IGCSE Business Studies
IGCSE Business Studies
Division of labour/Specialisation
Because there are limited resources, we need to use them the most efficient way possible.
Therefore, we now use production methods that are as fast as possible and
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as efficient (costs less, earns more) as possible. The main production method that we
are using nowadays is known as specialization, or division of labour.
"Division of Labour/Specialisation is when the production process is split up into
different tasks and each specialized worker/ machine performs one of these tasks."
Pros:
Specialized workers are good at one task and increases efficiency and output.
Less time is wasted switching jobs by the individual.
Machinery also helps all jobs and can be operated 24/7.
Cons
Boredom from doing the same job lowers efficiency.
No flexibility because workers can only do one job and cannot do others well if
needed.
If one worker is absent and no-one can replace him, the production process stops.
Why is business activity needed? (summary)
- Provides goods and services from limited resources to satisfy unlimited wants.
- Scarcity results from limited resources and unlimited wants.
- Choice is necessary for scarce resources. This leads to opportunity costs.
- Specialisation is required to make the most out of resources.
Business activity:
1.
Combine factors of production to create goods and services.
2.
Goods and services satisfy peoples wants.
3.
Employs people and pays them wages so they can consume other products.
Business Objectives:
All businesses have aims or objectives to achieve. Their aims can vary depending on their
type of business or these can change depending on situations. The most common
objectives are:
1.
Profit: Profit is what keeps a company going and is the main aim of most
businesses. Normally a business will try to obtain a satisfactory level of profits so
they do not have to work long hours or pay too much tax.
2.
Increase added value: Value added is the difference between the price
and material costs of a product. E.g. If the price when selling a pen is $3 and it
costs $1 in material, the value added would be $2. However, this does not take into
account overheads and taxes. Added value could be increased by working on
products so that they become more expensive finished products. One easy example
of this is a mobile phone with a camera would sell for much more than one without
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it. Of course, you will need to pay for the extra camera but as long as prices rise
more than costs, you get more profit.
3.
Growth: Growth can only be achieved when customers are satisfied with a
business. When businesses grow they create more jobs and make them more
secure when a business is larger. The status and salary of managers are increased.
Growth also means that a business is able to spread risks by moving to other
markets, or it is gaining a larger market share. Bigger businesses also gain cost
advantages, called economies of scale.
4.
Survival: If a business do not survive, its owners lose everything.
Therefore, businesses need to focus on this objective the most when they
are: starting up,competing with other businesses, or in an economic recession.
5.
Service to the community: This is the primary goal for most
government owned businesses. They plan to produce essential products to
everybody who need them.
These business objectives can conflict because different people in a business want
different things at different times.
Stakeholders:
Stakeholders are a person or a group which has interest in a business for various reasons
and will be directly affected by its decisions. Stakeholders also have different objectives
and these also conflict over time.
There are two 6 types of stakeholders, and these types can be classified into two groups
with similar interests.
Group 1: Profit/Money
Owners:
1.
Profit, return on capital.
2.
Growth, increase in value of business.
Workers
1.
High salaries.
2.
Job security.
3.
Job satisfaction.
Managers
1.
High salaries.
2.
Job security.
3.
Growth of business so they get more power, status, and salary.
Group 2: Value
Customers
1.
Safe products.
2.
High quality.
3.
Value for money.
4.
Reliability of service and maintenance.
Government
1.
Employment.
2.
Taxes.
3.
National output/GDP increase.
Community
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1.
2.
3.
4.
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Employment.
Security.
Business does not pollute the environment.
Safe products that are socially responsible.
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In order for products to be made and sold to the people, it must undergo 3 different
production processes. Each process is done by a different business sector and they are:
Primary sector: The natural resources extraction sector. E.g. farming, forestry,
mining... (earns the least money)
Tertiary sector: The service sector. E.g banks, transport, insurance...(earns the
most money)
Importance of a sector in a country:
Types of economiess
Pros:
Cons:
Not all products will be available for everybody, especially the poor
Pros:
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Eliminates any waste from competition between businesses (e.g. advertising the
same product)
education
defence
public transport
Pros:
Cons:
Essential businesses making losses will be closed
Government - tax
Workers - job security, how many people they will be working with
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Number of employees. Does not work on capital intensive firms that use
machinery.
Value of output. Does not take into account people employed. Does not take
into account sales revenue.
Capital employed. Does not work on labour intensive firms. High capital but
low output means low effiency.
You cannot measure a businesses size by its profit, because profit depends on too many
factors not just the size of the firm.
Business Growth
All owners want their businesses to expand. They reap these benefits:
Higher profits
Internal Growth: Organic growth. Growth paid for by owners capital or retained
profits.
Economies of scale
Spreads risks
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Owners objectives: Owners might want to keep a personal touch with staff and
customers. They do not want the increased stress and worry of running a bigger business.
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Private Sector
Sole Traders
Sole traders are the most common form of business in the world, and take up as much as
90% of all businesses in a country. The business is owned and run by one person only.
Even though he can employ people, he is still the sole proprietor of the business. These
businesses are so common since there are so little legal requirements to set up:
The owner must register with and send annual accounts to the government Tax
Office.
They must register their business names with the Registrar of Business
Names.
They must obey all basic laws for trading and commerce.
There are advantages and disadvantages to everything, and here are ones for sold traders:
Pros:
There are so few legal formalities are required to operate the business.
The owner is his own boss, and has total control over the business.
The owner has freedom to change working hours or whom to employ, etc.
He does not have to share information with anyone but the tax office, thus he
enjoys complete secrecy.
Cons:
Unlimited liability.
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Partnership
Pros:
Cons:
Unlimited liability.
No continuity, no legal identity.
Partners can disagree on decisions, slowing down decision making.
If one partner is inefficient or dishonest, everybody loses.
Limited capital, there is a limit of 20 people for any partnership.
Professionals, such as doctors or lawyers, cannot form a company, and can only
form a partnership.
Family, when they want a simple means of getting everybody into a business
(Warning: Nepotism is usually not recommended).
Note: In some countries including the UK there can be Limited Partnerships. This
business has limited liability but shares cannot be bought or sold. It is abbreviated as
LLP.
Private Limited Companies have separate legal identities to their owners, and thus their
owners have limited liability. The company has continuity, and can sell shares to friends
or family, although with the consent of all shareholders. This business can now make
legal contracts. Abbreviated as Ltd (UK), or Proprietary Limited, (Pty) Ltd.
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Pros:
The sale of shares make raising finance a lot easier.
Shareholders have limited liability, therefore it is safer for people to invest but
creditors must be cautious because if the business fails they will not get their money back.
Original owners are still able to keep control of the business by restricting share
distribution.
Cons:
o The Articles of Association: This contains the rules on how the company will be
managed. It states the rights and duties of directors, the rules on the election of directors
and holding an official meeting, as well as the issuing of shares.
o The Memorandum of Association: This contains very important information about
the company and directors. The official name and addresses of the registered offices of
the company must be stated. The objectives of the company must be given and also the
amount of share capital the owners intend to raise. The number of shares to be bought b
each of the directors must also be made clear.
o Certificate of Incorporation: the document issued by the Registrar of Companies that
will allow the Company to start trading.
Shares cannot be freely sold without the consent of all shareholders.
The accounts of the company are less secret than that of sole traders and
partnerships. Public information must be provided to the Registrar of Companies.
Capital is still limited as the company cannot sell shares to the public.
Public Limited Companies
Public limited companies are similar to private limited companies, but they are able to
sell shares to the public. A private limited company can be converted into a public limited
company by:
1.
A statement in the Memorandum of Association must be made so that it
says this company is a public limited company.
2.
All accounts must be made public.
3.
The company has to apply for a listing in the Stock Exchange.
A prospectus must be issued to advertise to customers to buy shares, and it has to state
how the capital raised from shares will be spent.
Pros:
Limited liability.
Continuity.
Potential to raise limitless capital.
No restrictions on transfer of shares.
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Cons:
Many legal formalities required to form the business.
Owners lose control, when the original owners hold less than 51% of shares.
Control and ownership in a public limited company:
The Annual General Meeting (AGM) is held every year and all shareholders are
invited to attend so that they can elect their Board of Directors. Normally, Director
are majority shareholders who has the power to do whatever they want. However, this
is not the case for public limited companies since there can be millions of shareholders.
Anyway, when directors are elected, they have to power to make important decisions.
However, they must hire managers to attend to day to day decisions. Therefore:
Shareholders own the company
Co-operatives
Cooperatives are a group of people who agree to work together and pool their money
together to buy "bulk". Their features are:
All members have equal rights, no matter how much capital they invested.
All workload and decision making is equally shared, a manager maybe appointed
for bigger cooperatives
producer co-operatives: just like any other business, but run by workers.
retail co-operatives: provides members with high quality goods or services for a
reasonable price.
Other notable business organizations:
Close Corporations:
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This type of business is present in countries such as South Africa. It is like a private
limited company but it is much quicker to set up:
Maximum limit of 10 people.
You only need a simple founding statement which is sent to the Registrar of
Companies to start the business.
Two businesses agree to start a new project together, sharing capital, risks and profits.
Pros:
Shared costs are good for tackling expensive projects. (e.g aircraft)
Pooled knowledge. (e.g foreign and local business)
Risks are shared.
Cons:
Profits have to be shared.
Expansion is much faster because the franchisor does not have to finance all
new outlets.
The failure of one franchise could lead to a bad reputation of the whole
business.
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The chance of failure is much reduced due to the well know brand image.
Many business decisions will be made by the franchisor (prices, store layout,
products).
Less independence
May be unable to make decisions that would suit the local area.
to close loss-making services, even if this mean some consumers are no longer
provided with the service.
Pros:
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These businesses are run by local government authorities which might befree to
the user and financed by local taxes. (e.g, street lighting, schools, local library, rubbish
collection). If these businesses make a loss, usually a governmentsubsidy is provided.
However, to reduce the burden on taxpayers, many municipal enterprises are
being privatised.
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All business activity has benefits and undesirable effects on society. These reasons are
why governments want to have some control over business activity:
Possible benefits:
Production of useful goods to satisfy customer wants.
Business earn foreign currency in exports and this could be spent on imports.
Possible undesirable effects:
Low wages and unsafe working conditions for workers because businesses
want to lower costs.
Pollution
Monopolies
Governments all have aims for their country, and this is what they are:
Low inflation.
Low unemployment.
Economic growth.
Balance of payments.
Low inflation:
Inflation occurs when prices rise. When prices rise rapidly many bad thing could happen:
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Workers wages buy less than before. Therefore their real income(how much
you can buy with so much money) falls. Workers will be unhappy and demand for higher
wages.
Prices of local goods will rise more than that of other countries with lower
inflation. People may start buying foreign goods instead.
It would cost more for businesses to start or expand and therefore it does
not employ as many people.
Some people might be made redundant so that the business can cut costs.
When people are unemployed, they want to work but cannot find a job. This causes
many problems:
Unemployed people do not work. Therefore national output will belower than
it should be.
Economic growth
A country is said to grow when its GDP (Gross Domestic Product) is increasing. This is
the total value of goods produced in one year. The standards of living tends to increase
with economic growth. Problems arise when a country's GDP fall:
The country's output is falling, fewer workers are needed
andunemployment occurs.
Businesses will not expand because they have less money to invest.
Economic growth is not achieved every year. There are years where the GDP falls and
the trade cycle explains the pattern of rises and falls in national GDP.
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Recession: Because overspending caused the boom, people now spend too little.
GDP will fall and businesses will lose demand and profits. Workers may lose their jobs.
Slump: A long drawn out recession. Unemployment will peak and prices will fall.
Many firms will go out of business.
After all of this happens the economy recovers and begins to grow again. Governments
want to avoid a boom so that it will not lead to a recession and a slump. Currently, the
government of China is spending a lot of money so that their economy would continue to
grow and avoid a boom.
Balance of payments
Exports earn foreign currency, while imports are paid for by foreign currency (or
vice versa). The difference between the value of exports and imports of a country is
called balance of payments. Governments try to achieve a balance in imports and
exports to avoid a trade deficit, when imports are higher thanexports. Of course, the
government will lose money and their reservoir of foreign currency will fall. This
results in:
If the country wants to import more, they will have to borrow foreign currency to
buy goods.
The country's currency will now worth less compared to others and can buy less
goods. This is called exchange rate depreciation.
Government economic policies
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Governments want to influence the national economy so that it would achieve their
aforementioned objectives. They have a lot of power over business activity and can pass
laws to try to achieve their goals. The main ways in which governments can influence
business activity are called economic policies. They are:
Fiscal Policy: taxes and public spending.
Income tax
Profits tax
Import tariffs
Income tax
Managers will cut costs for more profit. Workers might be maderedundant.
Businesses producing luxury goods will lose the most, while others
producing everyday needs will get less affected.
Profits tax or corporation tax
Owners will get less return on capital employed. Potential owners will
be reluctant to start their own business if the profit margin is too low.
Indirect taxes
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These taxes are a percentage on the price of goods, making them more expensive.
Governments want to avoid putting them on essential goods such as foods. A rise it it
would mean:
The effect would be almost the same as that of an increase in income tax. People
would buy less but they would still spend money on essential goods.
Again, real incomes fall. Costs will rise when workers demand higher wages.
Import tariffs and quotas
Governments put tariffs on imports to make local goods look more competitive and also
to reduce imports. When governments put import tariffs on imports:
Sales of local goods become cheaper than imports, leading toincreased sales.
Consumers who took out loans such as mortgages will now have lessdisposable
income. They will spend less on other goods.
Demand will fall for businesses who produces luxury or expensivegoods such
as cars because people are less willing to borrow.
These policies aim to make the countries economy more efficient so that they can produce
more goods and compete in the international economy. In doing so their GDP will rise.
Here are some policies:
Privatisation: Its aim is to use profit as an incentive to increase efficiency.
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responsibilities to consumers
location decisions
Undesirable effects created by business activity make governments want to control
business activity:
Monopolies.
Governments can pass laws to restrict and ban certain dangerous goods such as:
Weapons like guns and explosives.
Drugs
Consumers are easily misled by advertising. It is because consumers lack the technical
knowledge and advertising can be very persuasive. In the UK, these laws are passed to
protect customers from being exploited by businesses:
Weights and Measures Act: to stop underweight goods being sold to
customers.
Consumer Credit Act: makes it illegal to not give customers their copy of the
credit agreement to check how much money they really have.
Monopolies could cause a lot of harm to an economy because there are nobody to
compete against them:
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Unfair dismissal
Wage protection
Protection against unfair discrimination:
Often workers are discriminated in a job because of various reasons. There are laws that
protect the employee from such reasons to be discriminated against:
Sex Discrimination Act: people of different genders must have equal
opportunities.
Race Relations Act: people of all races and religions mush have equal
opportunities.
do not insist on excessively long shifts and provide breaks in the work
timetable.
Managers not only provide safety for their employees only because laws say so.
Some believe that keeping employees safe and happy improves their motivationand
keeps them in the business. Others do it because it is present in their moral code. They
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are then considered making an ethical decision. However, in many countries, workers
are still exploited by employers.
Protection against unfair dismissal
Employees need protection from being dismissed unfairly. The following reasons for the
employee to be dismissed is unreasonable:
for joining a trade union.
Wage Protection
Employers mus pay employees the same amount that has been stated on thecontract of
employment, which states:
Hours of work.
Pros:
Prevents strong employees to exploit unskilled workers who could not easily find
work.
Cons:
Increases costs, increases prices.
Higher paid workers want higher wages to keep on the same level difference as
the lower paid workers. Costs will rise.
Location of Industry
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They discourage firms from locating in overcrowded cites or sites noted for
their natural beauty.
How governments will influence the decisions of firms to locate:
They can grow into very important businesses employing thousands of workers
and producing output worth millions of dollars.
Provides more choice for customers. They compete against bigger companies.
They are often managed in a very flexible way, and is quicker to adapt to
changing demands.
Governments help them by:
Lower rates of profits tax, so they can have more retained profit.
Successful exporters earn more money and have to pay more profits tax.
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Trying to keep the local currency as stable as possible to make it easier for
businesses to know how much they are going to make from exports.
Offering credit facilities. This means that if a foreign customers refuses to pay
for goods, the company could be compensated by the government.
Businesses in the economic and legal environment
Businesses could not ignore the power of the government in controlling business
activity. Multinationals are an exception although normally businesses cannot afford to
move to other countries. Government decisions create the environmentin which
businesses will have to operate and adapt to. The environment created
by legal and economic controls are one of the constraints to managers when making
decisions.
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Increased competition.
Environmental issues.
Here is a table from the book giving examples and the possible impacts on
businessactivity:
Technological changes
Pros:
New products encourage customers to buy more.
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New production methods can be adapted very quickly which gives businesses
more flexibility in meeting consumer wants.
Businesses that do not develop new products will fail, leaving workers
unemployed.
To make these changes work better, workers need to be involved in the changes.
Workers might be told why the new machines are necessary and how they will be trained
to use them, as well as letting them suggest ways to make work more efficient with the
machines. It leads to more opportunities for trained and skilled staff and can lead
to new ideas and products.
Competition
Most businesses have competitors. Most business decisions are based on:
What competitors are doing?
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- Opinion A: Keeping the environment clean is too expensive. We want to keep prices
low and this is what consumers want too.
Protecting the environment is too expensive and reduce profits.
Firms could become less competitive compared to others who are not
environmentally friendly.
Consumers are becoming more socially aware. More now prefer firms that are
environmentally friendly which could become an marketing advantage.
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Consumers are becoming more socially aware, and many of them will stop buying
goods from companies which pollute the environment, harming a business'reputation
and image. Bad publicity means lower sales. If they want to keep their sales revenue
up firms would have to adapt to more environmentally friendly production processes
again.
Pressure groups are becoming very powerful nowadays. They can severely damage
businesses that are not socially responsible.
Protests
They have popular public support and has a lot of media coverage.
What a company is doing is unpopular but not illegal. (e.g. testing drugs on
rats)
The cost of making the company cleaner is more than losses that could be made
by losing image and sales.
The firm supplies other firms and not customers, public support will be less
effective.
Environmental issues and cost-benefit analysis
Cost-benefit analysis requires and awareness of external costs (costs to the rest of
society) and external benefits (gains to the rest of society). Here are some examples.
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Social costs are worked out from private costs and external costs.
Social benefits are worked out from private benefits and external benefits.
In other words:
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All business activity involves some kind of cost. Managers need to think about the
because:
Whether costs are lower than revenues or not. Whether a business will make a
profit or not.
Fixed costs = stay the same regardless of the amount of output. They are there
regardless of whether a business has made a profit or not. Also known as overheads.
Variable costs = varies with the amount of goods produced. They can be
classified as direct costs (directly related to a product).
The breakeven chart show the safety margin which is the amount by which sales
exceed the breakeven point.
Cons:
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Does not take into account discounts or increased wages, etc. and other things that
vary with time.
Break-even point: the calcultion method.
It is possible to calculate the breakeven point withought having to draw the graph. We
need two formulas to achieve this:
Direct costs: costs that are directly related to the production of a particular
product.
Marginal costs: how much costs will increase when a business decides to
produce one more unit.
Indirect costs: costs not directly related to the product. They are often
termed overheads.
Purchasing economies: Larger capital means you get discounts when buying
bulk.
Marketing: More money for advertising and own transportation, cutting costs.
Financial: Easier to borrow money from banks with lower interest rates.
Technical: They can now buy specialised and latest equipment to cut overall
production costs.
However, there are diseconomies of scale which increases average costs when a
business grows:
Low morale: People work in large businesses with thousands of workers do not
get much attention. They feel they are not needed this decreases morale and in turn
efficiency.
Slower decision making: More people have to agree with a decision and
communication difficulties also make decision making slower as well.
Budgets and forecasts: looking ahead
Business also needs to think ahead about the problems and opportunities that may arise
in the future. There are things to try to forecast such as:
wage increases.
There are some forecasting methods:
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Past sales could be used to calculate the trend, which could then be extended into
the future.
Create a line of best fit for past sales and extend it for the future.
Panel consensus: asking a panel of experts for their opinion on what is going to
happen in the future.
Market research.
Budgets
"Budgets are plans for the future containing numerical and financial targets". Better
managers will create many budgets for costs, planned revenue and profit and combine
them into one single plan called the master budget.
They can be used to see how well a business is doing by comparing the budget with
the result in the process of variance analysis. Thevariance is the difference between
the budget and the result.
If workers get a say in choosing the objectives for a budget, the objectives would be
more realistic since they are the ones that are going to do it and it also gives them
better motivation.
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Every end of the year, a final accounts must be produced which gives details of:
Profits and losses made.
Purchase orders: requests for buying products. It contains the quantity, type
and total cost of goods. Here is an example.
Delivery notes: These are sent by the firm when it has received its goods. It
must be signed when the goods are delivered.
Invoices: These are sent by the supplier to request for payment from the firm.
Credit notes: Only issued if a mistake has been made. It states what kind of
mistake has been made.
Receipts: Issued after an invoice has been paid. It is proof that the firm has paid
for their goods.
Methods of making payment
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Cash: The traditional payment method. However, many businesses do not prefer
to use cash for a number of security reasons. When cash is paid, a petty cash
voucher is issued by the person in charge of the firm's money who also signs it to
authorise the payment. The person making the purchase signs it too to show that the
money has been recieved.
Credit card: Lets the consumer obtain their goods now and pay later. If the
payment is delayed over a set period then the consumer will have to pay interest.
Debit card: Transfers money directly from user's account to that of the
seller.
Recording accounting transactions
Businesses usually use computers to store their transactions so that they can be easily
accessed, calculated and printed quickly.
Creditors: They want to see whether the company can afford to pay their loans
back or not.
Government: Again, they want to check to see if correct taxes are paid. They also
want to see how well the business is doing so that it can keep employing people.
This account shows how the gross profit of a business is calculated. Obviously, it will
contain this formula:
Note that:
Gross profit does not take to account overheads.
Only calculate the cost of goods sold, and forget the inventory.
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Depreciation is the fall in value of a fixed asset over time. It is also counted as an
indirect cost to businesses.
As for limited companies, there are a few differences with the normal profits and loss
account:
Profits tax will be shown.
It needs to have an appropriation account at the end of the profits and loss
account. This shows what the company has done with its net profits, in other words, how
much retained profit has been put back into the company.
The balance sheet shows you a business's assets and liabilities at a particular time. The
balance sheet records the value of a business at the end of the financial year. This is what
it contains:
Fixed assets: land, vehicles, buildings that are likely to be with the business for
more than one year. They depreciate over time.
Current assets: stocks, inventory, ash and debtors that are only there for a short
time.
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Net assets: Shows the net value of all assets owned by the company. These assets
must be paid for or finance by shareholders' funds orlong term liabilities. The
formula:
Net assets = Fixed assets + Working capital
Shareholders' funds: The total sum invested into the business by its owners.
This money is invested in two ways:
- Share capital: Money from newly issued shares.
- Profit and loss reserves: Profit that is owned by shareholders but not distributed
to them but kept as part of shareholders' funds.
Capital employed: Long-term and permanent capital of a business that has
been used to pay for all the assets. Therefore:
Capital employed = net assets
Capital employed = Shareholders' funds + long-term liabilities
Without analysis, financial accounts tell us next to nothing about the performance and
financial strength of a company. In order to do this we need to compare two
figures with each other. This is called ratio analysis.
The most common ratios used are for comparing the performance and liquidityof a
business. Here are five of the most commonly used ratios.
Gross profit margin: If this rises, it could mean that either they are increasing
added value or costs have fallen.
Gross profit margin = Gross profit/Sales revenue * 100
Net profit margin: The higher the result, the more successful the managers are.
This could be compared with other businesses too.
Net profit margin = Net profit before tax/Sales revenue * 100
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Ratios used for analysing liquidity: This is too see how much cash a business has to
pay off all of its short-term debts.
Current ratio: This ratio assumes that all current assets could be converted into
cash quickly, but this is not always true sincestock/inventory could not be all sold in a
short time. Generally, a result of 1.5 to 2 would be preferable, so that a business could pay
all of its short-term debts and still have half of its money left.
Current ratio = Current assets/Current liabilities
Acid test or liquid ratio: This type of analysis neglects stocks, but it is similar to
the current ratio analysis.
Acid test ratio = (Current assets - Stocks)/Current liabilites
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Cash inflows:
Sale of goods for cash.
Borrowing from a source (but will inevitably lead to cash outflow in the future).
Repaying loans.
Repaying creditors.
Cash flow cycle
A cash flow cycle explains the stages that are involved in the process of cash out and
finally into the business. This is what happens:
The longer it takes for cash to get back to the business, the more they will needworking
capital to pay off their short-term debts. This cycle also helps us understand
the importance of cash flow planning. This is what happens when a company is short
on cash:
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The company will want to insist customers on paying in cash, but they might lose
them to competitors who let them pay in credit.
There could be a liquidity crisis when it does not have enough cash to pay
for overheads (bills, rent, etc.) and the business might be forced to close down by its
creditors.
Managers need to plan their cash flow so that they do not end up in these positions.
However, when calculating profit, we also take into account credit that debtors owe us.
Therefore, a company might make $20,000 in profit but only $10,000 is received in cash
because half of it is payed by credit card.
As you can see, the closing bank balance in February is negative, which means that it has
become overdrawn.
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Because of the aforementioned problems, it is important for the manager to get an idea of
how much cash will be available for which months. A cash flow forecastcan tell the
manager:
How much cash is available for paying bills, loans and other fixed assets.
Whether the business has too much cash which could be more useful if used.
Uses of cash flow forecasts:
Managing cash flow: If a business has too much cash, it should put the cash
to some good use quickly. Some examples of this is: repaying all loans for less interest,
paying creditors immediately to getdiscounts.
Arrange for future loans with the bank when you anticipate negative cash flow.
Reduce or delay planned expenses until cash is available, e.g. ask to pay in
credit.
Increasing forecasted cash inflow, e.g. by getting a part-time job.
For more information on the importance of cash flow visit page 132 in the book.
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All all cases, businesses need finance for either capital expenditure or revenue
expenditure:
Sources of finance
There are many ways to obtain finance, and they can be grouped in these ways.:
Internal or external.
Short-term, medium-term or long-term.
Internal finance:
This is finance that can be taken from within the business itself. There are advantages and
disadvantages to each of them:
Retained profit: Profit reinvested into a business after part of the net profit has
been distributed to its owners.
o
+ Retained profit does not have to be repaid unlike a loan.
o
- New businesses do not have much retained profit.
o
- Retained profit from small firms are not enough forexpansion.
o
- Reduces payment to owners/shareholders.
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Sale of existing assets: Firms can get rid of their unwanted assets for cash.
o
+ Makes better use of capital that is not used for anything.
o
- Takes time to sell all of these assets.
o
- New businesses do not have these assets to sell.
Owners' savings: Only applies to businesses that do not have limited liability.
Since the legal identity of the business and owners are the same, this method is
considered to be internal.
o
+ Available quickly.
o
+ No interest paid.
o
- Limited capital.
o
- Increases risks for owners.
External finance:
This is money raised from individuals or organisations outside a business. It is the most
common way to raise finance.
Issue of shares: Same as owners' savings, but only available to limited
companies.
o
+ A permanent source of capital that does not have to berepaid.
o
+ No interest paid.
o
- Dividends will have to be paid.
o
- Ownership of the company could change hands to themajority
shareholder.
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Short-term finance:
This is working capital required to pay current liabilities that is needed up to three
years. There are three main ways of acquiring short-term finance:
Overdrafts: Allows you do draw more from your bank account than you have.
o
+ Overdrafts can vary every month, making it flexible.
o
+ Interest only needs to be paid only to the amount overdrawn.
o
+ They can turn out cheaper than loans.
o
- Interest rates are variable, and often higher than loans.
o
- The bank can ask for the overdraft back immediately anytime.
Trade credits: Delaying payment to your creditors, which leaves the company
with better cash flow for that month.
o
+ It is almost a short-term interest free loan.
o
- The supplier could refuse to give discounts or to supplyyou at all if
your payments are delayed too much.
Factoring of debts
Medium-term finance:
Finance available for 3 to 10 years that is used to buy fixed assets such as machinery and
vehicles.
Bank loans
Hire purchase: This allows firm to pay for assets over time in monthly payments
which has interest.
o
+ The firm does not have to come up with a lot of cashquickly.
o
- A deposit has to be paid at the start of the period of payment.
o
- Interest paid can be very high.
Leasing: Hiring something. Businesses could use the asset but will have to pay
monthly. The business my choose to buy the asset at the end of the leasing period. Some
businesses sell their fixed assets to a leasing company who lease them back so that they
could obtain cash. This is called sale and leaseback.
o
+ The firm does not have to come up with a lot of cash quickly.
o
+ The leasing firm takes care of the assets.
o
- The total leasing costs will be higher than if the business has purchased
it.
Long-term finance:
This kind of finance is available for more than 10 years. The money is used for long-term
fixed assets or the takeover of another company.
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Issue of shares: Shares are sometimes called equities, therefore issuing shares
is called equity finance. New issues, or shares sold by public limited companies can
raise near limitless finance. However, a business will want to give the right issue of
shares so that the amount bought by shareholders will not upset the balance of
ownership.
o
+ A permanent source of capital that does not have to be repaid.
o
+ No interests paid.
o
- Dividends will have to be paid. And they have to be paid after tax (so
taxes become higher), while interest on loans are paid before taxes.
o
- Ownership of the company could change hands to the majority
shareholder.
Long-term loans or debt finance: Loans from a bank, and this is how they are
different from issuing shares:
o
Interest is paid before taxes, it is counted as an expense.
o
Interest has to be paid every year but dividends only need to be paid if
the firm has maid profit.
o
They are not permanent capital.
o
They need collateral.
Debentures
Purpose and time period: Managers need to match the source of finance to
its purpose. It is quite simple, short-term finance is used to buy current assets and
things like that, while long-term finance forfixed assets and similar things.
Status and size: Bigger companies have more choices of finance. They
pay less interest to banks.
Control: owners lose control if they own less than 51% of shares in their
company.
Risk and gearing: loans raise the gearing of a business, meaning that
their risk is increased. Gearing is can be obtained by calculating
the percentage of long-term loans compared to total capital. If long-term loans take
up more than 50% of total capital, then the business would be called highly geared.
This is very risky because the business will have to pay back a lot of its loans and has to
succeed to do so. Banks are less willing to lend to these businesses, so they will have to
find other types of finance.
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Forecasts have to show that the firms are solvent, i.e. able to repay the loan and
the interest back.
Gearing ratio.
Business plans
Banks will want to see a business plan if they are to lend to most businesses, especially a
newly created one. A business plan contains:
Objectives.
How the business will be operated.
How the business will be financed.
By creating a business plan owners will have to think carefully ahead about their business
to ensure the best plan possible. These are things they will need to consider:
Here is an example of a business plan from the book, it shows the things you need to put
in a business plan:
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For simpler businesses in which the owner employs only himself, there is no need for
an organisational structure. However, if the business expands and employs other people,
an organisational structure is needed. When employing people, everybody needs a job
description. These are its main advantages:
People who apply can see what they are expected to do.
People who are already employed will know exactly what to do.
Here is an example of a Job Description taken from the book:
When there are more than one person in a small business and they all do different things,
it means that they are specialising in different jobs.
Delegation
Delegation refers to giving a subordinate the responsibility and authority to do a
given task. However, the final responsibility still lies with the person who delegated
the job to the subordinate. Here are the advantages of delegation for managers and
employees, as well as why some managers choose not to delegate.
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Managers are scared that the subordinate will do tasks better than them, making
them feel insecure.
Delegation must mean:
Organisational charts
Eventually, when a business grows larger and employs many people, they will have to
create an organisational chart to work out a clear structure for their company. Here
is another example of an organisational chart from the book:
It shows the chain of command, which is how power and authority is passed
down from the top of the hierarchy, and span of control, meaning how many
subordinates one person controls, of the business.
Advantages of an organisational chart:
The charts shows how everybody is linked together. Makes employees aware of
the communication channel that will be used for messages to reach them.
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Employees can see their position and power, and who they take orders from.
Gives people a sense of belonging since they are always in one particular
department.
Chain of command and span of control:
Here are two organisations, one having a long chain of command and the other a wide
span of control. Therefore, the longer the chain of command, the taller the business
hierarchy and the narrower the span of control. When it is short, the business will have a
wider span of control.
In recent years, people have began to prefer to have their business have a wider span of
control and shorter chain of command. In some cases, whole levels of management were
removed. This is called de-layering. This is because short chains of commands have
these advantages:
Managers are closer to all employees so that they can understand the business
better.
Spans of control will be wider, meaning that the manager would have to take
care of more subordinates, this makes:
o
The manager delegate more, and we already know the advantages of
delegation.
o
Workers gain more job satisfaction and feel trustedbecause of
delegation.
However, if the span of control is too wide, managers could lose control. If the
subordinates are poorly trained, many mistakes would be made.
Functional departments
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Here is an example of an organisational chart from a larger business from the book:
Not only are there departments, there are also other regional divisions that
take care of outlets that are situated in other countries. They use the local knowledge to
their advantage.
There are some departments which do not have a distinctive function but still
employs specialists and report directly to the CEO/Board of Directors. These
departments are the IT department, and theEconomic Forecasting department.
Some say the HR department fits in this category. These departments give specialist
advice andsupport to the board of Directors and line managers, and the managers of
these departments are called staff managers. They are often very highly
qualified personnel who specialises in only their area.
Pros:
Staff managers help and provide advice for line managers on things such as
computer systems.
Cons:
There may be conflict between the two groups on important decisions and views.
Line employees may be confused and do not know who to take orders form, line
or staff managers.
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Decentralisation
Decentralisation refers to a business delegating important decisions to lower
divisions in the business. In a centralised structure important decisions are taken at
the centre, or higher levels of management.
More delegation.
It is dangerous to let the lower-level management make all the decisions. Therefore, it is
wise for the central management to decide on major issues, long-term
decisions, growth and business objectives. If these issues are notcentralised then
there would be a lack of purpose or direction in the business.
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Organising:
A manager cannot do everything by himself. Therefore, jobs must be delegated to
employees. Employees need sufficient resources to complete their job, so managers
need to organise people and resources effectively.
Co-ordinating:
Commanding:
Controlling:
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control of employees.
There are different views of why some managers are better than others. Some say that
managers are born that way, while others say good managers are trained. However, good
managers do have these distinct characteristics:
intelligence: to understand difficult ideas and deal with different issues.
energy and enthusiasm: to work with high effort and involvement so that
others will follow.
Styles of leadership:
Different managers use different styles of leadership, and each one makes subordinates
react in a certain way. It is important for the managers to choose the appropriate
leadership style for the right situation. These styles will be discussed in Chapter 13:
Motivation at work.
There are three types of decisions which has their type of importance and the length of
time that is is going to affect the business. They are:
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Strategic: These are very important decisions that will affect the overall success
of an organisation. They are long-term decisions such as company goals or growth. They
are usually taken by the top management.
Tactical: These are decisions that are less important decisions that are taken
more frequently. They can include: new ways to train staff, new transportation routes
used, advertising methods, etc... They are usually taken by the middle management.
In business, decisions need to be made and the risks need to be accepted. People like sole
traders who have unlimited liability risk loosing all that they own by setting up a business
are called entrepreneurs. As we already know they are themanagers and risktakers of a company. Managers in a limited company are not "real" entrepreneurs,
because they are not risking their assets but the capital of the shareholders.
Risks are the results of failure. Risks cannot be eliminated, but they can be reduced by
the process of making decisions. Here are the steps:
Set goals: It is impossible to make decisions if the aims are not clear.
Identify and analyse the problem: Managers all make decisions to solve a
problem. This problem might be how to use your salary in the most efficient way possible,
how to spend the rest of your life, etc... It is imperative that you must understand the
problem before finding a solution for it. Otherwise, you might make the wrong decision.
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Recruiting staff.
Disciplining staff
The role of this department is becoming more and more important as the cost of hiring
staff rises, so that it is crucial for the HR department to manage people firmly and fairly.
An unsuccessful HR department results in a high staff turnover(people leaving the
business early). The department must also make sure that the business and staff comply
with all employment laws.
Marketing department:
Market research for:
o
New products.
o
New markets.
o
New opportunities.
Planning the release of new products, often working with the Production and
R&D departments.
Decide on the best marketing mix (discussed later) for a product and
implementing it.
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The marketing department is crucial for the business to keep in touch with its customers.
No business can survive without this kind of function.
Accounting and finance department:
Keeping the quality high to meet the standards of the consumers. All staff will
need to co-operate because poor quality is normally blamed on bad staff.
Administration department:
The responsibilities of the Administration department varies with the business it is in.
For example, in smaller businesses, the administration department would be the same as
the Accounts and Finance department. A larger business will have more specialized
administrative department. These are what the the department does:
Clerical and office support services: Ensure the smooth running of all other
departments.
o
Sorting of incoming mail and sorting and franking of outgoing mail.
o
Reception will greet visitors, answer calls, and schedule rooms for
meetings.
o
Office tasks will include filing all records. e.g. visitors and calls.
o
Information and data processing.
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The widespread use of computers means that many workers in all departments can do
some of these tasks by themselves (clerical and support services), reducing the function of
the Administration department and make them less common in businesses.
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Motivation theories
People work very hard when they are working for themselves. When they work for other
people, less so. Managers have been looking into what makes employees contribute their
fullest to the company and these studies have resulted four main theories of motivation.
F.W.Taylor
Theory:
Work is broken down into simple processes, and more money is paid which will
increase the level of productivity an employee will achieve.
Workers are seen rather like machines, and this theory does not take into
account non-financial motivators.
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Social needs: the need to belong and have good relationships with co-workers.
Cons:
Some levels are not present in some jobs.
Managers need to identify the levels of motivation in any job before using it to
motivate employees.
Herzberg
To Herzberg, humans have hygiene factors, or basic animal needs of humans. We also
have motivational factors/motivators, that are required for the human to grow
psychologically.
Hygiene factors:
Status.
Security.
Working conditions.
Salary.
Motivational factors:
Achievement.
Recognition.
Personal growth/development.
Advancement/promotion.
Job satisfaction.
To Herzberg, if the hygiene factors are not satisfied, they will act asdemotivators.
They are not motivators, since the motivating effect quickly wears off after they have
been satisfied. True motivators are are Herzberg's motivational factors.
McGregor
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McGregor splits his theory into what managers believe. One type believes in theory X,
while the other type believes in theory Y. Here is the table:
Here are some differences in how a X manager will work and how an Y managerwill
work:
X managers believe that people are naturally lazy, and has to be pushed
with external factors to work harder. (e.g. higher pay).
Y managers believe that people want to do a good days work but need a
good environment to do the work. A better environment is aninternal factor.
Security: knowing that you are physically safe and have job security.
Esteem needs (self importance): feeling important, feeling the job you do is
important.
Job satisfaction: enjoyment from the feeling of having done a good job.
non-financial motivators
Pay may be the basic reason why people work, but different kinds of pay can motivate
people differently. Here are the most common methods of payment:
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Wages
Wages are paid every week, in cash or straight into the bank account, so that the
employee does not have to wait long for his/her money. People tend to pay wages
to manual workers. Since wages are paid weekly, they must be calculated every week
which takes time and money. Wages clerks are paid to do this task. Workers get extra
pay for the overtime that they do. There are some ways that wages could be calculated:
Time rate: Time rate is payment according to how many hours an employee has
worked. It is used in businesses where it is difficult to measure the output of a worker.
+ Easy to calculate the wage of the employee. A time-sheet must be filled out by
the Accounts department to calculate the wage.
- Both good and bad workers get paid the same wages. Therefore,
moresupervisors are needed to maintain good productivity. a clocking-in system is
needed to know how many hours an employee has done.
Here is an example of a wage slip and time-sheet:
They show:
Basic pay + Overtime = Gross Pay
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Taxes
Pension
Union fees
- Workers will often neglect quality, and businesses will need aquality control
system which is expensive.
- Workers who focus on quality will earn less. Tension is caused when some
workers earn more than others.
Salaries
Salaries are paid monthly, and normally straight into the bank account. They are
usually for white collar workers. A salary is counted as an amount per year that is
divided into 12 monthly accounts. You do not usually receiveovertime. Managers
only need to pay their workers once a month, and since the amount is transferred by the
bank, the manager loses much less time and money calculate salary.
Salaries are usually a standard rate, but other rewards could be given to employees:
Commission: A percentage is paid, usually to sales staff, depending on
the value of goods they have sold. Workers are encouraged to sell more. However, they
could persuade customers to buy products they don'r really want, making the company
look bad. Just like the piece rate, in a bad month where there are little sales, worker's pay
will fall.
Bonus: A lump sum paid to employees who have done well. It is usually paid at
the end of the year or before holidays. However, this could cause jealousy between
workers. Giving bonuses to a team works better.
Share ownership: Employees receive some shares from the company. They
will either benefit from dividends or sell the shares when their price has risen. They
will be more motivated because they feel like a part of the company.
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There are other factors that motivate people in a business, and they are often
calledperks or fringe benefits. They may be having free accommodation, free car, etc...
However, when you look at it, it is just money in different forms. Here is a list of these
motivators:
Children's education.
Free Healthcare.
Company vehicle.
Free accommodation.
Share options.
Expense accounts.
Pension.
Free holidays.
Job satisfaction:
Employees will become more motivated by enjoying the job they do. Job satisfaction can
come in different ways. However, there are some factors thatdemotivate employees if
they are not satisfied, and must be satisfied before the motivators can take effect. Here
are some things that make workers' jobs satisfying:
Pay.
Promotion.
working conditions.
Fringe benefits.
Management
Working hours.
Colleagues, etc...
Herzberg and Maslow stresses that things such as responsibility recognition is also
crucial to provide job satisfaction. Letting workers contribute to the job would also help,
making jobs less boring and more creative. Here are some policies to increase job
satisfaction:
Job rotation:
Workers in a production line can now change jobs with each other and making their
jobs not so boring. It helps train the employee in different aspects of their jobs so that
they can cover for other employees if they do not show up.
Job enlargement:
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Adding tasks of a similar level to a worker's job. Job enlargement simply gives
more variety to employees' work which makes it more enjoyable.
Job enrichment:
Adding tasks of a higher level to a worker's job. Workers may need training, but they
will be taking a step closer to their potential. Workers become morecommitted to their
job which gives them more satisfaction.
This is when group of workers are given total responsibility to organise themselves
and perform a task. This makes the employees feel more important, as well as giving
them a sense of belonging when they are part of a team. If they organise themselves
differently every time, the team could get job enlargementand job enrichment too!
Leadership
Studies have shown that leadership has a great impact on worker's motivation. Good
managers have leadership skills that inspire their workers to work better, as well as
directing them with a common goal. Managers use many styles of leadership, and they
can be summarised into 3 main styles:
Autocratic leadership:
The manager controls all aspects of their subordinates' work.
The manager discusses tasks with his employees before making decisions.
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The style of leadership used can vary depending on situations where they are the most
effective.
Departments withing a business are good examples of formal groups. From time to
time different groups might be set up to cope with different problems or do different
tasks. Sometimes people from different departments could come together in a group to do
a team project.
There are can be many informal groups in a business that can increase the motivation of
workers because they have a true sense of belonging. e.g. There is a group of factory
workers who are interested in basketball, and they form an informal group, as a result,
when they get back into their formal group they are likely to co-ordinate better with each
other.
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There are other scenarios where two departments merge to become one, making them
one formal group. However, the people from these former departments still see
themselves as separate from each other. These two groups of people will refuse to cooperate until they are also merged into an informal group. Therefore, informal groups
should be handled carefully in business to yield the best results.
Regular meetings, free holidays, sporting events and such things could be organised to
create informal groups and use them in a more positive way to avoid them getting into the
way of business activity.
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We all know that recruitment and selection is one of the tasks that the HR
department fulfills. The other tasks will be discussed below:
Recruitment and selection: Involves selecting and attracting the best workers.
Redundancy and dismissal: Must obey all laws when firing workers.
Recruitment and selection
Workers are needed when a business starts up, expands or an existing
employeeleaves. Businesses use the recruitment process to successfully employ the
right people. This process is usually undertaken by the HR department, but in small
business, HR departments do not exist since the businesses employ too little workers
for it to be of much use. Here is a diagram summarising the recruitment process:
1.
Vacancy arises.
2.
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8.
Vacancy filled.
Given to candidates so they will know what the job will involve.
Opportunities of promotion.
Job specification
After the job description has been drawn up, the qualifications for the job can be
identified. They usually include:
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Local newspaper: Usually for office and manual workers. These people are
plenty since the job does not require too much skill.
National newspaper: Used to find workers for senior positions that requires a
lot of skills. It can be read by people anywhere in the country or overseas.
Recruitment agencies: Keeps details of qualified people, and will send the
suitable applicants to interviews when a business asks for a worker. Many businesses
prefer to use recruitment agencies to find them workers because it is easier.
However, it is expensive since their fee is based on a percentage of the workers pay.
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Job advertisement
This is what a business needs to decide when drawing up an advertisement:
Job specification
Advertising budget.
o
(depends on job)
Applications forms and CVs/rsums
o
When a person applies for a job, he will have to fill out an application form, or write
an application letter with a CV enclosed. CVs are descriptions about one's
qualifications and skills in a set format.
Businesses will use application forms and CVs to see whether an applicant match
the job specifications or not. The closest matching applicants are invited
tointerviews in the selection stage. A short-list is drawn up.
These are what CVs should contain:
Name
Address
Telephone Number
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Date of Birth
Nationality
Work experience
Positions of responsibility
Interests
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their selection.
Aptitude tests: To test how easily candidates can be trained/learn new things.
Personality tests: To test for people who have specific personal qualities which
will fit into jobs e.g. that has a lot of stress; requires you to work with a team.
Group situation tests: To test how well applicants work with other people.
Rejecting unsuccessful applicants
When applicants fail to get the job, they should be informed and thanked for
applying.
Training
Training is often needed to do achieve the needs listed below. These needs can be
long-term or short-term.
Improve efficiency.
Increase skills.
Increase knowledge.
Induction training:
Introducing a new
employee to their business/management/co-workers/facilities.
o
days.
On-the-job training:
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Off-the-job training:
o
Workers go to another place for training (e.g. school).
o
Methods are varied and usually more complex.
o
Usually classroom training.
o
Employees still work during the day.
o
Employees can learn many skills.
o
Workforce planning
A business will need to forecast the type and number of employees needed in the
future. This depends on the firm's growth and objectives. The forecast can be done
by:
Talk to staff about who would want to retrain for new jobs.
Provide a recruitment plan. (how many new staff are needed, and how
they should be recruited, internal or external)
Dismissal:
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Redundancy:
o
Employees are no longer needed.
o
Not the fault of the employee.
o
Some reasons are:
Some government have laws that makes businesses pay for their
workers this way.
o
If only some employees are to be made redundant, trade unions will
agree with the fairest way to see who goes. These terms are negotiated with the HR
department.
Older workers.
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Trade Unions
Employees with similar interests (higher pay) form a trade union. Trade unions are a
form of pressure group with has the ability to influence business activity. There are
four main types of trade unions:
Unions have a shop steward, who is an unpaid representative of the union. When
someone is new to a job they may ask if they may want to join. If the person joins,
they will have to pay an annual subscription. This money will be use for
employing union officials who will represent the views of the employees.
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Advantages of a union
Strength in numbers.
Advice/Financial
support if a worker is dismissed unfairly/made redundant or is asked to do
something not part of their job.
Closed shop
A closed
shop is when all employees must join one union in order to be employed. It is
because its members feel that the union is doing nothing when non-members receive
the same pay rises as them. They think it is unfair. Trade unions also gain greater
strength if all the employees are members of the union. However, many people think
that it is unfair since they are forced to join they should be able to make their own
decisions.
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A better working relationship should develop between the union and the
management.
The structure of different unions vary, but most elect a President or General
Secretary to work full-time for and get paid by the union. They work at the
union's headquarters. If the union is large, there will be union officials to take cared
of members in different branches. Each branch represents its members in one work
site, one factory, or one employer. Each branch has a representative. Unions are
usually democratic and their union officers are voted up by the members.
Employer associations
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They give advice on employment laws, health and safety, taxation laws etc
Strength in numbers, they want to influence government decisions.
They can share ideas and research facilities.
They can organise bulk buying for members and get discounts.
Employer associations represent similar wants of businesses, and will try to influence
the governments to give better conditions for businesses to prosper:
They want the government to control things such as inflation, law and order,
health and safety, and education for the workforce.
Lower taxes.
More freedom for businesses.
Fair competition.
Good transport infrastructure.
Access to overseas markets.
Reliable source of power.
Collective bargaining
This is when representatives of different interest groups negotiate and acollective
agreement is made. The bargaining can be with businesses or with
thegovernment. Collective
bargaining in businesses usually means that the representatives of one or more trade
unions negotiate with one or more employers or employer associations to come up
with a mutually
acceptable agreement on conditions of employment.
Inflation.
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Industrial action
There are various forms of industrial action that try to influence the decisions of
employers. Here are some of their most comment forms.
Strikes
Strikes are when workers stop working and leave the workplace to protest against
things.
Token strike: Stoppage for an hour, a few hours or half a day to show strong
feelings.
Selective strike: Only a few workers go on strike. They are chosen by the union
to cause as much disruption as possible.
All out strike: All union members stop working and wait until a dispute has
been settled.
Unions have to pay their members out of strike
funds as long as the strike has been approved by the union. All members vote to see
if the strike is favourable or not.
Picketing
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Work to rule
This is when workers stick rigidly to every rule and regulation in the business so that
it slows
down the production process. They still get paid since they are technically doing
nothing wrong, but this still causes a lot of disruption in the workplace.
Go slow
Non-cooperative
Workers refuse to work with any new rules or follow any new practices they
do not approve of.
Overtime ban
Workers refuse to do any overtime. This might damage the business if they need to
complete some orders quickly.
For employers:
Loss of output.
Loss of profit.
Loss of customers.
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Poor reputation.
o
Bad image.
For employees:
o
Loss of wages.
o
They might lose their jobs if the company suffers low profits.
For customers:
o
They need to find another supplier which might cost more (production
is stopped)
o
Shortage of products.
o
Deliveries not made.
o
For other businesses:
Employer's powers
However, employers can do something about the situation. Usually, they will sign
a no-strike agreement with the union which also involves pay rises. The pay rises are
determined by an arbitrator, an independent person who represents both sides and
decides on the best decisions possible. Again, he will most likely choose the "middle
path".
Nevertheless, if strikes do happen, here are some things employers can do:
Dismiss all workers: This leave the company in a very terrible position since
they can't produce goods or deliver goods.
Lock-out the workers: Stop workers from coming to work or get paid. Used to
counter work to rule and go slow strategies.
Institute a pay freeze: Used if employees are refusing to follow new rules,
practices or operate new machinery.
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Worker participation:
The management needs to let everyone feel that they are part of the business. This
means that managers will let workers participate in business decisions. There are
several ways of doing this:
Worker directors: Some workers become directors, but they are not allowed
to attend all board meetings.
Using a democratic style of leadership: Workers are delegated tasks and are
consulted in business decisions.
Advantages of worker participation
It increases motivation.
It increases job satisfaction.
It benefits the company since it can use knowledge from experiencedworkers.
It is time consuming.
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Other big companies cannot afford to produce a product that will not sell, so they
have to do market research first to find consumer wants before developing a
product. They are called market-orientated businesses. They will need to set up
a marketing budget for this, which is a financial plan for marketing of a product,
which contains the amount of money the Marketing department may spend on
marketing.
What is marketing
Marketing is the management process which identifies consumer wants,
predict future wants, create wants and find ways to use these wants to the fullest
(most profitably). In other words, businesses try to satisfy wants in the
mostprofitable way possible. Marketing covers a wide range of activities such as:
advertising, packaging, promotion, etc
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SWOT analysis
This is a method to evaluate the statistics of a product of business. It assess these
things:
Strengths (internal)
Weaknesses (internal)
Opportunities (external)
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Threats (external)
Strengths and weaknesses of a product are its internal factors, while opportunities
and threats are external factors.
Market segments
Market segments are parts of a market which contains people which have
similarpreferences for their products. The Marketing department should know which
segment their product fits the most, so that they can advertise and sell their products
to it.
There are two ways to segment markets. By the type of product or the attributes of
the customers buying it. Here are two types of markets which are segmented based
on the product:
Mass market: Where there is a large number of sales of a product. (e.g. Pepsi
can be bought anywhere)
Niche market: A small market for specialised products. (e.g. Ferrari cars)
Here is how a market can be segmented regarding people buying the product:
Income
Age
Region
Gender
Use of product
Lifestyle
It is very important to target the right market segment since it can increase
sales by a lot. If a business can analyse all of these market segments, they may find a
market segment whose needs are not being met. This is when the business finds
a gap in the market, and it could produce goods to take advantage of this gap and
again increase
sales.
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Price: There are different pricing strategies. Businesses need to use them so
that they increase sales.
Place: The location of the point of sale (the shop). Channels of distribution.
Type of shop (wholesaler or retailer?)
A successful product require effective use of the four P's. However,
businesses must be careful to not let each of these factors counteract each
other (e.g. expensive but low quality goods), else the product will fail.
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Any business should find out what people want to buy and how many people are
going to buy that product before producing a product since the chances of failing are
very high. Usually, market research try to answer these questions:
Type
of customer who buys the product.
There are two ways to gather any information for market research:
Primary research
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Primary research is gathering original data which may require direct contactwith
customers. There are several ways to do primary research:
Questionnaires
Interviews
Consumer panels
Observation
Experiments
Note: Questionnaires, interviews and consumer panels are all types of surveys.
The process of primary research
1.
Identify the purpose of the market research.
2.
3.
asked)
4.
5.
6.
take)
Pros:
Cons:
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Interviews
Interviews are face-to-face conversations with customers where the interviewer has
a set of prepared questions.
Pros:
Cons:
Samples
A group of people who are chosen to do market research on. There could be:
Consumer panels
Pros:
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Cons:
Observation
Observation involves:
Recording: e.g. meters can be fitted to a monitor to see what people are
watching.
Watching: e.g. see how many people go into a shop and actually buy
something.
Audits: e.g. counting inventory to see what has sold well. (inspecting)
Pros:
It is inexpensive.
Cons:
Only provide basic figures and not reasons why people do things.
Experiments
Experimenting involves giving products to consumers to see what they think about it.
Pros:
Cons:
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area.
Secondary research
Secondary research means taking information that has been already collected by
others.
Data collected from past researches could easily be used again if it is needed.
Examples of internal sources of information include:
Sales
department: sales records, pricing data, customer records, sales records.
Data collected from sources outside the business. The data may still be useful but
there are many limitations since it has been gathered for other purposes. Sources
include:
Internet: gives all sorts of information, but the info must be validated.
Specialist journals.
Research reports.
Government reports and statistics: contains things such as age groups and
culture.
Media reports.
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Data collected by others may not be accurate since it was used for
other purposes.
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out?
Make the questions simple. The answers should be simple enough tocollate.
(e.g. Yes/No answers)
Then:
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Bar chart:
Charts are a more meaningful and attractive way to present data. They are normally
used to compare two or more sets of stats with each other.
Pictogram:
It is similar to a bar chart but uses symbols instead of columns. It becomes extremely
effective if the data is short and simple.
Pie chart:
Pie charts are ways to show the proportion that each components take up
compared to the total figure.
Line graph:
Graphs show the relationship between two variables. It can be drawn in a straight or
curved line. It is usually to compare things with time and to identify trends.
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Tables
Tables could be also be used to present data in situations such as when people are
interviewed on why they like a product and they are givenmultiple choices.
Photographs
Photos can be used to help illustrate your points or support your work.
However, avoid adding them to your work just to make them moreattractive.
Diagrams
Diagrams are used to simplify information. It can be used to showrelationships of
things which all leads to the same root, which is usually at the centre of the diagram. It
can also be used to showvariation, e.g. diagram for ways to save water with different
ways to do so branching out from the centre of the diagram.
Maps
Maps are usually used to present location or transport routes, etc They aim to
make the information as clear as possible to the reader. This of course, only applies to
certain types of information where words and numbers cannot express them.
Wow, such a short chapter! Nevertheless, the information is still extremely
important and has more uses to it than just in Business Studies. Good luck spicing
up your reports with them!
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Types of products:
Consumer goods: Goods that are used up by consumers. (e.g. food, cake)
Consumer services: Services that are produced for people. (e.g. education)
The product must be at the right quality so that customers are willing to pay
for it.
Product development
Most businesses use a general process to develop any product:
1.
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1.
Employees.
2.
Customers.
3.
Competitor's products.
4.
R&D department.
5.
Sales department.
2.
Further research: The best ideas are selected and further research is
done to see their pros and cons.
3.
Will there be enough sales?: To see whether there will be enough sales
of the product to break-even (development costs included).
4.
Develop a prototype: To see how a product could be manufactured and
identify its problems.
5.
Test launch: To see if the product can sell or not.
6.
Full launch.
Unique name.
Unique packaging.
Consistent quality.
Packaging
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Getting the packaging right is very important. Packaging performs several tasks:
Make it eye-catching.
1.
2.
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5.
Saturation: Sales reach their limit. There are no new competitors. Sales
and advertising becomes stable but profits fall because of lowered prices to be
competitive.
6.
Decline: Product go out of fashion and sales and profits decline.
Advertising eventually stops. It is no longer profitable to produce the product.
The length of each stage varies with products. The business needs to identify which
stage their products are in so that they can use a suitable marketing strategy for it.
Extending the product life cycle
When a product has reached its maturity or saturation stage a business may
adoptextension strategies to stop sales from falling which extends the product life
cycle. Sales are given a boost by these strategies.
Nevertheless, it must be noted that businesses manufacture more than one product.
They should have a product in growth stage to counteract an older one which is
declining.
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Supply
Supply also varies with price. However, it is different. If the price goes up, then the
owners would want to be supplied with more products to take advantage of the high
price, thus the supply goes up (and vice versa). This can be demonstrated on the
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graph below:
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Changes in income.
Changes in advertising.
The result is: if demand falls, the market price and sales will fall, and the demand
curve will shift to the left. If demand rises, the market price and saleswill rise, and
the demand curve will shift to the right. It is illustrated on the graphs below.
Elasticity of demand
Elasticity of demand is how easily demand can change when prices change. A product
with an elastic demand curve would have a higher change in demandthan a change
in price (uses percentages). A product with an inelastic demand curve would have
a lower change in demand than a change in price. The elasticity of demand of a
product is mainly affected by how many substituteproducts that it has.
Factors affecting supply
o
o
Wage rates.
Improvements in technology:
Makes it cheaper to produce goods.
Taxes and subsidies:
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Elasticity of supply
Elasticity of supply is how easily and quickly supply can change when prices change.
How quickly means how quickly products can be produced and supplied, which is not
very quick for products made by agriculture. A product with an elastic supply
curve would have a higher % change in supply than achange in price. A product with
an inelastic supply curve would have a lower change in supply than a change in
price.
Pricing strategies
If a product is easily recognizable from other products, it would probably have abrand
name. And if it has one, it would need a suitable pricing strategy tocomplement the
brand name that should improve its brand image. Here are the strategies that are
used:
Cost-plus pricing
Cost-plus pricing involves covering all costs and adding a percentage mark-upfor
profit.
+ Easy to apply.
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- You lose sales if your price is higher than your competitors price.
Penetration pricing
Penetration pricing is used to enter a new market. It should be lower than
competitors' prices.
+ Sales will be high because your price is at a realistic level (not under/overpriced).
- You have to research on your competitors prices which costs timeand money.
Promotional pricing
Promotional pricing means that you lower the prices of goods for a short time.
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Using high price to make using the product give the user a status symbol.
Pricing a product at just below a whole number (e.g. $99) which gives it
an impression that it is cheaper.
Supermarkets charge low prices for products that are bought on adaily basis to
give consumers an impression that they are being givengood value for money.
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Public relations: Involves making the public aware of the company, e.g.
creating publicity in the media.
The aims of promotion
Advertising
The advertising process
1.
Decide
the
advertising budget: Set a limit on how much the business can spend on
advertising. It can be decided based on:
1.
A percentage of predicted sales revenue.
2.
How much competitors are spending.
3.
How much the business can afford.
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3.
Media
Television
Radio
Newspaper
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Advantages
Disadvantages
Expensive
Examples
Food
Cars
Household tools
Local services
Shops
Expensive compared to
others.
Local products
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newspapers.
Magazines
Adverts are
permanent*.
Posters/billboards
Cinemas
Leaflets
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Cars
newspapers.
Perfume
Banks
Golf equipment
Fashion clothes
Events
Cheap
Potentially seen by
anyone who passes by
them.
Products bought by
a large section of
the population
Toys for a
childrens film.
Fairly cheap.
Effective if target
audience goes to see
particular films.
Cheap
Delivered to peoples
houses.
Permanent*
Local events.
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Internet
Others (delivery
vehicles or sides of
bags)
Cheap
Virtual goods.
Services such as
banking or
insurance.
Virtually anything
that is not too
small.
Promotion
Different types of promotion
Promotion is usually used to support advertising and to encourage new or existing
customers to buy the product. Its main function is to boost sales in theshort-term,
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but not in the long term. It is used to attract new customers so that they can try out
items with the hope that they will like it and continue to buy it after the promotion
has ended. Here are some ways in which promotion is used:
Gifts: Gifts are placed in the packaging of the product to encourage consumers
to buy it. (e.g. toys in McDonald's happy meal).
Point-of sale displays and demonstrations: Can be put near the window and
displayed attractively. It could also encourage people to buy it if they can see how it
works (demonstrated by sales staff)
After sales service: e.g. warranty services. It reassures the customers that if
the product has a problem then they can go and fix it for free. This make the product
more attractive than others without warranty.
Can boost sales during the year when sales are traditionally low
(encourage off-season purchases)
The stage of the product life cycle: e.g. use informative advertisement in the
introduction stage of the life cycle.
The nature of the product itself: e.g. consumer goods use coupons but
producer goods use discounts on bulk buying.
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The nature of the target market: Different markets require different media for
advertising.
Personal selling
Quality varies.
o
Customer requirements vary.
When customers need advice on what type of product is the most appropriate
for their situation.
Public relations
o
o
o
Customer service
It is far more expensive to attract customers than to keep old customers, so one key
objective for any business is to retain their old ones. In the international business
environment, there are many competitors, so businesses need to raise thevalue of
their products with customer service.
Good customer service is not only producing a good product but also means:
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Giving advice about the product: It is always good to give as much information
about a product as possible so that the customers can be sure that they have
purchased the product that meets their requirements.
Providing credit facilities: This means letting customers pay later or in monthly
installments. This make products look cheaper and more affordable encouraging
customers to buy them. Credit facilities are usually offered when people buy
expensive products. You usually get interest as a result, but you could charge no
interest for promotional purposes.
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Channels of distribution
Businesses need to know how to get the product to the consumer. They may use a
variety of channels of distribution:
Channel 4: Involve selling the product overseas through an agent, who sells
them to wholesalers on behalf of the company. This may be because he/she has
better knowledge of the local conditions.
Methods of distribution
Methods of distribution for different channels of distribution can include:
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Department stores: Usually in the centre of town that sells a wide range of
goods from many producers.
Supermarkets: Very large retail stores with all kinds of goods. (usually daily
needs, foods)
Mail order: Customers order via the post by looking at the catalogue
Breaks bulk.
Fewer transactions are needed for the producers. (only a few wholesalers)
they no longer need to do as many deliveries.
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Cons
Is the product very technical?: Will you need to explain how to use the
product? If yes, Channel 1 should be selected (e.g. airplanes)
Location of customers?: Channel 4 might be used for customers overseas. Ecommerce would be viable anywhere apart from the countryside.
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befast enough for the product to reach its destination in time. However, they must
also be cost efficient and safe. These factors a taken into account when deciding
which method of transportation is used.
Road haulage:
Railways:
o
Even cheaper and faster than road haulage.
o
Useful for long distances.
o
Goods need to be transported to retail stores by road haulage at the
end of the destination.
Sea freight:
o
Used mainly for international trade.
o
Can carry a lot of products.
o
Products are stored in containers, which can be easily loaded onto
lorries. Makes it cheap to load and unload the ships.
Air freight:
o
Extremely fast but expensive.
o
Used for small, expensive, or perishable products.
Pipelines:
o
Used to transport liquids or gases over long distances.
o
Cheaper than using road haulage for liquids. Roads are not always
available.
Drawing up a marketing plan
o
Finally, after all the four P's of the marketing mix have been decided, the Marketing
department will put them together into one marketing plan. It will also consider how
the 4 P's will be modified or adapted to fit the overall image of the product. If this is
successful, sales and profits will be likely to increase.
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Note: a detailed drawing of the product must be included in the marketing plan.
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Productivity
Productivity is the outputs measured against the inputs used to create it. This is
measured by:
Output (over a given period of time)/Number of employees
If a worker makes more products in the same amount of time, his productivity
increases. Firms aim to be productively efficient to be able to make more profits and
compete against their competitors.
Methods of production
Job production
Pros
Cons
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Pros
It is flexible. You can easily change from making one product to another.
Cons
Uses specialization.
Benefits from economies of scale.
Is capital intensive.
Pros
Increased efficiency.
Little training is needed.
Goods are produced quickly and cheaply.
Goods do not need to be moved around like batch production. Saves time.
Quality is high and standardized (courtesy to Muhammad Hassaan Ayyub)
Cons
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Batch production: Demand is higher but products will not be sold in large
quantities. Batches are made to orders.
Stock control
Stock control is important so that a business will not
run
out of stock and be unable to satisfy demands. When stock levels get to a certain
point, more goods need to be reordered for the stock level to reach
its maximumagain. If more goods are not reordered, stocks could run out because of
anunexpected
surge in demand. However, keeping a lot of stock costs money, so the level of stock in
a company should always be balanced. The following graph demonstrates how stock
can be controlled:
Lead production
It tries to reduce the time taken to produce a product and transport it the
selling point.
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JIT production.
Cell production.
Kanban.
o
o
o
Kaizen
Goods are delivered to the selling point just when they are needed.
Boosts morale.
Kanban
o
o
o
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Improvements in technology
Here are some things that technology does in the production process:
CIM (computer integrated manufacture): CAD and CAM are used together.
The computer that uses CAD is directly linked with the one that controls the
production process.
Here are some things that technology does in shops:
EPOS (electronic point of sale): When products' bar codes are scanned and the
information is printed out on a receipt. Data is also sent to a computer to keep track
of stocks.
EFTPOS (electronic fund transfer at point of sale): When the cash register is
connected to the retailer's main computer and banks. The customer's credit/debit
card is swiped and the money is debited from the customer's bank account. A receipt
is printed out to confirm the transaction.
The advantages of new technology
Increased productivity.
Better quality.
Unemployment
Expensive
To invest in new technology.
To replace outdated technology.
Employees are unhappy with changes in the workplace.
o
o
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Quality control
There are three ways to control quality:
Quality control
Involves checking and removing faulty products at the end of the production
process.
Aim to
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Small
scale: transport and location of suppliers are less important.
Large
scale: transport and location of suppliers are more important.
Market
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Grants/subsidies.
Power
Water supply
Cost of water.
Personal preferences of the owners
They like.
Pleasant weather, etc
Climate
Do shoppers go there?
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Nearby shops
Competitors.
Mass market.
Rent/taxes
Security
Legislation
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o
o
o
o
o
o
o
o
o
o
Direct contact.
Is it convenient for customers to go the business?
Internet
Personal preference of owners
Technology
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Telephone.
Internet.
o
Transport.
Climate
If the business does not need direct contact with the customer, then it could
locate in cheaper areas.
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Exchange rates
Exchange rates is the value of one currency compared to another.
How are exchange rates determined?
There are two type so currencies:
Floating rates: The exchange rate of the currency is allowed to change freely
depending on market forces, i.e supply and demand of the currency.
Fixed rates: The exchange rate of the currency is set by the country's central
bank.
When the exchange rate rises, it is called appreciation. When it falls, it is
calleddepreciation.
How are businesses affected by changing exchange rates?
Appreciation:
Depreciation:
o
Import prices rise.
o
Export prices fall.
These exchange rate movements can cause serious damage to businesses, making
business endeavours that would have been profitable make losses because of
changes in the currencies. The EU, for example, wants to limit these bad effects, and
hence established a common currency, the Euro.
o
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Common currency.
o
Issue of Euros are controlled by the European Central Bank.
o
Interest rates for the Euro become the same.
o
o
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No 'protection' by governments.
Globalisation
Globalisation is the word used to describe the increased worldwide
competitionand business
activity. Goods and services that once can only be found in one country has spread all
around the world. There are several reasons for this:
Countries that have been undeveloped before start to develop andexport their
own goods, leading to more international competition.
Globalisation results in:
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Multinational businesses
Multinationals are businesses that have factories, services, or operations inmore
than one country. It is important to note that, for a business to become
multinationals, they must produce goods in more than one country.
Why do firms become multinationals
To cut costs:
Labour costs.
Imports are reduced since there are more goods in the country. Moreexports.
Local firms are forced out of business since they can't compete with
multinationals.
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