Enterprise

Purpose of Business Activity

 Businesses aim to add value to raw materials and semi-finished goods in order to satisfy
needs and wants of consumers.

 This helps raise living standards of the economy as businesses will employ people for
production.

Factors of production

1. Land - all natural resources used in production

o Return for land is “rent”

2. Labour - both manual and skilled work

o Return for labour is “salary” or “wages.”

3. Capital - finance is needed to set up and run the business, as well as man-made goods used in
production, e.g., capital goods like machinery.

o Return for capital is “interest”

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

o Return for enterprise is “profit”

Added value

 Added value = selling price - cost price

 Added value is not the same as profit

 Business is successful if the consumer is willing to pay more than the cost of materials.

How to increase added value

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

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

Economic activity

 There are insufficient goods to satisfy all of our needs so we have to make choices of which
need we want to satisfy now.

Opportunity cost

 The benefit of the next most desired option which is given up.

 If we decide to chose one option, the opportunity cost is the one we didn’t choose.

Changes in the business environment

 The business environment is always rapidly changing (dynamic)

 Changes can make original ideas less successful.

Shift in Business Environment:

 New entrants to the market business operates in.

 Modification in legal formalities and rules.

 Economic shift.

 Technological advancement.

How can businesses succeed?

 Having a solid understanding of customer needs.

 Efficient management of operation.

 Flexibility in decision-making.

 Clean and sufficient source to finance.

Why do new businesses fail?

 Lack of record keeping

 Lack of cash and working capital:

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

 o Ways to avoid working capital shortage:

 Make a cash flow forecast

 Inject more capital into the business

 Establish good relations with bank

 Use effective credit control with customers

 Poor management skills:

o Essential skills to avoid management problems:

 Leadership skills

 Cash handling and cash management skills

 Planning and coordinating skills

 Decision-making skills

 Communication skills

 Marketing, promotion and selling skills

 Changes in business environment:

o A few changes include:

 New competitors

 Legal changes

 Economic changes

 Technological changes

Why may businesses fail in early stages?

 Internal problems –

o Weak business idea

o Lack of managerial skills

o Lack of suitable employees

o Lack of sufficient finance

o Lack of entrepreneurial skills

o Poor initial research

o Over ambitious ideas

o Poor decisions

 External problems –

o Anticipated customers did not materialize

 o Changes in business environment affected customer’s spending patterns

o Unexpected competition

Local, national and multinational

 Local: Provides goods and services to local population.

 National: Provides goods and services to domestic market.

 Multinational: Provides goods and services to more than one country.

Characteristics

Intrapreneurs Entrepreneurs

Passionate Innovative

Determined Committed and self-motivated

Resourceful Multi-skilled

Think like entrepreneurs Leadership skills

Independent and proactive Self confidence

Innovative Ability to bounce back

Roles

Intrapreneurship Entrepreneurship

Take direct responsibility and risk for the ongoing success of Generate ideas for a new
a business. business.

Develop innovative ideas for projects. Invest own savings and capital

Accept responsibility

Accepted possible risks

Challenges Faced by Entrepreneurs

 Identifying successful business opportunities:

o Entrepreneurs need to find markets which have enough demand to be profitable

o People get their ideas from:

 Own skills
  Previous Employment

 Small-budget market research

 Sourcing finance:

o Entrepreneurs face financial issues due to:

 Lack of own finance

 Lack of awareness of grants and subsidies

 Lack of trading records to receive loans from bank

 A poor business plan

 Determining a location:

o An entrepreneur will have to decide on the best location, considering costs, potential
target market, the status of the area, etc.

 Competition

 Building a customer base:

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

o Businesses can do this by:

 Offering pre and after-sales services

 Providing discounts and other sales promotions

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

Types of Entrepreneurial Businesses

1. Primary sector – extracting materials like fishing and coal mining

2. Secondary sector – manufacturing sector like craft manufacturing

3. Tertiary sector – service sector like hairdressing

Impact of enterprise on an economy

 Employment creation

 Economic growth

 Firm’s survival and growth

 Innovation and technological change

 Exports

 Personal development

 Increased social cohesion

Difference Between Entrepreneur and Intrapreneur:

Entrepreneur:

Purpose:

 Setting up and starting a new business.

Potential risk?

 The liability falls upon the entrepreneur.

Possible reward?

 It goes to the entrepreneur in form of profit.

Intrapreneur:

Purpose:

 Coming up with an idea for an innovate product or project and executing it within the
existing business.

Potential risk?

 The liability falls upon the business in form of damaged reputation, loss of investment etc.

Possible reward?

 It goes to the business and intrapreneur in form of profit, sales or diversification and
potential promotion or wage raise respectively.

Benefits of Intrapreneur:

 Inject creativity and innovation to boost sales and improve product offerings.

 Develop new business methods to solve problems and enhance efficiency.

 Drive innovation and excitement to make change more acceptable.

 Create a competitive edge with innovative products.

 Encourage original thinkers to stay and innovate within the company.

Business Risk:

It refers to potential events or decisions that can affect a company's profitability and are often
measurable or predictable. It includes competition, operational challenges, or regulatory changes.

Business Uncertainty:

It involves unpredictable and uncontrollable events that can impact the business but are not
measurable, such as natural disasters or sudden economic crises. E.g. COVID-19 pandemic, 2008
market crash.

Business Plans

Meaning: document of the business objectives and how they will achieve them

Purpose: used to create a strategy, manage finance, attract investors

 Advantages Disadvantages

Can allocate resources Can be inaccurate

Future planning Can be time-consuming

Attract investors Changing business environment makes it flawed

Business Structure

Classification of business activity

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

2. Secondary sector – Processing and manufacturing products from natural resources. E.g. car
manufacturing, clothes-making.

3. Tertiary sector – Firms selling services to consumers and other firms. E.g. banking,
transportation

4. Quaternary sector – Businesses providing information services. E.g. Computing, web design,
R&D, ICT, and consultancy.

Public and Private Sector

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

2. Private sector – firms controlled and managed by individuals.

Changes in Business Activity

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

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

Advantages Disadvantages

It increases the GDP of the country, Causes a huge movement from rural to urban
helping raise living standards. areas, causing social and housing problems.

It increases the employment Imports of raw materials will increase, increasing

opportunities available import costs.

Increases exports and reduces imports. Manufacturing industries growth is usually

 Advantages Disadvantages

occurred due to growth of MNCs

Firms will be more profitable, increasing

tax revenue

Manufacturing sector goods have more

value than primary sector goods.

2. De-industrialisation occurs when the importance of secondary sector declines. It occurs in

developed countries like USA, UK.

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

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

Types of Economies

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

2. Mixed economy – both private and public sectors. Governments and individuals make
decisions together. Governments usually offer essentials like health care and education.

3. Command economy – economies that have only the public sector.

Sole trader

 These are businesses owned by one person

 The one person owns and controls the business.

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

Advantages Disadvantages

Easy to set up and manage Limited finance (capital)

Owner has complete control Unlimited liability

Ability to choose working times May face intense competition

Easy to establish relations with employees and customers Unable to specialise

Freedom of making own decisions Lack of continuity

 Advantages Disadvantages

Insufficient skills

Partnership

 It is a business owned by a group of individuals

Advantages Disadvantages

Each partner may specialise in different areas Unlimited liability

Shared decision-making Profits are shared

Additional finance (capital) injected by each owner Risk of conflicts

Losses are shared No continuity

Fewer legal formalities

Limited companies

Features:

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

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

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

 Unlimited Liability – Business owners have full legal responsibility for the debts of the
business.

Private limited companies

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

Advantages Disadvantages

Limited liability High legal formalities

Separate legal identity Can’t sell shares to public

Continuity Difficult to sell shares

Original owner will be able to retain Have to send accounts to companies’ house – less
control secrecy
 Advantages Disadvantages

Ability to raise capital from sale of

shares

Higher status

Public limited company

 These are businesses which have legal rights to sell shares to the public.

Advantages Disadvantages

Limited liability High legal formalities

Separate legal identity Cost of hiring specialists

Continuity High fluctuation in share prices

Easy to buy and sell shares Less secrecy

Access to substantial capital sources due to the

High risks of takeover
right to issue prospectus (flatation)

Directors influenced by short term

objectives of major investors

Legal formalities in setting up a company

1. Memorandum of association – name, address, contact number, maximum share capital,

declared aims

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

 These documents must be submitted to the registrar of companies

Other forms of business organisation

Cooperatives

 These are organisations owned by their members

 Features:

o All members contribute to running and managing

o All members have a say in important matters

o Equally shared profits

 Advantages –
 o Buying in bulk

o Working together to solve problems

o Good motivation

 Disadvantages –

o Poor management skills

o Capital and finance shortage

o Slow decision making

Joint ventures

 When 2 or more businesses agree to join for one project

 Reasons:

o Shared costs and risks

o Different companies’ different strengths

o Together more powerful

 Risks:

o Conflicts

o Errors or mistakes

o Business failure of one partner, risk the whole project.

Franchise

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

 They have a legal agreement to do so

To the Franchisor:

Advantages Disadvantages

Guaranteed income from Poor management of one business, affecting reputation

franchisee of all

Easy, risk-free way of expansion Potential management issues

Easy to manage Difficult to monitor

Still have some control

To the franchisee:
 Advantages Disadvantages

Proportion of revenue sent to

Lower risks as business is established
franchisor

Advice, training, supplies and advertising obtained by

Rigid business model already made
franchiser

Economies of scale Potential loss of large investment

Access to experts Expensive initial fee

Franchiser won't open another outlet in the same area

Public-sector enterprises – public corporations

 Known as public corporation

 In the public sector

 Profit is not their main aim

Advantages Disadvantages

Managed with social objectives rather than

High chances of inefficiencies
profit

Still operate, even if making a loss Subsidies may encourage inefficiency

Government may interfere in business

Finance raised from government
decisions

Social enterprise

Features:

 Directly produce goods and services

 Have social aims and ethical ways of producing them

 Need to make a surplus

Objectives:

 Social

 Economical

 Environmental

Together known as triple bottom line

Changes in Business Ownership:

 Access to more sources of finance.

 Gaining legal identity.

 Protection of personal asset through means of limited liability.

 To support business's new long-term objective.

 Manage financial issues.

 To seize opportunities to secure necessary resources for growth.

 Attract new investors or partners.

Size of Business

Different methods of measuring size

1. Number of employees

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

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

2. Revenue

1. Used to compare businesses of same industry

2. Depends on the total value of sales made.

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

3. Capital employed

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

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

4. Market capitalisation

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

2. Limited to public limited companies

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

5. Market share

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

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

Measuring business size

Best form of measurement

 No ‘best’ measure
  To choose which method to use, we need to known if we are interested in absolute size or
comparative size.

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

 Measures used will depend on the industry or specific business.

Problems while measuring businesses:

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

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

Small and micro-businesses

Significance of small and micro-businesses

 Benefits of encouraging development of small and micro-businesses:

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

 Often run by dynamic entrepreneurs. Provides greater variety

 Will create competition for large businesses. Discourage monopoly

 May provide specialist goods or necessities

 Helps them grow and become large

 Will have lower costs as no diseconomies of scale

Government assistance for small businesses

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

 Reduced rate of tax

 Loan guarantee scheme

 Information, advice, support

 Aid designed to overcome specific problems like:

o Lack of specialist management expertise

o Problems raising finance

o Marketing a limited product range

o Finding cost-effective premises

Small and Large Businesses

Advantages

Small Business Large Business

Managed and controlled by owners Ability to employ specialists

 Small Business Large Business

Flexible - adapt quickly to changes in demand Can conduct through market research

Personal contact with employees and customers Diversified risks

Offer personal service Ability to sell at lower prices

Economies of scale

Disadvantages

Small Business Large Business

Limited access to finance Diseconomies of scale

Not diversifies, high risks Divorce between ownership and management

Few economies of scale Conflicts

Unable to afford specialists Poor communication, slow decision making

Difficult to manage and control

Family business

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

Strengths Weaknesses

Success/continuity problem - there might be

Commitment - family owners will show more
failure within the family causing the failure
dedication towards their work
of the entire business.

Knowledge continuity - families ensure they Informality - there may be many

pass on the business knowledge to the next inefficiencies and internal conflicts as
generation allowing experienced and skilled personal and professional life is not
managers. separate

Reliability and pride - as the family business will

Nepotism may lead to inefficient
have their name and reputation, they try to
management
improve quality at all times.
 Strengths Weaknesses

Traditional - they are reluctant to change

(inflexibility)

Conflicts - Family problems may affect

business management

Business growth

Reasons for growth –

1. Increased profits

2. Increased market share

3. Economies of scale

4. Lower risks

5. Increased power and status

6. Ability to be more competitive

7. Increase value of business

8. Easy to access new target groups and markets

Internal growth

 It is expansion by expanding the existing operations

 It is cheap

 Avoids takeover problems

 Takes long time for results

 Limited extent of growth

 May not receive the desired outcome

 Ways for internal growth: -

o Enter new markets

o Increased marketing activities

o Increase investment

o Use newer techniques to produce more efficiently

External growth

 Merger: shareholders and managers of 2 firms come together with both owning shares

 Takeover: company buys more than 50% of another companies shares

Types of integration:

 Horizontal: same industry at same stage of production

 Vertical forward: same industry as a customer of existing business

 Vertical backward: same industry as a supplier of existing business

 Conglomerate: different industry

 Friendly merger: takeover with consent of the target business

 Hostile takeover: takeover without consent of the target business

Type of Impact on
Advantages Disadvantages
Integration Stakeholders

 Reducing costs
may lead to
negative
publicity
 Removes one  Consumers
competitor  Could trigger have fewer
monopoly choices
 It can in the
Horizontal investigations
reduction of  It might result
Integration - if the market
costs by in
merging with share becomes
increasing redundancies
companies in too large
production due to cost-
the same
efficiency  Customers cutting
industry and
might oppose
production  Greater  Workers might
the brand
stage control over be
because of the
suppliers by demotivated
merger
being a larger due to fall in
resulting in
business job security
potentially
lower number
of choices and
competition

Vertical  Control over  Customers  Workers will

Integration product might view potentially
(Forward) - promotion this negatively have better job
merging with a and pricing if it reduces security due to
business in the competition secure outlets
 Secure a
same industry
market for  Lack of  Employees
that is a
your experience in might be more
customer
products, this sector can motivated due
eliminating lead to to higher job
the need for problems security
 resulting in an
increase in
efficiency

 More varied
competitors' job
products opportunities,
but possible
customer
dissatisfaction
due to less
choice

 Possible career
 The firm might growth for
 Better control lack workers
over quality, experience  Consumers
Vertical pricing, and managing a may benefit
Integration delivery supplier from better
(Backward) -
 They can  A successful quality
merging with a
collaborate producer products
supplier in the
same industry on research might not be a  Supplies may
and good manager be more
development of supply reliable but
chains could limit
competition

 It helps  Career
diversifies the opportunities
business, may increase
reducing  Business can due to the
reliance on lack sufficient variety of
Conglomerate one industry experience in industries
Integration - and the new
merging with a  Consumers
mitigating risk industry
business in a may have
different  It spread risk  It can lead to access to a
industry across loss of focus wider range of
different on the core products, but
markets, business the company's
making the focus might
business become
more secure diluted

Financial Problems and Solutions of Growth Through Mergers/Takeover:

Potential Major Issues:

  Takeovers can be costly.

 Possibly, more fixed&working capital might be needed.

 It can lead to borrowing of long-term loan, equipped with interest payment, leading to
negative cashflow in the beginning.

Potential Solutions:

 Usage of internal sources of finance whenever possible.

 Providing the necessary capital from issues of share.

 Offering equity or share rather than cash to the seller.

Managerial Problems and Solutions of Growth Through Mergers/Takeover:

Potential Major Issues:

 Existing management might suffer from diseconomies of scale due to rapid rise in business
size.

 Lack of coordination and teamwork between divisions of now expanded business.

 Clash of culture between two management.

Potential Solutions:

 Policy of delegation and empowerment alongside new managerial order and system
appropriate to the expanded firm.

 Help manager motivate by giving them a clear focus through means of decentralised policies.

 Rapid modification in management culture.

How new Merger/Takeover can achieve their objectives:

 Better results due to sharing of research and ideas between the now integrated business.

 Achievement of economies of scale, reducing average cost.

 Usage of same sale outlet and team increasing effectiveness of cost-saving and decreasing
need of high budget for marketing team.

 It helps decrease expenses through means of rationalisation of assets.

Why new Merger/Takeover can fail to achieve their objectives:

 The combined business experiences diseconomies of scale because of becoming too big thus
way harder to manage.

 The custom and culture of integrated business may vary significantly which can hamper its
coordination.

 Small advantages might be seen from the research and marketing facilities if business
originally produced products different from the integrating business.

 Directors might find rapid growth rate too hard to operate effectively.

Joint ventures and strategic alliances

Importance of joint ventures:

 Costs are shared

 Risks are shared

 Different strengths can fit together

 Differing markets can increase potential consumers

Importance of strategic alliances:

 Can create rapid growth

 Leads to innovation

 Enter new markets

 Share ideas and resources

Business Objectives

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

Importance of business objectives

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

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

 Every business’s aims and strategies change over time.

Corporate objectives

 These are specific to a business and provide a much clearer guide for management.

1. Profit maximisation –

 It means producing at the level of output which leads to the greatest

difference between total revenue and total costs.

 The limitations of this corporate objective include:

 If short term profits are high, competitors may enter jeopardizing the
long-term survival

 Issues of independence and retaining control maybe of higher

importance

 Analysts assess business performance through return on capital

employed rather than profits
  Shareholders may aim for profit maximisation but other stakeholders
may want to prioritise other issues

 Very difficult to assess when the maximised profit has reached

 Negative impact on customers

2. Profit satisficing –

 It means achieving enough profits to keep the owners happy

3. Growth –

 Growth is measured through value of sales/output

 Benefits –

 Lesser chances of a takeover

 Economies of scale

 Motivated employees and managers

 If not growing, may lose its appeal to new investors.

3. Limitations –

 Too rapid expansion may lead to cash flow problems

 Growth may be achieved due to lower profit margins

 Diseconomies of scale

 Using retained earnings to finance profits will reduce dividends

 May lose focus and direction is diversified

2. Increasing market share –

 It is possible for a company to grow but it’s market share to reduce, if the
market is expanding

 If market share is high, it indicates the marketing mix of the business is

successful than most of its competitors.

 Benefits of being the market leader –

 Retailers will be keen to maintain high profile clients, so may provide

good quality and low prices

 Higher profits, due to lower supply prices

 Effective promotional campaigns to attract customers

2. Survival –

 Mostly an objective for start ups

3. Corporate social responsibility (CSR) –

  This concept applies to those businesses that consider the interests of
society by taking responsibility for the impact of their decisions and activities
on customers, employees, communities and the environment

 Benefits –

 Helps boost morale of employees as they feel more connected

 Helps attract skilled workers

 Workers have higher productivity and demand low wages

 Helps build reputation as responsible leader, gives competitive

advantage

 May help reduce costs and improve profits as consumers will be

willing to pay higher prices for sustainable products

 It increases sales and builds customer loyalty. It helps attract

investors

 Limitations –

 It leads to a rise in cost which affects profit margin adversely,

especially in short-term.

 It creates the necessity of hiring employees whose field of expertise

contains the triple bottom line or training existing employees due to
the complexity of CSR.

 Accusation of greenwashing might be on the way which leads to bad

publicity if firms commit to CSR only because of public image
purposes rather than genuine concern.

 If business commits and operates under belief of CSR, it might cause

conflict of interest with objectives such as profit-maximising.

 Stakeholders might put pressure on business during commence of

CSR commitment, such as stakeholder questioning profit margins.

 It might cause competitive disadvantages in pricing relative to

competitors who does not commit to CSR.

4. Maximizing short-term sales revenue.

 This is beneficial to managers and employees if salaries and bonuses

contagious to change due to change in sales revenue levels

 However, if higher sales is achieved by fall in product's price, profit of

business decreases

5. Maximising shareholder value -

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

Objectives of Social Enterprise:

  Economic (financial): Re-invest high degree of profit back into business.

 Social: To provide jobs or assist locals, especially marginalised communities.

 Environmental: Protect environment and operate business sustainably.

Corporate Social Responsibility – An Evaluation

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

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

 CSR is a form of WINDOW DRESSING.

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

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

 As it will lead to better reputation, lower regulations, chances of subsidies and grants,
customer loyalty, etc.

SMART criteria

 Every business objective must meet the SMART criteria

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

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

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

o R – realistic and relevant: aims should be realistic according to the resources

available and must be relevant to the people carrying it out.

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

Benefits of objectives

 They provide a sense of direction

 Helps improve focus of individual employees and departments

 Provides a framework for decision making

 Acts as a motivation tool

 Acts as a means of assess performance, progress and identify training needs

 Helps plan for future in terms of resources required

Factors that determine the corporate objectives of a business

1. Corporate culture
 o It is the code of behaviour and attitudes that influence decision making

2. Size and legal form of the business

o Small businesses – profit satisficing

o Public limited companies – growth, increase stock value

3. Public sector or private sector

o Public sector – CSR

o Private sector – profits

4. The number of years the business has been operating

5. Economic conditions

6. Ethics

Hierarchy of objectives

 This shows the balance and dependencies between the different stages of setting aims and
objectives.

Corporate aims

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

 These are objectives that translate the aims into achievable targets.

Advantages of corporate aims

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

 Help check progress

  They help development of successful tactics and strategies

Mission statement

 Mission statement is a statement of a business’s core aims, phrased in a way to motivate

employees and to stimulate interests by outside groups.

 It is a summary on how they intend to support/achieve their vision

 Businesses communicate their mission statement through – publishing it in their accounts,

websites, banners, advertising posters, company newsletters, etc.

Benefits –

 Helps inform the external stakeholders about the aims and vision quickly

 It helps attract employees, potential investors, shareholders, etc.

 Help motivate employees

 Help guide and direct individual employee behaviour and conduct

Limitations –

 Can be easily adopted by any business of any size

 It is not specific to a business

 They are too vague and general

 Used as a PR activity

 Impossible to analyse

Relationship between mission statements, objectives, strategies and tactics

 Aims and objectives provide basis for business strategies as they are the long-term plans for
the company.

 Strategies and tactics are derived from a company’s corporate objectives.

 Strategy provides the path a business needs to follow in order to achieve a organisations
corporate objective

 Tactics are more concreate and specific smaller steps for shorter time durations to achieve a
strategy.

Objectives and decision making

Stages in decision making framework:

1. Set objectives

2. Assess the problem/situation

3. Gather data about the problem and find possible solutions

4. Consider all solutions and decisions

5. Make a strategic decision

 6. Plan and implement the strategy

7. Review its success against original objectives

Changes in Business Objectives Over Time:

 Market conditions shift.

 Increase in intense competition.

 Technological improvement.

 Change in customer taste, fashion and attitude.

 Modification in regulation and rules.

 Economic changes.

 Growth or rationalisation of the business.

 Changes in leadership or set of directors.

 Expansion into new markets or foreign market.

 Mergers or Takeover.

Communicating Objectives:

Business must communicate their objectives with their internal stakeholders such as manager,
employees, shareholders through meetings, conferences as well as external stakeholders through
annual report that gets published or mission statement or via informal means.

Benefits to the business if employees are communicated with:

 Clear understanding of their own goals as well as the overall objective set for the firm.

 Employees can fit their personal goals with business objectives better in a way it might be
motivating to them.

 Shared responsibility for targets across the company.

 Managers easily monitor progress and provide feedback.

Failure of communication between employees and managers might cause installment of fear and
uncertainty in the employees, possibly making them resistant to change and take steps towards
industrial action.

Ethics

Ethical Code:

Businesses follow a code of conduct that details rules and guideline on employee's behaviour that is
required to be followed by all the employees.

Ethical Dilemmas:

Most businesses at one point of their lifespan falls into trade-off that is questionable morally, such
as:

 Should a toy business advertise to kids to make their parents buy the toys?
  Is it okay to take bribes to place orders with another company?

 Should a bank invest in weapon-making firms that make weapons or test chemicals on
animals?

 Is it right to feed genetically modified food to cattle?

 Should we accept lower profits in the short term to buy cleaner equipment?

 Should CEOs and directors get massive pay raises while other workers are being laid off?

 Is it fair to close a factory to save money if many people lose their jobs?

 Is it ethical to pay low wages and make people work long hours if the laws are weak?

 Should a company exploit child labour to save money if it’s not illegal?

 Is it ethical to make dangerous products as long as no one finds out?

Ethical influences on business objectives and decisions

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

 It may be expensive in the short term

o Ethical supply of raw materials is possibly more expensive

o Avoiding bribes to finalise business contracts might result in failure of securing

significant sales

o Avoidance of price fixing with competitors might lead to lower profit margin due to
reducing price

o Raising wage cost by paying worker's fairly or rationalisation to pay same amount of
wage to fewer workers, potentially leading to fall in competitiveness

 But, in the long term:

o Avoid legal problems

o Avoid bad publicity

o Avoid pressure groups

o May receive grants and subsidies

o May attract skilled workers and investors

Stakeholders in a business

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

 Stakeholder concept: The view that businesses and their managers have responsibilities to a
wide range of groups, not just their shareholders.
Stakeholder Roles Rights Responsibilities

 Obtaining  Honesty –
goods and Payment for
services that goods bought
meet local or services
laws received
regarding when
health and requested
 To buy safety,
goods and design and  Not
services performanc committing
e theft
 To give
revenue  To be  Not to make
Customers
from sales, offered false
which allows replacemen claims about
the business ts, repairs poor service,
to function or underperfor
and expand compensati ming goods
on if the or failed
product or items, to
service fails tarnish
the business's
minimum reputation
levels laid out of
down by law personal spite

 On-time
payment as
discussed or  Supply goods
written in and services
 To supply the service ordered by
goods and agreement the business
services to between the in the time
allow the business and condition
Suppliers business to and agreed upon
offer its suppliers by the
products to  Fair purchase
its own treatment a contract or
customers nd not to be supplier’s
exploited by service
the agreements
customer
business
Stakeholder Roles Rights Responsibilities

 Having an
employmen
t
contract tha
t meets
legal  Meeting the
standards, conditions
 Provide e.g. and
manual and minimum responsibiliti
other labor wage rate es of the
services to employment
 Treatment
the business, contract
and
in
payment in  Ability to
accordance
accordance cooperate
with the
Employees with with
employment
agreement management
contract, to
on in all
help in
employment reasonable
production
contract requests
of goods and
services to  In most  Observance
be supplied countries, to the ethical
to customers be allowed code of
to join a conduct of
trade the business
union if
desired
without
repercussio
ns

 To be
consulted a  To cooperate
bout major with the
 To provide changes business,
the labor that affect where
Local Community services requ it, e.g. reasonable to
ired by the expansion do so, on
business plans or expansion
changing and other
methods of plans
production

Local Government  To provide  Not to have  To meet

Stakeholder Roles Rights Responsibilities

local services reasonable

and requests fro
the
infrastructur m the
community’
e to the business for
s lives badly
business to local services
affected by
allow it to such as public
the
operate, transport for
business’s
produce and employees
activities
sell within and waste
legal limits disposal

 To treat
businesses
 To pass equally under
laws that the law
restrain  To prevent
many  To expect
unfair
aspects of the business
competition t
business to meet all
hat could
activity legal
damage
constraints,
 To provide chances of
Government such as
law and business
producing
order and survival
only legal
economic goods and  To establish
stability to to pay taxes good trading
allow on time links with
business other
activity to countries to
take place allow
international
trade

 To be repaid  To provide
on the the agreed
 To provide agreed date amount of
finance to
 To be paid finance on
Lenders the business
finance the agreed
in different
charges, e.g. date for the
forms
interest on agreed time
loans period

Managers  To control,  To have a  To report to

command contract of stakeholders;
 Stakeholder Roles Rights Responsibilities

employmen
t; to have
and direct to act legally
sufficient
resources and ethically
authority to
fulfill roles

 Set targets
for managers,
 To receive a
ideally on
share of
basis of
 To give profits; to
SMART
business receive
Owners/ criteria; to
access to accurate
Shareholders give
sufficient reports on
managers
finance business
adequate
performanc
time and
e
resources to
meet targets

Significance and Reaction of Stakeholders to Business Decisions:

Stakeholder Local
Business Decision Employees Customers
Response Community

More
employment
Greater
for local
Build new factory to Job efficiency
Impact residents and
expand business opportunities leading to
rise in spending
lower prices
in local
businesses

Concern
New working Possible about
method in new disruption due whether the
factory to increased focus will
requiring new pollution and shift from
skills traffic levels quality to
quantity.

Reaction Increased May seek to Will

number of job deny planning purchase
seekers permission more
products if
 Stakeholder Local
Business Decision Employees Customers
Response Community

prices
decrease
while
maintaining
the same
quality

Trade unions
might push for Might impose
higher wages restrictions on
for more skilled large trucks
work

May organize a
petition or
boycott

The merged
company could
Expansion on
become more Economies
the existing site
stable and of scale
Horizon could lead to
Impact provide could result
Integration/Takeover more local jobs
increased in lower
and higher
career prices
incomes
advancement
opportunities

Rationalization Reduced
aimed at Rationalization competition
reducing waste of overlapping might lead
and cutting facilities might to higher
costs might cause closures prices and
lead to job and job losses fewer
losses choices

Reaction There may be The community Customers

industrial might urge the could
action if job government to respond
security is block the with a
compromised takeover if it boycott if
threatens job prices
losses and increase due
facility closures to decreased
 Stakeholder Local
Business Decision Employees Customers
Response Community

competition

More
efficient and
adaptable
Training and
Local IT service production
Purchase of IT- advancement
providers might processes
controlled Impact opportunities
see increased could lead to
automated machines may be
orders improved
provided
quality and a
wider range
of products

Fewer
There will be a
untrained
need for skilled Issues with
workers will be
workers, IT reliability
needed; those
reducing the might result
unable to
number of in supply
acquire new
unskilled job delays
skills could face
opportunities
redundancy

There may be
Increased
Workers facing calls for
demand may
redundancy retraining
follow if the
Reaction might take programs for
product
industrial the
quality
action unemployed
remains high
who lack skills

How to solve conflict which arises from satisfying different stakeholder aims

 The traditional shareholder perspective argues that focusing on stakeholders other than
shareholders might reduce profits due to non-essential costs.

 The stakeholder approach suggests that addressing the needs of various groups can
ultimately benefit shareholders.

Conflicts between stakeholder goals often require compromises, such as:

1. Gradually phasing out a product line to support employees.

2. Relocating new facilities to minimize local disruption.

3. Funding noise reduction for residents affected by extended airport operations.

Senior management must:

 1. Prioritize stakeholders.

2. Weigh additional costs.

3. Assess the impact of negative publicity on revenue.

4. Balancing these conflicting interests is a key reason for higher executive compensation.

Human Resource Management

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

 HRM has a major impact on efficiency, flexibility and motivation

Purpose and roles of HRM

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

 In the past, HRM was:

o Bureaucratic and had inflexible approach

o Focused solely on recruitment and selection rather than development and training

o Reluctant to delegate

o Not part of the strategic management team

 Roles of HRM include:

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

skills required

o Recruitment and selection – recruiting the most suitable employees

o Developing employees – training, appraisal and developing employees

o Employment contracts – preparing employment contracts and ensure they are

abided by

o Ensuring HRM operates across the business – involving managers in development

and training of employees

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

o Incentive systems – paying appropriately

o Monitoring -measuring and monitoring employee performance

o Dismissing employees with inappropriate behaviour

Recruitment

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

Job analysis

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

Job description

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

 It helps attract the right type of people to the job

Person specification

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

Job advertisement

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

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

agencies, recruitment agencies, etc.

Types of Recruitment

1. External – outside the organisation

o Bring new ideas

o Wider choice of applicants

o Avoids jealousy and resentment

o Standard of applicants maybe higher

2. Internal – from within the organisation

o Already known to the business, no need for induction training

o Known to the selection team

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

o Quicker, less time consuming

o Cheaper

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

o Management style already known

Selection process

Shortlisting applicants

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

Selecting between applicants

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

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

Employment contracts

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

 It includes workers responsibilities, working hours, holiday entitlement, wages, appraisal

process, etc

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

Labour turnover

 It measures the rate at which employees leave the organization

average number of employees employed

Labour Turnover Rate = (Number of Employees Leaving in 1 Year) ÷ (Average Number of

Employees) × 100

Cost of labour turnover

High and increasing labour turnover indicates low moral and employee discontent

 It increases costs of recruiting, selecting training new workers

 Customer service maybe compromised

 Difficult to establish loyalty and team spirit

Potential advantages of labour turnover

 Low skilled workers may be replaced by productive ones

 New ideas

 May reduce costs if business is planning redundancy and rationalisation

Training and development of employees

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

 Types of training –

o Induction training –

 It is an introduction training given to all new employees

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

organisation

o On-the-job training –

 Instructions at the place of the work

  Done by watching and working closely with an experienced member

 It is cheaper

o Off-the-job training –

 Instructions given away from the work place by experts

 It is expensive but more productive

 Training is expensive

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

 It may encourage poaching which acts as a disincentive for companies to set

up expensive training programmes

 Increases productivity and efficiency

 Makes the workforce more flexible

 Better customer service and lower accidents

Development and appraisal of employees

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

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

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

development programme

 The performance is measured against pre-set goals.

 It encourages them to work harder

Discipline and dismissal of employees

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

 They can even be dismissed. This is when a worker is asked to leave, due to parts of their job
or behaviour being unsatisfactory

 There maybe chances of unfair dismissal allegations if the organisation can not prove that
the necessary steps have been take to avoid it.

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

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

Redundancies

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

 This is done when there is a fall in demand, advances in technology, business is trying to
rationalise and cut costs
  Business must ensure these announcements are made efficiently as they have a major
impact on other employee’s morale and job security.

Employee morale and welfare

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

 Increases morale and sense of loyalty

Work-life balance

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

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

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

 Some methods to do this may include:

o Flexible working

o Teleworking – work from home facility

o Job sharing – 2 people working as one full time employee

o Sabbatical periods – extended period leave from work

 This is mainly due to:

o Consumers expect access to goods and services 24/7

o Globalisation and increased competition

Policies for diversity and equality

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

 Diversity is the process of creating a mixed workforce

 Benefits –

o Higher reputation

o Higher morale

o Ability to recruit top talent

o Capture a greater consumer market

o Better ideas and greater creativity

Encouraging Intrapreneurship through Employee Development

 Foster independent thinking and creativity.

 Provide opportunities to collaborate with skilled employees from various departments.

 Empower employees with authority and resources for innovation.

  Accept and expect some failure; removing the fear of failure is crucial.

 Start with small ideas before tackling larger projects

Benefits of Cooperation between Management and Workforce

 Reduces strike days and industrial action.

 Eases the implementation of workplace changes, such as automation.

 Management may recognize and reward workforce contributions with better pay and
benefits.

 Enriches business competitiveness through efficient operations.

 Workers’ insights contribute to more effective decision-making.

Trade union:

A trade union is a workers' organization that protect the rights of the employees, negotiates on
wages and work conditions, and supports their members in disputes.

Impact of Trade union involvement in workplace:

 Trade unions gain power through unity, allowing them to negotiate better pay and conditions
for all members.

 Collective action/bargaining, like strikes, is more effective than individual efforts.

 Unions offer legal support for claims of unfair dismissal or poor working conditions.

 They ensure employers meet legal requirements, such as health and safety rules.

Collective bargaining and it’s benefits:

The process where a group of workers, usually through a union, negotiate with their employer as a
team to improve pay and working conditions.

 The benefit of collective bargaining are:

o Employers deal with a single individual representing the union instead of individual
workers, saving time and ensuring fair treatment.

o Unions provide a way to communicate problems and plans between workforce and
management.

o Unions can prevent disruptive, hasty industrial action by disciplining members.

o Responsible union system helps employers and unions discuss shared issues, leading
to better agreements and higher job security for employees. It also leads to higher
productivity, increased profits for the business.

Ways Trade union leaders use industrial action during dispute with employers when cooperation
are non-existent:

 Continue collective bargaining: This can be done with the help of an independent arbitrator.

 Go slow: In this industrial action, workers keep working but at the slowest pace demanded
by their contract of employment.
  Work-to-rule: Here, employees refuse to do any work outside the precise terms of the
employment contract. Overtime will not be worked and all non-contractual cooperation will
be withdrawn.

 Overtime bans - industrial action in which workers refuse to work more than the contracted
number of hours each week. During busy periods, this could lead to lost output for the
employer, damaging the potential sales.

 Strike action - the most extreme form of industrial action in which employees totally stop
working for an indefinite period of time. Strike action leads to production stopping and the
business shutting down during the industrial action.

Methods employers use to resolve an industrial dispute:

 Negotiations: Try to find a compromise to avoid industrial action.

 Public relation Campaign: Use public relations to win public support and pressure the union
to settle.

 Redundancy Threats: Warn of potential job cuts to push unions toward a settlement.

 Contract Changes: Require workers to do overtime, accept flexible hours, or agree not to
strike.

 Lock-Outs: Temporarily close the business to stop employees from working and getting paid.

 Business Closure: Shut down the business completely, leading to all workers being laid off.

3333

333

Motivation

What is motivation?

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

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

Importance of motivation

 Help a business achieve its goals

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

 Helps maintain low labour turnover and absenteeism rates

 Impact the productivity and competitiveness of the business

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

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

His main purpose was to reduce inefficiencies

His approach included 7 steps:

 1. Select group of workers

2. Observe them perform tasks

3. Record time taken

4. Identify the quickest method

5. Train all employees in that method

6. Supervise them

7. Pay them accordingly

 He believed that people are only motivated by money

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

 He believed that autocratic leadership style should be used

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

 One-way communication

 Theory X manager ideology is adopted

Problems of this method –

 Not everyone is motivated by money

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

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

Mayo and Human Relation theories

Mayo is best known for his Hawthorne effect where he ran experiments in Hawthorne factory in USA.

He reached surprising observations and they are:

 Working conditions alone don’t determine productivity.

 Other motivational factors need to be explored for accurate conclusions.

Afterwards, he conducted more experiments by changing rest periods, payment system etc.

The Hawthorne Effect, conclusion of Mayo’s work:

 Changing working conditions and pay often doesn’t impact productivity much.

 Talking with workers boosts motivation.

 Working in teams and building team spirit can boost productivity.

 Allowing workers control things like break times increases motivation.

 Teams can set their own targets, often influenced by informal leaders.

Evaluation of Mayo’s research for today’s businesses

  Worker Participation: More businesses involve workers in decision-making.

 Human Resource Management (HRM): HR departments have been established to apply the
Hawthorne effect.

 Team Working: Many businesses use teams to leverage the Hawthorne effect.

 New Research: Involving workers and understanding their goals has spurred new research in
industrial psychology.

Abraham Maslow – Hierarchy of human needs

 He categorised employee needs into 5 levels.

 Every employee starts at the lowest level

 Physical needs – food, shelter, water, rest

 Safety needs – job security, health and safety

  Social needs – trust, friendship, teamwork, acceptance

 Esteem needs – respect, status, recognition, achievement

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

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

Limitations-

 Everyone has different needs

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

 Self-actualisation is never permanently achieved

Frederick Herzberg – Two factor theory

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

 Job enrichment principles should be adopted

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

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

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

 Team work should be encouraged and adopted

 He divided his results into 2 factors –

 Hygiene factors –

o Salary, working conditions, supervision, social relations

o They DO NOT motivate employees, but their absence DEMOTIVATES them

o They just remove dissatisfaction

 Motivators –

o Achievement, recognition, work itself, responsibility, advancement

o These factors MOTIVATE employees

David McClelland – Motivational needs theory

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

1. Achievement motivation –

o Have realistic goals

o Seek opportunities of job enrichment and advancement

 o Have result driven attitudes

2. Authority motivation –

o Desire to control others

o Need to be influential, effective, make an impact

o Strong leadership instincts

3. Affiliation motivation –

o Need for friendly relations

o Teamwork and interaction with others

o Be liked and popular

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

Vroom – expectancy theory

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

 People can be motivated if they believe:

 There is a positive link between performance and effort

 Will result in a favourable reward

 Reward will help satisfy important needs

 Desire to satisfy the need is strong

 3 beliefs –

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

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

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

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

Motivational theories – evaluation

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

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

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

Motivators - Financial rewards

Time based wage rate Piece rate Salary

Payment to a worker
Payment to worker for each unit Annual income, paid
made for each hour
produced. monthly
worked

Mode of payment for

manual, clerical and Reflects the difficulty of the job and Professional, supervisory
other blue collared the standard time. and management staff
workers

Too low- demotivates, too high- Fixed each year and

Time rate is present,
reduces incentives (will be able to determines the status of
usually paid weekly
meet their target wage level easily) job

Does not directly link to Encourages faster working and Job evaluation helps
efforts put in efforts decide salary bands

Security of income and

Low security for workers Requires output to be measurable helps in cost and price
calculation

Suitable for jobs where

Little security for workers
output is not measurable

Can lead to complacency

Helps in price determination on the
as income is not related
basis of labor costs.
to effort

Quality and safety issues \n Leads to Regular appraisal is

falling quality standards necessary

Resistance from workers in the event

of change of work

Performance- Fringe
Commission Bonus Profit-sharing
related pay Benefits

Proportion of In addition to A bonus scheme A bonus for staff Non cash

the sales their to reward staff based on the forms of
made wages/salary for “above profits of the reward
average work business- can be a
performance” proportion of the
salary, issue of
organizations
 Performance- Fringe
Commission Bonus Profit-sharing
related pay Benefits

shares

Company
Maybe too cars, free
Given for work Earns
persuasive, In addition to insurance,
well commitment from
poor brand basic salary pension
done/efficiently staff
image schemes,
loans.

Requires regular
target setting, In case of issue of In addition
Low security annual appraisals shares solves the to normal
for workers against preset problem of “us payment
targets and and them” schemes
paying bonuses

Often
Reduces retained
Teamwork is inadequate,
profits and
not short-term
dividends for
encouraged effect \n Problem
shareholders
of favouritism

Herzberg theory:
Diluted share
it only moves,
capital
not motivates

Hawthorne
Workers may sell
effect: individual
shares quickly,
focus rather than
reducing its effect
team.

Non-financial rewards

Job Rotation Job Enlargement Job Enrichment Empowerment

Empowerment fastens
Increasing
Increasing the scope Principle of problem-solving and
flexibility of the
of job organizing work leverages employees'
workforce
relevant experience

Giving variety of Broadening the task, Encouraged to use It increases motivation

work- multi skills deepening full ability-not just and morale through
physical effort challenging work and
Job Rotation Job Enlargement Job Enrichment Empowerment

recognition

Switch from one Reduction of It enhances

Includes both
job to another- direct supervision, communication and
rotation and
avoids allowing decision reduces turnover by
enrichment
monotony making authority increasing involvement

Based on 3
principles from
Usually happens in Managers can focus on
Herzberg's theory:
Series of case of strategic issues as routine
\n - Complete
separate task redundancies or problems are
units of work \n -
shortage handled by employees
Direct feedback \n
- Challenging tasks

Training is needed to
Doesn’t increase
Horizontal manage the risks of
empowerment
enlargement increased authority with
or responsibility
empowerment

Adding tasks to
avoid it from
Less supervision might
becoming boring
result in poor decision-
but no
making
power/authority is
given

Doesn’t lead to
Reduced coordination can
long-term job
occur, leading to
satisfaction or
inconsistent approaches
enrichment

Some employees may

reluctantly accept more
responsibility
for job security

Job redesign Training Quality circles

Improving and
Restructuring of a job with the
developing the skills of Originated in japan- Kaizen
agreement of the employee
employees
Job redesign Training Quality circles

Voluntary groups of
Attempt to make work more Increases status and
workers meet regularly and
interesting and challenging chances of promotion
discuss issues

Employees have first hand

Adding and removing certain tasks Greater sense of
experience with the
can lead to rewarding work belonging
problem

Similar to enrichment Better and quicker solutions

Allows workers to gain a wider

range of skills and increases Provides a new perspective
chances of promotion

Leads to job enrichment –

Herzberg motivation

Delegation and
Worker participation Team-working Target setting
Empowerment

Actively encouraged to
become involved in decision Lower labor Management by Passing down of
making within the turnover objectives authority
organization

Involvement in decisions on
Better ideas, Enables feedback Delegating control
break times, job allocations,
improved quality and comparison over work
productivity

Maslow and
Improves productivity and Provides a sense
Herzberg’s
lowers wastage of direction
applications

Time taking –
Better decisions, new
Delayering appraisal every
perspectives
year

Not everyone is a
Can be time consuming
team player

Autocratic managers find it Conflict with

difficult organizational
 Delegation and
Worker participation Team-working Target setting
Empowerment

values

Paternalistic leadership
Training costs
used – demotivating

Financial and non-financial motivation – evaluation

 Pay is not the only motivating factor

 Managers must be flexible

 Depends on:

o Leadership style

o Culture of management

o Attitude of managers and workers

 Usually, business use a mix

 Non-financial methods are cheaper than financial

33

Management and Leadership

Functions of management – what managers are responsible for

1. Setting objectives and planning

1. Future planning and creating departmental and individual objectives for each
employee

2. Organising resources to meet objectives • They will ensure clear division of work and
delegate tasks to keep everyone motivated

3. Directing and motivating staff

1. Guiding, leading and overseeing people to ensure corporate objectives are met

4. Coordinating activities

1. Encourage teamwork between departments and division to lower duplications

5. Controlling and measuring performance against targets

1. Make sure targets are being met and if they are not, find solutions like training
workers, buying better equipment

Management roles

 According to Henry Mintzberg’s the nature of managerial work, there are 10 different roles
of management.
  These 10 can be classified into 3 main groups:

o Interpersonal roles – dealing with people

o Informational roles – receiver, sender of information

o Decisional roles – make decisions and allocate resources

Interpersonal roles

1. Figurehead – symbolic leader of the company

2. Leader – motivating subordinates, selecting and training workers

3. Liaison – linking managers of one department with others

Informational roles

1. Monitor – collecting data about the operations

2. Disseminator – sending information about internal and external factors to relevant people

3. Spokesperson – communicating information about the business

Decisional roles

1. Entrepreneur – look out for new opportunities

2. Disturbance handler – flexible in responding to changes

3. Resource allocator – deciding on the spending of the business’s resources

4. Negotiator – representing the organisation at all negotiations

Leadership

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

 The best managers are also leaders

o Qualities –

 Desire to succeed

 Self-confidence

 Creative and innovative

 Multitalented

 Incisive mind

Important leadership positions in business

 Directors –

o They are the senior managers elected by shareholders

o Responsible for delegation, assist in recruitment, meeting objectives within their

department
  Managers -

o Responsible for people, resources and decision making

o Have authority over people below them

o Direct, motivate, discipline

 Supervisors –

o Appointed by management

o Not a decision-making role

o Responsible for working towards pre-set goals

 Workers’ representatives –

o Elected by the workforce

o They discuss areas of common concern with managers

Leadership styles

Autocratic Democratic Paternalistic Laissez-faire

Believes that manager

Promotes active is in a better position
Decision-making at It means, let them
participation of than the workers to
the centre do it
workers know what’s best for
the business.

Leaves the
Some consultation, decision-making on
Leader takes all Two-way
but end decision workforce after the
decisions communication
based on managers broad objectives
are set

Little information Full staff No true participation Very little input

given to staff involvement in decision-making from management

Depends on the Workers maybe

Close supervision of High level of
level of dissatisfied and
workforce delegation
involvement demotivated

Workers may not

One-way Worker feedback is appreciate lack of
communication taken structure and
guidance
 Autocratic Democratic Paternalistic Laissez-faire

Faster decision Better final

making \n Good for decision \n Better Lack of feedback
unskilled workers motivation

May demotivate
Time consuming \n
workers \n No staff
Not helpful during
input who have
emergencies
hands on experience

McGregor’s theory X and theory Y

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

 He found that the management attitude is the most important factor

 He identified 2 distinct approaches

 Theory X and theory Y managers

 Theory X –

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

o They need to be managed and controlled with close supervision

o This encourages autocratic leadership

 Theory Y –

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

o This led to democratic leadership style

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

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

Factors affecting the leadership style

 Training and experience of workforce

 Amount of time available for discussion

 Attitude of management

 Culture of firm

 Importance of issues

 In general, democratic is considered the best

Marketing

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

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

Related Concepts

1. Markets

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

2. Human needs and wants

1. Needs are basic requirements that a person needs to survive.

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

3. Value and satisfaction

1. Value is not equal to cheapness

2. A product is considered of good value if it provides satisfaction to consumers and is

of a reasonable price

3. A business must aim to increase satisfaction and value of a product/service to

maintain good long-term customer relations

Marketing Objectives and Corporate Objectives

 Marketing objectives may include:

o Increase market share

 Increase the number of items purchased per customer visit

 Increase loyalty

 Increase the number of times a customer shops

  Increase customer satisfaction

 Brand identity

 Increase new customers

o To be successful, marketing objectives must be:

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

 Determined by senior managers

 Must fit into the SMART criteria

 Importance of marketing objectives:

o Provide a sense of direction

o Allow progress to be monitored

o Easily broken down into individual targets (motivation by objectives)

o Form basis of marketing strategies

Coordination of Marketing with Other Departments

 The marketing department has a central role in coordinating the work of other departments

 Marketing and Finance: know the marketing budget and help make cash flow forecasts

 Marketing and HR: devise a workforce plan and help in the recruitment and selection of
suitable employees

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

Demand

 Demand: The quantity consumers are willing and able to buy at a given price in that specific
time period
Movements in a demand curve
Factors affecting demand

 Changes in consumer income

 Changes in prices of related goods

 Changes in age and population structure

 Fashion, tastes and attitudes

 Advertising and promotion

Supply

 Supply: The quantity of the product a firm is prepared to supply for a price in a specific time
period.
Factors affecting supply

1. Costs

2. Taxes

3. Subsidies

4. Weather conditions

5. Advances in technology

Equilibrium

 It is the price level where demand = supply

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

 Disequilibrium is when demand is not equal to supply (there’s either a surplus or shortage)
Creating Value

1. Creating/adding value

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

2. Higher the added value, higher the profits

3. Added value can be increased by –

1. Create an exclusive and luxurious retail environment

2. High quality packaging

3. Promote and brand the product

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

Mass marketing

Mass marketing is selling the same/standardised products to the whole market.

Advantages;

 Wider choice for customers.

 Economies of scale due to large customer base.

 Fewer risks.

 Lower average cost of production if their mass market strategies lead to high sale volume.

Disadvantages:
  Aim on low prices has conflict of interest as it would not produce a exquisite brand image.

 Lack of varieties of products or marketing might not attract many customers.

 Technological or other change might lead to fall in demand for such products, making it a
risky strategy.

Niche Marketing:

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

Advantages:

 May survive as are producing customised products.

 Ability to charge high prices and increase profits.

 Improves brand image and loyalty.

Disadvantages:

Niche Disadvantages -

 Small markets don't allow for reducing costs by producing in large amounts.

 Growth is limited if the market has few customers.

 Relying on one market is risky if the market changes.

 Profitable markets may attract competitors, leading to lower prices and profits.

Market segmentation – identifying different consumer groups

 Businesses create consumer profiles which includes age groups, income levels, gender and
social class. Successful market segmentation makes it essential for the business to have
proper analysis of customers in the targeted market. Basically, a consumer profile which is a
quantified picture of the business's consumers, showing data about their:

1. Age group.

2. Social class.

3. Income levels.

4. Gender.

5. Location.

 Examples: Socioeconomic group contains:

1. Higher managerial , administrative and professional personnel, for example directors

of big companies and successful lawyers

2. Managerial staff, including professionals such as teachers

3. Supervisory, clerical or junior managerial staff

4. Skilled manual workers

5. Semi-skilled and unskilled manual workers

 6. Casual, part-time workers and the unemployed.

 Example: Different demographic group abbreviation:

o DINKY: Double income no kids.

o VALS: Values attitude and life-styles.

o LOHAS: Lifestyles of health and sustainability.

o OINKY: One income no kids yet.

o Kippers: Kids in parent pockets eroding retirement savings.

 Advantages –

o Easy to target marketing strategies to specific consumer groups

o Enables identification of gaps in the market

o Differentiated marketing strategies can be focused on target market groups

o Price discrimination may be used to increase revenue and profits

o Allows specialisation

 Disadvantages –

o High research and development costs

o High promotional costs

o May not be able to enjoy marketing economies

o High stock-holding and production costs

o May lead to over-specialisation

o Extensive market research may be needed

Local, National and International Market

Local Market:

Some businesses only sell to local customers in their area, such as roadside eatery, barbers, grocery
shop and car repair shops. These businesses operate in a small, local market.

National Market:

Some firm expand and sell across the whole country, reaching more customers and raising revenue.
Fewer businesses do this compared to those that stay local. Examples include national grocery
chains, large clothing stores, and regional banks.

International Market:

The biggest opportunities are in international markets, where businesses sell in many countries.
Expanding internationally is a major decision because it requires adjusting to different cultures,
tastes, and laws in each country.
Consumer Marketing (B2C):

Goods and services sold to end users.

They are classified as:

 Convenience products bought repeatedly, usually on impulses that is sold to mass market.
E.G. Chips.

 Shopping items which necessitates some knowledge and planning before purchase. E.G.
Electric Oven.

 Specialty items which are purchased on certain occasions and might be equipped with
powerful sturdy brand loyalty justifying high price tag. E.G. Motorbike.

Industrial Marketing (B2B):

Goods or services sold to other businesses.

They are classified as:

 Materials and components required for production to take place. E.G. Engine for a car.

 Capital equipment, machinery and mean of transport such as truck.

 Services and supplies to other businesses.

Difference Between Consumer and Industrial Marketing:

 It targets individuals or households who buy products for personal use. Industrial marketing
targets businesses or organizations that buy products or services for usage in their
operations.

 The buying process is often quicker and based on impulses, brand loyalty or accessibility.
However, the process in B2B is longer and more complex, involving multiple people,
research, and careful consideration.

 End users normally buy in smaller quantities and inexpensive items where selling to other
businesses often leads to larger quantities purchase of higher-value items.

 B2C focuses on broad advertising, promotions, and social media to reach a large audience.
B2B focuses on building relationships, direct sales, and personalized communication to
convince businesses to buy.

 Products are usually standardized, thus usually found in the mass market, whereas products
may be customized to meet the specific needs of a business client, which is found in the
niche market.

Market Orientation:

An outward-looking approach that makes product decision on consumer demand, learned via market
research.

Benefits:

 Products match customers' needs properly, leading to happy and loyal customers.
  It helps companies easily adjust to changing market trends due to doing extensive market
research.

 Better understanding of customers helps stand out from competitors.

Limitations:

 Market research is expensive and time-consuming due to collecting customer feedback.

 Extensive market research can also delay product development.

 By focusing on current needs, a firm can overlook new opportunities or chance to be

innovative.

Product Orientation:

An inward-looking approach which focuses solely on developing a superior/innovative product that

can be made. Firms will try to sell them, hoping the innovation will attract customers.

Benefits:

 It primarily focuses on creating cutting-edge/innovative products, allowing firms to use price

skimming as well as have successful launches.

 Focus on perfecting the product, causing it to be high quality.

 Can set industry standards with superior products.

Limitations:

 It might lead to products made that don’t meet customer expectations, consequently causing
business experience low sales

 There can be a risk of the product not fitting market demand.

 It can be slow to adapt to changes in the market or customer preferences as it's focused on
product, thus being inflexible.

Market Size:

The total value/quantity of sales of all the firms within a market in a given time period.

There are two ways to measure the size of market to understand how successful the firm is:

1. Market Share.

2. Market Growth

Market Growth:

Percentage of change in total size of of the market over a time period.

Depending factors that determine rate of market growth:

 Rate of nation's economic growth.

 Change in consumer income, taste, fashion and attitude.

 Establishment of new markets and products that decreases revenue of existing markets and
products.
  Technological changes

 If market is saturated with majority of customers owning that market's product.

What will happen with rise in the rate of market growth?

 Sales will grow if the business keeps the same share of the market.

 The business, now can justify raising prices and make more profit per item.

 More sales could also help lower costs, saving budget for other areas of improvement.

 More companies might enter the market seeing the profitability, leading to more
competition.

What will happen with fall in the rate of market growth?

 Sales will grow more slowly, even if the business keeps its market share.

 Competitors might lower their prices to increase sales in a market that isn't growing much or
is shrinking.

 Lower prices likely will lead to less profit per item.

 Businesses might look at expanding into markets that are growing faster, like in
other countries.

Market growth could be measured in two ways:

1. Volume, showing the difference in sales via percentage.

2. Value, showing difference in revenue via percentage.

Market share:

It is the percentage of the total market sales the business earns relative to its competitors.

Formula:

Market Share Calculation

The formula to calculate market share is:

Market Share (%) = (Revenue of Business in a given time period / Total Market Revenue in a
given time period) × 100

What is a brand leader?

The brand that owns the highest share of the market.

Consequences of rise in market share:

 Sales are growing faster than those of other businesses in the same market, which could lead
to higher profits.
  Retailers will want to stock and promote the best-selling brands. These brands might get the
best spots in stores.

 The business that makes the top-selling brand might be able to offer a smaller discount to
retailers (for example, 10% instead of 15%), less than what smaller brands offer. This,
combined with higher sales, should lead to more profit for the leading brand's producer.

 Being the market leader can be highlighted in advertising and promotions. Consumers often
want to buy the most popular brands.

Consequences of fall in market share:

 Sales are likely to fall unless there is rapid market growth.

 Retailers will be less keen to stock and promote the product.

 Larger discounts to retailers might have to be offered.

 The product may no longer be a brand leader, so promotions will not be able to state this.

Customer Relation Marketing (CRM):

Usage of marketing activities to create and build good customer relationships so that the loyalty of
existing customers must be maintained.

Costs of CRM:

 What it costs to have effective IT systems and software are needed and employees need to
be trained to respond to customer feedback.

 Effective CRM campaigns may require the use of an external marketing consultancy at high
cost.

 CRM needs an existing customer base to be established first before investing in CRM. If this is
not done, the costs will not lead to higher sales.

 It may be costly to respond to each customer's feedback, especially if it contains special

requests or requirements.

Benefits of CRM:

 For businesses with an existing customer base, CRM has proved to be cost-effective. Higher
sales from effective CRM nearly always exceed its cost.

 It is a sustainable strategy creating long- term customers unlike 'special price offers' or
similar promotions.

 Loyal customers often recommend the business to friends and family, providing additional
marketing benefit at no cost.

 It costs less per customer than trying to attract new customers.

Market Research

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

Purpose of market research:

 Overall size: Is it potential return on investment worthy of entering the market.

 How fierce the competition is.

 Is the market for the product in terms of sales growing or shrinking?

Need for market research

1. To reduce risks associated with new product launches

o Market research helps investigate the potential demand for a product.

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

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

2. To predict future demand changes

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

demand

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

3. To explain patterns in sales of existing products and market trends

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

4. To assess the effectiveness of the marketing strategies used

o Conducting market research after implementing few marketing strategies like

changed promotion, etc will allow a business to understand the effectiveness of
these strategies in achieving the long-term marketing goal

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

5. Know consumer feedback

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

6. Identify competitors, their USP and differentiate the product

o Market research helps identify competitors, their product differentiation strategies.

It allows the business to adapt and modify their USP accordingly

The Market Research Process

1. Identify problem and define objective

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

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

2. Determine research design

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

3. Design and prepare research instrument

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

4. Sampling and collecting data

o Choosing a sample size and method

5. Analyse data

6. Visualise and communicate results

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

How Market Research assists NPD

New Product Development Correlation to Market research

Identify consumer needs and Primary and Secondary research into consumer needs and
likings potential competition

Product vision and packaging Experimenting the product and packaging with consumer
design group

Brand positioning and trial of

Pre-testing the product image and promotion
advertisement

Product launch and after-launch

Overviewing sales and consumer feedback
period

Primary research

 Also known as field research

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

 Benefits –

o Up-to-date information

o Relevant information

o Confidential

 Drawbacks –

o Expensive

o Time-consuming

o Doubts over accuracy and validity (due to sample size)

Primary data collection methods

Method Details Benefits Limitations

Questionnaire Questionnaires can include

Cost-effective for
(Postal, in-store, detailed, open questions
reaching a large
online and mobile which give qualitative and
audience.
phone etc.) quantitative data.

Limited depth of
Low response
Easy to analyse and information due
rates may skew
compare feedback. to predefined
results.
answers

Interviews allow personal

Interview (Face to Provides in-
contact with respondents. Time-consuming
face or mobile depth, qualitative
Follow-up questions can be and expensive.
phone.) data.
asked.

Allows for follow-

Potential
up questions
interviewer bias
which assists
can influence
detailed
responses of
understanding of
interviewee.
feedback.

Observation If people know they are It captures candid Can be intrusive to

(seeing which being observed, they could behaviour in real- potential
décor or behave differently. time. customers,
advertisement of making them
a shop attracts uncomfortable ,
customers.) altering their
 Method Details Benefits Limitations

behaviour.

Useful for
understanding
consumer Difficult to
behaviour interpret without
according to additional data.
context and
environment.

Test Marketing (In The results might indicate Provides real-

certain whether the national world feedback
geographical launch of a new product before a full
location.) will achieve sales targets. launch.

Costly and time-

consuming.

Decreases the
Competitors might
risk by identifying
observe and react
issues early and
accordingly.
rectifying them.

Focus Group
(Conversation It encourages debate
with potential or between consumers about Assists gathering Group dynamics
existing a product or advertisement. diverse opinions can lead to biased
consumers, with Discussion is and ideas quickly. results.
goal of gaining observed and recorded.
qualitative data)

Difference between Primary and Secondary Data and Evaluation:

Primary Data:

 Collected firsthand for a specific research purpose.

 Usually more accurate and up-to-date but time-consuming and costly to gather.

Secondary Data:

 Already collected by others for a different/similar purpose.

 Easier and cost effective relatively to obtain but may be outdated or not entirely relevant to
the current research.

Evaluation of changes in Market Research in Recent Years:

  Electronic methods: Businesses are now using electronic methods like mobile surveys and
loyalty card data to collect marketing information. Retailers can overview/monitor what
customers buy and who they are, allowing their marketing strategies to be more precisely
targeted and cost-effective. This means promotions are aimed at products customers are
most likely to buy, reducing wasted/low R.O.I advertisement.

 Social media: It is changing market research as it allows developed software to utilise the
usage of social media, chat apps and behaviourial data. This combination assists in
understanding respondent’s thoughts, ideas and emotions. It reaches an advanced level such
input appear as image, sound and video.

 Online marketing: It allows businesses to conduct cost effective research by acquiring the
benefit of pre-made questionnaires, surveys etc. Customers can fill them conveniently
through their electronic devices. Pre-recorded text/survey request can be automatically
presented and analysed electronically.

 They are becoming less expensive and more accessible but a question persists, is it worth the
expenses? is it cost-effective? Well, the evidence show that well-planned and focused market
research has high R.O.I by giving higher revenue and profit.

Secondary research

 Collection of data from second-hand sources

 It is also known as desk research

 It is gathering data which has already been collected

 Advantages –

o Cheap

o Assists planning of primary research

o Less time consuming

o Allows comparison between different sources

 Drawbacks –

o Maybe outdated

o Not available for new products

o May not be accurate

o May not be suitable to the business

Types –

1. Government publications

2. Local libraries and government offices

3. Trade organisations

4. Market intelligence reports

 5. Newspapers and specialist magazines and publications

6. Internal company records

7. The internet

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

Sample size

 It is impossible to survey every member of the target population

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

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

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

 Major constrains in selecting the sample size – time and money

Accuracy of Primary Research (evaluation points)

1. Sampling bias

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

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

2. Questionnaire bias

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

3. Other forms of bias

o The respondent may not be truthful

Measure of a set of quantitative data:

These are the 4 most frequent methods used to measure a set of quantitative data:

Arithmetic Mean:

Value calculated by totaling all the results and divided by the number of results.

Example: Sadman has 5 subjects. His subjects are scored out of 10 with 8 being A grade. He got 6, 8,
8, 9 and 9 in his 5 subjects out of 50. His mean/average grade will be 8 which is a by 6+8+8+9+9=40,
40/50=0.8 or 80%.

Uses:

 Used to estimate expected sales over time, helping to decide when to reorder stock.

 Helpful for comparing different data sets, like football club attendance.
Advantages:

 Takes all data into account when calculating.

 The most common average, easy to use and understand.

Disadvantages:

 Can be influenced by very high or low results, skewing the data which can be a
misrepresentative of the average.

 Often results in a number that isn’t whole which might be unhelpful in decision-making.

Mode:

The value that occurs the most in a set of data.

Example: If in a data set of 1000 of a survey asking people their favourite anime and if 500 of them
answer X instead of Y, Z or W, then the mode is X.

Uses;

 It can be utilized during ordering/reordering inventory, seeing the most wanted size or
product type to ensure all the goods are sold.

Advantages:

 No calculation is required as proper observation is sufficient.

 Results comes out in whole number, making it simple to understand.

Disadvantages:

 It does not account all the data, thus further analysis cannot take place.

 There might be more than one modal result, leading to possible confusion.

Median:

The median is calculated using the following formula:

Median = number of values + 1⁄2

Where n is the number of values in the dataset.

Example: if the value is 5, then;

Median= 5+1/2= 3th value is the median.

Uses:

 It can be used in wage negotiation

 It can be used for advertisement

Advantages:

 It is less influenced by extreme results/outliers.

Disadvantages:
  Complicated calculation when there is a set of data.

 Not applicable for use in further statistical analysis.

 It will result in estimated value in case of an even number.

Range:

Difference between highest and lowest value. Example: Out of 200% in Business Theory of AS level. X
scored 88% and due to Grade threshold, he got A* as the range for top 10% students was 85% to
90% of the Raw marks, meaning the range is 5% and he has 96% on his result certificate.

Uses:

 It shows the variability of the data set.

 It helps compare the spread between different data sets.

Advantages:

 Easy to calculate.

 Thus, gives result fast of how variable the data set is.

Disadvantages:

 It can become misleading if there is an extreme result/outlier

 It does not tell how it distributed the data set, leading to limited measure of how spread out
the data is.

Measure of a set of qualitative data:

 Tables: Present data in a precise, structured format for easy reference and comparison.

 Pie charts: Show proportions of data relative to the whole, useful for visualizing percentages
and comparing sets of results.

 It also has an equation=

Angle of Section (Pie Chart) = (Value of one section / Total value of all sections) × 360 degrees

 Line graphs: Ideal for displaying trends and changes in data over time, highlighting
fluctuations.

 Bar charts: Use bars of varying height to compare values, useful for comparing different
items or changes over time.

Quantitative Data:

Numerical data that can be statistically analysed.

Benefits:

 It is easy to analyze and identify trends.

 It provides measurable, generalizable results.

Limitations:
  It lacks depth in understanding behaviors.

 Limited by predefined questions that leads to a certain direction.

Qualitative Data:

Non-numerical data, which provides insight into the detailed motivations of consumers and helps to
explain their buying behaviour or opinions. quantitative data: numerical results from research that
can be statistically analysed.

Benefits:

 It assists business to a deeper insights into motivations behind consumer behaviour.

 It allows flexible, detailed responses.

Limitations:

 Harder to analyze due to potential biases.

 Results might not be widely applicable.

33The Marketing Mix: Product

Marketing Mix

 The 4P’s include:

o Product – existing product/newly developed product. Includes packaging, quality,

features of the product

o Price – amount customers pay

o Place – how the product is distributed

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

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

Why is product a key part of the marketing mix?

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

 This includes the quality, durability, performance and appearance

 Customer expectations must be met in terms of these factors

What is meant by ‘product’?

 This includes both consumer and industrial goods and services

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

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

 It is expensive and may not be successful

 Unique selling point

 Features that differentiate a product from its competitors

 Benefits of having a USP –

o Effective promotion

o Free publicity

o Chance to charge high prices

o Higher sales

o Brand loyalty

Products and brands

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

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

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

Tangible and intangible attributes

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

branding

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

Product positioning

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

 One method – market mapping

o Identify features that consumers deem important

o Plotting it on a comparison chart

Uses of PLC

 Assisting with marketing mix decisions

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

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

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

 Identifying how cash flow might depend on PLC

o Every business requires cash flow in order to be successful

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

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

o But, in the growth and maturity stage, cash flow is likely to improve and become
positive

o Therefore, knowing about the PLC stages of different products, allows a business to
plan for its next project and see its effect on cash flow

 Identifying the need for a balanced product portfolio

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

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

Product life cycle

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

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

Stages of PLC

 Introduction

o Low sales

o Increase slowly

 Growth

o Significant growth in sales

o Few competitors start entering the market

 Maturity/saturation

o Sales remain constant

o Many competitors are in the market

 Decline

o Sales fall rapidly

o May occur due to changes in technology, tastes, etc

Product Life Cycle Graph:

 Extension strategies

 Strategies used to extend the maturity stage of the PLC

 Examples –

o Selling in new markets

o Repackaging and relaunching

o Finding new uses

o Sales promotion techniques

o Adding new features

Marketing Mix and Phases of PLC:

Produc
t Life Promo Distrib
Price Product
Cycle tion ution
Stage

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uction may be levels uted in model
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 about
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 If age
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 Product
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and
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PLC – evaluation
 PLC is an important part of the marketing audit and helps in assessing the marketing
departments position

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

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

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

Product portfolio analysis – evaluation

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

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

 But without a well-managed product portfolio, the other 3 P’s may not be in use and the
objectives may not, ever, be met

Boston Matrix Analysis:

A method of analysing the product portfolio of a business in terms of market share and
market growth.

It consists of:

 Star: High market share, High market growth. It is highly successful in a growing market.
However, to maintain its market position, it needs high promotion costs. Therefore, the
business needs to invest heavily to sustain growth and profitability.

 Cash Cow: High market share, Low market growth. It is established and profitable with high
cash flow and requires low promotional costs due to strong brand awareness. Due to this,
the business mostly needs to maintain it and use the profits to support other products.

 Question Mark: Low market share, High Market growth. It requires significant investment
and promotion as it has an uncertain future. These includes evaluating quickly and consider
redesign, rebranding, or even withdrawal from market if sales fail to improve.

 Dog: Low market share, Low market growth. It has little return or future potential,
considering weak sales and cash flow. Therefore, the business should consider replacing or
withdrawing such products from the market.

The image shows how to represent it graphically:

 Impact of Boston Matrix Analysis on Marketing Decisions:

The Boston Matrix helps in:

 Evaluating Products: Understanding how well current products are performing and their
market position.

 Planning Actions: Deciding what to do with existing products and how to introduce new ones.

How to make marketing Decisions Based on the Matrix:

 Building Question Marks: Invest in advertising or expand distribution for products with
potential but currently low market share. Use profits from successful products (cash cows) to
fund this.

 Holding position of Stars: Keep supporting high-performing products to ensure they stay
successful and continue to grow.

 Milking Cash Cows: Use the profits from successful, established products to fund other
products or initiatives.

 Divest: Consider stopping production of underperforming products. This decision involves

considering impacts on the workforce and how to use any freed-up resources effectively.

These strategies work well with a balanced product portfolio. Too many poorly performing
products can limit the firm's ability to invest and grow.

Limitations of the Boston Matrix:

 It cannot predict future product performance. Therefore, continuous market research is

needed to understand future trends which is costly.

 Managers must consider the impact of competitors, technological changes, and economic
conditions, which the Matrix does not account for.

 The Boston Matrix is a planning tool. It oversimplifies the factors affecting product potential
success and may not capture all complexities.

 It assumes higher market share leads to higher profits, but this isn’t always true if profits are
reduced by low prices.
 333

The Marketing Mix: Price

Why is price a key part of the marketing mix

 Price is the amount paid by customers

 Its impacts:

o The demand

o Degree of value added by the business

o Influence on revenue and profits earned

o Reflect on marketing objectives and their success

o Establish psychological image of the business

Factors affecting pricing decisions

1. Costs of production

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

2. Competitive conditions

o Monopoly – more freedom in deciding prices

o Perfect competition – fix similar prices

3. Competitors prices

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

4. Business and marketing objectives

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

5. Price elasticity of demand

o Elastic – low prices

o Inelastic – increase prices

6. New or existing product

o New products – price skimming or penetration pricing

Pricing methods

Cost based pricing

 Mark-up pricing
 o When a percentage of fixed mark-up is added to the cost of the product.

o The mark-up size depends on the strength of demand, number of substitutes, stage
of PLC (Product life cycle), etc.

 Cost-plus pricing

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

o This ensures all costs are met

o Easy to calculate

o Suitable for firms with high market shares

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

o Inflexible method

 Contribution-cost (or marginal-cost) pricing

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

o Contribution per unit = selling price – variable cost per unit

o Break even point = fixed costs/ contribution

o Ensures variable costs are covered

o Flexible method

o Fixed costs may not be covered

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

 Competitive pricing

o Prices are based on the price set by competitors, analysing them and retailing at
similar price point.

o Scenarios where it is suitable:

 Following the market leader

 Avoid a price war

 Destroyer pricing – force others out of the market

 Based on study of conditions

Advantages and Disadvantages of Cost-Based Pricing:

Methods Benefits Drawbacks

Cost-plus Easy and to calculate by adding a It doesn't consider competitor

Pricing fixed percentage or amount to the prices or customer willingness to
 Methods Benefits Drawbacks

cost, causing the process to to take

pay.
less time to complete.

It ensures that all costs are covered If costs are high, prices might be set
and a profit margin is added. too high, potentially reducing sales.

It helps in understanding how much It ignores fixed costs in pricing,

each unit contributes to covering which might lead to incomplete
fixed costs and profit. financial planning.

It might be misleading if not

Contribution- Useful for making decisions like combined with full cost information
Cost Pricing accepting special orders. for comprehensive decision-
making.

Competing solely on price can

Competitive Prices are set based on competitors'
lower profit margins if prices are
Pricing prices, helping to stay competitive.
set too low.

It draws customers' attention, It doesn't account for the unique

specifically those who are looking value or quality of the product,
for better deals compared to which can be overlooked in price
competitors. comparisons.

It doesn't consider customer

Easy to apply by adding a fixed
Mark-Up demand or competitor prices,
percentage to the cost of the
Pricing which can lead to setting the price
product.
too high or too low.

This can result in pricing that

It ensures a consistent profit margin doesn’t reflect the actual market
on each product sold. value, making this method at
times inefficient.

Loss Leader

 Retailers use the loss leader method by setting very low prices on some products, sometimes
below their cost.

 The aim/goal is to attract customers with these low priced items, hoping they will also buy
other products that are more profitable.

 The business expects that the extra profit from these other products will cover the losses
from the low priced items, resulting in a positive contribution.
  Loss leaders often promote the sale of related/complementary products. For example, selling
printers at a low price might lead customers to buy more expensive printer ink.

Market-oriented pricing

 Psychological pricing

o Also known as customer-value/perceived-value pricing

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

o Used for products with inelastic demand

 Price discrimination

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

o For example, bus or train companies offer lower prices to the elders than they do so
to other adults.

o Another example might be mass transit system such as sky-train offering lower prices
during off-rush hours than rush hours.

 Dynamic pricing

o Changing prices, frequently, to respond to changes in demand

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

o For example, Airlines use dynamic pricing. It depends on the number of seats left, the
lower the seats, the higher the prices are usually.

Advantages and Disadvantages of Market-Oriented Pricing:

Methods Benefits Drawbacks

Frequent price changes

It adjusts prices based on demand and can annoy customers who
Dynamic
competition, potentially earning more feel they are being
Pricing
money. charged unfairly, eroding
brand perception.

It requires advanced
Quickly adapt to market changes to optimize
systems and data analysis,
pricing, ensuring maximum reach to highest
which can be expensive
possible revenue and profitability.
and complicated.

Psychological The business use tactics like pricing items Some customers might
Pricing at 9.99insteadof9.99insteadof10 to make feel tricked by these
them seem cheaper and encourage purchase, pricing tricks, which can
boosting sales. damage trust and erode
customer perception of
 Methods Benefits Drawbacks

the brand.

It may not always boost

It makes products look like a better deal to
sales significantly if the
customers as it appears cheaper in
product doesn’t actually
comparison to similar products.
offer good value.

This might upset

It can charge different prices to different
Price customers who see others
groups, increasing overall revenue as well as
Discrimination paying less for the same
profit margin from each segment.
product.

It broadens the market by creating products Firms Might face legal

that are affordable to different income levels, issues if the pricing is seen
reaching more customers. as unfair.

Pricing strategies for new products

1. Penetration pricing

o Involves selling at a low price to attract more customers

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

2. Price skimming

o Setting a high price to differentiate it from competitors

o Usually for products with inelastic demand (luxury goods)

o It creates an exclusive image for the product

Benefits and Limitation of Pricing Methods for New Products:

Methods Benefits Drawbacks

Low prices initially can draw in

Penetration As initial prices are low, the profit
customers quickly and build market
Pricing margins are also low.
share.

Raising prices later can be challenging

Low prices can make it harder for
once customers become accustomed
competitors to enter the market.
to the lower price.

Price Starting with high prices help High initial prices can limit the number
Skimming maximize profit from early of customers who can afford the
adopters before lowering them product.
 Methods Benefits Drawbacks

over time.

It helps to quickly recover High prices can attract competitors to

development and marketing costs enter the market with lower-
with higher initial prices. priced alternatives.

Pricing decisions – some additional issues

1. Level of competition

o It depends on the type of market

1. Perfect competition

 Consumers have complete knowledge

 All producers are identical products

 Freedom of entry and exit

 Equal market share

 Here, only competitive pricing will work

2. Monopoly

 Single seller with 100% market share

 They are price makers

 High barriers to entry and exit

3. Oligopoly

 Price wars to gain market share

 Non price competition – competitive promotional campaigns,

product differentiation

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

2. Loss leaders

o It involves setting relatively low prices for some products, expecting consumers to
buy it.

 They hope, the profits earned from other products will cover the losses for
the other product

o Usually used for complementary goods

3. Psychological pricing

o It involves setting prices just below the whole number

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

Pricing decisions – evaluation

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

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

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

 Price is only one factor. The complete brand image is more important

333

The Marketing Mix: Promotion

Why is promotion an important part of the marketing mix?

 Promotion involves communicating with potential customers

 It helps increase awareness and create an image in consumer minds

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

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

Promotion objectives

 Aims of having promotional objectives:

 Increase sales by new customers

 Raise customer awareness

 Remind customers about the USP/product

 Increase purchases by existing customers

 Demonstrate USP and product differentiation strategies

 Correct misleading reports/image

 Develop a public image

 Encourage retailers to stock and promote their product

Advertising

 Known as ‘above-the-line’ promotion

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

 Effectiveness depends on selecting the appropriate target market and suitable media

 Helps increase awareness and long-term brand loyalty and image

Types of advertising

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

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

Advertising agencies

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

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

 Stages in creation of a promotional plan:

o Research the market

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

o Use creative designers to devise ads

o Print out the adverts

o Monitor public reactions to improve future ads

Advertising decisions – which media to use?

 Greater the promotional budget, wider media choices available

 Factors to consider when choosing the media to use:

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

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

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

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

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

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

Types of Advertising Methods

Print Advertising:

Appears in newspapers, magazines, and specialised publications.

Benefits:
  Can target specific towns, regions, or readers of special interest magazines.

 Offers a physical copy that consumers can keep for future use.

Limitations:

 Expensive as if tries to gain national coverage.

 Less effective with younger consumers compared to digital ads due to usage of social media.

Broadcast Advertising:

Includes TV, radio, and cinema ads.

Benefits:

 Creates a brand image through visuals and actors.

 Can reach national or international audiences.

 Memorable if visually striking.

Limitations:

 High costs to buy media time.

 Ad production is expensive.

 No physical copy to keep.

Outdoor Advertising:

Seen on billboards and bus shelter posters.

Benefits:

 Cheaper than other types of advertising.

 Can be placed in popular areas with large quantity of potential customers passing by.

 Seen multiple times by passers-by.

Limitations:

 Popular spots are costly.

 Ads can be damaged or vandalised.

 Many passers-by might not notice the ads.

Product Placement Advertising:

Products appear in TV shows and films.

Benefits:

 These shows or films are chosen to target a specific audience.

 Creates a positive image if linked to famous actors or popular shows.

  Not direct advertising; some viewers think the product is used because it's desirable, not
because it was paid for.

Limitations:

 The show, film, or actors might lose popularity.

 Very expensive for well-known shows or films.

Guerrilla Advertising:

Benefits:

 Products are advertised in surprising, unconventional ways to grab attention.

 Low cost, such as using graffiti, but permission is recommended.

 Can be creative and appeal to young people.

 Encourages word-of-mouth among potential customers.

 A staged event might get free media coverage.

 Example: Coca Cola’s “Share A Coke” campaign.

Limitations:

 The message might be misunderstood.

 Could be seen as irresponsible and lead to negative reactions.

 Might be remembered for the wrong reasons.

Sponsorship:

A business pays to be associated with an event, person, or sports team, like having their logo on a
team's shirts.

Benefits:

 Good publicity from being linked to major events.

 Global media coverage for large events.

 The success of the team or individual can boost interest in the brand.

 Example: Sponsoring a Formula One team can bring in much more free publicity than the
cost.

Limitations:

 Can be very expensive to pay the team or individual, especially if they are a big name in their
field or world known.

 If the event, team, or individual fails, it can negatively affect the brand.

Which Advertisement method to choose from?

One need to review the following points before choosing their advert form for marketing purposes.
They are:
 1. Cost: Marketing managers should compare the cost of different methods, including cost per
target consumer. Using celebrities in ads increases costs, while viral marketing on social
media can be almost free. For example, if £100 broadcast adverts is seen by 500 potential
customers, that is £0.2 per potential customer who had been exposed to the brand ad. It is
called cost per click in digital marketing.

2. Consumer Profile: It's important to match advertising to the right audience. Advertising a
children’s toy late at night or exclusive clothing in a cheap newspaper wouldn’t be effective.
Younger audiences are more reachable through social media and digital marketing.

3. Message and Image: Written ads work well for detailed product information, as they can be
revisited. For promoting new clothes or sports gear, a vibrant TV ad or YouTube video might
be better.

4. Marketing Mix: Ads should align with other marketing efforts. For example, promoting cheap
meals in a high-end women’s magazine could be ineffective.

5. Legal Constraints: Laws can restrict certain types of ads. For instance, tobacco ads were
banned in Formula One, and some countries limit TV ads aimed at children to prevent undue
influence.

Sales promotion

 Also known as below-the-line promotion

 It aims to achieve a short-term rise in sales

Methods of sales promotion

1. Price reductions –

1. A temporary reduction in price

2. Also known as price discounting

3. Reduce the profit margin on each product

4. May have a negative impact on reputation

2. Money-off coupons –

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

2. Retailers may not have enough stock, leading to customer disappointment

3. Effectiveness depends on size of coupon

3. Customer loyalty schemes –

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

2. High administration costs

4. Money refunds –

1. Offered when receipt is returned to the manufacturer

 2. Involve customers filling in forms which maybe a disincentive

3. Delay in refund may affect brand image

5. BOGOF –

1. Buy one get one free

2. Substantial fall in profit margin

3. If used to sell of stock, may impact brand image

4. Current sales may increase, but future sales may fall

6. Point-of-sales-display –

1. Placing products in attractive and informative places

2. Only offered to market leaders

3. New products may struggle

Sales Promotion

Personal selling

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

 Expensive

 Requires skilled sales staff

 Used for expensive, luxury items

 High success rates

Telemarketing:

 This involves using the phone to sell, research, and promote products, often from call
centres.

 Telemarketing can be outsourced. The outsourced contractor might charge for the script and
either by the hour or for each successful lead.

 It’s cost effective compared to personal selling.

 Business can monitor how many people respond or reject the calls.

 However, many people dislike cold calls and can lead to fall in perception of the brand if it is
done repeatedly.

 It's easy for consumers to ignore telemarketing.

Direct mail

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

 May provide detailed information

 Well focused on potential customers

  Cost effective

 Maybe missed

Trade fairs and exhibitions

 Used to market to other businesses (retailers and wholesalers)

 Used to make contacts and identify potential customers

Public relations (PR)

 It is used to gain free publicity provided by the media

 Tries to arrange positive TV and press coverage

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

 Used to improve reputation

Digital Promotion

Social Media Marketing:

Social media is used not just for marketing but also for connecting with people and following
interests. Businesses often use multiple platforms like Facebook, Twitter, and Instagram. Popular
methods include ads, hashtag campaigns, and influencer marketing.

Email Marketing:

This method connects with customers directly in their inboxes, helping to boost brand loyalty and
sales. Common tactics include newsletters, purchase confirmations, and product updates.

Online Advertising:

This involves placing pop-up banners or ads on websites targeting similar audiences. Platforms like
Google AdSense help businesses automatically display ads on related sites.

Smartphone Marketing:

This method is crucial for reaching younger consumers. Businesses use emails, text messages, and
free apps to engage users, often sending real-time updates. Messaging platforms like Messenger and
Telegram also allow the use of marketing bots.

Search Engine Optimisation (SEO):

SEO helps businesses rank higher on search engines like Google, making them more competitive.
Methods include optimising content for specific keywords, but businesses must keep up with
changing search engine algorithms.

Viral Marketing:

Viral marketing aims to create content that spreads quickly online, like videos or memes. It uses
multiple channels such as Twitter and YouTube. Influencers with a large following play a key role in
spreading these viral messages.

Social Media Marketing:

Social media is used not just for marketing but also for connecting with people and following
interests. Businesses often use multiple platforms like Facebook, Twitter, and Instagram. Popular
methods include ads, hashtag campaigns, and influencer marketing.

Email Marketing:

This method connects with customers directly in their inboxes, helping to boost brand loyalty and
sales. Common tactics include newsletters, purchase confirmations, and product updates.

Online Advertising:

This involves placing pop-up banners or ads on websites targeting similar audiences. Platforms like
Google AdSense help businesses automatically display ads on related sites.

Smartphone Marketing:

This method is crucial for reaching younger consumers. Businesses use emails, text messages, and
free apps to engage users, often sending real-time updates. Messaging platforms like Messenger and
Telegram also allow the use of marketing bots.

Search Engine Optimisation (SEO):

SEO helps businesses rank higher on search engines like Google, making them more competitive.
Methods include optimising content for specific keywords, but businesses must keep up with
changing search engine algorithms.

Viral Marketing:

Viral marketing aims to create content that spreads quickly online, like videos or memes. It uses
multiple channels such as Twitter and YouTube. Influencers with a large following play a key role in
spreading these viral messages.

Benefits of Digital Advertisement:

 A website helps businesses find new global markets by providing the brand a worldwide
reach, increasing their potential customer base.

 A well planned and targeted digital promotion campaign can reach the appropriate potential
customers at a lower cost than traditional advertising.

 Web analytics make it simple to measure how effective a campaign is, providing detailed
insights to improve future marketing strategies or strategies of the business as a whole.

 Digital promotion allows businesses to offer personalized experiences, making customers feel
special with targeted offers.

 Active social media engagement and quick responses to customer messages can build loyalty
and a good reputation.

 Digital advertisement, such as content marketing, lets businesses create engaging content
like images and videos, which can help boost their brand, especially if it goes viral.

 Websites make it more convenient for customers to purchase, leading to higher success rates
compared to other sales methods.

Limitations of Digital Advertisement:

  Managing online ads and creating marketing content is time-consuming and expensive if firm
hires an expensive digital agency. The success of promotions should be weighed against the
time and cost involved.

 Employees need updated skills to succeed in digital marketing since tools and trends change
quickly. Regular training may be vital.

 While it's easy to reach a global audience, it also means more competition. Standing out
among many competitors might be challenging and costly, often requiring search engine
optimisation.

 Negative feedback can spread quickly online. It's important for businesses to respond
promptly and effectively to any criticism on social media or review sites.

How to measure success of Promotion?

The business needs to ensure their marketing manager gather maximum information in regards to
the success or failure of their promotional strategies. The managers can measure it by:

 Business can compare product sales performance before the promotion with daily and
weekly sales during and after the campaign to measure impact.

 Market research agencies provide weekly data on the degree of consumer awareness and
response to ads, offering quick feedback on the campaign’s progress.

 Consumer panels might be useful for giving detailed feedback on how well promotions and
ads are working.

 Firm can monitor how many people respond to ads through tear-off slips, phone calls,
website visits, or views on video sites.

 Social media feedback quickly shows how well a new product or promotion is received,
making it a key measure of success.

Branding

 It is a distinguishing name given to a product

Aims –

 Customer recognition

 Product differentiation

 Giving the product an identity

Benefits of branding –

 Increases chances of consumer recall

 Product differentiation

 Increases consumer loyalty

Limitations of Branding:

 Developing and maintaining a good brand image can be costly

  Building the Brand's unique identity will be time-consuming

 Brand image can be damaged by potential negative publicity and bad experience of customer
service etc.

Effective Branding Advantages:

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

 It helps consumers remember the brand, even when many similar products are available.

 Might help sets the product apart distinctively from others, with promotion reinforcing the
difference.

 Asists in establishing the creation of related products under the same brand name.

 Makes consumers less sensitive to price increases, as they often prefer well-known brands
and are willing to pay more.

 It can increase brand loyalty to the brand, giving significant advantages in its market.

Packaging

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

 Cheap and nasty packaging may destroy the brand image

 Unique packaging can help the brand form necessary basis of promotional theme, such as
Audi cars are identified through their 4 ring on the front of a car

 Wasteful expenditure on packaging alongside rise in environmental concern and creation of

pressure groups might lead to negative publicity if it's packaging is deemed too pretentious
or polluting. This will even reduce the product’s competitiveness

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

 Functions –

o Protect the product

o Give important information

o Support the brand image

o Aid customer recognition

333

The Marketing Mix: Place

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

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

 A correct distribution channel is necessary –

 o Consumers need the product to be convenient and accessible

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

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

Distribution

Concept of distribution

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

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

Customer service as objective of distribution

 Distribution channels chosen may not always be the cheapest

 Customer service is the main objective of distribution, therefore convenience to customers

may also be a very important factor when deciding the distribution channel

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

Channels of distribution

1. Manufacturer → Consumer

o Direct selling to customers

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

o Has complete control of the marketing mix

o Quicker

o Fresher food available to consumers

o Direct contact with customers

o Expensive – storage and stock costs

o No retail outlets, limits promotion from physical shop/website

o Not convenient for customers

o No advertising done by intermediaries

2. Manufacturer → Retailer → Consumer

o Retailer pays for stock and storage costs

o Retailer offers after sales service and has product displays

o Available in many locations – convenient for customers

 o Producers can focus on production

o Retailer promotes and advertises the product

o Intermediary adds profit margin, more expensive to consumers

o Producer loses SOME control over the marketing mix

o No exclusive outlet, may sell competing products

o Producer bares delivery costs

3. Manufacturer → Wholesaler → Retailer → Consumer

o Wholesaler buys in bulk, reducing storage costs for producer

o Wholesaler bares transport costs to retailers

o Wholesaler break bulk by selling small quantities to different retailers

o More convenient for customers

o Best way to enter foreign markets

o Higher final prices as more intermediaries add profit margins

o Producer further loses control over marketing mix

o Slow distribution chain

o No direct contact with customers

Factors influencing choice of distribution channel

 Industrial product or consumer product

 Geographical dispersion of target market

 Level of service customers expect

 Technical complexity of the product

 Unit value of product

 Number of potential customers

 Competitors actions

 Integration impact of distribution channel with other marketing mix components

Bright side to choosing the right distribution channel:

 Consumers can benefit from easy access to products. They can see, try, and buy items easily,
with the option to return them if deemed necessary.

 Manufacturers need stores that have broad market distributing reach to numerous areas
while also promoting the product’s image effectively.

 Retailers sell directly to consumers and add a markup for profit. If keeping prices low is
important, using fewer middlemen can help manufacturers offer lower prices.
Internet and E-commerce

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

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

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

 Sales contacts are established by visitors leaving their details on sites

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

 Ability to use dynamic pricing

E-commerce:

Selling and marketing activities that uses the internet, email and mobile communications to
encourage direct sales via electronic commerce.

Benefits of E-commerce:

 Comparatively cheaper if measured against the number of people reached.

 Access to worldwide audience for a fraction of traditional advertising costs.

 Websites allow consumers to buy and share important data.

 Easy for consumers to use if they have a computer, mobile or laptop, etc.

 Accurately measure clicks and the success of web promotions.

 Increasing computer and smartphone use worldwide, making e-commerce a thriving

marketplace.

 Online sales have lower fixed costs than physical stores, decreasing cost of product which
increase incentive for purchase for certain demographics.

 Dynamic pricing makes it easier to charge different prices for different consumers.

Limitations of E-commerce:

 Some countries have slow internet and limited computer access, especially in poorer regions.

 Consumers can't physically inspect products, which may reduce online purchases.

 Product returns may rise if customers are unhappy with what they receive.

 High costs and unreliable postal services can reduce the benefits of online selling.

 Websites need to be regularly updated and user-friendly, and creating good ones can be
costly.

 Concerns about internet security and data privacy may limit future growth.

Physical Distribution

The activities that combine to achieve the efficient movement of finished products from the end of
the production operation to the consumer. They are received by paper, optical discs and film
cassettes.
Digital Distribution

the delivery or distribution of digital media content such as audio, video, TV programmes, films,
software, and video games.

It also involves streaming and downloading of content. Promotor of this form of distribution asserts
that music writer/performers through this can:

 Distribute music globally via platforms like iTunes, Spotify, and Google Play.

 Avoid high costs of physical distribution.

 Grow a global fan base.

 Keep 100% of revenue.

 Use an eco-friendly distribution method with no transport or packaging.

An integrated marketing mix

Key marketing decisions that complement each other and work together to give the customers a
consistent message regarding the brand's product.

 If the marketing mix is not integrated, it may confuse customers who will stay away from the
product and find alternatives. This will lower long-term sales

Examples of poorly integrated marketing mix:

Here’s a shortened version of the bullet points:

 Would you not find it suspicious if you find an expensive shoe being sold on a market stall?

 Would it be surprising if an exclusive shop wrapped gifts in newspaper?

 Would a children's clothing ad in a magazine for professional women generate sales?

 Mixed messages about a product can confuse its identity.

 If a product looks cheap but is expensive, are we being overcharged, or is the quality higher
than it seems?

 If a product looks expensive but is cheap. Is it a great deal or low quality?

The most effective marketing decisions will –

 Based on the marketing objectives

 Affordable within the marketing budget

 Integrated and consistent with each other

333
Operations Planning

Operations decisions

1. Link with marketing

o Operations manager needs to know market demand forecasts to be able to match

supply and demand. This is known as operations planning.

o If sales forecasts are accurate:

 Easily match supply to demand

 Keep inventory levels to a minimum efficient level

 Reduce wastage

 Employee appropriate number of factors of production

 Produce the right product mix

2. Availability of resources

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

o Lack of these will influence operations decisions:

 Location – locate in areas with abundant supply of materials

 Nature of production method – if labour productivity is high, business may

use labour intensive production method

 Automation – if technology is cheaper, business may decide to switch to

automated production method.

3. Technology

o Technological developments have changed the production process

o They help the process become more efficient and cost effective

The Transformational Process

Definition: An activity or group of activities that transform one or more input, adds value to them,
and produce outputs for customers.

It takes the following inputs:

 Enterprise

 Land

 Capital

 Labour
Adds value to them via production, whether capital or labour intensive.

Transform them into the following output:

 Finished goods

 Services

 Components for other firms

Contribution of Operations

Contribution of operation to improve added value:

 Efficiency: Minimize production costs to stay competitive by improving efficiency.

 Quality: Ensure goods or services meet their intended purpose.

 Flexibility & Innovation: Adapt to new processes and products.

Amount of added value depends on inputs and different factors.

The following factor affecting Added Value are not operational management issues:

 Design of Products: Make it cost-effective to produce while having high-quality visual appeal
to justify a higher price.

 Operational Efficiency: To cut waste and boost productivity to lower per unit costs and
increase value.

 Branding: Create strong branding to make consumers willing to pay more than the
production cost, like with luxury clothing, stationary etc.

Efficiency Production leading to Effective Sustainability

One of the main goal of an operations manager is resource management. they plan to optimize
resource use by being efficient in product and minimize negative impacts on future generations
through compliance to sustainability.

One major misunderstanding occurs through knowing the difference of productivity and production.
The difference is:

 Production is the measure of the total output in a given period.

 Productivity is the measure of how inputs are converted into outputs per time period.

There is an calculation of calculating productivity and that is by using the labour/Capital productivity
equation.

Labor productivity (number of units per worker) = Total Output in a given time / Total Workers
Employed

Capital productivity (number of units per worker) = Total Output in a given time period / Total
Capital Employed

There are also ways to raise productivity and they are:

 Boost Skills: Training improves productivity but is costly and risks losing staff.
  Enhance Motivation: Financial and non-financial incentives can motivate employees and cut
costs. Although Non-financial incentives are usually preferred as it does not raise labour cost.

 Upgrade Equipment: New and improved technology increases output. However, it requires
large investment and retraining for employees.

 Improve Management: Effective management can raise productivity level by handling

resources and workers effectively.

However, high productivity does not guarantee success as:

 Wage demand: Increased effort for higher productivity might cause workers to seek higher
pay, which could cancel out the productivity gains.

 Worker Resistance: Workers might be reluctant to follow necessary steps to raise

productivity. Improving productivity by 20% could cause job losses and potential industrial
disputes if sales don’t grow.

 Management Role: If the management quality is poor, success is unlikely. Therefore, high
quality management that involves workers and values their input can improve productivity
and acceptance.

 Efficiency or Effectiveness?: Despite raising productivity, it might not lead to success as

productivity is measured via efficiency and not rather effectiveness.

Effectiveness should be focused on as well, it means meeting the needs of the customers profitably.
They, combined together, gives the best outcome. Efficiency is focused on reducing the average cost
of production while effectiveness is ensuring that the product that is being produced meets the
needs of their targeted audience profitably.

Sustainability of operation

It is done via maintaining business operations long term by focusing on environmental protection and
preserving quality of life for future generations.

Ways to operate business sustainably:

 Using recycled materials

 Producing goods that can be recycled

 Waste management in production

 Buying sustainable resources from suppliers

 Reducing energy usage and carbon emission

 Lowering the usage of non-biodegradable materials such as plastic

Why business wants sustainability in their operation:

 To comply with strict laws on environmental issues

 Pressure group activity exposing environment-damaging businesses

 Businesses should follow through on corporate responsibility promises through their senior
management.
  Sustainable practices can improve public relations, enhancing positive publicity.

 Consumers are more likely to buy eco-friendly products, increasing sales.

Benefits of Sustainability Drawbacks of Sustainability

Lower Energy Costs: Using less energy saves Going green may require costly investments
money. like solar panels

Fall in production usage and sales of plastic

Eco-friendly materials might be pricier and
and non-biodegradable materials draws eco-
less effective than plastics
conscious buyers

Using recycled materials reduces need for new Recycled materials often need extra cleaning
raw materials. Thus, potentially decreasing or processing, heightening production
costs completion time

Recyclable products can cut waste disposal Creating recyclable products is likely to be
cost costly and time-consuming

Lowering waste from operations decreases It might require Investing in worker training
overall production costs and advanced equipment

Purchase of resources from sustainable

Sustainable supplies to make product might
suppliers supports sustainability and reduces
be more expensive, raising overall costs
bad publicity risk

It might not be suitable for business target

audience income

Need for flexibility and innovation

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

 Ways to increase flexibility –

o Increase capacity

o Hold higher stocks

o Have a flexible workforce

o Flexible flow production equipment

Process innovation

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

 Done through using CAM, CAD, robots, faster machines, computer tracking inventory system,
etc
  Gives a competitive edge

 Better quality

 Higher reputation and brand loyalty

 Expensive

Labour Intensive vs Capital Intensive

Benefits of Capital
Benefits of Labour Intensive Production
Intensive Production

Low machine expense Economics of Scale

Interesting and varied work thus higher employee motivation Consistent quality

One-off design/Job production processed product can be made Low average cost of
that meets customer requirements precisely. production

Lower start up cost as buying numerous machines to begin Higher ability to supply to
operation increase cost of a business by a great margin Mass market

Drawbacks of Labour Intensive

Drawback of Capital Intensive Production
Production

Lower output level in comparison High fixed cost

Skilled, High-paid workers might be Cost of financing the machinaries or finding

required for overall operation sufficient finance might be time-consuming

Quality of the product made depends on

High maintenance cost and higher cost for repairs
experience, motivation and skill of each
as skilled workers are necessary
worker

Due to constant improvement in technology. It

leads to latest equipment depreciating fast and
becoming obsolete.

The approach of the production method that should be chosen depends on:

 Nature of the product

 Brand Image

 Relative cost of Labour and Capital

 Size of Business

 Accessibility to finance
Economies of scale

 Cost benefits arising with increased scale of operations

Types of economies of scale

1. Purchasing economies

o Bulk buying economies

o Suppliers may offer discounts on bulk purchases

o They will want to keep large customers happy so may provide good quality goods
and on time delivery

2. Technical economies

o High output will lower unit costs

o Fixed costs are spread across the output, lowering its output

3. Financial economies

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

o They may be willing to charge lower interest rates to them

4. Marketing economies

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

5. Managerial economies

o Employing specialists and managers will be easier for large firms as their salary will
be spread over a larger output

Diseconomies of scale

 Factors which lead to a rise in average costs of production arising with increased scale of
operations beyond a certain size.

Types of diseconomies of scale

1. Communication problems

o In a large firm, the feedback provided will be poor

o The chain of command may be long leading to distortion of messages

o This may cause poor decision making

2. Alienation of the workforce

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

o They may feel demotivated due to lower job satisfaction

3. Poor coordination
How to avoid diseconomies of scale

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

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

3. Reduce diversification: Businesses that concentrate on ‘core’ activities may help to reduce
coordination problems and some communication problems.

Production methods

1. Job production

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

o It is labour intensive

o Specific consumer needs are met, higher reputation and loyalty

o Specialised products are produced, ability to charge higher prices

o Cannot enjoy economies of scale

o Expensive as requires skilled labour and training

2. Batch production

o Producing products in separate groups where the entire groups goes through the
production process together

o Enables division of labour and specialisation

o Economies of scale

o Easy to alter batches according to demand and preferences

o High storage costs – work in progress inventory

o Workers may get bored and demotivated

3. Flow production

o Producing products in a continuous process through the use of technology

o Higher output

o Economies of scale

o Consistent and standardised quality

o Low labour costs

o High initial costs

o Lower job security

4. Mass customisation

o It involves the use of computer aided production to meet specific customer needs at
mass production costs
 o Allows businesses to focus on differentiated marketing

o Increases added value

o Low unit costs

o Customer needs are met

Production methods – making the choice

1. Size of market – if the market is small, flow production can not be used, batch or job
production is more appropriate

2. Amount of capital available – employing flow production is expensive and requires a high
initial capital investment. Small firms may not be able to afford this and therefore use job or
batch production

3. Availability of other resources – using flow production requires a high supply of unskilled
workers and huge land area. Job production requires highly skilled workers. The chosen
production method may even depend on whether the company is able to allocate these
resources.

4. Market demand exists for products adapted to specific customer requirements – if the
company wants low costs but has a differentiated target market, mass customisation is the
best option.

Problems of changing production methods

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

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

Conclusion: Production method

Traditional differences between production methods are becoming less obvious. Technology allows
large businesses to meet the diverse range of customer needs, which could threaten small firms that
focus on niche markets with specialized products. However, as consumers become wealthier, there
will still be demand for unique and specialized items, so small firms can continue to thrive in the
niche market regardless of dominance of large businesses in terms of market share.
Inventory Management

Inventory

 Materials needed for the production of goods and services.

Types:

1. Raw materials

o Purchased from outside suppliers

2. Work in progress

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

o Depends on time period of production and production method used.

3. Finished goods

o Good ready to be sold to consumers

Inventory management

 Without effective inventory management, there maybe many problems.

 Insufficient inventories to meet unforeseen changes in demand

 Out-of-date inventories maybe held

 Wastage due to incorrect storage conditions

 High storage and opportunity costs if extra inventory is held

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

Inventory holding costs

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

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

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

Costs of not holding inventories

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

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

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

Optimum order size

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

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

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

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

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

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

Inventory control graphs

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

 They help in determining the right order time and quantity.

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

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

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

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

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

Just-in-Case (JIC) Inventory Control

This management system targets to lower the risk of running out of inventory to the minimum by
holding high buffer inventory levels.

Benefits of JIC inventory management Drawbacks of JIC inventory management

JIC makes it highly unlikely to run out of

High capital cost as finance is required to
inventory, so production can continue even
invest in inventories
with major supply delays.

Lower requirement to forecast sales as Other costs such as space, holding and other
accurately as with JIT due to high inventory variables associated with inventory,
level increasing overall expense of business

Takes advantage of purchasing economics of Inventories are highly likely to lose its value
scale by ordering supplies in large quantities, due to potential change in fashion or
lowering average supply cost technology

Supply Chain Management

 Supply chain: the network of all the business activities involved in creating a product for sale,
starting with the delivery of raw materials and finishing with the delivery of the finished
product.
supply chain management: Management of the entire production flow of a product (from raw
materials to finished product) to minimise costs as well as improve customer service.

Supply chain management targets to decrease the time period of converting inputs into outputs.

Supply management system shorten the time period by:

 Build sturdy and consistent communication with suppliers to ensure on-time and high-quality
delivery of raw materials.

 Improve transport systems to speed up delivery.

 Speed up new product development to stay competitive in the market

 Use technology and flexible workforces to speed up production.

 Reduce waste at all stages to cut costs.

Benefit of effective supply chain management:

 It can create happier customers by providing high quality customer service by ensuring fast,
on-time delivery of quality products.

 Reducing expenses on buying, storing, and producing goods by saving time and decreasing
waste will lower operating cost.

 Improvement in inventory management and efficiency, will inevitably lead to higher business
profits.

Just in time (JIT) inventory control

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

Requirements for JIT

 Excellent relations with supplier

 Flexible and multiskilled production staff

 Flexible equipment and machinery

 Accurate demand forecasts

 Latest IT technology

 Excellent employee-employer relations

 Quality must be priority

Advantages and disadvantages

JIT evaluation

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

 JIT may be unsuitable when:

 Costs of halting production exceed inventory holding costs

 Expensive IT systems cannot justify potential cost savings

 Global inflation makes holding inventories cheaper

Capacity Utilisation and Outsourcing

Capacity Utilisation and Maximum Capacity

 Maximum capacity refers to the total possible level of output that can be
undertaken/sustained by a business in a given time period.

 Capacity utilisation refers to the proportion of maximum output capacity currently being
achieved. It measures the efficiency of the business usage of its resources.

The following formula rate of capacity utilisation measures exactly that:

Capacity Utilisation = Current Output LevelMaximum Output Level×100

Operation at maximum capacity and minimum capacity

When capacity utilization is high or near max capacity, fixed costs like rent and machinery
depreciation are shared among many units. This means average or unit fixed costs are lower. When
capacity utilization is low, these fixed costs are spread over fewer units. Thus, average fixed costs
become higher.

Benefit of Operating at Maximum Capacity:

 Average fixed cost is at lowest possible level

 Employee feel their job is secure due to constant high demand and feel proud of being a part
of the business, increasing their loyalty.

 If corporated business, it increases people willingness to invest, which might raise finance.

 Business can use this for marketing purposes which might entice potential customers to
check out the “hype”.

Drawbacks of Operating at Maximum capacity:

 High workload can increase employee stress, affecting their performance negatively.

 Production mistakes are costly due to no slack time.

 Increased orders may lead to lost customers if not managed, it will put the long term
customer relation with the business in danger.

 Continuous machine operation can delay maintenance, risking future issues.

 It can lead to fast depreciation of the machineries used by the business.

Therefore, each business aims to operate near maximum (optimal) capacity rather than the full
capacity. They keep the spare capacity for unforeseen events that can inevitably occur.

Operation at excess/spare Capacity

When the level of output is below full capacity output of a business.

Businesses tries to improve their capacity utilisation and there are two option to choose from: short-
term and long-term.

Short-term excess capacity:

This occurs due to low seasonal demand, to improve capacity utilisation in such periods, business
have options such as:

 Adopting flexible production system, which lets business make different sort of product at
different time of the year. This creates a need for flexible workforce which likely increases
wage.

 High output levels Increases inventories, potentially costly and risky if sales don't recover.

 Having flexible employment contracts Reduces hours during low demand to cut costs, but
may impact employee morale and motivation.

Long-term Excess Capacity:

This occurs due to recession or technological changes. To improve utilisation of capacity during such
period, businesses can either:

1. Rationalisation: Decrease in capacity by closing production units or factories.

Advantage of Rationalisation Disadvantage of Rationalisation

Lowers overhead costs. Might have to bear redundancy payments.

Increases capacity utilization of

Workers might have concerns about job security.
remaining units.

Risk of industrial action.

Potential need for increased capacity if the economy

improves or new products are developed.

Potential criticism for failing to meet social responsibilities.

2. Research and Develop New Products:

Advantages Disadvantages

New products can replace outdated

ones and enhance competitiveness.

Can be costly to develop and launch.

Quick introduction of new products may

May not prevent cutbacks in time.
help avoid rationalization issues.

Risk of launching products too rapidly without a

solid market strategy, potentially leading to failure.

Capacity Shortage
When demand for a products of the business exceeds its production capacity.

To raise production capacity for long-term operation, a business considers:

 Should the business increase production level by acquiring additional production resources?

 Should they maintain existing capacity but outsource or subcontract work to other
businesses?

 Should they operate at full capacity without expansion due to potential risk of declining
demand.

Businesses use the following in order to reduce long-term capacity shortage and they are:

1. Use subcontractors or outsource suppliers:

Advantages Disadvantages

Requires no major capital investment. Lesser control over output quality.

It might raise administration and

Comparatively quick to arrange.
transport costs.

It provides greater flexibility than expanding

Potential uncertainty regarding delivery
facilities. Contracts can be ended if demand
times and reliability.
decreases.

Unit costs might be higher due to the

supplier fulfilling its profit margin.

2. Invest in capital for expansion of production facilities:

Advantages Disadvantages

High capital costs and difficulty can occur when raising

Increases long-term capacity.
funds.

The higher capacity can become a problem if demand

Might give access economies of
for products of the business decreases over an
scale.
extended period.

New facilities enables the business Building new facilities and equipping it with appropriate
to use of the latest equipment and machineries takes time and customers might go to
methods. another business.

Business has control over quality

and delivery times.
Outsourcing: Using another (a third party) to undertake a part of the production process rather than
doing it within the business using the firm’s own employees.

Advantages Disadvantages

Outsourcing can negatively impact employee

Outsourcing is usually cheaper than motivation and public image might be questioned
hiring full-time specialists and leverages due to possible redundancies and ethical
economies of scale. standards as business might from low-wage
economies.

It turns fixed costs to variable costs and Due to hiring workers from low-wage economies,
allows for flexibility for the business can undermine CSR commitments regarding
depending on demand. workers and the environment.

This method can provide high-quality

Outsourced IT functions can pose security risks and
services or resources which might not be
accountability issues for lost data.
available internally.

They helps the management to Customers may have concerns about foreign call
concentrate on core activities by centers and outsourced components affecting
outsourcing function such as HR or quality of the service/good they purchase,
finance. lowering their loyalty.

It is difficult to monitor outsourced quality.

It frees up resources which can be used Therefore, the business need quality control on-
for other business improvements. site to ensure quality being up to the highest
standards.
Business Finance

Why does a business require finance?

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

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

 While business expansion

 Needed to merge/acquire other businesses

 Unforeseen expenses and difficulties

 Fund research and development

Types of Expenditure

Capital expenditure

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

Revenue expenditure

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

Working Capital

Start up capital

Finance the founder of the business/entrepreneur requires in order to purchase necessary factors of
production to set up their business.

Working capital

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

 It is the lifeblood of the business

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

 Working capital = current assets - current liabilities

How much working capital is required?

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

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

 Longer the cycle, greater the amount required

Managing working capital

 Maintain smaller inventory level to minimize costs and storage needs.

 Track sales and inventory via computer system, and automate reordering.

 Prevent losses from damages and wastage by efficient inventory handling and control.
  Reduce working capital tied up in inventory by using Just in time production system.

 Ensure delivery of product is done as fast as possible to customers to speed up payment.

Businesses also have trade receivables and payables.

Trade payables can be managed by:

 Delay payments to suppliers to lengthen the credit period.

 Choose suppliers that offer credit terms, preferably the one who offers the longest window.

Trade receivables can be managed by:

 Sell products only by cash payment to avoid credit risks.

 Decrease the credit period offered to customers to improve cash flow.

Internal sources

1. Profits retained in the business

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

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

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

2. Sale of assets

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

 It will help raise permanent capital for the business

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

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

3. Reductions in working capital

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

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

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

External sources

Short term sources

1. Bank overdrafts

 Most flexible

 The bank allows the business to overdraw its account

  High interest rates

 Bank can ask the business to repay anytime

2. Trade credit

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

 Customers may switch to competitors if they provide greater credit period

 Suppliers may not provide discounts

3. Debt factoring

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

 Lowers risk for the business

 Full amount is not given

Medium-term sources

1. Hire purchase

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

 It helps avoid large initial cash payment

 Ownership of asset is obtained

2. Leasing

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

 Leasing company is responsible for maintenance and repairs

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

3. Medium-term bank loan

Long term sources

1. Long-term bank loans

 Maybe given for fixed/varying interest rates

 Fixed provide greater certainty but maybe more expensive

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

 They require a business plan and cash flow forecast

2. Debentures

 A company can issue bonds to potential investors and pay a fixed rate of interest for the life
of the bond
  No collateral security is required

Sale of shares – equity finance

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

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

 It is a method of permanent finance

 Way to sell shares:

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

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

Debt or equity capital – evaluation

 Debt finance benefits:

o Ownership is not diluted

o No permanent increase in liabilities as the loans will be repaid

o Lenders have no voting rights

o Interest is paid before corporation tax

 Equity benefits:

o Never needs to be repaid

o Dividends must be paid whenever the business has enough profits

Other sources of long-term finance

1. Grants

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

 They do not need to be repaid

2. Venture capital

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

 Venture capitalists provide advice for the business owners

 But they may expect a part of ownership in the business

Finance for unincorporated businesses

 Unincorporated = sole trade & partnership

 Can not raise finance from the sale of shares

  Unsuccessful in raising finance through sale of debentures

 Sources of finance –

o Overdrafts

o Loans

o Credit from suppliers

o Borrow from friends and family

o Own savings

o Grants

o Crowdfunding

o Microfinance

Microfinance

 Involves selling financial services to poor, low-income customers or small businesses who do
not get finance from banks

 High interest rates

Crowd-funding

 Crowdfunding websites allow entrepreneurs to promote their business and encourage

individuals to each invest a small amount

 Effective form of promotion

 Investors may expect a return on investment

 Investors, when the business is successful will receive: initial capital plus interest, equity
stake in the business

 Must keep accurate records of thousands of investors

 Increased risks of idea being copied

Importance of business plan

 Business plan is a detailed document giving information about a business to convince

external stakeholders to lend money to the business

 Helps gain loans and credit facilities

 Helps lower risks

Financial Stakeholders
Making the decisions – factors influencing finance choice

Choosing the right finance source is utmost important for long-term success. Costly or inflexible
sources, or those that can be withdrawn quickly, can harm the business harshly. Finance managers
must carefully evaluate options before making decisions. The factors influencing such decisions are
the following:

Why finance is required and time period when

Costs
it is needed

No finance source is free to obtain,

Avoid using long-term finance for short-term
including internal finance, due to
needs to minimize risk and cost.
opportunity costs.

Use permanent capital, like issuing shares, for

Rising interest rates can increase the cost
long-term expansion or research projects for
of loans.
long term finance.

Go for short-term finances to address Listing a new public company in the Stock
immediate needs such as increasing inventory or Exchange can incur high fees and
paying creditors. promotional costs.

Once equity finance has been raised.

Dividends are not tax-deductible, unlike
loan interest
Business Finance

Why does a business require finance?

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

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

 While business expansion

 Needed to merge/acquire other businesses

 Unforeseen expenses and difficulties

 Fund research and development

Types of Expenditure

Capital expenditure

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

Revenue expenditure

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

Working Capital

Start up capital

Finance the founder of the business/entrepreneur requires in order to purchase necessary factors of
production to set up their business.

Working capital

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

  It is the lifeblood of the business

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

 Working capital = current assets - current liabilities

How much working capital is required?

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

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

 Longer the cycle, greater the amount required

Managing working capital

 Maintain smaller inventory level to minimize costs and storage needs.

 Track sales and inventory via computer system, and automate reordering.

 Prevent losses from damages and wastage by efficient inventory handling and control.

 Reduce working capital tied up in inventory by using Just in time production system.

 Ensure delivery of product is done as fast as possible to customers to speed up payment.

Businesses also have trade receivables and payables.

Trade payables can be managed by:

 Delay payments to suppliers to lengthen the credit period.

 Choose suppliers that offer credit terms, preferably the one who offers the longest window.

Trade receivables can be managed by:

 Sell products only by cash payment to avoid credit risks.

 Decrease the credit period offered to customers to improve cash flow.

Internal sources

1. Profits retained in the business

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

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

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

2. Sale of assets

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

 It will help raise permanent capital for the business

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

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

3. Reductions in working capital

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

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

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

External sources

Short term sources

1. Bank overdrafts

 Most flexible

 The bank allows the business to overdraw its account

 High interest rates

 Bank can ask the business to repay anytime

2. Trade credit

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

 Customers may switch to competitors if they provide greater credit period

 Suppliers may not provide discounts

3. Debt factoring

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

 Lowers risk for the business

 Full amount is not given

Medium-term sources

1. Hire purchase

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

 It helps avoid large initial cash payment

 Ownership of asset is obtained

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

 Leasing company is responsible for maintenance and repairs

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

3. Medium-term bank loan

Long term sources

1. Long-term bank loans

 Maybe given for fixed/varying interest rates

 Fixed provide greater certainty but maybe more expensive

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

 They require a business plan and cash flow forecast

2. Debentures

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

 No collateral security is required

Sale of shares – equity finance

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

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

 It is a method of permanent finance

 Way to sell shares:

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

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

Debt or equity capital – evaluation

 Debt finance benefits:

o Ownership is not diluted

o No permanent increase in liabilities as the loans will be repaid

o Lenders have no voting rights

o Interest is paid before corporation tax

 Equity benefits:

o Never needs to be repaid

 o Dividends must be paid whenever the business has enough profits

Other sources of long-term finance

1. Grants

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

 They do not need to be repaid

2. Venture capital

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

 Venture capitalists provide advice for the business owners

 But they may expect a part of ownership in the business

Finance for unincorporated businesses

 Unincorporated = sole trade & partnership

 Can not raise finance from the sale of shares

 Unsuccessful in raising finance through sale of debentures

 Sources of finance –

o Overdrafts

o Loans

o Credit from suppliers

o Borrow from friends and family

o Own savings

o Grants

o Crowdfunding

o Microfinance

Microfinance

 Involves selling financial services to poor, low-income customers or small businesses who do
not get finance from banks

 High interest rates

Crowd-funding

 Crowdfunding websites allow entrepreneurs to promote their business and encourage

individuals to each invest a small amount

 Effective form of promotion

 Investors may expect a return on investment

  Investors, when the business is successful will receive: initial capital plus interest, equity
stake in the business

 Must keep accurate records of thousands of investors

 Increased risks of idea being copied

Importance of business plan

 Business plan is a detailed document giving information about a business to convince

external stakeholders to lend money to the business

 Helps gain loans and credit facilities

 Helps lower risks

Financial Stakeholders

Making the decisions – factors influencing finance choice

Choosing the right finance source is utmost important for long-term success. Costly or inflexible
sources, or those that can be withdrawn quickly, can harm the business harshly. Finance managers
must carefully evaluate options before making decisions. The factors influencing such decisions are
the following:

Why finance is required and time period when

Costs
it is needed

No finance source is free to obtain,

Avoid using long-term finance for short-term
including internal finance, due to
needs to minimize risk and cost.
opportunity costs.

Use permanent capital, like issuing shares, for

Rising interest rates can increase the cost
long-term expansion or research projects for
of loans.
long term finance.

Go for short-term finances to address Listing a new public company in the Stock
immediate needs such as increasing inventory or Exchange can incur high fees and
paying creditors. promotional costs.

Once equity finance has been raised.

Dividends are not tax-deductible, unlike
loan interest
Forecasting and Managing Cashflow

What is Cashflow?

The sum of cash transaction to a business minus sum out of business.

Example: Paying the bank loan (outflow) for the money that was taken by the business via the bank
(inflow).

Without sufficient cash flow, a business can become insolvent and force the business into
liquidation.

Insolvency: when a business is unable to pay its short-term debt, it becomes insolvent.

Net cashflow:

It is the total sum of cash going in and out of the business.

Net cashflow equation:

 Cash Inflow – Cash Outflow.

Cash vs profit:

 A profitable business may fail due to insufficient cash

 Having enough cash – short term goal

 Good profits – long term goal

Why new entrepreneur need cashflow planning:

 New businesses have less credit time

 Banks may not be willing to lend

 Limited finance at the beginning

Cash Inflow:

Cash going in the business as cash payment/injection.

Common example of cash inflow are:

1. Owner’s own capital injection.

2. Bank loan payment.

3. Customer’s cash purchase.

4. Trade receivables.

The first two mentioned are easy to forecast as they have known variable.

Example:

 Bank loan payment is fixed.

 Owners know the sum of money they will inject.

Last two mentioned are difficult to forecast as they contain unknown variable:
  Customer cash purchase might change depending on sales.

 Debtor might pay money earlier or later than agreed date at times. Or in some cases, they
are very unlikely to ever pay, thus it becomes bad debt.

Bad debt: unpaid customers’ bill that are highly unlikely to ever be paid.

Cash outflow:

Cash going out of the business as payment to suppliers, workers in form of wage and more.

Common examples are:

1. Lease payment for premise.

2. Annual rent payment.

3. Utility (electricity, gas and water) bill.

4. Cost of material and payment to supplier.

5. Wage payment.

The first two are easy to forecast as they have fixed variable.

The last 3 mentioned are difficult to forecast as they have depending factors:

 Utility bill depends on season, weather etc.

 Cost of material and supplier payment can change depending on consumer demand and
credit available.

 Wage payment depends on no. of full time, part time workers and hours worked.

Creditor: suppliers who agreed to supply materials on credit and those who not been paid yet.

Cashflow forecast

Estimation of future cash inflow and outflow of a firm.

Why do business requires them for their business plan?

 Acquiring finance: Shows well thought out planning done by firm, thus firms are more lenient
to give loan to starts up.

 It makes the banks/investor thinks the chances of success are higher than they would think
without forecast.

 Their credit given by supplier is shorter so forecasting helps gather the sum for payment.

The structure of cashflow forecast might be the following:

Closing balance: cash held by a business at the end of a month after cash flow calculation.

It becomes next month’s opening balance such as 5,800$ for May.

Opening balance: cash kept by the business at the beginning of the month.

Benefit and Drawback of Cashflow Forecast:

Benefits Limitations

They show possible negative net cash flow, thus Unexpected cost increase due to
allowing business to find reason of such to fix the changes in variables, leading to
issue or gather additional finance. inaccuracies in the forecast.

By indicating possible negative cash flow in a time Incorrect assumption regarding

period, business can plan to minimize the negative sales/cost of sales by the business can
net flow. occur.

They are essential for all business plans, without it, Mistakes can be made by the person
acquiring finance by lenders are exhaustingly hard. making the forecast, leading to
 Benefits Limitations

inaccuracies.

Cause of Cashflow Problems

 Lack of planning in cases of business not efficiently forecasting out cash flow management, it
leads to higher unexpected cost and other negative factors.

 If a business keeps loosely/ill sufficient record of cash flow, then they might not chase trade
receivable and can receive trouble for late trade payable.

 Many firms allow trade credit to be competitive in the market. This is beneficial although if
the credit goes for example, 2 month long, it leads to lower short-term cash inflow and
increases the likelihood of bad debt.

 Overtrading/expanding a business rapidly without obtaining all of the necessary finance thus
a cash flow shortage develops.

 Unforeseen cost due to variable factor such as demand varying too much.

How to improve cashflow? (Increasing cash inflow)

Methods How it works Potential Drawback

A flexible source of cash from a bank that

Overdraft ·Interest rates can be high.
can be borrowed till an agreed limit.

There may be an
arrangement fee.

A fixed amount can be borrowed for an The interest costs have to be

Short term loan
agreed length of time. paid.

The loan must be repaid by

the due date.

Selling off redundant assets, which will Selling assets quickly can
Sale of assets
boost cash inflow. result in a low price.

The assets might be required

at a later date for expansion.

The assets could have been

used as collateral for future
loans.

Sale and Assets can be sold (for example to a The leasing costs add to
 Methods How it works Potential Drawback

leaseback of finance company), but the assets can be

annual overheads.
Assets leased back from the new owner.

There could be loss of

potential profit if the assets
rise in price.

The assets could have been

used as collateral for future
loans.

5. Trade Receivables:

How it works? Possible Drawbacks

Not extending credit to customers or asking customers Customer might buy from someone
to pay more quickly. who offer credit.

Selling claims on trade receivables to specialist financial

Fee needs to be paid for service.
institutions called debt factors.

100% of value isn’t returned.

Finding out whether new customers are creditworthy. It is time consuming.

Offering a discount to customers who pay promptly. Reduces profit margin on sale.

How to improve cashflow? (Improving cash outflow)

Methods How it works Potential drawback

The efficiency of the

Delay capital business may fall if
By not buying equipment, vehicles etc.
expenditure inefficient equipment is not
replaced.

Expansion becomes very

difficult.

The leasing company owns the asset The asset is not owned by
Usage of leasing
and no large cash outlay is required. the business.
 Methods How it works Potential drawback

Leasing charges include an

interest cost and add to
annual overheads.

The business will decreases the These costs will not reduce
Cut overhead costs
outflow of cash by cutting unnecessary production capacity and
that do not directly
cost. These won’t cause change in cash outflows will be
affect output
production capacity. reduced.

Future demand may be

reduced by failing to
promote the products
effectively.

4. Trade Payables:

How it works? Possible Drawbacks

Purchasing more supplies on If a business has a good credit rating, this may be easy, but
credit and not cash. in other circumstances it can be difficult.

Extend the period of time If the business is small, it is harder to insist on longer credit
taken to pay periods from suppliers.

Cash management

 Use cash flow forecast

 Plan for future and range external finance when needed

Working capital increase – permanent

 Long term loans

 Issue of shares
Costs

Uses of cost information

 Helps calculate accurate profit and losses, calculate profitability, liquidity

 Helps make informed pricing decisions – marketing department

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

 Help set future budgets

 Managers can make decisions about resource allocation

 Help in decision making

Classification of costs

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

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

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

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

5. Marginal costs – cost of producing one extra unit of output

Problem in classifying cost:

 Labour costs generally vary with production and are considered as direct costs. When there
is not enough work, businesses continue to pay their workers, making these wages fixed in
the short term. As a result, wages become overhead costs because they cannot be allocated
to any specific product or output.

 For example, TV presenters on fixed salaries are an example of indirect costs, as their pay
does not change with the number of shows they appear in. Moreover, salaries for roles in
administration, selling, and non-production are considered indirect costs because they are
not linked to specific products or services and are usually fixed over the short term.

 Electricity costs in a factory can sometimes be allocated to specific products if accurate

records are maintained. However, due to the practical challenges of tracking energy use for
each product, these costs are often considered as indirect expenses.

Cost and Profit Centre

Cost Centres:

Cost centres are areas where costs are tracked separately.

For example:

 In a manufacturing business, cost centres might include different products, departments,

factories, or specific stages in production, like assembly.

 In a hotel, cost centres could be the restaurant, reception, bar, room rentals, or conference
services.
  In a school, different subject departments are considered cost centres.

Profit Centres:

Profit centres are parts of a business where both revenues and costs are allocated to together to
measure profit.

For example:

 Each branch of a chain of shops can be a profit centre.

 Each department in a department store can be a profit centre.

 In a business that sells multiple products, each product can be a profit centre.

What are the benefits of cost and profit centres?

 Managers and employees have clear targets to aim for, which can boost motivation if the
targets are set according to the criteria of SMART.

 Targets help compare actual performance, making it easier to see which part of the business
is doing well and which is not.

 The performance of different divisions and their managers can be evaluated and compared.

 Work can be tracked, and decisions can be made about what to do next, such as whether to
keep a profit centre open or raise the price of a product.

Overhead:

Indirect expenses in a business are usually divided into four main groups:

 Production Overheads: Costs related to making products, like factory rent, equipment
depreciation, and energy use.

 Selling and Distribution Overheads: Costs for warehousing, packing, distribution, and salaries
of sales staff.

 Administration Overheads: Costs for office rent and salaries of clerical/administrative and
executive staff.

 Finance Overheads: Costs related to interest on loans.

Average cost:

Total cost divided by the number of units produced.

Average cost (AC) is calculated by:

AC=Total CostNumber of Units Produced

Full Costing:

A method of costing in which all indirect and direct costs are allocated to the products, services or
departments of the firm.

 Identify and add up all of the direct costs.

 Calculate the total overheads of the business for a given time period.
  Add the total direct costs of making the product.

 Calculate the average cost of producing each product by dividing total costs by output.

Uses of full costing:

 Full costing is clear and straightforward for businesses with only one product.

 All costs are included, so nothing is left out in the total or unit cost.

 It helps set prices by calculating the full cost and adding a profit margin.

 You can compare costs over time if you use the same method for allocating overheads.

Benefits and Drawbacks of Full costing:

Advantages Disadvantages

When two or more products are involved,

It is easy to calculate when only one product is
question arises about how the indirect
involved.
expense will be divided.

It provides a complete overview of all costs Full costing may not always match overhead
associated with producing a product, including costs to the right areas, leading to
both direct and indirect costs. This ensure inaccuracies, such as allocating too much
business understand its expenses extensively. cost based on factory space alone.

Full costing helps in setting prices by covering Poor methods of assigning overheads can
all costs and ensuring that the business makes cause differences in cost reporting between
a profit. departments and products.

It allows for a better analysis of profitability of

Using full costing for decisions can be risky
of the business by showing how much each
because it might not reflect the true cost
product contributes to covering fixed costs and
accurately.
generating profit.

Overheads should be allocated the same

way each year to ensure accurate
comparisons over time.

The cost per unit is only correct if the actual

production matches the planned output;
less output increases the cost per unit.

Additional points of full costing:

 A method of allocating indirect costs has to be selected and used.

 This method should not change over time, or cost comparisons over time will be difficult.
  Indirect costs can be allocated using several methods. Proportion of total direct costs was
used above, but other methods include:

o proportion of total factory space taken up by each product

o proportion of total labour costs incurred.

o proportion of the output of each product to total output.

Marginal Costing:

The additional cost of producing one more unit of output.

Benefits and Limitations of Marginal Costing:

Benefits Limitations

It is appropriate for short-term decision-

making, such as evaluating the impact of It does not allocate fixed costs, which can lead to
changes in production volume or pricing incomplete cost assessments.
strategies.

Marginal costing highlights the impact of

Marginal costing is suited for short-term decisions
variable costs on profitability, making it
and may not provide a complete picture for long-
easier to identify areas for cost
term strategic planning.
reduction.

It allows for quick adjustments in pricing

It can be misleading if fixed costs are significant
and production strategies based on
and need to be considered for accurate financial
variable cost information due to
planning and performance evaluation.
flexibility.

Contribution Costing:

Contribution costing: costing method that allocates only direct costs to cost centres and profit
centres, not overhead costs.

Benefit and Disadvantages of Contribution costing:

Benefits Limitations

It helps to see how much each unit It does not consider fixed costs in its
contributes to covering fixed costs and calculations, which can lead to incomplete
generating profit. financial assessments for long-term decisions.

Useful for making short-term decisions, such This method provides less information for
as deciding whether to continue with a comprehensive cost management and
product line or other related to product financial reporting compared to full costing
portfolio analysis. methods.
 Benefits Limitations

Focusing on variable costs, it makes it easier It might show fluctuations in profit based on
to manage and control these costs changes in sales level, which may not reflect
effectively. the overall financial condition of the business.

It assists breakeven analysis and profit

planning by highlighting how changes in sales
level can affect profit.

Advantages of Cost Information:

 It helps managers make more well informed decisions by showing cost details and profits.

 Helps create appropriate and precise budgets and financial plans by out indicating the
expected costs.

 Makes it easier to keep track of expenses and find ways to save money.

 It helps set the appropriate prices by understanding how much it costs to produce the good
or service.

 It helps evaluate how well different departments or products are doing by comparing their
costs and results.

 It assists in planning for the long term by showing how costs affect overall profitability.

Contribution Costing and Decisions on Stopping a Product:

 Contribution costing helps managers see which products contribute most to covering
overheads and profit.

 If a product is making a positive contribution, stopping its production might actually lower
overall profits. This is because, even though the product is not being made, the fixed
overhead costs still need to be paid, and the contribution from that product helps cover
these costs.

 Using full costing might lead to stopping a product that seems unprofitable, but contribution
costing shows the real impact on overall profits by focusing on contributions rather than just
costs.

Contribution Costing and Special Orders:

 If a business has spare capacity or wants to enter a new market, contribution costing helps
decide if accepting a lower-priced special order is beneficial. For example, hotels might offer
lower rates in off-peak seasons to attract more guests.

 Accepting a special order at a price below full cost can boost profits because fixed costs are
already covered, and any extra contribution adds to the profit.

However, there are some potential Issues:

 Existing customers might want the lower prices offered to new customers.
  Selling all products at near marginal cost could lead to overall losses.

 Lower prices can harm a brand’s exclusive image, making it visible as a cheap or low quality
product.

 Selling at contribution cost might reduce sales of products priced at full cost.

 The lower-priced items might be resold at higher prices by customers.

Circumstances where Usage of Contribution Costing is appropriate:

 Useful for setting prices that cover direct production costs and contribute towards fixed
costs.

 It helps in product decisions, whether to keep or close a product or profit centre based on its
contribution, not just profit or loss.

 Effective for accepting special orders or contracts when there is extra capacity and the order
makes a positive contribution.

Circumstances where usage of Contribution Costing is not viable:

 As it ignores the indirect costs, which can lead to overlooking higher costs for some products.

 However, it is not suitable for firms that only sell one product and need to cover all fixed
costs.

 It doesn’t consider all costs for business expansion or new product development.

 It might overlook important factors like brand image, which can be crucial in decision-
making.

Break even analysis

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

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

How to construct a Break even chart:

 The fixed cost line is horizontal, indicating that fixed costs remain the same regardless of
output level.

 Sales revenue starts at zero because there is no revenue without sales.

 The variable cost line starts at zero (0), showing that variable costs only occur with
production. It’s often not included in charts for simplicity.

 The total cost line starts at the fixed cost level and rises with variable costs added to it.
Margin of safety

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

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

Break even equation

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

 Contribution per unit = selling price – variable cost per unit

Break even analysis – benefits

 Easy to construct and interpret

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

 Helps in decision making

 Break-even analysis has equations which produces a precise break-even results.

 Gives information relating the margin of safety

 Helps in deciding which location to select.

Break even Analysis - limitations

 Costs and revenues are shown as straight lines, but in reality, costs like labour may increase
with higher output.
  High output might need price cuts, which could create multiple break-even points.

 Semi-variable costs can complicate break-even analysis.

 Break-even charts assume all units produced are sold, which isn’t always true.

 Fixed costs may change at different output levels, especially near maximum capacity.

 New businesses base break-even analysis on forecasts, which can be inaccurate.

Break even analysis – evaluation

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

 Not all costs can be classified between fixed & variable

 No allowance for inventory levels

 Unlikely that fixed costs remain unchanged throughout

Budget

What does budget mean and its purpose

Budget: It is to plan future activities by establishing performance targets, most importantly financial
ones.

Without a business planning its budget for future, it will be:

 Without a direction or goal to work towards for.

 The allocation of scarce resources of the business will be severely ineffective.

 With no plans or targets to work towards, the employees will be grimly/badly demotivated.

 Business will be unable to measure its progress by measuring the plans against actual
performance.

Budgeting process:

Setting and agreeing to financial plan for each section of the business such as HR, Marketing or
Finance.

Measuring performance

Managers should measure business performance by compare actual results to their targets for each
department of the business, analysing its weaknesses and strengths. It's important to set financial
targets such as revenue, cost and profit and non-financial ones such as customer service. Budgeting
helps track financial results and find areas that need improvement.

Benefits and Drawback of Using Budgets

Advantages Possible Disadvantages

Budgets help managers plan for the future Fixed budgets without room for changes can
and set realistic targets. For instance, a sales become unrealistic if unexpected events
budget guides departments on production occur, leading to demotivation among
levels and spending on promotions. employees.

Budgets are created usually for a short period

Budgets helps the business by ensuring they such as 12 months. Managers might make
don’t overspend. They provide a clear plan short-term decisions that harm the long-term
for how resources and money will be divided success of the business, like cutting talented
among different department/areas. staff members from its department to stay
within budget.

Effective coordination between departments

Managers might spend extra money at the
is needed to allocate resources and achieve
end of a budget period to avoid having a large
targets. Departments must work together
surplus, which could make it hard to justify the
once budgets are set. Otherwise, the
same budget next year.
business will never meet its target.
 Advantages Possible Disadvantages

Targets adjusted by SMART criteria helps

motivate people to work better. Budget
Managers need thorough training to manage
holders or managers are more
and stick to budgets effectively.
driven/incentivised when they have the
responsibility of meeting budget goals.

Estimating budgets for new or unique projects

Regular assessment of business operation are
is challenging and often inaccurate. Therefore
necessary to monitor performance and
without flexibility, it won’t succeed fulfillment
ensure budgets are followed. Plans should be
of its departmental goals as much as it was
adjusted if circumstances change.
targeted

If managers have spent less than their budget,

At the end of the budget period, variance
they might spend extra before budget period
analysis is used to compare actual results to
ends to avoid having a large surplus, which
the budget to assess performance and
could make it hard to fight for the same or
departmental success.
higher budget for its area in the next year.

Essential features of effective budgeting:

 A budget is not a forecast as a forecast predicts what might happen in the future under
certain conditions, whereas, Budget is a plan that businesses aim to achieve.

 Budgets can be set for any measurable part of an organisation, including sales, capital
spending, labour costs, and profit. It also means most cost and profit centre have budget
sets.

 It’s important for departments to coordinate when setting budgets to avoid conflicting plans.

 Managers responsible for meeting budget targets should be involved in setting them. Those
who are responsible for fulfilling budget should also be involved. This involvement helps
create targets that are highly realistic which can motivate the team. This approach is also
known as delegated budget.

 Budgets help evaluate the performance of managers in charge of cost or profit centres,
identifying those who meet or fail to meet targets.

Types of Budgets:

 Delegated budget: budget for which junior managers have been given some degree of
authority for setting and achieving.

 Incremental budgeting: It updates last year’s budget by making adjustment for the next year
but doesn’t consider unexpected events or review each department’s needs in detail.

 Zero budgeting: It sets budget to zero each year and budget holders have to justify and argue
their target level for their entire budget to receive any finance which is time-consuming. This
method encourages managers to thoroughly defend their budgets and allows adjustments
based on dynamic conditions.
  Flexible budgeting: it allows change from budget that can lead to higher than targeted profit.
They are set assuming output will stay at predicted/budgeted levels. If actual output differs,
it can cause variances from the budget, but these variances don't always mean there are
efficiency issues. It can be either favorable or adverse. They are more motivating for budget-
holders as they are more realistic.

Variance

A change from budget set that either leads to favorable or adverse outcome. These can be analysed.

Adverse Variance:

Change from the budget that leads to lower than targeted profit.

Favourable variance:

Change from the budget that leads to higher than targeted profit.

Budgeted level Actual level

Output 200 units 150 units

Direct
$40,000 $30,000
material

 This shows favourable variance of $5000 for the business as cost were lower than budgeted,
meaning it might cause higher profit. However. it is ignorant of the fact that output is 25%
lower than targeted. Thus, despite being favourable, it does not mean anything as less
material will cause less expense. Flexible budget should be used here.

 It can be used oppositely as well where higher cost however, output level is higher than
expected thus justifying the expense.

Variance analysis:

It is the difference in actual figures from the budgeted figures.

It is important to calculate and analyse the reason of such differences because:

 Measure how actual performance differs from the budget for each department.

 Understanding variances helps create more realistic budgets in the future.

 Analysing variances can help in decision making, like lowering prices if sales drop due to an
economic recession.

 It allows for accurate and objective assessment of each cost and profit centre. Basically, it's a
performance overview.

Possible cause for variance:

Potential reason for favourable variance Potential reason for adverse variance

Revenue is below budget due to fewer Revenue is higher than budget due to higher than
 Potential reason for favourable variance Potential reason for adverse variance

sales or lower prices caused by expected economic growth or shut down of a

competition. massive competitor/rival business.

Actual raw material cost is higher than Actual raw material cost is lower than planned
planned because of increased output or because of decreased output or lower material
higher material costs. costs.

Labour cost is above budget due to

Labour cost is above budget due to lower wages
higher wage rate or more time needed to
or quicker completion of assigned work.
complete work.

Overhead cost higher than expected, Overhead cost lower than expected, possibly due
possibly due to the annual rent increase to a fall in interest rate on loan or subsidized
which was above the forecasted figures. energy industry thus lower price for utility bill.

Benefit of regular variance analysis:

 Identifying potential issues early on to take corrective action, such as responding to new
competition by adjusting strategies.

 It allows managers to concentrate their efforts on major issues, thus making better decision
or getting better understanding of the issue.

Formulae:
 Added Value = Price - Total Costs

 Sales Growth (%) = (Original Sales - New Sales / Original Sales) × 100

 Revenue = Selling price × Quantity sold

 Market Capitalisation = Current share price × Total number of shares issued

 Labour Turnover (%) = (Number of workers who left / Average Number of Workers) × 100

 Time-based Salary = Wage rate × Hours Worked

 Piece-Rates = Units Produced × Rate per Unit

 Commission = Sales Revenue × Commission Rate

 Profit Share = Total Profit × Share of Profit

 Market Share (%) = (Business Sales of The Business / Total Revenue of The Industry) × 100

 OR

 Market Share (%) = (Units Sold by Business / Total Market Units Sold) × 100

 Market Growth (%) = (New Market Size - Original Market Size / Original Market Size) × 100

 Median Value = (Number of values + 1) / 2

 Range = Highest result - Lowest result

 Angle of Section (Pie Chart) = (Value of one section / Total value of all sections) × 360
degrees

 Labour Productivity = [Output Produced / Number of Workers (per hour)]

 Capacity Utilisation (%) = (Current Capacity / Total Capacity) × 100

 Profit = Price - Total Costs (per unit)

 OR

 Profit = Total Revenue - Total Costs (total)

 OR

 Profit = Contribution - Overheads

 Working Capital = Current Assets - Current Liabilities

 Opening Cash Flow = Closing Cash Flow - Net Cash Flow

 Closing Cash Flow = Opening Cash Flow + Net Cash Flow

 Net Cash Flow = Cash Inflow - Cash Outflow

 Closing Cash Balance = Opening cash balance + (Cash inflows - Cash outflows)

 Total Variable Costs = Variable Costs per Unit × Output

 Average Fixed Costs = Total Fixed Costs / Output

 Contribution = Price - Variable Costs per Unit (per unit)

 OR

 Contribution = Revenue - Total Variable Costs (total)

 Unit Contribution = Price of unit - Direct (variable) cost of unit

 Average Total Cost = Total Costs / Output

 Marginal Cost = Change in Cost / Change in Output

 Total Cost = Total Variable Costs + Total Fixed Costs

 OR

 Total Cost = (Variable Cost per Unit × Output) + Fixed Costs

 Break-Even Level of Output = Fixed Costs / Contribution

 OR

 Break-Even Level of Output = Fixed Costs / (Price - Variable Costs per Unit)

 Production Over Break-Even Point = (Margin of safety / Break-even output) * 100

 Margin of Safety = Current Level of Output - Break-Even Level of Output

 Adverse Budget Variance = Actual Cost - Budgeted Cost

 Favourable Budget Variance = Budgeted Cost - Actual Cost