higher.

Span of control:
The number of subordinates a person directly controls in a business. Wide span of
control means a person controls a lot of subordinates so difficulties arise. Narrow span of
control means a person controls fewer subordinates.

Flat and Hierarchical (tall) structures:

Flat Structures:
- Communication is better because chain of command is short
- Management costs are lower due to few layers of management
- Control may be less formal as it is more direct between layers
Hierarchical (tall) Structures:
- Poor communication because chain of command is long
- Management costs are higher
- A clear route of promotion which helps motivate staff
- Control is more formal due to all the layers in the hierarchy

Delegation:
A manager may hand a more complex task to a subordinate to save time which also
motivates workers. However, if there is no reward they may be dissatisfied.

Centralisation and Decentralisation:

Decision making is centralised if employees do not have any authority in the business
however decentralised is if every employee has the authority to take decisions.
Centralised: Advantages
- Senior management has complete control over resources
- Senior managers are trained and experienced in decision making
- Prevents parts of the business acting independently
- Coordination and control is easier
Centralised: Disadvantages
- Employees may be demotivated without any authority
- Brings less creativity and fewer ideas
- Procedures may be needed to make decision-making easier
- Top of hierarchy may be out of touch with the needs of customers

Decentralised: Advantages
- Workers have autonomy and may be better motivated
- Speeds up decision making
- Takes pressure off senior managers by reducing their workload
- Workers get opportunity to be creative and share their ideas
- Provides more promotion opportunities
Decentralised: Disadvantages
- Senior managers may lose control of resources
- Costs may be higher due to less standardisation and more variability in
decision-making processes
- Some employees may not have the ability to make decisions
- Some employees may not welcome the extra responsibility

Organisational charts and growth:

Most small businesses start with an entrepreneurial structure where decisions are made
centrally by the owner. In some businesses, matrix structure is favoured where
employees are put into teams that cut across departmental roles.
 24: Departmental Functions
Human resources (HR) Department:
Responsible for the welfare of employees. Main tasks completed by department include:
- Workforce planning: involves calculating the number and types of staff
that will be required by the business
- Recruitment and selection: place job adverts and provide application
forms as well as shortlisting for interviews and selecting an employees
- Training: organise induction and other types of training
- Health and Safety: ensure and comply with legislation that staff are fully
trained in health and safety and issue required clothes and equipment
- Staff Welfare: meeting the welfare needs of employees and monitoring the
work environment to ensure it is comfortable
- Employment issues: draw up contracts of employment and clarify its
contents and condition of service for new employees
- Industrial relations: maintain good communication with trade unions and
organise negotiations between employees and employers
- Disciplinary and grievance procedures: provide information on issues
and how to deal and resolve them
- Dismissal: giving formal warnings and dealing with legal requirements
when laying off staff like in employment tribunal
- Redundancy: if business has to make people redundant, a strict procedure
has to be followed before they are laid off

Finance department:
Responsible for administering and monitoring all financial transactions carried out.
- Recording transactions: records of every sale and purchase to produce
financial statements
- Wages and salaries: deal with wage queries and process them to
employees on time
- Credit control: monitoring the amount of money owed by customers
- Cash flow forecasting and budgets: controlling the firm’s finance by
producing budgets and cash flow forecasts
- Accounts: financial statements to show how well the company performed
Marketing department:
Most businesses are now market-oriented meaning the main focus is the customer
- Market research: gathering, processing and presenting data about
customer’s needs, markets and competitors
- Product planning: deciding which products should be marketed
- Pricing: what prices should be charged for the products sold
- Sales promotion: develop interesting and effective methods of promotion
- Advertising: create innovative and effective adverts
- Customer service: providing assistance and advice to customers
- Public relations: Communication between the company and the public
- Packaging: design of the packaging
- Distribution: Products are made available to customers in the right place
at the right time

Production department:
Making goods and providing services.
- Design: design products for individual customers
- Purchasing: buying the resources needed by the business
- Stock control: storing, controlling, supplying and handling stocks of
resources and providing information about stocks
- Maintenance: cleaning and maintenance of business property
- Research and development: the investigation and discovery of materials,
processes and products
Unit 3: Business Finance
25: Sources of Finance
When raising money, businesses have to decide which source of funds is best for their needs.
They often have to choose between long-term and short-term sources of finance.

Short-term needs:
The finance needed to fund day-to-day expenditure that includes the running costs of business
such as wages, material and premises is called short-term finance because it is usually repaid
within a year.

Long-term needs:
When the business takes more than a year to repay what is owed it is called long-term finance.
Some long-term finance comes from the owners (Capital). Other long-term sources may be
borrowed from financial institutions. Long-term sources of finance are often used to buy
resources that will be used repeatedly by the business for long periods of time.

Start-up capital:
Funds that are needed when first setting up a business. Some of the resources needed are
‘one-off’ items meaning they are not repeated again for many years. Other start-up costs might
include research, converting premises, legal fees and marketing.

Expansion:
Businesses often need to raise finance to help fund their expansion. After the business is
established, they might want to:
● Expand capacity to meet growing orders
● Develop new products
● Branch into overseas markets
● diversify

Internal Finance:
Finance generated by the business from its own means after it has been established. Most
businesses would prefer to use them as they are cheap and more readily available

Personal savings:
When a business is set up the owners are usually required to contribute some finance. The
capital is provided by the owners from personal savings.
Retained profit:
Retained profit is profit retained by the business and not returned to the owners. It is an
important source of finance as it is cheap with no charges involved and a flexible source of
finance as it can be built up and kept in a bank to earn interest. However many owners object
to it as it can not be returned to them.

Selling assets:
An established business may be able to sell some unwanted assets to raise finance. For
example, machinery, land and buildings and some large companies sell off parts of their
organisation to raise finance.

External Finance:
Finance obtained from outside the business. There is a wide variety of both short-term and
long-term external sources of finance.

Short-term sources may be needed for:

● Some businesses have seasonal trade
● A manufacturer may need finance to pay for raw materials and wages to meet a
large order
● A firm might be short of money waiting for a customer to pay
● A business might need to meet emergency expenditure

Short-term finance:

Bank Overdraft:
A bank overdraft means the business can spend more money than it has in its account. The
bank will set an overdraft limit and interest is charged when the account is overdrawn. The
bank has the right to call in the money owed at any time.

Trade Payables:
It is a cheap way of raising finance as businesses often buy resources and pay for them at a
later date. However it has its downsides:
● Many suppliers encourage early payment by offering discounts
● The cost of goods is often higher if firms buy on credit
● Delaying payment may upset suppliers
Credit Cards:
Credit Cards are convenient, flexible and avoid interest charges if accounts are settled within
the credit period. They can be used to meet expenses when travelling and small businesses can
use them to buy materials. However, interest rates are high if accounts are not settled within
the credit period.

Long-term Finance:
Loan Capital:
Fixed agreement between a business and the bank. The amount borrowed, and interest, must
be repaid in regular instalments over a fixed period.

Unsecured bank loans:

The bank lends money without the security of having a claim on your assets if you don't pay it
back. If a business collapses, the bank might not get its money back. Interest rates are higher
and it is hard to get as it is risky for banks.

Mortgages:
It is a long-term loan and the borrower must use land or property as security. If the borrower
fails to make the repayments, the lender can repossess the property. Interest rates are lower
than unsecured loans. They may be taken out for up to 25 years

Debenture:
It is a long-term security yielding a fixed rate of interest, issued by a company and secured
against assets.

Hire purchase:
Buying specific goods with a loan, often provided by a finance house. The features of it are:
● The business makes a down payment
● The remaining fee is paid in monthly instalments
● The goods bought do not legally belong to the buyer until all instalments are
paid
● If the buyer falls behind with the repayment, the goods can be repossessed
● HP agreements can be short term or long term
Share Capital:
For limited companies, share capital is an important source of external finance. Limited
companies can raise money by selling more shares. Selling shares to raise capital avoids
paying interest however shareholders will expect to be paid dividends.

Venture Capital:
Venture capitalists are specialists in the provision of funds for small and medium-sized
businesses. They may invest in businesses after the initial start-up. They prefer to take a stake
in the company meaning they have some control and entitled to a share in the profit. Venture
capitalists raise their funds from institutional investors.

Crowdfunding:
It is where a large number of individuals invest in a business venture using an online platform
and avoiding using a bank. Transactions are conducted online. Specialist websites allow those
seeking finance to publish details of their business idea and how investors will profit from it.
 26: Cash Flow Forecasting
The importance of cash:
The most liquid of all business assets: notes, coins and money in the bank.
Businesses need cash:
- To pay suppliers, overheads and employees
- To prevent business failure: business can become insolvent if it ran out of cash

A business have better control over its cash flow if it:

- Keeps up-to-date records of financial transactions
- Produce accurate cash flow forecasts
- Operates an efficient credit control system, prevents slow or late payments

The difference between cash and profit:

- Some goods are sold on credit, some customers may owe money making profit
greater. As well the business might receive cash increasing cash balance.
- Sometimes owners might put or borrow more cash into the business
- Purchases of fixed assets will reduce cash balance but have no effect on profit
- Amount of cash will differ at the end of the period compared to profit

Cash inflows and outflows:

Cash inflow:
The money entering the business when income is received
Cash outflow:
The money going out of a business when payments are made
Net Cash flow:
The difference between cash inflows and outflows. Positive net cash flow means that more
cash is flowing into the business while negative cash flow means more outflow of money.

Cash flow forecast:

Financial document that shows the expected cash inflows and outflows over a future period. It
has the closing cash balance: the amount of cash the business will have at the end of the month

Why are cash flow forecasts important?

- Identifying cash shortages
- Support applications for funding
- Helps when planning the business aims and objectives
- Monitoring cash flows and identifying issues
 27: Costs
Why does production generate costs:
The production of goods and provision of services uses up resources that costs the business.
Marketing, distribution and administration costs as well as any interest on loans.

Fixed costs:
Production costs remain constant whatever the level of output also called overhead costs

Variable costs:
Production costs that change when the level of output changes. More output means the
variable costs will increase and less output means the variable costs will fall.

Total costs:
The cost to a firm of producing all output over a period of time. Equation:

Average costs:
The cost of producing a single unit of output. Equation:

Total Revenue:
The amount of money a firm receives from selling its outputs (sales generated). Equation:

Calculating profit:
Firms calculate their costs and revenue to figure out the profit and loss. Equation:
 28: Break-even Analysis
The Concept of Break-even:
A business will break even if its total costs and total revenue are exactly the same. At this
point the business does not make a profit or loss.

Calculating the Break-even point:

- Fixed cost
- Variable cost per unit
- Selling price per unit

Break-even chart:
- Break-even point is where total costs and total revenue intersect
- At any level of output below the break-even point, the business makes a loss
- At any level of output above the break-even point, the business makes profit
- Margin of safety: range of output over which business can make profit

Break-even charts show:

- How much output a business has to produce in order to break even
- The costs, revenue and profit at different levels of output
- The margin of safety

The limitations of Break-even charts:

- The TC and TR are shown as straight lines which is not always accurate
- It is assumed that all output is sold and no stocks are held
- The accuracy of break-even chart depends on the quality and accuracy of the
data used to construct total cost and total revenue
 29: Statement of Comprehensive Income
The purpose of a statement of comprehensive income:
It is a financial document showing a firm’s income and expenditure in a particular period.
Businesses use it to calculate the profit at the end of the financial year.
Profit is calculated through two steps:
Gross profit:

Operating profit:

Retained and Distributed profit:

Retained profit is profit held by the business rather than returning to the owners and which
may be used in the future. Distributed profit is profit returned to the owners of the business.

The statement of comprehensive income includes:

Revenue: money the business receives from selling goods and services.
Cost of sales: represents the direct costs related to the manufacturing of goods/services.
Administrative expenses: general overheads or expenses of the business. Other operating
Expenses are expenses not included in administrative costs. Selling expenses are a range of
expenses a business may incur from directly selling their products
Finance costs: interest paid on loans. Finance income is interest received by the business on
deposit accounts.
Profit for the year: Operating profit - Costs of Finance.
Profit for the year after tax: the amount of money that is left over after all expenses,
including taxation, have been subtracted from revenue.

How the statement of comprehensive income is used in decision making:

- Business might use it to decide how much money to invest
- It helps identify costs and analyse any issues with them
- It is used as a forecast for the future performance of a business
- Investors use when deciding where to invest their funds

Normal profit: minimum financial reward an entrepreneur must receive in order to maintain
interest in a business.
 30: Statement of Financial Position
What is a statement of financial position:
A summary of a firm’s financial position including business assets, liabilities and capital at a
particular point in time (often called the balance sheet).
- Assets are the resources owned by a business
- Liabilities are the debts of the business used as a source of funds
- Capital is the money put into the business by the owners

Features of a statement of financial position:

Non-current assets: assets that last for more than one year and the most productive resources
Current assets: liquid assets that are likely to be converted into cash within a year
- Inventories of raw materials, semi finished goods and finished goods
- Trade receivables - amount of money owed to the company by customers
- Cash ‘in hand’ or in the bank
Current liabilities: business debts which must be repaid within a year
- Trade payables - money owed to suppliers
- Taxation owed to tax authorities
- Leases and hire purchases
- Short-term loans and overdrafts
Net current assets: Current Assets - Current liabilities
Non-current assets: business debts that are payable after 12 months
- Mortgage - long-term secured loan
- Long-term bank loans, leases, or hire purchase agreements
Net Assets:
Shareholders’ equity: All the money owed to the owners. It includes:
- Shared capital
- Retained profit
- Other reserves - amounts owed to shareholders

Interpreting the statement of financial position:

- Value of all business assets, capital and liabilities
- Asset structure of business
- Capital structure of business
- Value of net current assets - how much working capital a business has
Non-physical assets: Goodwill: the amount a buyer would be prepared to pay for a business
in addition to the net assets due to good relationships with its customers and suppliers.
 31: Ratio Analysis
What is ratio analysis:
It is a mathematical approach to investigate accounts by comparing two related figures.
Probability ratios measure the performance of the business and focus on profit, revenue and
the amount invested in a business. Liquidity ratios measure how easily a business can pay its
short-term debts such as wages or suppliers.

Gross profit margin:

Operating profit margin:

Helps to measure how well the business controls its expenses and cost of sales

Mark-up:
Profit made by item sold

Sometimes it is used to set prices:

Concept and importance of liquidity:

Liquidity refers to the ease and speed with which assets can be converted into cash. Two ratios
can be used to assess the liquidity of a business: current ratio and acid test ratio.

Current ratio:
Acid test ratio:

Return on capital employed:

It compares the profit (return) made by the business with the amount of money invested (its
capital)

Using ratios to make comparisons:

Ratios can be used to assess the performance and the liquidity of a business at a particular
point in time. They can also be used to monitor the progress of a business over time. They can
also be used to make comparisons between businesses in the same industry
 32: The Use of Financial Documents
Using financial documents to assess the performance of a business:
Managers and Employees:
Managers will want to assess the performance of a company. The profit will be a reflection of
their performance. They also make comparisons with competitors that motivate them to work.
Employees might need financial information during wage negotiations.

Owners and shareholders:

Owners will be interested in the performance of businesses and financial positions and
whether the business has met its profits target. Shareholders will also be interested to see how
their investment is growing and make comparisons with competitors.

External stakeholders:
Banks need up-to-date financial information when deciding whether to lend money to a
business. Suppliers will want to assess the creditworthiness of businesses that buy resources
from them using trade credit. They are also used by potential investors and financial analysts
to help make decisions when buying shares.

Using financial documents to inform decision making:

Funding Decisions:
Access to relevant financial information can help predict when more money will be needed for
the business. As well it helps the business decide which type of funding is appropriate to
expand the business with.

Reducing costs:
A business might use the statement of comprehensive income to analyse costs and to assess
whether costs are under control and examine the different costs to help identify problems.

Increasing profitability:
It may be possible to use the accounts to help find ways of making more profit.

Investment decisions:
Investment decisions are risky and uncertain because businesses can never know if the
investment will generate income or not. However financial documents help investors assess
whether a business is strong enough to take risks.
Other uses of financial documents:
Government:
Many governments gather business and financial information which is made available to the
public. Governments use the information to monitor the progress of the economy and help
evaluate the success of its economic policies

Competitors:
Limited company accounts are made available to the public so competitors use them to
analyse and make comparisons.

The Media:
Television, media companies, and radio often produce reports on business and commerce.

Tax authorities:
They may require details of income when working out how much tax businesses and their
owners must pay as well as VAT and excise duties (taxes on selected goods) owed by business

Auditors:
The accounts of limited companies have to be checked for accuracy by an independent firm of
accountants and registered auditors.

Registrar of companies:
Limited companies in some countries have to register with a registrar of companies and
submit a copy of their financial statements and accounts every year.
Unit 4: Marketing
33: Market Research
Purpose of market research:
Market research involves gathering, presenting, and analysing information regarding the
marketing and consumption of goods and services.

To identify and understand customer needs:

A business will be more successful if it can supply products that meet customer’s needs.
Businesses also can anticipate customer needs so they can respond to changes very quickly.
They have to research needed factors such as: model design and style, colour, durability,
efficiency/ performance, ease of handling, and ease of storage.

To identify gaps in the market:

A business may be able to increase its revenue and profit before a competitor arrives. Finding
untapped markets and gathering information from people to help identify present issues in
production will give the business a competitive edge.

To reduce risk:
Launching new products in competitive and fierce markets is risky. Market research helps
reduce the risk of failure as it predicts whether the product will develop or not.

To inform business decisions:

Market research can provide a wide range of information that could be used to improve
decision making as managers will have access to meaningful detailed information.

Methods of primary research:

Businesses use primary or field research to gather information that does not already exist. The
main advantage is that it is original and information gathered is adapted to a business’s needs.
However it is time consuming and expensive as some hire special market research agencies.

Questionnaires:
It is a list of written questions used to record views and opinions of respondents. A good
questionnaire will have the following features:
- A balance of opened and closed questions
- Contain simple clear short questions avoiding use of jargon
- Does not contain leading questions as they are biassed
Different types of questionnaires:
- Postal surveys: Questionnaires sent out to respondents by letters
- Telephone surveys: It is cheap and a wide geographical area is covered
- Personal interviews: people are approached in the streets and helps get detailed
information and questions to be explained
- Online surveys: surveys are sent out through emails

Focus groups or consumer panels:

Consumer panels ask a group of customers for feedback about products. Focus groups are
where a number of customers are invited to attend a discussion led by market researchers. It is
cost effective and helps gather detailed information. However it could be generalising.

Observation:
Market researchers ‘watch’ the behaviour of customers. Observers may record the amount of
time customers spend looking at particular products. However, there is no feedback.

Test marketing:
This involves selling a new product in a restricted geographical area to test it and sales levels
before a national launch. Feedback is gathered from customers and used to modify the product

Methods of secondary research:

Businesses use secondary or desk research to collect information from data that already exists.
It could be internal or external data. Secondary research is quick and easy to gather. However,
data collected does not adapt to business needs and may be inaccurate and out of date.
Qualitative and quantitative data:
Qualitative data is about the attitudes, beliefs and intentions of consumers. It is usually written
down or recorded. It is detailed but also open to many interpretations. Focus groups,
interviews and social media. Quantitative data is expressed in numbers and can be measured.
It is easier to gather, process and present to readers. Statistics from surveys and governments.

Role of social media in collecting market research data:

- It can reach many people around the world and easy to gather
- It allows specific groups of people to be targeted
- It may be free for business or really cheap and easy to gather
- It allows communication on a personal basis with individuals and groups
- Information can be collected quickly from a variety of sources
 34: The Importance of Marketing
Markets and Marketing:
Market exists when buyers and sellers communicate and exchange goods for money
- Consumer goods markets: where products such as food, magazines are sold
- Markets for services: these are varied and could include service for individuals
- The housing market: where people buy and sell properties
- Commodity markets: markets where raw materials such as oil are traded
Marketing is a management process involved in identifying, anticipating and satisfying
consumer requirements profitably.
- It identifies the needs and wants of consumers
- It designs products that meet these needs
- It understands the threat from competitors
- It tells customers about the products
- It charges the right price
- It persuades consumers to buy products
- It enables products to be available in convenient places

Building customer relationships:

Keeping customer loyalty:

To retain existing customers, a business must continue to satisfy their needs by developing
new products, providing first-class customer service, maintaining effective communication
links, delivering reliability and responding to any changes in the market. Reward cards are
used to give customers points according to what they purchase. They also give Free gifts to
loyal customers. As well, making donations to charities helps provide trust. Businesses set
up deals with other businesses to share costs and benefits of rewarding. (Partnerships)
Product and market orientation:
Product oriented businesses are more concerned about the quality of their products. Their
efforts are concentrated on the design and manufacturing of the product itself. Market
oriented firms are led by the market. They spend a lot of their time and resources on
identifying, reviewing and analysing the needs of customers.

Market share and market analysis:

Businesses are often interested in their market share which is the proportion of sales in a total
market that a business or product enjoys. If a firm can dominate the market, it may be able to
charge higher prices. A business must keep in touch with market developments and respond to
them. A business might carry out market analysis in which they collect quantitative and
qualitative data about the features of a market. It is useful to find out:
- The size of the market
- The current growth rate and potential for future growth
- The number and sizes of businesses currently operating in the market
- The factors that might influence possible changes in the market
- The possible costs and profitability of the market
- Opportunities for segmenting the market
- The way consumers behave in the market
Market share equation:

Niche marketing and Mass marketing:

Some businesses sell their products to mass markets where they sell the same products to all
consumers and market them in the same way. Businesses produce large quantities at a lower
unit cost by exploiting economies of scale. Niche markets are a small market segment selling
to a customer group of specific needs.

Responding to changes in the market:

Changing customer needs:
- Consumers’ incomes change so they choose different products
- Consumer become better educated so people are more aware of opportunities
- Consumers are influenced by changes in social habits
- Fashions change over time
- New technologies result in different needs
Changing customer/consumer spending patterns:
Businesses gather information about spending patterns in markets. They carry out their own
research using statistics generated by governments or market research.

Competition puts businesses under pressure:

Increased competition leads businesses to monitor the behaviour of their competitors. They
also use a range of methods to attract customers and beat the competition:
- Lowering prices
- Making their products appear different and more appealing
- Offering better quality products and offering ‘extras’
- Using more attractive advertising and promotions
 35: Market Segmentation
What is meant by market segmentation:
Markets can be divided into market segments. Each segment is made up of consumers with
similar needs. By dividing the market, businesses can easily supply products that meet
consumers needs
- Some businesses concentrate on producing one product for one segment
- Some businesses produce a range of different products and target them at
several different segments
- Some businesses aim their products at nearly all consumers

Methods of market segmentation:

Location (Geographical) segmentation:
Different customer groups are likely to have different needs depending on where they live.
There might also be differences in groups living in the same country.

Demographic segmentation:
It is common for businesses to divide markets according to the age, gender, income, social
class, ethnic origin, or religion of a population.

Lifestyle (or Psychographic) segmentation:

Spending patterns of individuals may differ even if they have the same demographics and
location. Therefore some businesses target others lifestyles like adventure holidays may be
targeted at ‘outdoor types’ who like to risk things.

Benefits of market segmentation:

- Businesses that produce different products for different market segments can
increase revenue as businesses charge higher to different customer groups
- Customers may be more loyal to a business that provides products that are
designed specifically to them
- Businesses may avoid wasting promotional resources if they only target their
adverts at those who are actually interested in the product
- Some businesses can market a wider range of goods to different customer
groups
 36: Product
The marketing mix:
To achieve marketing objectives, a business must find the right balance between product,
price, and promotion.
- Design and produce high quality products
- Charge a price that is acceptable to consumers
- Let customers know about products through promotion
- Make products available in the right place at the right time

Product development:
Product development is a continuous process for many businesses. New products are needed
to replace ones that are out of date and help the business gain a competitive edge in the market
1. Generating ideas: Ideas for new products may come from business owners,
customers, competitors, staff, and research and development. Ideas must also
result from analysing rival products and improving them.
2. Analysis: Business must analyse products closely and decide whether they are
marketable and a suitable fit with the current portfolio and legal.
3. Development: It is a lengthy process and involves carrying out experiments,
using simulations, building models, producing samples and initial testing.
4. Test marketing: This stage involves testing the product using a representative
sample of the whole market.
5. Commercialisation and launch: A business puts the ‘final touch’ by resolving
issues by making modifications. A marketing strategy will be designed that
will begin with the national launch of the new product

Packaging:
Product life cycle:
This shows the levels of sales at the different stages through which a product passes over time
1. Development: Sales are zero as the product is not yet on the market and is
being researched, designed and tested. Costs are high.
2. Introduction: Spending on promotion and official launch will be high. Some
may start with skimming or penetration pricing to get established in the market
3. Growth: If the product is successful, sales will start to grow and the revenue of
the business will recover from the development costs and profit is received
4. Maturity and saturation: The product will make profit because costs have
been recovered, the market will become saturated and prices are likely to fall
with different promotion methods.
5. Decline: sales of many products decline and are taken off the market. This is
because consumer tastes change, new technology emerges or new products
appear in the market

Extension strategies:
They lengthen the life of a product before it starts to decline. They are popular with businesses
because costs are high and they help the business generate more cash.
- Finding new markets for their products
- Finding new uses for a product
- Modifying the product
- Develop the product range
- Change the appearance and packaging
- Encourage more frequent use of the product

Managing and reviewing the product portfolio:

Product portfolios are the range of products that a business has available in the market. The
Boston matrix describes products according to the market share they enjoy and whether the
market has any potential for growth.
- Stars: valuable products with a high market share and potential for growth.
They are likely to be profitable
- Cash Cows: are mature products with a high market share. Not likely to grow
but generate a steady flow of income.
- Question marks: are products with low market share but the market is growing
and may have potential
- Dogs: are at the end of the product cycle. They have low market share and are
not likely to grow. They are replaced by new products
 37: Price
Pricing:

Cost-Plus pricing:
It ensures that all costs are covered however it does not take into account market conditions.
Cost-plus pricing: Mark-up + Total Costs

Penetration pricing:
A business will introduce a new product and charge a low price for a limited period. It is used
to establish a place for the product in the market and slowly rises. Businesses that sell into
mass markets favour this strategy. This is used because:
1. It is hoped consumers get into a habit in buying the product that they continue
to buy it when the prices are high
2. Large retailers may show interest if the product is generously price which will
help the business sell large quantities of the new product

Competition-based pricing:
Some businesses take a close look at what their rivals are charging when setting their prices.
This ensures that a price war is avoided. Another approach is for the market leader to set the
price and all the others follow, this is called price leadership. A business might lower its price
for a temporary period to drive out the competitors. (destroyer or predatory pricing)

Skimming:
Some businesses may launch a product into a market charging a high price for a limited time.
The main objective is to generate high levels of revenue with a new product before their
patents expire, competition emerges, and prices fall.
Promotional pricing:
Promotional pricing involves lowering the price of a product for a short period of time to draw
in customers. They may be cut:
- To get rid of old stock
- To generate some cash quickly to help solve cash flow problems
- To generate renewed interest in an existing product
- To attempt to win a larger share of the market by encouraging band switching
Discount and sales:
Businesses often cut prices for a short time. They have sales where goods are sold below
standard price. Some sales are seasonal.

Psychological pricing:
One common price strategy is to set prices slightly below a round figure tricking consumers
into thinking it is cheaper.

Loss leaders:
Some products are sold at a price lower than the cost. The objective is to draw customers in
and hope they buy more products which will overall generate profit.
 38: Place
What is place:
It refers to the location where people can buy products. If products are not available in
convenient locations, consumers may not have time to search for them.

Distribution channels:
The route taken from the producer to the customer. Intermediary are businesses that provide
links between producers and consumers like retailers and wholesalers.

Retailing:
Retailers buy goods from manufacturers or other suppliers and sell them straight to consumers
- Bulk breaking: buy large quantities from manufacturers and wholesalers and
sell small quantities to customers
- They sell in locations convenient to consumers
- They may add values to products by adding extra services

Independents:
Tend to be small outlets owned by sole traders, found in variety of locations like toys stores

Supermarkets:
Supermarkets are usually large stores selling up to 20,000 product lines like groceries. They
are usually cheaper and can afford to buy in bulk from manufacturers. They are usually
located in the outskirts of towns and cities where land is relatively cheap and readily available
Department stores:
These are large stores split into distinct selling departments. They usually aim to provide good
quality products with high levels of customer service. They are often found in city centres.

Multiples or chain stores:

This is where one owner opens multiple stores selling the same range of goods in many
different locations. They specialise in all sorts of product lines. They buy bulk directly from
manufacturers so their costs are low.They have a limited range of products and staff are poorly
motivated. They usually have standardised product range, pricing strategy, store fronts, store
layout, staff uniform and staff training wages and conditions of work

Superstores or hypermarkets:
These are very large stores, usually located on the outskirts of towns and selling a wide range
of cheap goods. Goods are not likely to be displayed attractively and there is fewer staff.

Kiosks and street vendors:

These are very small outlets selling a limited range of goods. They generally operate with low
set-up costs and minimal overheads however that depends on the location.

Market traders:
These are usually small-time businesses selling goods from market stalls. They have low
overheads and are often cheaper. They may be permanent or temporary depending on location

Online retailers:
Businesses that buy goods from manufacturers and sell them online to customers.

E-tailing (E-commerce):
Business to consumers (B2C): is the selling of goods and services by business to consumers
like ordering goods online and taking deliveries examples include purchasing tickets for films

Business to Business (B2B): involves businesses selling to other businesses online

Benefits to consumers of online distribution:

- It is cheaper
- Consumers can shop 24/7
- There is a wide range of goods
- People can shop from anywhere
Benefits to businesses of online distribution:
- E-tailers may not have to meet the costs of operating stores
- Lower start-up costs
- Lower costs when processing transactions
- Less paper is needed for documents
- Payments can be made and received online using payment systems
- B2C businesses can offer goods to a much wider market
- Businesses can serve their customers 24/7
- Businesses have more choice when deciding locations

Disadvantages of online distribution:

- Businesses will face increasing competition
- There is lack of human contact so consumers can not guarantee quality of
products and delivery businesses may be low quality
- There may be technical issues and security risk and spread of fake traders
- Customers with no internet access and credit cards are excluded

Other distribution methods:

Direct selling:

Wholesaling:
Wholesalers buy from manufacturers and sell to retailers. Wholesalers may break bulk, repack
goods, redistribute smaller quantities, store goods, and provide delivery services.

Agents or brokers:
Their role is to link buyers and sellers. They are used in a variety of markets.
Choosing appropriate distribution channels:
The Nature of the product:
Different types of products require different distribution channels
- Most services are sold directly to consumers
- Fast-moving consumer goods can not be sold directly to consumers
- Businesses producing high quality ‘Exclusive’ products
- Some products need explanation or demonstration

Cost:
Businesses will choose the cheapest distribution channels. They will prefer direct channels as
intermediaries take part of profit. Many producers sell directly which helps keep costs down

The Market:
Producers selling to markets are likely to use intermediaries. Producers selling overseas are
likely to sell using agents as they will know foreign markets better.

Control:
Some producers prefer complete control over distribution.
 39: Promotion
What is promotion:
Businesses use promotion to communicate, obtain and retain customers.

Above-the-line promotion:
Involves advertising using the media.
Television (pros): Huge audience can be reached, the use of products can be demonstrated,
creative adverts have great impact and opportunity to target groups with digital devices
Television (cons): It is very expensive, messages are short lived, some viewers avoid television
adverts, delay between seeing adverts and shopping

Newspapers and magazines (pros): National and local reach, readers can refer back, adverts
can be linked to articles and features, opportunity to target segments and relatively cheap
Newspapers and magazines (cons): No movement or sound, individual adverts may be lost,
rivals products may be advertised as well

Cinema (pros): Big impact with big screen, local and national advertising, specific age groups
can be targeted, sound and movement can be used.
Cinema (cons): limited audience and message seen once and short lived

Radio (pros): cheap production, minority audience allows targeting and sounds can be used
Radio (cons): may lack impact and is ignored, not visual and can be irritating for listeners

Posters and billboards (pros): national campaigns, seen repeatedly, short sharp messages and
large posters have a big impact
Poster and billboards (cons): damaged by vandals, only limited info, difficult to evaluate
Internet (pros): updated regularly, can be targeted, hits and response can be measured and
cheap and easy to set up
Internet (cons): pop-up adverts are irritating and possible technical problems

Below-the-line promotion:
Any promotion that does not involve the media.
Sales promotions:
These are incentives used to encourage people to buy the products. They are used to boost
sales in attracting new customers to keep buying the product. Examples: Free gifts, coupons,
loyalty cards, Competitions, BOGOF, Money off deals

Merchandising and packaging:

- Product layout: layout of products is planned to encourage customers to follow
particular routes and look at certain products
- Display material: Posters, leaflets, and other materials to persuade customers
to buy certain products
- Stock: shelves must be well stocked, empty shelves create bad impressions

Direct mailing:
This is where businesses send households leaflets or letters. They may include information
about a new product or price changes. Creates more personalised marketing messages.

Direct selling or personal selling:

Might involve a salesperson calling at households or through telephone calls. Features of the
product can be discussed however people are easily irritated by this approach.

Exhibitions and trade fairs:

Businesses attend exhibitions and trade fairs to promote their products face to face
- Products might be tested on consumers before a full launch
- Overseas exhibitions can be used to break out foreign markets
- Products are physically demonstrated and questions can be answered
- Exhibitions attract media
Public relations:
Press release:
Information about the business is presented in the media in a positive light.
Press conference:
This is where representatives face the media and present information verbally. This allows for
questioning and feedback.

Sponsorship:
Many companies attract publicity by linking their brands with sporting events through
sponsorship (making a financial contribution in return for publicity). This allows for the name
of the brand to be projected globally. And is usually used in markets where product
positioning is important

Donations:
They are used by a business to improve their image which is usually used in the media.

Using technology in promotions:

Online targeted advertising:
This means that adverts are only directed at people who are likely to be interested in the
product. This is possible because businesses can use browsing habits and other data collected
from online users to make adverts more personalised.

Viral advertising:
This involves any strategy that encourages people to pass on messages to others about a
product or business electronically. It creates the potential for exponential growth in the
exposure of a message.

Social media:
Social networks gather lots of information about users, which allows businesses to target their
adverts more effectively. Behaviour is collected and processed then ends up with businesses
- It is relatively cheap
- Businesses can respond immediately to developments in the industry
- The quality of customer service can be improved
- The method has a huge reach
- Links can be used to draw traffic into company websites

E-newsletters:
These are documents released to interested parties and can develop customer business
relationships if they contain interesting information.
Branding:
Branding involves giving a name, term, sign, symbol, design or any features that allows the
business to be instantly recognised and differentiate it from competitors.
- Create customer loyalty
- Differentiate product
- Develop an image
- Raises prices when brand and image becomes strong