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Business Studies AS & A2 Level
Contents
Business objectives and strategy Objectives Strategy Stakeholders Business organization Starting a small firm Legal Structure The Growth of Business Marketing Market Research Market Strategy Marketing Planning Marketing Budget Marketing Mix Elasticity Budgeting, Costing, and Investment Budgeting Costs Investment Appraisal Company accounts Balance Sheets Depreciation Profit and Loss Account Cash Flow Ratio Analysis Ratio Analysis – Introduction Liquidity Ratios Profitability Ratios Financial Efficiency Ratios The Gearing Ratio Shareholders Ratios Limitations on Ratio Analysis Production Control Stock control Quality Lean Production Production Decision Making Basics of Production Scale of Production External Environment The Economic Environment The Technological Environment The Social Environment The Legal Environment The Political Environment Management, Leadership, Motivation and Communication Management and Leadership Leadership Schools of Thought Motivation Communication People in the workplace Human Resource Management (H.R.M) Trade Unions 2 4 10 15 17 20 27 30 38 39 45 53 56 62 71 75 76 79 83 83 84 86 87 88 90 94 96 98 104 107 118 123 124 127 128 134 137 137 141 144 152 159

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Business objectives and strategy Objectives
An objective is a goal that needs to be achieved.

Mission statements Under both UK and EU law, a company must state what it is in business to do - this is known as its overall aim and it can be embodied in a mission statement. This is often a simple and memorable sentence which explains what the organisation is in business to do and what it wants to achieve. A mission statement can often be found in the front of a company's annual report and it is, effectively, a summary of its day-to-day activities and long-term objectives, showing a sense of underlying purpose and direction.

It is often argued that mission statements are best when they are simple and informal. For example:

Ford Motor Company PLC "...is a worldwide leader in automative products and services, as well as in newer industries such as aerospace and communications. Our mission is to improve continually and meet our customers' needs, allowing us to prosper as a business and to provide a reasonable return for our shareholders." Cadbury Schweppes PLC "...is a major international company with a clear focus on its two core businesses - confectionery and beverages. Our quality brands are bought and enjoyed in more than 110 countries around the world..." The Body Shop PLC "...to dedicate our business to the pursuit of social and environmental
change..." A good mission statement should be clearly defined, realistic and achievable, and at the same time it should ensure that the employees' attention is focussed towards the overall company aim. Mission statements normally express the organisation's objectives in qualitative terms, (as opposed to quantitative, that is, facts and figures) and many businesses include the following variables in their mission statement: their number one priority, their product definitions, their non-financial objectives and their overall values and beliefs. Although many people view mission statements as a focus for employees and for other stakeholders, they are still viewed by their critics as nothing more than a publicity seeking exercise.
Business objectives It is important to understand how business ojectives 'fit in' with business aims and strategies.

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-An aim states what you want -An objectives set out what you need to have achieved to get what you want -A strategy is a course of action which enables you to meet your objectives. In order for objectives to be effective, they must: 1.provide detail about what specifically needs to be achieved (often in a quantitative form) 2.have a time limit by when they need to have been achieved 3.need to state the necessary resources that they require in order to be met. Setting clearly defined and realistic objectives will enable many employees to understand exactly what their job entails and achieving clearly stated objectives might be linked to bonus payments - this can easily act as an incentive and motivator to employees.
Primary and secondary objectives A primary objective is an ultimate long-term goal of the business (e.g. survival, profit maximisation, diversification and growth). They are often referred to as strategic objectives.

A secondary objective is a day-to-day objective, and it makes a direct contribution to meeting the primary objectives (e.g. increase sales by 5% each year, keep labour turnover at less than 4%). They are often referred to as Tactical objectives.
Private and public sector objectives

Private sector
Private sector objectives will often differ considerably from objectives set in the public sector. Profit maximisation is often quoted as the over-riding objective for businesses in the private sector. This will involve trying to produce at the point where there is the maximum difference between the firm's total revenue and its total cost - resulting in large dividend payments for the shareholders. However, it is far more likely that businesses will aim to profit satisfy rather than profit maximise (that is, they will aim to earn a satisfactory level of profits to keep shareholders content, and then use the remaining resources to pursue other objectives such as diversification and growth). Another objective in the private sector, for a rapidly growing business, may well be tomaximise sales (or sales revenue) and so increase their market share in order to gain a competitive advantage. Many businesses set objectives to improve their image and to appear more socially responsible and environmentally friendly - this is often achieved through strategies of recycling materials,

Local Education Authorities and council services in an attempt to make them more accountable. Health & Safety. traditionally. been centred around providing a public service. pay levels. Performance targets were set for many Local Health Authorities.Generated by Foxit PDF Creator © Foxit Software http://www. and complacency crept in with regards to customer service. Once this has been achieved and the business has stabilised its performance. whilst others are more complex and require significant management time and effort. British Telecom and the Electricity Boards were sold to the private sector.com For evaluation only. The remaining public sector organisations were told to run in a more cost-efficient manner and to improve the quality of their services to consumers. However. Some examples of decisions that all businesses need to make are: • • • • • • Where should we locate the business? What goods should we produce? What price should we charge? What should we do if a supplier fails to deliver on time? Which job agency should we use to provide us with some temporary workers? Which employee appraisal system should we use? . when British Gas was a public corporation it had to provide gas supplies to all areas of the UK.g. or growth through amalgamation. then it may well look to achieve its long-term objective of diversification into new products and new markets. A short-term objective may be to consolidate. Public sector Public sector objectives have. Short-term and long-term objectives Short-term objectives will often differ from long-term objectives. especially if the business is experiencing poor financial performance at present. in the UK in the 1980s and 1990s. a massive privatisation programme by the government was implemented and many large utilities such as British Gas.g.some are fairly simple and routine. sponsoring local events and strictly adhering to all employee legislation (e.). discrimination. etc. to reduce their costs and to improve the quality of their output. quality levels and response times. many of which were isolated and very unprofitable for the organisation).foxitsoftware. rather than make a profit (e. or even simply to survive the difficult trading conditions that it is experiencing. Strategy A strategy is a way of achieving an objective Decision-making Businesses of all sizes have to make many decisions each day . This regularly led to loss-making organisations being subsidised by the government.

a new competitor entering the market. Evaluate the outcome.g. day-to-day and fairly risk-free are handled by lower-level management. from as many sources as possible.com For evaluation only. A tactical decision is a fairly routine. which is normally handled by middle management (e. realistic and identifiable target to be met. using the available resources of the business. 6. Look at the results. Other decisions which are repetitive. 4. Make a decision. This stage is vital to the whole process. The relevant people. 7. 2. need to be informed about the decision and how it may affect them. and are generally referred to as operational decisions (e. The course of action that has been decided upon is implemented. Communicate. predictable. or breaking into foreign markets). A strategic decision is one which is very high-risk and is likely to influence the overall longterm policy and direction of the business.Generated by Foxit PDF Creator © Foxit Software http://www. Use market research to collect as much information as possible from inside and outside the business. what price to charge for products). or the lack of a multi-skilled workforce) and external (such as a rise in interest rates. Did the decision work ? Was it the best course of action ? How can it be improved next time? What went wrong? Businesses can rarely carry out their decision-making in a totally open and risk-free environment. that will limit the possible options available to a business. it is likely to be dealt with by senior management (e. Obtain as much feedback as possible concerning the recently implemented decision. effectively. Analyse the data. Gather data.g. taking over a competitor. There are many tools available to a business that will help it limit both the risk involved and the chance of failure. The decision-makers must ensure that they follow the correct course of action and do not reject a better alternative. and there are often many constraints which exist. These constraints can be internal (such as the lack of available finance. so to enable the decision-makers to have the necessary data with which to make an effective decision. 8. how long should tea-breaks be?). Businesses have to make decisions in order to achieve their objectives. both inside and outside the organisation. This to the whole organisation. or new legislation which restricts the activities of the business). what new products to develop). Three types of decision making tools are shown below: . when making a vital decision (such as launching a new product. Look at the different courses of action and decide which ones look the most achievable and realistic to meet the objective. Decision-making is the basic task of all managers in all departments of the business.g. and both in the private and the public sectors. These decisions are. As such.foxitsoftware. 3. designed to influence the actions of other people. There are eight key stages involved in the traditional decision-making process: 1. Implement the decision. The decision-making process cannot proceed without an achievable. short-term decision. Set objectives. 5.

000 . with associated selling costs of £5. since it predicts that IF THE DECISION WAS TAKEN MANY TIMES then Mr.000 costs).Generated by Foxit PDF Creator © Foxit Software http://www. The decision-tree below illustrates the above scenario: Calculation of expected value at node B: £325. He has been informed that he has just two options open to him: 1.000.He could sell the land now for a guaranteed price of £250. If the market price does rise. 2.000 in 12 months. which represents the average pay-off if the decision was taken many times. Smith owns a piece of land and he wants to sell it to raise some money for his ailing business. Decision tree A decision tree is a diagram that sets out the different options that are available to a business when making decisions and it also shows the chance (or probability) of their occurrence.6 = £195. with associated selling costs of £7.000 x 0.000 The tree diagram points in favour of delaying the sale of the land for 12 months.000 minus £7. For example: Mr.1 respectively.foxitsoftware.He could wait for 12 months for the market price to hopefully rise and he could then sell it.000 Total expected value = £290. then it is likely to be valued at £200.3 and 0.com For evaluation only.000.000 £250. if the price deteriorates.3 = £75.000 £200.000 x 0. An estate agent has informed him that the chance of receiving a higher price for the land is 0. to give an expected value. instead of the £245.6.Smith would ONAVERAGE receive £283.000. while the probabilities of the price remaining the same or worsening are 0.000 (£290.000 x 0. then the land is likely to be valued at £325. However.1 = £20. These can then be multiplied by the relevant probability of that event happening.000. It sets out the actual values to be expected should a particular course of action be followed.

There are several points to note from the diagram: 1. 5.com For evaluation only. node B) then the decisionmaker must calculate along the branches from right to left.Node B is represented as a circle and is called a chance node (i.e. In order to calculate the expected value at a chance node (e. subject to change. The cost associated with each branch is written beside it. 2. 2. The tree diagram is laid out from left to right. 3.They are tangible and therefore people can easily see the issue that they are faced with. at this node. and these costs have to be deducted before a decision can be made. There are several advantages of using decision trees to analyse a particular situation: 1. rather than attempting to visualise somebody's description. therefore.000 at node B. legal constraints.000 is multiplied by 0.Each event stemming from a chance node has a probability attached to it (these probabilities must always add up to 1).The actual values are always listed at the end of each branch.They set out problems clearly and logically. (£250. by multiplying the actual value by the probability and adding the results. 3. Each branch is cut-off as it is rejected (this is represented by two parallel lines cutting through the start of the rejected branch).1. These are then all added together to give the expected value of £290. 4.Constructing a decision tree may show possible courses of action which had not been previously considered. £325.g. However.000 is multiplied by 0. 4. the decision-maker can only choose one branch to follow).3. 2. one of which will definitely happen). This leaves just the best alternative option remaining.6.e. etc.They can only show quantitative data .000 is multiplied by 0.They show the likely amounts of money involved in the decision. Hence.000 costs) that he would receive by selling the land now.Node A is represented as a square and it is called a decision node (i. . and the £200.The probabilities are only estimates and are. decision trees are not without their faults: 1.they do not take account of peoples' feelings. there are several possible outcomes from this node. and the probabilities of their occurrence.Generated by Foxit PDF Creator © Foxit Software http://www.000 minus £5.foxitsoftware. the £250.

leading to many new product ideas Achieving economies of scales in production High level of customer loyalty and repeat purchasing Effective promotion Opportunities: Several of our products are reaching the end of their life-cycle Too many marketing personnel are leaving the business Restricted product range Threads: New markets in Far East Competitors are threatening a price war . S. such as new competitors entering the industry. Remember. the development of new products. such as having a strong management team. A threat represents a potential future problem which the business may face in the future. or the possibility of being taken-over by another company.O. A weakness is an area in which the business currently performs poorly. such as the take-over of a competitor. by looking at its Strengths. The opportunities and threats are external factors which the company may face in the future. Analysis This is another method of helping management to reduce the risk involved in making decisions in a dynamic industry.Generated by Foxit PDF Creator © Foxit Software http://www. as illustrated below: Example of a S.O. The S.W.W. in order to show just one side of an argument. It involves analysing the current position of a product. A strength is a factor which a business currently possesses and which it performs effectively.T analysis for a Chocolate manufacturer.The results can be biased. or falling productivity levels.foxitsoftware.W. An opportunity is a potentially successful or profitable activity that the business could take advantage of in the future. the strengths and weaknesses are internal factors which the company currently faces. analysis is represented in a simple four-box diagram. such as having a high level of industrial disputes. and trying to identify its possible future courses of action. and some of the data may be out-of-date by the time the decision is finally made. 3. or a loyal customer base.T. new legislation restricting the use of certain raw materials. Opportunities and Threats.com For evaluation only. a department or even the whole organisation.O. 4.T. a profitable portfolio of products. falling profitability. Strengths: Weaknesses: Plenty of R&D. or breaking into new markets.There can be significant time delays whilst making the decision. Weaknesses.

in order to be able to react to them swiftly and efficiently if they do ever occur.a sudden strike by its workforce.T.O. The results of a S. Crisis management is the response of an organisation to a crisis (e. rather than to try and simply cope with it when it occurs. but it is rare that the actual crisis will go according to plan.W. analysis as part of its annual marketing audit .W. and it can provide the basis for discussion of business strategy at meetings. Before contingency planning can take place.this highlights the products which are performing effectively.O. a fire. analysis may often identify possible courses of action that had not been considered. In most large businesses. Contingency Planning and Crisis Management Not all the opportunities and events that a business faces will go to plan. and they can predict to a high level of accuracy the likely effects of a crisis on the finances and resources of a business.foxitsoftware. terrorist activity. Some crises will be long-lasting and will affect the whole economy (such as a recession.com For evaluation only. as he needs to make quick and effective decisions without the time for discussion and consultation with others. those which are reaching the end of their lifecycle. Contingency planning means preparing for these unwanted and unlikely possibilities. Many companies will have some sort of contingency plan to cater for such situations. 2. but nevertheless to overcome any crisis is likely to cost the business a significant amount of time and money. 3.an environmental disaster. A business may produce a contingency plan in case of: 1. These potential scenarios are often computer-simulated. some crises will affect all the businesses in a particular industry (such as the . potential new markets to break into and the overall effectiveness of its personnel.a severe recession. the marketing department will carry out a S. Effective planning should reduce the impact of a crisis on a business. natural disaster). such as different sizes of bars Take-over by domestic rival New legislation may affect the source of our ingredients This diagram is simple and easy to follow. and some may prove detrimental to the continuity of the business (such as a huge downturn in demand for their products).g. a business must consider many possible threats and crises that it may face. It is likely that the person in charge at the time of the crisis will manage the crisis in a very authoritarian fashion. A joint venture with a foreign chocolate manufacturer Product extensions. or a natural disaster).Generated by Foxit PDF Creator © Foxit Software http://www.T. Contingency plans enable a business to be in a better position to manage a crisis. as well as categorising and prioritising the problems that the business faces.

financial or otherwise. as long as the business is seen to be limiting the effects of the crisis upon its various stakeholder groups (especially its customers) then its reputation may well remain intact. It is employees who perform the basic functions and tasks of the business (producing output. who will run the company on their behalf.Generated by Foxit PDF Creator © Foxit Software http://www. by a rise in the share price. since their pay levels and their job security will depend on the performance and the profitability of the business. the company issues a portion of this to each shareholder for every share that they hold (this is known as adividend). strong leadership. The main stakeholders are considered to be: Shareholders These people have a clear financial interest in the performance of the business. based on the level of profits for the year. or a strike by a workforce).these different groups are known as stakeholders. Firstly. The shareholders are also entitled to vote each year at the A. Any crisis is likely to have implications for the finances of the business. in the performance of a business . the effectiveness of personnel and communications and the production patterns. problem solving and decision making . Stakeholders There are many groups of people who have an interest. adequate finance.) and over recent years their traditional role has started to change.G. and it must try to ensure that the damage to the business (especially to its reputation and its image) is minimised by using which ever resources are at its disposal. Crises will always pose a number of unexpected and unforeseen problems and dilemmas for businesses. Secondly. Employees This group also has an obvious financial interest in the company.M. The business must be seen to be acting swiftly when faced with a crisis. etc.foxitsoftware. collapse in demand for UK ship building) and others crises will simply affect a single business (such as the Perrier Water contamination scandal. They are often now encouraged to become involved in multi-skilled teamworking. However.thus having a significant input to the workings of the business. The return that they receive can come in two forms. Successful public relations campaigns. so that they can sell their shares at a higher price than the purchase price (this is known as making acapital gain). rapid action and effective communication (both internal and external) are the key ingredients for a crisis to be solved effectively. . They have invested money into the company through purchasing shares and they expect the company to grow and prosper so that they receive a healthy return on their investment. to elect the Board of Directors.com For evaluation only. meeting deadlines and delivery dates.

and Business Rates to the local council for the provision of local services. job creation schemes and business relocation packages. 3.T) on their sales. The goods and services must then be promoted in such a way as to appeal to the target market and to inform them of the availability. and to produce their output to directly satisfy these needs . Suppliers Without flexible and reliable suppliers. then this will discourage businesses from borrowing money since the repayments will now be significantly higher). the business could not guarantee that it will always have sufficient high quality raw materials which they require to produce their output. such as new infrastructure. price. rates and low-interest loans. businesses can also cause many problems in . However. businesses can also benefit from government incentives and initiatives.foxitsoftware. (for example. including Corporation tax on their profits. since they purchase the goods and services which provides the business with the majority of its revenue. It is important for a business to maintain good relationships with their suppliers. pay at a later date). it is essential that after-sales service is offered and that the customer is happy with his/her purchase.this is done through market research. Businesses have to pay a variety of taxes to central and local government.com For evaluation only. Value-Added Tax (V. Businesses also have to adhere to a wide-ranging amount of legislation. so that raw materials and components can be ordered and delivered at short notice. The business must try to keep the customer loyal so that they return in the future and become a repeat-purchaser.Generated by Foxit PDF Creator © Foxit Software http://www. The Local Community Businesses are likely to provide significant amounts of employment for the local community and often will produce and sell much of their output to the local residents. socially responsible organisation. buy now. offering cheap rent. Once the goods and services have been purchased by the customer. However. 2.e.A. the employees and the local environment from business activity. etc. Many businesses develop links with local schools and colleges. It is therefore vital for a business to find out exactly what the needs of the consumers are. Businesses will be affected by different economic policies. The sponsorship of local events and good causes (such as local charity work) can also help the business to establish itself in the community as a caring. if interest rates are increased. The Government The government affects the workings of businesses in many ways: 1. Customers Customers are vital to the survival of any business. which is aimed at protecting the consumers. and also so that the business can negotiate good credit terms from the suppliers (i. offering sponsorships and resources to these under-funded institutions.

. then it may decide to relocate to another area. and the dubious quality of the parts once they have been inspected. However. The community and the business As outlined previously. Suppliers and the business Suppliers are often quoted as complaining about the lack of prompt payments from businesses for deliveries of raw materials. if the business faces strong protests from residents and from pressure groups concerned about its actions. and then use the remaining resources to pursue other objectives such as diversification and growth). congestion and the building of new factories in areas of outstanding beauty. it is no surprise that there are often disagreements and conflict between the different groups. they will aim to earn a satisfactory level of profits.com For evaluation only. and if this became a regular problem then the suppliers may well refuse credit to the businesses or may even cease all dealings with them. This conflict between these two groups is often referred to as divorce of ownership (the shareholders) and control (the management). local communities. such as congestion. However. it is far more likely that the managers of the business will aim to profit satisfy rather than profit maximise (that is.foxitsoftware. pollution and noise. causing much unemployment and a fall in investment in the community it leaves behind.Generated by Foxit PDF Creator © Foxit Software http://www. Disagreements between stake holders Due to the demands placed on businesses by so many different stakeholders. More customers are prepared to complain about the quality of products and after-sales service than ever before. and the business must ensure that it has in place a number of strategies designed to satisfy the disgruntled customer. On the other hand. noise. Customers and the business Customers are unlikely to remain loyal and repeat purchase from the business if the product that the have purchased is of poor quality and/or is poor value for money.resulting in large dividend payments for them. the local community can often suffer at the hands of a large company through the negative externalities of pollution. Some of the more common areas of conflict are: Shareholders and management Profit maximisation is often the over-riding objective of shareholders . many businesses have been known to complain about the late deliveries of raw materials and components from suppliers. and these negative externalities may often outweigh the benefits that the businesses bring to the community. reimburse any financial loss that they may have incurred and persuade them to remain loyal to the business.

what is meant by the stakeholders in a company. why differing stakeholder and organisational objectives might cause problems for managers. (Marks available: 10) Answer outline and marking scheme for question: 1 Give yourself marks for mentioning any of the points below: a) Focus for all employees.profit (cost cutting creates pollution). Exam-Style Questions 1. but management seek to invest profits for long term. then the employees. . employees.g. Is it in the interests of all stakeholders that a company should try to maximise its profits? (Marks available: 20) Answer outline and marking scheme for question: 2 Stakeholders are those persons who hold a stake in the company.com For evaluation only. (5 marks) (Marks available: 10) 2.Generated by Foxit PDF Creator © Foxit Software http://www. measure by which to judge the performance of the business. banks. and the shareholders last. put the customer first. even competitors. with Milton Friedman. that the objective of the company is to increase shareholder wealth.foxitsoftware. with examples. informs strategic planning. local community objective . e.clean environment. (max 12) A candidate might wish to refine the question and write of "long term" profits and then argue. (5 marks) b) Conflict. Shareholders may demand high dividends. Green issues may be mentioned. Many will argue that the company has a duty to other stakeholders. Explain. they include shareholders.g.if the American definition of "anyone who may be affected by the actions of the corporation" is adopted. company objective . with examples. for example. a) Why is it important for a business to specify its objectives? b) Explain. Johnson and Johnson. Decision making: e. the local community. government . customers.

(max 12) Excellent A clear and concise explanation of the stakeholder concept and a well sustained argument for or against the maximising of profits. Weak A limited knowledge of what is meant by stakeholders and ill-connected comments for or against maximising profits. (Marks available: 20) .Generated by Foxit PDF Creator © Foxit Software http://www.foxitsoftware. Competent Adequate A knowledge of what is meant by stakeholders and some reasons for or against maximising profits.com For evaluation only. An informed account of the stakeholder concept and a reasoned argument for or against maximising profits.

a cashflow forecast. It is used to try and persuade investors (banks. This is a document which outlines the marketing. firm. decisive. which meets the consumers' needs. Many businesses which have started in the UK over the past 25 years have failed within the first 3 years of trading. production and financial plans for the proposed business.foxitsoftware.the aims and objectives of the business .e. organised. Some of the most common reasons for starting up a new business include the need for independence. size of the market. a good negotiator and must be able to recognise an opportunity when it arises. To reduce the probability of failure. or provide a service. redundancy from your previous job.) to lend money to the entrepreneur to fund his/her new business. ambitious. links with your hobbies and interests. etc. it is vital that businesses carry out market research in order to establish if a profitable gap exists in a market and to see if their business is in a strong enough position to fill this gap. copied and reproduced by other people without their permission. In order to make a success of the new business venture. a projected profit and loss account and balance sheet for the end of the first year's trading .details of the new product or service being offered . Business Organization Starting a Small Firm Identifying an Opportunity It is vital for the success of a business that it manages to identify an unsatisfied consumer need in a market and then produce a product.the proposed number of employees . These protect the owner / inventor from having their products. he/she must draw up a business plan. to achieve your personal ambitions.an outline of the existing market details (i.how and where the product will be produced .Generated by Foxit PDF Creator © Foxit Software http://www. The Business Plan Once an entrepreneur has recognised an opportunity. The new product / service can be protected against competition by the use of copyrights and patents. The main sections of a business plan include: . number of existing competitors) . etc. ideas.com For evaluation only. being bored with your current job. the entrepreneur must be hardworking.

then the Patent Office has to be supplied with the original drawings and designs of the new product. and often they will only lend the money at a high rate of interest. Liquidity is the financial term given to express the ability of a business to raise cash at short notice. films. then the bank will take ownership of an asset of the business which will cover the amount of the outstanding loan. . . In order for the patent to be approved. the bank will insist that some security (or collateral) is provided by the business. so that if the business defaults on the loan repayments. having a positive cashflow is vital for the survival of the business. process. Having a positive cashflow Leading on from this previous point. then they may lead to the insolvency and failure of the new venture. invention or information against copying and reproduction by other people without the entrepreneur's permission. The Copyright. paying suppliers. It can often be difficult for a budding entrepreneur to persuade banks and other financial institutions to lend money to a new business. Patents are often sold to larger businesses in order to provide a large injection of capital. Problems of Start-ups Most new businesses will face a number of problems when they are starting up and if these problems are not tackled immediately. etc.). People using copyright material without permission risk legal action.details of the finance required and the forecasted rate of return on this. and the inventor must state that the ideas and features of the product are his own work and have not been copied from other products. These repayments can cripple the business and eventually lead to its insolvency. The law on copyright is governed by The Copyright. which can help the small business to grow and expand its product range. Designs and Patents Act (1988) gives this right for a 20 year period following registration. A patent gives an entrepreneur or a business the legal right to be the sole owner or user of a particular production process or of a new product. Designs and Patents Act (1988). sound recordings) in order to control the copying and duplicating of the owner's original work. Any new business must have sufficient cash available to meet its short-term needs (such as paying employees. A copyright is the legal right of the creators of certain kinds of material (books. Below are listed some of the major problems faced by a new company: Raising finance and meeting the repayments Raising finance and meeting the repayments is often cited as the major reason for the failure of many new business ventures.foxitsoftware. rent. utility bills. As well as the repayments.Generated by Foxit PDF Creator © Foxit Software http://www. Patents and Copyrights An entrepreneur can use patents and copyrights to protect a new product.com For evaluation only.

and if any of these are overlooked or completed inaccurately. but they alone have to provide all the finance (often savings and bank loans) and bear all the risks of the business venture. Enticing consumers to try the new product Enticing consumers to try the new product / service can also be a major problem for any new business. veterinarians.e. solicitors and dentists. Ensuring that consumers try your product and then buy it again at a later date (consumer loyalty) can often only be done through extensive (and costly) advertising and promotional campaigns.g. market traders).Generated by Foxit PDF Creator © Foxit Software http://www. In return. accountants. A sole trader faces unlimited liability for his/her debts and it is referred to as an unincorporated business . . which are often difficult to sell and therefore the business may find it difficult to raise cash quickly. etc. Taxation and insurance payments are vital for the smooth running and survival of new businesses. Partnership To overcome many of the problems of a sole trader. A partnership is an association of individuals and generally there will be between 2 and 20 partners. newsagents. perhaps worse. Any oversight on these payments could land the entrepreneur with a large tax bill or. Each partner is responsible for the debts of the partnership and therefore you would need to choose your partners carefully and draw up an agreement on the responsibilities and rights of each partner (known as a Deed of Partnership or The Articles of Partnership). Paperwork and legal requirements All businesses face a variety of paperwork and legal requirements. commonly found in trades where only small amounts of finance are required to set up and where there are very few advantages to the existence of larger organisations (e. a partnership may be formed.foxitsoftware. if the business gives its customers credit (i. property and stock which will not be insured against fire. Further to this. The most common examples of a partnership are doctor's surgeries. they have full control of the business and enjoy all the profits. Many businesses have a lot of cash tied up in stocks. Legal Structure Sole Trader A sole trader is a one-person business. then this could lead to the failure of a new business. Sole traders often employ waged employees.this means that there is no legal difference between the business and the owner. buy now.com For evaluation only. theft. hairdressing. but pay us at a later date) then this will simply add to any cash flow problems that the business is facing. especially if there are already a handful of established businesses which dominate the market.

most important are the Memorandum of association and the Articles of Association. just like a sole trader. type of joint-stock company and. Private Limited Company This is a type of joint-stock company (that is. Each shareholder in a private limited company MUST be a part of the business and under no circumstances can any shares be sold to members of the general public.L. Often private limited companies are small. A company is run by a Board of Directors (who are elected by the shareholders) and this is headed by a Chairman.G. family run businesses which are owned by shareholders. but does not wish to take on any new active partners.) and also to a share of the company's profit at the end of the financial year (a dividend). Each share entitles the owner to 1 vote at the company's Annual General Meeting (A. is run by the Board of Directors on behalf of .foxitsoftware.M. A partnership. is an unincorporated business. Before a company can be formed. The only exception is in a Limited Partnership. To overcome this problem. only lose the value of their investment in the company. As stated earlier.these people will provide finance for the business to use. Public Limited Company (P. it is an incorporated business . they have purely put the money into the business as an investment. When these are completed. therefore. they are sent to the Registrar of Companies. The company's name must finish with the wordLimited and it must raise less than £50. since a buyer must be found within the framework of the company.C. Each shareholder has limited liability for the company's debts and can. the partnership may take on as many Sleeping (or Silent) Partners as they wish . In other words. most partners in a partnership face unlimited liability for their debts. It can be very difficult for a shareholder in a private limited company to sell their shares. This is where a partnership may wish to raise additional finance.000 of share capital. just like a private limited company. These cover details such as : • • • • • the objectives of the business its headquarters and registered office the amount of capital to be raised from the sale of shares details concerning meetings within the business the arrangements for auditing the accounts of the business. a PLC is an incorporated business.Generated by Foxit PDF Creator © Foxit Software http://www.where the business has a separate legal identity from the owners).) This is the other. much larger. a number of legal documents must be completed . but will not have any input into how the business is run.com For evaluation only. These Sleeping Partners face limited liability for the debts of the partnership. who will then issue the business with a Certificate of Incorporation which allows the business to trade as a Private Limited Company.

Generated by Foxit PDF Creator © Foxit Software http://www. This is known as thedivorce of ownership and control. If a private limited company wishes to become a PLC. at which shareholders vote on certain key issues relating to the company. if they manage to accumulate over 50% of the shares in the PLC.). Until the successive Conservative governments of Thatcher and Major (1979-1997). raise significantly more finance than a private limited company. The PLC has to publish its annual accounts (known as disclosure of accounts) and therefore is extremely vulnerable to investors' and bankers' perceptions about its progress and success. The main difference between a PLC and a private limited company is that a PLC can sell its shares on the Stock Exchange to members of the general public and can. libraries. whether or not they could afford them in the private sector (such as education and healthcare). Essential services (such as street lighting. Following on from this.G.com For evaluation only. If the company is considered to have acted legally and for the best interests of its shareholders. a PLC is also at risk from a takeover from an outside body. there were many public corporations in the UK providing a . A merit good is one which the government feel that everyone should have. street cleaning. so that the shareholders will receive a very handsome dividend per share. swimming pools. the shareholders and has an A. Public Sector Organisations The public sector refers to all the businesses and organisations which are accountable to central or local government. • • • A public good is one which would not be provided by private sector businesses because it would not be profitable to do so (such as the emergency services and the armed services). therefore. However. which will allow it to sell its shares on the Stock Exchange. refuse collection. then it must change its Memorandum and Articles of Association and re-submit them to the Registrar of Companies. etc. A public corporation is the term used to describe a nationalised industry which is providing a good or a service to the general public. It is often the case with a PLC that the owners of the company (shareholders) will wish the PLC to make as much profit as possible.M.foxitsoftware. then it will be issued with a new Certificate of Incorporation and also with a Certificate of Trading. the Board of Directors and the management will often wish to devote some of the PLC' s resources to growth and diversification (such as the introduction of new products) and this will clash with the shareholders' desire for maximum profits. The public sector provides 3 types of good / service. The price of the shares will then fluctuate according to investors' perceptions of the PLC. They are funded directly by the government and they tend to supply public services rather than produce products for a profit. parks.

if the business is a PLC. The franchisee will be based locally and is likely to be making his initial business venture. Internal growth (Often referred to as organic growth) refers to a situation where a business increases its size through investing in its existing product range. etc. through the issue of shares. He buys the business format. The Growth of Business Internal -v. The franchisee is provided with a ready-made product. logo. Income Tax). Tie Rack. lower start-up costs than for a business of his own. . However.com For evaluation only. and help with the store layout. and it is therefore a far less risky venture than setting up his own business.foxitsoftware. the Conservatives sold many of these public corporations to the private sector . the licence that the franchisee buys is usually restricted to a specific geographical area and for a limited period of time. not leaving the franchisee much room for initiative and flair. which has been tried and tested in other areas. bank loans or. or by developing new products. can result in the parent company experiencing rapid expansion in a country. The franchisee has a licence to trade under the franchisor's name and also to use the logos. and The Body Shop). This is a slower and safer method of expansion than external growth.g. This process of selling the rights to use a company's name. This will normally be financed through the use of retained profits (from previous trading years).internal growth and external growth. Franchising Franchising has led to a rapid growth in the presence of many high-street stores in the UK over the past 10 years (e. through Rates). trademarks. Perfect Pizza. McDonalds. huge range of services to consumers. Central government pays for the public goods and merit goods through taxation (e. A business franchise involves the franchisor (the owner of the business) selling a business format to a franchisee (the purchaser of the business name) in return for a fixed sum of money and a percentage royalty on sales revenue. However. whereas local governments pay for the services they provide through Council Tax (formerly Community Charge and. the royalty must be paid to the franchisor even if a loss is made and the franchisee can have strict restrictions placed on their actions and promotions within the store.this process is known asprivatisation. etc.External Growth There are two main ways in which a business can grow . financial and management help and advice. with little of the investment that would have been required had the company bought the outlets itself.Generated by Foxit PDF Creator © Foxit Software http://www. before that.g.

but at a different stage of the production process. a car manufacturer taking-over a supplier of car components). nearer to the consumer). Forward vertical integration.g. • • • .foxitsoftware. Regardless of the method of growth. Both mergers and takeovers are referred to as growth through amalgamation. or takes-over. survive in an increasingly competitive market. there are several reasons why firms wish to grow: • • • • • To To To To To achieve economies of scale and see the average cost of production decline. another company which is closer to the source of the raw material (e. Vertical. the new business may become complacent and inefficient and find that it suffers from diseconomies of scale and / or falling profits. There are several different classifications of integration: • Horizontal. as well as securing its supplies at a lower cost.Generated by Foxit PDF Creator © Foxit Software http://www. achieve security through becoming more diversified. An example of this would be a car manufacturer taking-over a range of car showrooms. satisfy the ego of the businessman. The new. Occurs where a company merges with. Occurs where a company merges with. Forward Vertical integration is often the result of a desire to secure an adequate number of market outlets and to raise their standard.therefore giving the predator full control of the newly acquired company. another company which is closer to the retail stage (i. the Nestle takeover of Rowntree). This occurs when two firms in the same industry join together who produce the same product and are at the same stage of the production process (e. Mergers and Take-Overs A merger occurs where two firms combine. or takesover. However. or simply integration).e.g. Backward vertical integration. and achieve higher sales revenue and profits. achieve a greater market share.com For evaluation only. Backward Vertical integration is often the result of a company being able to exercise much greater control over the quantity and quality of it supplies. External growth Involves much greater sums of money and takes place through the use of mergers and takeovers (often known as growth through amalgamation. with the consent of both groups of shareholders and Directors. larger business is likely to be more powerful. This occurs when two firms combine who are in the same industry. A takeover (also known as an acquisition) refers to a situation where over 50% of the shares in another company have been purchased . or simply as integration. have a larger market share.

Making more effective use of working capital. larger firm is that it has diversified its product range and spread its risks. Here. Retained profit refers to profits made from previous years. Internal finance is generated from within the business and is likely to come from one of three sources: 1. This body does not have the power to take legal action against the company.) that some action needs to be taken against the recently merged companies.T. • The underlying motive for most mergers and takeovers is to achieve synergy. This is often called the "2+2=5 Effect". In general. This occurs where two firms merge which are in different industries and produce different goods . vehicles or even land and buildings which are idle. the firms can benefit from the management and marketing techniques employed by the other. 3. but instead it can recommend to the Office of Fair Trading (O. Cadbury-Schweppes). It is a useful source of finance to fund new products. any merger or takeover which will result in a market share of 25% or more will be investigated by the Competition Comission. Lateral. such as machinery. since the end result will hopefully be more than what the two firms put in to the venture. both companies produced products which were sold to similar market segments (confectionery and soft drinks). which have remained after corporation tax has been paid to the Inland Revenue and after dividends have been distributed to shareholders. Often. it is pure diversification. • Conglomerate. then it may be referred to the Competition Comission for investigation. The sale of fixed assets. etc. can also be a large source of cash to fund new projects. but are not in the same industry (e. Internal and External Sources of Capital The amount of finance required by a business will depend on a range of factors. the track-record and profitability of the business. External finance is generated from outside the business in a variety of ways: . 2.g. including the age of the business. selling off any available stocks and negotiating longer credit periods with suppliers all release cash for use within the business.F. If it is believed that a proposed merger or takeover is likely to act against the public interest.com For evaluation only.in other words. This occurs where two firms combine which are similar in some way.foxitsoftware. such as chasing debtors for prompt payment. The major advantage to the new. the industry that it is in and the state of the economy.Generated by Foxit PDF Creator © Foxit Software http://www.

having collected the debt from the customer.Generated by Foxit PDF Creator © Foxit Software http://www. it will not leave the business with large monthly interest repayments. etc.e.com For evaluation only. However. . the factor company will give the business the remainder of the money less a fee. vehicles and land and property). machinery. marketable securities. debentures. for a fixed period of time (often 3-5 years) with a monthly payment made to the company who owns the assets. The business leasing the assets cannot put these items on its balance sheet (since it never owns them). who will immediately give the business 80% of the money owed to it by its customer. Factoring involves a business selling its debts to a factor company. premises. which they believe has massive growth potential. new buildings. short-term method of borrowing extra cash. the business must ensure that it is adequate for the needs of the business (i. They require monthly repayments to be made for a significant period of time (up to 25 years for a mortgage) and the bank will also want an item to be placed as security (collateral) to cater for the event of the business defaulting on it loan repayments. • Bank overdrafts allow the business to withdraw more money from the bank than it has in its account. Leasing is a common way to fund new fixed assets. However.foxitsoftware. when they are already burdened with high gearing). • • • • • • Whichever source of finance is chosen. The business will sign a contract committing it to using some vehicles. Debentures are sold by companies to investors as a way of raising finance for use within the company. interest is calculated on a daily basis and it can be recalled at very short notice. which will pay the holder a fixed amount of money every year until its maturity date . The danger is that too many loans and mortgages will increase the company's gearing to a dangerously high level. it is enough to pay for the new product development. Trade credit involves the business obtaining goods from another business. They are long-term. Loans and mortgages are often used to purchase new fixed assets (machinery. but not paying for them for a period of time. as opposed to purchasing them outright. At a later date. Venture capital is a very risky type of investment that entrepreneurs (calledventure capitalists) will make in a small to medium sized business. like loans and mortgages. will increase the gearing level of a company. Problems of Growth Rapid and unexpected growth can lead to a host of problems for businesses. Probably the most common problem is the effect that the growth has on the company's finances specifically upon the liquidity and gearing of the company.e. These funds will clearly help the business to grow and achieve its potential. It is a flexible. etc.at which time the holder will be able to sell the debenture back to the company for it market price.) and that it is appropriate (i.

but would also like some of the company's resources and money to be invested into new products and new markets. clearly.com For evaluation only. they become the owners. Management Buy-Outs and Management Buy-Ins Management Buy-Outs Management Buy-Outs involve the management team buying an equity stake in the company that they work for (i.e. also reduces the dividend payments to shareholders. the control of the company is in the hands of the management and the Directors. rather than let it be acquired by an outside organisation. The managers are often a highly motivated group of people and they realise that the success or failure of the . The managers often make a success of such a venture because they are more in touch with the workings of the company and with the markets in which they operate. profitability.Generated by Foxit PDF Creator © Foxit Software http://www. However. This could lead to a significant fall in profits. Extra expenses and increased long-term liabilities (such as loans and mortgages) may reduce the liquidity and increase the gearing levels of the company and leave it dangerously close to insolvency. The management team. assets and the different markets in which it operates. therefore. A major problem that a PLC can experience as it grows is the divorce of ownership and control. This.foxitsoftware. This refers to the fact that the owners of a PLC (shareholders) are usually interested in maximising the company's profits and. or part-owners. product range. Each member of the management team will be expected to invest much of his own money into the venture. They too want the company to be profitable. their own dividend payments. One of the most common examples of Management Buy-Outs is when the management team of a company that is facing receivership decides to buy-out the company.this could lead to a rapidly expanding workforce. which in turn could persuade shareholders to sell their shares . then the management team may well take the risk and buy-out the company. therefore. It is also possible that the company may become inefficient and it may experiencediseconomies of scale (rising average costs). but the majority of the finance required to buy the company will come from financial institutions and from venture capitalists. when deciding whether to buy-out the company. reduces the short-term profits of the company and. should make an assessment of the business in terms of its cashflow.this would result in a falling share price. of the company). If the company looks as if it has potential. with the problems of recruitment. training and lengthy communication channels that this will inevitably lead to. It may simply be the case that the managers cannot cope with the extra responsibilities and workloads that they are faced with .

Give yourself marks for mentioning any of the points below: . Flat structures have very few levels of responsibility.foxitsoftware. Management Buy-Ins Management Buy-Ins exist where the management team of an outside company buy enough shares in another company to control it. Exam-Style Questions 1. increased customer focus and the ability to respond quickly to external changes and customer demands. (5 marks) (Marks available: 10) 2. The managers buy the shares because they believe that they can run the company more efficiently and profitably than the existing management team. and one that failed was M. An example of a Management Buy-Out that was a tremendous success was Denby Pottery. teamwork ethos.F. A Management Buy-In is likely to be financed predominantly through borrowed funds. company rests with their activities.com For evaluation only. a) What is meant by "tall" and "flat" organisational structures? b) Why have many organisations moved away from tall to flat organisational structures? (Marks available: 10) Answer outline and marking scheme for question: 1 Give yourself marks for mentioning any of the points below: a) Tall structures refer to hierarchical organisations with many layers of management/levels of responsibility. (5 marks) b) Tall organisation structures have become less popular due to moves towards leaner organisations. a) What services do banks offer to small businesses? b) How might the purpose of a loan influence the period over which it is borrowed? (Marks available: 10) Answer outline and marking scheme for question: 2 .Generated by Foxit PDF Creator © Foxit Software http://www. which will cause the gearing ratio to be high.I.

simply a concentration among fewer and larger.e. resulting in capital investment. i. a) What is the difference between organic growth and growth through acquisition? b) Is growth necessarily good for a firm? (Marks available: 20) Answer outline and marking scheme for question: 3 Give yourself marks for mentioning any of the points below: a) Organic growth is growth through increased sales. lend money and offer advice. so that there is no growth in the industry as a whole. for example. what the finance is to be used for. financial groups. (max 10 marks) (Marks available: 20) . current or fixed assets.Generated by Foxit PDF Creator © Foxit Software http://www.com For evaluation only. If it is a new company. Overtrading might be discussed: a firm can overextend its borrowing and find itself starved of working capital (more firms go bust in the upturn following a recession than during the recession itself). they may have to pay higher rates of interest. Growth through acquisition (Hanson is a good example) occurs through takeovers of other businesses.foxitsoftware. (max 10 marks) b) The second question can be answered in several ways. the small business may find difficulty in raising finance through banks. Will the purchase be obsolete before the loan is paid back. The extent of the help will depend on a number of factors such as the financial standing of the company. a) Banks offer a range of services to small business. sales turnover. (5 marks) b) Considerations should include. (5 marks) (Marks available: 10) 3. A candidate might note that a firm may change its character as it grows: A family firm may find that growth entails bringing in outsiders and relinquishing some family control. perhaps in new plant. and the banks may be less flexible if the business deviates from its business plan. the length of time it has been trading.

television viewing patterns.observation. The primary and the secondary research will provide the business with much data relating to its markets and its consumers. Observation involves watching people and monitoring and recording their behaviour (e. It is important that every respondent must be asked the same questions in the same order. retail audits which measure which brands of product consumers are purchasing). Questionnaires are a means of direct contact with consumers and can take a variety of forms. This data can then be used to describe the current situation in the marketplace. postal questionnaires.Generated by Foxit PDF Creator © Foxit Software http://www. Marketing Market Research Market research involves gathering and analysing data from the marketplace (i.e. . from consumers and potential consumers) in order to provide goods and services that meet their needs. Experimentation involves the introduction of a variety of marketing activities into the marketplace and then measuring the effect of each of these on consumers. Primary research This is research designed to gather primary data. cameras which monitor traffic flows. questionnaires and experimentation. but is nevertheless relevant. This involves breaking the market down into distinct groups of consumers who have similar characteristics. that is. Personal questionnaires (such as door-to-door interviewing). which has previously been collected by others and is not designed specifically for the study in question. where a new product is launched in a small.foxitsoftware. test marketing. and to explain the trends that have occurred. to try to predict what will happen in the future in the marketplace. For example. government publications and company reports.g. Questionnaires can be a very expensive and time-consuming process and it can be very difficult to eliminate the element of bias in the way that they are carried out. telephone questionnaires and group questionnaires (such as asking for the attitudes of a group of consumers towards a new product). with no help or emphasis being placed on certain questions / responses. but it can be out-of-date by the time that it is researched. Secondary research This is the collection of secondary data. geographical area and then the response of consumers towards it will dictate whether or not the product is launched nationally. The business may also use the market research data to segment the market. The main sources of secondary data are reference books.com For evaluation only. information which is obtained specifically for the study in question. Secondary data is far cheaper and quicker to gather than primary data. It can be gathered in three main ways .

which should . age or gender). so as to offer each group a product which best meets their needs.this gives each member of the public an equal chance of being used in the sample. By demographics: their age.the consumers are grouped into segments again (or 'strata') based upon some previous knowledge of how the population is divided up. estimated sales of a new product. type of house. urban -v. the numbers of people interviewed in each segment are not usually representative of the population as a whole. Quantitative vs Qualitative research Quantitative research Quantitative research involves carrying out market research by taking a sample of the population and asking them pre-set questions via a questionnaire (normally 200+ respondents) in order to discover the likely levels of demand at different price levels.com For evaluation only.g.this normally involves the consumers being grouped into geographical groups (or 'clusters') and then a random sample being carried out within each location.Generated by Foxit PDF Creator © Foxit Software http://www.this method involves the consumers being grouped into segments which share certain characteristics (e. The number of people chosen to be interviewed from each 'strata' is proportional to the population as a whole. sex. and lifestyles.e. It is usually conducted through group discussions (often called focus groups) in order to discover the rationale behind consumers' purchases. hobbies. The group discussion is often chaired by a psychologist in a relaxed manner. The respondents are often chosen by computer from a telephone directory of from the Electoral Register. Quota sampling . The data is numerical and can be analysed graphically and statistically. The interviewers are then told to choose a certain number of respondents from each segment. Effective segmentation of the market can lead to new opportunities being identified (i. etc. Qualitative research Qualitative research attempts to gain an insight into the motivations that drive a consumer to behave in a particular way. sales potential for products being realised and increased market share. and the 'typical' purchaser of the company's products. and socio-economic group. revenue and profitability. interests. gaps in the market for a product).rural. income. The main ways of segmenting a market are: By consumer characteristics: this involves investigating their attitudes.foxitsoftware. Cluster sampling . By location: the region of the country. However. Stratified sampling . There are several types of sample that can be used to gather quantitative data: Random sampling .

this considers the range within the central 50% of a set of data. There are 4 main components of time-series data : the trend.g. The interquartile range . that occurs most frequently in a set of data. costs. Forecasting can be done in a number of ways: Extrapolation . It therefore ignores the top 25% and the bottom 25% and is less prone to distortion by extreme values. etc).this is the middle number in a set of data. Statistical Analysis There are a variety of techniques that a business can use to analyse the data that it collects through its market research methods.g. The range .Generated by Foxit PDF Creator © Foxit Software http://www. encourage the consumers to discuss their shopping habits and pre-conceptions concerning certain products and brands. Clearly.this is the sum of the items divided by the number of items.com For evaluation only. It is always advisable for businesses to use a variety of forecasting techniques to arrive at suitable and acceptable figures for the future (e. The median .this can be used to try and establish the purchasing intentions of consumers. the level of sales).this is the difference between the highest value and the lowest value in a set of data. trying to predict and forecast what will happen in the future is not easy and many variables will change in both the short-term and in the long-term which will affect the accuracy of forecasts. The mode . The Delphi Technique . The mean . seasonal fluctuations and random fluctuations. . cyclical fluctuations (due to the economic cycles of recessions and booms). This is often done by using a software package to establish a line of best fit for past data.this involves using a panel of business and forecast 'experts' who discuss and agree long-range forecasting for important issues and events. and then simply extending this line into the future.this is the number. sales levels.foxitsoftware. Forecasting This involves attempting to estimate future outcomes (e.this involves identifying the trend that existed in past data and then continuing this into the future. Time Series analysis . The standard deviation . revenues. Market research . or value.this also attempts to predict future levels from past data. profits.this is a measure of the deviation from the mean value in a set of data.

often lucrative.000 £132. Market Strategy Niche Marketing This involves a business selling its product(s) in small. and dividing the resulting answer by 5 (£563. It allows extreme values to be glossed over. For example.000 / 5 = £112. then index numbers can be used to help identify the trend within the data. £220. Year 2 has £20. Confidence Interval .333.600).000 in year 3. The sales in year 1 will be given an index number of 100 (this is known as the baseyear). However.000 £ 65.000 more sales than year 1 . 4 and 5. This process is then repeated for the next 3-year period (i.000). a 3-year moving average can give a more realistic indication of the changes in the trend over the 5 years.foxitsoftware.Generated by Foxit PDF Creator © Foxit Software http://www. and adjusting the other items of data in proportion to it. It involves giving one item of data a value of 100 (the base period). This is calculated by adding together the first three year's data. consider the following data referring to sales over a 5 year period for a business : Year 1 Year 2 Year 3 Year 4 Year 5 £100.000 £120. This gives an answer of £343.000 £146.this is a measure of the likely accuracy of the results of a sample. Moving average .this is a 10% rise. Many small businesses can identify unsatisfied .000 / 3 = £105. if the sales for a particular business are £200. The next 3-year period covers years 3. For example.000 / 3 = £114. Year 3 has £70. 3 and 4). so the index number in year 2 will be 110. Index numbers . years 2.95 probability that the true average will be where the sample believes it will lie (in other words.com For evaluation only.000 in year 2 and £270.000 / 3 = £95. so the index number in year 3 will be 135. It is the opposite strategy to mass marketing. This gives a figure of £317.this is a statistical measure which is designed to make changes in a set of data (such as sales figures) easier to manage and interpret. These figures show how the trend has moved within the data over the 5 year period.000 in year 1. the results of the sample will be correct 19 times out of 20).e. there is a 0. so as to show the underlying pattern in a set of data. segments of a market. and dividing the resulting figure by 3 (£285.000 The mean value of sales over this 5 year period is found by adding all 5 values together.this is a 35% rise.000 more sales than in year 1 .this is another way of identifying the trend in a set of data.667. With a 95% confidence interval.

SAGA in the holiday industry). but various pop groups and childrens' toys have a lifecycle that can last less than 12 months). then niche markets can offer a very lucrative opportunity to many small businesses to offer a personalised. there are six stages to the lifecycle .foxitsoftware. The length of the lifecycle will vary from product to product and from industry to industry (e. It is also dangerous for a business to offer just one product within the market.com For evaluation only. Generally. consumer needs in a particular segment within a large industry. growth. during periods of economic growth and higher consumer spending.g. maturity. since any larger rivals are likely to be more diversified and have a wider product portfolio. Nevertheless. Product Life-Cycle This shows the various stages that a product is expected to pass through and it also indicates the likely level of sales that can be expected at each stage. the smaller businesses will often find it difficult to compete effectively with these well-resourced businesses. saturation and decline. high value-added service/product. Oxo Cubes.Generated by Foxit PDF Creator © Foxit Software http://www. This allows the small businesses to exist in industries that are dominated by large businesses (e. as illustrated on the diagram below : . Classic FM in the radio broadcasting industry. introduction. therefore.g. Levi Jeans and Kellogg's Cornflakes have lifecycles that have lasted for over 50 years. and they can develop products to meet these needs. However. if larger rivals appear within the niche market. reduce their prices to such a low level that the small business cannot compete profitably. Theses larger businesses could.development.

therefore. trying to entice customers to use the product more frequently. This is usually an inevitable result of changing customer tastes and fashions. new novels) whereas others will head straight from introduction into growth in a matter of days (eg new pop-music album releases). A prototype will often be test-marketed. The saturation stage of the lifecycle will occur where the sales of the product have reached their peak and the number of competing products will have grown significantly.g. Once the business has made customers aware of the new product and it has managed to achieve a high level of repeat-purchasers. This is where the product starts to become profitable. trying to find new uses for the product. new technology and the loss of market share to new products introduced by competitors. incur many expenses during the development stage of the product lifecycle and the product will produce a large. then it may choose to implement one or moreextension strategies to improve the product's ailing level of sales. It is estimated that only 1 in every 5 new products actually pass the development stage and reach the introductory stage of the lifecycle.Generated by Foxit PDF Creator © Foxit Software http://www. much time will be spent designing and testing the product concept. The product is. Extension strategies If a business believes that a product which has reached the saturation stage of the lifecycle can still produce a higher level of sales. The business will.foxitsoftware. The final stage of the lifecycle is where the sales of the product go into decline. such as : • • • • • changing the appearance and the packaging of the product. During the development stage. . It is during this stage of the lifecycle that the business may decide to use an extension strategy to prolong the lifecycle and boost sales. negative cashflow. The business will try to prolong the growth stage for as long as possible. but sooner or later it will reach the maturity stage of the lifecycle. therefore. in order to assess the potential sales and profitability of the new product. The length of this stage will vary considerably according to the product. Advertising is still extensive. There will be several competing products on the market. Competitors may launch similar products to cash-in on the successful new product. The introduction stage commences with the launch of the product onto the market. A decision will then be made whether or not to launch the product. trying to find new markets for the product. then the product will head into the growthstage of the lifecycle. The growth in sales will start to slow down and the product will nearly reach its maximum market share. unprofitable at this stage. Some products will take a long time to reach the growth stage of the lifecycle (e.com For evaluation only. Sales are low and costs are still very high (especially advertising and distribution). sales revenue and profits. ltering the ingredients of the product.

They will require a significant amount of money to be spent on their promotion in order to achieve a healthy market share. They are very successful products which create a large amount of revenue for the business.Generated by Foxit PDF Creator © Foxit Software http://www.foxitsoftware. This is a product which has a low market share in a high growth industry. The effects of an extension strategy on a product lifecycle can be represented in the diagram below: The purpose of the extension strategy is to delay the decline stage of the lifecycle and produce extra sales and revenue for the business.com For evaluation only. Stars These products have a high market share in a high growth market. in order to keep ahead of the rival products in the marketplace. These products have often been launched quite recently and have not had the necessary time to establish themselves in the market. They still require a large amount of money to be spent on their promotion. according to their market share and the level of market growth. the number and range of different products which a business produces at a particular point in time). The 4 categories are : Problem Child Sometimes referred to as Question Marks or Wild Cats). They are at the 'Growth' stage of the product life-cycle. Boston Matrix This is a method of analysing the product portfolio of a business (that is. This model was developed by a group of management consultants called the Boston Consulting Group. . and it divides the products that are produced by a business into 4 categories. They are at the 'Introduction' stage of the product life-cycle.

These products are at the 'Maturity' and 'Saturation' stages of their product life-cycle and produce a very large amount of revenue for the business. This money is often used to promote the 'Problem Child' products and to develop new products.foxitsoftware. Dogs These products have a very low market share in a low growth market. require much money to be spent on its advertising and promotion. but is probably likely to face strong competition in the near-future.com For evaluation only. Some important points to note from the diagram : Product 1 is a 'Dog' and is clearly in decline .e. therefore.Generated by Foxit PDF Creator © Foxit Software http://www. . They produce very little revenue for the business and are at the 'Decline' stage of the product life-cycle. market growth is low). These different categories can be represented in a Boston Matrix.the business would be advised to delete this product from its portfolio. It will. as illustrated below: As you can see from the above diagram. The size of each circle is proportional to the amount of revenue which each product generates. Product 2 is a 'Cash Cow' and produces large amounts of revenue to fund new product development as well as to fund 'Problem Child' products (such as Product 3). this business has five products in its portfolio. in order to protect its sales from rival brands. The business has to decide whether to try and extend the life-cycle and boost sales revenue. or whether to delete the product from the portfolio. Product 4 is a 'Star' and is generating a high level of sales. Cash Cows These products have a very high market share in a stable market (i.

and helps it to develop new products and devise new marketing strategies. For example. Niche marketing capitalises on the consumer loyalty that a business has. Otherwise product 5 may well go into terminal decline like product 1. It is derived from Frederick Taylor's method of decision-making. many chocolate manufacturers (such as Cadbury. These may total £6. Marketing Model This is a framework for making marketing decisions in a scientific manner. Asset-Led Marketing This refers to the situation where a business develops its strategy based upon its existing strengths and assets.Generated by Foxit PDF Creator © Foxit Software http://www. the raw materials needed to manufacture a car might include steel.000 is not the profit that the manufacturer receives from selling the car. For example. plastic. . as well as maintaining their high sales levels for the confectionery lines). and then using this as the base for developing new products or breaking into new markets.so the profit will be less than the £13.com For evaluation only. which retails to customers for £19. Some products have a very high added value figure (e. The business may decide to use an extension strategy to prolong the life-cycle of the product and to boost its sales level.000.000 is added value. This £13.Set the marketing objective (normally based on the company's objectives). The customer is prepared to pay a price which is several hundred percent higher than the cost of the raw materials. For example. The model has five stages: Stage 1 .000. Starburst and Rolo have become high sales-volume ice-cream lines. This involves the business focussing on what it currently performs effectively. then a marketing objective may be to increase the number of markets in which it sells its products. since part of it will be used to pay for wages and factory costs . etc. rubber. Adding value This refers to the amount of money which is added on to the raw material cost in order to arrive at the retail price for a product.foxitsoftware.g. the advertising or the quality of the finished product. McDonalds 'Big Mac'. Sunny Delight. Nestle and Mars) have built on the tremendous success of their confectionery products to break into the ice-cream market (e. brands such as Crunchie. if the company's main objective is growth. Product 5 is another 'Dog'. The difference of £13. but it clearly still produces a reasonable level of sales revenue. the quality of the image / brand.g. the design. the taste. electronics. and Manchester United football kits.000 for a particular car. glass. aluminium. It represents what the customer is actually prepared to pay for the final product. This could be due to the speed of service.

(5 marks) (Marks available: 10) . For example. This involves implementing one of the hypotheses. a medium-sized UK manufacturer of shoes may start selling products in the lucrative North American market. internet. (theories and strategies about how best to achieve the objective). Exam-Style Questions 1. cinema and local radio advertising. the competitors. Stage 5 . Local and national TV is expensive and reaches too wide an audience.Generated by Foxit PDF Creator © Foxit Software http://www. update the brand image in order to attract young customers. Schools and colleges may use local press. via the marketing mix.foxitsoftware.Test the hypotheses. their own publications.Form hypotheses. This will involve the extensive use of market research to gather qualitative and quantitative data concerning the market size. a) Why do well established companies. Stage 3 .Control and review the whole process.Gather the data that will be needed to help make the decision. Stage 4 . customers' perceptions of the company and its products. maintain market share. feeder school visits. or it may decide to concentrate on new segments of the UK market (e. (5 marks) b) The media mix is the combination of media for publicity purposes. Stage 2 .g. This will be carried out through further market research.com For evaluation only. such as Coca Cola and McDonalds advertise? b) Briefly outline a media mix which might be suitable as part of the promotion policy for a school or college (Marks available: 10) Answer outline and marking scheme for question: 1 Give yourself marks for mentioning any of the points below: a) Coca Cola and McDonalds advertise in order to retain brand loyalty and re-buy. Each hypothesis will be analysed to see its potential profitability and the likelihood of success. the market growth. etc. sports-shoes). This will help the business to set future strategies and plans which will be achievable and realistic. open evenings. and looking at its outcome (ie did it meet the objective? could it have been improved?). possibly by test marketing a product in a small geographic area in order to assess its potential for success.

(5 marks) (Marks available: 10) . and have an expensive lifestyle with childcare and associated costs. a) Why do marketing managers use the official socio-economic classification of the population i. Slinkies are clever.Generated by Foxit PDF Creator © Foxit Software http://www. (5 marks) b) Two new socio-economic groupings have been identified which make up 15 per cent of UK households.C2. ambitious and status conscious.B. They are defined as: 'Silkies are single ladies on high income defined as £25. There are no kids.e. A. Slinkies are also on high income. (5 marks) b) New groupings means that the marketing strategy of price. product place and promotion will have to be changed to meet the changing market.C1.D and E.foxitsoftware.000 a year or more with kids up to 15 years old.' (Source: Financial Times) How might such new groupings affect marketing strategy? (5 marks) (Marks available: 10) Answer outline and marking scheme for question: 2 a) To enable segmentation of the market.com For evaluation only. so that the marketing is more effective in that marketing is targeted at a specific audience. money rich. They are classically time-poor. 2.

if there is expected to be an economic downturn. Positive (i.e.Generated by Foxit PDF Creator © Foxit Software http://www.com For evaluation only. or where the actual amount of money flowing out of the business is less than the budgeted figure. as well as taking into account any expected changes in the external environment (e. Any differences between the budgeted figures and the actual outcomes are known as avariance. including a small percentage change in each category. favourable) variances occur where the actual amount of money flowing into the business is more than the budgeted figure. Based on the sales levels from previous years. . If a business is planning to expand its product portfolio this forthcoming year. The biggest source of expenditure within the marketing department is often the promotional campaigns. then the marketing expenditure budget will probably need to be set at a significantly higher level to reflect the extra money spent on the launch and advertising of the new products. Some businesses will set the forthcoming year's marketing budget based on last year's figures. The marketing department must ensure that it sets a budget based on the overall objectives of the business. outlining what it hopes to achieve in terms of sales volume.e. It may be the case that a business will use a set percentage of last year's sales revenue figure for its budgetary expenditure figure for the forthcoming year. unfavourable) variances occur where the actual amount of money flowing into the business is less than the budgeted figure. Based on previous years' budgets. Based on the budgets of competitors. expenditure and profit. In very competitive industries (such as supermarkets) the amount spent on advertising and other promotional campaigns may be in relation to that spent by your main rivals. then this needs to be translated into the sales and revenue targets for the next 12 months). It will often outline the month-by-month targets for the department and show the departmental personnel the objectives that they need to achieve over the next 12 months. There are several ways that a business may set its marketing budget: • • • • • Based on the amount of finance available. Negative (i. or where the actual amount of money flowing out of the business is more than the budgeted figure. The amount of money and finance that is available for the whole business will clearly affect the amount of planned expenditure within each department.g.foxitsoftware. Based on the expected size of the product portfolio this year. Marketing Planning Marketing Budget The marketing budget is a plan for the forthcoming year for the marketing department. sales revenue.

Product mix is the term used to describe the different collection of product lines that a business produces (eg the same business may also produce video recorders. a business may produce televisions. tyres and headlights for vehicles). such as dishwashers. delivery vehicles. again. Shopping products. Consumers may suggest slight alterations and modifications to the suggested product in order to make it more marketable and desirable. steel). and its product line may include portable televisions. A product line is the term used to describe a related group of products that a business produces (e. Is there a sufficient market for the new product? This stage of the product development process will involve carrying out extensive primary market research to test consumers' reactions to the suggested product. raw materials (timber. Fast-moving consumer goods (f. as well as televisions). Producer products Purchased by businesses and are either used in the production of other products. camcorders and computers..foxitsoftware.. etc.g.consumer products andproducer products. Speciality products.Generated by Foxit PDF Creator © Foxit Software http://www. very high.g.com For evaluation only. They often carry a very high profit-margin. or will the business have to re-train the existing staff? Testing the new concept. and components used to make larger products (e.m. For example. Examples include cars and houses. There are generally considered to be a number of stages in the development of new products: • • The generation of ideas. Most businesses will wish to change their product portfolio over time. such as soap. A number of issues need to be considered. The profit-margins are.gs) sold in supermarkets. bread. toilet paper. such as will the new product meet the objectives of the business? Does the business have the spare capacity to produce the product? Will the new product contribute to the continued growth of the business? Will new personnel be required. Marketing Mix Product Products can generally be classified under two headings . replacing those products which have entered the 'decline' phase of the product life-cycle or to try to break into new markets or new segments within an existing product. These are very expensive items that consumers often spend a large amount of time deliberating over. These are durable products which are only purchased occasionally. 18-inch screen models. machinery. or in the running of the business. This can be the result of changing consumer tastes. televisions and furniture. due to the large investment requires to purchase the product. etc). 12-inch screen models. . Consumer products Purchased and used by individuals / citizens for use within their homes and these products fall into 3 categories: • • • Convenience products.c. These often carry a low profit-margin. televisions with a built-in video facility. chocolate.

and then a percentage profit is added to this unit cost to arrive at the selling price.com For evaluation only. . since a national launch needs to be supported by extensive advertising and promotional campaigns. packaging. This is where the product enters the 'Introductory' stage of its product lifecycle. The business image if the image of the business is prestigious and up-market. if the consumers indicate that some element of the marketing mix is ineffective (price. then the higher the selling price is likely to be. However. quality and safety of the product will now become paramount. The degree of competition in the industry the number of competitors in the industry will affect the price level that the business decides upon for its product(s). since to make alterations and modifications at a later date will be extremely expensive and time-consuming. in order to test consumer response. If the consumer response is favourable. and many of those that do succeed in being launched will fail within a few months of their commercialisation. There are many methods and strategies that a business can use in order to arrive at a selling price for its products: Cost-plus pricing. What will be the costs of production? How many units will the business be able to produce? What will the selling price be set at ? What will be the profitability of the new product? Developing a prototype. The business may often decide to test market the new product in a small geographic area. National launch. they provide strong after-sales service. they compete in many different markets. However. There are many considerations that a business will need to take into account before it decides upon a selling price for a new product. This is where the cost of producing each unit is calculated. The design. then a higher price is likely to be charged for the product(s). A prototype of the product will be developed using the details that the market research indicated that consumers wanted. advertising. materials. The channels of distribution the more intermediaries that are used in getting the product from the factory to the consumer. such as: • • • • The objectives of the business if the main objective of the business is to maximise profit. before it launches the product nationally.foxitsoftware. • • • • Analysing the costs/revenues. they get the product to the market place quickly. This is a very costly operation.Generated by Foxit PDF Creator © Foxit Software http://www. the businesses which seem to be most successful in bringing new products to the market place tend to meet a number of vital criteria: • • • • they develop 2 to 3 times the number of new products as their competitors. It is inevitable that many new product ideas will not get to the market place. It is essential to ensure that this stage of the development process is detailed and extensive. etc) then this is likely to be changed before the national launch of the product. then it is likely that the product will be priced at a high level. then the product is likely to be launched nationally. Test marketing the new product. Price The price level that a business decides to sell its product(s) at will affect both the quantity of sales and the profit-margin received per unit.

This is a pricing strategy for a new product.promotional activities include more short-term tactics such as personal selling. This strategy is used where the business has a prestigious. products. and as a result they are forced out of the industry. or those which have high production costs which need recouping quickly. It is a strategy often used for new. Mark-up pricing.g. 'Going rate' pricing is the term used to describe a business charging a similar price to competitors for a similar product. This method of pricing involves setting the price of the product at a level based upon customers' perceptions of the quality and value of the product.promotional activity refers to extensive promotional campaigns on national media. . Rolls Royce). as the product builds up a strong brandloyalty. This profit mark-up will need to cover the fixed overheads and then contribute towards profit. Skimming pricing. Prestige pricing. Promotion Promotion refers to the tactics that a business uses to make consumers aware of their product(s) and to entice them to purchase the products. or charging the same price. sales promotions. This method of pricing involves a business setting its prices at such a low level that other (often smaller) competitors cannot compete profitably. packaging. The price may be raised over time. This is where the business adds a profit mark-up to the direct cost for each unit in order to arrive at the selling price. and it can then raise its prices to a much higher level in order to recoup any losses that they incurred when their prices were low. up-market image. creating sales revenue for the business. 'below the line' . This method of pricing ignores both the costs of production and the level of customer demand. Promotion can often be referred to as either: 'above the line' . expensive image by setting the price at a very high level. designed to create an upmarket. designed to undercut existing competitors and discourage potential new rivals from entering the market. The price of the product is set at a low level in order to build up a large market share and a high degree of brand loyalty. and it wishes to reflect this through high prices for its products (e. branding and direct mail. charging a higher price. innovative or high-tech. Penetration pricing. Or. Competition-orientated pricing. Demand-orientated pricing. such as television and newspaper advertisements. Instead it bases the price level on the prices charged by the competitors in the industry -either undercutting the competitors.foxitsoftware.Generated by Foxit PDF Creator © Foxit Software http://www. This leaves the larger business in a dominant position. Predatory (or destroyer) pricing. This is a pricing strategy for a new product.com For evaluation only.

it must reach the desired target audience (i. Advertising Advertising is the most expensive of all the promotional activities undertaken by businesses. on television and at the cinema. A brand is simply a name for the product. rather than any of its product range.com For evaluation only. in newspapers.C)monitors any advertisements on the radio. to have a great impact on consumers and to reinforce other types of promotion that it is carrying out (e. the advertisements must be attractive and appealing to the target audience (this can be done through using certain images. in magazines. Most businesses will use a combination of 'above-' and 'below the line' tactics in order to create the desired impact on consumers. Branding and packaging Branding and packaging are another common way of differentiating the product from rival products in the market place.foxitsoftware.e. and businesses will try to build up brand loyalty (that is where consumers are happy with their . and ensures that they are true. Any complaints by consumers can lead to the advertisement being investigated and possibly banned from publication.A) monitors any advertisements in newspapers.g.persuasive advertisements attempt to get the consumers to purchase the product. magazines and posters. persuasive advertisements . decent. pictures.informative advertisements attempt to purely let the consumer know the availability of the product. the advertisements must create far more money through sales revenue than the business spends on the advertising campaign. Advertising can allow the business to easily reach a vast audience. Secondly. often reflecting the character of the product. where the business advertises its name and image. Another category of advertising is 'corporate advertising'. The Independent Television Commission (I. at the cinema. its function and purpose and to inform the consumers about the characteristics of the product (e. Advertisements can generally fall into two categories: • • informative advertisements . those consumers who are most likely to purchase the product.T. There are two bodies established by the government which monitor advertisements in the UK. The Advertising Standards Authority (A. Again. Government information films).Generated by Foxit PDF Creator © Foxit Software http://www. words and personalities). fair and legal'. Businesses will try to stress the distinctiveness of their products and therefore create a certain image for their products in the eyes of the consumers. Thirdly. style and moving images). by emphasising certain aspects of the marketing mix (e. competitions).g. and on the internet. the taste.g. on the radio. on posters. it has the powers to investigate any complaints about certain advertisements and ban the business from advertising in the future.this can be discovered through market research). There are several criteria that must be met in order for an advertisement to be considered'effective': • • • Firstly.S. It can be carried out on television.

using the reputation of its existing products to break into the market. and exhibitions. McDonalds 'Who Wants To Be A Millionaire' scratchcards. These have become a very popular way of boosting sales over recent years (e. trade fairs. It is more of a personalised way of promoting the business.g. free products. The purpose behind these loss-making products is that they attract many consumers into the stores. resulting in a high profit-margin for the product.Generated by Foxit PDF Creator © Foxit Software http://www. Direct mail Direct mail (sometimes referred to as 'junk mail') involves posting promotional literature directly to consumers' homes. to see the consumers' reactions to the product. and will return to purchase it again in the future). Telephone selling can be used as a slightly cheaper method of direct contact with potential consumers (e. Sales promotions Sales promotions are a short-term method of boosting sales volume and sales revenue. size. 'Britannia Music Club'). .foxitsoftware. Packaging is also important because it is another way that the consumers can distinguish between different products (eg through the colours. They are often used to complement national advertising campaigns and can also include product endorsements by sports stars or television personalities. Loss Leaders Supermarkets often sell a few of their own brands of products at a loss.g. since the business deals directly with the consumers. insurance etc). A strong brand can enable it to be sold at a high price. shape and logos used on the packaging). using such tactics as a price discount.g. and discount coupons. Personal selling Personal selling can take the form of door-to-door selling. which are selected from a list of known customers (e. who will consequently purchase a selection of profit-making products as well as the loss leader. purchase of a particular product. These allow an opportunity for the salesman to show how the products actually work. Packaging also offers protection for the product during transportation and can contain competitions and prizes to further promote the sales of the product. etc). and to allow the consumers to discuss the performance of the product with an employee from the business. This is otherwise known as direct marketing. It can also provide a strong basis for the business to launch new products. rather than through an intermediary such as a retail outlet.these are called'loss leaders'. Walkers Crisps 'Cubix' cards.com For evaluation only. but it often fails to produce a large enough sales revenue to justify its use. and may offer easy payment terms for the consumers. double-glazing. competitions.

glass products) need to have minimum handling and travelling time. longer opening hours to fit in with busier lifestyles. and sells each batch to a retailer after adding on a profit margin (this is known as 'breaking bulk'). This reduces the final price of the product that the consumer has to pay. The retailer then sells each batch of products to the consumer. Heavy and bulky goods will often need a direct channel of distribution from the factory to the retail outlets. Place This refers to: • • firstly to the stores and the retail outlets where consumers can purchase the products of the business. then the higher the final price of the product. These developments are enabling the larger businesses to dominate markets and hold a significant percentage of the overall market share. who pays a low price per unit (this is known as 'bulk purchasing').g. in order to minimise the risk of damage to the products. and an increasing demand from consumers for many products to be sold in one outlet.com For evaluation only. such as perishable and fragile products (fruit. including the development of out-of-town shopping centres. In order for the distribution channel for a product to be efficient. then the following criteria must be met: • • • • It must be able to make products available to consumers quickly and cheaply. Often. distribution companies and retail outlets). Large and dispersed markets will require many intermediaries -these must be chosen carefully to ensure the swift transportation and availability of the products to the consumers. These retail outlets can. or even directly to the consumers themselves.foxitsoftware. The wholesaler then breaks this large quantity into smaller batches. a manufacturer will sell its output in a large quantity to a wholesaler. Some products. and it also speeds up the delivery and distribution process.O. since each intermediary will add on a profit margin in return for offering their services. after adding on a profit margin. The channels of distribution refer to the intermediaries that a business chooses to use to transport its product and make it available to consumers (e.P. secondly to the channels of distribution that the business uses to get its products from the factory to these outlets. The more intermediaries that exist in the distribution of a product from a factory to the consumer. the widespread use of Electronic Point Of Sale (E. The trend over recent years has been for businesses to eliminate many of the intermediaries in the distribution channel. exercise .S) systems. therefore. Retailing is a fast-changing sector of the economy and there have been many developments in this sector over the last decade. wholesalers.Generated by Foxit PDF Creator © Foxit Software http://www. and for the product(s) to be sold directly from the factory to the retail outlets.

m. Diagram 1 represents a product which has an inelastic demand: At a price of P1. An increase in price to P2 results in only a small fall in the quantity demanded to Q2. when the price of the product changes.c. the percentage change in quantity demanded is far less than the percentage change in price that brought it about. Price Elasticity of Demand This is the responsiveness of demand for a product to a change in the price of the product itself (i.e. and habit-forming goods such as alcohol and tobacco. Products with an inelastic demand curve include fast-moving consumer goods (f. quantity Q1 is demanded. The factory providing them with their stock and supplies will have little alternative than providing the supplies at a low price. more power than ever before when buying stock from factories and warehouses -enabling them to dictate the prices that they will pay for their supplies. since they cannot afford to lose such a large and important client. peoples' incomes.foxitsoftware. or the advertising of the product).com For evaluation only. it measures the change in demand following a change in another variable (such as the price of the product. In other words.Generated by Foxit PDF Creator © Foxit Software http://www. In other words. . by how much does demand change?). Elasticity Concept This is the responsiveness of demand for a product to changes in one of the factors that influence demand.g) such as bread and milk.

the quantity demanded would stay at Q1. cars. Diagram 3 represents a product which has a perfectly inelastic demand: This shows that demand is completely unresponsive to changes in price.Generated by Foxit PDF Creator © Foxit Software http://www. An increase in price to P2 results in a large fall in the quantity demanded to Q2.com For evaluation only. In other words.foxitsoftware. dishwashers and televisions. . Diagram 2 represents a product which has an elastic demand: At a price of P1. regardless of the change in price. In other words. quantity demanded is Q1. the percentage change in quantity demanded is far greater than the percentage change in price that brought it about. Products with an elastic demand curve include luxury goods such as holidays.

there is only a demand for the good at the price P1. The formula for calculating price elasticity of demand: Example 1. If the price of product B falls from £ 10 per unit to £ 9 per unit. and the quantity demanded falls from 100 units to 50 units.Generated by Foxit PDF Creator © Foxit Software http://www. At any other price. then the price elasticity of demand for product A is: =2 Example 2.foxitsoftware. and the quantity demanded rises from 80 units to 84 units. there would be no demand at all. Both diagrams 3 and 4 are theoretical extremes and there are no realistic examples. Diagram 4 represents a product which has a perfectly elastic demand: In this case. then the price elasticity of demand for product B is: . If the price of product A rises from £ 8 per unit to £ 10 per unit. In other words. demand is completely unresponsive to changes in price.com For evaluation only.

then the income elasticity of demand for product D is: .e. if a person's income changes. where an increase in income will often lead to an individual buying less of an own-brand product. An answer of infinity indicates that the demand for the product is perfectly elastic (see diagram 4). Income Elasticity of Demand This is the responsiveness of demand for a product to a change in peoples' incomes (i. If a person's income rises from £ 200 per week to £ 250 per week. An answer of one indicates that the demand for the product is unitary elastic. then the product is a normal product.6 Example 2. then the income elasticity of demand for product C is: = 1. An answer of between zero and one indicates that demand for the product is inelastic (see diagram 1).Generated by Foxit PDF Creator © Foxit Software http://www. If an increase in income leads to an increase in demand for the product. (e. The formula for calculating income elasticity of demand: Example 1.com For evaluation only. If a person's income falls from £ 400 per week to £ 360 per week. If an increase in income leads to a fall in demand for the product.g. = 0. and her demand for product D rises from 100 to 105 units. by how much does his / her demand for the product change?). supermarket own-branded products. then the product is an inferior product. and his demand for product C rises from 10 units to 14 units.foxitsoftware.5 • • • • • An answer of zero indicates that demand for the product is perfectly inelastic (see diagram 3). An answer of greater than one but less than infinity indicates that the demand for the product is elastic (see diagram 2). and more of an expensive brand).

and the demand for product E rises from 10 million units to 14 million units. and the demand for product F rises from 1 million units to 1.foxitsoftware. An answer of zero indicates that changes in income have no effect on the demand for the product (i. then the advertising elasticity of demand for product F is: =-1 • • A positive answer indicates that the advertising campaign is effective. The formula for calculating advertising elasticity of demand: Example 1. since either an increase in advertising expenditure leads to a rise in demand for the product. or a decrease in advertising expenditure leads to a rise in demand for the product.Generated by Foxit PDF Creator © Foxit Software http://www.e. the product is completely income inelastic). then the advertising elasticity of demand for product E is: = +2 Example 2.com For evaluation only. The larger the negative value. = -0.2 million per year. A negative answer indicates that the product is an inferior product. by how much does the demand for the product change?).5 • • • A positive answer indicates that the product is a normal product. the more inferior it is. if a business spends more money on the advertising of a product.1 million units.e. since either an increase in advertising expenditure leads to a fall in demand for the product. . A high positive answer would suggest that the product is a luxury product. A negative answer indicates that the advertising campaign is ineffective. or a decrease in advertising expenditure leads to a fall in demand for the product. Advertising Elasticity of Demand This is the responsiveness of demand for a product to a change in the advertising expenditure used to promote it (i. If a business reduced its advertising expenditure on product F from £ 2 million per year to £ 1.8 million per year. If a business increased its advertising expenditure on product E from £ 1 million per year to £ 1.

The ability to discriminate between different groups of consumers. (Marks available: 10) Answer outline and marking scheme for question: 2 . Availability of substitutes. She wishes to estimate. a) Define price elasticity of demand and explain why some products are price-elastic and other products are price-inelastic. within one month of its introduction. The competitiveness of the market. Price elasticity depends upon the characteristics of the product.foxitsoftware. the percentage of women who will purchase a particular new Brand X. (Marks available: 10) Answer outline and marking scheme for question: 1 Give yourself marks for mentioning any of the points below: a) Price elasticity of demand is the sensitivity of quantity demanded to changes in price. b) Outline the factors which may influence an organisation's pricing policy. How large a random sample should be taken if she wants the estimate to be at 95% confidence level. by sampling. proportion of income spent on the good are factors which with determine the degree of price elasticity.Generated by Foxit PDF Creator © Foxit Software http://www. (5 marks) (Marks available: 10) 2. a) What is meant by a random sample. Exam-Style Questions 1.com For evaluation only. b) A marketing manager's experience has been that between 10% and 20% of women purchase a new brand of cosmetics within one month of its introduction. (5 marks) b) The factors which may influence the organisations pricing policy: Whether the product is new.

price. Give yourself marks for mentioning any of the points below: a) Random sample. The pleasure of staking a small sum linked with numbers of special significance to oneself. Camelot have done well to have a midweek draw and to have set the ticket price at £1. a sum which most people will "invest" without discomfort and to make tickets available in a multitude of shops so nobody has to go far to buy one. but they are not throwing their money away. b) = 1600 approx.com For evaluation only.Generated by Foxit PDF Creator © Foxit Software http://www. but a thoughtful candidate may mention some of the characteristics associated with the product: The excitement at the possibility of winning. . a) What is the product offered by a lottery firm such as Camelot? b) How might a lottery firm optimise its marketing mix? (Marks available: 20) Answer outline and marking scheme for question: 3 Give yourself marks for mentioning any of the points below: (a) "A lottery ticket" is the straightforward answer. Camelot have done well to emphasise the proportion of receipts that goes to charitable causes and the relatively low proportion that goes to administration: punters may feel they have a small chance of winning. The feeling of being party to a syndicate which buys several tickets each week.foxitsoftware. promotion and place. (Max 10 marks) (b) Candidates might do well to comment on the four headings of product. everyone is likely to be chosen. Camelot have been fortunate to have free publicity in the televised draw and winner notification on the news. (Marks available: 10) 3.

foxitsoftware.Generated by Foxit PDF Creator © Foxit Software http://www.com For evaluation only. (Max 10 marks) (Marks available: 20) .

. a balance sheet. 2. Common mistakes that many businesses make when preparing their budgets for the forthcoming year include:. When a business draws up its budget. by making the employees feel valued by the business. and rent or mortgage payments). This forecasts a wide range of expenses for the forthcoming year (e. which will indicate the raw materials that need to be purchased. It is vital that each department involves all their staff in the planning and budgeting process.com For evaluation only. a cash flow and a capital expenditure budget (showing the fixed assets which the business forecasts that it will purchase in the forthcoming year). 5.g. The main budgets that are drawn up are : 1. a profit & loss account. therefore. A sales budget. This also includes several other forecasted documents . This will specify the direct and indirect staff that are required throughout the business for the forthcoming year. managerial salaries. in an attempt to achieve gains in efficiency. that each budget that a business sets must be realistic and achievable. it is essentially a series of smaller budgets covering all areas of operation.specifically. This forecasts the number of units of each product that the business aims to produce over the next year. Costing and Investment Budgeting Purpose of Budgeting A budget is simply a financial plan for the forthcoming year. A staffing budget.g. These budgets are then consolidated into the master budget. A selling expenses budget. Budgets are often used to exert a degree of control over the costs of the business.Generated by Foxit PDF Creator © Foxit Software http://www. utility bills. sales promotions and distribution). firstly in order to identify their needs for the forthcoming year and secondly to act as a motivator. This forecasts the number of units of each product that the business aims to sell next year. Budgeting. 1. It follows on from this. 6. office expenses. the price level that will be charged. in terms of the number of staff and their wages.foxitsoftware. This attempts to forecast the fixed overheads that the business will incur in the forthcoming year. It will include the materials budget. Repeating last year's figures. A production overhead budget. advertising. and the corresponding amount of sales revenue that is likely to be received. which can be related to production. This represents the various costs associated with selling the products of the business (e. 4. since any which cannot be met may leave the workforce with low levels of morale and motivation. An administrative expenses budget. that is drawn up to help a business achieve its objectives. A production budget. 3.

or where the actual amount of money flowing out of the business is more than the budgeted figure. or competitors ceasing to trade.com For evaluation only. an economic recession or a rise in labour costs. and consequently it can be changed accordingly). The business needs to investigate these variances and attempt to establish the reasons for their existence .Generated by Foxit PDF Creator © Foxit Software http://www. including an increase in the demand for the products of the business. This could be due to a variety of reasons.e. Negative or adverse (i.e. Positive (i. Sticking rigidly to the budget.000 for the year. forgetting the fact that it is only a plan and a guide for the next year. . costs. for sales. This could be due to a variety of reasons. but actually managed to sell £ 605. and concentrating instead on their own goals. For example. 3. (i.000 of products. It budgeted to have sales revenue of £ 500.e. 2. Variance Analysis It is vital that a business regularly reviews and revises its budgets. Setting unrealistic and unachievable budgets.this is known as budgetary control. Any discrepancies that exist between the budgeted figures (i. etc) and the actual results are known as variances. including price discounts on the products of the business. consider the following data which has been extracted from the budgeted figures and the actual results for a business: Budget £ 000 Sales revenue 500 Raw materials 200 Labour costs 100 Advertising 50 Delivery 20 Utility bills 15 Actual £ 000 605 220 110 45 20 16 Variance £ 000 105 F 20 A 10 A 5F 0 1A % 21 F 10 A 10 A 10 F 0 7A The business has six budget-heads listed.foxitsoftware. a reduction in the labour costs. or where the actual amount of money flowing out of the business is less than the budgeted figure.e. 4. unfavourable) variances occur where the actual amount of money flowing into the business is less than the budgeted figure. Each department ignoring the overall objectives of the business. favourable) variances occur where the actual amount of money flowing into the business is more than the budgeted figure. Variances can be either positive or negative.

000 of raw materials. it is common for managers to concentrate on the large positive and large negative variances and ignore the smaller variances. since it results in the business spending more money than it budgeted for. Similarly. It actually spent £ 110. This is an unfavourable or adverse variance (A). This is an adverse (A) variance of £ 1.000. because it results in the business receiving more revenue than it budgeted for.000. and the manager of the particular division or department then has to justify any expenditure which they wish to make. since it results in the business spending less money than it budgeted for.000. The business budgeted to purchase £ 200. but it actually spent only £ 45.foxitsoftware. This is a variance of £ 10. However.000 (or 7% of the budgeted figure). This is known as management by exception and involves the managers focussing their attention on those areas which have resulted in large overspending or underspending. when money is not as readily available and the business wishes to make cutbacks in its expenditure.000 on its labour costs.000 on raw materials. and attempting to discover the reasons behind it.000. . The distribution budget was £ 20. because it results in the business spending more money than it budgeted for.000 (or 10% of the budgeted figure).000 (or 21% of the budgeted figure).000 on its advertising for the year. This is a favourable variance (F) of £ 5. When investigating and analysing the variances.000 (or 10% of the budgeted figure). This is a favourable variance (F). This leaves a variance (the difference between the budgeted sales revenue and the actual sales revenue) of £ 105. Again.000 and the actual cost of distributing the products was £ 20. Therefore there is no variance. The budgeted figure for the utility bills was £ 15. this is an unfavourable or adverse variance (A). Zero Budgeting This is where a budget is set to zero for a given time-period. This is a variance of £ 20.com For evaluation only. It actually spent £ 220. since the actual figure was the same as the budgeted figure.000 on its labour costs (wages and salaries). because it results in the business spending more money than it budgeted for. the utility bills actually cost £ 16.000 (or 10% of the budgeted figure).Generated by Foxit PDF Creator © Foxit Software http://www. the business budgeted to spend £ 100. The business budgeted to spend £ 50. It is often used in an economic recession or a downturn in the industry.

as the level of output increases. then variable costs increase). mortgage payments. Variable and Total Costs Generally speaking. . and it would be incurred even when output was zero. Examples include raw materials. Variable costs. as well as identifying those departments which require minimal expenditure. other direct production costs.com For evaluation only. However. managers' salaries. Zero budgeting helps the business to identify those departments which require large amounts of essential capital and day-to-day expenditure. Fixed costs. production wages. zero budgeting can result in managers spending far more of their valuable time on the budgeting process than would be the case if budgets were set more traditionally.Generated by Foxit PDF Creator © Foxit Software http://www. Costs Fixed. A fixed cost is one which is totally independent of the level of output.foxitsoftware. a business will incur two types of cost when it produces goods and provides services to consumers: 1. They are often referred to as overheads. 2. Total fixed costs (TFC) are represented in diagram 1: Variable costs are those which vary directly with output (i.e. Examples include rent. and utility bills. and loan repayments.

In other words: . Total costs are represented in diagram 3: Note that TC starts at the same point as TFC. then the total costs (TC) of the business can be calculated.com For evaluation only. Average costs Average fixed costs (AFC) are calculated by dividing total fixed costs by the level of output. This helps the business to calculate its total costs at any given level of output. Total variable costs (TVC) are represented in diagram 2: When fixed costs are added to variable costs. In other words.foxitsoftware. TFC + TVC = TC.Generated by Foxit PDF Creator © Foxit Software http://www.

Average variable costs (AVC) are calculated by dividing total variable costs by the level of output.this is because the total fixed costs remain constant and they are. spread over a larger and larger amount of output. Average fixed costs are represented in diagram 4: It is clear to see that average fixed costs decline continuously .hence AVC will decline. In other words: Average variable costs are represented in diagram 5: It is clear to see that average variable costs will start to decline over time.foxitsoftware. the business is likely to reach a level of output where it . and it can produce each unit for less .com For evaluation only. therefore.Generated by Foxit PDF Creator © Foxit Software http://www. This is because the business becomes more efficient at producing its output. Thus. However. the average fixed cost (the fixed cost per unit) will decline.

then the average total costs (AC) of the business can be calculated. Contribution is the term given to the amount of money that remains after all direct and variable costs have been deducted from the sales revenue of the business.foxitsoftware. Average costs (AC) are calculated by dividing total costs by the level of output. In other words: Average costs are represented in diagram 6: It is clear to see that average costs will also start to decline over time. .com For evaluation only. When average fixed costs are added to average variable costs. then the business is said to have achieved economies of scale. Contribution Analysis Contribution is one of the most important concepts in A-level Business Studies.Generated by Foxit PDF Creator © Foxit Software http://www. In these circumstances. the business is likely to reach a level of output where average costs (the cost per unit) will start to rise again. However. becomes less efficient at producing its output and its average variable costs (the variable cost per unit) will start to rise again. In other words: AFC + AVC = AC This helps the business to calculate its average cost at any given level of output. the business is said to be experiencing diseconomies of scale. When this occurs in the long-run.

foxitsoftware. Therefore it is vital that a loss-making product is not deleted simply because it fails to produce a profit .5 million. if a product has a selling price of £ 10. 2. In other words. which it sells for £ 9 per unit. Contribution can be analysed in two ways: 1. Break-Even Charts This is a graph showing the total revenue and the total costs of a business at various levels of output. it represents the amount of money which will contribute towards the profit of the business.5 million. Contribution per unit sold Contribution per unit sold = Sales price per unit .R) of a business (or product) is equal to its total cost (T. The variable cost of each unit is £ 4 and the business faces fixed costs per year of £ 1 million. if a business has total sales revenue of £ 4 million.Variable costs per unit. Total contribution Total contribution = Total sales revenue . The break-even point is the point on a break-even chart where the total revenue (T. and its total variable and direct costs are £ 2. but it nevertheless makes a contribution towards covering the fixed costs of a business. It can also be calculated mathematically by using the following formula: For example: A business produces just one product. then it is still worthwhile to produce it. It is called 'contribution' because it represents the amount of money which is available to contribute towards covering the fixed costs of the business and. This is because the total profit of the business will actually decrease if the contribution from the loss-making product is no longer received.C). then it would be unwise to delete the product from the product portfolio.com For evaluation only.Generated by Foxit PDF Creator © Foxit Software http://www. then it has a contribution of £ 7 per unit. It is a form of Management Accounting and it enables a manager to see the expected profit or loss that a product will face at different levels of output. raw materials. once these are covered. For example. .if it produces a contribution towards fixed costs.fixed costs = profit. then the total contribution for the business is £ 1. contribution .Total direct and variable costs. If a product is loss-making. This contribution will hopefully cover the fixed costs and then contribute towards profit. For example. and its variable costs (labour. etc) is £ 3 per unit.

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The business currently produces and sells 500,000 units. What is the break-even level of output and what profit will the business make if it sells all of its output? In order to assist the drawing of the break-even chart, we can calculate the break-even level of output and the amount of profit using simple formulae:

In other words, the business will need to produce 200,000 units before it breaks-even. Any level of output below 200,000 will yield a loss. Any level of output above 200,000 will yield a profit. The profit is equal to total revenue minus total cost (or profit = TR - TC). Total revenue (TR) is calculated by multiplying the selling price by the number of units sold. In this example, the selling price is £ 9 and the number of units sold is 500,000. Therefore the total revenue (TR) is £ 9 x 500,000 = £ 4.5 million. The total cost (TC) is calculated by adding together the total fixed costs (TFC) to the total variable costs (TVC). In this example, the fixed costs are £ 1 million and the total variable costs are £ 4 x 500,000 units = £ 2 million. Therefore the total cost (TC) is £ 3 million. The profit is, therefore, TR - TC, which gives us: £ 4.5 million - £ 3million = £ 1.5million. We can now draw a break-even chart and check the figures on the chart with the answers above. In order to have an accurate break-even chart, three lines must be plotted: Total Fixed Costs (TFC), Total Costs (TC)

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Total Revenue (TR). The x-axis is labelled as 'Output' (in units). In this example, the axis will go up to 500,000 units. The y-axis is labelled as 'Costs, Revenue and Profit' (in £ ). In this example, the axis will go up to £ 4.5 million.

As you can see, the answers on the chart correlate with the answers calculated using the two formulae above. The break-even point (shown as a red dot) is the point where the TC and the TR lines cross. This is then measured by dropping a vertical red line down to the x-axis, to give 200,000 units. The profit at 500,000 units is then calculated by taking a red vertical line up from the 500,000 unit mark to where it hits the TC line. This is then measured across to the y-axis (again using a red line) to give us total costs of £ 3 million. The vertical red- line from the 500,000 unit mark is then extended to where it hits the TR line. Again, this is then measured across to the y-axis to give us a total revenue of £ 4.5 million. Therefore, the profit is the difference between TR and TC (i.e. £ 1.5 million). Although break-even analysis is a very useful tool, it does have several drawbacks:
1. It assumes that the TFC, the TC and the TR functions are linear. In reality, this is very unlikely. 2. It assumes that the selling price is constant, in reality the selling price is likely to vary from customer to customer and region to region. 3. It assumes that the business only produces one product.

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4. It assumes that the business can sell all of its output. In reality, very few businesses will be able to do this and some will remain as unsold stock.

The data used to construct the break-even chart may well be out-of-date and therefore inaccurate.
Cost Centres and Profit Centres A cost centre is an area of a business where costs stem from and can easily be recorded (i.e. a department or a person where costs can be identified as being incurred). These costs include wages and salaries, raw materials and capital expenditure (e.g. machinery).

Cost centres are used for several reasons:
1. Allowing the business to see which departments and people are spending the most money. 2. To see if the departments and people are generating enough benefits for the business with the money that they spend.

Direct costs (i.e. those costs which are incurred directly as a result of production) are easy to allocate to cost centres, but indirect costs (e.g. rent, rates, loan repayments, etc) are far more difficult to allocate to a specific cost centre. A profit centre is an area of a business where revenue can be identified as being earned, (and, hopefully, profit will be made). Profit centres generally include different product lines and retail outlets, and they are frequently used by businesses which are large and diversified. They allow a business to see which parts of the business and which products generate the most revenue. The main reasons for using cost-centres include: 1. Loss-making departments of the business and loss-making products can be easily identified. 2. Each profit centre can be viewed as operating independently and this can lead to higher levels of motivation amongst the staff in each profit centre. Overall, the use of cost centres and profit centres allows a business to exercise a degree of financial control over its operations, and to monitor the efficiency and profitability of its various departments and product-lines.

Investment Appraisal
Purpose All businesses require capital equipment (fixed assets) such as machinery, premises and vehicles. The purchase of such assets is known as capital investment and is undertaken for the following reasons:

foxitsoftware. involves an element of uncertainty. How long is the payback period ? After 1 year. Larger businesses may use it as a screening process before embarking on one of the more complicated techniques. the cashflow will be £ 450. because expenditure is incurred today in order to produce some benefit in the future. 1.000 (or one third) of the cashflow from year 4 in order to reach the payback point. After 2 years. to achieve economies of scale) 4.com For evaluation only. 4 months).000 per year. the cashflow will be £ 300.V) method. To replace existing equipment which is out-of-date or obsolete 2.).e. (machinery etc.000 in new machinery. After 3 years.R. To expand the productive capacity of the business 3. Investment appraisal techniques are designed to aid decision-making regarding such investment projects. The firm will need £ 50. the payback period is 3 1/3 years (or 3 years. For example: A manufacturing firm is considering investing £ 500.000. like all other business activities. To produce new products and. to generate sufficient net cash flow to pay for itself. Payback Method This is the simplest method of investment appraisal and is usually preferred by small businesses because of its simplicity. There are 3 methods which can be used to appraise any investment project: 1.Generated by Foxit PDF Creator © Foxit Software http://www. Firms can use this technique in one of two ways: .R) method 3. therefore. The Net Present Value (N. the cashflow will be £ 150. The equipment is expected increase the firm's cashflow by £ 150. The payback period is the time taken for the equipment. To reduce the production costs per unit (i.000. The Payback method 2.000. Therefore.P. The Average Rate of Return (A. break into new markets Capital investment.

5m £ 0m £ 1m Project A pays back in 3 years (£ 0 in year 1 + £ 0. project C actually brings more cash into the business and would be the better project to select. The payback method clearly discriminates against projects which produce a slow but substantial return. • Firstly. consider an item of capital (e. Example: Each of the three alternative projects below involve an initial cost of £ 1 million. Average Rate of Return (A. project B would be selected.5m in year 3). The timing of the return prior to payback. 2.5 million . Secondly.com For evaluation only. resulting in the danger that highly profitable projects will be rejected because of the delay in producing a return (yield). a machine) which will cost £ 1 million to purchase.5 million = £ 2. and will produce an annual net cash flow of £ 0. and produce net cash flow as shown: PROJECT A B C YEAR 1 £ 0m £ 0. Using 'The Pay-back Method' to decide between these projects.) Method This method takes the total return (yield) over the whole life of the asset into account and therefore overcomes one of the defects of the payback method. the earnings after payback). The total return (yield) is: 5 x £ 0. • However. the payback method can be used to rank projects according to the speed at which they payback. In order to understand the arithmetic.g. Project C pays back in 3 1/2 years (£ 0 in year 1 + £ 0 in year 2 + £ 0.5m £ 0. Project B pays back in 2 years (£ 0. the payback method ignores the following two important factors: 1.5m £ 0m £ 1m YEAR 5 £ 0.5m in year 2 + £ 0. But if you looked at the total revenue over the full life of each project. and any project which is not expected to payback within this period is rejected.R. The total return on the investment project (i.5m in year 1 + £ 0.e. a firm could set an upper limit on the time allowed for payback.5m YEAR 4 £ 0.5m £ 0.5 million.R.Generated by Foxit PDF Creator © Foxit Software http://www.5m in year 3 + half of the £ 1m in year 4).5m in year 2). when faced with a choice of projects.5m £ 0m YEAR 2 £ 0.foxitsoftware. is expected to last 5 years.5m £ 0.5m £ 0m YEAR 3 £ 0.

The maximum life of each asset is three years and the capital outlay is £ 100. we can use the A.000 in each case. If we now deduct the initial cost of investment (£ 1 million) we are left with a total return (yield). the 4 steps for calculating the A.R. when faced with a choice of alternative projects.R. Divide the resulting figure by the expected life (in years) of the capital 4.capital outlay = £ 50. Further examples. Annually. then the projects can be ranked by their A.R.000 £ 140.000 £ 50. Add up the total forecasted net cash flow 2. Secondly.foxitsoftware.Generated by Foxit PDF Creator © Foxit Software http://www. the firm might set a predetermined level and reject any project which has an expected A. less than this percentage. in two ways.000 B £ 100.000 £ 20. A firm is considering three alternative investment projects. Firstly.The table below depicts net cash flow in each of the three years: PROJECT YEAR 1 YEAR 2 YEAR 3 A £ 50.R.com For evaluation only.R. Deduct the capital outlay from this 3.666.R.R. Express this annual figure as a percentage of the capital outlay As with the Payback method.67 (this is the amount of profit per year) .000 £ 50. this works out at: When we express this annual figure as a percentage of the original capital outlay we get the Average Rate of Return for the project: To recap.000 £ 16.000 Total forecasted net cash flow .5 million.R. are: 1.000 £ 0 C £0 £ 50. net of the initial capital outlay. of £ 1.000 Project A: Total forecasted net cash flow = £ 150.

This is where the notion of present value is used. as well as the size of the inflows.capital outlay = £ 90. inflation will erode the real value of that sum of money over the year). A sum of money in one year's time is worth less than that same sum of money now (i.Generated by Foxit PDF Creator © Foxit Software http://www.capital outlay = £ 20. The more sophisticated methods of investment appraisal take the timing of the cash inflows into account.P.foxitsoftware. Project B: Total forecasted net cash flow = £ 120.V. Hence.com For evaluation only.) Method The return on an investment comes in the form of a stream of earnings in the future.V.67%.R.67% Project C: Total forecasted net cash flow = £ 190. Net Present Value (N. irrespective of when it is received. The N.67 (this is the amount of profit per year) 6. method of investment appraisal takes into account the size of the cash inflows over the .000 £ 6.R treats all money as of equal value. a project may be favoured even though it only produces a return over a long period of time.000 £ 30.e.R. 16. method of investment appraisal is that it attaches no importance to the timing of the inflows of cash.666.000 Total forecasted net cash flow .000 Total forecasted net cash flow .P.R.000 (this is the amount of profit per year) 30% The great defect of the A. A.

Example: In appraising a £ 300. net of operating costs.72 Year 0 is the present day (i. or D. to be received in a certain number of years.000 +£ 85.foxitsoftware.599. the firm expects to sell the equipment for £ 10.000 Present Value -£ 300. then the project should not be undertaken.702. If the sum of present values (minus the capital cost) is positive. when the initial capital outlay is spent).000.com For evaluation only.C.Generated by Foxit PDF Creator © Foxit Software http://www.000 investment project.787. The equipment will produce a cash inflow (net of operating costs) of £ 75. over a five year period.000 +£ 75.000 +£ 75.e. so that you do not have to work it out! The present value of each year's cash inflow are then aggregated (this is called thediscounted cashflow.000 +£ 75. has a present value of: In examinations you will usually be given the discount factor. then it is worthwhile proceeding with the project. a firm uses a discount rate of 5%. Hence. at a 3% rate of discount.82 +£ 61.69 +£ 66. What is the Net Present Value of the project? Year 0 1 2 3 4 5 cashflow -£ 300. A greater weighting (or importance) is given to the inflows of cash in the earlier years.000 in year 1 has a present value of: .F) and this figure is compared with the initial capital outlay.428.57 +£ 68. The weighting can be calculated from the following formula: A = the actual sum of money concerned r = the rate of discount (called the 'Discount factor') n = the number of years This enables us to calculate the present value of money. At the end of the five years.027.000 +£ 75. life of the equipment. but also makes adjustment for the timing of the money. The cashflow of £ 75.000 +£ 71.000 per year.21 +£ 64. If the resulting figure is negative. £ 1000 in two years time.

21 The process continues for the remaining years. The external environment needs to be considered before any decision can be taken regarding a proposed investment project.57 The cashflow of £ 75. Qualitative factors such as the objectives of the business must be considered at all times.027. £ 71. from year 1 to year 5). then the investment project should not be undertaken. pollution) will have a detrimental effect on the image and reputation of the business. components).546. .g. The discounted cashflow is the sum of the present values for the 5 cash inflows (i. the level of technological progress in the industry (e.g. it may be dangerous to attempt to expand during a recession. In other words: £ 332. and any legislation (e.000 = £ 32.000 in year 2 has a present value of: £ 68.01 .546.com For evaluation only.g.Generated by Foxit PDF Creator © Foxit Software http://www. Other Influencing Factors There are many other factors that a business will need to take into consideration when appraising an investment project.01 The net present value is found by deducting the initial capital outlay from the discounted cashflow. since any external costs (e. pressure group activity. The effects of the actions of the business on the environment must also be taken into consideration. competitors may already be using the new machinery). These factors include the state of the economy (e.e. because demand for products may be falling).£ 300. then it is advisable for the firm to go ahead with the investment project.546. This figure is £ 332. other than the financial (quantitative) factors.01 Since this result is positive. new working practices and changes to their working conditions. restricting the use of certain materials.428.g. as well as the effect upon the employees of new machinery.foxitsoftware. If the result had been negative.

a) What is meant by Net Present Value in relation to investment appraisal? b) The following are net cashflows from three projects. (Marks available: 10) Answer outline and marking scheme for question: 1 Give yourself marks for mentioning any of the points below: a) Net present value is the present value of future income from an investment project.foxitsoftware. which have an initial investment of £40. B is best B is the best choice. as with any investment decision. Return on investment. B is fastest.Generated by Foxit PDF Creator © Foxit Software http://www. the business will also need to consider the amount of finance that is available for expansion.com For evaluation only. (5 marks) (Marks available: 10) . less the cost. A is best. NPV. Give reason for your answer. B and C. state which of the projects above you would recommend.000: Using investment appraisal methods with which you are familiar. Exam-Style Questions 1. (5 marks) b) Payback method. and the effect that any borrowing to raise extra finance will have on the gearing ratio. A. Finally.

There are three categories of fixed assets: a) Tangible fixed assets (physical items such as land.e. b) Intangible fixed assets (non-physical items.foxitsoftware. which are very difficult to place a value on. the purchase of which is known as 'capital expenditure'). There are two main types of classification of assets . since every penny raised as capital must have been used for some purpose and must be accounted for.e. it tells us how the money was spent). a) A fixed asset b) A current asset Fixed Assets A fixed asset is acquired for the purpose of use in the business and is likely to be used by the business for a considerable period of time (more than 12 months). and vehicles. c) Financial fixed assets (investments that the business has.fixed assets and current assets. It summarises the financial state of the business at that date. Current Assets A current asset is either part of the operating cycle of the enterprise or is likely to be realised in the form of cash within 12 months. it is a "snapshot" of the financial strength of a business at a particular moment in time). buildings. Assets An asset is an item that will give present or future monetary benefits to a business as a result of economic events. the liabilities and owners' equity represent the sources of capital (i. goodwill and patents). it tells us where the money came from) and the assets represent the uses of the capital (i. such as brand names. liabilities and owners' equity at a specific date (i. machinery. Company Accounts Balance Sheets A balance sheet is a statement of a firm's assets. Therefore. such as shares and debentures in other companies). There are five categories of current assets: .com For evaluation only. When added together. an asset is basically an item or money that the business owns.Generated by Foxit PDF Creator © Foxit Software http://www.e. The two sides of the account must always balance.

b) Cash on the premises ("petty cash"). There are two main types of classification of liabilities: a) long-term liabilities b) current liabilities Long-term liabilities A long-term liability is a source of long-term borrowing and will exist on the balance sheet for more than 12 months. b) Creditors (suppliers who the business has not yet paid). a) Cash in the bank. e) Prepayments (where the business has paid in advance for the use of an item.foxitsoftware. b) Mortgages (essentially a long-term loan to purchase land and buildings). There are three categories of long-term liability: a) Bank loans. a liability is basically an item or money that the business owes to a third party. c) Debtors (customers who have purchased goods on credit. and have not yet paid). c) Debentures. They arise mainly through the process of day-to-day trading and there are five categories. Liabilities A liability is the amount outstanding at the balance sheet date. rent for example). e) Dividends payable. d) Stock (raw materials. Current Liabilities A current liability can be simply defined as amounts of money owing to third parties which will be settled within 12 months. . work-in-progress and unsold finished goods).Generated by Foxit PDF Creator © Foxit Software http://www. c) Accruals (debts for which a bill has not yet been received).com For evaluation only. which the business is under obligation to pay. Therefore. d) Corporation tax (owed to the Government). a) Bank overdraft.

liabilities Therefore. It also shows us the effect of a rise in value (an appreciation) of any of the assets owned by the business. In a sense. how much money the shareholders have a claim on within the business and what the business has done with any retained profits over the years. we can see that: If Assets = liabilities + owners' equity Then Owners' equity = assets . Shareholders funds There are several other items that appear on a Balance Sheet . The owners' equity is usually left in the business as long as it is required and it can fluctuate in value. the money it used to start-up).foxitsoftware. These items show us where the business got its original capital from (i. as at 01/04/00 Fixed Assets Current Assets: Cash Debtors Stock Total Current Assets Less Current Liabilities: Overdraft Creditors Total Current Liabilities Net Current Assets [=Working Capital] Net Assets [=Assets Employed] £(000) £(000) 500 100 150 50 300 20 140 160 140 [300-160] 640 [500+140] . Using simple algebra.most notably shareholders' funds (also called 'owners equity') and reserves.Generated by Foxit PDF Creator © Foxit Software http://www. owners' equity is a liability of the business. in as much as it is a claim on the assets. it differs from other liabilities in that it does not have a definite date by which it is to be repaid and it is not a fixed amount. Owners' equity is a residual claim on the business after all the other liabilities have been settled.e.com For evaluation only. the owners of the business own the assets of the business less what the business owes to other bodies. Balance sheet format The usual layout for a balance sheet is as below: Balance Sheet for 'My company PLC'. However.

It is also referred to as 'working capital' and it is calculated by deducting current liabilities from current assets. It also gives some information on the liabilities of the business and when they will fall due. that the Balance Sheet is only one part of the financial statements required to give an accurate appraisal of the financial position of a business. for example. One of the most important parts of a balance sheet is the 'net current assets' section. however.Generated by Foxit PDF Creator © Foxit Software http://www. It may be the case that the business suffers a liquidity crisis and has to sell off some fixed assets. The purpose of a Balance Sheet The purpose of a Balance Sheet is to communicate information about the financial position of the business at a particular moment in time. It summarises information contained in the accounting records in a clear and understandable form. Remember. The combination of this information can assist the user in evaluating the financial position of the business. and as such the importance of just one of these statements should not be over-emphasised. in order to raise the necessary cash to meet its debts.foxitsoftware. It can give an indication of the financial strength of the business and can also indicate the relative liquidity of the assets. Working capital is used to pay for expenses such as wages. . what it owes (liabilities) and where the company got its money (capital) from at a specific point in time. On the other hand. then it can be argued that this cash is not being used productively to help the business grow and diversify into new products and markets. raw materials and utility bills. and the business must ensure that it does all that it can to keep enough cash available to pay its current liabilities.com For evaluation only. if the business has too much cash tied-up in working capital. This is the day-to-day finance that is needed for running a business. that close control is kept over working capital. It should be remembered. If a business does not have sufficient working capital then it can face problems when paying its short-term debts (current liabilities). Represented by: Long-Term Liabilities 200 Share Capital 250 Reserves 190 Capital Employed 640 [200 + 250 + 190] ASSETS EMPLOYED = CAPITAL EMPLOYED: the two parts MUST always balance. It is vital. therefore. a balance sheet shows what a company owns (assets).

.e. to 12 months).000 This means that after 1 year. It is only by collectively analysing the Balance Sheet.Generated by Foxit PDF Creator © Foxit Software http://www. After 2 years. Depreciation represents the fall in the value of these fixed assets. Straight-line depreciation The most common method of depreciation is the straight-line method -this method of depreciating a fixed asset charges an equal amount to each year of its expected useful life. due to time. The formula for its calculation is: The depreciation charge per year Example: If a new machine is purchased by a business for £100. After 4 years. the Profit & Loss account and the Cash Flow Forecast of a business that an overall impression can be gathered on the financial strength of the business.000. the net book value will be £64.foxitsoftware.000 and it is expected to have a useful life of 5 years.000. it will be £46.000. then what is the depreciation charge per year? The depreciation charge per year =£18.com For evaluation only. it will be £28. at the end of which it will be sold for a scrap value (residual value) of £10. Essentially. After 3 years. or due to obsolescence. depreciation divides up the historic cost of a fixed asset over the number of expected years that it will be used by the business. Depreciation The lives of fixed assets are not limited to a single accounting period (i. the fixed asset will have a net book value (historic cost minus depreciation) of £82.000.000. either due to their use.

000 will be written-off . For example. Examples include wages. costs from which all benefits have been extracted during an accounting period). Profit and Loss Account The profit and loss account is a financial statement which represents the revenue that the business has received over a given period of time. but has not yet received the cash) interest royalties dividends that the business receives on its investments or fees for hiring-out the resources of the business to a third party. Revenue Revenue is the inflow of money to the business in the course of the ordinary activities of the enterprise.000 (this is the same value as the residual or scrap value). Instead of writing-off the total cost of the machine. There are a number of different sources of revenue. and utility bills -often known as revenue expenditure.e. It must be remembered that expenses are not necessarily the same as costs. a portion of the £50. this £50. where the business has sold goods to customers. • • • • • • cash sales credit sales (i.e. However. expired). At the end of year 5.foxitsoftware. since the benefits from the machine will last for more than a single accounting period (i.000 will not be written-off as an expense.Generated by Foxit PDF Creator © Foxit Software http://www. for more than 12 months). Revenue is recognised at either the receipt of the cash OR at the point of sale (if the goods are sold on credit). It also shows the profit that the business has made over a period of time (usually 12 months) and the uses to which the profits have been put.e.000). and the corresponding expenses which have been paid. The depreciation charge per year will be entered in the profit and loss account of the business as an expense. it will have a value of £10. since it represents that part of the cost of the fixed asset that has been usedup (i. if a business purchases a new fixed asset (such as a machine) then it will clearly incur the monetary cost of purchasing the machine (say £50. Expenses Expenses are expired costs (i. raw materials.e.com For evaluation only.

we have not yet accounted for selling and administrative expenses (such as advertising costs. These refer to the profit made from normal trading activities.S.foxitsoftware. From this. renting out premises). These are sometimes referred to as direct materials. the result is known as trading or operating profit. Format of the Profit and Loss account The usual layout for a profit and loss account is as below: Profit & Loss Account (01/04/99 .o.31/03/00) £000 Sales Revenue Cost of Sales: Materials Direct labour Production overheads Gross profit Less selling expenses Less administrative expenses Trading [Operating] Profit Add non-operating income Profit before interest and tax Less interest expense Profit before tax [Net Profit] Less taxation Profit after tax Less dividends Retained Profit £000 1. Sales revenue less C. the labour charges associated with the production. is known as Gross profit.G. utility bills. However.g. The resulting figure is known as profit before interest and tax. distribution costs. When these are deducted from the Gross Profit. as an expense each year over the useful life of the machine -this is known as a 'depreciation charge'. and the production overheads. known as non-operating income (e. The next adjustment is to add on any income from other activities. etc. .such as the cost of the raw materials. direct labour and direct overheads).). salaries.com For evaluation only.000 300 200 100 (600) 400 100 120 (220) 180 (10) 190 (30) 160 (60) 100 (20) 80 The first line gives the Sales Revenue for the business from selling its goods and services.Generated by Foxit PDF Creator © Foxit Software http://www. we deduct the "Cost of goods sold" (costs directly associated with the production of the goods and services .

Profitability can be improved by bringing some of the revenue for the next financial year's confirmed orders into the current financial year. The final part of the account is known as the appropriation account. therefore. or by using a 'sale and leaseback' scheme. We then deduct a figure for interest charges. there are two drawbacks: 1. and then paying a sum of money per year to lease it back. . and it will imply to the readers of the accounts that cash is readily available. It provides information on the way in which the profit is dispersed. The cash from the sale of the asset will improve the liquidity of the business.com For evaluation only. however. 2. 2. The 'fixed asset' figure on the balance sheet will have fallen after the sale of the land and building. Window Dressing This is a form of creative accounting and it basically involves manipulating various figures in the financial accounts of a business. If a business is experiencing a deteriorating liquidity situation. The resulting figure is known as profit before tax or net profit. The business is not tackling the cause of the low profit figure.Generated by Foxit PDF Creator © Foxit Software http://www. so to flatter its financial position. Some is taken in corporation tax and goes to the Inland Revenue. This involves a business selling a fixed asset (often land and buildings) to a third party. This artificially boosts the 'sales revenue' figure for the current financial year and. The business still retains the use of the asset.foxitsoftware. then it can temporarily improve this figure either by selling off fixed assets. but no longer owns it. some is drawn from the business as dividends to be distributed to the shareholders and the remainder isretained within the business for re-investment. However. there are two drawbacks to this: 1. The business will not be able to count the money again for the next financial year when the orders are dispatched -therefore the profit figure for the following year will be depleted of this revenue. The business is not tackling the cause of the liquidity problem. Again. There are two key variables that a business may like its shareholders (and other stakeholders) to believe are stronger than they really are: • • liquidity (the ease with which a business can raise cash quickly) profitability. also boosts the profit figure for the business.

bills and wages). without a sufficient financial base. Further to this point. Overborrowing -therefore having large monthly loan repayments.foxitsoftware. Chasing debtors for the monies owed to the business.com For evaluation only. 2. Offering price discounts to boost sales and sales revenue. Cash flow refers to the difference between the cash flowing into the business (e. 3. the business must ensure that it is implemented quickly and that a careful eye is kept on the liquidity (cash flow) position in the future. through sales revenue) and the cash flowing out of the business (e. Overtrading -where the business attempts to expand too rapidly. Having too much money invested in stocks. 5. if the products are sold on credit to customers. 4. A 'sale and lease back' arrangement.g. Selling off stocks. then the time delay between the cash outflows and the cash inflows will be even longer.Generated by Foxit PDF Creator © Foxit Software http://www. There are many actions that a business can take when it is experiencing a liquidity crisis: 1. . Unexpected changes in demand for their products. Whatever action is decided upon. which have to be met. 3. Cash Flow Cash Flows Cash is the most liquid of all the assets of a business -it represents the bank balance and the cash that the business has available on the premises (otherwise known as 'petty cash'). This potential problem is compounded by the fact that businesses often have to pay many expenses several weeks or even months before any cash actually flows into the business. 2. 5. which shows the cash inflows and the cash outflows for a business over the past 12 months. since without the ability to pay workers and suppliers then the business will soon have to cease trading. The major causes of cash flow crises for a business are: 1. Cashflow problems Having a positive cash flow is vital for the survival of a business. suppliers will have to be paid for any raw materials. wages and salaries will have to be paid to employees. Allowing too much credit to their customers. 4. and the rent or mortgage payments will have to be paid before the products can be manufactured and sold to customers. Selling off fixed assets. Cashflow statement A cash flow statement is a Financial Accounting document.g. For example.

e.com For evaluation only. Example: Total £ Jan Feb Mar Apr Sales revenue Other revenue Total cash inflows Total cash outflows 2850 650 3500 3400 900 850 750 350 200 200 100 150 1100 1050 850 500 700 950 1200 550 400 100 (350) (50) 600 700 350 300 Net monthly cash flow 100 Bank balance 300 The business forecasts that in January it will experience cash inflows of £1.Generated by Foxit PDF Creator © Foxit Software http://www.foxitsoftware. wages. its cash outflows are forecast to be greater than its cash inflows). in the months of March and April. This gradually reduces the bank balance to just £300 by the end of April. the forecasted cash inflows are only £100 more than the forecasted outflows. . the business needs to arrange extra borrowing or overdraft facilities to provide extra cash). This is added to the £200 bank balance which existed at the end of December.100 and cash outflows of £700. etc) per month for a business over an accounting period. so that it can prepare for those months in which it is forecast to experience a cash flow crisis (i. However. to give a forecasted bank balance at the end of January of £600. Cashflow forecast A cash flow forecast is a Management Accounting document. It indicates those months in which the business suffered a cash flow crisis (where cash outflows were greater than cash inflows) and it will also highlight those months in which the business was cash-rich (i.e. In February. the business is forecast to experience negative net monthly cash flows (i. It is important for a business to produce a cash flow forecast. leaving a bank balance of £700. It allows a business to prepare a cash flow forecast for the forthcoming year. by basing the estimated cash inflows and outflows on the results from the previous year. which outlines the forecasted future cash inflows (from sales) and the outflows (raw materials. leaving a positive net monthly cash flow of £400.e. more cash inflows than cash outflows).

new product development). in the months where the business is forecast to be cash-rich.com For evaluation only.foxitsoftware. (known as the gearing ratio)? c) Why might a company use various sources of finance? d) Using examples. over five years. it can use this money profitably elsewhere within the business (e. But with regards to liquidity it would seem that B is sailing close to the wind and may find itself with cashflow problems.g. Alternatively.Generated by Foxit PDF Creator © Foxit Software http://www. This seems to be confirmed by the net profit as a percentage of capital employed. a) Using the information in the table explain the comparative attractiveness of the two firms to a potential investor. A seems to be more secure but has it got too much cash? . The data summarised in the table below show the performance of two firms A and B. Exam-Style Questions 1. (Marks available: 20) Answer outline and marking scheme for question: 1 Give yourself marks for mentioning any of the points below: a) It would appear that As performance is deteriorating compared with B. explain why it is important that potential investors should consider nonfinancial factors before making their investment decision. b) Why is it important that potential investors should be aware of the ratio of ordinary share capital to other forms of long term finance. On this basis B would seem to be the better bet.

this should send alarm bells to a potential investor. There is the time period for borrowing and charges made that have to be taken into consideration. Trade credit is a source of funds used to purchase raw materials.com For evaluation only. Expenditure can be for revenue or capital expenditure. For example it is important to look at the previous performance of the company to identify trends and compare them with what is happening in the market place. For example if company sales are increasing in a shrinking market. This means that the majority of long term funds comes from the owners of the company.Generated by Foxit PDF Creator © Foxit Software http://www. for example: is the economy entering a downturn or is the economy enjoying a boom? (Marks available: 20) . Capital expenditure is on goods which can be used over a long time period such as machines and can be financed over a long time period. More information is needed to make a true assessment. For example if the gearing ratio is less than 100 per cent a company is said to be low geared. Internal sources sources the company has control over compared with external funding. Revenue expenditure is spent on items such as raw materials or labour. b) The gearing ratio shows the relationship between equity capital and interest bearing capital. Why is the market shrinking? The state of the economy might indicate the timing of investment.foxitsoftware. This will be consumed quickly. d) Examples other than financial help to give a fuller picture of the likely future performance of the company. c) Sources of funds can be internal or external. usually implies that a company is not a risk taker and the potential for growth is higher.

5 and 2. 3. It is calculated using the following formula: For example. Liquidity ratios. and must be repaid with interest.Generated by Foxit PDF Creator © Foxit Software http://www. which can be used to measure the solvency. this measures the proportion of the capital of the business which has come from external sources. Profitability (or 'performance') ratios.39 of current assets available. these measure the strength of the company. Shareholders' ratios. the answer should be between 1.000 and current liabilities of £180. these analyse the profit made over the last year. This measures current assets as a proportion of current liabilities. 5. if a business has current assets of £250.com For evaluation only.000. Financial efficiency (or 'activity') ratios.foxitsoftware. The current ratio 2. A figure less than 1. these measure the solvency of the business and its ability to meet short-term debts.5 indicates . There are five main categories of accounting ratio: 1. these analyse the efficiency of the business in terms of the use of its resources in generating sales. Ideally. the profitability. the business has £1.Introduction Ratio analysis is an accounting tool. Ratio Analysis Ratio Analysis . 4. then the current ratio would be: This means that for every £1 of current liabilities. Liquidity Ratios There are two main ratios that can be used to measure the liquidity of a business: 1. by analysing its financial accounts (specifically the balance sheet and the profit and loss account). Gearing ratio. Accounting ratios are very easy to calculate and they enable a business to highlight which areas of its finances are weak and therefore require immediate attention. and the overall financial strength of a business. its share price and its dividends. 2. The 'acid-test' ratio The current ratio The current ratio.

An answer of more than 1.E). An answer of more than 2 indicates that the business may be holding cash in an unproductive and unprofitable form.83 of cash available at short-notice. The net profit margin. then the gross profit margin would be: .C. that the business may experience difficulties in meeting its short-term debts (i. a liquidity crisis).000 and current liabilities of £180. This measures current assets less stock as a proportion of current liabilities.O. For example. Return on Capital Employed (R. the answer should be between 1 and 1. It is calculated using the following formula: For example. The acid test ratio The 'acid-test' ratio.2.2 indicates that the business may be holding cash in an unproductive and unprofitable form.foxitsoftware.e. if a business has gross profit of £4 million and sales revenue of £6 million. The gross profit margin. if a business has current assets less stock of £150. It is calculated using the following formula: Stock is excluded because a business may not be able to convert it into cash quickly. A figure less than 1 indicates that the business may experience difficulties in meeting its short-term debts (i. 2. and it may be better used elsewhere.000. and it may be better used elsewhere. 3.com For evaluation only. Profitability Ratios There are three main ratios that can be used to measure the profitability of a business: 1.e. then the current ratio would be: This means that for every £1 of current liabilities. a liquidity crisis).Generated by Foxit PDF Creator © Foxit Software http://www. Ideally. the business has £0. The gross profit margin This measures the gross profit of the business as a proportion of the sales revenue.

then the net profit margin would be: This means that for every £1 of sales revenue. allowing both large dividend payments to shareholders and a significant amount of profit to be retained for growth. The net profit margin This measures the net profit of the business as a proportion of the sales revenue. if the business is a 'company'. This money then contributes towards covering the corporation tax that must be paid on profits to the Inland Revenue and. since a high margin will leave more profit for covering the remaining expenses and. then the Return on Capital Employed figure would be: . It basically relates the profit to the size of the business and it is calculated using the following formula: For example. covering the dividend payments to shareholders. for covering the dividend payments to shareholders. the business would want this margin to be as high as possible.O. Any profit which remains is kept in the business for re-investment and is called 'retained profit'. 16. Again.Generated by Foxit PDF Creator © Foxit Software http://www.67 remains after all direct expenses have been deducted.E) This is often referred to as the 'primary accounting ratio' and it expresses the annual percentage return that an investor would receive on their capital.6m. It is calculated using the following formula: For example. Return on Capital Employed (R.foxitsoftware. This means that for every £1 of sales revenue.7 pence remains after all direct and indirect expenses have been deducted. if a business has gross profit of £1 million and sales revenue of £6 million. This money then contributes towards covering the other expenses of the business. if a business had a net profit of £2. if the business is a 'company'.com For evaluation only. £0.C.2m and a capital employed of £7. The business would want this margin to be as high as possible.

3. The stock turnover ratio This measures the number of times in a 12-month period that a business sells its stock. then the stock turnover ratio would be: . It is calculated using the following formula: For example.Generated by Foxit PDF Creator © Foxit Software http://www. and it is the final line in the balance sheet (remember that it is the same value as 'assets employed'). if a business has a 'cost of goods sold' figure of £2 million and an average 'stock' figure of £0. The asset turnover ratio This measures the productivity of the business (i.e. This means that for every £1 of capital invested in the business.O. Capital employed is equal to shareholders' funds plus long-term liabilities.foxitsoftware. the better.C. how many pounds worth of sales revenue can be generated from the assets employed?). It is normal for service industries (e. The asset turnover ratio.5 million. Clearly an investor would like to receive as high a R.g. The stock turnover ratio. the annual return would be 28. as possible. The debtor days ratio. if a business has sales revenue of £8 million and net assets of £5 million. since service industries generate very high sales in relation to their net assets. to competitors' returns and to the returns on other investments.60 of sales revenue. 2. supermarkets) to have a much higher asset turnover ratio than manufacturing industries.9 pence.com For evaluation only.E. although the figure would need to be compared to last year's return. Clearly the higher the answer. Financial Efficiency Ratios There are three main ratios that can be used to measure the financial efficiency of a business: 1. the business generates £1. It is calculated using the following formula: For example. then the asset turnover ratio would be: This means that for every £1 of net assets.

Generated by Foxit PDF Creator © Foxit Software http://www. This means that the business would turn its stock over (i. since a supermarket. then its gearing ratio would be: An answer of more than 50% indicates that the business is 'highly geared'. care must be taken when comparing the stock turnover ratios of different businesses. if a business had long-term liabilities (loans. However. or it may be due to the fact that it allows customers a number of weeks before payment is due as part of its marketing strategy. mortgages and debentures) totalling £3. since it has to make large monthly debt repayments.foxitsoftware. if a business had debtors of £1. and a 'capital employed' figure of £8. the proportion of the value of the business which is interest-bearing debt). The Gearing Ratio This measures the proportion of capital employed (i.2m and a sales turnover of £9. since it can be used to boost the day-to-day capital (working capital) that is available to pay bills. for example. etc. on average. a business takes to collect the debts owed to it by customers who have purchased their goods on credit. sell the lot and order some more) four times per year. Ideally.e.e.5 million.com For evaluation only. or every 91 days on average. the sooner the business receives all the cash from sales revenue.1m. is likely to have a much higher stock turnover (especially for vegetables. It is calculated using the following formula: For example.3 million. the better.e. The debtor days ratio This shows how long. It is calculated using the following formula: For example. then the debtor days figure would be: This means that. washing machines. This may be due to a poor debt-collection system. the value of the business) which is funded by long-term liabilities (i. it takes the business 48 days to collect its trade debts. on average. etc). This can become a problem (especially if the economy . fruit and other perishables) than a retailer such as 'Dixons' (for televisions.

P. and the earnings per share is 30 pence. heads into a recession or the industry goes into decline) because the business will still have to make its monthly repayments. However. 5.Generated by Foxit PDF Creator © Foxit Software http://www.S) This measures the company's potential dividends that it could pay to shareholders. since its monthly debt repayments do not form a significant proportion of its monthly outgoings.com For evaluation only.50.foxitsoftware. Price Earnings (P/E) ratio This measures the market price of the share as a proportion of the earnings per share calculated above. even though its cash inflows may be deteriorating. if a company has profit after tax of £12m and it has issued 40 million ordinary shares. It is calculated using the following formula: For example. Dividend yield. Clearly the shareholders would want as much of the profit after tax as possible to be payable to themselves. it is most likely that some of the profit after tax will be kept in the company for re-investment (this is called retained profit).S). Shareholders Ratios There are five main ratios that can be used by shareholders in order to assess the worth of a particular company and their shares: 1. Dividend per share. A business with a gearing ratio of less than 50% is said to have 'low gearing'. Earnings per share (E. 4.P. It is calculated using the following formula: For example. if the current market price for a company's share is £1. would be: This means that every ordinary share could pay a dividend of 30 pence IF all the profit after tax is distributed as dividends. Earnings per share (E.P. then its E. Price/ Earnings (P/E) ratio. Dividend cover. 3. then the P/E ratio would be: . 2.S.

if a company had a dividend per share of 7. and a market price of £1. This figure would need to be compared to other companies' P/E ratios before a judgement could be made. The remaining £9m of profit after tax would be retained for future investment. the shareholders would want the dividend per share to be as high as possible. This answer indicates that it would take an investor 5 years to recover the cost of the share. It is calculated using the following formula: For example. and therefore the P/E ratio of the share will not be the same for very long . Dividends per share This measures the size of the dividends that the company actually pays to its shareholders.5 pence. In general. It is calculated using the following formula: For example.5 pence. However. Dividend Yield This shows the dividend per share expressed as a percentage of the market price of the share. the higher the P/E ratio.50. then the better the expectations of the company's future profitability.Generated by Foxit PDF Creator © Foxit Software http://www.com For evaluation only.this can make it difficult to compare the P/E ratio with other companies. if a company has profit after tax of £12m (and issues 25% of this as dividends) and it has issued 40 million ordinary shares. then its dividend per share would be: This means that every ordinary share would pay a dividend of 7. in order to maximise their return on their investment.foxitsoftware. Clearly. the share price of the company is likely to fluctuate frequently. then the dividend yield would be: .

Using financial ratios can assist these people in identifying the financial strengths and weaknesses of a company. This means that the company kept much of the profit after tax as retained profit for reinvestment. 4.to see if pay rises are likely. However.to ensure that the business has the necessary money to repay them.foxitsoftware.to see if the business is solvent and profitable enough to repay any loans. Creditors . including: 1. Dividend cover This measures how many more times the dividends could have been paid out of the profit after tax. The community . This is not a very high return for the risk involved in investing money in shares. 3. Limitations to Ratio Analysis There are many different groups of people (or stakeholders) who are interested in the accounts of a company.g. It is calculated using the following formula: For example. 2. The management and the employees . or to ensure that their jobs are secure. other companies. as well as indicating to the company itself those areas that need corrective action.the company has actually only paid a quarter of their profit after tax as dividends.to ensure that jobs and services for the local community are assured.Generated by Foxit PDF Creator © Foxit Software http://www. Potential lenders . if a business had profit after tax of £12m and it paid total dividends of £3m. ratio analysis does not provide a complete and exhaustive analysis of a company. etc) to see if it is providing a competitive return. and there are several other factors that the stakeholders and the company will need to take into account. banks.com For evaluation only. This figure would need to be compared to other investments (e. in order to get the 'full picture' of its financial position: . then the dividend cover would be: This means that the company did not pay the shareholders a significant proportion of the profit after tax in the form of dividends .

to ensure that the business has the necessary money to repay them. in order to measure the performance of a business. . Therefore. • • • • The state of the economy (i. The community . job losses. job losses. Comparison year on year. and there are several other factors that the stakeholders and the company will need to take into account. in order to measure the performance of a business.e. The ratios for the business from the current year must be compared to the ratios from previous years. Therefore.to see if pay rises are likely. 2.e. factors other than mere financial ratios need to be considered. etc). External factors. External factors. as well as indicating to the company itself those areas that need corrective action. in order to get the 'full picture' of its financial position: • • • • The state of the economy (i. Comparison year on year.com For evaluation only. it may be the case that the industry is in decline. The financial ratios do not take into consideration any effects on the local community or the environment (i.e. The financial ratios do not take into consideration any effects on the local community or the environment (i. or to ensure that their jobs are secure. There are many different groups of people (or stakeholders) who are interested in the accounts of a company.foxitsoftware. they ignore the effects of pollution. 3.e. 4. Creditors .e.to see if the business is solvent and profitable enough to repay any loans. The performance of competitors (i. including: 1. then the ratios are more likely to be unsatisfactory than if the economy is experiencing a 'boom'). etc). Using financial ratios can assist these people in identifying the financial strengths and weaknesses of a company. in which case all the rival businesses are likely to be experiencing deteriorating ratios). Potential lenders .e. in order to see any marked improvement or deterioration in the financial performance. it may be the case that the industry is in decline. The performance of competitors (i. if the economy is in a recession. in order to see any marked improvement or deterioration in the financial performance. factors other than mere financial ratios need to be considered. ratio analysis does not provide a complete and exhaustive analysis of a company. The ratios for the business from the current year must be compared to the ratios from previous years.to ensure that jobs and services for the local community are assured. The management and the employees . they ignore the effects of pollution.Generated by Foxit PDF Creator © Foxit Software http://www. then the ratios are more likely to be unsatisfactory than if the economy is experiencing a 'boom'). if the economy is in a recession. in which case all the rival businesses are likely to be experiencing deteriorating ratios). However.

(Marks available: 20) Answer outline and marking scheme for question: 1 Give yourself marks for mentioning any of the points below: a) It would appear that As performance is deteriorating compared with B.com For evaluation only. But with regards to liquidity it would seem that B is sailing close to the wind and may find itself with cashflow problems. b) Why is it important that potential investors should be aware of the ratio of ordinary share capital to other forms of long term finance.Generated by Foxit PDF Creator © Foxit Software http://www. . explain why it is important that potential investors should consider nonfinancial factors before making their investment decision.foxitsoftware. On this basis B would seem to be the better bet. Exam-Style Questions 1. over five years. The data summarised in the table below show the performance of two firms A and B. (known as the gearing ratio)? c) Why might a company use various sources of finance? d) Using examples. A seems to be more secure but has it got too much cash? More information is needed to make a true assessment. a) Using the information in the table explain the comparative attractiveness of the two firms to a potential investor. This seems to be confirmed by the net profit as a percentage of capital employed.

Revenue expenditure is spent on items such as raw materials or labour.com For evaluation only. c) Sources of funds can be internal or external. For example if the gearing ratio is less than 100 per cent a company is said to be low geared. Expenditure can be for revenue or capital expenditure. There is the time period for borrowing and charges made that have to be taken into consideration. Why is the market shrinking? The state of the economy might indicate the timing of investment. d) Examples other than financial help to give a fuller picture of the likely future performance of the company.foxitsoftware. This means that the majority of long term funds comes from the owners of the company. usually implies that a company is not a risk taker and the potential for growth is higher. b) The gearing ratio shows the relationship between equity capital and interest bearing capital. Capital expenditure is on goods which can be used over a long time period such as machines and can be financed over a long time period. This will be consumed quickly. for example: is the economy entering a downturn or is the economy enjoying a boom? (Marks available: 20) . this should send alarm bells to a potential investor. For example if company sales are increasing in a shrinking market. Internal sources sources the company has control over compared with external funding. For example it is important to look at the previous performance of the company to identify trends and compare them with what is happening in the market place. Trade credit is a source of funds used to purchase raw materials.Generated by Foxit PDF Creator © Foxit Software http://www.

televisions or washing machines). and the delivery of the goods to the business.g. Lead Times This is the amount of time that elapses between a business placing an order with a supplier for more stock or raw materials. 2. chocolate bars or baked beans) is likely to order a far larger amount of stock from its suppliers than a manufacturer of goods with a slower stock turnover (e. The costs of stockholding. Production Control Stock Control This is the system used to ensure that the business always has sufficient stock available to meet customer requirements. since in the time taken to receive its supplies.foxitsoftware. The business will wish the lead-time to be as short as possible.Generated by Foxit PDF Creator © Foxit Software http://www. 3. Buffer Stocks This is the minimum stock level which will be held by a business to meet any unexpected occurrences. whether it is perishable or durable. .g. a supermarket is likely to have a higher re-order level than a car dealer. 4. so that it can meet its customer orders and minimise the time between paying for the stock and receiving the revenue from the customer. deliveries of raw materials not arriving on time. This again will vary from business to business and from industry to industry. A sudden large order from a customer. The type of stock. For example. Lead times. For example. or computer re-ordering systems breaking down. There are several factors which will influence the amount of stock which a business orders.com For evaluation only. The expected level of customer demand. Re-Order Quantities The re-order quantity is the amount of stock and raw materials that a business orders from its suppliers each time it reaches its re-order level. a business selling fast-moving consumer goods (e. including: 1. Re-Order Levels This is the minimum amount of stock that a business will hold before it re-orders from its suppliers. For example. a supermarket is likely to sell far more stock than a car dealer. The re-order level will vary from business to business and from industry to industry.

This is the process of ensuring that the older batches of stock are used first rather than the newer batches. combining the above four elements. therefore avoiding the possibility that the older stock will be left in a warehouse.D/C. buffer stock (i. The The The The re-order level (i. or the breakdown of the suppliers' lorries delivering the stock to the business.e.O) system. 4. This is often referred to as a First In First Out (F. can be seen below: From this diagram. the amount of stock ordered from a supplier) is 20. the minimum stock holding) is 10. to encourage the older batches of stock to be used first. the time delay between placing an order for stock and receiving it) is 8 days. this may not happen due to a number of factors.Generated by Foxit PDF Creator © Foxit Software http://www.S). the amount of stock remaining when an order is placed) is 20.M) The production process and stock control systems in a business can be assisted by the use of Information Technology (I. 3. An effective stock control system.A. using such systems asElectronic Point of Sale (E. Sophisticated software packages can enable a business to keep detailed and accurate records on its purchases of stock and its sales to customers. possibly becoming unusable. 2.e.A.foxitsoftware. in order to avoid the possibility that the older stocks will become obsolete or go past their sell-by-date.O.T). Stock Rotation Many businesses use a stock rotation system. Link to Information Technology (C. . it can be seen that: 1. However. re-order quantity (i. lead-time (i.com For evaluation only.e.P.000 units. such as delays in the supplier receiving the order.e.I.000 units.000 units.F.

foxitsoftware. Internal relationships between workers and their superiors and subordinates are seen to be as important as the external relationships that exist between the business and its customers and suppliers. 4. marketing or personnel). This enables a tight control to be kept on both costs and waste. Team-working is important. to consider the alternative solutions to these problems. This records every transaction made by a business and can. This should help to improve the level of motivation amongst the workers because it makes each person in the group feel valued and that they are making a significant contribution to the improvements on the factory-floor.Q. and higher motivation than if workers were performing repetitive tasks on their own. Quality Total Quality Management (T.Q. Computer Aided Design (C. as well as recording the amount of revenue received from customers and any outstanding customer debts. Regular market research must be undertaken to ensure that customers are happy with the level of service that they receive (any complaints can be used to improve the existing systems). as well as monitoring the quantity of each component that is used in the production process. and has the commitment of.There are a number of components of T. and to try to encourage all employees to make 'quality' paramount within their daily activities (whether in production. Quality Circles This is a group of workers that meets at regular intervals during the working week in order to identify any problems with quality within production.M: 1. TQM must be seen to be a policy that is followed by. .Generated by Foxit PDF Creator © Foxit Software http://www.M) This is the attempt by a business to stop errors and waste from occurring at all levels within the organisation. Computer Aided Manufacturing (CAM) is the use of computers and software for a wide variety of production tasks. enable it to monitor its stock levels and sales of products to a 100% level of accuracy. from senior management to shop floor employees.D) is the use of sophisticated computer software to design three-dimensional images of products quickly and relatively cheaply. This system can automatically re-order stock when numbers fall to a certain level in the warehouse. all workers. and to then recommend to management the solution that they believe will be the most successful. since a group of people working together will develop a wider range of skills. therefore. 5. The business must monitor all its activities and processes in order to identify any areas for improvement and to ensure that quality is being achieved. The members of the quality circle are also involved in the implementation and monitoring of the solution. 2.com For evaluation only. co-operation. 3.A. including automated production lines and stock control systems.

and reduce both the time and the costs of production. The BSI 'kitemark' on a product implies to customers that it has been manufactured and produced to a high level of quality. and will be fit for the purpose for which it was advertised. but also those in marketing. the production. Zero defects can lead to an improved business and customer reputation. it is necessary for quality to be an important consideration in the design. The business will need to continually update and improve their products and marketing.foxitsoftware. It links in with other concepts such as TQM. or offering improved after-sales service.com For evaluation only. It is widely held that any aspect of the business can be improved. therefore eliminating waste and the time taken to correct mistakes. In order for the objective of zero defects to be achieved. Kaizen aims to eliminate waste. as well as facing pressures from their competitors who are producing new and improved products. Continuous Improvement (Kaizen) Kaizen is a Japanese word which means 'change for the better'. the distribution. Quality of output is vital for retaining customer loyalty and. the sale and the after-sales service of products. not simply those in the production department. British Standard 5750 (BS 5750) was the most common quality certification in the UK. by ensuring that the business sets certain quality standards and publicises the fact that these standards are met throughout the business. quality circles. finance and personnel. productivity improvements and new product development. which is an international standard that tells customers that a business has reached a required level of quality in its products and processes. not just the production processes and. as well as increasing levels of both sales and profitability. Quality assurance refers to the attempt to achieve customer satisfaction. to produce every product with no defects.Generated by Foxit PDF Creator © Foxit Software http://www. making sure that they are all committed and suitably trained. it is vital that every employee in the business is involved in this philosophy. Quality Standards The British Standards Institution (BSI) is the body that is responsible for setting quality and performance standards in UK industry. it requires the involvement of every employee in the business. in order to stay ahead of their competitors and boost revenue and profitability. Zero Defects This is the ultimate objective for a business. . as with zero defects. It is now known as ISO 9000. A business will often be facing increasing demands from customers to add new features to their products. therefore.

3. Less need for storage space for raw materials and finished goods. Cashflow is improved. Communication and co-operation between the marketing and the production departments are improved. as less money is tied up in raw materials. 2. 4. Quality control is the process of checking the quality and the accuracy of raw materials and supplies as they arrive at the business. This is usually carried out either by quality inspectors or by the employees themselves. the number of orders) rather than simply producing finished goods and waiting for orders.Generated by Foxit PDF Creator © Foxit Software http://www. the level of production is related to the demand for the output (i. Just-In-Time This is a method of manufacturing products which aims to minimise: • • • the production time the production costs the amount of stock held in the factory. The advantages of a just-in-time production system are: 1. and consequently there is very little stock sitting idle at any one time. Employee involvement and participation in quality programmes (e.this reduces the amount of money tied up in stocks. Raw materials and supplies arrive at the factory as they are required.com For evaluation only. Help motivate the workers by making them feel that their contributions and their suggestions are highly valued. in order to reduce the costs and time associated with both waste and the correction of low quality output. 2. work-in-progress and finished goods.g.e. and leaves more money available for investment elsewhere. Lean Production Lean production is the term given to a range of measures traditionally used by Japanese businesses in an attempt to reduce waste and costs in production. quality circles and suggestion-schemes) will serve two purposes: 1. and also of the finished products as they leave the business en route to retailers and customers. Improve the overall quality of the output and processes. The business builds up strong relationships with its suppliers. With a just-in-time production system.foxitsoftware. Each stage of the production process finishes just before the next stage is due to commence and therefore the lead-time is significantly reduced. The philosophies of zero defects and Kaizen require stringent quality control systems. This means that raw materials and stock only needs to be ordered from suppliers as required . .

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The disadvantages of a just-in-time production system are:
1. The business may struggle to meet orders if their suppliers fail to deliver the raw materials on time. 2. The business is unlikely to 'bulk-buy' its raw materials and, therefore, it may lose the benefit of achieving economies of scale. 3. Buffer stocks are minimal and this may lead to the business having to reject customer orders requiring delivery immediately.

Cell Production This method of manufacturing an item organises workers into 'cells' within the factory, with each cell comprising several workers who each possess different skills.

Each cell is independent of the other cells and will usually produce a complete item, and each cell will usually have an output target to achieve for a given period of time. It is often argued that if the group of workers in each cell can see the completion of the finished product, then their work will have more meaning and therefore their levels of motivation and job satisfaction will be greatly enhanced. This method of production is often combined with the just-in-time approach. The advantages of cell production are:
1. 2. 3. 4. 5. 6. Improved job satisfaction and motivation. Improved quality as the group of workers take responsibility for the output. Multi-skilling of workers means that job rotation can occur. Stockholdings are reduced (leaving less money tied up in stocks). The factory space can be used more efficiently. Lead-times are reduced.

The disadvantages of cell production are:
1. Output may not be as high as a 'flow' production system. 2. Different 'cells' may work at different speeds (leading to conflict and tension). 3. The business may need to invest heavily in new machinery and equipment, as each cell will require the same capital items.

Benchmarking This refers to a business finding the best methods and processes that are used by other businesses, and then trying to emulate these in order to become more efficient in its operations.

Benchmarking can be used in all areas and processes in a business, not just for production.

For example, it can be used to improve customer service, advertising campaigns, Human Resource Management, and budgeting procedures.

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Data for benchmarking is collected and used with the full co-operation of the other businesses, and often the results will help both businesses to improve their systems and procedures. There are several stages involved in implementing a benchmarking system:
1. 2. 3. 4. 5. Researching the areas in a business which need improving. Deciding how an improvement in these areas can be measured. Identifying 'best practice' in other businesses. Agreeing the exchange of information with other businesses. Comparing the 'best practice' with the existing processes, systems and procedures in the business. 6. Altering the processes, systems and procedures in order to improve performance. 7. Evaluating how successful the changes have been.

In order for benchmarking to be successful, the business must ensure that firstly every employee is committed and involved in the system, (from senior management to shop-floor employees), and secondly that sufficient time and finance is available for the gathering of data and the implementation of new procedures. Benchmarking will fail to deliver improvements to the business if there is a lack of willingness by other businesses to disclose information, or if the systems and procedures used by the 'best practice' businesses are not appropriate for the business in question. In summary, benchmarking can help a business identify those areas in its operations which need improvement, as well as considering alternative processes and procedures for achieving its objectives. 'Best practice' can be emulated and the competitiveness of the business should improve as it strives to improve and become more efficient.
Time-based Management Time is a very valuable resource and time-based management is concerned with reducingboth the length of time taken to produce the product and also, therefore, reducing thelead-time (the time lag between the customer placing an order and the business delivering the finished product).

In order for a business to successfully operate a time-based management system, it is important that machinery is flexible and production runs can be shortened or lengthened at short notice, in order to produce more of an existing product or to start the production of an alternative product. It is also essential that staff are multi-skilled and can rotate between different tasks, as they may be required to perform a number of different jobs in a short space of time. Time-based management makes it easier for a business to implement other lean production techniques (such as just-in-time and cell production), and since these techniques require less time and fewer stocks of raw materials than more traditional mass production techniques, then the business will save money.

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However, it is often argued that the move away from mass production and lengthy production-lines will reduce the chance of the business benefiting from economies of scale in its manufacturing techniques. It is also likely that a business will be able to implement the time-based management philosophy to its R&D processes, as well as to the production-line. A business which can develop and launch more products in a shorter time than its competitors will benefit from a number of advantages:
1. If the business is the first to launch a product on the market, then it can charge a premium price to reflect the innovative nature of the product. 2. Premium prices help to quickly recoup R&D costs, as well as earning the business a significant profit-margin per unit sold. 3. Brand loyalty is likely to develop - enabling the business to use this strong customer base as a 'launch pad' for new products in the future. 4. The diversity of products that are on sale will increase the product portfolio of the business, as well as reduce the risk of business failure should one or two of the products prove unsuccessful.

Exam-Style Questions
1. A graph representing a statistical process control chart for the production of gnomes.

a) What are the functions of lines x and y shown in the control chart and how are they set? b) What recommendation would you make if you saw the results shown in the chart? c) How are control limits likely to be affected by the size of the sample taken and the variability of the production process? d) Explain whether or not ideas of TQM have had an effect on statistical quality control techniques?

com For evaluation only. Standard Deviation (usually) y=2 and x=*3 (5 marks) b) Alarm bells would start to ring. There is an upward trend away from the base. a) How might kaizen improve customer satisfaction? b) Does kaizen eliminate the need for market research? (Marks available: 10) Answer outline and marking scheme for question: 2 . (5 marks) c) The larger the sample size the more accurate the outcome. (Marks available: 20) Answer outline and marking scheme for question: 1 Give yourself marks for mentioning any of the points below: a) Upper and lower action and warning limits. for example identifying problems.foxitsoftware.Generated by Foxit PDF Creator © Foxit Software http://www. (5 marks) d) TQM is a concept which involves all workers within an organisation. again the more accurate the outcome. TQM is more concerned with continuous improvement in all company processes whereas statistical control of quality is concerned with control of processes and their resulting outcomes. 'Kaizen' is defined as continual improvement involving a commitment from everyone in the company. (5 marks) (Marks available: 20) 2. The more consistent the production run.

low price goods. (5 marks) b) No. Give yourself marks for mentioning any of the points below: a) Kaizen is continuous improvement and product quality should therefore be continually improving. Market research is required to identify customer needs and the situation in the competitive marketplace. (5 marks) (Marks available: 10) . Through the removal of defects and waste. cost should be reduced and therefore prices may fall. Market research enhances kaizen.com For evaluation only. Customers get high quality.Generated by Foxit PDF Creator © Foxit Software http://www.foxitsoftware.

Scottish whisky). such as timber. Production Decision Making Basics of Production Industrial Location This is the decision that a business or an industry makes concerning its geographical placing in a country.c. even after the reasons for it locating there in the first place are exhausted. Industrial inertia refers to the situation when a business or an industry decides to remain in its original location and is very reluctant to relocate. tax breaks.m. will often try to locate near their suppliers so to reduce the lead-time between ordering and receiving the raw materials. There are many factors which influence the precise location of a business or an industry. Some areas and products have an international reputation which may be difficult to establish if the business were to locate elsewhere (e. including: • • • • • • The cost and the availability of land. then mass . The cost and the availability of labour.gs) will often have to distribute their products nationwide. If the industry goes into decline and no other industries or businesses wish to move to this area. 2. businesses which require bulky raw materials. and reduced rent and rates) are offered both to existing businesses to relocate to the depressed areas. rail links. For example. and a business which is labour-intensive may choose to locate near to an area of high unemployment in order to take advantage of the availability of labour at a fairly low wage. However. 3. Many businesses choose to locate near to motorways. The unemployment rate varies in different areas of the UK. The cost of moving may be very large. The incentives (such as grants. and therefore will try to locate as near to the market as possible so their transportation costs are not excessively high. Strong links with the local community and with other local businesses may have been developed and a move away from there may destroy those links.foxitsoftware. Government location incentives. in order to reduce the unemployment rates in those areas by creating jobs. and also more feasible. Communication links.com For evaluation only. Availability of raw materials. Some businesses will try to locate near to their suppliers or to the source of their raw materials. Therefore it would be advisable.g. Transport costs/proximity to the market. For example.Generated by Foxit PDF Creator © Foxit Software http://www. seaports or airports if they either have a significant amount of raw materials to receive. for a business which requires a large amount of land to locate away from the centre of an urban area. Some businesses will locate in certain areas of the country in order to minimise their transportation costs. industrial inertia can actually make an area become depressed if that area depends on a particular industry or business for employment and wealth-creation. as well as to new businesses which are about to set up. Land in an urban area is clearly less abundant (and therefore more expensive) than land in rural locations or on the edge of towns and cities. Possible reasons for this include: 1. or a significant number of products to distribute across a wide area of the country. The UK government has over the past 30 years offered a range of incentives to businesses to locate in depressed areas of the UK. producers of fastmoving consumer goods (f.

g. Sony) create wealth for the UK by providing employment and income to workers. 2.Generated by Foxit PDF Creator © Foxit Software http://www. cheap rent.specifically from Japan.foxitsoftware. 4. The Japanese companies are enticed to locate in the UK through a number of factors: 1. Low wage rates in the UK. Nissan. unemployment is created.g. carpenters). These factors include: • • • • the language spoken legal differences the economic environment the stability of the political structure. the UK government has encouraged much foreign investment into the UK from outside Europe . rather than being mass produced. although larger businesses which specialise in 'one-off' products (e.g. International location International location of industry is also a very important factor in today's global business environment.com For evaluation only. and many of these unemployed will not be trained to perform any other jobs. flow production and cell production.g. This type of production is usually undertaken by small businesses and craft industries (e. . and paying tax to the UK government. Production Methods There are four ways for manufacturing businesses to organise their production . etc). As well as the reasons for location mentioned earlier. Gateway for selling goods to other EU countries. 3. These items are often made to customer requirements. Over the past 25 years. bridges) may also use this production method.job production. rates. These Japanese companies (e. Job production This method of production involves an item being manufactured entirely by one worker or by a group of workers. They can help to rejuvenate depressed areas and often purchase their supplies and raw materials from other UK businesses. batch production. English is the first foreign language taught in Japan. Government incentives to locate in the UK (e. there are a number of other factors that a business will need to consider before choosing a foreign country in which to locate.

foxitsoftware.it is for these reasons that much machinery is today used on these production lines to perform simple. demotivation and absenteeism amongst the employees . leaving the business with much stock that it is unable to sell. This method of production was first established by Henry Ford in the 1920s. It is often argued that if the group of workers in each cell can see the completion of the finished product. This is the purpose of research and development (R&D). This involved each car passing the workers on a moving conveyor belt.com For evaluation only. and an important part of this strategy must be the continual development and launch of new products. This type of production is usually undertaken by large businesses. In other words. Research and Development (R&D) All businesses need to develop long-term strategies. repetitive tasks which humans may easily become bored in performing. where customers' tastes can change quickly and unpredictably. instead of being produced in batches. This method should boost labour productivity and reduce average cost of production even further. and then the batch moves onto the next manufacturing task. This may be a problem if the business is in a fashion industry. A collection (or 'batch') of items each have one of these tasks completed. It is often argued that flow production leads to high rates of alienation. and each cell will usually have an output target to achieve for a given period of time.Generated by Foxit PDF Creator © Foxit Software http://www. This production method can result in the build-up of large amounts of stock and work-inprogress. several items have the same task performed on each of them and then they move onto the next task together in a group. when he developed the world's first automated production line. rather than the workers continually moving to the car. Batch production This method of production involves the manufacture of an item being divided into a number of small tasks. . Cell production This method of manufacturing an item organises workers into 'cells' within the factory. then their work will have more meaning and therefore their levels of motivation and job satisfaction will be greatly enhanced. with each cell comprising several workers who each possess different skills. Each cell is independent of the other cells and will usually produce a complete item. or amendments made to existing products. a car assembly line).g. Flow production This method of production involves the tasks which were identified in 'batch' production becoming continuous for each unit. often with the use of a moving conveyor belt (e. Each unit is produced individually.

Generated by Foxit PDF Creator © Foxit Software http://www. and it will probably take several years before it will have broken-even and covered all the R&D costs. and provide very strong after-sales service to customers.e. The businesses which are most likely to succeed in the future are those which develop more new products than their closest rivals.foxitsoftware. launched onto the market) for every ten which are developed and test-marketed. innovative product is immeasurable. External economies of scale. and then developing a range of prototypes. This is known as benefiting from economies of scale.and geographic-markets than their rivals. In other words. the average cost of production will fall for all the businesses in a particular industry). bring their new products to the market in less time than their rivals.g. The development of products can take several years to complete and many businesses spend a huge amount of money on this process (e. Scale of Production Economies of scale As a business grows in size and produces more units of output. . R&D can basically be defined as: 'carrying out extensive scientific research into the product and its design. Therefore. benefit all the businesses in a particular industry (i.' The prototype which best meets the needs of the customers and the business is then likely to be commercialised.e. on average. each to a slightly different specification.e. each unit of output costs less to produce). The benefit of being the first company to launch a new.e. such as computers and aerospace) that extensive R&D spending today can result in a huge competitive advantage in the future. Economies of scale can be divided into internal and external economies: • • Internal economies of scale simply benefit a single business as it grows (i. It can often be a very risky process. It is estimated that only about one product in the pharmaceutical industry reaches the commercialisation stage (i. industries which are fairly young and have rapid growth potential. the company will have massive R&D costs to recoup when it actually launches a new product.com For evaluation only. however. the business is becoming more efficient in its use of its inputs to produce a given level of output.e. its average cost of production starts to fall). compete in more product. It is within the 'sunrise' industries (i. since the company can charge a high price and build up a strong market share as it faces no competition. Unilever spent over £600 million on R&D in 1997). since much money can be spent on ideas that will never be commercialised. then it will aim to experience falling average costs of production (i.

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Internal economies of scale
Internal economies of scale fall into four main categories:

Technical. This refers to the fact that the use of automated equipment and machinery to produce output is far more cost-effective than using labour, since the machinery can be used 24 hours a day, with no breaks and with a constant level of output per hour. Purchasing. Larger businesses are more likely to be able to bulk-buy their supplies and their raw materials, and therefore secure their supplies at a far lower cost per unit than a smaller business. Financial. Banks and other financial institutions are more likely to offer a lower rate of interest on a loan repayment to a larger business than to a smaller business, since the larger business represents less of a risk because it is more financially secure. Managerial. Larger businesses are more likely to be able to afford to employ managers who are specialists in a particular field. These managers can therefore devote all their time to specialising in one particular field (resulting in higher levels of efficiency and hopefully falling average costs). Smaller businesses will often employ managers who have to perform a variety of tasks and therefore cannot specialise in a single area of the business.

External economies of scale
External economies of scale fall into three main categories:

• •

Labour. A large pool of available labour in a particular area of the country which has been trained at a local college, or even at a rival business, will possess specialised skills which will be useful to the whole industry, rather than simply to just one business. Joint ventures. Two or more businesses may decide to join forces (perhaps for R&D) in order to spread the costs and the risks of developing a new product or manufacturing process. Support services. A wide range of commercial and support services often cluster together in a certain area near a number of rival businesses (e.g. waste disposal, cleaning, component suppliers, distribution, etc). Clearly this benefits all the businesses in the area, rather than just one of them.

However, it is also possible that as a business grows in size and produces more units of output, then it will actually experience rising average costs of production (i.e. on average, each unit of output costs more to produce).

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Dis-economies of scale It is also possible that as a business grows in size and produces more units of output, then it will actually experience rising average costs of production (i.e. on average, each unit of output costs more to produce). This is known as experiencing diseconomies of scale. In other words, the business is becoming less efficient in its use of its inputs to produce a given level of output.

Diseconomies of scale can also be divided into internal and external economies:
• •

Internal diseconomies of scale simply affect a single business as it grows (i.e. its average cost of production starts to rise). External diseconomies of scale, however, affect all the businesses in a particular industry (i.e. the average cost of production will rise for all the businesses in a particular industry).

Internal diseconomies of scale
Internal diseconomies of scale fall into three main categories:

Communication. This refers to the fact that as a business grows in size, the channels of communication lengthen and are more prone to delay and distortion. This can result in inefficiency in terms of the time taken to perform a task and, therefore, this can lead to higher costs. Co-ordination. As a business grows in terms of the number of employees, the number of departments and the number of different plants, then the overall co-ordination of all these can become very difficult. More and more meetings will be required and this all costs both time and money. Motivation. As the number of workers increases in a business, each worker will be seen to be making only a very small contribution to the finished product. This can result in falling levels of job satisfaction and motivation, which in turn can result in falling levels of productivity and, therefore, higher costs.

External diseconomies of scale
External diseconomies of scale often result from the overcrowding of businesses in a particular area and the resulting congestion, the late arrivals of supplies and raw materials, the late deliveries of finished goods to customers or warehouses, and the late arrival of employees to work. All these factors will affect all the businesses in a particular area and therefore push up their costs of production and distribution.
Critical Path Analysis This is often referred to as 'Network Analysis' and it is a way of showing how a lengthy and complex project (e.g. a building project) can be completed in the shortest possible time.

The project is broken down into a number of separate activities, and each activity is then placed in the correct sequence, so to minimise the duration of the project. It shows which of the activities are 'critical' - this means that if these activities are delayed, then the project will not be able to be completed on time. Management effort and resources

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can then be concentrated on ensuring that these 'critical' activities are completed on schedule. Other activities (which are not critical) have a degree of flexibility in the amount of time taken to complete them. This ensures that the waste of time and resources are minimised, and the profitability of the project is maximised. A critical path diagram shows:
1. the order in which each activity must be undertaken 2. the duration of each activity 3. the earliest date at which later activities can commence

Each diagram is composed of 'Activities' and 'Nodes':
• •

An activity is that part of the project which requires time and resources - it is represented by an arrow, running from left to right. A node is the start or finish of an activity, and it is represented by a circle. Each diagram must start and end on a single node and no activity lines must cross each-other.

Diagram 1 illustrates what a node looks like and diagram 2 illustrates a simple network : Diagram 1.

The Earliest Start Time (E.S.T) is calculated from left to right on the diagram, by adding the duration of the previous activity to its own E.S.T. The Latest Finish Time (L.F.T) is calculated from the right to the left after the E.S.Ts have been calculated. Work backwards through the diagram, starting with the E.S.T in the final node, and deduct the duration of each activity to arrive at the L.F.T in each node. Diagram 2.
• • • •

Activity Activity Activity Activity

A is the start of a project (duration 3 days) B can start when activity A is completed (duration 5 days) C can start when activity A is completed (duration 7 days) D follows all the other activities (duration 2 days)

3 days . the LFT will also be 12 days. The LFT at node 2 will be 10 days minus the duration of activity C of 7 days (since this is longer than activity B). but has 7 days in which to be completed (i. Therefore it has 2 days 'float time'.com For evaluation only. which takes 5 days to complete. It is clear to see from diagram 2 that if more than one arrow feeds into a node (as in node 3). The LFT at node 3 is simply 12 days minus the 2 days that it takes for activity D to be completed.foxitsoftware. since if any of these activities are delayed then the project will not be able to be completed in 12 days. The critical path is represented by double arrows. then the EST at this node is determined by the longest preceding activity (in this case activity C). This gives an LFT at node 2 of 3 days. This gives an LFT at node 3 of 10 days. between day 3 and day 10). The LFT at node 1 is simply 3 days minus the duration of activity A (i. The LFTs are calculated by working backwards from right to left.3 days = 0) Diagram 3 illustrates a more complicated network: Diagram 3. LFTs and the critical path.e. because the earliest completion time for the project is day 12. so the management would want the LFT to also be 12. The critical path is ACD.Generated by Foxit PDF Creator © Foxit Software http://www. Consider the following table and use it to draw up a fully labeled network showing ESTs. In node 4. (The first and the last nodes will ALWAYS have the same EST and LFT). Activity A B C D E F G H Order/ dependency 1st dependency must follow A must follow A must follow B must follow C must follow C must follow F must follow F Duration (days) 4 4 6 4 2 8 2 1 . The only activity with any spare time (called 'float time') is activity B.e.

it does need to be followed strictly and rigidly if it is to be a success and it does not allow for any changes in the external environment having a detrimental effect on the length of the project (e. the critical activities) will cause the duration of the project to be more than 20 days. E. and lead times. since a strong pound may result in a fall in demand from both foreign and domestic customers and a corresponding increase in imports entering the UK. based on factors such as price.D. The competitiveness of a UK business with overseas rivals will often be affected by theexchange rate of the pound (£) against foreign currency.E and H all have 'float time' available. International Competitiveness This term refers to the ability of a business to compete effectively with foreign competitors in a particular industry. 8 days. * Critical path is ACFG * Therefore. and any resources which are not being used at these locations can be transferred to the critical activities to ensure that these are completed on time. and H) can be completed when appropriate. (8 days. D. as well as identifying the potential areas which may cause problems.g. F. activities B. or a high level of absenteeism amongst the employees).Generated by Foxit PDF Creator © Foxit Software http://www. C.com For evaluation only. However. quality.e. activities B. . 8 days. and 1 day respectively) The minimum time in which the project in diagram 3 can be completed is 20 days. or G (i. Any delay to activities A. The activities which have some float time available (i.foxitsoftware. since it can help to reduce the total time and the resources that are needed to complete a difficult project. Critical Path Analysis is a very useful management tool when a large and complex project is being undertaken.e. design. poor weather conditions for a building project.

Don't assume that a low-priced product will outsell its higher-priced rivals (price no longer provides the competitive edge that it once did).c. The UK is seen to have a distinct international competitive advantage in several industries. reliability and after-sales service offered (e. Develop a strong reputation for customer service and after-sales service (helping the customer as much as possible is likely to keep them loyal to you). Selling these products at high prices enables the business to establish an upmarket. In order to retain this competitive advantage over other foreign rivals then there are a number of criteria which must be met: 1.foxitsoftware. the price of the product has been less of a consideration for many customers as the main reason for purchasing one brand over another.com For evaluation only.g's). warranties. which are more expensive than many other rival products on offer.e. including fast moving consumer goods (f. Become more capital intensive in the production of the products. 5. Over recent years. high quality products. insurance and banking. quality image. 2. . 4. Instead. guarantees. other factors such as the quality.m. Look for long-term growth and profitability. well built. and pharmaceuticals. 3.g. as well as producing high value-added products which contribute greatly towards the overall profitability of the business.Generated by Foxit PDF Creator © Foxit Software http://www. Companies and brands such as BMW and Technics have achieved high sales levels and profits through selling well designed. find out what the customer wants and develop a strong corporate image to help sell the products). etc) have become important selling-points for products. instead of short-term gains. Develop strong marketing and branding (i.

Generated by Foxit PDF Creator © Foxit Software http://www. The decision tree below represents the problem faced by a manager considering the introduction of a new product.000. Cash flows are shown in £million and probabilities are marked.foxitsoftware. The cost of employing the consultants is £100. a) (i) Calculate the probabilities A and B. (Marks available: 10) Answer outline and marking scheme for question: 1 Give yourself marks for mentioning any of the points below: . b) Advise the manager whether she should employ the firm of consultants. The manager could employ a firm of consultants to give advice on either "launch" or "do not launch". Exam-Style Questions 1. (ii) Calculate the expected values (cashflows) at C and D.com For evaluation only.

a) State briefly the key production decisions a business must make to supply its market. (Marks available: 10) 2.Generated by Foxit PDF Creator © Foxit Software http://www.17 b) Candidate argument and calculation to decide whether to employ consultans and take their advice. A = 0. b) How might the objectives of the production department conflict with the objectives of the marketing department? (Marks available: 10) Answer outline and marking scheme for question: 2 Give yourself marks for mentioning any of the points below: .15 D = 4.foxitsoftware.3 B = 0.com For evaluation only.45 C = 4.

which markets to produce for. He has listed the jobs to be done and the time each job will take. (Marks available: 10) 3. b) If the time required for job F could be reduced by 2 weeks. Identify the critical path and state the total time required to complete the whole project.Generated by Foxit PDF Creator © Foxit Software http://www. They will also expect the production department to accommodate changes in customer orders.com For evaluation only. quantity of product to be supplied. to implement the production of newly developed products rapidly and easily. a) Key production decisions a business must take to supply its market: what goods to produce. b) The production department will wish to keep the volume of production steady so that incoming raw materials. what would be the effect on the time required for the project and what would be the new critical path? (Marks available: 10) Answer outline and marking scheme for question: 3 Give yourself marks for mentioning any of the points below: a) PICTURE Total time 30 CP A E F G I . workload and finished goods remain constant and predictable The marketing department will wish to increase sales through promotional campaigns and will expect the production department to respond immediately to changes in levels of demand. The owner of a shopping centre plans to extend the centre by building new shopping units and finding tenants for them. the nature of raw materials and its suppliers and the conversion of raw materials into the finished product. variations of the product to be supplied.foxitsoftware. a) Draw a critical path diagram.

(5 marks) (Marks available: 10) .com For evaluation only. He may adopt a different style when managing office staff. time. (5 marks) b) Depends on situation.Generated by Foxit PDF Creator © Foxit Software http://www. b) Total time 29 CP A D G I (Marks available: 10) 4. a) How may the roles of a manager and a leader differ in business? b) Explain briefly in what situations a manager might adopt different management styles.foxitsoftware. A manager organises resources to achieve the objectives. (Marks available: 10) Answer outline and marking scheme for question: 4 Give yourself marks for mentioning any of the points below: a) A leader normally sets objectives. and the decision to be made. For example: a logistics manager of a transport company will tend to direct his drivers.

External Environment The Economic Environment Macro-Economic Issues Economics is concerned with the process of satisfying the needs and wants of the population. Seasonal: where people are unemployed due to the seasonal nature of their jobs. It is calculated by reference to the Retail . 4. The main types of unemployment are: 1. There are several methods that a government can use to reduce the amount of unemployment in an economy: 1. 3. 3.foxitsoftware.Generated by Foxit PDF Creator © Foxit Software http://www. and falling aggregate demand. capital and enterprise. Helping new businesses to set-up. capable of working. Frictional: where people are unemployed because they have left one job and are waiting to start another job. and offering incentives to existing businesses to relocate to areas of high unemployment. Retraining incentives offered to the unemployed. 2. Policies to increase demand: such as reducing taxation or reducing interest rates. The two major measures of unemployment are the 'claimant count' (where people must declare that they are out of work. A low level of unemployment A low level of inflation A high level of economic growth A good foreign trading position Unemployment is defined as the number of people in the workforce in a country who are looking for a job. 2. 4. available to work and actively seeking work) and the 'International Labour Force' count (where people must be out of work. otherwise known as the 'factors of production') in the most efficient way. Cyclical: where the level of consumer demand is low. high government spending. 3. There are generally considered to be four main objectives of an economy: 1. Structural: where people are unemployed due to changes in the structure of the economy. but cannot find one. by using the limited resources of the economy (land. Unemployment can be very damaging to an economy because it can lead to falling output. 2. have been looking for work in the past 4 weeks and must be available to start work in the next 2 weeks).com For evaluation only. Inflation is defined as a general and sustained rise in the average prices of goods and services within an economy over a period of time. labour.

foxitsoftware.P. as well as an increase in the number of new businesses starting up. The diagram below illustrates how an economy moves through a number of 'highs' and 'lows' over time. Economic growth. 2. Gross National Product is calculated by adding G.e.N. 2.P. Economic growth is likely to lead to an increase in the amount of investment in the economy.e.Generated by Foxit PDF Creator © Foxit Software http://www. Incomes policies. Gross Domestic Product is the total value of a country's output over a period of time (usually 12 months). a fall in investment and savings. This term refers to a real growth (i. forces the producers to increase their prices. Inflation can be very damaging to an economy because it leads to the reduced purchasing power of the pound.D. uncertainty about the future. Increases in the money supply: this can cause inflation where rises in the money supply have increased at a faster rate than the output of products. Demand-pull: where the level of customer demand outstrips the number of products that the business can produce. minus the income earned by foreigners investing in the UK). 3. There are several methods that a government can use to reduce the rate of inflation in an economy: 1. It is normally measured by reference to Gross Domestic Product (G. Price Index (R. Cost-push: where an increase in the costs of the business. to the net income from abroad (i.D. such as raw materials or wages.P). the income earned on overseas investments by UK citizens and businesses. designed to indicate any changes in the average price level in the UK. Reducing the amount of credit (borrowing) that is available to customers. which indicates the level of growth in the economy : . Increasing interest rates to discourage high levels of customer spending. The main types of inflation are: 1.I). leading to increases in output. expenditure and income. accounting for the effects of inflation) in the income per capita (or income per head) of the population over a given period of time. so to deter high levels of costs and expenditure. which is a weighted index.com For evaluation only. 3. and increasing costs for businesses.P) and Gross National Product (G. where pay increases are limited.

Businesses are likely to be making high levels of profit and there will be strong inflationary pressure.P. Income. or the G. 'Recovery' or 'Expansion'. consumption and investment gradually increase and the economy starts to expand again. and falling business and consumer confidence. low investment. This is the bottom of the trade cycle. The economy is at its peak.D. per capita (i. Other features of a recession include falling house prices.D.com For evaluation only.e. Consumption and investment will be at high levels. 'Slump' or 'Trough'. and natural resources must be used to their optimum efficiency. in order to achieve a faster rate of economic growth). then the government must ensure that the workforce is adequately educated and trained to perform their jobs effectively. and pay rises are likely to be large.N. . It refers to the fluctuation of employment. income. and rising unemployment. Balance of payments. We can identify several feature from the diagram: 'Peak' or 'Boom'.P. significant amounts of investment in new machinery and production techniques are undertaken. of an economy has fallen for two successive quarters (6 months).P.foxitsoftware. This diagram is known as the 'Trade Cycle'. 'Recession'. In order to improve the G. It is characterised by falling customer demand. output and employment start to rise again. very low levels of consumption and investment and a poor international trade situation. and this stage is characterised by a high level of unemployment. This refers to a situation where the G. expenditure and output in an economy over time -thus showing us the level of economic growth. This is a record of a country's financial transactions with the rest of the world over a given period of time (normally 12 months).Generated by Foxit PDF Creator © Foxit Software http://www.

An increase in the value of the pound is known as an appreciation. 4. For example. the imports and exports of intangible services. making their goods and services uncompetitive. buying the currency when its value is threatening to fall. These foreign currencies are purchased in exchange for sterling on the world currency market. A strong pound makes goods and services produced in the UK more expensive for foreigners to purchase. the UK must pay for these imports using the foreign currency of the country concerned). The exchange rate is the external price of a country's currency. shipping. This involves government intervention on a regular basis. which is placed on an imported good. and a fall in the value of the pound is known as depreciation.Generated by Foxit PDF Creator © Foxit Software http://www. the government can devalue the currency if it feels that its value is too high against foreign currencies. The current account of the balance of payments measures both 'visible' trade (that is. Protectionism is the term that refers to a government's policies of protecting its domestic businesses from more competitive foreign imported goods. which makes the imported good more expensive. the imports and exports of tangible goods such as furniture and cars) and 'invisible' trade (that is. A supply of sterling is generated when the UK imports goods and services (i. 3. A demand for sterling is created when the UK exports goods and services (foreigners must pay for these goods and services using sterling. making the domestically produced good more appealing and competitive. A fixed exchange rate system involves the value of the currency being fixed against other currencies and not being allowed to fluctuate in response to the demand and supply for it. Tariffs: A tariff is a tax. This devaluation of the currency boosts the international competitiveness of the country's exports. The government can use a variety of these protectionist policies (also known as barriers to trade): 1.com For evaluation only. Under this system. such as banking. .foxitsoftware. making it difficult for foreign producers to sell their products in the UK. but makes foreign goods and services cheaper to import. and selling the currency when its value is threatening to rise. Quotas: These place a physical restriction on the number of units of a product allowed to enter the country. Embargo: This is a ban on all trade with a certain country. 2.e. £1 = 3. and insurance). A free-floating exchange rate system involves the value of the currency being allowed to float (fluctuate) according to the supply and demand for the currency.1 Deutschmarks. which they purchase in exchange for their own currencies). expressed in terms of another currency. The capital account of the balance of payments measures any flows of capital between the UK and other countries (purchase of shares and other forms of investment). by making them cheaper for other countries to purchase.. Technical barriers: This involves imposing strict technical standards for the supply of a product in a country.

4.U.foxitsoftware. Denmark. Netherlands. oil companies). Spain. making the level of demand too high for their goods and services and leading to inflation. banks. This was formed in 1993. The Council of Ministers: This is the main decision-making body of the E.U are: 1. each of which produces an identical product. Belgium. they make enough revenue to simply cover their costs). and after-sales service. It consists of the following 15 member countries: Austria. and the main objective was to remove all the trade barriers (financial.C). following the Maastricht Treaty.U) European Union (E. It performs a similar role to that of the Cabinet within the UK government. giving members until 1992 to abolish all barriers to trade between members. replaced the European Economic Community (E.E. there are several different types of competitive structure that can exist in an industry: 1.C. in turn. physical and technical) between the member states. Germany. According to economic theory. 'Unilever' and 'Proctor & Gamble' dominate the detergent market). having the freedom to charge whatever price he feels he wants to and having the ability to restrict the levels of output and quality. supermarkets. the amount of employment. Luxembourg. The Treaty of Rome (1957) established the E.Generated by Foxit PDF Creator © Foxit Software http://www. Profits are not as high as in an oligopolistic industry. The main institutions within the E. Italy. This should encourage the free movement of people. Monopolistic Competition: This refers to a situation where many businesses exist in an industry. France. The price for each product is the same and all businesses only make what are termed 'normal profit' in the long-run (i. Monopoly: This is where a single producer dominates the industry. but instead will compete on other aspects such as advertising. replacing the European Community (E. It agrees and adopts pieces of legislation that are referred to it by the European Parliament. businesses and goods and services between the member states. Duopoly: This refers to a situation where 2 businesses dominate the industry (for example. Again. Greece.E. 5. the government can revalue the currency if it feels that its value is too low against foreign currencies. Finland.g.U). 3. which had. and each has a wide product range and a degree of product differentiation. Competition The competitive structure of an industry will directly affect the level of output. they are very large businesses and they have the ability to earn very high levels of profit. Sweden. there are a large number of very small businesses.com For evaluation only. . Alternatively. European Union (E. Oligopoly: This is where a small number of businesses (3 -8) dominate the industry (e. the Single European Act was passed in order to try and achieve this goal. 2. and the UK.C). and the price level of the goods and services produced. which does not exist in reality. Portugal. Ireland.e. Perfect Competition: This is a theoretical extreme. They will often not compete on the price of their products.

2. The ultimate aim of the E.U. which is then passed to the Council of Ministers.S).T). people working from home using telecommunications equipment).U.E. 3. 1999. The currency is mainly being used by the business-sector. all members have agreed to monetary union -this led to the development and the launch of the Euro (the single currency) on 1st January. interest rates.U.T) The effects of new technology are many and varied. monetary. increasing levels of output and productivity. shorter product life-cycles and more flexible working patterns (where job security is becoming a rather outdated concept). However. This aimed to create greater unity between the member states in political. using such systems asElectronic Point of Sale (E.O. but there is still much that needs to be done in preparation for this aim. is economic.com For evaluation only. enable it to monitor its stock levels and sales of products to a 100% level of accuracy. This records every transaction made by a business and can. etc. 2002. This system can automatically re-order stock when numbers fall to a certain level in the warehouse. 2002. monetary and political union of all the member states. All member states will be required to harmonise aspects such as taxation.Ps).P. more flexible manufacturing systems and shorter product-development times. The European Commission: This proposes E. new technology is also leading to job losses. They advise the Council of Ministers on a variety of issues and they have the power to dismiss the European Commission. social and welfare areas (including education and health). This enables a tight control to be kept on both costs and waste. The Maastricht Treaty was signed by all member states in 1991. The European Parliament: This has over 600 Members of European Parliament (M. as well as recording the amount of revenue received from customers and any outstanding customer debts. legislation. It is leading to a rapid increase in teleworking (that is. The Technological Environment Advances in Information Technology (I.Generated by Foxit PDF Creator © Foxit Software http://www. who are elected every 5 years. citizens on 1st January. .U. taking effect as of 1st November 1993. therefore. Sophisticated software packages can enable a business to keep detailed and accurate records on its purchases of stock and its sales to customers. as well as adopting the single European currency and allowing the free movement of people and businesses throughout all E. The result of the deliberations of the Council of Ministers is then implemented by the European Commission.foxitsoftware. but will be available for all E. with the withdrawal of all national currencies by 30th June. Many processes and systems in businesses can be assisted by the use of Information Technology (I. With the exception of the UK. countries. as well as monitoring the quantity of each component that is used in the production process.

Generated by Foxit PDF Creator © Foxit Software http://www. Resistance from employees and from trade unions to the new working practices The Social Environment Ethics and Social Responsibilities Ethics are moral principles and judgements that many people believe should be considered when a business makes any decision (for example. employees. Much time is often required to train staff in the use of the new equipment and software 2. and there have been many stories in the media concerning information stored on computers that has been 'hacked' into. A 'good' business is deemed to be one which acts in a socially responsible fashion. it respects the environment. customers.g. The main problems can be summarised in the list below: 1. it creates wealth. Social Responsibilities are the duties that a business has towards the people who are affected by its activities. 'hacking' into the computer-held information and changing the data or embezzling the business funds) 3. Any business which does not employ computer-literate staff and does not use Internet-trading is likely to suffer falling levels of sales and profits as a result. for example. and takes ethical decisions and actions at all times. Added to this is the increasing amount of business being conducted using electronic mail (email) and the Internet (it is estimated that by 2005. there are many problems inherent in what is termed 'the electronic office'. So it is clear to see that the 'information-age' and the 'digital-age' are going to be a major influence on how business is conducted in the future.com For evaluation only. a work environment that is highly computerised and relies heavily on software and communications equipment. which are not using the Internet to trade and interact with customers are likely to lose any competitive edge that they may have). Huge initial capital outlay required in order to purchase the equipment and software 4. These records are never 100% secure. it is . Equipment and software may become obsolete within a few years 5.foxitsoftware. It minimises waste. Computer Aided Design (C. production and personnel records). any businesses. However. as well as computers 'crashing' and losing vital data for which there was no duplicate copy.D) is the use of sophisticated computer software to design three-dimensional images of products quickly and relatively cheaply. and the local community. it treats its employees well. Computer Aided Manufacturing (CAM) is the use of computers and software for a wide variety of production tasks.A. Computer fraud (e. it does not employ 'fat cat' executives. Opportunities and Threats of New Technology An increasing number of businesses rely on computers and information technology systems for their communications (as well as for their financial. including automated production lines and stock control systems. what is 'right' and 'wrong'? What is 'good' and 'bad'?). suppliers.

They do not have any direct political power. The use of child labour. 2. . 2. 4.foxitsoftware. There are many advantages that businesses can gain from taking a highly ethical and socially responsible stance: 1. Generating good publicity. 3. 2. including increasing costs. or test their products on animals).Generated by Foxit PDF Creator © Foxit Software http://www. Pressure Groups Pressure groups are organisations that develop in order to tackle a matter of vital interest to the members of the group (e. including arranging boycotts of products.com For evaluation only. campaigning against businesses which cause pollution. The exploitation of cheap labour in foreign 'sweatshops'. 3. holding public demonstrations. Attracting new consumers. as well as the actions of businesses. it meets consumers' expectations and it returns some of its profit to the community in which the sales are generated. The basic difference between the two groups is that interest groups are motivated by selfinterest. reducing profits. and 'lobbying' the government (i.g.g. Dealing with corrupt foreign governments and businesses. creating adverse publicity for the business.e. trade unions).g. taking a highly ethical and socially responsible stance can lead to a variety of shortterm problems. Topical ethical issues in today's business world include: 1. Pressure groups try to exert influence in a number of ways. Causing damage to the environment. and conflict between the management and the shareholders. animal welfare) as to make the general public aware of this cause. but they often aim to influence the actions of local government and central government. Attracting and retaining high quality employees. Pressure groups can generally be classified as: 1. Basically. efficient in its use of resources. pressure groups aim to raise as much publicity and awareness of their cause as possible. However. Cause groups: These groups are established to further a particular cause (e. Interest groups: These groups are established to further the interests of its members and to make the general public aware of its cause (e. in the hope that this will stop the businesses from continuing their actions. Attracting ethically-minded investors. attempting to get the cause noticed and acted upon by MPs). whereas cause groups are more concerned with other people and the environment. 4.

Their reputation. 3. and developing long-term trade-links with suppliers and communities in third-world countries (i.e. In other words. Social Audits A social audit is an independent and critical review and appraisal of the business in aspects such as its level of environmental damage. 5. and instead they will be able to produce a range of social benefits (such as sponsorship of schools and local events. 2. such as pollution and congestion) and social costs (which measure the total cost to society of the activities of a business). As a result of these concerns. Concerns are being raised about the negative aspects of business activity such as waste by-products. businesses are engaging in a number of environmental schemes which aim to promote the business in a socially-responsible fashion. its use of recycled materials.Generated by Foxit PDF Creator © Foxit Software http://www. water pollution. the most important of which are: . Their organisational ability. but social audits take into account both external costs (the detrimental consequences of the activities of a business that are paid for by society as a whole. Their access to politicians and people in powerful positions in industry. . congestion. ensuring that these suppliers and communities receive a fair price for their services). The success of a pressure group in achieving its aim(s) will depend on a number of factors. social costs are equal to the internal costs of the business plus the external costs faced by society. 4. and the provision of a range of services that can be used by the local community). sponsorship of local communities. Traditional business audits purely measure financial ratios and performance. noise and damage caused to the environment.foxitsoftware. it is hoped that businesses will reduce the number of social costs that they impose on communities and on the environment. Their available funds and resources. job creation. By becoming more environmentally aware and considerate of their effects on society. including recycling schemes. An increasing number of businesses are carrying out social audits due to rising environmental awareness amongst consumers and investors. air pollution. The level of public sympathy.com For evaluation only. 1. and the health and safety of the workforce.

redundancy and maternity. or an applicant for a job. 1979: This states that goods must be of merchantable quality. 1975: Stating that it is illegal to discriminate against an employee.Generated by Foxit PDF Creator © Foxit Software http://www. The Race Relations Act. 5. 6.com For evaluation only. 7. 1999: Stating that employees who have been in employment with the same business for a period of one year have the right not to be unfairly dismissed. on the grounds of their ethnic background. Employee Protection The government has passed many pieces of legislation over the past 30 years which aim to ensure that businesses treat all of their employees fairly and meet a variety of health and safety regulations. The Employment Rights Act.foxitsoftware. 8. 1987: This states that it is an offence for a business to give a false or misleading price indication on its product(s) AND businesses are liable for any damage and injury that their defective products cause to consumers. as described in their advertisements and fit for their purpose. 1996: Covering unfair dismissal. The main pieces of legislation aimed at protecting the employees in business are: 1. . The Public Interest Disclosure Act. The Sex Discrimination Act.P. The Legal Environment Consumer Protection The government has passed many pieces of legislation over the past 40 years which aim to ensure that consumers are protected from the negative aspects of the operations of businesses. The Consumer Credit Act. The Health & Safety at Work Act. 1990: This states that it is an offence for a business to sell food if it is not registered to do so and also if those handling the food have not been appropriately trained. 2. 4. 1968: This makes it illegal for a business to provide false or misleading descriptions of their products. etc). The Employment Relations Bill. 1998: Covering employees who disclose confidential information. 5. or an applicant for a job. The Consumer Protection Act. accommodation and facilities. 1974: Covering working conditions and the provision of safety equipment. It also states that the food must be of the expected nature and quality that is demanded by the consumer. 3. 1976: Stating that it is illegal for an employer to discriminate against an employee. on the grounds of their sex and/or their marital status.R) that will be charged. 4. 1970: stating that pay and working conditions must be equal for employees of the opposite sex who are performing the same work. The Sale of Goods Act. 1971: This stated that unsolicited goods become the property of the recipient if the sender does not retrieve them from the recipient within 30 days of notice.60 per hour to its full-time staff who are aged over 21. 2. 1974: This states that any business which offers credit facilities must obtain a licence from the Director-General of Fair Trading and must also display the annual percentage rate (A. 3. The Unsolicited Goods Act. services. 1999: Making it illegal for employers to pay less than £3. The Food Safety Act. The main pieces of legislation aimed at protecting consumers in the UK are: 1. hygiene. The Trade Descriptions Act. 6. The National Minimum Wage Act. The Equal Pay Act.

M. with little or no private sector activities. sets quality standards for businesses to achieve.Generated by Foxit PDF Creator © Foxit Software http://www. The Political Environment Some countries in the world can be labelled 'command' economies (e. Competition Legislation In the UK.C) for further investigation. The O. The Competition Commission is an organisation that was established by the government in 1948.com For evaluation only.foxitsoftware. A government is said to adopt a 'laissez-faire' approach to managing the economy if it allows the operations of the free market to exist (i. on the grounds of their disability. that action is necessary. . This ensures that businesses meet the requirements of the Fair Trading Act 1973. the government body that is responsible for ensuring that anti-competitive business practices are abolished and consumers are protected is the Office of Fair Trading (O. 9. will also investigate any claims of restrictive practices.T. and establishes 'Watchdog' bodies to protect consumers' interests and monitor business practices. where businesses act together to reduce the degree of competition in an industry (e.T. its goods and services are provided partly by the public sector (the government) and partly by the private sector (which consists of privately run businesses and organisations). China.T). it does not intervene in the economy in order to change the workings of the market mechanism from deciding how to allocate resources).F. that is. has the power to set maximum price increases to prevent monopoly exploitation. In general. This involves the allocation of resources being decided upon by the government (the public sector).F.e.g.T.g. The O.T. and it was designed to investigate and monitor proposed mergers and take-overs of large businesses and to ensure that any businesses with monopoly power do not act against the public interest. and North Korea). if it feels that they are acting against the public interest (e. The UK (like most of the developed countries in the world) is a mixed economy.F. The O. but instead it can recommend to the O. that is.F. price fixing). any business with a market share of 25% or more is likely to be investigated. 1995: Stating that it is illegal for a business with 20 or more employees to discriminate against an employee.g. or restricting consumer choice). The Competition Commission cannot take legal action itself against any businesses that are acting against the public interest. has the power to recommend any business to the Monopolies and Mergers Commission (M. Cuba. or an applicant for a job.F. charging very high prices. The Disability Discrimination Act.

8. 2. 5. Taxation can be classified in 2 ways: 1. Excise duties. income tax. The main taxes in the UK are: 1.B. public order. Value-Added tax.g. Direct and Indirect: Direct taxation is tax that is paid directly from the income. . defence. 6. V.foxitsoftware. Council Tax.g. location and value of domestic property. The money raised is spent by the local councils on libraries.S. VAT and excise duty). If the government raises more money through taxation than it needs to spend in a particular year. 2. The government will spend the money that it raises through taxation on a variety of items.R). It therefore needs to borrow the extra money that it requires through selling Treasury Bills to individuals or to businesses. then it is said to have a Budget surplus.A. income tax). A regressive tax is one where the proportion of income that is paid in tax falls as the income of the taxpayer rises (e. This is known as the Pubic Sector Debt Repayment. as opposed to central government. 4. If the government needs to spend more money on these items than it raised through taxation in a particular year. transport and housing. Inheritance tax. education. sick pay and unemployment benefit. wealth or profit of an individual or a business (e. Progressive. This is a tax on the value of assets left on the death of an individual. corporation tax). most governments adopt an 'interventionist' approach to managing the economy and there are a number of policies that the government can use to influence the workings of an economy. A proportional tax is one where the proportion of income that is paid in tax remains the same as the income of the taxpayer rises (e. Capital Gains tax: This is a tax on the profits (or 'capital gains') that are made on investments (shares and other assets). However. This is a tax that is levied by local councils. 7. tobacco and gambling.D. the 'community charge'). alcohol. including social security.S. It can therefore repay some of its borrowings from previous years. health.g. Fiscal Policy This is a government policy. Corporation tax: This is a tax on the profits of businesses. These taxes are levied on fuel.com For evaluation only. This is known as the Pubic Sector Borrowing Requirement. It is based on the size. then it is said to have a Budget deficit. health.g. (or P. Indirect Taxation is tax that is paid on goods and services. Regressive and Proportional: A progressive tax is one where the proportion of income that is paid in tax rises as the income of the taxpayer rises (e.R). This is a tax on individuals' expenditure. 3. (or P. parks and refuse cleaning. (e.g. National Insurance contributions: This is also paid by every employee. which aims to influence the economy by raising finance (through taxation) and then spending this finance on public services such as education.Generated by Foxit PDF Creator © Foxit Software http://www. and transport). Income tax: This is a tax on individuals' incomes and it is the single most important source of revenue for the government.T). and the money raised goes towards financing state pensions.

should allow inflation to fall. by altering the money supply. since it does not need to make massive profits. and therefore it can charge a price to consumers that barely covers the costs of production. 2. and providing cheap loans and mortgages.foxitsoftware. an abundant labour force. Monetary Policy This is a government policy designed to control the amount of spending in an economy. This. The measures that the government can use include giving grants to the businesses. fewer people applied for loans and mortgages. income and wealth. providing training programmes for employees. but instead it is decided upon by the Monetary Policy Committee (M. By increasing interest rates.Privatisation Nationalisation occurs when businesses and industries are transferred from the private sector to the public sector. therefore reducing their demand for goods and services. then the government was likely to increase the base-rate (that is the interest rate which all banks use in order to set their own rates of interest). Nationalisation -v. interest rates. This is a government policy that attempts to reduce regional inequalities of employment. as well as increasing the amount of the repayments for people who already had a loan or a mortgage.e. the government can use monetary policy to restrict the amount of money that consumers and businesses will borrow. in the past. if the economy was believed to be overheating and inflation was considered to be too high. and expenditure in the economy was reduced. The government can use regional policy in one of two ways: 1. However.I) has labelled several areas in the UK asAssisted Areas. the control of interest rates is now no longer in the hands of the government. Giving a variety of incentives to existing businesses to relocate to less affluent areas of the country in order to create employment and wealth in these areas. Similarly. giving financial and legal advice and support.T. and significant amounts of under-utilised land and premises). which areas which require revitalisation. by restricting bank loans or by placing more stringent restrictions on giving credit agreements to individuals. making borrowing less attractive to both individuals and to businesses.com For evaluation only. It is often argued that consumers benefit from lower prices with a nationalised industry (public corporation). exchange rates and the amount of credit that is available to customers. offering rent-free and rate-free premises. Regional Policy Regional Policy.P. . in turn. The Department of Trade and Industry (D. Enticing new businesses to set-up in these less affluent and depressed areas.C) at the Bank of England. thus reducing the rate of inflation. relatively low wage-rates. For example.Generated by Foxit PDF Creator © Foxit Software http://www. but which have huge development potential (i. Therefore.

Rolls Royce. British Petroleum. Privatisation refers to the transfer of public sector organisations and resources to the private sector.foxitsoftware. It generates a large amount of revenue for the government. The privatisation of many of these public corporations has resulted in many cases in a rapid increase in their profitability. as well as a significant rise in the price of their services. Further to this last point.g. British Water Authorities. which may not exist if the network was privatised. 2. health. 4. The sale of public corporations: These are transferred to the private sector and become Public Limited Companies (P. The following businesses were privatised by the successive Conservative Governments of Margaret Thatcher and John Major between 1979 and 1997: British Telecom. British Airports Authority. It widens share ownership amongst the population. Deregulation: the removal of any government rules and regulations from the operation of an industry. British Gas. "British sugar. c) Explain how small firms are able to exist alongside multinationals producing similar goods. The public corporations become far more efficient when in the private sector. Contracting out: private sector contractors are given the opportunity to place a bid to secure public sector contracts (e. Any loss incurred can be subsidised by the government. often allowing new competitors to enter the industry. and Sealink. The Conservative government from 1979 . . 2. Revenue that is raised from the sale of these public corporations can be used to reduce taxes. Jaguar Cars.1997 was a firm believer in the privatisation of public corporations for a number of reasons: 1.4th October 1998) a) What is the justification for action of this kind by the European Commission? b) Outline other measures which might be taken to encourage competition.Cs) which are floated on the stock market. 3. rural bus routes) being kept running and therefore providing a vital service for many small communities. British Steel. Tate and Lyle which together hold more than 90 per cent of the British sugar market and two sugar distribution companies are likely to be fined by the European Commission for running a price fixing cartel." (The Guardian . since they have to become competitive and provide a service to the consumer at a profit in order to survive. Many public corporations have faced strong competition and have been forced to improve their image and their marketing in order to protect their market share.Generated by Foxit PDF Creator © Foxit Software http://www. Exam-Style Questions 1. refuse collection and cleaning contracts).com For evaluation only. This 'windfall' can be spent on areas such as education.g. It generally falls into three categories: 1. etc.L. Electricity Boards. British Airways. 3. nationalisation often results in loss-making services (e.

giving consumers more discretionary income. local market. at a time of impending recession. (5 marks) (Marks available: 20) 2. mortgages are also less expensive. d) Why do most small firms remain firm? (Marks available: 20) Answer outline and marking scheme for question: 1 Give yourself marks for mentioning any of the points below: a) To encourage competition in markets and to punish those companies who seek to reduce consumer choice. Consumers may buy more credit as it is cheaper. Reduce restrictive practices to allow free entry into the marketplace. market too small for multinational to invest in. b) How might a downturn in economic activity affect a business. Firms will find it cheaper to invest in new machinery and equipment. (5 marks) d) Owner desire control over business. lack of finance to invest.foxitsoftware.Generated by Foxit PDF Creator © Foxit Software http://www. exports are encouraged and imports discouraged. lack of knowledge. . is there often a call for a reduction in interest rates. Investigate industries with few produces which make huge profits. (5 marks) c) Niche markets. (5 marks) b) Government assistance for new businesses. a) Why. small demand. (Marks available: 10) Answer outline and marking scheme for question: 2 Give yourself marks for mentioning any of the points below: a) Interest rates can be reduced at the time of a recession to attempt to stimulate the economy.com For evaluation only.

(5 marks) b) A downturn in economic activity will affect a business as less demand for a product may be experienced. The private company will tend to operate on more profitable urban routes and regulate their service to customer demand. electricity would not be greatly affected by a downturn in economic activity. (5 marks) (Marks available: 10) .com For evaluation only.foxitsoftware. (5 marks) b) A bus service run by a local authority may operate profitable and non-profitable routes and use cross subsidisation. not necessarily to seek a profit to satisfy shareholders.Generated by Foxit PDF Creator © Foxit Software http://www. a) Explain briefly why governments might need to intervene in the market economy. (5 marks) (Marks available: 10) 3. This may result in a cash flow problem. The objective of the local authority is to provide a service. Government watchdogs oversee privatised companies to prevent exploitation of the customers. what intervention methods could be used? b) How might a bus service run by a local authority differ from one operated by a private company? (Marks available: 10) Answer outline and marking scheme for question: 3 Give yourself marks for mentioning any of the points below: a) Governments may need to intervene in the market economy in order to provide public and merit goods. Any change in demand for a firms product depend on the product itself.

The relationship that exists between the management and their subordinates in a business can be represented diagrammatically in the form of an organisational chart: . management can be categorised as senior management (setting long-term plans and strategies. Staffing: having the 'right' person in the 'right' job (known as Human Resource Management). and supervisory management(monitoring the regular and routine day-to-day tasks). 5. appraising middle management). Planning: setting clear objectives. However.foxitsoftware. In a small business. The main functions of management are: 1. 3. 4. Organising: dividing the work into smaller tasks and delegating to others. One of the most important skills of management in a large business is knowing how. and that they have the necessary skills and time available to complete the delegated task. when and what tasks to delegate to others. 6. Delegation occurs when managers pass a degree of authority down the hierarchy to their subordinates. responsible for all the managerial tasks. Management.com For evaluation only. Directing: decision-making and giving instructions to others. then some of these tasks can be delegated to others. Budgeting: preparing a detailed financial plan for the next trading year. In general.Generated by Foxit PDF Creator © Foxit Software http://www. appraising departmental staff). the owner is likely to be the manager as well. Motivation and Communication Management and Leadership Different styles of management Management is the process of achieving the objectives of the business by using its available resources effectively. middle management (establishing departmental strategies. The managers must ensure that the subordinates are sufficiently competent to cope with the task. Leadership. as a business grows. 2. Co-ordinating: Bringing the various parts of the business together.

In this example. This diagram indicates that this business has four layers in its hierarchy and that there are many 'line' and 'staff' relationships which exist. This refers to the number of people directly accountable to a single superior. therefore. In this example.Generated by Foxit PDF Creator © Foxit Software http://www. there are 4 different departments (Production. However. b) The chain of command.com For evaluation only. An organisational chart shows: a) The different departments within the business. .foxitsoftware. Instead. delayering can actually overstretch employees by giving them too much work and can. person C (supervisor) and person D (shop-floor worker). c) The span of control of each manager. A 'line' relationship exists where there is direct authority (in the diagram.g. a chain of command exists between person A (senior manager). This is done to reduce costs and to improve the speed of communication flows within the business. In this example. it is a relationship in an advisory capacity (e. the span of control is 4 people. an example of a 'line' relationship is between person B and person C). A recent trend in many large businesses has been delayering the organisational chart. an expert who provides advice on. person B (middle manager). actually have a negative effect on their level of morale and motivation. A 'staff' relationship exists where there is no direct authority. d) The channels of communication used. In the diagram. Finance and Personnel). say. Marketing. an example of a 'staff' relationship is between person B and person D. This means stripping out one layers of management from the hierarchy. as well as to provide each employee with more responsibilities. computers or staff training).

say. 2. The development of many employees by empowering them. It should lead to improved levels of morale. 2.foxitsoftware. An alternative management method is for decentralised decision-making to occur. as the managers are more committed to the achievement of their goals. based on the overall objectives of the business. The business becomes rather inflexible and bureaucratic in its operations. There is very little use made of employees further down the hierarchy.com For evaluation only. It was first developed by Peter Drucker in the 1950s. This can lead to problems of loyalty and prioritising of workloads. The advantages of this method of management are: 1. The business has tight control over its operations. 3. Traditionally. Getting too many employees involved in decision-making may lead to mistakes being made. with all they key decisions being made by senior management. The business becoming faster and more efficient in its operations. 2. However. which involves each manager setting objectives for himself. Decisions can take a long time to be made. This involves a situation where a number of employees from different departments within the business are asked to temporarily work together to achieve. It forces managers to plan . with little responsibility and authority being passed down the hierarchy. A common management method as business try to become more flexible is matrix management. A loss of control / power at the top of the business.Generated by Foxit PDF Creator © Foxit Software http://www. Higher levels of morale and motivation amongst the employees. Another management technique is management by objectives. 2. people can specialise in the jobs to which they are best suited. 3. The advantages of this method of management are: 1. as the employee can neglect their departmental duties in favour of the new project they are involved in. the successful launch of a new product. However. This is where responsibility and authority are passed away from the top of the business to regional offices and departments. many businesses had highly centralised decision-making. Each person in the team will then be accountable to their departmental manager as well as the team manager. the disadvantages include : 1. the disadvantages include: 1. but has become a very popular management tool over the past 20 years.

There are a number of styles of leadership: 1. but it can at times rely too much on the skills of the workforce. This method of leadership can result in high levels of enthusiasm for the task in-hand. Schools of Thought There are a number of different 'schools' of management thought that have been developed over the past century. with no opportunity for feedback to the leader. The main 'schools' of thought are: . 2. 3. and it basically means that the people at the top of an organisation make all the decisions and delegate very little responsibility down to their subordinates. but he is unlikely to listen to much of the feedback. It is. Democratic. Communication is top-down. carefully for the next year and the performance of the manager is judged on how effective he has been in the achievement of his objectives for the year.Generated by Foxit PDF Creator © Foxit Software http://www. and then they have to decide how best to achieve them using the available resources. although their social and welfare needs are taken into account when a decision is made that will affect them. Paternalistic. The leader is likely to consult the workforce before implementing any decision. This involves managers and leaders taking into account the views of the workforce before implementing any new system. Autocratic. whereas a leader may often emerge as the best to cope in a given situation (i. therefore.com For evaluation only. Laissez-faire. crucial to have a strong leader who can inspire and motivate the employees. A leader is different to a manager. This can lead to increased levels of morale and motivation amongst the workforce. 4. This is often referred to as an authoritarian leadership style.e. This is fairly autocratic in its approach to dealing with employees.foxitsoftware. It can cause much resentment and frustration amongst the workforce and it is not very common in today's business world. an employee who is very competent at computing may well be viewed as a leader. but it can also result in far more time being taken to achieve the results since many people are involved in discussing the decision. This is where employees are set objectives. Leadership Leadership is the process of influencing people so that they will perform a variety of tasks in an effective manner. even though he may be towards the bottom of the organisational hierarchy). since a manager is often appointed to a position of power.

Scientific Management.Generated by Foxit PDF Creator © Foxit Software http://www. and he introduced a piece-rate style of payment for the workforce (this meant that the workers received an amount of money per 'piece' that they produced. This was developed by Henri Fayol and it emphasised the following factors as being essential to an effective management process: a) The division of labour. Taylor believed that efficiency and discipline were the two greatest features of a good manager and a good workforce. This method was developed in the USA in the early part of the 20th century by Frederick Taylor. These managers believe that a worker's performance can be improved by being given praise and recognition for their efforts. and 240 times in an 8-hour day). The Human Relations 'school' of management thought looks beyond mere financial and productivity variables in deciding the best way to manage a workforce. Taylor also worked very closely with Henry Ford in developing the world's first moving production-line for the model 'T' Ford car. building on the earlier work of Henri Fayol. b) A wide span of control. If the worker completed more than his designated number of tasks per day.g. Human Relations Management. then this could be done 30 times per hour. that workers should be consulted in any decision that affects them. and then this provides the basis for the worker's level of output per day (e. but what he failed to recognise was the high level of alienation and low levels of morale and motivation that this system produces in the workforce.foxitsoftware. thereby linking their pay to their productivity).com For evaluation only. . d) An authoritarian style of management. Taylor also believed that a high division of labour was needed to produce more output. where each worker is timed when performing a task. if it took a worker 2 minutes to perform a task. This method of management paid close attention to 'time and motion' studies. then he would be eligible for a monetary bonus. and that the leader should be democratic rather than autocratic. Classical Management. c) A tall organisational structure.

com For evaluation only. Once these needs are satisfied.foxitsoftware. initiative and creativity. Abraham Maslow's 'Hierarchy of Needs' can be seen in the diagram below: We first need to satisfy the basic requirements of continued existence (i.Generated by Foxit PDF Creator © Foxit Software http://www. USA. He called this the 'Hawthorne Effect'. then further motivation for the employee can only come by giving them greater scope for using skill. hours of work. and the praise and recognition that is given to them by their managers. and he discovered that the level of output rose each time.e. can have a tremendous psychological effect on their productivity levels. agreeing that the way that employees are treated. Frederick Herzberg and Douglas McGregor. you cannot progress onto a higher level need. physiological needs). heating).g. then we seek to satisfy the higher level needs. Probably the most famous study of Human Relations Management was carried out by Elton Mayo between 1927 and 1932 at the Western Electric Company. Until a lower order need is satisfied. once the lower level needs are satisfied. He concluded that the only factor that was needed to consistently achieve a high level of productivity was a strong level of social interaction and teamwork amongst the 6 employees. lighting. Neo-Human Relations Management. He changed many of the working conditions (e. at Hawthorne in Chicago. He studied a group of six female workers over this time. There are a number of management writers and theorists who built on the earlier work of Mayo. . rest periods. Hence. and tried to establish a link between their working conditions and their productivity levels. The main writers in this field are Abraham Maslow.

A Theory Y manager. safety needs include Health & Safety protection and pension schemes. they prefer to be told what to do. Self-fulfilment needs will depend on the individual employee. in which he distinguished between what he called Motivators (which actually give an employee positive satisfaction) and Hygiene / Maintenance factors (which do not give positive satisfaction. but their absence will cause dissatisfaction). The motivators are concerned with the content of the job and include a sense of achievement. working conditions. these motivators equate with the ego and self-fulfilment categories in Maslow's Hierarchy. and they are really only interested in job security. supervision. as fewer and fewer people reach them. they like to be given responsibility at work. on the other hand. being given responsibility. which had either resulted in a marked improvement or a marked reduction in their job satisfaction. they do not seek responsibility. assuming that employees need constant supervision. assumes that employees wish to be given praise and recognition for their achievements.Generated by Foxit PDF Creator © Foxit Software http://www. bureaucracy ("red tape") and interpersonal relations.com For evaluation only. whilst at the same time ensuring that the negative.foxitsoftware. they will avoid performing their jobs if they can. A Theory X manager is very authoritarian. whether he has achieved his full potential or not. As a result of this progression. and they wish to use their imagination. yet very few reach the self-fulfilment category (and those that do reach it will not remain at it for very long). who represented a cross-section of Pittsburgh industry. They were asked about events they had experienced at work. the size of each of the sections in Maslow's hierarchy diminishes the higher they get. company policy. physiological needs include pay and working conditions. the implications of Herzberg's work are that it is necessary to provide strong motivational factors. job title or size of office. using initiative and creativity. social needs include the need to work in a team and mix with others. His most famous theory is called the 'Two-Factor Theory'. Frederick Herzberg carried out several studies of management and motivation and he attempted to identify the factors that motivate employees. For managers. Applying this theory to employees. Herzberg studied 200 engineers and accountants. some reach the ego category. Douglas McGregor developed what he termed 'Theory X' and 'Theory Y' management styles. . creativity and initiative. and being involved in decisionmaking. The Hygiene / Maintenance factors are concerned with the context of the job and include such items as pay. and ego needs may include a company car. In other words. hygiene factors are minimised. Most people reach the safety and social categories.

the Human Relations (Mayo). some situations in a business will call for a more authoritarian management style (e. a crisis). The need is either satisfied by an extrinsic reward (e.g. This management 'school' of thought was developed in the 1960s and. McGregor) schools of management thought are all content theories. and the Neo-Human Relations (Maslow. whereas in other situations a more participative 'hands-on' approach to management will be required. since it can lead to higher rates of productivity. pay) or an intrinsic reward (e.com For evaluation only. The Classical (Fayol). being given responsibilities. job security. Most managers find that the situation that they are in and the people that they are dealing with will influence the style of management that they use. promotional prospects. the morale and the job satisfaction of the employees. content theories and process theories. but instead they are concerned with the thought-processes that influence workers' behaviour. Link to Motivation It is clear that the management and leadership styles that are adopted by a business and its management will have a measurable effect on the motivation level. do not concern the needs which must be satisfied in order to achieve motivation. the employees and trade unions). better quality output. it believes that there is no single approach to management which will suit all businesses and all employees. it is very rare to find a business using management styles similar to Fayol and Taylor. Most businesses use elements of Human Relations management. and low rates of absenteeism and labour turnover.Generated by Foxit PDF Creator © Foxit Software http://www. since these theories tend to be preferred by all concerned (the managers. fringe benefits. Motivation Having a motivated workforce is vital for most businesses. unlike the other theories.g. the Scientific (Taylor). The main factors which affect the motivation of workers are pay levels. Process theories. they study the needs that must be satisfied in order for the employee to be motivated.g. recognition and praise). Motivational Theories There are two basic theories of motivation. Content theories focus on what actually motivates people. participation in decision-making and working in a team. working conditions. the relationship between the management style that is used within the business and the level of motivation within the workforce is a subject of much debate within industry. Herzberg.foxitsoftware. Today. Contingency Management. In other words. There are two such theories: Expectancy theory: . Nevertheless.

Generated by Foxit PDF Creator © Foxit Software http://www. Therefore his pay is directly linked to his productivity level. However. This states that workers will only act when they have a reasonable expectation that their work will lead to the desired outcome. This payment method involves the employee receiving a basic rate of pay per time period that he works (e. so that he can produce more output in a given period of time. £7.g. £50 per day. This is common with managerial and professional workers. often at 'time and a half' (e. Equity theory: This states that each worker will wish to receive a remuneration package (equal to their pay plus fringe benefits) in return for their efforts. 3.g. Any time that the employee works above the agreed number of hours per week may make him eligible for overtime payments. This is a common method of payment for salesmen (e. each of which can have different effects on the level of motivation of the workforce. .50 per hour instead of £5 per hour). then their level of effort will be great and they will be motivated. £400 per week). insurance. Financial Methods There are many different methods of payment that a business can choose from. double-glazing. The main methods are: 1. If they believe that they possess the ability and skill to achieve the goal. Performance-related pay (PRP).foxitsoftware. Time-rate ('flat rate') schemes. £5 per hour. The pay is not related to output or productivity. related to the employee achieving a number of targets over the past year. Each worker will only be motivated if their remuneration package is seen to be fair (or equitable) in relation to the remuneration packages received by the other workers for their efforts. telesales).com For evaluation only. 4. Commission.5%) of the value of the goods that he manages to sell in a period of time. an employee may reduce the quality and craftsmanship per unit. The employee receives a very small percentage (say 0. This is a method of giving pay rises on an individual basis.g. it is possible that in order to boost his earnings. 2. Piece-rate schemes. This payment method involves the employee receiving an amount of money per unit (or per 'piece') that he produces.

effectively representing an annual pay rise. lead to higher levels of motivation. This involves increasing the number of tasks which are involved in performing a particular job. and there are many methods which are used by different managers to achieve the goal of a motivated and satisfied workforce. subsidised meals. This involves the employees performing a number of different tasks in turn. Non-Financial Methods There is no universal rule for motivating employees. These include: Delegation. This forms a profitable savings-plan for the employee. discounts on holidays and travel. Job rotation. if the business makes low profits (or even a loss) then this is likely to have a detrimental effect on the level of motivation of the employees. Share ownership. pension schemes.Generated by Foxit PDF Creator © Foxit Software http://www. Job enlargement. Empowerment. This involves each employee receiving a share of the profit of the business each year. Job enrichment. It aims to increase the levels of effort. This involves a manager giving his subordinates a degree of power over their work (i. A common form of payment in many PLCs is what is termed 'share options'. 6. cheap mortgages and loans. 5. The total package of pay plus fringe benefits is known as theremuneration package. However. This occurs when managers pass a degree of authority down the hierarchy to their subordinates. This basically involves each employee receiving a part of each month's salary in the form of shares (usually at a discounted price).foxitsoftware. in order to motivate and multi-skill the employees.e. This should motivate the employees to work harder and increase their efforts. motivation and productivity of each employee. company cars and discounts when buying the company's products. This is a method of motivating employees by giving them more responsibilities and the opportunity to use their initiative.com For evaluation only. it enables the subordinates to be fairly autonomous and to decide for themselves the best way to approach a problem). . since the share price will rise as the company becomes more profitable. in order to increase the variety of their job and. therefore increasing the capital gain on their shares. and he can sell them after a given period of time. Profit sharing. since their annual pay-award will be related to the profitability of the business. therefore. Many of these different methods of pay are likely to be supplemented by fringe benefits (or 'perks') such as private health schemes.

. d. Develop a strong corporate culture and team-spirit. Design more challenging jobs. f.Generated by Foxit PDF Creator © Foxit Software http://www. Symptoms of poor motivation amongst the workforce include high rates of absenteeism and labour turnover. This refers to the participation of workers in the decision-making process. Teamworking involves a number of employees combining to produce a product. low quality output and an increasing number of disciplinary problems. This is the opposite production technique to an assembly-line which uses an extreme division of labour. high rates of waste. Teamworking. Worker-directors are not very common in the UK. e. Worker-directors. as well as 'leaking' confidential information to employees. Cell production is an example of teamworking. and then recommend to management the solution that they believe will be the most successful. When a poor level of motivation exists in a workforce. Quality circles. This is a group of workers that meets at regular intervals in order to identify any problems with quality within production. These are workforce representatives who participate in the meetings held by the board of directors. b. Ensure that communication flows are effective and that the relevant messages get to the relevant personnel. then the management should: a. Worker participation. Communication Many managers devote a significant proportion of their time to communications both within and outside the business. Introduce decision-making at lower levels in the organisation. Ensure that pay levels are fair.com For evaluation only. This is a type of worker participation and it consists of regular discussions between managers and representatives of the workforce over such issues as how the business can improve its processes and procedures (in production or marketing. consider alternative solutions to these problems. Give praise and recognition to employees for their efforts and achievements. asking them for their ideas and suggestions. c. poor timekeeping. for example). Works council.foxitsoftware. with each employee specialising in a few tasks. since employers often believe that they can slow down the decision-making process.

to the anonymous passing of information to the media relating to unethical business practices. Formal -v. or it can be discussing non work-related matters (e.g. Communications can also be classified in terms of direction. Where there is no facility for feedback. These information flows will be concerned with the content of the jobs and may be in one of several forms. Communication can be simply defined as the flow of information from one person to another.Generated by Foxit PDF Creator © Foxit Software http://www. arranging a staff social function). therefore. Good communication will reduce conflict and will prevent any misunderstandings of what is required by employees. since the employee performing the task is unable to ask his superior for assistance or clarity.g. Vertical communication can be top-down (e.com For evaluation only. top-down. since the delegation of work. vital to the success of the business. Effective communications are. as well as encouraging lower rates of absenteeism and labour turnover. for example.g. spoken. implementing systems of quality circles or works councils). (often under an authoritarian management style) then this is referred to as one-way communication.e. between superiors and subordinates. This will help to improve their job satisfaction and level of motivation. such as information being passed through 'line' and 'staff' relationships (e. however. directions and instructions given from superior to sub-ordinate) or it can be bottom-up (e. bottom-up and horizontal) in order to involve employees and make them feel valued by the business (e.g.g. . feedback from sub-ordinate to superior). This is often referred to as the 'grapevine'.g. written. the feedback of information and the controlling of the business all rely on accurate.Informal Communication Formal communication refers to the official channels of communication which exist in a business. This can be concerned with the content of the jobs (e. two employees commenting on the poor performance of a task by their superior). or electronic for example. It could also refer. Informal communication refers to the unofficial channels of communication that exist in a business (often spoken as opposed to written communication). There is a danger here. or between people on the same level). It is a widely-held view among many businesses today that communication must be multidirectional (i. Horizontal communication refers to contacts and flows of information between people at the same level in the business. that the message will be misunderstood or poorly performed. quick and effective communication flows.foxitsoftware. vertical or horizontal.

Notices k. whether the receiver is an employee. Letter f. Video-conferencing h.com For evaluation only. body language).e. a customer. Memorandum g. fast and efficient. which can often confuse the recipient of the message and lead to the misinterpretation of the information. putting the message and the information into a form that can be easily understood). The choice of communication channel will usually depend on the type of stakeholder that the message is being sent to (i. Advertising i. Face-to-face contact (eg a meeting) b. In-house publications Whichever communication channel is chosen.e. to be simple. if a business believes that it needs to improve . Channels of Communication The basic communication process involves the transmitter (the sender) encoding a message (i. However. Quantitative communication involves the transmission and interpretation of data and numerical information (e. interpret what the message is conveying) and act upon it as necessary. The transmitter then chooses the communication channel that he wishes to use in order to send it to the receiver (the target for the message). Facsimile ('fax') e.foxitsoftware. There are a number of communication channels that the transmitter of the message can use to send the message to the receiver. On receipt of the message.g. these messages are often complicated by the use of non-verbal communication (e. either spoken or written. The main communication channels are: a. Telephone c. Qualitative communication involves the use of language. Videotape j. sales figures or financial data).Generated by Foxit PDF Creator © Foxit Software http://www.g. the message will have the same objectives. or a supplier). E-mail d. the receiver will decode it (i. However.e.

g.Generated by Foxit PDF Creator © Foxit Software http://www. production and personnel records). the communication channels that it uses. then the following criteria should be considered: a. There are a number of factors which can cause communication breakdown: a. Any business which does not employ . Too much information being sent ('information overload') d. Encourage the use of simple language b. Too much technical language ('jargon') being used b.com For evaluation only. communications between different countries in different time-zones) e. as an increasing number of businesses rely on computers and information technology systems for their communications (as well as for their financial. Employees already being overworked and ignoring the message g. Use a variety of media to convey a message e. Poor presentation and use of grammar c.g. Technology breakdown (e. Make employees aware of communication problems Communication Breakdown This is often referred to as 'noise' and simply means anything that will distract the recipient of the message or cause either a failure to receive the message or a misinterpretation of the message. computers 'crashing') This last point has become a growing problem over the last 10 years and is likely to continue to grow.foxitsoftware. So it is clear to see that the 'information-age' and the 'digital-age' are going to be a major influence on how business is conducted in the future. any businesses which are not using the Internet to trade and interact with customers are likely to lose any competitive edge that they may have). Shorten the communication chain c. Encourage feedback d. Added to this is the increasing amount of business being conducted using electronic mail (email) and the Internet (it is estimated that by 2005. Geographical and time problems (e. Length of the communication channel f.

Huge initial capital outlay required in order to purchase the equipment and software d.foxitsoftware. Much time is often required to train staff in the use of the new equipment and software b. Computer fraud (e. Resistance from employees and from trade unions to the new working practices . computer-literate staff and does not use Internet-trading is likely to suffer falling levels of sales and profits as a result. The main problems can be summarised in the list below: a. However.Generated by Foxit PDF Creator © Foxit Software http://www. a work environment which is highly computerised and relies heavily on software and communications equipment. 'hacking' into the computer-held information and changing the data or embezzling the business funds) c. Equipment and software may become obsolete within a few years e. there are many problems inherent in what is termed 'the electronic office' .com For evaluation only.that is.g.

inexperienced or young workers. being able to communicate. Exam-Style Questions 1. Disadvantages: Unrealistic targets without looking at the market place. Other motivating factors may be missed out. Targets can be set for each individual sales person. holidays. Paternalistic: suitable for dealing with new. Constitutional: suitable for resolving conflict or areas of uncertainty. job satisfaction and working as a team. a) What are the advantages and disadvantages of performance related pay? b) Other than through performance related pay systems how can managers motivate their sales force? (Marks available: 10) Answer outline and marking scheme for question: 1 Give yourself marks for mentioning any of the points below: a) PRP advantages: creates incentive. a) What qualities should a good leader possess? b) Explain. If targets are clearly set. (5 marks) (Marks available: 10) 2. then sales person has clear objectives. . (5 marks) b) To suit their style and situation. why leaders vary their leadership style in different circumstances (Marks available: 10) Answer outline and marking scheme for question: 2 Give yourself marks for mentioning any of the points below: a) The qualities of a good leader include having a clear vision and direction.foxitsoftware. using examples. (5 marks) b) Group incentives. directive: suitable for instructing workers for structured tasks. For example.Generated by Foxit PDF Creator © Foxit Software http://www. fringe benefits.com For evaluation only. and being able to motivate people towards achieving organisational objectives.

(ii) More interesting work. a) Describe two ways in which employees can be empowered. a) How may the roles of a manager and a leader differ in business? b) Explain briefly in what situations a manager might adopt different management styles. A manager organises resources to achieve the objectives. The power to make decisions is given to those who previously acted on orders from more senior staff. lower staff costs. (Marks available: 10) Answer outline and marking scheme for question: 3 Give yourself marks for mentioning any of the points below: a) Refers to devolving responsibility down to the lowest levels within an organisation. Participative: suitable for qualified. (5 marks) (Marks available: 10) 4. (5 marks) (Marks available: 10) 3.Generated by Foxit PDF Creator © Foxit Software http://www. autonomy over work. employees are aware of business needs. able to respond quickly to market changes. (Marks available: 10) Answer outline and marking scheme for question: 4 Give yourself marks for mentioning any of the points below: a) A leader normally sets objectives. (5 marks) b) (i) Saves management time. more responsibility. sign of employers trust. .com For evaluation only. specialist and experienced workers. b) Give two advantages of empowerment from the point of view of: (i) The organisation (ii) The employee.foxitsoftware.

and the decision to be made. (5 marks) b) Reference to motivational theory required. Pension may depend on the age of person. Share option depends on size offered. Increase in employee morale.Generated by Foxit PDF Creator © Foxit Software http://www. time. help motivate the work force? (Marks available: 10) Answer outline and marking scheme for question: 5 Give yourself marks for mentioning any of the points below: a) Greater range of skills. He may adopt a different style when managing office staff. compare between chief executive and a shop floor worker. knowledge to solve problems.foxitsoftware. Team ideas more creative than individual. such as pensions and share option schemes. Problems across the organisation can be solved more easily. (5 marks) b) Depends on situation. a) What are the advantages to an organisation of encouraging teamwork? b) How do reward packages. (5 marks) (Marks available: 10) 5. (5 marks) (Marks available: 10) .com For evaluation only. For example: a logistics manager of a transport company will tend to direct his drivers.

4.R. These employees have the advantage of already knowing about the systems and the routines of the business. graduate trainees. 3. H. more senior positions.com For evaluation only. Using past data (e.P) is the process of forecasting the workforce requirements of the business for future years. if a manufacturing business is wishing to change its production technique from labour-intensive to capital-intensive. The views of the management (the management are often in the best position to estimate the number of new employees that will be required in their department or division).P) Human Resource Planning (H. then the business will have to recruit many new employees to replace those that are leaving. as well as the type of employee that will be required (e.R. 2.g.R. to ensure maximum efficiency and effectiveness of the workforce. then it is not likely to require many new employees in the future. For example.P. For example.R. 5. People in the Workplace Human Resource Management(H. Estimating the level of labour turnover. Alternatively. The rate of unemployment in the area. this trend may well continue). This can be done in a number of ways: 1. if the workforce has grown at 4% per year over the past 3 years. however. It looks at how many employees the business will require in the future.R. Clearly the process of H.M) Human Resource Planning (H. the business may decide to fill these (and more junior) positions from outside the business. if the number of employees that are expected to leave the business next year is 50 (due to retirement or transfers). This can be done by promoting those employees who have already demonstrated their potential and effectiveness in their current posts. that will affect the availability of external labour for a business: 1. requires that the business make estimates of the number of workers that it believes it will require at all levels in the business in the future. but they would still require the relevant training and development in order to prepare them for their new. more employees will be required if the number of customer orders is estimated to rise significantly).foxitsoftware.g.Generated by Foxit PDF Creator © Foxit Software http://www.g.P. also ensures that the 'right' employee is in the 'right' job. It is possible that a business may decide to meet any requirements for employees at the supervisory and management levels from within the existing workforce. Expected changes in working practices. There are a number of factors. Analysing the expected levels of customer demand and sales (e. skilled-manual and supervisors). .

was often referred to as 'Personnel' in the past. Performance appraisal. Training and development. The Human Resource Management (H. Government incentives and subsidies (paying the training costs for the business). A job description needs to be written. price and availability of housing or availability of public transport). Health and Safety issues.M. 4.foxitsoftware. including: 1.R. Human Resource Planning (H.R. The availability of workers with the necessary skills and qualifications. because both the business-world and the internal requirements of the organisation are very dynamic. there are a number of problems associated with Human Resource Planning. this goes beyond a description of the job. training and retaining employees with the necessary skills and competencies to perform their jobs effectively. 8. 5. radio. Will the 'new' employees mix effectively with the existing workforce? 2. Once this is completed. the internet. Dealing with the termination of contracts of employment. and internal notice-boards).com For evaluation only.Generated by Foxit PDF Creator © Foxit Software http://www. 2. H.g. 4. Remuneration packages. The number of competitors in the area. in order to get as many people as possible to apply for the post. Changes in the external environment (e.M) Process Human Resource Management is the management of the people within the business. 3. 2. a recession) could lead to the business having to make redundant several of the recently-appointed employees. The H. as well as the tasks and the responsibilities that will be covered by the successful applicant. 3. department will then need to write an advertisement for the job and to place it in a variety of media (newspapers. and it lists the physical and mental attributes that will be desirable or essential for the successful applicant (such as the level of intelligence. The recruitment and selection process commences when the business realises that there is a vacancy in the organisational hierarchy which needs to be filled. 10. job agencies. 7. However. and it covers all the following areas: 1. The extent of the infrastructure in the area (e.M. by recruiting.P).R. Grievance procedures. their disposition and their interests). job centres. this outlines the job title. then a job specification needs to be written.g.R. 5. . 9. It will always be difficult for a business to accurately forecast the number of new employees that it will require. Disciplinary procedures. Recruitment and selection of new employees. Looking after the employees' welfare. 6.

as well as studying their application forms.e. legal. This can be in sequence (i. department will contact the successful applicants and ask them to attend an interview. uninterrupted. the job title. this involves analysing the CVs and the application forms and deciding which applicants appear to be most suitable for the post. the pay and fringe benefits. inoffensive and essential. an essential factor in getting the 'right' person for the 'right' job. and then the interviewer must inform the applicants when they will be notified of the decision.foxitsoftware.M. Once this is done. and conducted in a friendly manner. and a contact name and address. the relevant experience and qualifications that are required. then the H.R. with the use of open-ended questions which will give the applicants the chance to talk openly about themselves. the applicants must be given the opportunity to ask questions about the job and about the business. the applicant will be interviewed by a panel of people). as well as far less time and money being spent on the whole process.com For evaluation only. A good interviewer will have studied the job description.R. in order to measure the applicants' intelligence. It is likely that the job will be advertised within the business as well as through external media. CVs and covering letters in order to know as much information as possible about the applicants before the interview commences. The interview process is very time-consuming but is. their performance in certain scenarios. as well as asking questions that are relevant. . Whichever method of interviewing is chosen.M. and request Curriculum Vitae (CVs) from. all those people who write to the business expressing a desire to apply for the job. the job specification and the job advertisement before interviewing the applicants. It is likely that applicants for a job will be interviewed by a number of people.e. It is possible that the business may choose to use a variety of tests to complement the interview process. the purpose remains the same.Generated by Foxit PDF Creator © Foxit Software http://www. nevertheless. The advertisement will include the hours of work. The interviewer must listen carefully to the applicants' comments and make notes as necessary. At the end of the interview. The H. department will then need to send out application forms to. A good interview needs to be well structured. The advantages of recruiting from within the existing workforce include the fact that a shorter training and induction period is necessary. and their personality traits. to select and appoint the 'best' applicant for the job. It is vitally important that the application form is tailored to the specific post that is being advertised. Once these application forms have been completed and returned to the business (often with a CV and a covering letter) then the short-listing process will ensue. the applicant will have one interview quickly followed by another) or it can be simultaneous (i.

g.M.Generated by Foxit PDF Creator © Foxit Software http://www.R.M. pay. It will be necessary at certain times (e. department. including: 1. during a recession. department is to make the termination of the employees' contracts of employment as smooth and efficient as possible. 'last-in-first-out' (where . This induction training covers the basics of the new employee's job. However. Once a business has selected the most suitable applicant for the available post (often involving much discussion between the different interviewers). Redundancy. date employment commences. training is not limited to the new employees of a business.foxitsoftware.g. Once a new employee has been appointed to a business. or a decline in the industry) for a business to 'downsize' its workforce (make a certain proportion of them redundant). Training can increase the levels of job satisfaction and motivation of the employees.g. Training courses are likely to be targeted at all employees in the business at various stages in their career (e. Training can improve employee productivity. Training employees increases the chances of their promotion. management training courses.g. Training can create a multi-skilled. job title. as well as the process for disciplinary and grievance procedures. conference centres and universities). compulsory redundancy. This process could be done in several ways. holiday and pension entitlements). There are many reasons for the extensive use of training across the workforce of a business: 1. it is likely that they will receive induction training in order to help them settle into the new job. This will involve the new employee being given a Contract of Employment. training on how to use new machinery and technology). apprenticeships. number of employees and the range of products). It is also imperative that all training courses that are attended by employees are evaluated in order to determine if the training course provides value for money for the business. 4. The final role of the H.voluntary redundancy (where workers opt for a redundancy package). as well as the background details and the history of the business (e. 3. then he/she will be appointed. hours of work. 'Off-the job' training involves the employees attending courses away from their workplace (e. flexible workforce. This evaluation is often carried out by asking the employees to complete short questionnaires and provide feedback to the H.g. There are a number of different ways in which employees can have their contracts of employment terminated. 2.com For evaluation only.R. and mentoring). which is a written statement covering the terms and the conditions of employment (e. Training can be classified as either 'on-the-job' or 'off-the-job'. 'On-the-job' training involves the employees receiving their training at the place of work (using such techniques as work-shadowing. at local colleges.

The Employment Relations Bill. 2. The Health & Safety at Work Act. as well as both their state pension and their private pension. bad timekeeping. regardless of the stakeholder group which the legislation protects (e. on the grounds of their disability). then they are eligible for re-instatement in their previous job. The Disability Discrimination Act.foxitsoftware. The Equal Pay Act. 1970 (stating that pay and working conditions must be equal for employees of the opposite sex who are performing the same work). 1974 (covering working conditions and the provision of safety equipment and hygiene). and told that their services are no longer required by the business. The main pieces of legislation affecting the successful operations of the Human Resource Management department are: 1.com For evaluation only. This is where the employee is deemed to have broken their contract of employment. 1976 (stating that it is illegal for an employer to discriminate against an employee. orretention by merit (where the least effective employees are made redundant). . 1998 (covering employees who disclose confidential information). or union membership). they can apply to have the case heard at an industrial tribunal. 1999 (stating that employees who have been in employment with the same business for a period of one year have the right not to be unfairly dismissed). on the grounds of their sex or their marital status). and destruction of business property. redundancy and maternity). racial harassment. The National Minimum Wage Act. 1995 (stating that it is illegal for a business with 20 or more employees to discriminate against an employee. In all areas of the activities of the business. The Sex Discrimination Act. Retirement.Generated by Foxit PDF Creator © Foxit Software http://www. 1996 (covering unfair dismissal. ethnic background. The Public Interest Disclosure Act. the most recent appointments are the first to be made redundant). the business must ensure that it abides by every piece of legislation.g. 8. on the grounds of pregnancy. on the grounds of their ethnic background). 1975 (stating that it is illegal to discriminate against an employee. as well as a financial award (to cover loss of earnings. 3. if an employee feels that they have been unfairly dismissed (e. sleeping on the job. At the end of their working-life. In return. or an applicant for a job. 1999 (making it illegal for employers to pay less than £3. or an applicant for a job. but especially it seems within Human Resource Management. and pain and suffering). Fair dismissal can be on the grounds of sexual harassment. 4. Dismissal. If the employee is successful in claiming that they have been unfairly dismissed. 6. The Employment Rights Act. The Race Relations Act.60 per hour to its full-time staff who are aged over 21). However. Transfers and Resignation. 3. This is a small court that deals with claims of unfair dismissal and discrimination from employees against their (former) employers. or an applicant for a job. 7. This occurs when an employee leaves the business and transfers their services to another business (the employee may apply for a more senior job at another business). 9. employees will wish to retire and stop offering their services to the business. 2.g. 5. employees and customers). 4. they will often receive a lump-sum payout.

etc). or from 1 to 5. This method of appraisal breaks the job down into many specific areas. This is a less common method. although some employees may be appraised every six or even every three months. for example). often someone who works closely with him. . there can be many problems associated with appraisal systems: 1. It is common for employees to be appraised annually.g. customers. To set objectives for the employee for the next year. the employee's achievement of these objectives is measured. 4. and then each area is rated on a scale (from A to E. 5. There are many different ways in which an appraisal can be carried out. superiors. After a period of time working for a business. Objective setting. each employee is likely to be appraised in order to measure their strengths. at the end of the year. 2. subordinates.Generated by Foxit PDF Creator © Foxit Software http://www. Self-appraisal. 4.foxitsoftware. Grading system. The appraiser should not let his personal feelings interfere with the objectivity of the process. The time and the cost of the appraisal can use up scarce resources which could be used elsewhere within the business. leading to poor results. often using it as the basis for a promotion or a pay rise. qualities and value of their contributions to the success of the business. 3. 3. being honest about his strengths and his weaknesses and setting himself realistic improvements which need to be made. Appraisal can be a very subjective process. There are a number of reasons why a business will use systematic and regular appraisals of its employees: 1. Appraisal by subordinates. This involves the employee appraising himself. peers. Rating system. Some appraisers are not trained sufficiently in the appraisal process. 6. but some of the most common are: 1. Peer appraisal. This involves the appraiser gathering as much information concerning the employee from as many different groups of stakeholders as possible (e. weaknesses. This involves the employee and his appraiser setting objectives for the employee for the next year.com For evaluation only. 7. 2. Then. since many subordinates are often unwilling to criticise their superior for fear of recrimination. To provide some constructive criticism of the employee's performance at their job and to suggest some areas in which the employee needs to improve. Performance Appraisal This is the process of measuring the effectiveness of an employee. '360 degree' appraisal. This is carried out by an employee on the same level as the employee being appraised. 3. Although a regular and systematic appraisal is vital for the benefit of both the employees and the business. suppliers. To identify any barriers which exist to inhibit their effective performance. This involves each employee being graded (by a letter from A to E) according to their overall effectiveness at their job. Appraisal generally involves a discussion between the job holder and his appraiser. To provide the basis for performance-related pay. 2.

2. the business would wish the figure to be as low as possible. There are four main measures that a business can use in order to measure the effectiveness of its employees: 1. The appraisal process is a waste of time and resources if it is not followed-up with feedback sessions. A high rate will inevitably lead to the business having to spend a large amount of money on training and paying temporary workers who are performing the jobs of the absent employees. or better remuneration packages being offered by competitors. Labour Turnover. job satisfaction and motivation. poor management techniques. 3. This high rate will inevitably lead to the business having to spend a large amount of money on recruitment and training of new employees. It is calculated using the following formula: A high labour turnover rate could be a sign that the workforce have low levels of job satisfaction and motivation. It is calculated using the following formula: . and it is measured by the amount of output per worker. Businesses will. wish to discover if the money that they have invested in their workforce has been spent effectively and if it has improved the effectiveness of the employees. Personnel Effectiveness Many businesses spend a significant proportion of their total costs on their workforce (e.com For evaluation only. This measures the proportion of the workforce who are absent from work in a particular period of time. since a high figure could indicate that the employees have low rates of morale. It is calculated using the following formula: Ideally. expressed as a percentage of the total number of people employed. Labour Productivity. This could be due to poor wages. pay. This reflects the efficiency of the workforce.g. interviewing costs.foxitsoftware. Absenteeism. This measures the number of employees who leave a business per year. training. and fringe benefits).Generated by Foxit PDF Creator © Foxit Software http://www. therefore.

foxitsoftware. 4. since the effect on customer loyalty and reputation could be disastrous if the business supplies poor quality output to its customers. 2. To support the training and the professional development of its members. To ensure that their members' interests are considered by the employers when any decision is made which will affect the workforce.com For evaluation only. and supports industrial action by the workers. the competitiveness of the business. 4. Trade unions have a number of aims: 1. To improve the pay of its members. These are for skilled and unskilled workers performing different jobs in different industries (e. General Unions. transport workers). 3. . It can be argued that labour productivity is the most important measure of employee effectiveness. poor quality output which has to be reworked. then this could be due to a poorly trained workforce with low levels of both motivation and job satisfaction. 'Waste' products refers to lost and damaged raw materials. the business should ensure that the employees are all adequately trained for their specific tasks. hence the production cost per unit will fall.g. since it directly affects the average cost of production and. which contributes towards the costs and expenses that the trade union incurs when it provides services to its members. Waste levels. Trade Unions Types of trade Union A trade union is a group of workers who join together in order to protect their own interests and to be more powerful when negotiating with their employers. In this case. cleaners. There are four main types of trade union in the UK: 1. It is vital that the reasons for this are discovered quickly. It is calculated using the following formula: If a business has a high percentage of 'waste' products. To improve the working conditions and the working practices of its members. and output which has to be discarded due to its poor workmanship.Generated by Foxit PDF Creator © Foxit Software http://www. therefore. Each employee who wishes to join a trade union must pay an annual fee. and investigate any other reasons for the poor quality of the output. An increase in labour productivity will benefit the business since it means that more output can be produced for a given amount of inputs. clerical staff.

musicians). 2. will the pay rise be a 'blanket' coverage giving every employee a fixed percentage rise. 3. The third and final stage involves a negotiation process between the trade union and the employer. as well as maintaining the competitiveness of the business (i. Pay Bargaining Trade unions are most closely associated with negotiating with the employers of a business on behalf of their members over the issue of pay. Craft Unions. These are for different workers in the same industry (e. covering workers at all levels in the hierarchy). It must be remembered that there are many other issues that a trade union will negotiate for its members other than pay rises (e. The first stage in this process is for each side (the employer and the trade union) to decide on its objectives. this extra profit should be shared with the workers by giving them higher rates of pay.M). the rates of pay which are being offered by rival businesses). will the pay rise be awarded in a lump sum per employee. White-collar Unions. length of the working week. In order for this to be a success. inflation) requires that workers have a pay rise in order to maintain their purchasing power.e.U. or will different groups of workers receive different percentage pay rises?). both sides will be required to compromise and be prepared to accept less than their original objectives. 4. An increase in labour productivity rates will mean more sales revenue and profits for the business.g. and it is an example of collective bargaining. which they believe will reflect the current trends in the labour market (i. Industrial unions. and proposed redundancies). both the trade union and the employer will also need to decide how the money will be distributed amongst the members of the trade union (i. 3. performing the same or similar work in different industries (e. These are for 'white-collar' (or professional) workers who perform the same or similar tasks in different industries (e. scientists). teachers.g. the National Union of Miners (N. or will it be staggered over time? The second stage involves both sides (the trade union and the employer) presenting their arguments at a 'pay-talk' discussion.foxitsoftware. This is known as the 'pay-bargaining process'. which will be based on one or more of the following points: 1. not increasing their costs by a large percentage).e. Further to this point.e.g.g. . A trade union will put in a 'pay claim'. 4. These are fairly small unions for skilled workers.e. A pay rise is required in order to recruit and retain the 'best' workers that the business can find. working conditions. then they need to be compensated for this extra work by being given a pay rise. If workers are using new machinery and working practices. An increase in the cost of living (i.com For evaluation only. As well as deciding the amount of a pay rise.Generated by Foxit PDF Creator © Foxit Software http://www. 2. The employer will put forward a 'pay offer'.

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Industrial Action If the negotiation process collapses (whether it was negotiating for pay or for working conditions), then there are a number of different methods of industrial action which the trade union can propose to its members that they use in order to achieve their demands :
1. Non co-operation. Refusing to attend meetings and use new machinery or processes. 2. Work to Rule or 'Go Slow'. Refusing to perform any tasks not in the contract of employment and keeping the output of products to a minimum. 3. Overtime Ban. Refusing to work any hours over and above the required weekly number of hours. 4. Picketing. Standing at the entrance to the workplace and not allowing any person or vehicle to cross the 'picket line' and enter the workplace. 5. 'Blacking'. Refusing to deal with certain employees or suppliers because they have refused to participate in the industrial action. 6. Strikes. This is often the last resort for a trade union. It involves the employees stopping their work, leaving the workplace and refusing to return.

Whichever method of industrial action is implemented, the trade union and the employees are using it in an attempt to reduce output (therefore also reducing sales and profits) and hoping that the employer will give-in to their demands.
Employee Participation This refers to employees being given more responsibilities at the workplace and being involved in the decision-making process. The aim of participation is to increase the levels of motivation and job satisfaction amongst the staff by making them feel more involved in the business.

Trade unions often try to increase the amount of worker participation in the workplace, since it provides a sound justification for pay rises for the employees. The main types of worker participation include Employee shareholders. These are a common form of payment in many PLCs and are often termed 'share options'. This basically involves each employee receiving a part of each month's salary in the form of shares (usually at a discounted price). This forms a profitable savings-plan for the employee, and he can sell them after a given period of time. This should motivate the employees to work harder and increase their efforts, since the share price will rise as the company becomes more profitable, therefore increasing the capital gain on their shares. Empowerment. This involves a manager giving his subordinates a degree of power over their work (i.e. it enables the subordinates to be fairly autonomous and to decide for themselves the best way to approach a problem). Kaizen. This is a Japanese word meaning 'continuous improvement'. It is widely held that any aspect of the business can be improved, not just the production processes.

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Quality circles. This is a group of workers that meets at regular intervals in order to identify any problems with quality within production, consider alternative solutions to these problems, and then recommend to management the solution that they believe will be the most successful. Teamworking. This is the opposite production technique to an assembly-line which uses an extreme division of labour. Teamworking involves a number of employees combining to produce a product, with each employee specialising in a few tasks and the whole team taking the responsibility for production. Works council. This is a type of worker participation and it consists of regular discussions between managers and representatives of the workforce over such issues as how the business can improve its processes and procedures. Worker-directors. These are workforce representatives who participate in the meetings held by the board of directors. Worker-directors are not very common in the UK, since employers often believe that they can slow down the decision-making process, as well as 'leaking' confidential information to employees.
Advisory Conciliation and Arbitration Service (A.C.A.S.) The Advisory Conciliation and Arbitration Service was set up by the government in 1975 as an independent body that helps to settle industrial disputes and claims of unfair dismissal by employees. As the name suggests, there are three main services that are offered by ACAS, advice, conciliation and arbitration.

A.C.A.S. representatives can be invited into a business by the two feuding parties (employers and trade unions) in order to offer their advice to both parties on the industrial unrest and the 'best' way to proceed in order to settle the unrest. Conciliation is an attempt to get the two sides in an industrial dispute to resolve their differences. A conciliator listens to the arguments of both sides, and then tries to encourage the trade union and the employer to negotiate and compromise so that they can reach a solution that is acceptable to both parties. Arbitration is the process of resolving an industrial dispute by using an independent person to decide the appropriate outcome. The arbitrator will look at the arguments put forward by both parties, and then he will arrive at a decision. The decision can be legally binding on both parties if this was agreed prior to the arbitrator's decision. Pendulum arbitration is a type of arbitration in which the arbitrator will decide completely in favour of one party or the other, with no compromise or negotiation being allowed. It is likely, therefore, that both parties (the employers and the trade union) will make their demands more conservative and realistic than if the arbitrator was allowed to choose an outcome which was somewhere between the two.

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Exam-Style Questions
1. Study the information and answer the questions below on workforce characteristics of the UK and France.

a) What is meant by the term flexible workforce? b) Compare the flexibility of the labour markets of France and the UK. c) What are the main advantages of flexible working to the employer and the worker? d) How, if at all, is it possible to improve flexibility of the workforce to benefit the whole economy? (Marks available: 20) Answer outline and marking scheme for question: 1 Give yourself marks for mentioning any of the points below: a) 'The flexible workforce' refers to those workers who are multiskilled or those workers whose hours are changed according to the demand of the employer. (5 marks) b) The UK would appear to have a more flexible workforce as shown for example by the percentage of part- time workers of the total labour force, a higher percentage of temporary contracts of less than one year. France has a higher proportion of companies who have increased their use of shift working.

(5 marks) c) The employer can meet peaks in demand they have lower add on costs on pensions and insurance. Rewards might mean Differentials are eroded and new reward system might be seen as inequitable. (5 marks) (Marks available: 20) 2.foxitsoftware. a) Why might a change in working practices and rewards imposed on the workforce by the employer be a source of conflict between employer and employee? b) What is the role of trade unions in resolving conflict? (Marks available: 10) Answer outline and marking scheme for question: 2 Give yourself marks for mentioning any of the points below: a) Resistance to change is usually applicable to any form of change. For example the reduction of demarcation lines and the increased use of Japanese working methods such as cell production can improve productivity and reduce labour turnover. Some types of flexibility such as part-time work might have held wage costs down enabling UK firms to become more competitive.com For evaluation only. are often consulted by employers prior to changes in workforce being made and their agreement sought. The increased flexibility of the employed may have caused higher employment or made it difficult for those unemployed to obtain jobs.Generated by Foxit PDF Creator © Foxit Software http://www. The employee can work hours to suit their needs. They can use the temporary contract as a form of long term recruitment. (5 marks) d) Flexibility of the workforce depends to the extent that restrictions or barriers within the labour market have been reduced or eradicated. (5 marks) . the amount of training given. Output per person may have increased at the expense of unemployment and the waste of this resource. gain work experience. abide by rulings of conciliation and arbitration bodies. (5 marks) b) Represent members in disciplinary matters with the employer. can be a stepping stone to a permanent job. negotiate with employers on terms and general conditions for employees. Depends on communication beforehand.

(Marks available: 10) .foxitsoftware.com For evaluation only.Generated by Foxit PDF Creator © Foxit Software http://www.