Business Activity & Influences on

Business
What is Business Activity?
Involves the production, distribution, and exchange of goods and services to satisfy needs and
wants.

Key Vocabulary

● Business: organization that produces goods and services.

● Services: non-physical products such as food delivery and banking services.
● Goods: physical products that can be seen and felt such as clothes.
● Needs: basic goods that are essential for human survival.
● Wants: desires for goods and services which are infinite.
● Scarcity: resources with limited availability.

Purpose of Business Activity

● The main purpose of a business is to provide goods and services and satisfy the needs
and wants of consumers with availability of resources while making a profit.
● Business activity uses the scarce resources of our planet to produce goods and services
that allow us all to enjoy a much higher standard of living than would otherwise be
possible if we were fully self-sufficient. However, different business exists for different
reasons:
1. Private enterprise:

a. Owned by individuals or groups of individuals

b. They are private sector businesses.

c. Main aim is to make profits.

d. Examples: Sole traders.

2. Public enterprise:

a. Owned and controlled by the central or local government b. They are public sector
businesses
 c. Main aim is to provide goods and services that private sectors may be incapable of
providing (i.e. serving unprofitable regions)

d. Examples: Free education, free health care

3. Social enterprise

a. Nonprofit making organizations

b. Main aim is to meet social or environmental goals rather than maximizing profit.

c. May still generate revenue, but primary focus is on social and environmental
well-being.

d. Examples: Clubs, Charity organizations.

Business Stakeholders
A stakeholder is an individual or group who have interest in the operation and running of a
business.

Owners

● To make sure that they get financial returns (i.e. profits or dividends) on their investments
as they’re taking risk of starting a business venture.

Customers

● To make sure they get the best quality products for reasonable prices → customer
satisfaction.

Employees

● To make sure they have good working conditions

● To demand for higher, fair wages or salaries if the business is making profit
● Job securities and opportunities for promotion and advancement

Managers

● In order to lead teams such as marketing, finance, human resource and production
● Solving problems
● Settling disputes and motivating workers
● Make key decisions (Because often owners give managers the responsibilities to take
key decisions in large corporations)
 ● Demanding for higher salaries if the business is performing well.

Financiers

● They lend money to the business in times of difficulties and when businesses first star
trading.
● They may have an interest in the business in order to make sure that the business is
able to make the repayments in the future with interest amount.

Suppliers

● They may want to know whether the business is able to make timely payments for the
goods supplied.
● Also to make sure that the consumers make regular orders

Local community

● Employment opportunities and increased pay if business performs well.

● Expects contribution to community development and responsible behavior of business.

Government

● Employment in order to lower the unemployment level in an economy.

● Taxes from businesses and employees.
● Regulates business activities and sets policies.

Business Objectives
Key Vocabulary

● Objectives: goals or targets assigned by a business.

● Profits satisficing: making sufficient profits to satisfy the needs of the owner.
● Revenues: money generated from sale of goods and services.
● Large businesses: Business that employs more than 250 people.
● Small businesses: Business that employs less than 50 people.
● Profit maximization: making as much profit at a given period of time.
● Dividends: shares of profit paid to shareholders in a business.

Importance of clear objectives

● Objectives help business owners to assess their weaknesses and take steps to
overcome them and achieve their objectives easily.
● Employees need something to work towards and if they had objectives then everyone in
the organization may have the common goal and can achieve it easily.
 ● Owners need motivation in order to keep the business running. If not they may allow the
business to drift.

Financial Objectives

All businesses that set clear objectives could make them either financial or non-financial.

The businesses in the private sector have the main objective as to make profits but there are
other financial objectives to consider such as:

● Survival - One of the main objective of many small businesses is survival in the first few
years of their trading. They may be operating in a competitive environment in which they
may threatened by trading conditions such as, competition.
● Revenue - Some of the business owners may want their businesses to grow significantly
in order to enjoy the benefits of growth in revenues. Examples: economies of scale, etc.
Many stakeholders may want the business that they have stake on, to grow as they may
enjoy benefits such as employment opportunities, tax revenues etc.
● Increase market share - All businesses may want to build a higher market share. This
is because when they have a higher market share they will be able to charge higher
prices, increase their reputation and win over their competitors all of which will help them
increase their revenues and hence, increase their profits. They will be able to dominate
the market.
● Financial security - Most business may not want to make huge amount of profits but
may make profits that may be sufficient for the owner. One reason is because the
owners may not want to take risk of expanding their business as they have to go through
many lengthy legal procedures which are time-consuming and cost a lot.

Non - financial objectives

Some businesses may have non-financial objectives which may depend on the nature of the
business and the owner.

Examples are:

● Social objectives - Social objectives are designed to improve the well-being of humans.
Most public service business such as government owned businesses aim to provide
public services. However, these services may not be of high quality as they may be
produced at lower costs.
● Challenge - Some people may love to take challenges and may try starting a business.
As starting is very challenging. Even after facing many failures and finally becoming
successful, they may want to take more challenges and risks as they become more
motivated by this.
● Independence and control - Some people may want to be independent and do their
work as they wish. They may not want other people to interfere in their work and be
 instructed. They may want to take control of their own futures and achieve their
objectives.
● Personal satisfaction - Some people may want to work for themselves as they may find
it uncomfortable to work for others such as, an employer. This may bring satisfaction for
them. There are other people who want to develop their interests and hobbies into
business.

Why might objectives change as business evolves?

As businesses operate in a competitive environment their objectives may change frequently

depending on the environment and external factors example, changes in consumer spending
patterns.

Reasons could be:

● Market conditions - Market conditions can change from time to time. For example, new
entrants can enter into the market and offer better quality products for cheaper which
may result in businesses losing their market share. If the business wants to keep their
products competitive then they may have to lower their prices below the cost or so on.
● Legislation - Legislations imposed by governments may influence the objectives of the
business. For example, more businesses are becoming environmentally friendly which is
because of the emerging legislation for protecting environment.
● Internal reasons - Businesses may change their objectives due to other reasons such
as changes in the form of business. For example, if they change from sole trader to
private limited company they may have to increase their production.
● Technology - Technology is evolving in the last 30 years and more businesses have to
operate efficiently in this modern world. Businesses can purchase more machineries and
produce more. This way business have to change their objectives as to increase their
production as to enjoy lower costs.
● Performance - Business may face times of great profitability followed by times of
difficulties. Businesses have to change their objectives according to their performance.
For example, at times of profitability business can set objectives such as, expansion or
increase in revenues. However, at times of difficulties businesses can set objectives
such as, survival. Objectives may evolve according to the business performance.

Sole Traders, Partnerships, Social Enterprises &

Franchises
Key Vocabulary

● Labor: people employed in a business used in production

● Unincorporated: business in which there is no legal difference between the owner and
the business.
 ● Cooperative: organization in which all the people working own equal share of it
● Consumer cooperative: cooperatives that’s owned by consumers
● Worker cooperative: cooperatives that are owned by workers
● Incorporated: business that has separate legal identity from that of the owner’s.
● Unlimited liability: owner of the business is personally liable for all business debts
● Limited partnership: this is where some partners contribute to the business and enjoy
the benefits but doesn’t take active role in running of the partnership business.
● Limited liability: business owner is only liable for the original amount invested

Entrepreneurs are the owners of the business who had invested money in the business and
are responsible for bringing up all the 3 factors of production together and producing the
products more effectively.

Key roles of entrepreneurs

1. They are innovators. They bring out a lot of business ideas and try to make the products
using their business ideas and earn money out of it.
2. Entrepreneurs are responsible for bringing together the 3 factors of production (i.e. land,
labor, capital) and organizing them.
3. Key decision makers. They make different types of decision
4. Risk takers. They risk their money although they know that if the business wasn’t
successful they will have to lose their money. However, if the business is successful they
will earn profits.

Types of Business
1. Sole trader - A sole trader is business that’s being owned by a single person who takes
the risk of running the business and meets all expenditures by themself and keeps all
profits to themself if earned.

Advantages:

● Owner keeps all the profits

● Simple to set up with no legal requirements
● More flexible as they can easily adopt changes
● The owners can offer personal services as they are smaller businesses

Disadvantages:

● May struggle to raise finance

● No continuity- business dies with the owners death
● Unlimited liability
● Long hours and very hard work
 2. Partnerships - A partnership business is owned by 2 or more owners. A maximum
number of 20 people can stay in a partnership. Owners share the responsibility of
running the business while also sharing the profits/losses earned. Partners draw up a
deed of partnership before beginning which shows the amount of profits that each
partner is entitled to receive, interests on capital, interests on drawings and if salaries
are given to specific partners for their huge contribution to the business.

Advantages:

● Job of running the business is shared

● Financial information is not published
● Easy to set up with no legal requirements
● More capital can be raised with more partners contributing

Disadvantages:

● Partners may have conflicts and leave the business

● Partnerships are still tended to be small
● Unlimited liability
● Profits are to be shared

Limited partnerships - In a limited partnership, partners have limited liabilities. There will be
some partners who contribute financially but may not take active role in the running and
managing of the business and they are known to be as sleeping partner. However, one partner
in this type of business may have unlimited liability and he may be given additional benefits.

3. Franchises - A franchise is a business which a franchisor owns. Franchisor is the owner

of the franchise owns. Franchisee is the one who trade under the name of the franchisor.
This type of business structure suits someone who has the money to start a business but
is unable to start due to the lack of business ideas and innovation skills. However, this is
an expensive method to start a business as the franchisee has to pay a very large
amount of money to the franchisor in order to trade under their name.

Advantages & Disadvantages to the franchisor

Advantages:

● Faster and cheaper method of growth

● Franchisees take some of the risks
● Franchisees are more motivated than employees

Disadvantages:

● Profits are to be shared with franchisee

● Poor franchisee can damage reputation
 ● Costs of support may be high
● Franchisee can get merchandise from somewhere

Advantages & Disadvantages to the franchisee

Advantages:

● Less risk
● Back up support is given
● Set up costs are predictable
● National market may be organized

Disadvantages:

● Profits are to be shared

● Strict contracts are to made with the franchisor
● Lack of independence
● Expensive method to start a business
4. Social enterprises - The aim is to improve the social and environmental well-being
rather than making profits.

Types of Social enterprises:

a. Worker cooperative

b. Consumer cooperatives

c. Charities

Limited Companies & Multinationals

Key Vocabulary

● Limited companies: business organizations that have separate legal identity from that
of the owner’s
● Certificate of incorporation: document that’s required before a new business can start
trading
● Private limited company: It’s a company that’s owned by family and close friends, they
have limited liability and do not trade in the stock market Stock market: market for share
in PLCs
● Public limited company: Company that’s owned by outsiders and trade in the stock
market. They are very large businesses
 ● Multinational company: Large business that have their headquarters in one country
and their operation facilities all over the world.

Features of Limited Companies:

● They pay corporation taxes while sole traders and partnerships pay income taxes.
● There is a legal procedure to form a limited company. To form a limited company there
must be a minimum of 2 people and a maximum of unlimited.
● The owners must submit 2 documents that is the memorandum of association and the
articles of associations to the registrar of companies. If their documents were accepted
they will get a certificate of incorporation which will allow them to trade as a limited
company.The owners have limited liability
● The business can raise capital by selling its shares. Each shareholder owns a number of
shares and these owners contribute to the running of the business. Shareholders elect a
group of board members headed by a chair person in order control the running of the
business.

Private limited companies

Features:

● Company name ends with LTD or limited

● Shares can only be transferred to family members or close friends
● Family owned businesses
● Directors run the business instead of the shareholders

Advantages:

● Limited liability
● More capital can be raised
● Business continues even if shareholders pass away
● Has more status that sole trader

Disadvantages:

● Financial information has to be made published

● Takes time to transfer shares
● Cannot raise huge amounts of money as PLCs
● Expensive and time consuming to firm

Public limited companies

Advantages:

● Large amounts of capital can be raised

 ● Can exploit Economies of scale
● May be able to dominate the market
● Have a very high reputation

Disadvantages:

● Setting up costs are expensive

● Financial information is to be published
● Control is lost to outsiders
● Managers take control rather than owners

Features of multinational companies

1. Huge Assets
2. Highly influential both economically and politically.
3. Ownership and control is centered in the host countries
4. Highly qualified and experienced managers and staffs
5. Powerful advertising capabilities
6. Lower costs (Economies of scale)
7. Highly advanced technologies

Public Corperations
Key Vocabulary

● Public corporation: A business or an organization that’s owned and controlled by the

government
● Privatization: it is a transfer of a state owned assets to the private sector
● Subsidies: Government offering financial benefits for firms in order to make them do
something.

Features

● State owned: Government is responsible for the running and managing the corporation.
● Created by law: They are created by an act of parliament.
● Incorporation: They are incorporated business and have a separate legal identity.
● State funded: Government invests capital to these organization which is often from the
tax revenues.
● Provides public services: There main aim is to provide a quality service to the public in
a very low price or for free.
● Public accountability: These organizations are to provide reports of the progress of the
business and are accountable to the general public as they are they are the ones who
funded the organization through the taxes paid.
Main reasons for government owning the public corporations

● Avoid wasteful duplications: It would be a waste of resources if the government

privatizes these industries to the private sector as there may be competition and
therefore, many business will start to offer the same service which would cause
congestion in the country.
● Fill the gaps left by the private sector: the services provided by the private sector
businesses are charged for a higher price. So, only those who could pay are able to
enjoy the benefits while the ones who are unable to pay are excluded hence, the
government wants to ensure that everyone enjoys the benefits.
● Maintain control of strategic industries: Governments do not privatize these industry
as they fear that outsiders from other countries can purchase and exploit the industries
and produce lower quality services.
● Save jobs: As the main aim of the private sector businesses is to make more profits they
may lower the costs by laying off workers which will result in higher unemployment level
so in order to protect the workers the government do not privatize these industries.
● Serve unprofitable regions.

Disadvantages of the government owning businesses:

● Cost to the government: When the public corporations face losses they would have to
be funded by the tax payers. Hence, the general public doesn’t support this as the
government have to forgo spending on other parts of the economy which could probably
decrease the economic growth rates in the country.
● Inefficiency: As there is no competition or less competition for these public corporations
they become more inefficient as a result. This increases the lead times and delays the
train services and so on. The productivity decreases as the corporation has no
motivation to be efficient.
● Political interference: public corporations are often disturbed by the political
interference. This is because when governments change the policies and the way to run
the corporations changes.
● Difficulty to control: As some corporations are extremely huge and employ millions of
people they would experience diseconomies of scale hence, costs may arises and
eventually, taxes are likely to rise. Also coordination becomes much more difficult.

Different forms of privatizations

● Contracting out: This involves the government allowing the general public to bid for the
businesses that are previously owned by the public sector and purchase them.
● The sale of land and properties: This is when the government sells the lands or
properties that were previously owned by the government while also give some
discounts.Sale of public corporations: This is when a government sells the business that
are owned by the government to the private sector or general public. One example of
doing this selling shares.
 ● Deregulation: This involves removing restrictions and encouraging competition with the
public corporations.

Reasons for privatizations

● To generate income: This is because when the public corporations are sold the
government can raise a lump amount of money which could be used to fund huge
government projects such as, construction a bridge etc.
● To reduce inefficiencies: this is because private sector businesses are more efficient
as they have to be in order to increase their consumer satisfaction and generate more
profits.
● As a result of deregulation: Legal barriers are to be removed therefore, more business
are required to compete with the public corporations.
● To reduce political interference: There won’t be changes in policies and investments
are freely made and government will not interfere in the business.

Appropriateness of Different Kinds of Ownerships

Factors affecting the different kinds of ownership:

● Growth: if a business wants to raise more finance then they will have to change their
legal status in order to persuade financial institutions to lend money. Moreover,
companies that want to grow significantly and exploit economies of scale and enjoy cost
benefits and trade worldwide then a large public limited company or multinational
company would be the most appropriate.
● Independence and control: If the owners want to be independent and adopt changes
more flexibly and enjoy all profits made by the business, sole trader would be most
appropriate. When businesses admit new partners then they become partnership
businesses and each partner will have a say in the decision making.
● Size: Many small businesses are sole traders. Medium-sized businesses are private
limited companies often owned by families and close friends while large businesses
employing millions of workers all over the world can be public limited companies.
● Need for finance: It is similar to growth in order raise more capital business owners
change their legal status.
● Limited liability: If the owners of businesses are more concerned about protecting their
finance then they can change to limited companies as their money that is originally
invested will only be lost rather than their financial possessions in case of a loss.

Factors affecting the appropriateness of different kinds of ownerships

● The type of business.

● Plans to use profits: If dividends are to be paid then it could be a limited company, or if
salaries are to be paid to owners it could be a partnership etc.
 ● Stakeholders: For instance, employees in a private limited company may discourage a
shareholder from going public due to the concerns about the future.

Classification of Businesses
Primary sector

● Businesses in the primary sector are involved in the extraction of natural resources.
● For instance, agriculture, fishing and forestry are primary sector business activities. This
is where the raw materials for making the products are being extracted.

Secondary sector

● Businesses in this sector involves manufacturing of the goods using the raw materials
extracted from the primary sector. The goods that are produced in the secondary sector
tends to be semi-finished or finished goods. They are sold on to the tertiary sector
businesses.
● Examples of businesses operating in the secondary sector includes: textile production,
chemical industries and car production.

Tertiary sector

● This sector is mostly known as services sector as the products are being sold or services
are being offered.
● It includes various kinds of services for example, banking services, transport services
and leisure services.

Interdependence of the sectors

Businesses in each sector are interdependent on the other sectors. For example, a car
manufacturer is dependent on the vehicle seller for sales. The aluminum manufacturer is
dependent on the car manufacturer for their sales as aluminum is used for manufacturing cars,
etc.

Changes in the sectors

● Different sectors grow and decline at different times due to the costs, changes in
demand patterns, trends and tastes.
● In most developed economies the percentage of workers employed in the primary sector
will be very less compared to the secondary sector. While in developing economies the
percentage employed in the tertiary sector will be significantly higher than the primary
sector workers.
Reasons for the decline in the manufacturing/secondary sector in
developed countries:

● Advancement in technologies means that less workers are required since more
machinery has replaced workers. Hence, unemployment in these sectors fall.
● People may prefer to spend more on the tertiary sector rather than the secondary sector
as they may feel that the demand for manufactured products have fallen significantly in
last few years.
● There are fierce competitions that are emerging from countries which makes these
developed countries feel that they cannot succeed in outcompeting these countries.
● As the countries develop, the government spends more on the public services which
adds up to the growth of tertiary sector.

Decisions on Locations
Key Vocabulary

● Brownfield sites: areas of land that were once used for urban developments.
● Green field sites: remote area that is on the outskirts of the town.
● Trade blocs: group of countries who are located in the same region and they join
together to abolish all trade barriers.

Factors influencing the location of the business:

● Proximity to the market: business that produce large and heavy products must locate
close to their consumers as, if they locate far from their consumers then this will increase
their transport costs and therefore, decrease their profits. Other businesses that provides
services such as café or restaurants should locate their business in residential areas if
they wanted more sales.
● Proximity to labour: labour intensive businesses who require large number of workers
can locate their premises in countries where labour is cheap.
● Proximity to materials: Businesses that purchase a huge amount raw materials
example, car manufacturers can locate their premises close to their suppliers to reduce
the carriage inwards costs more commonly known as transport costs.
● Proximity to competitors: some large businesses may locate closer to their
competitors in order to attract the consumers of their rivals when there is an excess
demand. However, some small businesses may operate away from competitors in order
to earn higher profits and increase their market share.

The nature of business activities

● Services: business must ensure that they have proper parking facilities and is more
convenient for the consumers.
 ● Office based businesses: If a business employs thousands of people it’s more
preferable for them to locate in residential areas despite the increase in costs.
● Manufacturing and processing: Locations for these businesses can vary. Different
manufacturers have different needs. Locations can vary according to the factors such as
labor, raw materials, proximity to showrooms and costs.
● Agriculture: these types of business may require a large amount of land therefore, they
may locate their businesses in areas in which huge plots of land are available.

Impact of internet on locations

Technology has improved and this has been an advantage for many businesses all around the
world. Internet has made it easier for purchasing and selling products. Availability of internet
means that buyers and sellers can communicate without the need of a market or face to face
communications. Sellers can sell their products worldwide without any need for a premise.
Buyers have more choices as they can gain access to almost all shops around the world.
However, the need for greater quality network with high speed computer will and has increased.
But the costs have fallen significantly as the cost of premises have totally decreased. This
method is called e-commerce.

Legal controls

Government may intervene and try to influence decision of the location of businesses. There are
many reasons for this:

1. To avoid congestions through extra developments.

2. Minimizing impact on local communities. Example: noise pollution, air pollution etc.
3. To encourage manufacturers and other businesses to locate in areas of high
unemployment.
4. Offering financial incentives for businesses to locate on specific areas for development
of those areas.
5. To attract more foreign direct investments.

Trade blocs

Many businesses try to avoid trade barriers such as tariffs that is tax that is imposed on imports
to make it expensive and quotas that is the physical restriction of the supply of imports. In order
to avoid this they locate their premises inside a trade bloc, which is an area where trade barriers
are abolished. Hence, this makes it easier for business to import raw materials and reduces the
costs of production and hence, increase profits.

Globalisation
Key Vocabulary
 ● Globalization: growing integration of the world’s economies.
● Saturated market: to offer so much of a product for sale that there is more than people
want to buy.
● Hostile takeovers: takeovers that the company being taken over doesn’t want or agree.

What is globalisation?

In today’s world, firms and people are behaving as though there is just one market. People are
free to live in any country of their choice, firms can borrow money from any countries and
people can work at different places and products could be manufactured at the most cost
effective country considering the costs of raw materials and labor.

Features

● Goods and services can be traded freely between countries as trade barriers are being
avoided as more countries are moving into trade blocs and the world trade organization
is encouraging countries to remove all trade barriers.
● People are free to live and work in any country they choose. This has increased the
expatriates in many countries.
● There are high level of interdependence between nations. This means the events in one
country are likely to affect the events in other countries.
● Capital can flow freely between nations. This means firms and people can save their
savings in other countries bank accounts.
● There is a free exchange of technology and intellectual property rights that is the
knowledge and creative idea of people that have commercial values.

Reasons for globalization:

● Development in technology has helped to boost globalization. Modern devices allow

businesses to transfer data from one corner of the world to other with no cost within a
fraction of seconds through emails.
● International transport levels has improved in recent years. The costs of flying from one
country to another has reduced and number of destinations has increased.
● There has been a huge amount of deregulation. This has helped many domestic
industries to become more competitive and improve their international competitiveness
and remove trade barriers and enjoy free trade. Increase in tourism has led more people
to try goods and services produced by other countries and enjoy the better quality.
● Many firms decided to sell abroad as to increase their global market share or if their
market is saturated.

Intersection between globalization and the government:

● Countries cannot trade if international borders are kept close.

● International trade can be restricted if government put up trade barriers.
 ● People can be free to live and work only if borders are open.
● Firms can’t develop their businesses overseas if planning permission was denied.

Advantages of globalization to businesses

● Access to larger markets: this means that businesses can sell their products to wider
consumer base and therefore increase their revenues and earn higher profits while
increasing their global market shares.
● Lower costs: This means that businesses are able to choose the most cost effective
location in terms labor, raw materials and premises.
● India and China have become popular among businesses for offering lower wage cost
due to the higher unemployment rates.
● Access to labour: globalization has allowed businesses to employ skilled and highly
qualified workers from all around the world.
● Reduced taxation: as globalization has boosted business can locate their operations in
other developing countries and locate their headquarters in countries where taxes are
lower hence, less costs.

Disadvantages of globalization to businesses:

● Competition: as trading globally has increased significantly in the last few years this has
resulted in more business in the global market. Therefore, the competition has increased
widely which means that business trading in the global market will have a reduced profit
margin.
● International takeovers: Globalization makes it easier for businesses in one country to
take over the business in other countries. Companies are more vulnerable to these take
overs and some smaller companies experiences a hostile takeover which is an
aggressive act.
● External costs: globalization has resulted in many negative impacts on the environment
such as air and water pollution for the local community.

Importance and Growth Of Multinational Companies

MNCs take up around 66% of the global exports and 10% of the world’s GDP. There are many
reasons for multinational companies to emerge. Some include:

1. Economies of scale: As multinationals produce a huge quantity of products they

purchase raw materials in bulks. This allows the suppliers to reduce the cost of a single
unit and therefore, the average costs falls. Hence, this allows MNC’s to produce more
products.
2. Marketing: As MNCs make huge profits they invest more on advertising their products.
This increases the consumer awareness of their product and increases their brand
loyalty. Hence, they become more successful in their home country and then globally.
 3. Technical and financial superiority: As MNCs are huge businesses they enjoy
superiority that is the quality of being better, more skillful and having more power. This is
because they employ the most qualified workers, advanced technology and also have
resources to diversify and take risks. They have more power politically and economically.

Benefits to a business of becoming a MNC:

● Larger consumer base: this means that MNCs can sell their products to many
consumers globally and increase their global sales and market share. This will help them
to increase their profit margins and have competitive edge over their competitors.
● Lower costs: As MNCs can gain access to the economies of scale this will result in their
costs of production falling. Transport costs are also likely to fall if they locate near
factories and suppliers. They can borrow money at lower rates as they are huge and can
easily persuade financial institutions.
● Higher profile: as MNCs emerge their reputation increases this is because their
products become more recognizable worldwide. Hence, their global revenues increases
which also increase their profits.
● Avoiding trade barriers: this is a potential benefit to the MNCs as they set up their
operations all over the world. Hence, this will reduce the costs and increase their
revenues.
● Lower taxes: MNCs can set up their operations and headquarters in countries where
their taxes are lower. This will reduce their costs and increase their profit margins.

Benefits of MNCs to the host country

● Increase in income and employment: when MNCs come into the country they require
labor for their new operations. Hence, they may recruit new workers from the host
country and these workers will be given training and wages will be quite high.
● Increase in exports: as MNCs are global giants they will export more and this will add
up to the host country’s exports and therefore, improve the current account balance.
● Transfer of technology: MNCs provide technical help and training to their suppliers and
also help them to purchase the most updated machineries.
● Improvement in human capital: MNCs provide training for people in less developed
countries and the government may spend more on education and training in order to
attract MNCs.
● Increase in tax revenues: this is because the profits earned by MNCs are taxed by the
host country’s government and therefore, the government earns higher tax revenues and
therefore, they can spend these revenues on the economy which will increase their
economic growth.

Drawbacks of MNCs:
 ● Exploitation of labour: as MNCs employ labors from the host countries they offer poor
working conditions and lower pay because the people are ready to work at any
conditions due to the lack of employment opportunities.
● Environmental damage: as MNCs are more involved in the extraction of resources from
the ground and releasing polluting gases from factories and sending out waste materials
to the rivers and lakes this results in water, air and noise pollution.
● Repatriation of profits: this is where a MNC returns the profits made in the host country
to their home country which is usually a developed country.

International Trade & Exchange Rates

Key Vocabulary

● Exports: goods and services sold overseas

● Imports: goods and services bought from overseas
● Visible trade: goods
● Invisible trade: services
● Balance of trade: difference between the visible exports and visible imports
● Exchange rate: value of a currency in terms of another currency
● Appreciate: rise in the value of a currency in terms of another currency
● Depreciate: fall in the value of a currency in terms of another currency

International trade - The exchange of capital, goods, and services across international borders
or territories. It creates a lot of benefits which includes, competition, consumer choices and
cheaper products.

International trade allows:

● Countries to obtain goods that cannot be produced domestically or cheaply.

● Countries to sell off the excess of commodities.

Visible trade - Trade in physical goods while invisible trade is the trade in services. The
balance of trade is visible imports – visible exports.

Exchange rates - Different countries have different currencies. So, in order to exchange a
currency with another we will have to calculate the value of the currency in terms of another
currency.

Fall in exchange rates (Depreciation)

E.g., when the exchange rate falls from 1 Euro = 1.50 Dollars to 1 Dollar = 1.20 Euro

● Change in exports: exports become cheaper in UK as the prices fall and demand
increases.
● Change in imports: imports become more expensive because the prices increases.
 ● Impact on current accounts: current account balance improves.

Rise in exchange rates (Appreciation)

E.g., when the exchange rate rises from 1 Euro = 1.50 Dollars to 1 Dollar = 1.20 Euro

● Changes in exports: exports decreases as now they become more expensive for US.
● Changes in imports: imports increases as they become cheaper as prices are lowered
● Impact on current accounts: current account balance worsens.

International competitiveness and exchange rates

● When exchange rates rises then business that export will have to suffer losses while
businesses that imports raw materials will benefit a lot as the costs may fall. While when
exchange rates fall exporters will benefit while importers may have increased costs.
● If there was a sustained period of depreciation in an economy this means exporters will
have increased revenues and the country’s unemployment level may fall along tax
revenues may increase. However, choices will be restricted as imports are expensive
hence, standard of living decreases therefore, economic growth rates reduces.
● If the exchange rates were continuously changing this will result in business unable to
predict the future costs and profits which causes an uncertainty. Budgeting becomes
more difficult for businesses.

Government Objectives & Policies

Key Vocabulary

● Barriers to entry: restrictions which means its difficult for new firms to enter the market.
● Mergers: 2 or more businesses joining together to form one large business
● Dumping: where businesses sells goods in another country below the costs.
● Trade barriers: measures designed to restrict the trade.
● Quotas: physical limits on the quantity of imports allowed into the country.
● Subsidies: financial support given to a domestic producer to help compete with an
overseas firm.
● Tariffs: a tax that makes the imports more expensive.
● Administrative barriers: use of strict health and safety regulations to make the imports
more awkward.
● Interests: prices of borrowed money and the reward to savers.

Government spending and taxation

● The government of many countries spends a huge amount of money on the public
services. For instance: education, healthcare and infrastructure. The higher the spending
level the more the businesses benefit. This is because incomes of people increases and
 therefore, they may have more disposable income and would purchase more products,
hence, the profits rises.
● Governments earn a huge amount of revenue from taxes and these taxes are of 2 types.
One is the direct taxes that are levied on the income or profits of individuals or
businesses. Example: income tax and corporation tax. While the other tax is the indirect
tax which means the taxes that are levied on the producers of products but are indirectly
passed on to consumers through higher prices. An example is VAT.
● Governments can use fiscal policy that is the making changes to the taxation and
government spending in order to stimulate the aggregate demand in an economy. For
example: when the taxes are lower people have more incomes hence, they may
purchase more which will increase the profits for businesses.

Constraints on public spending

In the recent year’s government have decided to reduce the amount they spend on the public.
These have had great impacts on businesses:

● As many employees will be dismissed in order for public sector organizations to cope up
with the increase in costs, this will result in businesses losing out as workers may lose
their income hence, profits for businesses reduce.
● Private sector businesses (construction companies) that carry out government
infrastructure work will lose their business if the government cancel the projects such as
building schools or so on.

How can government affect business activity?

● Infrastructure provision: as the government spends money on the infrastructure such

as: building schools and motorways the private construction companies may get projects
which may help in increasing their revenues and profits.

● Legislation: without the government intervention the businesses may not meet the
needs of the stakeholders. One of the roles of the government is to provide a legal
framework in which business can operate and ensure that vulnerable groups are
protected. Some of the consumer laws in UK are sale of goods act and the food safety
act.

● Competition policy: government tries to promote competition by encouraging the

growth of small firms: this can be done by providing subsidies or grants and making
them more competitive and able to compete with the larger firms.

● Lowering the barriers to entry: so that more firms will find it easier to enter into the
market and therefore, consumer choices increase while prices reduces.
 ● Introducing anti-competitive legislation: these laws are designed to restrict the
formation of monopolies or mergers which may exploit the consumers by increasing the
prices.

● Environmental legislation: business activities may have negative impacts on the

environment for example: air pollution caused burning of coal and water pollution caused
by sending of waste materials to rivers and lakes. The approach used by the government
is to impose strict laws with huge penalties which are big enough for business to be
encouraged to cause less pollution.

● Trade policy: the governments of many countries find international trade to be a

disadvantage and due to this they impose trade barriers to protect the domestic
industries which are known to be as protectionism.

Reasons why governments use protectionism

1. To protect the jobs of citizens working domestic industries

2. To avoid inflow of harmful products and protect infant businesses.
● There are 4 types of protectionism the government can use: tariffs, quotas, subsidies
and administrative barriers.

● Another approach in which government can influence is businesses is through forming a

trade bloc in which businesses will be able to sell and buy product with no forms of
trade barriers which will reduce their costs.

● Some of the benefits of trade blocs are:

1. Access to wider markets

2. Lower costs due to economies of scale
3. Protection from large MNCs from outside the blocs

Effects of interest rates on businesses and consumers spending

Monetary policy is the use of interest rates and money supply to stimulate the aggregate
demand in an economy. Higher interest rates means more expensive to borrow money and
more worthy to save money. Lower interest rates mean cheaper to borrow money and less
worthy to save money.

● Effects on businesses: when interest rates are higher, the costs of borrowing will
increase which will result in consumers having less disposable income and therefore,
they may purchase less which will decrease the profits for businesses. Furthermore, as
interest rates rises costs may increase if the business has borrowed money and this will
increase their costs of production and therefore, lower their profits. Moreover, as interest
 rates increases consumers will save more as to gain the reward and purchase which will
again is a loss for the business.
● Effects on consumer spending: savers will be hit if interest rates are lower and
therefore, may save less. As more consumers depend on the interest or reward that they
get from savings now they will have to borrow more. Additionally, demand for goods and
services may fall as interest rates increases as more consumers purchase using the
borrowed money. However, when interest is higher it becomes expensive to borrow and
therefore, may not borrow and purchase lower quality products which will decrease the
living standards.

External Factors
Key Vocabulary

● Urbanization: process of constructing more building on villages.

● Capital intensive: using more machineries than labor
● Market orientated: when a business concentrates more on its consumers rather than
products
● Sustainable development: idea of that people must satisfy their basic needs for
survival and improve their living standards ensuring that they don’t compromise the
quality of life for future generations.
● Pressure groups: groups or organizations that try to influence the opinions of ordinary
people and persuade the government to take actions

The nature of external factors

There can be many impacts on businesses when external factors occur. However, businesses
have no control over these factors and therefore, they may have positive or negative
consequences.

Social factors

● Increased consumer awareness: nowadays, as technology has been advancing

consumers are having many choices and make their purchases over the internet. This
has allowed many business to publish their information online and set up e-commerce
businesses. Businesses are becoming more market orientated.
● Changing demand patterns: as the lifestyles of people changes according to the
modern era this results in changes in goods that they want. For example, more
consumers want the most advanced products that doesn’t require any human action
such as: automated cars.
● Increased numbers of woman at work: woman have now changed their roles from
childcare to work. This has resulted in an increase in the supply of labor. More part time
workers: as the number of people taking part time works have increased more income is
 required by these people this has resulted in an increase in goods and services
purchased. This also has increased the flexibility for businesses.
● Urbanization: as in many developing nations more people have moved from rural areas
to towns and cities which has increased labor supply and profits of many businesses.

Technology

As technology has been evolving in last few decades this has resulted in huge impacts on
businesses which is considered to be more efficient, beneficial and saves more time.

● In the primary sector: the use of pesticides by the farmers have helped the crops to
grow faster and safely.
● In the secondary sector: the use of robots have helped to increase the productivity of
labors and save more time although machineries are expensive.
● In the tertiary sector: banks have used ATM machines to make it easier for consumers
to withdraw money and other transactions without the need of coming into banks. More
businesses become capital intensive as machineries have been replaced labors and this
decreases the costs of labor.

Businesses usually welcome technological developments as the benefits outweigh the

drawbacks:

● It saves time
● Reduces the costs as employment in labor reduces
● Productivity increases
● Development in social media has improved the communications and reduce the costs of
advertising.

Environment

● Global warming: most business factories emits carbon dioxide gas which is a
greenhouse gas which can contribute to global warming. Also as the economy develops
this results in more cars and airplanes to different destinations which again increases
global warming.
● Habitat destruction: some of the businesses build factories and other operations in
habitats of many animals. Such as forests. This results in deforestation which means
that many trees are being cut down. This is habitat for many animals such as birds.
● Resource depletion: as oil, coal and gas are non-renewable resources they are running
out and can’t be replaced.
● Sustainable development: this means that people should satisfy their needs and
increase their living standards. If they don’t then this will result in reduction in the quality
of life.
● Businesses can reduce the environmental issues by using environmentally friendly
products and reduce the greenhouse gas emissions.
Political

These factors can influence businesses that are operating in stable, democratic counties.
However, in unstable countries although the government is corrupt there are many pressure
groups that monitor the business and ensure that the country benefits. Some examples include:

● In 2015, some felt that Greece might leave the EU. This could have disrupted financial
markets and created a great deal of uncertainty in the Eurozone.
● A new government may be elected which is very pro-business. This might encourage
more people to become entrepreneurs. It might also mean that more foreign investment
can be attracted.

Measuring Success in Business

Capital employed: amount of money that is being invested in the starting of the business
usually or in the middle.

For any business, it is unlikely that the owners will not want to know whether their business is
successful. In order to measure the success of businesses there are 7 ways which have their
advantages and drawbacks.

1. Revenue

○
Revenues could be used to judge if the business is successful. For example, if
the revenues increases year by year this can indicate that the business is
successful. In the same way, if a business sets an objective to increase their
revenues generated by say 5% in the following year and if they had achieved this
then this again ensures the owner that the business is becoming successful.
Businesses can also compare their revenues with their competitors in the same
industry. The advantage of this is that it is easy to calculate revenues as it is
readily available in the income statement however, the drawback is that the costs
of production is not taken into account.
2. Market share

○ When a business has increased market share it is easier to dominate the market
and earn higher profits. This would raise the profile of the business. If a business
increases its market share from year to year this means that they are winning the
consumers from the rivals as they may have a competitive edge which clearly
differentiates their products from that of the rivals. Therefore, they are considered
to be successful. The advantage of this method of measuring success is that, if
their market share increases then the owners can ensure that their products are
satisfying to consumers. However, collecting information for market share could
be challenging as a lot of information may be required.
3. Customer satisfaction

○ If consumers are satisfied then a business is considered to be successful. When

customers satisfaction increases this results in higher revenues and profits. As
many businesses are becoming market orientated this results in them focusing
more on the consumers rather than their products. Owners of businesses can
collect these information by providing consumers’ questionnaires and monitoring
the customers’ complaints that they may post on social media and take
necessary steps to overcome their weaknesses and benefit the business. The
advantage of this method is that it is more appropriate as business can ensure
that their consumers are really satisfied from the products supplied. However, the
drawbacks could be that the information provided by the consumers may be
biased and the fashion and tastes changes all the time.
4. Profit

○ Another possible method of measuring success could be the profits that are
made by the business. If the profits increases year by year this may mean that
the business is successful. The advantage of this method is that the profits could
be compared with the rivals’ profits. Also, the profits can be measures more
effectively for small business as there are figures and are easily available in the
income statements and also considers the costs. However, the drawbacks are
that the profits of businesses are often depending on the size of the business. If
the business is huge then the profits made may be huge and cannot be
compared with small rivals.
5. Growth

The objectives of many small businesses is to grow. If the business is growing from year
to year this may mean that they are successful. It could be measured in 4 different ways:

○ Turnover: when the revenues increase this means that the business is growing
and the costs are increasing with the increase in the production.
○ Number of employees: as the output level increases the number of people
employed also increases. When the number of employees increases year by
year this means that the business is successful.
○ Market share: for a business like apple that has about 80% of fthe market share
may considered to be huger than a rival such as Alcatel that may have about
20% of the market share.
○ The amount of capital employed: if the amount that the owner invested in the
business is higher and then the business is considered to be successful.
6. Owner & Shareholder satisfaction

○ Owners judge the success of the business by the amount of money that they get
in return for the capital that they have invested and if it increases year by year
then it is considered to be successful. Shareholders judge the success of the
 business by the increase in their dividends payments year by year and if it
increases then they consider the business to be successful. This is mainly for
shareholders in public limited companies.
7. Employee satisfaction

○ Employees judge the success of the business in their perspectives. If they get
higher salaries or more facilities and a pleasant working environment with more
job security then the business is considered to be successful. However, it is not
always possible to make a business successful in the eyes of the employees
because sometimes businesses may have to lay of staffs and this may mean
higher profits but employees may think the business is not successful.

Reasons for Business Failure

1. Cash flow problems

1. Overtrading: some businesses accept orders which they are incapable of

producing. For example, if a business has its monthly output to be as 2000 units
and if they accept an order from another for about 3500 units then it would be
impossible to produce and finally this will lead to failure to produce as well as
losing out cash.
2. Investing too much in non-current assets: Some businesses invest too much
in non-current assets while it is much cheaper to lease them. Hence, they run out
of cash.
3. Allowing too much of credit: some businesses allow their consumers a credit
period which is known to be the amount of time that consumers have to pay the
amount that they owe for the products consumed. If a business allows too much
of credit period this may results in many irrecoverable debts.
4. Over borrowing: many businesses borrow money in order to start a business,
purchase resources or many other reasons.
5. Seasonal factors: some businesses have higher revenues in certain time of the
year. For example, farmers may have increased crops in spring.
6. Unexpected expenditures: for example, a tax company may walk into a
business and charge an amount of tax for producing products that may cause
diseases such as diabetes this will increase the costs.
7. External factors: Consumers’ fashions, tastes, demand patterns may change
from time to time. This may result in businesses to struggle while some other
businesses may benefit. So, these are out of control of businesses hence they
may have insufficient cash at this time.
8. Poor financial management: when a manager is recruited for running a
company, the company must ensure that the recruited manager is capable and
has experience. As if the wrong person is recruited this may result in they may be
spending too much on particular things and eventually run out of cash.
 2. Lack of finance

Some businesses underestimate the importance of cash. This may eventually result in
businesses to fail. As some businesses start without cash which is previously said to be as
undercapitalization. They may not have money for long and may finally borrow money which
may increase their costs and force them to increase their prices for the products hence, results
in lower market share.

3. Not competitive

1. New entrants: it may be very challenging for new entrants to enter into an
established market. This is because the rivals may use destroyer pricing and
bring out superior products or their products may not match the needs and wants
of the consumers. Hence, they may eventually fail.
2. Ineffective costs control: when the costs increases the profits may decrease.
Some the reasons for the costs to be higher than the profit are that they may be
too small to exploit the economies of scale, they may be using wasteful
resources, paying too much for unwanted resources and due to external factors.
3. Ineffective marketing: some businesses fail because of many reasons. Some of
them are because of launching products that don’t satisfy the needs of
consumers or using inappropriate marketing strategies or inappropriate pricing
strategies or investing heavily on unwanted marketing campaigns.
4. Lack of business skills: most small businesses fail because their owners or
managers are having less skills or experience to run a businesses in a
competitive environment. As they are the decision makers their work depends on
their ability to make a decision and if their decision fails then the business fails.
5. Poor leadership: many companies employ managers. They must ensure that
the managers that are being employed are skillful, motivational and have a good
knowledge of that field.
4. Failure to innovate

As technology evolves many businesses fail to innovate as they may fear the increased costs of
research and development. They may not be updated with the latest technology and consumers
may want their life styles to be easier, faster and automated. If consumers needs are not met
this may result in lower profits as revenues may fall. If the businesses are unable to keep up
with the latest technology then they may eventually fail.

Importance of Communication
 ● Communication is sending and receiving information; this occurs through several
different means, such as face-to-face, emails, phones, telephones and radios. This
involves a sender and a receiver.
● Communication channels are routes through which information and messages can travel
in a business.
● Downward communication is the passing of messages from the top of the business
organization to the bottom. Subordinates are people in the hierarchy who work under the
supervision of a senior worker.
○ Managers pass information/instructions to their subordinates and can easily
organize, control and command the employees.
○ Subordinates can look up to their managers for support and leadership and
carefully carry out tasks given by management.
● Upward communication is the passing of messages from the bottom of the business
organization to the top.
○ Subordinates can convey requests and give feedback to managers and, hence,
feel valued. They will be more motivated and feel more valued as their views are
being considered, so they will work efficiently, which can increase labour
productivity.
○ Managers can understand the subordinates' needs, problems and perspectives
and receive information to help make significant decisions.
● Horizontal communication: passing messages between employees on the same level
in a business’s hierarchy.
● Vertical communication: sends and receives information between subordinates and
line managers/supervisors.
● Internal communication: passing information between people inside the business (e.g.,
a board meeting of directors, a subordinate explaining an issue to a manager, etc.)
● External communication: information passing between the business and external
stakeholders, e.g. customers, government authorities, banks, shareholders, etc.
● Formal communication is the use of standardized, “formal” channels for exchanging
information, such as through social media platforms and emails.
● Informal communication: uses non-approved channels for exchanging information
such as “on the grapevine” – through rumours and gossip.

Ineffective communication can result in;

● Costs increase as the business could face financial penalties for missed deadlines,
technological breakdown, etc.
● Mistakes occur, such as defective goods being produced and incorrect orders being
taken due to misunderstandings.
● Decision making slowing down if the information passed takes a long time to reach the
recipient; this could lead to missed opportunities.
● Labour productivity and motivation decline as employees may get frustrated easily due
to miscommunication, which could lead to higher absenteeism and a higher turnover.
Communication Methods
Face-to-Face Communication

● Spoken information is sent and received by people who can see each other. Examples
are an interview of a job candidate, induction training sessions, presentations for
investors/reporters, a manager assigning a task to a subordinate, etc.
● Advantages include encouraging cooperation, saving time, and allowing immediate
feedback and new ideas to be brought about.
● Disadvantages include the message not being recorded, negative body language can
create a barrier, people not listening - short spans of attention, irrelevant information may
be conveyed, and there is a limit to the number of people the message can reach.

Electronic Communication

● Quick, easy, and very flexible method to pass on information globally and to a large
audience.
● A limitation is that technology is necessary, and technical issues - signal-receiving
problems may occur.
● Social media such as Twitter and Instagram can be used to communicate with
customers and gather primary data to learn about the views of customers. Information
can be sent quickly and gathered from a target audience or various demographic
groups.
● The Internet can display information about a business’s services and goods through a
website. Other examples include customers who can buy goods with credit cards
through shopping sites and submit queries online, whereas the business can advertise
jobs externally and internally.
● Email can be used to pass information through text or images. However, a limitation is
that emails may get overlooked as many people tend to get so many emails that they
ignore some or are not motivated to reply.
● Other forms of electronic communication include electronic noticeboards, public
address systems (PA), intranet, mobile phones, videoconferencing, and
teleconferencing.

Written Communication

● Memorandums are short, hand-written notes used for communication within the
business. They are brief and very flexible and used as reminders, to pass on
instructions, etc.
● Noticeboards are used to pass information to a large audience and are very cheap. A
limitation is that they can become untidy, sometimes overlooked, and prone to public
abuse.
● Letters pass information to employees, customers, suppliers, shareholders, and other
stakeholders. Information can be expressed clearly so the receiver can understand it
 well, and the letter can also be kept as a record. A limitation is that writing a letter is
time-consuming, and employees may have poor writing skills.
● Forms, such as routine forms, are used to pass information about day-to-day affairs to
gain employee feedback. Claim forms are used for expenses, whereas order forms are
used for ordering and delivering products. Application forms are used for recruitment
selection and loans.
● Reports are used to pass information formally, whether a report is short or very
complex, statistical, and detailed. They tend to be precise and well-structured. A
limitation is that writing a report is time-consuming to research and write.
● The advantages of written communication are that it can be formal, concrete evidence
can be referred to when needed, and lots of information can easily be shared.

Barriers to Communication
Communication is only effective if the receiver understands the message sent. Things that get in
the way of good communication are called communication barriers. ​

Examples include: ​

● Lack of clarity - If a message is unclear, it may be misunderstood or ignored. ​

● Technological breakdown - A lot of business communication is done electronically. If
technology is faulty, communication may become unclear or break down.
● Poor communication skills - some people may have poor communication skills​.
● Jargon - Sometimes, people use jargon when communicating. Jargon is vocabulary
used and understood by people in a specific group.
● Distractions - Communications may break down if there are distractions in the
communication process. ​
● Business culture - Some businesses may develop a culture of poor communication. ​
● A long chain of command - If there are too many layers of management in the
organization, the chain of command will be longer. ​
● Using the wrong medium - The different methods by which messages can be sent are
called communication media. However, an important message may be missed if the
sender uses an inappropriate medium.
● Different countries, languages, and cultures - In multinational companies, people
may work in countries where languages and cultures vary. Such differences may make
communication more challenging​.

Problems of Ineffective Communication

● This can lead to multiple expensive problems, such as more staff absences and
frustrated employees, leading to lower productivity.
● Lack of motivation, poor customer service, work-related injuries, lower profits, and
higher legal expenses are other issues that could occur.
Ways to Remove Barriers to Communication

● Training ​staff helps them improve verbal communication skills, e.g., over the telephone.
● When recruiting, a business should ensure the candidates they hire have good
communication skills by checking the quality of the person’s written job application and
speaking skills during the interview.
● A company can use standardized written templates that can be easily stored on the
system and used for sending newsletters, emails, etc.
● A business can shorten the management levels involved so there is a shorter chain of
command; thus, information can get around more quickly.
● Social events for staff allow colleagues to build work relationships and improve
communication.

Recruitment & Selection

Key Vocabulary

● Recruitment: this is the process of employing people due to reasons such as

expansion.
● Job description: document that shows the responsibilities and tasks of the employee
after being employed.
● Person specification: personal profile of the type of person required to do the job.
● Internal recruitment: recruiting people from inside the business.
● External recruitment: recruiting people from outside the business.

Types of Employment:

● Full time employment: this is where a business recruits and expects an employee to
work all days in a week except for the holidays.
● Part time employment: this is when a business allows an employee to work only at
times when the business in need of them. This gives them more flexibility.
● Job share: this is where 2 part time employees share the job and the salary of a single
full time employee. The employees must make sure that they interact effectively and
work as a team.
● Casual employment: this is when a business employs people who have to work on a
call. Which means that the employees must be ready at any time.
● Seasonal employment: this is where employees are being recruited at certain times of
the year for example, at summer times the demand for ice-cream increases therefore,
people employed in the production of ice cream will get their jobs.
● Temporary employment: this is when employees are employed in order to cover the
absence of full time employees who have taken leave due to specific reasons: paternity
or maternity leave.
Recruitment stages

1. Identify the type and the number of people required

2. Prepare the job description and person specification
3. Advertise using appropriate media
4. Evaluate applicants and select a shortlist for interview
● Shortlisting: after receiving the application forms the personal manager must ensure to
choose the right people for the final interview. This is easier with the use of application
forms as comparisons can be made and the experience and skills will be considered
when going through the CV.
● Interviewing: After the final shortlist the applicants are called for interview in which the
business can analyze and assess the candidates’ performance in terms of verbal
communication and body language. They can also clarify the information that is given in
the CV. They can also asses the confidence of the candidate. This will also help
businesses to ask challenging questions to the candidates and see their answer and
how they may deal with the problems.

Documents for recruitment process

1. Job description: it states the job titles, tasks, duties and responsibilities for the job. It
clearly shows what is expected from an employee. It could also be used in appraisal that
is when judging the quality of the new employee who is employed.
2. Person specification: details of qualifications, referees and experience may be included
which is expected from an employer. They can be used to screen applicants while
finding the best candidate for interviews. The things that are essential and desirable can
also be shown.
3. Application forms: while employees apply for the job they are required to fill an
application form which will help businesses gather enough data and the same data from
every applicant which will make comparisons to be much easier.
4. Curriculum Vitae: it is a personal document that is submitted by the job seeker which
includes the years of experience, referees and other personal information. This allows
the job seeker to express his personality.

Internal and external recruitment

Internal recruitment is recruiting employees or replacing positions to fill vacant positions using
the employees who are already existing in the business.

Advantages:

● Cheaper as it saves advertising costs

● No need for induction training as the employees are familiar with the policies.
● Staffs are motivated if they know that there is a promotion.

Disadvantages:
 ● No fresh ideas generated
● Motivation may suffer if the person who worked to get the promotion didn’t get it.

External recruitment is recruiting people from outside the business.

Advantages:

● Fresh ideas generated

● Larger pool of potential employees Induction training is to be given which
● increases the time
● More talented

Legal Controls Over Employment

Key Vocabulary

● Discrimination: choosing one person instead of another based on their characteristics.

● Minimum wage: minimum amount per hour that all employers are supposed to pay to
the workers or employees.

Businesses must ensure that they do not discriminate one another employee based on their
race, religion or gender. However, if the person is much more skilled and experienced than the
other the business choosing this person is ethical.

Legislation that governments have imposed in order to protect the rights of

all employees:

1. Gender - One of the most common form of discrimination is gender discrimination.

Businesses must ensure that the advertisements, references in work titles, promotions
and wages for staff must not be based on gender. For example, the business who is
advertising for a police officer must ensure that they don’t specify the gender such as:
policemen.
2. Race and religion - Businesses have to make sure that they don’t discriminate
employees based on their color, race or religion. Some examples are: businesses have
no rights to prevent women and men from wearing religious such Burka or turbans. And
workers must receive good training to encourage equality at work.
3. Disability act - Unemployment rate for the disabled people are comparatively higher
than the unemployment rate for abled bodies. Business should ensure that they do not
discriminate employees based on their disability but should classify people according to
their skills. They should make facilities for employees to use the wheel chairs such as
ramps for wheels and give them holidays for weekly check-ups.
4. Sexual preference - Businesses should make sure that they do not discriminate any
employee based on their sexual preference and this is also illegal. However, many
 countries have different laws. This will also result in dissatisfaction of workers due to
harassment and bullying in work place.
5. Age - An employee of the same skills with more experience and qualifications but older
to another employee must get the same pay as the younger employees. However, most
businesses discriminate employees in terms of age. For example, business cannot
refuse to offer promotion to an elderly person

Minimum wage laws

Minimum wage legislation is set by the government. And this is the minimum amount of money
an employee is entitled to receive. An employer will face a huge penalty if they didn’t pay.

Reasons for minimum wage laws

● To benefit the disadvantaged workers such as women.

● When minimum wage laws are being imposed this may increase the salaries or wages of
all disadvantaged workers hence, they have increased incomes. This will result in their
living standards to be improved hence, economic growth will increase.
● To reduce poverty: minimum wage laws increase the income of the low income earners.
Hence, poverty will reduce and many people will move out of poverty.
● To help business: the profits of business may increase as productivity increase as a
result of increased motivation due to increased wages.

Effects of minimum wage laws on businesses

When minimum wage laws are being imposed this will increase the costs of production and
therefore, they may eventually have to increase the prices.

Advantages to business of minimum wage laws

● People will be motivated hence, lower absenteeism and therefore, increased

productivity.
● Low wage earners will have increased income hence, their disposable income may
increase and therefore, disposable income may increase and therefore, more purchases
and hence, profits rises.
● As the wages of employees increases they may do one job instead of 2 or more jobs.
Therefore, they may be more committed to their work.

Training
Key Vocabulary

● Training: it means to increase the skills and knowledge of the workers to enable them to
do their work effectively.
● Induction training: training that’s given to a fresh employee.
 ● On the job training: training that’s given in the workplace by another employee.
● Off the job training: training that’s given by a specialist in another premise.

Importance of training

It is unlikely that an employee will go through their life without proper training. Training increases
the knowledge of the employees while also increases the productivity and competitiveness.
Hence, businesses gain more revenues. Also it ensures that employees know how to do their
jobs and be safe.

1. Induction training: this is given to new employees who have recently joined the
business this helps employees be familiar with the working practices.

2. On the job training: these types of trainings takes place at the workplace and they may
be given for different purposes such as: introduction of technology, new working
practices etc.

It can take place in three ways:

1. Shadowing: new employees will be instructed to learn from another worker by

looking at how he or she does the work.
2. Mentoring: this is where the worker will be given the tasks to work but can ask
questions and learn more from the mentor.
3. Job rotation: this is where employees are given opportunities to work in different
departments or different jobs in order to improve the flexibility and make the
workers work more interesting.

Advantages:

● Cheaper method
● Can be easy to organize
● Output is being produced at the same time with others

Disadvantages:

● Mistakes may affect the output

● Could be dangerous for a surgeon
● May be stressful for workers for working with others
3. Off the job training: this is where training takes place away from the workplace.

Advantages:

● Outputs are not affected if mistakes are made

● Customers and others are not put at risk
● Training could take place outside the work place if required
Disadvantages:

● Expensive method
● It takes time to organize
● No output produced as no contribution to work

Training in healthy and safety

As many of the jobs that people have some dangerous problems, the government has imposed
many health and safety regulations to protect the employees. For example, businesses should
prepare a written statement of their general policy of health and safety and must give it to the
employees. Employees should learn how to use health and safety equipment and machinery
properly too.

Advantages of training

● Keeps the workers up-to-date: training will help businesses ensure that their workforce
is well aware of the latest technology that has arrived and how to use this and be more
competitive.
● Improving labour flexibility: this will help businesses cover the absenteeism of one
employee by replacing with another.
● Improving the job satisfaction and motivation: as employees become more familiar
after the training they are more satisfied and motivated with their job. Hence, productivity
rises.
● New jobs in the business: as the business expands there will be more new jobs and
therefore, more training is required.
● Training for promotion: as staffs are promoted due to vacancies they may require more
training to do their new jobs and can learn more skills and knowledge.

Disadvantages of training

● Costs of training: training is expensive as the specialists who come to train will be paid
and other equipment that are required is also expensive.
● Loss of output: some new workers who join the business learn by doing the work so if
mistakes occur this will damage the business reputation and increase the wasteful
resources.
● Learn by doing: as employees learn the job by doing them there may be distractions in
the work place due to the sound this may affect the quality of the training.
● Employees leaving: when employees are well trained and if they decide to leave the
business and move to the rivals this may be waste of money in training hence, the rivals
have an advantage.

Importance Of Motivation in the Workplace

Key Vocabulary

● Hygiene factors: things at work that result in dissatisfaction.

● Motivators: things at work that result in satisfaction.
● Job enrichment: making a job more interesting and challenging
● Maslow’s hierarchy of needs: order of people’s needs starting with basic human
needs.

Why is employee motivation important in business?

● Easier to attract employees: if the employees are highly motivated and the working
environment is pleasant there are high chances that a business might attract the best
possible employee from the rivals. Hence, new ideas and secrets can be shared
therefore, business is likely to get a competitive edge.
● Easier to retain employees: when the motivation increases this may result in lower
absenteeism and employees may begin to love the job they do. This will help to increase
the employee satisfaction and therefore, help to reduce the staff turnover.
● Higher labour productivity: when there is a well-motivated workforce, businesses will
be more productive as the labor productivity is likely to increase significantly. This is
because employees may be willing to show gratitude to the business for keeping them
motivated and therefore, may work harder to increase the profits for the business. The
business will have increased reputation.

3 main theories have developed on how to keep employees motivated:

1. Herzberg-two-factor theory: Fredrick Herzberg has introduced 2 factors known to be

as motivators and hygiene factors. Examples of motivators: achieving aims, recognition
etc. While for hygiene factors examples include: pay, working conditions etc. He gave
more emphasis on job satisfaction and job enrichment. He said that workers are only
motivated if they get more targets to achieve and win more promotions.

2. Maslow’s hierarchy of needs: Abraham Maslow recognized the importance of

business to satisfy some of the needs and he put them into a pyramid which starts from
the bottom.

1. Physiological needs: they are the basic needs of survival and humans cannot
live without them. Examples: food and water. Businesses must ensure that they
provide these else they should give enough money for the employees to satisfy
these needs.
2. Safety and security: businesses should make sure that their employees are well
protected and are familiar with the business procedures.
3. Social needs: the working environment must be open enough for the employees
to interact with each other make new friendships and relationships which would
increase the motivation to work.
 4. Esteem needs: employees want appreciation and awards for their hard work.
5. Self-actualization: employees may want taking their carrier to another level and
therefore, they may need more challenges in their work and want to be creative.
3. Taylor’s theory of scientific management: Fredrick Taylor suggested that workers are
highly motivated with money as they can only do things if they had enough cash in their
pockets. He also said that workers should use specialist tools, receive proper training
and so on. As soon as they have established the best way to carry out tasks then Taylor
said that the employees must be given a fair day’s pay for a fair day’s work.

Methods of Motivation at Work

Key Vocabulary

● Remuneration: money that is paid to the employees for their work.

● Time rate: payment system based on the amount of time employees spend on work.
● Salary: pay to non-manual workers expressed as yearly figure but paid monthly.
● Piece rate systems: payment system in which employees receive an amount of money
for the number of units produced.
● Performance related pay: a payment system or non-manual workers where increase in
pay is given if targets are met.

Businesses can use different types of methods of motivation. They are usually classified into 2
categories:

● Financial
● Non-Financial

Financial methods (Remuneration)

● Time rate: this method of pay is related to the time that the employees spend at work.
Workers may be paid for the extra hours that they work and this is called overtime pay.
However, the non- manual workers who are paid with salaries will not get overtime
payment even if they spend extra- hours at work.
● Piece rate system: this is a payment system which is completely related to the number
of pieces produced. This could increase the productivity of workers as if they produce
more pieces they may be able to get a higher pay. However, workers may use shortcuts
and therefore, quality of work will be poor. Workers may do the work faster hence,
mistakes can occur.
● Performance related pay: this is a payment system that is used to reward non-manual
workers whose output is immeasurable. Their pay is related to their performance. They
may be given a target and if they achieve it they may be awarded with bonuses or
commissions. This system also helps in appraisal system to evaluate the staff
performance.
 ● Bonus payments: bonus is paid in addition to the basic salary because the targets are
met. The main advantage of this system is that they are paid only if targets are met. That
means they are paid when money is earned. They motivate workers to work harder and
meet targets faster.
● Commissions: it is awarded to reaching certain targets but only for sales staffs. A sales
person may have a very low salary but increased with huge commissions for reaching
targets. This can be a method which Fredrick Taylor may approve to motivate workers.
● Promotions: as most of the employees want to build up an illustrious career at work
they may want to get promoted. Businesses must ensure that there are clear chances for
promotion. If there is a promotion employees may be motivated to work harder and
therefore, productivity increases. Also after getting promoted the increase in pay may
also be a motivation. As per Herzberg’s theory, this is a motivator.
● Fringe benefits: they are the perks that are given above the normal wage or salary.

Non-financial methods

● Job rotation: This is a method of motivating employees. This involves the business
allowing employees to take up different responsibilities and tasks and work in different
departments. There will be frequent changes in the jobs. Employees may feel it to be
interesting rather than doing the same job repeatedly. Also, business will benefit from the
flexibility because if one employee is absent the other can take over the job of the
absentee. Hence, there is no delay in production. However, the training costs may rise.
● Job enrichment: This involves businesses giving challenging work to their employees
which may include problem solving, decision making and more interesting tasks. This will
help employees build up their career and showcase their talents. They are allowed to
use their minds creatively and may also be awarded with promotions. However,
employees may be forced to take on extra-responsibility hence, may be disappointed.
● Autonomy/empowerment: This is when a business gives the employees to take
decisions by themselves on their work issues. This will help the employees to take
control over their own work and have set goals for the future. They may feel valued and
motivated. Hence, businesses may be having higher labor productivity. Costs will lower
as businesses now have the opportunity to reduce the number of supervisors and
managers as workers are now having control of their own work.

Reasons for using non-financial methods of motivations

● Some people are not motivated by money

● Some workers give more importance to non-financial methods
● As more workers work in teams individual financial rewards are inappropriate

Organization Structure & Employees

Key Vocabulary
 ● Organizational charts: diagram that shows the different job roles in a business and how
they relate to each other.
● Span of control: number of people a person is directly responsible in a business.
● Centralized: type of organization where the decisions made come from the top level
management to the workers in the lower level along a chain of command.
● Decentralized: type of organization system where decision making comes from the
bottom level workers to the top along a chain of command.

An organizational chart shows:

● How the business is split into functions or departments.

● Who has the responsibility and to whom are people accountable to

The roles of employees and their job titles

Employees’ roles and responsibilities

● Directors: they are appointed by the owners or shareholders and they are led by a
chairperson who is accountable to the owner. They have authority over the managers.
● Managers: some of the functions carried out by the managers are problem solving,
decision making and so on. They are expected to use the limited resources that the
business owns effectively. They are entirely responsible for the running of the business.
They are accountable to the directors and have authority over the supervisors.
● Supervisors: they monitor and ensure that all work is done on time with the best quality.
They have authority over the operatives and general workers while they are accountable
to the managers.
● Operatives: they are the skilled workers and work in the production department. They
carry out functions such as operating machineries etc. they are accountable to the
supervisors and are having authority over general workers.
● General staff: general staffs are unskilled workers with lower wages and can perform
variety of tasks and can also be promoted. Examples: accounting clerks.
● Professional staff: they are skilled and highly trained.

Features of organizational structures

1. Chain of command: route through which orders are passed down in the hierarchy.
Information can pass from the top to bottom and from bottom to top. If the chain of
command is too long messages are lost or changes might not be accepted.
2. Span of control: number of people a person is directly responsible for. If the san of
control is wider the communication will be less friendly and more formal. If the span of
control is narrower communication will be more friendly and informal.

Flat structures
Advantages: communication is better, management costs are lower and control is friendlier and
less formal.

Disadvantages: less chances for promotion

Tall structures

Advantages: there is a clear route for promotion

Disadvantages: communication through the whole structure can be poor because there is a
long chain of command, management costs are higher and control is more formal and less
friendly.

Delegation

This is where a manager transfers his or her work to a subordinate due to travelling or overload
of work. This may motivate the employees and make them feel valued. Although the manager
has responsibilities for the work the time may be saved. However, some of the employees may
think this to be as an extra load of work and therefore, may be displeased.

Centralized Structures

Advantages:

● Coordination and control becomes easier

● Senior manager has complete control over resources
● Senior managers are experienced and trained in decision making.

Disadvantages:

● Procedures may be needed to make the decision making much easier.

● Employees are demotivated as they have no authority
● Less creativity and fewer ideas

Decentralized Structures

Advantages

● Workers have autonomy and are better motivated

● Speeds up decision making
● Workers have opportunity to share their ideas

Disadvantages

● Senior managers may lose control of resources

● Some employees may not have ability to make
 ● decisions
● Some employees may not welcome extra responsibility

Departmental Functions
Key Vocabulary

● Market orientated: where a business focusses on the needs of consumers when

developing products.
● Human resource: deals with issues related to employees.
● Finance department: deals with the issues related to money and suppliers.
● Production department: deals with the issues related to producing the product.
● Marketing department: deals with issues related to the sales of the product.
● Contracts of employment: a written agreement between an employer or employee in
which each has certain obligations.

Human resource department

This department deals with all decision based on employees. Some of the functions carried out
by this department:

● Work force planning: this involves calculating the number and type of employees
required.
● Recruitment and selection: providing application forms, interviewing and selection is
done for new candidates.
● Training: organizing induction and other training.
● Health and safety: business must ensure that all their staff is well protected with
required equipment and must impose legislations.
● Staff welfare: this department is responsible for maintaining the environment and
ensuring that it fits all employees with a pleasant working environment.
● Employment issues: The human resource department is responsible for drawing up
contracts of employment which may show the number of hours to be worked and many
more.
● Industrial relations: The HR department is responsible for maintaining healthy relation
with trade unions and employees.
● Disciplinary and grievance procedures: The HR department is responsible to make
the working environment pleasant by imposing rules for disciplinary conduct.
● Dismissal: sometimes the HR department will have to dismiss employees for their poor
conduct or make employees redundant due to increased labor cost.
● Redundancy: when employees are made redundant there is a strict procedure the HR
department must make sure all goes as the regulations.

Finance department
This department is mostly involved in transactions relating to money. Some of the activities
carried out by this department are:

● Recording transactions: transactions that goes in and out of the business will be
recorded and these information may be used to produce reports and son on.
● Cash flow forecasting and budgets: as the finance department is responsible for
controlling and dealing with the money of the business these reports may assist them.
● Accounts: the finance department is responsible for ensuring that all accounts are being
prepared. This information will be taken into account while preparing financial
statements.
● Wages and salaries: this department is responsible to ensure that all salaries and
wages goes on time to all employees.
● Credit control: This involves ensuring that all debts are paid on time and all customers
pay on time.

Marketing department

● Market research: businesses must collect and analyze the information that is gathered
and use this to make decisions based on the product and improve the product as per the
customers’ needs and wants.
● Product planning: this involves deciding which product to be marketed.
● Pricing: the business should ensure that they charge the right price after gathering
details about the costs, competitor and the nature of the product.
● Sales promotions: people employed in these areas have to ensure that they have an
effective marketing technique.
● Advertising: This involves purchasing advertising space from the media and using the
best adverts to attract the customers. They must ensure that the company website is
more attractive.
● Customer service: Most of the businesses focus on the quality of the customer service
that they provide. This is because they may want to get the most loyal consumers who
may even purchase the products when the prices increases.
● Public relations: this is the communication between the company and general public
and also links to the advertising and is more about building up the image of the
business.
● Packaging: this involves wrapping the product with the best design to attract the
consumers and differentiate from the rivals products.
● Distribution: they must ensure that products are available at the right place at the right
time. They must also ensure that delivery services are on time if they have.

Production department

This department is involved in making goods and services. Some of the activities carried out
are:
 ● Design: the production department is responsible for designing the product and
changing the look and so on.
● Purchasing: they are also involved in purchasing raw materials and other things that are
required for the production of the product.
● Stock control: this involves controlling and calculating the inventory and resources
while providing enough information about the inventory. It would send signals to the
purchasing department about the stock level.
● Maintenance: there is a team of workers who will be cleaning and maintaining the
machineries.
● Research and development: the production department is fully responsible for
innovating new products by investing more on R&D.

Business Activity & Influences on Business

Business Finance
Sources of Finance
Key Vocabulary:

● Short term finance: money borrowed for one year or less.

● Long term finance: money borrowed for more than one year.
● Capital: finance provided by the owners to a business.
● Internal finance: finance generated by the business from its own means.
● Retained profits: profit held by the business without returning to the owners and which
may be used in the future.
● External finance: finance obtained from outside the business

The need for finance

● Short term needs: when the business begins to trade they may have revenues which
could be used to cover the expenditures, however, it may not be enough at times and
this is when the business has to borrow money.
● Long term needs: in order for the business to begin trading or continue trading they
may need funds. These may be funded by the owner’s capital that is invested or by
some financial institutions. This money will be kept in the business for a long time or
permanently.
● Startup capital: in order for a business to start they may have a lot of expenditures such
as purchase of non-current assets that are one off and so on.
 ● Expansion: when a business wants to expand then they may need money. One of the
reason why most of the businesses want to expand is that to meet the large orders.

Internal source of finance

1. Personal saving: as a business is to begin there is a need for finance. Some of the
finance may be funded by the owners and some by other financial institutions.
2. Retained profits: once businesses have established they may generate a huge amount
of profit and a small amount of profit could be kept by the business without returning it to
the owners. This amount can be used for future expansions or emergency funding. This
is the cheapest source of finance as it has no any extra charge such as interests.
3. Selling off assets: when a business develops they may have a lot of unwanted
non-current assets that may worth a lot. They can sell these assets to fund expansions

External sources of finance

● Long term - remain in the business for more than a year or short term - which will last
in the business for less than a year. They are needed by businesses for various reasons
such as:
● Some businesses have seasonal trade and they may need finance at off season to fund
all expenditures.
● A firm may be short of money because a customer has delayed the payments.

Sources of short-term external sources of finance:

1. Bank overdrafts: this means the business is allowed to spend more money than it has
in its account. However, there is a limit set by the bank. There may be interest charges.
The bank has all the rights to call the business and ask for the money immediately at any
time and they may do this when they feel the business is facing a loss.
2. Trade payables: business can purchase raw materials from their suppliers on credit.
That is the payment can be paid at a later date usually within 30 to 90 days. The
business can delay the payments to their suppliers in order to fund some important
things.
3. Credit cards: they are very flexible and easy source of finance. The accounts should be
settled within 56 days to avoid any interest charges. And if the payment is delayed even
after 56 days interest charges will be very high.

Sources of external long-term sources of finance:

1. Loan capital: bank loans can be used to fund short or long-term needs. They loan must
be paid in regular installments with the interest. The main advantage is that businesses
will know how much to pay every month
 2. Unsecured bank loans: this is when banks lend loans to business with no any form of
security or guarantee. Banks often avoid this and prefer secured bank loans. The
interest rates are very high for these loans comparative to secured loans.
3. Mortgages: this is a long term loan in which the business or the borrower must use a
land or a property as a security. Interests are lower for these types of loans.
4. Debentures: this is a long term security yielding a fixed rate of interest issued by a
company and secured against assets. They must be repaid at a set date usually when
the debenture matures. Public limited companies usually use this form of loans.
5. Hire purchase: this is when the business borrow the tools that may be required instead
of purchasing them. The business may have to make a down payment.
6. Share capital: this is a common method of raising finance for limited companies by
selling their shares to people. The business can also use a right issue which may give
the existing shareholders the right to purchase more shares. However, the shareholders
may expect dividend payments and the costs of administration is much higher
7. Venture capital: they are specialist investors who provide money for business purposes,
often to new businesses. They may be entitled to a share of profit. They invest in
companies that have a higher growth potential.
8. Crowd funding: this is where a large number of people invest in a business venture
using an online platform. The main advantage of this is that there is no interest
payments. The lenders may be a large number of people who together may represent
the crowd therefore, a large amount of money may be raised. However, if the business
fails the crowd will be disappointed.

Cash Flow Forecasting

Key Vocabulary

● Cash flow: flow of money into and out of a business.

● Insolvent: inability to meet debts.
● Cash flow forecast: it is a prediction of all receipts and payments over a period of time
for the future.
● Closing cash balance: amount of cash that a business expects to have at the end of
each month.
● Cash inflows: Money that is coming into the business.
● Cash outflows: money that is going out of business. Examples: tax, other expenses
● Net cash flow: difference between cash inflow and outflow.

The importance of cash

Cash is the most easiest to be changed into money. When a business has a very high amount
of cash then it is considered to be successful, else it’s considered to be struggling to survive.

Why is cash needed?

 ● To pay suppliers and other costs: as the raw materials are purchased from the
supplier, they may be expecting cash in return. If the business fails to pay them
adequate amount of cash then this will result in a damage to the healthy relationship with
the suppliers and they may refuse to supply.
● To prevent business failure: businesses must ensure that they have enough cash to
pay their outstanding debts. And if they are unable to pay (insolvent) then this will result
in the business shutting down. They should continually monitor their cash flow and keep
up-to-date records of financial transactions.

The between cash and profit difference

Sometimes the value of cash and profit may be different at the end of the trading period. Some
of the reasons are:

● As some goods are sold on credit, there may be some consumers who have not paid the
money at the end of the trade period and therefore, cash is less than the profit.
● Sometimes owners put more cash into the business therefore, cash is greater than profit.
● Purchase of non-current assets may reduce the cash.

Why is cash flow forecast important?

● Identifying any cash shortages: business can in advance identify the cash shortages
and make arrangements to raise funds.
● Supporting applications for funding: If the cash flow balances are positive then
financial institutions are more willing to lend money.
● Help when planning the business: It helps to clarify the aims and to make
improvements to the business.
● Monitoring the cash flow: Business can compare the predictions and the actual ones
and find the weakness and try out different steps to increase the cash inflow.

Costs
Key Vocabulary

● Costs: expenses that must while running the business

● Fixed cost: the costs that remain constant
● Variable cost: the costs that vary with the level of output
● Total cost: the total of the fixed cost with the variable costs
● Total revenue: money generated from the sale of outputs
1. Fixed costs

a. Fixed costs do not vary with the level of output. They don’t increase when output
increases neither do they decrease when the output decreases. However, they are to be
met even if no output is produced.
 b. They form a straight horizontal line in a graph. Examples: rent, wages, etc.

2. Variable costs

a. Variable costs are the costs that vary with the level of output. When output increases
they increase and the vice versa. Examples: raw materials, packaging.

b. Total variable costs=Variable cost per unit ∗ number of unitsTotal variable

costs=Variable cost per unit ∗ number of units

3. Total costs

a. This is the addition of the Variable and fixed costs.

b. Total cost = Fixed cost + Total Variable costsTotal cost = Fixed cost + Total
Variable costs

4. Average costs

a. This is the average cost of producing one single unit.

b. Average costs = Total costtotal quantity producedAverage costs = total quantity

producedTotal cost​

5. Total revenue

a. The amount of money the firm receives after selling its outputs

b. Total revenues = Price ∗ QuantityTotal revenues = Price ∗ Quantity

Break-Even Analysis
Key Vocabulary

● Break-even point: it is the level of output where the total revenues is equal to the total
costs. Neither a profit nor a loss is made.
● Break even chart: the graph that shows the total costs and total revenues.
● Margin of safety: amount of output available to be sold above the break-even point
where the business makes a profit.
● Break-even point=Break-even point= Fixed costsSelling price – Variable cost per
unitSelling price – Variable cost per unitFixed costs​
What does the Break-even chart show?

● Break-even point is where the total costs and total revenues intersects.
● Fixed costs are always horizontal in the graph
● 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 a profit.
● Margin of Safety = Current output – Break even outputMargin of Safety = Current
output – Break even output

Effects of changes in price and costs on the break-even chart

● If the price is higher, the TR line will be steeper and the Break-even point will shift to the
left.
● If the price is lower, the TR will be flatter and the break-even point will shift to the right.
● If the FC is higher, then the TC will move upwards with the steepness unchanged and
the break- even point will shift to the right.
● If FC is lower, TC will move downward with the steepness unchanged and break-even
point will shift to the left.
● If VC is higher, TC will be steeper and the break-even point will shift to the right.
● If VC is lower, TC will be flatter and the break-even point will shift to the left.

Limitations of Break-even chart

● The TC and TR are shown as straight lines. This is because the costs may lower when
the suppliers offer discounts on large orders. And therefore, the TC may fall.
● It is assumed that all goods are sold. However, there are unsold stocks at the end of the
trading period.
● The accuracy of the break-even chart depends on the accuracy of the details that is
given and the quality of the data that is used to construct the chart.

Statement of Comprehensive Income

Key Vocabulary

● Income statement: financial document that shows a firm’s expenses and income for a
particular trading period.
● Profit: money that is left over after the costs are deducted.
● Retained profit: profit that is held in the business and not returned to the owner.
● Normal profit: minimum profit a business needs to make to retain the interest of owners.

Purpose of an income statement

Income statements are used by businesses to calculate profits for a particular trading year.
There are 2 types of profits: Gross profit which is calculated before deducting the overheads,
and operating profit which is calculated after the deductions of overheads and other costs.

Features of income statement

● Revenues: money the business receives from selling goods and services.
● Costs of sales: costs of producing the products such as: purchase of raw materials.
● Gross profit: Revenues – costs of salesRevenues – costs of sales
● Administrative expenses: general overheads or expenses of the business.
● Other Operating expenses: any expense that is not included in the administrative
expenses are included here
● Selling expenses: the expenses that are directly related to the selling of its products.
● Operating profit: the administrative costs and other overheads are subtracted from the
gross profit to get the operating profit.
● Finance costs: interests paid on loans.
● Profit for the year: costs of finance is subtracted from the operating profit to get the
profit for the year.
● Profit for the year after tax: the amount of money that is left over after all expenses
have been deducted as well as the taxes.

How might the income statement be used in decision making?

● Investment decisions: a business can analyze the income statement and see if they
are having enough profits to invest in new projects. They can also see into the previous
year’s income statement and compare the performance.
● Basis for future forecasts: After a deep look at the income statements of the previous
years the business can find a trend in the profits. If they are decreasing they can
necessary steps to increase the profits and expect more for the future.
● Making comparisons: the operating profit in the income statement can be compared
with the profits of the rivals and measures can be taken to increase the profits if rivals
were outcompeting.
● Cost Analysis: businesses can also evaluate the increase or decrease in costs. For
example, if the costs of raw materials has increased then they can find new suppliers
with lower prices.

The nature and importance of profit

Profit is the key element that encourages many people to start businesses. If there were no
profits earned, business owners may fail to continue. All business owners need a normal profit
to retain their interest in the running of the business. Many people will invest their money in
more profitable industries to increase their profits. They are also prominent as a measure of
success as they can be compared with the profits of rivals.
Statement of Financial Position
Key Vocabulary

● Statement of financial position: it is a summary of the business assets and liabilities at

a period of time.
● Assets: resources used or owned by the business.
● Liabilities: debts of business that provides funds.
● Capital: Finance provided by the owners of the business
● Non-current assets: the assets that last in the business for more than a year.
● Current assets: assets that last in the business for less than a year and will be turned
into cash easily.
● Liquidity: how easily an asset is converted into cash.
● Current liabilities: the liabilities that are to be paid within a year.
● Non-current liabilities: the liabilities that are to be paid even after 1 year.
● Net assets: the value of all assets deducted by all liabilities.
● Goodwill: the value that a company has because it has good relationship with its
customers and suppliers.
● Working capital: the value of the liquid resources that can be used to meet the running
costs

Purposes of Statement of financial position

The main purpose of a statement of financial position is that it helps a business find the value of
their net assets and analyze are they able to continue in the future. If not they will have to find
ways to increase their net assets.

Features of a Statement of Financial position

1. Non-current assets: they are the assets that last for more than a year in the business.
2. Current assets: they are the assets that may be changed into cash easily and they
include: inventory of raw materials, Trade receivables and cash in hand.
3. Current liabilities: they are the debts to be paid within a year. Examples include: trade
payables, bank overdrafts and taxes.
4. Net current assets: They are the current asset minus the current liabilities. This shows
the working capital. If a business is short of working capital it could have cash flow
problems.
5. Non-current liabilities: money owed where repayments is not due for more than a year.
Examples: Borrowing loans for more than one year, mortgage payments.
6. Net assets: this is the value of assets deducted by the value of liabilities.
7. Shareholder’s equity: the money that the owners have contributed to the business.
8. Retained profit is the amount of money that is held back without returning to the owner.
Other reserves is any other amount that is owing to the owner.
9. Capital employed: the money that owners have invested in the business.
Interpreting the statement of financial position

The information provided by the statement of financial position can be used to evaluate the
position of the business. It provides a guide to the value of a business. However, the value will
be estimated as for assets its generally hard to provide a value. Also, some businesses may
have assets that are non-physical such as good will.

Ratio Analysis
Key Vocabulary

● Ratio analysis: mathematical approach to investigating accounts by comparing 2

related figures.
● Gross profit margin: it is the gross profit that is expressed as a percentage of turnover.
● Operating profit margin: operating profit expressed as a percentage of turnover.
● Current ratio: it assesses the firm’s liquidity by dividing the current assets by the current
liabilities.
● Acid test ratio: similar to current ratio but excludes inventory from current assets.
● Return on capital employed: profit of a business as a percentage of capital employed.

Ratio analysis can be done in 2 ways:

1. Liquidity ratios: this measures how easily a business is able to pay its short term debts.
2. Profitability ratios: it measures the performance of a business.

Profitability ratios

1. Gross profit ratio =Gross profit ratio = Gross profitRevenues∗100RevenuesGross

profit​∗100
2. Operating profit margin = Operating profitRevenue∗100RevenueOperating profit​∗100
3. Mark-up =Mark-up = Profit per itemcosts per item∗100costs per itemProfit per
item​∗100. It is calculated by businesses to set a price. This is because it guarantees that
all costs of production are covered and a profit is generated.

Liquidity ratios

This measures how easily the business can convert its assets into cash.

1. Current ratios = current assets current liabilities current liabilitiescurrent assets​:

a. The norm for current ratio is from 1.5 to 2.0

b. If a business has less than 1.5 then it is unable to pay its short term debts.
c. If a business has more than 2.0 then it has lots of money tied up unproductively.

2. Acid test ratio:

a. This is the most severe test of liquidity which involves the deduction of inventory which may
take some time to convert into cash.

b. Current Assets – InventoryCurrent liabilitiesCurrent liabilitiesCurrent Assets – Inventory​

c. If the business has a lower acid test ratio, the business may be unable to pay the suppliers.
Hence, the suppliers may refuse to supply.

3. Return on capital employed

a. operating profitcapital employed ∗ 100capital employedoperating profit​∗ 100

b. The advantage of this ratio is that it links profit to the size of the business.

c. Capital employed = Non-current Liabilities + Capital and reservesCapital employed =

Non-current Liabilities + Capital and reserves

Using ratios to make comparisons

Ratios can be used to analyze the performance of the business. They can help businesses to
improve their performance by working on their weaknesses. They can be used to make
comparisons between 2 or more businesses in the same industry. This will also help them to
find their market share in comparison to other businesses.

The Use of Financial Documents

Key Vocabulary

● Quantitative information: the information that are expressed in numbers.

● Auditing: this is a financial procedure that checks the accuracy of the company’s
financial statements.

The use of financial documents to assess the performance of the business

Reasons for different stakeholders having a look and analyzing the financial statements:

1. Managers and employees: Managers may need for making comparisons and also to
demand for higher salaries if business is becoming profitable. Employees may need
while negotiating for wages and ensuring that they have job security.
 2. Owners and shareholders: owners may need to see if their business is profitable or is it
worth investing more? Shareholders may need because to see whether they can get
higher dividend payments.
3. External stakeholders: Banks may need to look at the financial statement s of the
business before granting a loan to see if there are any unpaid debts or will the business
be able to repay them back. Suppliers may want to see if businesses are able to pay for
the goods or to see the credit worthiness of the business before allowing to trade on
credit.

Use of financial documents to inform business decisions

Financial documents consist of quantitative information which is very helpful in decision making.

1. Funding decisions: Businesses can look into th financial statements to see if they have
enough of cash to fund the expenses of the following year.
2. Reducing costs: businesses can use the income statement to see if the costs are
rising. They can take measure to reduce the costs. Also, they can use the ratio analysis
to see the profitability of the business.
3. Increasing the profitability: businesses can try ways using the financial documents to
increase their profitability. For example, if the gross profit margin is lower they can
increase the selling price, etc.
4. Investment decisions: Businesses can look into these documents to see if they have
enough cash to invest in expansion of the business. However, these information alone
cannot help managers take risky decisions.

Other uses of financial documents

1. Government: governments may use these information to monitor the progress of the
economy and the success of economic policies.
2. Competitors: they may use the information when comparing their figures with the rivals
to evaluate their level of success.
3. The media: they may use to produce reports on business and commerce.
4. Tax authorities: they may require the financial documents of business when deciding
how much tax to charge.
5. Auditors: They may need the financial documents while checking the accuracy of the
accounts and ensuring a true and a fair view of the business is given to the
shareholders.
6. Registrar of companies: it is a must that when companies register they have to submit
a copy of their financial statements every year.

People in Business
Marketing
Market Research
Key Vocabulary

● Market research: this is the gathering of data related to the consumption of goods and
services related to the market and analyzing them and using for Marketing purposes.
● Untapped: it is market that is available but yet to be exploited.
● Focus groups: number of people are invited to a discussion attended by groups of
Market researchers.
● Consumer panels: groups of consumers who are asked for feedbacks about products
over a period of time.

Purpose of Market research

● To identify and understand consumer needs: it is important that businesses always

meet the expectations of their consumers. Market research will help businesses to do
this by gathering information and predicting consumers’ needs and wants.
● To identify gaps in the market: by finding the unsaturated places in the market, the
business can innovate new products that their rivals have not yet touched. This will help
them gain a competitive edge in the market.
● To reduce risk: before any business begin to trade it is important that they carry out
market research. This is because they may get to know the market, consumers and
rivals. Hence, this can prevent the likelihood of business failures.
● To inform business decisions: information that are collected by carrying out market
research can be used to influence the decision making in a business.

Methods of primary research

● Questionnaires: most common form of primary research. They may include opened and
closed questions, simple questions, be short and may not include leading questions.
They can be used in different ways such as postal surveys, telephone interviews,
personal interviews, online surveys.
● Focus groups or consumer panels: detailed information can be collected using this
cost-effective method. The people must represent the whole population. They may not
be reliable as consumers’ fashion and trends changes all the time.
● Observations: this is where market researchers observe the behaviors of consumers
using CCTV cameras and see how much time they spend on watching the products and
so on. However, many questions go unanswered.
 ● Test Marketing: this is a market research technique that is used before a national
launch. The product is sold in small restricted area and then the feedbacks are used to
modify the product. They may be free at times.

Advantages of primary research

Original and accurate information

● Not used by competitors.

Drawbacks of primary research

● Expensive

● Time consuming

Methods of secondary research include business websites, internal data, competitors,

media and commercial and government publications

Advantages of secondary research

● Cheaper
● Less time consuming
● Easier method

Drawbacks of secondary research

● Inaccurate information
● Out of date

Qualitative and quantitative data

Qualitative data is the intentions, attitudes and beliefs of consumers. It is written down in words
and recorded in video clips. Quantitative information are those expressed in numbers. They
need less interpretation and examples include: statistics or market shares.

Role of social media in collection of market research data

1. Broad reach - Can reach millions of people

2. Ability to target - it allows specific groups to target
3. Free or low cost - It may be free for businesses and paid options may be cheaper

Importance of the reliability of market research data

The information collected should be reliable for businesses to use and see a positive effect. If
the information was unreliable then this will result in failures. The reliability of information
collected depends on the number of people and whether they represent everyone. Businesses
should appreciate that human behaviors are unpredictable as trends and tastes changes
overtime. If the quality or reliability of the information is poor then the decision taken based on
this information will not be effective.

The Importance of Marketing

Key Vocabulary

● Market: set of arrangements that allows buyers and sellers to communicate and trade in
goods and services.
● Marketing: identifying customers’ needs and satisfying them profitably.
● Product orientated: where a business focusses on the design of the product rather than
the consumers.
● Market orientated: this is where a business focusses on the consumers rather than the
product.
● Market share: it is the proportion of sales in a market that a business enjoys.
● Mass market: large market in which branded products are marketed.
● Niche market: small market within a large market or industry.

Importance of Marketing

Marketing is not just about selling products however, it is about identifying the needs and wants
of consumers, charging the right price, and so on.

● Satisfying the customer needs: businesses must ensure that they satisfy the needs
and wants of their consumers after carrying out market research and identifying the
needs of their consumers.
● Building customer relationships: businesses needs to build proper consumer
relationship. They can do this with good communication and ask for feedbacks in social
media platforms.
● Keeping customer loyalty: in order to retain and make their consumers come again for
purchases businesses must use some effective techniques to gain this loyalty. Such as:
○ Reward cards: these cards get points when consumers make purchases and at
the end of the specific period the business gives them money-off vouchers which
could be used at the same store.

○ Free gifts: businesses can give gifts to their loyal consumers and this may
encourage them to do more purchases.
○ Charitable donations: this is when a business can transfer a small amount of
the money they receive from a purchase of a product to a charity organizations.

○ Partnership deals: this is when businesses share the costs and the benefits of
rewarding loyal consumers with some other businesses.

Product and Market Orientation

1. Product orientation is when a business focusses on the manufacture

and the design of the products rather than the consumers who are the
main buyers of it.
2. Market orientation is when a business focusses on the needs and wants
of consumers and satisfaction of consumers rather than the products.
○ Market share and Market analysis

1. Market share is the share of the total market that a business enjoys.
Market share = Total product of business sales Total sales in the
whole market∗100Market share = Total sales in the whole
marketTotal product of business sales​∗100
2. Market analysis is a quantitative and qualitative assessment of a market.
This is when a business analyses the whole market about the consumers,
rivals and other things relating to the product.
○ Niche and mass marketing

1. When a business sells its products to a mass market, they have to spend
a lot of money in making their products more attractive than the rival’s
products to their consumers as competition is high. However, they will be
able to exploit economies of scale as they produce in large quantities to
serve the whole market.
2. Niche market is a small segment of market that is not served by large
markets. It is serving a small group of customers with specific needs.
○ Responding to the changes in the market

○ Changing customer needs: customer needs changes for various reasons such
as: changes in incomes so consumers prefer better quality products, changes in
fashions, advancement in technologies and so on.

○ Changes in consumer spending patterns: Businesses can collect data or

information form market research or purchase it from specialist market
researchers and identify which products are frequently consumed by consumers
and produce similar products.
 ○ Increased competitions: businesses should monitor rivals carefully and
innovate new features or characteristics to their products in order to differentiate
and increase their market share while attracting consumers.

○ Competition may put businesses under pressure: consumers are forced to

purchase the products of the business instead of the rivals by some methods of
attraction such as lowering prices or producing better quality products.

Market Segmentation
Key Vocabulary

Market segment: this is a part of a whole market where a particular customer group has the
same characteristics.

How do businesses use market segmentation to target consumers?

Some businesses:

● concentrate on producing one product for a particular segment.

● produce a large number of products and target several segments.
● aim their products at all consumers.

Methods of market segmentation

● Location segmentation: people living in different countries have different needs

depending on their climates. For example: hot countries may prefer cotton clothes. Also
in different regions have different needs and so on.
● Lifestyle segmentation: this is when businesses classify their consumers according to
their lifestyles. For example, television broadcasters may target sports channels at
sports lovers.

Demographic segmentation: this is where businesses divide their consumers in terms of

gender, age, status, religion and race.

● Age: teenagers may want the trending clothes with the latest fashions while adults may
want decent clothes.
● Income: High income earners may want luxurious cars while low income earners may
want any type of transport vehicle to travel.
● Social class: this is when businesses target consumers based on their employment
status.
● Ethnic origin: Different ethnic groups are having different needs based on their cultures.
Benefits of market segmentation

● Can increase the revenues when the products are targeted at the right group.
● More loyal consumers as their needs are met.
● Can avoid wasteful promotional resources by targeting the right group.
● Businesses can target a wider range of goods to different customer groups.

Product
Key Vocabulary

These are the elements of a firm’s marketing that are designed to meet the needs of
consumers. They are:

● Product
● Price
● Place
● Promotion

Product development

Products are needed to be produced in order for a business to trade. However, sometimes
businesses may produce products while trading. These may be because the existing product is
getting out of date or to build up a competitive edge in the market.

In order to produce a product there are few stages:

1. Generating ideas: these may come from various sources such as: owners or research
and development centers.
2. Analysis: after the ideas are being generated businesses are required to analyze the
ideas and filter them, choosing the best, marketable, profitable and legal idea.
3. Development: this is where experiments and simulations may be carried out and the
product is produced as expected.
4. Test marketing: this is when the product is being tested in a market and sample is taken
to be as a representative of the whole market.
5. Commercialization and launch: this is where the business modifies the product finally
and launches it nationally.

Packaging

● Consumers link the quality of the product through the neatness and beauty of the
packaging.
● It helps businesses to display their brand name and increase their image and reputation.
● It helps consumers differentiate it from the rivals.
Product life cycle

● Development: there is no sale. This is where the product is being made, tested and
analyzed. Lump amount of money is spent on research and development and the costs
are high.
● Introduction: product is being introduced with huge parties/promotions. Pricing
strategies are implemented and costs still remain high while there is a slight increase in
the revenues.
● Growth: if the product is successful the revenues starts to increase significantly. Line is
steeper in the graph and costs are beginning to be recovered. At the end of this phase
revenues starts to fall as competitors are emerging with their own products of the same
type.
● Maturity: revenues begin to fall and the costs are fully recovered. Cash flow is improved
and business is making a profit. More rivals and therefore, some businesses are forced
out or their promotion techniques changes. Some businesses use extension strategies
to lengthen the lifecycle.
● Decline: this is where the product is out of date or not trending due to changes in tastes
and fashions or advancement of new technologies. Some businesses bring out new
products to replace the declining products.

Extension strategies

These are the methods that are used to lengthen the life of a product. Some methods are:

● Changing the appearance of the product.

● Encouraging more frequent use of the product.
● Finding new markets for the products.

Advantages of using extension strategies

● Brand image is improved.

● Costs of developing new brands are saved.
● Competitors may find it difficult to enter the market.

Disadvantages of using extension strategies

● They are expensive.

● They may damage the brand image if extended product is a failure.

Managing and reviewing the product portfolio

Product portfolio is a range of product a business is currently marketing. A business has to

manage the product by constantly reviewing each product and making changes whenever
necessary.
A Boston matrix may be used to analyze a product marketed by a business while categorizing
it according to the market share and market growth.

The Boston matrix puts the products into 4 categories:

1. Stars: valuable products for a business while having a high market share and growth.
2. Cash cows: mature products with high market share but low market growth while
generating a steady income.
3. Question marks: potential products with lower market share but higher market growth.
4. Dogs: declining products with low market share and growth.

Price
Key Vocabulary

● Cost plus pricing: adding a percentage to the cost of the product to get the price.
● Mark-up: percentage that is added to the cost that makes a profit for the business while
setting the price.
● Penetration pricing: starting with a lower price and eventually increasing the price when
the product is established in the market.
● Competition based pricing: strategies based on the prices charged by rivals.
● Predatory pricing: setting a lower price until the rivals drive off the market. Skimming:
setting a higher price initially and then lowering the price when rivals begin to enter the
market.
● Loss leaders: products sold below the costs to bring more consumers.

Importance of Price
Price is one of the key elements of the marketing mix. Consumers want better quality products
for reasonable price. Some of the factors affecting the price are marketing mix, objectives, taxes
and competitions.

There are different types of pricing strategies:

1. Cost plus pricing - This strategy involves adding a percentage of the costs known to be
as a mark-up to the price. One of the key advantage of this pricing strategy is that it
ensures that a profit is made for every product that is sold. However, the price may be
higher than the market price.

2. Penetration pricing - This is when the business initially starts with a lower price to draw
in consumers and then increase the price when there are more loyal consumers and
product is established in the market.

3. Competition based pricing - This is a pricing strategy that is based on the prices
charged by the rivals. The main advantage of this strategy is that a price war is likely to
be avoided. Sometimes businesses may use predatory pricing to drive out the rivals from
the market and to reduce the competition in the market.

4. Skimming - This is when a business initially starts with a higher price and then
eventually lower the prices when the competition increases. One of the key advantage of
this strategy is that the profit margins are higher and the costs are recovered as soon as
possible.

5. Promotional pricing - This involves lowering the price of the product for a short period
of time in order to draw in consumers.

They can take place in various forms:

1. Discounts and sales: this involves the business cutting down the price for a
short period of time and revenues increases as goods are sold below the
standard price.
2. Psychological pricing: this involves setting the price slightly below a round
number. Example: £99.99. This attracts the consumer easily and they may think
this is much cheaper than £100 and may eventually end up purchasing the
product.

Place
Key Vocabulary

● Distribution channel: route taken by a product from the producer to the customer.
 ● Wholesalers: person or business that buy goods from manufacture and sell them in
smaller quantities to retailers.
● Retailers: business that buy goods from manufacturers and wholesalers and sell them in
smaller quantities to consumers.
● E-commerce: use of electronic systems to sell goods and services.
● Direct selling: where business sell their products directly to consumers.
● Agent: intermediary that brings together the buyers and sellers.

Distribution channels

This is a route through which the product travels from the producer to the consumer. Some
businesses sell their own products directly to their consumers or use intermediaries such as
retailers and wholesalers in order to reach their consumers.

Retailing

Why do manufacturers sell their products to the retailers instead of directly selling it to the
consumers?

● Locations where retailers are available is more convenient to the consumers rather than
the location in which the manufacturers are available in.

● Also, retailers may add value to the products by providing extra services such as:
delivery services which will not be provided by the manufacturer.

● There are different types of retailers such as:

1. Independents: they are sole traders such as: greengroceries, jeweler etc. and
are found in malls and high streets.
2. Supermarkets: Large stores, cheaper products, includes ranges of products and
provides free parking facilities.
3. Department stores: large stores split into departments and provides good
quality products with better customer services.
4. Multiples/chain stores: They may be many stores in different locations with the
same products and may be controlled by a central office.
5. Hypermarkets: Large giants, with cheaper products than in supermarkets, less
customer services and goods are not displayed attractively.

E-commerce

The most common form of retailing in today’s world is E-commerce. It uses electronic systems
to sell and purchase goods and services all around the world.

2 types:
 ● Business to consumers - This is when the goods are purchased online and delivered
at home. However, the new trend is that goods are ordered and collected from a central
hub.
● Business to business - This involves businesses selling to other businesses online.
Sophisticated software can be used to purchase the components that are required with
the help of these software which may help to find the best cheapest supplier while
carrying out all the paper works.

Benefits to businesses of online distribution

● Lower overheads as no need to rent premises

● Businesses have more choices when locating operations

Drawbacks to businesses of online distribution

● Businesses may have to face increased competition as this is a cheaper method of

forming business.
● There is a security risk as hackers may gain access to sensitive information.
● Site may be affected by malware and poor internet connections.

Benefits to consumers of online distribution

● It is cheaper because saves travel costs.

● It saves time which is valuable
● There is more choices for consumers

Drawbacks to consumers of online distribution

● Consumers cannot touch or look at the goods before purchase.

● Customers may experience poor after sales services.
● Customers without credit cards or internet may not get the service.

Other methods of distributions

● Direct selling: this is where the business sells their products directly to the consumers.
Wholesaling: they buy from manufacturers and sell to retailers.
● Agents or Brokers: they link buyers and sellers.

Choosing the appropriate distribution channels

● The nature of the product - Different products require different distribution channels.
● Cost - Businesses may choose the cheapest distribution channel and also may prefer
less intermediaries because if there were more intermediaries then the product may
become more expensive and therefore, lower revenues and market share. Websites
may be used by businesses to sell their products directly to the consumers so that costs
are lower.
 ● The market - Producers selling to larger markets are likely to use intermediaries. While
producers selling to small markets are likely to sell directly to consumers. Producers
selling overseas are likely to use agents to guide them to the new market.
● Control - Some producers may prefer to sell their products directly to consumers as they
do not want to see their products sold in down markets as it may damage their brand
image.

Promotion
Key Vocabulary

● Advertising: communication between a business and customers where messages are

placed in the media to encourage the purchase of a products.
● Public relations: attempt by a business to communicate with interested parties.
Sponsorship: making a financial contribution to an event in return for publicity.

Above and below the line promotion

Above the line promotion involves placing the adverts using the media while below the line
promotion involves placing the advert without the use of media. Examples of above the line
promotion is advertising in newspapers whereas an example of below the line promotion is
press release.

Above the line promotion

● Television: advantage is that huge audience can be reached and creative adverts can
have great impacts. However, very expensive.
● Newspapers and magazines: advantage is that they are relatively cheap and readers
can refer back. However, no movement or sounds.
● Cinema: advantage is that big impact with big screens and sound and movement can be
used. However, limited audience.
● Radio: advantage is that sound can be used and cheaper production. However, not
visual.
● Posters and billboards: advantage is that they are seen repeatedly and good for sharp
messages. However, difficult to evaluate the effectiveness.
● Internet: advantage is that can be targeted and updated. However, possible technical
problems.

Below the line promotion

Doesn’t use any media to advertise. One of the forms of the below the line promotions is:
 ● Sales promotions - They are the incentives to purchase the product. For example, free
gifts, coupons and loyalty cards are offered by businesses to encourage people to make
purchases.

Merchandising and Packaging

Most businesses arrange point of sales so that this attract consumers easily. This is called
merchandising. Some examples include, layout of the product is made more attractive and
visible, posters and leaflets are used to advertise, and shelves are often kept well stocked to
give a good impression in the minds of the consumers.

Direct mailing

This is where businesses sends letters and leaflets about the product to consumers. They may
be personalized. This may encourage consumers to purchase the product.

Direct and personal selling

Direct selling involves a sales person calling to numbers and encouraging the consumers to
purchase a product. One advantage is that features of a product can be discussed more clearly.
However, people often get irritated by this.

Public relations

This is an attempt by the business to communicate with the interested parties. The main
purpose is to increase the revenues by improving the image and establishing the brand. The
main advantage of public relations is that it is a cheaper method of promotion.

Some approaches that are used are:

1. Press release: some information about the business or the product may be given to the
media and this may be used to write an article for the newspaper and this may improve
the image of the business.
2. Press conference: some of representatives of the business may speak in the media
and this allows the press to ask for frequently asked questions and give their feedbacks.

Donations: this can be used by businesses to improve their image.

Using technology in promotion

1. Online targeted advertising: this is when businesses could make use of their
advertising resources more effectively. This is made possible by the use of browsing
habits and other data that are collected using cookies.
2. Viral advertising: businesses can use this type of advertising technology to increase
their revenues. This contains messages, video clips and images which may promote a
 product. These messages may encourage people to pass on to their friends and family
and thereby, make it viral.
3. Social media: This helps businesses to target their adverts more effectively. One of the
main advantage is that, it is relatively cheaper method and the advert may reach millions
of people.
4. E-newsletter: some businesses may send electronic messages to interested parties
which may include interesting statistics and industry news. They may send messages to
consumers who have already purchased goods from them.

Branding

Branding involves giving a product a name, sign or symbol for the product in order to
differentiate it from that of the rivals. It is used to create customer loyalty and to develop an
image.

The use of promotion strategies in different market segments

● Advertising: this may not differ much in any market segments. However, in large
markets, businesses may use social media or television advertising.
● Sponsorship: this is used in markets where images are important. This is a cheaper
method of advertising.
● Special offers: some business may give discounts on some products in order to hook in
the consumers into the stores while hoping that some other products may be purchased.
This method may be used to clear out stocks or generate quick cash.

Business Finance

Business Operations
Economies and Diseconomies of Scale
Economies of scale

This is the financial advantages of producing something in huge quantities or the fall in average
costs for a business when they produce in bulk. The two types are:
 ● Internal economies of scale

● External economies of scale

What are the internal economies of scale?

They are the financial or cost benefits an individual firm could enjoy as they expand. Some of
them are:

● Purchasing economies of scale: this is when businesses get discount for purchasing
components in bulk. Therefore, average costs fall.
● Marketing economies of scale: for instance, it would be senseless for a small business
to purchase a machinery that may be used once a month.
● Technical economies of scale: larger operations are more efficient as they may include
specialized equipment and machineries which may save time and money.
● Financial economies of scale: as businesses grow they can easily convince financial
institutions to lend money as they may be able to support their repayments using their
previous successful year’s financial statements.
● Managerial economies of scale: larger companies can employ specialized managers
for each department so they can get fresh ideas which may help to increase the
revenues of the business.
● Risk-taking economies of scale: larger businesses may have wider product ranges
selling into varieties of market and therefore, if one product fails they can depend on the
other.

External economies of scale

The cost benefits that all firms in an industry enjoys as the industry as a whole expands.

● Skilled labour: when an industry develops there may be well-trained workers with
required qualifications and experience, hence, training costs may be lower for
businesses.
● Infrastructure: when an industry expands the road and other infrastructures may suit
the needs the industry.
● Ancillary and commercial services: when an industry is established then suppliers
may be encouraged to set up close to the industry hence, in this way the costs may fall.
● Cooperation: when more firms are located in the same industry cooperation is likely to
increase hence, there may be some cost benefits, such as for sharing the costs of
Research and Development.

Diseconomies of scale

This is when a firm expands beyond a certain limit it experiences a rise the total average cost
and this is called diseconomies of scale. Some of them are:
 ● Bureaucracy: when businesses grow too fast and too much the decision making
process slows down. This is because there are number of departments and lots of paper
work.
● Labour relations: the relationship between the employees and the higher management
reduces. Hence, motivations suffers and therefor, productivity falls.
● Control and coordination: controlling a firm with thousands of employees, millions of
units and many departments is difficult. There is a need for more supervision.

Other limitations to growth

● Lack of finance: some businesses may want to grow but may not have the required
amount of money that is needed to grow. Purchasing machineries, equipment and other
things are expensive.
● Nature of market: some businesses by nature cannot grow.
● Lack of managerial skills: some businesses may not have proper owners who know
hpw to run a business effectively and grow. Hence they may be prevented from growth.
● Lack of motivation: some business owners may not want to grow because they may
not want to take the extra responsibility of running a huge organization.

Production and Productivity

Key Vocabulary

● Production: transformation of resources into a final product.

● Productivity: rate at which goods are produced, and the amount produced, especially in
relation to the work, time and money needed to produce them.
● Labour productivity: output per worker in a given time period. Lead time: time it takes
to prepare or deliver something.

There are different types of production:

Job production

This is when a business produces one product from start to finish before moving onto the next.
All factors must be employed for producing a single unit of output at a time. This is used when
orders are small and each item is different. The advantage of this method is that the products
may meet the customer expectations. However, the lead times may be longer.

Batch production

The method that involves completing one operation at a time on all units before performing the
next. This is suitable when the demand is higher and all units are to be standardized. The
advantage is that the unit costs are also likely to be lower and the production is flexible with
large orders. However, work may be boring for workers because of specialization therefore,
motivation suffers.

Flow production

It is a large scale of production for standard products where the products move from one
operation to the next in a conveyor belt. Some of the features of this method of production are:
large quantities are produced and standard products are produced. The main advantage of this
type of production, unit costs are lower and productivity is increased. However, the set-up costs
are higher.

Labour and Capital – intensive production

Labour intensive production is when a business use more of laboor than machineries. Whereas
capital intensive production is when a business use more machineries than labor in their
production process. They may use this when machinery is relatively cheaper than labour.

Productivity

● This is the rate at which goods are produced especially in relation to the work, time and
money spent.
● Labour productivity is the amount of output produced by the workforce at a given period
of time. Whereas capital productivity is the amount of units or output produced by the
machineries in the production process over a period of time.
● Labour productivity = Total outputnumber of workersLabour productivity = number of
workersTotal output​
● Capital productivity = Total output capital employedCapital productivity = capital
employedTotal output​

Methods to improve labour productivity

Businesses can use motivation schemes that are financial or non-financial to motivate their
workers hence, employees are more willing to work and therefore, productivity increases.

Methods to improve capital productivity

● Downsizing: process of laying of staff for reducing the capacity. The advantage of
downsizing is that there is less costs and profits are increased as profitable parts don’t
subsidize the unprofitable ones.
● Relocation: businesses often relocate their workplace in order to improve the efficiency
and productivity. They can take advantage of the cheaper resources such as labor.
● Outsourcing: contraction out of work that may be otherwise done by the organization to
other business. This means that work that can be currently done by the business can be
done by other business who can do it at lower costs.
 ● Lean production: the productivity of business can be improved by reducing the usage
of resources.

Impacts of business on productivity

● Financial impact: the costs may be lower and the profits may increase. However, some
of the measures that are used to improve the productivity may cost money, such as
investing in new technology.
● Competitiveness: as productivity increases businesses may have a competitive edge in
the market. Hence, they can enjoy huge profits, higher market share and more loyal
consumers.
● Workforce: there are positive and negative impacts for this. When motivational schemes
are introduced workers are more willing to work as their bonuses may have increased
and work may be more interesting. However, when new technology is introduced
workers may be laid off and this may create an adverse impact in the minds of the
existing workers.
● Customers: the benefits of improvements in productivity for customers are better quality
products, lower prices as unit costs are reduced and better products with increased
facilities and tastes.

Lean Production
Key Vocabulary

● Lean production: approach to production aimed at reducing the quantity of resources

used.
● Just in time: Production technique that is highly responsive to customer orders and
uses very little stock holding.

The main aim of lean production is to use fewer resources in production as it uses less of
everything. It raises the productivity and reduces costs and cuts the lead time. It also reduces
waste and improves the productivity.

Some of the principles of lean production are:

Just-in-time production

This is a production technique that is highly responsive to customer orders and uses a very little
stock holding. Suppliers may have to deliver the goods several times a day.

Advantages

● Cash flow is improved

● Space is released
 ● Fewer suppliers

Disadvantages

● High ordering and administration costs

● Vulnerable to a break in supply
● Hard to cope up with changes in demand

Kaizen

Kaizen is a Japanese word that refers to continuous improvements as everything in this world
can be improved. Workers are always encouraged to come up with fresh ideas to improve the
quality of the product and the efficiency at the workplace. When kaizen is adopted in western
countries they are needed to be trained as this may be unfamiliar for the people in the west.

Advantages

● Continuous improvements
● Makes people aware of their mistakes
● More loyal consumers

Disadvantages

● Expensive
● More cooperation is required
● Proper quality procedure is required

The 5s of good house keeping;

● Sort: Getting rid of the clutter in the workplace.

● Set in order: Organizing the workplace.
● Shine: ensuring that the workplace and equipment are well cleaned.
● Standardize: The practices must be identified by everyone and adopted in their daily
work hours.
● Sustain: everyone should adopt the system to lock the other 4s on a permanent basis.

Some of the practices and principles that Kaizen is surrounded with are:

● Standardization: this means that all activities of a business should be carried out
according to the established formulae. Quality can be assured while ensuring that
customer needs are met
● Team working: this involves dividing the workforce into smaller groups expecting that
workers may develop a team spirit, flexibility may improve, labor relations and
communications may also improve.
● Empowerment: this is when businesses give their employees more authority over their
own work.
 ● Suggestion schemes: this is when the employees are given the rights to suggest ideas
in order to improve the productivity or reduce the costs.
● Quality circles: these are small groups of workers who get together to discuss the
work-related problems and try solving them. Hence, the employees get the opportunity to
improve their job.
● Multi-skilling: this is when workers are trained in different departments and different
jobs to help improve the flexibility of the business in case of an emergency.

The advantages of lean production

● Financial benefits: costs are lower as less resources are used. Therefore, more profits
for owners and cheaper funds are available for the future.
● Improved competitiveness: when the costs are lower the prices of the products can be
lowered hence, higher market share and revenues.
● Positive environmental effects: when businesses use the resources efficiently this will
reduce the negative impacts in the environment. Hence, their image will increase as they
become more environmentally friendly.
● Improved customer service: lean production results in shorter lead times.

Technology in Production
Key Vocabulary

● Computer aided design (CAD): use of the computers to design products

● Computer numerically controlled machines (CNCs): machines that carry out the
instructions fed by the computers
● Computer aided manufacturing (CAM): where computers link and control the design
and production of goods in manufacturing
● Computer integrated manufacturing (CIM): use of computers to control the entire
production process

The impact of new technology in the primary sector

Advantages

● Increase in productivity
● Lower costs
● Improved health and safety procedures
● Increased nutritional values for products

Disadvantages

● Increase in installation costs

● More pollution from new machineries
The impact of new technology in the secondary sector

Robots

They are divided into 3 categories:

● Material handling robots: used in transport of inventory or components from one place
to other inside a factory.
● Processing operations robots: performs specific task and specialized to do the task
with the fitted tools.
● Assembly line robots: they do a single task or are used in inspection of the products in
an assembly line.

Computer Aided Design (CAD)

The design of a product before it is being manufactured can be made easily and accurately with
the use of CAD. It is also cheaper method and faults can be detected easily. Also, by the use of
CAD the need for models are less. Hence, the advancement of technology has mad businesses
feel more in the production of their product.

Computer numerically controlled machines (CNC’s)

These are machineries that can be programmed by the computer to do several tasks such as:
cutting and sewing. They do their jobs more accurately. There are no human errors and the
amount of waste is reduced. They can measure several variables, such as dimensions, weight
and temperature.

Computer Aided Manufacturing (CAM)

This approach is used when the design and production are linked together and the whole
process of production may become automated. It assists several activities such as planning,
management and transportation. CAM speeds up the production and minimizes the waste.

Computer Integrated Manufacturing

This involves using computer for the whole production process. People may only be used for
maintenance, monitoring and supervising.

Impact of new technology in the tertiary sector

Advantages

● Lower labour costs in the financial services as ATM machines are readily available and
many transactions can be carried out online.
 ● In advertising the costs have been lowered as now advertisements can be placed
online on social media platforms where it could reach millions of people without any cost.
● In the leisure industry, there are less paper work and saves travel expenses as there
is no need to travel to purchase tickets.
● The use of IT has reduced the cost of administration and communication.
● E-commerce is the use of electronic systems to sell and purchase goods. This had
reduced the cost of travelling for consumers and the cost of rent of premises for
businesses.

Overall the advancement in technology has great impacts on the tertiary sector business
such as lower costs and faster, accurate and easier work.

Advantages

1. Tasks are easier for workers

2. Improved health and safety procedures
3. Less waste of resources
4. Improved communications

Disadvantages

1. Loss of flexibility
2. High installation costs
3. Technology breakdown can be expensive
4. Reduced motivation for machine workers

Factors of Production
Key Vocabulary

● Fixed capital: stock of human made resources that are used to help make goods and
services
● Entrepreneur: individual who organizes the other factors of production and risks own
money in the business venture

Factors of production

These are the resources that are used to produce goods and services. They are generally of 4
types:

● Land - It is the plot of land that is required for businesses to locate their premises. It also
may include natural resources such as iron, coal and rain water etc.
 ● Labour - This is the amount of human workforce that is required to produce the goods
and services. They may be skilled, semi-skilled or unskilled workers.

● Capital - It is an artificial resource as it is made by labor itself. There are 2 types of

capital:

1. Working capital: it is the stock of raw materials and components that will be
used in the production process.
2. Fixed capital: it refers to the offices, shops and machineries that may be used in
the production and fixed capital is also used in converting the working capital into
goods and services.
● Enterprise - Responsible for setting up and running the business.

Specialization and division of labour

Specialization is a production of limited range of goods or services usually in which the business
is an expert in. Departments specialize in different activities such as marketing and finance.
Workers will also specialize in certain tasks and skills, this is called division of labour.

Some of the advantages of division of labour are:

1. Workers concentrate on the task that they do the best.

2. Workers’ skills are improved as they regularly do the same work.
3. Time is saved as workers don’t switch from one job to another.

Labour and capital intensive production

Labour intensive production is when a business uses more labour relative to machineries in
their production process. Capital intensive production is where a business uses more
machineries in comparison to labour in their production process.

The best resource mix between labour and capital depends on the following factors:

● The type of the product: fast moving consumer goods are likely to produce in large
operations using large amounts of machinery.
● The relative prices of the 2 factors: Most eastern countries use labour intensive
production as labour is much cheaper than machineries. However, most of the western
countries use capital intensive production as machineries are cheaper than labor in their
production process.

Labour intensive production

Advantages
 ● Cheaper for small scale production
● More flexible than machineries as they can be retrained
● People are more creative than machineries

Disadvantages

● People are difficult to manage

● People need breaks and holidays
● People can be unreliable as they may take sudden holidays from work

Capital intensive production

Advantages

● Machineries can operate 24/7

● Machineries are easier to manage than labour
● Machineries are more precise and accurate

Disadvantages

● Huge set-up costs

● May be inflexible

Quality
Key Vocabulary

● Quality: it is the feature of a product that allows it to satisfy the needs of the consumer
● Quality control: this is ensuring that the quality of a product meets the specified quality
standards

Some of the main features that consumers look into while checking the quality of the
product are:

1. Durability
2. Reliability
3. Customer service
4. Physical appearance

Why is quality of a product important for a business?

● Increased competition: As competition is increasing in a market, better quality products

are having higher demand as they serve as a competitive edge for businesses because
consumers prefer better quality products for reasonable prices.
 ● Government legislation: businesses have to follow the legislations that are imposed by
the government else they may be fined.
● Faulty products are costly for businesses: Cost of components are higher when
faulty products are produced.

Quality assurance

They are the working methods that take into account customers’ needs and wants when
standardizing quality. It also ensures that the quality standards are met. This is a method of
checking quality during the production process. Some of the advantages are less costs and
reduces waste and saves time. However, implementation costs are higher.

Total quality management (TQM)

Some of the main features of TQM are:

● Quality chains: every worker in a production line will receive and pass on the
semi-finished work after ensuring that the specified quality standards are met. This
avoids faulty products being made.
● Everyone is involved: everyone is involved and TQM starts from the top management
down to the bottom.
● Quality audits: statistical data is used by businesses to reduce the variations which is
the cause of many quality problems and to make all products standardized.
● Customer focused: businesses must ensure that they respond to changes in people’s
needs and expectations.
● Zero defects: every product that is manufactured is free from defects.

Advantages

● Focus is on customer needs

● Quality improved in all aspects of business

● Improves the communication channels

Disadvantages

● High training and implantation costs

● Focus is on processes and not on the product
● Will only work if everyone is committed

Quality and competitive advantage

Businesses that produce good quality products have a competitive advantage in the market
which could be used by them to earn a higher market share which potentially could increase
their revenues and profits. Furthermore, consumers are prepared to purchase products for
higher prices if the product is of high quality.

Marketing