Chapter 1: Understanding Business Activity

1.1: Business Activity

1.1.1: The purpose and nature of business activity

Consumers: people and organizations who are willing to buy goods and services

Consumption: the using up of goods and services to satisfy consumer needs and wants

Production: using resources to make goods and services to satisfy consumer needs and
wants

Factors of production: productive resources used to make goods and services. The factors
of production are:
●​ Land
●​ Labour
●​ Capital
●​ Enterprise

Firm: organizations that produce goods and services

Entrepreneur: a person with the know-how and willingness to take the risks and decisions
necessary to set up and run a business

Opportunity cost: the benefit lost by not consuming or producing the next best alternative
product

Specialization: focusing production on a single or limited range of products in order to make

the best use of scarce resources

Division of labor: the dividing up of a production process into a number of sequential tasks,
with each one, completed by a different worker or group of employees

Customers: consumers who buy goods and services from business organizations

Revenue: proceeds from the sale of goods and services to customers

Profit: a surplus of revenue over costs of production

Value added: the difference between the price of a product and the cost of the natural and
man-made materials, components, and resources used to make it
 1.2: Classification of Business

1.2.1: Business activity in terms of primary, secondary and tertiary

sectors

1.2.2: Classify business enterprises between private sector and public

sector in a mixed economy

Industrial sector: a group of firms specializing in similar products or using similar production
processes

Primary sector: industries that produce or extract natural resources. Some primary sector
industries include:
Crop and animal Forestry and logging Fishing
production

Mining Quarrying Oil and gas extraction

Manufacturing: the process of converting natural resources into other products

Secondary sector: industries involved in processing natural resources, manufacturing or

construction. Some secondary sector industries include:

Food processing Textiles Paper, pulp and Chemicals

paperboard

Oil and gas refining Pharmaceuticals Rubber and plastic Fabricated metals
products

Electric power Water collection, Computer, electronics

Construction generation, treatment and supply and optical products
transmission and
distribution

Tertiary sector: service industries. Some tertiary sector industries include:

Wholesaling, retailing and repairs Transportation and storage

 Accommodation and food services Publishing and broadcasting

Telecommunications Banking and insurance

Real estate Public administration

Defence services Education

Arts and entertainment Internet services

Health care Legal services

Industrial structure: the relative size and importance of industrial sectors in an economy

Developed economy: a country with a wide range of industries and a large tertiary sector

De-industrialization: the decline of manufacturing and the growth of services in developed

economies.

Developing economy: a country that is seeking to develop its resources, create jobs and
increase incomes and living standards through industrialization

Difference between economies

Developed Rapidly developing Less-developed

●​ There is a small ●​ There is a large but ●​ Most workers are

primary sector shrinking primary employed in agriculture
●​ Manufacturing output sector, especially in and other primary
and employment have agriculture industries
declining ●​ The manufacturing ●​ There are very few
●​ The service sector has sector is expanding manufacturing
expanded significantly rapidly. Workers from industries
●​ Incomes and living agriculture and mining ●​ The service sector is
standards are have been attracted to small and growing only
generally good for higher-paid jobs in very slowly
most people. People manufacturing. ●​ Incomes and living
spend a large ●​ Service sector output standards for many
proportion of their and employment are people are poor
incomes on goods and also growing ●​ Few goods and
services ●​ Incomes and living services are available
●​ A wide variety of goods standards for many to consumers
and services are people are improving
available to consumers ●​ The amount and
variety of goods and
services available are
growing quickly

Private sector: that part of an economy owned and operated by private individuals and
privately owned businesses
Public sector: that part of an economy owned and controlled by the government and
government owned organizations. Public sector organisations include:
●​ national,regional and local government authorities
●​ Government agencies
●​ Public corporations

Mixed economy: an economy that combines private sector and public sector ownership of
resources and provision of goods and services

1.3: Enterprise, business growth and size

1.3.1: Enterprise and entrepreneurship

Enterprise: business know-how, skills and qualities including the willingness to take
considered financial and other business risks

Entrepreneur: an enterprising person who is willing and able to take the risks and decisions
necessary to organize resources to produce goods and services. The advantages and
disadvantages of being an entrepreneur are:

Advantages Disadvantages

●​ Making best use of your skills and ●​ Increased risk

interest ●​ Increased responsibility
●​ Being independent ●​ Long hours
●​ Increased motivation ●​ High opportunity cost
●​ The potential to earn more income

Entrepreneurship: the process of identifying a business opportunity, organizing the

resources needed to start and run a business and taking both the risks and reward it
involves. Some common characteristics of entrepreneurship are:
●​ Risk-taker
●​ Self-motivated
●​ Confident
●​ Ambitious
●​ Able to learn from others
●​ Analytical abilities
●​ Hard-working
●​ Innovative
●​ A good communicator

Business plan: a written statement about a business idea: how it will be organized, what the
owners want to achieve with it and how they will do so. A business plan includes:
●​ The aims or objectives of the business
●​ A description of the goods and services it will offer
●​ An assessment of the market potential for the goods or services
 ●​ A plan for how and where production will be organized
●​ The resources the business will require
●​ A financial plan and projections
●​ Sources of finance and how much capital the business will need
and helps the entrepreneurs by
●​ To assess whether it is possible to turn a business idea into a successful business
●​ To set out what needs to be done, how it needs to be done and when it needs to be
done to achieve the objectives of the business
●​ To support an application for financial help
●​ To monitor how well the business is performing against its plan

Government grant: a non-repayable sum of money given by a local, state and central
government to another person or organization for a specific purpose; for example, to fund
business start-up including the purchase of equipment and/or training

1.3.2: The methods and problems of measuring business size

1.3.3: Why some businesses grow and some remain small

Capital-intensive: a firm or production process that requires more capital equipment than
labour

Labour-intensive: a firm or production process that uses more labour than capital
equipment

Market size: the total sales revenue or turnover for a particular product over a given period
of time

Market share: the proportion of total sales of a product achieved by one firm

Methods of measuring business size

Measure Limitation

Number of employees Some large firms are capital-intensive and

employ relatively few workers

Capital employed Some large firms may be labour-intensive

and so use relatively less amounts of capital

Output or sales The volume of sales for different industries

may be different

Market share It depends on the size of the market.

Internal growth: involves an increase in the sales of production within a firm through the
employment of additional factors of production

External growth: an increase in the size of a firm through the takeover of, or merger with,
other enterprises

Reasons for business expansion

Banks are willing to lend Suppliers of resources may A large firm may have the
more money to large give discounts to large financial resources to invest
businesses at lower rates of businesses buying in bulk. more in the latest
interest technology

Business managers can Workers may benefit from Business owners may earn
increase their responsibility more secure jobs and higher more profits
and salaries wages in large firms

A large firm may be able to A large business can Increasing the volume of
produce a wide range of increase sales and it’s output or scale of production
products for different market share can reduce the average cost
markets at home and of producing one unit. This
overseas. This way, it can is known as economies of
protect the business from a scale
fall in consumer demand for
one product

Horizontal integration: the formation of a larger enterprise through merger or takeover

between two or more firms in the same industry and at the same stage of production

Vertical integration: the formation of a larger enterprise through merger or takeover

between two or more firms at different stages of production of the same product

Lateral integration: involves merger or takeover between two or more firms in different
industries to form a single, larger enterprise

Merger: combining two or more firms with the agreement of the owners to form a larger
enterprise

Takeover: the acquisition of one firm by another with or without the agreement of its owners

Diversification: a business strategy that involves producing a variety of different products

and/or expanding into different markets to expand total sales and reduce the risk to the
business from a fall in demand for any one product or in any one market

1.3.4: Why some (new or established) business fail

Overstocking: or holding excess inventory, means a business has purchased and stored far
more goods than necessary or desirable

Overtrading: this happens when a business expands too quickly and takes on more work
than it is able to finance and complete

Insolvency: the inability of a business to pay its debts because it has run out of cash, i.e.
because it has become illiquid

Creditors: people, suppliers and other organizations to whom a business owes money

Bankruptcy: a term used for a business that is declared in law as unable to pay its debt

Liquidation: a legal procedure to close a bankrupt business involving the sale of its
remaining assets to pay off its debts

Going concern: a business that has sufficient financial and other resources to continue
operating indefinitely. A business that is no longer a going concern is a business that is
bankrupt

Liquidity: a measure of the ability of an organisation to raise enough cash to pay off its
short-term debts as they fail due, either from its holding of cash or by selling off some of its
assets for cash

1.4: Types of business organization

1.4.1: The main features of different forms of business organization

Unlimited liability: the owners of a business are legally responsible for the full amount of its
debts

Limited liability: the legal responsibility of the owners of a business to repay its debts is
limited to the amount of capital they invest in the business

Separate legal identity: a business organization considered to be legally separate from its
owners

Sole trader: a business organization owned and controlled by one person

Partnership: a legal agreement between two or more people, usually up to 20, to jointly
own, finance and run a business, and to share its profits

General partner: a partner with unlimited liability

 Limited partner: a partner with limited liability

Joint-stock companies: limited companies or corporations which are jointly owned by their
shareholders

Incorporated business: a business organization with a separate legal identity from its
owners

Stock market: the global market for the purchase and sale of new or existing shares (or
stocks) in public limited companies

Flotation: when shares in a public limited company are made available for sale to the
general public for the first time through a stock exchange

Franchise: an agreement by one company with another business organization to permit the
distribution of its goods or services using its trademark or brand name

Public corporation: a government-owned enterprise created to carry out a governmental

function or public service

Business Sole trader Partnerships Private limited Public limited Joint Franchises
companies companies Ventures

Advantages They are easy to Partnerships are Shareholders A public Costs and Franchisee
set up. There are relatively easy can elect limited risks can be
few legal to set up. There directors to company can shared Selling or making
requirements are few legal manage the advertise an established
needed for requirements business on new issues Each product reduces the
business involved in their behalf of shares for business in risk of business
registration drawing up a sale using a the joint failure
partnership Shareholders prospectus venture
These businesses agreement or receive gains access Banks are often
can often be set deed of dividends The public to the more willing to lend
up with little partnership from profits sale of knowledge, to businesses
capital shares technologies, looking to purchase
Partners invest Limited through the superior a franchise because
The owner is their new capital into companies stock market management risks are lowered
own boss and has the business to have a can raise and
full control over finance separate legal significant customers of Training for staff,
the business expansion identity from capital the other supplies and
their owners promotional
The owner Partners bring Shareholders A joint materials are
receives all profits new skills and Shareholders can elect venture may provided by the
and so is ideas into a have limited directors with enjoy size franchisor
incentivized to business liability key business advantages,
work hard skills to increased Franchisor
Partners share The sale of manage the market share
Personal contact responsibilities shares can business on and power, Offering a franchise
with customers for raise their behalf and is a relatively quick
can increase decision-making significant economies and easy way to
customer loyalty and managing capital Shareholders of expand the
the business receive large-scale business, sales and
Separate financial Private limited dividends production market share
accounts are not Partners share companies from profits
required for the any profits and are a popular Fees and regular
business are therefore form of Limited payments are
motivated to organization companies received from
The owner can work hard for family have a franchisees
keep financial businesses or separate
details about the Partners share partnerships legal identity Franchisees are
business private business and looking to required to buy
financial risks, raise Shareholders products and
but limited additional have limited supplies from the
partners have capital to liability franchisor
limited liability expand their
business Management costs
are minimized as
franchisees
manage their own
business units
Disadvantages The owner has full Discussion Private limited It can be The Franchisee
responsibility for between companies expensive to business
running the partners can are legally form a public involved in Fees and ongoing
business. This slow down required to limited the joint payments can be
means working decision-making keep detailed company venture may expensive
long hours without and they may financial disagree on
many holidays disagree on statements Public limited important The role of
important and some companies decisions business owners is
The business may business countries are required reduced to being
lose revenues and decisions require them by law to Profits and branch managers
profits if the owner to publish publish ideas which because most
is sick or holiday Problems can their details detailed could give a business decisions
and cannot arise if one or annual competitive are taken by the
manage the more partners Large reports and advantage franchisors
business are lazy, shareholders accounts and are shared
inefficient or can outvote to hold There may be
The owner has even dishonest. others on AGMs with The joint regular monitoring
unlimited liability There may be decisions that shareholders venture of performance by
to repay any arguments, the affect the partners may the franchisor
business debts business may company The original have very
lose money and owners can different Franchisor
Sole traders often other partners Directors may lose overall ways of
lack capital to buy will have to work run a control of running their The franchisees of
new equipment or harder company in their business and each business unit
to expand their own company their cultures keep most of the
General interests unless they may clash profits they make
Sole traders often partners have rather than in keep a
lack all the skills an unlimited best interests controlling A franchisee that
they need to run liability to repay of the interest of at fails to maintain a
their business any business company’s least 51% of good-quality
successfully debts shareholders all shares in product and level
the company. of service could
Raising Shares can damage the
additional only be sold The original reputation of the
capital to privately and owners may entire business
finance further only with the also lose
business agreement of control of
expansion can all other their
be difficult shareholders company if it
because many is taken over
countries place by another
a limit on the
number of Directors
partners allowed may run a
in each company in
partnership their own
interests
rather than in
best interests
of the
company’s
shareholders

1.5: Business objectives and stakeholder objectives

 1.5.1: Businesses can have several objectives and the importance of
them can change

1.5.2: Differences in the objectives of private sector and public sector

enterprises

Business objective: a goal or aim the owners, managers and employees in a business
work towards. Some objectives include

Business objectives in the private sector

Objective Meaning

Survival Running the business for a certain period of time

Profitability The ability to continually generate revenue from the sale of goods or
services that exceed the costs of production

Growth Involves increasing the size of the business through internal or external
growth to increase sales and profits

Increase market share Involves the increasing of the proportion of the sales of the market for 1
firm

Business objectives in the public sector

Objective Meaning

Financial targets Achieving strict targets in order to control or reduce running costs

Good quality Providing good service to people and families including education,
healthcare, policing, transport and other desirable services funded by
the government

Social objectives Protecting or increasing employment and supporting people who are
unemployed, sick, disabled or on low income

Environmental objectives Reducing water, paper and energy use

Mission statement: a brief written statement of the purpose and objectives of a business
organization

Profitability: the ability of a business to continually generate revenues that exceed its cost

Business target: an objective expressed as a value or volume to achieved by a given date

Profit maximization: choosing production methods, outputs and prices that will earn the
business the greatest amount of profit possible from the resources it uses
Social entrepreneur: a person who uses his or her business skills to set up and run
organizations to maximize improvements in social and environmental well-being rather than
profit

Social enterprise: a private sector organization with social or environmental objectives that
reinvests surplus revenues it makes towards meeting these objectives rather than paying
them as profits to its owners

1.5.3: The role of stakeholder groups involved in business activity

Business stakeholders: people and organisations with a direct or indirect interest in

business activities and performance. Some stakeholders are:

Stakeholders Who are they?

Owners and shareholders People or other organizations that own a

business organization. A shareholder is a
person or organization owning a share of a
limited company or corporation

Managers People employed in senior positions in a

business to run it from day to day

Employees People who work for a business. Their interests

may be represented by a trade union or labour
union

Creditors People and organizations that help to finance

business activity. They include banks which
provide loans and credit cards, and suppliers
that accept payment at a later date

Government Local, regional and central government

authorities and elected officials

Community People and all other organizations that may be

directly affected by the activities of a business

Trade credit: deferred payment terms offered by suppliers for goods and services they
supply to a business

Trade union: an organisation of employees who have joined together to negotiate improved
pay and working conditions with their employers

Shareholders: owners of limited companies or corporations

STAKEHOLDER OBJECTIVES
Stakeholders Why are they important? Their main objectives

Owners and shareholders They invest money in starting To earn a good profit on their
and expanding a business investments in business

They lose the money they have To grow the business to

invested if the business fails increase the value of their
investment
They share any profits

Managers They take important decisions Growing the business, which

to run a business successfully can give them more power,
more status and a higher salary.
The business could fail if they This is usually at the expense of
make bad decisions higher profits

Employees They are employed by a Good wages, salaries and

business to develop, test, working conditions
make and sell goods and
services Job satisfaction

They are paid wages or Job security

salaries by the business

Unions may organize strikes to

secure better wages and
working conditions for
employees

Creditors They lend money to a business To be involved with a well-run

or sell it goods and services on business which can repay it’s
credit debts

If the business fails, they will Business growth, which can

not be repaid increase demand for their goods
and services

Consumers Consumers are willing and able Good-quality and reasonably

to buy products from priced products that offer value
businesses for money

A business must attract Good customer service and

customers to earn revenues after-sales care

A business will fail to make a Business activity should not

profit if it does not attract harm the environment
enough consumers

Consumer wants are important

and businesses carry out
market research to identify
these

Government Government officials control To encourage successful

the economy and influence the businesses that employ people,
overall level of demand for provide incomes and pay taxes
goods and services
To support new and growing
They raise taxes on businesses to increase national
 businesses and incomes output and incomes

They pass laws and

regulations to protect
employees, consumers and the
environment

Community People benefit from goods and To improve their living standards
services produced by business
activity For business activity to provide
jobs and incomes
People are affected by noise,
air and water pollution created For business activity to produce
by business activity safe and worthwhile products
that do not cause harm or
They may object to the damage the environment
damage business activity
causes to the environment For business activity to treat
employees fairly and safeguard
the natural environment

Chapter 2 : People in Business

2.1: Motivating Employees

2.1.1: The importance of a well-motivated workforce

Motivation: a desire to work hard and the satisfaction obtained from doing so

Job satisfaction: how content an employee is with his or her job

Motivational theories: ideas about what motivates people at work

Physiological needs: basic human needs for food, clothing and shelter in order to survive

Social needs: human desires to communicate and interact with other people
 Theories of motivation

Theory Maslow F.W. Taylor Herzberg

Meaning Maslow proposed that Labour productivity Herzberg argued that

people work for different would be improved if people have 2 sets of
needs, which keep changing. each employee needs.
Maslow has 5 tiers of needs, specialized in a
which are: particular task and Hygiene factors are the
●​ Physiological needs, was rewarded with basic needs of people.
which are more pay if he or she These do not motivate
○​ Food achieved production people but they must be
○​ Shelter targets. However, satisfied. They are:
○​ Clothing most modern ●​ Job security
●​ Safety and security organizations do not ●​ Job status
needs, which are use Taylor's principles ●​ Wages, salaries
○​ Personal anymore and other rewards
safety ●​ Working conditions
○​ Job security and environment
●​ Social needs, which ●​ Relationships with
are: managers
○​ Friendship ●​ Rules and
○​ A sense of regulations in the
belonging organization
○​ To gain
respect Motivators are needs for
●​ Esteem needs, achievement, recognition
which are: and personal development.
○​ To feel They are:
valued ●​ A sense of
○​ Status and achievement
recognition ●​ Recognition for
●​ Self-actualization, good work
which is ●​ Opportunities for
○​ Developing promotion
full potential ●​ Interesting and
○​ A sense of varied work
achievement ●​ Being trusted with
more responsibility
●​ Personal
development

Disadvantages Not all employees are Taylor did not factor N/A
motivated by the same that undertaking
needs repetitive jobs can
demotivate
It can be difficult for employees and so
managers to identify what Taylor’s principles are
level of the needs hierarchy no longer used
an employee is on

2.1.2: Methods of motivation

Net earnings: the take-home pay of an employee after any payroll and income taxes,
pension contributions and/or trade union subscriptions have been deducted from gross
earnings

Wages: weekly or monthly payments in exchange for labour supplied to a particular

occupation

Time rate: a wage rate per hour worked by an employee

Piece rate: a wage rate per unit of output produced by an employee

Profit sharing: rewarding employees with a percentage of​the profits of the business
organization they work for

Performance-related pay: financial rewards given to an employee or group of employees in

recognition of high achievement and productivity

Employee share ownership: rewarding employees with shares in the ownership of the
company they work for

Fringe benefits: non-financial rewards or “perks”

Teamworking: dividing the workforce into small groups of employees and giving them the
responsibility for planning and organizing their own areas of work

Job rotation: enabling employees within a team to swap tasks with each other

Job enrichment: increasing the degree of challenge in a job by adding tasks that require
more skill and responsibility

Job enlargement: involves adding extra and more varied tasks that require the same level
of skill to an employee's job description

NON-FINANCIAL METHODS OF MOTIVATION

Job enlargement involves adding extra and more varied tasks that require the same
level of skill to an employee's job description

Job rotation enabling employees within a team to swap tasks with each other

Job enrichment increasing the degree of challenge in a job by adding tasks that
require more skill and responsibility

Teamworking dividing the workforce into small groups of employees and giving
them the responsibility for planning and organizing their own areas of
work

Training Training helps employees understand how their work fits in with the
aims of the business
 Promotion Opportunities The possibility of promotion motivates employees because promotion
often means more job security and better financial rewards

2.2: Organization and management

2.2.1: The importance of a well-motivated workforce

Organizational structure: how roles, responsibilities and management authority are

allocated within an organization

Organizational chart: a diagram of an organizational structure

Department: subdivision of a business organization that specializes in performing a

particular job or function

Hierarchy: the layers of management and command in an organization. The advantages

and disadvantages of a hierarchical structure are:

Advantages Disadvantages

There is a clear management structure Communications up and down the hierarchy can
take time and slow down decision making
Individual roles and responsibilities are clear to
everyone in the organization Managers recruited to senior positions may
have limited experience and understanding of all
Senior managers and directors are able to make the other functions performed in the
all major decisions and control the organization organizations

If senior managers take all the major decisions,

it can discourage junior managers and
employees from developing new ideas and
using their own initiative to solve business
problems

Chain of command: the line of management authority in a hierarchical organization

Span of control: the number of subordinate staff a manager supervises

Delegation: assigning tasks to other employees in a chain of command

Managing director: the most senior manager in a company( also called the chief executive
officer or CEO in some companies)

Tall structure: an organization with a long chain of command and in which managers have a
relatively narrow span of control
Flat structure: an organization with a short chain of command and in which managers have
a relatively narrow span of control

Advantages of tall and flat structures

Structure Tall structure Flat structure

Advantages Managers have fewer Communications are quicker and

subordinates and so can problems can be solved faster because
communicate and supervise more there are fewer layers of management to
easily go through

Managers and employees are able Management costs are lower because
to specialize in those tasks they there are fewer managers
are best able to do because they
have fewer responsibilities Senior managers are less remote from
their employees and the issues faced by
the business

Managers and employees have greater

freedom to make decisions and may be
more motivated

Disadvantages Management costs are high Senior managers may have less direct
because there are more managers control over their organization and
subordinates
Senior managers may find it
difficult to manage and Managers have more subordinates
communicate with large numbers reporting to them, making it more difficult
of junior managers to supervise them and communicate with
them easily. More mistakes may occur
Decision-making may be slow as
there are many layers of
management to consult and
possibly many procedures to
follow

Centralized organization: an organization in which authority, responsibility, decision-making

is concentrated at the top of the chain of command

Decentralized organization: an organization in which a lot of authority, responsibility and

decision-making is delegated to lower levels of management

2.2.2: The role of management

2.2.3: Leadership styles

Management: the organization and coordination of people and activities in order to achieve
agreed aims and objectives
Management functions: the roles and responsibilities of managers, including planning,
organizing, co-ordinating, commanding and controlling how labour and other resources are
used in an organization. The management functions are:

Function Definition

Planning Involves setting aims and objectives for an organization

Organizing Involves organizing employees and other resources to achieve

organizational objectives

Co-ordinating Involves bringing together employees and other resources in the

organization to achieve organizational objectives

Commanding Involves giving instructions to employees to carry out tasks

Controlling Involves assessing the performance and behaviour of employees and

making sure their work is satisfactory

Autocratic leadership: telling employees what to do without consideration

Democratic leadership: consulting employees before making decisions

Laissez-faire leadership: allowing employees the freedom to organize their work and make
their own decisions about how best to achieve business objectives.

Leadership Styles

Style Autocratic Democratic Laissez-faire

Management Management Management

Meaning An autocratic manager A democratic manager A laissez-faire

tells employees what consults employees manager
to do and expects the and involves them in communicates the
orders to be followed problem-solving and business objectives to
without question. decision making. employees and lets
them make their own
decisions as to best
achieve the objectives

Advantage A good style to adopt Communication is This approach

when decisions have two-way and so encourages
to be made quickly employees feel valued employees to be
creative

Disadvantage Employees may It slows down decision Workers may fail to

become dissatisfied making because coordinate their
because they are consulting employees activities if the lack of
unable to contribute requires time leadership fails to
ideas or challenge provide the direction
decisions which they they need and creates
feel are wrong confusion and isolation
 2.2.4: Trade unions

Trade union (or labour union): an association representing employees in a particular

workplace or industry, the aim of which is to negotiate improved pay and working conditions
with employees

Closed shop: trade union membership in a firm is made a compulsory condition of

employment within that firm

Collective bargaining: negotiation between organized workers, usually through a trade

union, and their employer or employers to agree wages and working conditions

Single union agreement: an agreement between an employer and a trade union that the
union can represent all the workers in the organization

Industrial action: organized disruptive actions, such as a strike or work to rule, that workers
may take to increase their bargaining power over wage or other demands or to address their
grievances. The types of industrial action are

Form Meaning

Overtime ban Workers refuse to work more than their normal hours

Work to rule Workers deliberately slow down production by complying rigidly with every
single rule and regulation

Go-slow Work is carried out deliberately slowly to reduce production

Strike Workers refuse to work and may also protest.

Arbitration: a process involving the judgement of an independent person or body to help

resolve industrial disputes between workers and employers
 2.3: Recruitment, selection and training of employees

2.3.1: Recruiting and selecting employees

Recruitment: the process of attracting job applicants, for example using job advertisements

The recruitment process:

Job analysis: identifying a job vacancy and the tasks and responsibilities of that job

Job description: a document describing the tasks and responsibilities required to do a job

A job description contains:

The job title Main purpose of the job Position in the

organizational structure

Department of the job The job holders manager The number of subordinates
 Main tasks and Working conditions, hours The name and location of
responsibilities and wages the organization

Person specification/Job specification: is a document listing the skills, qualifications,

experience and personal qualities a person needs to do a specific job

Internal recruitment: filling a job vacancy from the existing workforce within an organisation

Advantages of internal recruitment Disadvantages of internal recruitment

Saves time and money Creates vacancies elsewhere

Allows the business to reward high Prevents recruiting employees with new
performing employees skills and ideas

Employees already know the business May create jealousy among other
practices employees

Promotions and opportunities motivate

employees

External recruitment: attracting job applicants from outside the organisation to fill job
vacancies

Selection: assessing the suitability of applicants for a job and choosing the most suitable
candidate

Sifting: comparing and marking job applications against the requirements of a person
specification

Shortlisting: selecting the most promising candidates for a job from that set of job
applications

Full-time employment: a job that usually requires 35 or more hours of work every week

Benefits to employers Benefits to employees

Work fixed, predictable hours Fixed, predictable hours of employment

More likely to develop loyalty Wages are higher than part-time workers

Employees usually only have one job Other benefits may also be better

Can run a business in owners absence More chances of training and promotion
 Limitations to employers Limitations to employees

Employees may not want to work extended Less time available for leisure or for family
hours

Extra work will have to paid overtime May have to work overtime

Annual leave and other benefits are costly Work may be boring and without variety

Part-time employment: a job that usually requires less than 35 hours of work every week

Benefits to employers Benefits to employees

Good for new and small businesses Offers more flexibility

Business can vary the working hours May have more than one job, improving skills

Employees may not qualify for benefits, Greater variety of jobs available
making employment cheaper

Limitations for employers Limitations for employees

Employees may be less loyal Wage rates may be lower than full-time

Recruitment costs may be higher May not qualify for benefits

Employees may not be as skilled May receive less training

Difficult to communicate Less likely to be promoted

2.3.2: The importance of training and the methods of training

Induction training: teaching new employees about the organization they work for

Multi-skilling: training employees in a variety of skills so they are more flexible in the work
they do

On-the-job training: training employees while they carry out their normal duties

Off-the-job training: training employees away from their normal workplace

Type Benefits Limitations

Induction Helps new employees understand Only specific to the organization

 the expectations, aims and
objectives of the organization New employees may be confused if
badly designed
Helps new employees to avoid
making mistakes Involves existing employees teaching
so takes time away from work
New employees can socialize with
other new employees Time spent in training is time away
from the job, reducing productivity
Organization gets a more effective
worker Confused employees are likely to
make more mistakes and take longer
Employee may stay for longer to become efficient

On-the-job Work can continue while the Reduces productivity of the trainer
employee trains
Trainer may be impatient and
Relatively cheap and easy to alienate the new employee
arrange
Skilled employees resent training
New employees see how to do the new recruits
job
If trainer has bad habits, the new
Experienced employees offer help employee may pick them up
and advice
Not all experienced workers are good
New employees can socialize with communicators
other new employees

Off-the-job Training carried out by Expensive

experienced teachers
Takes time out of work if done in
Employees can focus solely on work hours
training and not on the job
Employees may find it difficult to
Allows a wide range of teaching attend training sessions after work
methods to be used hours

Wider range of skills can be taught Employees may get a better job
elsewhere due to the training
Can provide the employee with provided
qualifications

2.3.3: Why reducing the size of the workforce might be necessary

Workforce planning: determining the right size, skills and composition of a workforce a
business will require to fulfill its future needs and objectives

Downsizing: reducing the size of the workforce in an organization

 Organization retains Organization releases

Most skilled and productive workers Workers whose jobs are not required

Employees with the business for the longest Least skilled and productive workers
time because of experience

Employees with the business for the longest Workers with poor punctuality records
time because more expensive to let go

Workers who are relatively new

Compulsory redundancy: when a job is cut and the employee is forced to leave
employment in return for monetary compensation

Voluntary redundancy: when an employee chooses to leave employment in return for

monetary compensation

Disciplinary procedure: formal rules and actions followed in an organization when an

employee breaches his or her contract of employment

Dismissal: termination the employment of an employee

2.3.4: Legal controls over employment issues and their impact on

employers and employees

Employment laws: legislation that governs the rights and responsibilities of employees and
their employers

Indirect discrimination: when a group of people is disadvantaged by their gender, race,

religion or other characteristics because they fail to meet an unjustified requirement for a job

Direct discrimination: the unequal treatment of job applicants or employees because of

differences in their race, religion, gender, disability, age or other characteristics.

Legal minimum wage: the minimum amount of money workers must be paid for their
employment per period of time

Advantages Disadvantages

Protects young workers from getting very low Increases costs and reduces profits
wages

Motivates workers to be more productive Businesses may reduce demand for labour

Encourages more people to seek employment Higher paid workers may want hikes to
maintain pay level gap
 Businesses may pass on higher costs to
consumers

Employment contract: a formal legal agreement between an employer and an employee

that details the workplace duties and responsibilities the employee will perform in return for
an agreed wage or salary

Health and safety laws: legal controls designed to set minimum standards of safety and
cleanliness to reduce the risk of injury and ill health resulting from working

Employment tribunal/Industrial tribunal: a court of law that determines a dispute over

employment rights between an employer and an employee

2.4: Internal and external communication

2.4.1: Why effective communication is important and the methods used

to achieve it

2.4.2: Demonstrate an awareness of communication barriers

Internal communications: messages and information passed between people within an

organization

External communication: sending or receiving information and messages to or from

individuals or organisations outside of a business

Vertical communication: messages and information passed up and down a chain of

command

Horizontal communication: messages and information passed between different

departments in an organisation

Two-way communication: those involving direct feedback from the receiver to the sender of
a message or information

Open communication: can be read or listened to by anyone

Restricted communication: messages or information intended only to be received by an

identified person or a group of people

To be effective, communication requires

Transmitter Person who wants to send a message

 Transmission The message to be sent

Medium The method used to communicate

Receiver The person who will get the message

Feedback Indication from the receiver to the transmitter that the message has
been reached and understood

Verbal communication: spoken messages

Methods:
One-to-one meetings Direct, usually two-way communication
between a sender and a receiver

Business meetings A common means of discussing ideas or

resolving problems in a business. Mostly
involving multiple people.

Telephone conversations Allows one-to-one meetings to happen

without directly visiting the receiver

Video conferencing Allows business meetings to take place

without a gathering of people

Advantages Disadvantages

Can be communicated to many people in Difficult to determine whether receivers are

business meetings listening and understanding the message

Can use facial expressions and body Internet speeds and line quality can vary,
language making telephone calls difficult

Written and visual methods can reinforce Relies on sender and receiver speaking the
spoken methods same language at a high level

Feedback from the receiver can be Do not provide a record of discussions for
immediate later reference

Written communication: handwritten or electronically typed messages

Business letters Sending restricted business information to consumers and other

organizations

Reports Detailed document based upon a specific business issue, usually

produced by experts

Memos Record and transmit short but important messages

 Minutes Key point and actions agreed at business meetings

Notices Displays factual information for everyone to read

Fax Copy of the written communication

Press releases Written public announcement or statement to the media

Emails and texts Fast method of sending messages to one or more receivers at the
same time using the internet

Social media Fast, mass communications using Facebook, Linkedin and Instagram

Advantages Disadvantages

Provide a record of messages and Difficult to determine whether receivers and

information received and understood the message

Useful for long and complicated messages Some receivers may not understand
complicated terms and language used

Can be stored physically or electronically Immediate and direct is usually not possible

Emails are fast and cheap Restricted written communication may be

leaked

Communication barriers: obstacles and problems that prevent effective communication

Communication breakdown: a failure to communicate accurately and effectively

Chapter 3 : Marketing

3.1: Marketing, competition and the environment

3.1.1: The role of marketing

Market: all the producers and consumers of a given product or service

Marketing: the anticipation, identification, creation and satisfaction of consumer needs and
wants

Product-oriented firm: a business that focuses on production processes and products

Market-oriented firm: a business that focuses on identifying consumer needs and wants
using market research

Marketing mix: the combined elements of a marketing strategy focused on the design,
price, promotion and place of sale of a product

3.1.2: Market changes

Market conditions: features or characteristics of a given market, including the degree of

competition between producers and the numbers, types and spending levels of different
groups of consumers

Expanding market: a market in which consumer demand and sales revenue are rising over
time; there is an upward trend in sales

Contracting market: a market in which consumer demand and sales revenue are falling
over time; there is a downward trend in sales

Disposable income: personal income that is available to spend or save after the deduction
of personal income or payroll taxes

Competition: rivalry between businesses trying to win consumers’ acceptance, sales and
loyalty

Price competition: rivalry between similar businesses over the selling price of their products

Non-price competition: rivalry between businesses over different features of their products,
such as quality, image and packaging, and their customer services, after-sales care and
advertisements

3.1.3: Concepts of niche marketing and mass marketing

Niche marketing: a marketing strategy aimed at a small, specialized market

Benefits Limitations

Less competition due to small market size Opportunities for sales and growth are limited
 Advertising costs tend to be lower Many niche producers make only one
product. If demand falls, the business will fail
too

Customers usually pay higher for niche

products

Over time, niche producers can develop a

good reputation

Mass marketing: a small part or segment of a large market consisting of consumers with
specialized tastes or preferences

Benefits Limitations

Creates opportunities for business expansion Mass markets have high competition

Increased sales and profits can be significant Advertising costs are very high

Business benefits from marketing economies Some customers do not like to buy mass
of scale produced items

Business reduces impact of demand falling

3.1.4: How and why market segmentation is undertaken

Market segmentation: grouping together consumers who have similar characteristics,

preferences and buying habits

Market segment: an identifiable group of individual or business consumers sharing similar

characteristics or preferences

Common market segments:

Income Age Lifestyle

Gender Location Socio-economic group

Target market: a group of consumers (or market segment) that a business will design its
products and marketing strategies to appeal to

Lifestyle segmentation: dividing up consumers into groups according to their hobbies,

interests and opinions

Socio-economic group: a group of consumers with similar social, economic and/or

educational status
 3.2: Market research

3.2.1: The role of market research and methods used

3.2.2: Presentation and use of market research results

Market research: the collection and analysis of data about consumers’ preferences,
spending patterns and other market conditions

Quantitative data: numerical information

Qualitative data: written or verbal information

Primary research: new data collection from “field research”

Advantages of interviews and surveys Disadvantages of interviews and surveys

Cost-effective way of gathering data Many consumers may be unwilling to take part

Different types of consumers can be targeted Telephone surveys can be expensive

Questions can be explained face-to-face They can be time-consuming

Poorly designed questions can be misunderstood

Interviews must be careful not to mislead responders

Advantages of consumer panels Disadvantages of consumer panels

Can gather range of opinions at same time Time consuming and expensive to set up

Provides info on how purchasing Some members influenced by how others

behaviours change over time react

Advantages of observation Disadvantages of observation

Cost effective for large amounts of data Time consuming

Field trials reduce risk Cannot provide reasons for customer

behaviour

Different in different regions

Secondary research: desk-based research using existing sources

Test marketing: a limited field trial of a new product or promotion to test consumer reaction

Random sampling: choosing consumers to interview or survey at random

Quota sampling: choosing consumers to interview according to pre-specified

characteristics, such as age and gender

Sampling bias: choosing consumers to interview or survey who are not fully representative
of those in the target population in terms of their characteristics, buying behaviour, tastes or
opinions

Market leader: the firm with the largest share of a market or market segment measured by
its share of the total number of units sold or total value of sales per period

3.3: Marketing mix

3.3.1: Product

Product benchmarking: comparing rival products so that a firm is able to match or improve
on them

Reverse engineering: taking apart competitive products to discover their strengths and
weaknesses and how they were made

Branding: the process of creating distinctive and durable perceptions of a product in the
minds of consumers

Brand name: a name used to identify and distinguish specific goods, services or businesses
from others

Product life cycle: the profile of sales and profitability of a product over its commercial life
cycle. It is characterized by a number of different stages starting from product development
and launch and ending with maturity and eventual decline

Stage 1: Launch The product is introduced to a market. Prices are set low and
significant advertising takes place

Stage 2: Growth Sales increase and price competition may increase

Stage 3: Maturity Product becomes established as the growth in sales slows down

Stage 4: Decline Sales and profit begin declining and production may stop

Stage 5: Extension The product may be redesigned and relaunched for more sales
 Launch Growth Maturity Decline

Sales Low Rising Peak Falling

Product Offer one version Add new versions Offer full range Keep best, scrap rest

Price Low to create Competitively to Defend market Adjust prices to stay

sales build market share share from others profitable

Place Limited outlets Increase locations Expand methods to Reduction in

for sale maximum locations for sale

Promotion Use informative Use persuasive Remind consumers Reduce to

advertising advertising of qualities minimum/introduce
extension strategies

Extension strategies: marketing methods used to extend sales and the profitable life of a
mature product

Product portfolio: the range of different products produced and marketed by a business at
any given point in time

3.3.2: Price

Cost-plus pricing: adding a mark-up for profit over the average cost of producing a product

Destruction pricing: cutting price, sometimes below costs, to force a rival out of business

Price war: intense price competition between rival business

Price skimming: setting the initial price at product launch in order to maximise profits in the
short run where there is little to no competition

Penetration pricing: setting price low at product launch to encourage sales and consumer
acceptance of the new product

Promotional pricing: reducing the price for a short period of time to boost sales, for
example to sell off old and unwanted inventory

Psychological pricing; using prices to influence consumer perceptions of a product

Strategy Benefits Limitations

Cost plus -Ensures all costs are covered and -Does not take into account prices
profits are made consumers want to pay
-Easy to calculate -Does not take account of competitors
-Easy to see if costs rise and to take -Can result in overpricing when adding
action percentages for desired profits

Competitive -Ensures business can compete on -May not cover costs of production
price -Some consumers are not price sensitive
-Helps increasing sales -Competitors may not price products
-Business makes sure product is correctly
priced within market -Can start a price war

Penetration -Can build big consumer base -Business sacrificing profits in initial
-Fast growth in sales for new stages so if product declines too quickly
products businesses lose all minutes and can’t
-Can take market share from others increase the price
-Forces business to keep costs low -May only attract consumers looking for
-May force others out of the market cheap products and not a consumer base

Skimming -Ensures high profit yield -May not be successful in a competitive

-Can recover research costs market
-Will attract consumers who -This may be seen as exploiting
associate high price with quality consumers, leading to legal troubles
-Takes advantage of high prices early -If a business uses skimming regularly,
consumers pay consumers will wait for prices to fall

Promotional -Increases sales -Business sacrifices profit in order to boost

-Expands consumer base sales, even making a loss sometimes
-Gets buyer to purchase now rather -Competitors may also start a promotional
than later strategy, leading to a price war
-Can take market share from -May only attract consumers looking for
competitors cheap products and not a consumer base

Price elasticity of demand: the responsiveness of consumer demand to a change in price

Price elastic demand: when a small change in demand causes a significant change in
demand

Price inelastic demand: when a change in price causes only a modest change in demand

3.3.3: Place-distribution channels

Logistics: the science of moving things, including managing inventories, transportation and
distribution systems

Distribution channel: the people and organizations involved in the physical movement and
the transfer of goods and services from producers to consumers
Advantages of selling direct to consumer Disadvantages of selling direct to consumer

Business retains full control of distribution Bulk products will be expensive to transport if
channel customers are located far away

Business can build close relationship with Investments required to own and operate a
customers distribution system is very high

Distribution costs are lower Mail sending is very costly

Advantages of an agent Disadvantages of using an agent

Agents based in other regions have better Business has far less control over the
knowledge of local conditions and legal distribution
controls

Final selling prices will be higher due to

agents commision

Retailer: a business organization specializing in the sale of products to consumers

Type Definition

Supermarket Large self-service grocery store that sells food and household goods

Hypermarket Large superstore which combines a supermarket and a department

store

Discount store Low-price store that sells unsold stock of other organizations at a
discount

Department store A large store offering a wide range of products

Boutique A small, single outlet offering a specialist range for a niche market

Multiples Retail outlets by the same organization selling narrow range of goods

Independent store Specialist which typically operates as a sole trader

Factory outlet A factory or a farm selling products directly to consumers

Non-store retail Online sellers, mail orders and vending machines

Advantages Disadvantages

Can sell large quantities to major retailers Business has no control over final sale
 Some large retailers with stores in multiple Business has no relation with consumers
locations

Retailers can promote goods at point of sale Final selling price may be higher

Wholesaler: an intermediary that buys and stores products in bulk from producers and sells
small quantities to retailers

Advantages to manufacturer Advantages to retailer

Wholesalers buy in bulk Break up bulk and allow payment at later date

They pay for storage Offer a wide range of products

They cover the costs of transport Deliver products when needed, reducing costs

Reduce costs of making and handling sales Pass on bulk purchase discounts to retailers

Provide market research data Provides information on new products

Disadvantages to manufacturer Disadvantages to retailer

Less control over distribution More expensive than if bought from maker

Wholesalers add a mark-up for profit Single wholesaler may not stock full range
of products

Perishable products take longer to reach May not supply to very small retailers
customers

Delivery lead time: the time lag between placing an order for a product and its delivery

3.3.4: Promotion

Above-the-line promotion: marketing communications using mass advertising media

Below-the-line promotion: marketing promotions that do not use mass media

Media Advantages Disadvantages

National -Bought by large number of people -Most papers in black and white
newspapers -Lot of information can be provided -Small ads get lost among others
in an ad -Readers ignore advertising sections
-Readers can keep and refer back -Sales are falling due to more online
-Reasonably inexpensive news
Regional -Ads can be linked to local events -Most in black and white and
newspapers and features reproduction is poor
-Can be used to test market before -Average cost per reader is relatively
national launch high

Magazines -Ads can be linked to featured -Ads have to be submitted long time
articles before publication
-Can be used for targeting specific -Only published weekly or monthly
audience -More expensive than newspapers
-Competitors also displayed on same
page

Radios -Allows for creative use of sound -Visual messages cant be shown
-Cheap to produce and broadcast -Advertisement is short lived
-Growing number of stations -Consumers may not listen to ads
-Can be targeted for audiences -More limited audience

Television -Creative use of sound and visuals -Production and other costs are high
-Large audience -Messages are usually short-lived
-Repeats can reinforce message -Advertising during breaks of
-Targeted for different audiences programming

Movies -Creative use of sound and visuals -More limited audience than other media
-Targeting different audiences for -Cannot be reinforced by repeats
different movies

Posters -Cheap and permanent displays -Messages can be ignored

-Larger audience depending on -Can only provide limited information
placement -At risk of vandalism

Internet -Easy and cheap to set up website -Access is limited in some countries
-Can deliver info in attractive -Many competing websites
manner to large audience -Search engines may not highlight a
-Emails and social media used to website
inform about promotions -Online fraud may discourage
consumers

Leaflets -Cheap for small businesses -Many leaflets can be wasted

-Handed to wide range of -Leaflets delivered door-to-door can be
customers considered junk mail and deter
-Can contain promotional discount consumers from purchasing the product
codes

Other Inexpensive forms of ads such as -May not be seen by consumers in large
logos on bags, t-shirts and other markets
goods -Possible to send negative messages

Informative advertising: advertising that provides factual information about goods, services
and organizations

Persuasive advertising: advertising designed to influence consumer preferences,

encourage brand switching and increase sales
Public relations: actions to establish and maintain a good company and product image with
the general public

Point-of-sale promotions: promotions targeted at the customers at places where a product

is displayed and sold

Personal selling: face-to-face marketing communications with a customer

Marketing budget: a financial plan for the marketing of a product.

3.3.5: Technology and the marketing mix

Internet: the shared global computing network that enables electronic communications
between all connected computing devices

E-commerce: promoting, buying and selling goods and services using electronic systems
connected to the Internet. This can be business-to-business(B2B), or business-to-consumer
(B2C).

Advantages to businesses Disadvantages to businesses

Websites are cheap way of marketing Increases competition for businesses

Businesses attract more consumers through Increased competition may force some
websites than other mediums firms to shut down

Saves money on retail outlets and Staff will need to be trained on maintaining
employment of retail staff and updating the websites

Businesses can find low-cost suppliers for Businesses must protect themselves from
goods and services online fraud and credit card scams

Information about consumer spending can Website design and maintenance costs can
be recorded easily be high

Advantages to consumers Disadvantages to consumers

Consumers can choose to buy from a wider Increased online shopping forces local shops
variety of goods and services to close, leading to consumers without internet
access with less choices

Increased competition between businesses Consumers take time off work to receive
leads to lower prices and better quality delivery parcels

Consumers do not travel to shops, saving More difficult to return damaged and faulty
time and money goods

Online fraud is rising,

 Consumers may receive unwanted promotions

Search engine: an internet application that hunts for, gathers and reports information
available on the internet

Social media: internet applications that enable users to create and share content or to
participate in social networking

Advantages of social media Disadvantages of social media

Cost-effective way of reaching potential customers Some consumers find pop-ups annoying

Many forms of social media allow for targeting Pop-up advertisements need to be paid for

Many forms of social media are free Some messages may be changed to
ridicule businesses

Promotions can be updated quickly and easily Some countries restrict usage of social
media

Consumers can see promotions instantly

Messages can be personalized and two-way

3.4: Marketing strategy

3.4.1: Justifying marketing strategies appropriate to a given situation

Marketing strategy: a plan detailing the market objectives of a business and resources
needed to achieve them

3.4.2: The nature and impact of legal controls related to marketing

Consumer protection laws: legal controls on businesses designed to protect consumers

from misleading or inaccurate marketing claims, unfair trading practices, and the production
and sale of damaged, faulty or dangerous goods and services

3.4.3: The nature and impact of legal controls related to marketing

Market entry: targeting promotion and sales of a new or existing product at a group of
consumers, often overseas, that has not been previously targeted by the producer
 Joint venture: a contractual agreement between two or more organisations to share the
expertise, investment, management, costs, profits and risks of forming a new business. The
new business may produce and sell an existing product to a new market or develop an
entirely new product

Methods Benefits Limitations

Local contacts -Provides detailed local -May be difficult to provide after sales
knowledge service
-Language skills -Business may lose control of brand
-Less costs than training and image
recruiting -Not all contacts are reliable

Setting up own operation -Keep control of quality and -Can be very expensive
brand image -Requires recruitment and training of
-Easier to provide after sales new employees which adds costs
service -May be difficult to control operations in
-Reduces transport costs a foreign country
-Can tailor to local market

Licenses or franchises -Reduces risk of entering -Less control over output

foreign markets -Requires paperwork and high legal
-Inexpensive way for brand costs
recognition -Requires time and money to recruit
-Business receives share of franchisees
revenue -Unreliable licenses damage reputation

Joint-venture -Experiences, costs and risks -Partner may focus on own objectives so
are shared venture suffers
-Local knowledge will have -Conflicts and disagreements may arise
detailed skills -Could be a clash of cultures
-Can use local suppliers -May be hard to exit if unsuccessful

Takeovers and mergers -Established local business -Communication and coordination issues
-Customer base already exists may lead to diseconomies of scale
-Trained employees already in -High costs involved
place -Integration may have language and
-Lower costs due to economies cultural barriers
of scale -Some employees may feel insecure.
 Chapter 4: Operations Management

4.1: Producing of goods and services

4.1.1: The meaning of production

Production: using resources to provide goods and services to satisfy consumer needs and
wants

Productivity: a measure of the efficiency of use of resources in a business by comparing

the volume or value of output with the resource inputs used in production

Labour productivity: average output or revenue per employee

Lean production: improving efficiency and eliminating waste in a production process so that
products can be made better, cheaper and faster

Inventories: stocks of materials, work-in-progress and finished goods stored by a business

to ensure uninterrupted production and to meet peaks in consumer demand

Just-in-time inventory control: keeping inventories of materials and work-in-progress to a

minimum by taking delivery of new parts and materials only when they are needed for
production

Kaizen: the continuous improvement of production processes to remove waste and increase
efficiency

4.1.2: The main methods of production

4.1.3: How technology has changed production methods

Job production: the production of a single item items made to order, usually involving
labour-intensive techniques

Flow production: mass production of a large number of identical items in a continuous,

usually automated, process

Batch production: production of a limited number of identical products to meet a specific

requirement or customer order. Each new batch may be slightly different from the last one
produced

Computer-aided design (CAD): the use of computer systems to create, modify and
optimize the design of a product
Computer-aided manufacturing (CAM): the use of computers to control and monitor the
use of machinery and equipment in a manufacturing process

Research and development: improving existing products and the discovery, testing and
development of new products, materials or production processes, to gain a competitive
advantage or to increase social welfare

Disruptive technologies: new products, materials or processes that completely change the
way businesses produce and operate or completely change what consumers want and buy

Technological spillovers: the application of a new technology developed in one sector to

the products and production processes of other industrial sectors

Factor substitution: replacing one factor of production with another in a production process

4.2: Costs, scale of production and break-even analysis

4.2.1: The meaning of production

4.2.2: The main methods of production
4.2.3: How technology has changed production methods

Fixed costs: costs that do not vary with output

Variable costs: costs that vary directly with output

Direct costs: costs that can be attributed to a specific activity or the production of a
particular product

Overheads: the day-to-day running costs of an organisation

Average cost: the cost of producing each unit of output

Profit margin: the difference between the selling price per unit and the average cost per unit

Break-even level of output: the minimum level of output a business will need to produce
and sell to cover its costs

Break-even analysis: using cost and revenue data to calculate the break-even level of
output

Economies of scale: a fall in the average cost of producing each unit due to an increase in
the scale of production

Diseconomies of scale: rising average costs due to a business being too big to operate
efficiently