Qdoc - Tips - Business Studies Unit 124

9707/1,2 – Business Studies U ni t 1: Business & Environment
A Levels
BUSINESS AND ENVIRONMENT
Business Activity:-
Transformation of resources
resources into g oods and
and services to satisfy the needs of customers with
profit as an aim.
Resources / Factors of Production
- Land
- Labour
- Capital
- Enterprise – organization
organization
- Entrepreneur
Entrepreneur – person who invests
consumer / capital
Output goods durable / Non durable
services – intangible
two types – commercial or personal
transportation doctor
warehouses lawyer
banking teacher
insurance consultant s
advertising hair dressers
wastes products
Research & Development  to find out the exact needs of consumers  decide the price.
Marketing – 4 Ps
Product and Packaging
Price
Promotion
Place
HRM – recruitment
recruitme nt and appraisal of employees
– training workshops
workshops
administration
administration – physical office environment
External Influences
- Competition
- Technological
Technological
- Economic situation
- Pressure groups
- Govern ment
- World affairs
- Consumers
- Natural climate
Economy – Inflation, unemployment, Interest rates

Classification
Classification of business Activity
- Primary Sector
- Extractive Industry
deals with the extraction of raw material
A Levels
- Secondary Sector
- Manufacturing Industry
- Tertiary Sector
- Service
Primary  secondary transition is called Industrialization
Benefits – increase in GDP – Gross Domestic Product
GDP is the value of all the products

products or total output produced within a country over
ove r a period of
time.
- income per head increase, increasing living standards.
- employment
employment as more jobs are created.
drawbacks – pollution
– urbanization – damages population
population balance
balance
– inflation
Secondary  Tertiary transition is called Deindustrialisation

Deindustrialisation
Private sector – private individuals

individuals control, own and finance the organizations.
Public sector – owned and controlled by government
Private sector – Sole traders

– Partnerships
– Limited companies
companies
• Private Ltd. Co.
• Public Ltd. Co.
A Levels
DEFINITIONS
1. BUSINESS ACTIVITY
It is the
the tra nsform
nsformati
ation
on of
of resour
resources
ces (raw
(raw materi
material
al and
and hu
hu man resour
resource)
ce) into
into pro
pro ducts
ducts
(goods & se rvices) to satisfy the ne eds and
and wa
wa nts of customers. The main aim for
for any
business is profit – making.
2. OPPROTUNITY COST
This is the next best choice given up in favour of the alternative chosen from two
choices. E.g. If a busine
busine ss has a choice of purchasing
purchasing new premises oror new machinery
and it also has the abilit
abilit y to buy these but chosen new machinery because
because of its greater
utility, then the premises is the cost opportunity.
3. FACTORS OF PRODCUTION
They are
are the resources
resources neces
necessary
sary for
for the prod uction
uction of go ods and
and services
services.. There
There are
four factors of production as follows:
a. Land
Land:: Thes
These e incl
includ
udes
es all
all rene
renewa
wabl
ble
e and
and n on-r
on-ren
enew
ewabable
le reso
resour
urce
ce s (raw
(raw mat
mat eria
erial)
l)
including water (fish), forests, coal, oil and minerals.
b. Labour:
Labour: The human
human res ource
ource required
required in the d evelopme
evelopmentnt of produc
products
ts e.g. for run ning
machinery i.e. the employees of the business.
c. Capital: The finance (money) invested by the owner to start a business
business e.g. machinery
machinery &
rent.
d. Enterprise / Entrepreneur: An organization
organization or individual that takes risk to start a business
by initial investment.
4 CONSUMER GOODS
These are the tangible goods (that can be felt) which are sold to the general public. This
include dur able and non-durable goods. Durable goods such as machinery, garments
and mobiles can
can last for a long time while non-durable
non-durable goods such
such as e dible things soon
become damaged.
5. CAPITAL GOODS
They are
are ph ysical
ysical produ
products,
cts, manufac
manufactured
tured specifical
specifically
ly to be sold to oth er industri
industries
es for
the production of other goods and services like commercial vehicles.
6. SERVICES
They are non-tang

non-tangible
ible products
products for the public
public to satisfy
satisfy t heir wants.
wants. They could
could be
commercial or personal.
personal. Commercial services
services include banking,
banking, insurance, transport
transport ation
which are done on a large scale. Personal services are one-to-one services such as hair-
dressing, teacher and lawyer.
7. PRIAMRY SECTOR
Also called extraction industry.

industry. These include f irms involve d in activitie s to extract the
natural resources of the earth e.g. mining, fishi ng and agriculture. The se will give with
the resources (raw materials) for production of goods and services.
A Levels
8. SECONDARY SECTOR
Also termed as Manufacturing

Manufacturing indust
indust ry. These deals or inclu
includes
des firms and industries
industries that
process the raw materials extracted by
by the primary sector
sector into finishe d goods
goods to satisfy
the needs and wants of customers e.g. Steel Industry, Textile Industry & Food Industry.
9. TERTIARY SECTOR
Another name is the service sect or. They include

include firms and indust
indust ries that pr ovide
serv
servic
ices
es to othe
otherr fir
firms
ms or cust
custo
o mers
mers belo
belong
ngin
ing
g to
to the
the gene
genera
rall p ubli
ublic
c e.g
e.g.. r etai
etaili
ling
ng,,
banking, teaching, consultants.
10. PUBLIC SECTOR
The firms in this business are owned, controlled and run purely by the g overnment. They
are usually
usually f inanced
inanced by t he taxes.
taxes. e. g. Pakistan
Pakistan State Oil.
Oil. Usually
Usually these
these firms might
might be
too important
important or strateg
strateg ic to left to the private owners.
owners. e.g.
e.g. certain healt
healt h and educatio
education
n
instit
instituti
ution
on serv
service
ices
s may have
have toto be given
given for
for free
free to the
the p oor sect
sector
or of popu
populat
lation
ion that
that
private sector wont usually provides.
11. PRIVATE SECTOR
The firms
firms a re own
owned,
ed, contro
controlle
lled
d an d runrun by
by priva
private
te indi
individ
vidual
uals
s who
who h ave profit
profit a s th e
main
main object
objective
ive.. Most
Most bu siness
siness fa
fa ll in this
this categ
categ ory.
ory. The sizes
sizes of
of busin
busin esses
esses vary
vary sole
sole
traders, partnerships, limited companies
companies are all included in this sector.
12. INDUSTRIALISATION
The
The incr
increa
ease
se in the
the impo
import
rtan
ance
ce of the
the seco
secon n dary
dary sect
sector
or agai
agains
nstt th
th e prim
primar
ary
y s ecto
ector
r
usually in developing
developing countries
countries is industriali zation. This means an overall increase
increase in the
level of an
an d value of output as well as ratio of working
working force in the manufacturing
industry. This results in increased GDP and higher living standards.
13. DE-INDUSTRALISATION
It is th e rise
rise in the import
importanc
ance e of tertia
tertiary
ry se ctor
ctor and de crease
crease in t he import
importanc
ancee of
secondary or manufacturing
manufacturing sector. It occurs mostly in developed countries. This means means
that the val
val ue of service
service sector
sector increas
increases.
es. De-indu
De-industril
strilisati
isatio
o n reduces
reduces competiti
competition
on with
developing countries
countries and has
has more
more specialized jobs for edu edu cated people that are
are more
interesting.
14. BUSINESS FUNCTIONS
They
They are th e activi
activitie
ties
s t hat occu
occurr in a busin
business
ess and
and are
are contr
controll
olled
ed and
and direct
directed
ed by
by th e
business
business manageme
management. nt. They
They are n ecessary
ecessary for
for the eff
eff icient
icient running
running of the bu siness
siness as
well as production. The different functions are:
a. PRODUCTION: This de als with the actual

actual manufacture
manufacture of goods / products demanded
by the customers. It requires co-ordination of all resources to produce the best product at
lowest cost.
A Levels
b. RESEARCH & DEVELOPMENT: It is to find out the exact requirements of customers as

to the
the produ
product
ct and
and its
its price throug
throug h market
market re search.
search. It also
also inclu
include
de s finding
finding the right
right
market segment to be aimed.
c. FINANCES: The finance and accounting accounting function
function is the allotment of relevant funds for
each and ev ery function
function as well a s to keep record of all inco
inco mes and expenses and and the
profits or losses.
d. MARKETING: This function involves the 4 Ps. Product & Packagin g which is the
deve
develolopm
pmenentt of
of the
the act
actua
uall pro
produ
duct
ct as dema
demandnded
ed by the
the cust
custom
omererss and
and with
within
in an
attractive packaging
packaging suitable for the segment aimed as well as keeping the product safe.
Promotion of the product through
through advertising
advertising so the information
information of a prod uct reaches the
target audience. Charging the correct price is also necessary so that customers buy and
profits are also made. And selling at the correct place is necessary too.
e. ADMINISTRATION:
ADMINISTRATION: It is the physical physical office environment that ensures efficient workingworking of
different functions in co-ordination as well as good communication.
communication.
f. HUMA
HUMAN N RESO
RESOUR URCECE:: It deal
deals
s with
with the
the recr
recrui
uitm
tmen
entt and
and appr
apprai
aisa
sall of empl
employoyee es to
mainta
maintainin corr
correct
ect standa
standa rds of work
working
ing in the
the comp
company
any.. Its functi
function
on is
is ident
identifi
ificat
catio
io n of
vacancy, finding a suitable employee and conducting training workshops.
A Levels
QUICK TIPS: BUSINESS ORGANISATION

Private Sector
- Sole trader
- Partnerships
- Limited Companies Pvt. Ltd.
Public Ltd.
- Joint ventures
- Co-operatives
Co-operatives
- Franchises
- Holding Companies
- Multinationals
Multinationals
- Charities / Non-profit Organization
Public Sector
- Central Government Organization

- Local Government Organization
Deed of Partnership
- profit and loss sharing

- bonuses
- salary
- requirements
requirements of each partner
Partnerships can be limited only upto 20 people
In lim
limit
ited
ed p artn
artner
ersh
ship
ip o ne or
or more
more per
perso
sons
ns h ave
ave unli
unlimi
mite
ted
d liab
liabil
ilit
ity.
y. The
The oth
other
ers
sa re sle
sleep
epin
in g
partners while unlimited responsibility holding partners take all decisions.
Capital sources are still few as compared to Ltd. companies.
Limited Companies – common to both types

- shares are sold i.e. ownership is shared
1 limited liability – liable only to investment
2 separate, legal identity
owners and business
business a re separate
separate i.e. the company has a separate name. so rewards
rewards
and suring is on the company
3 continuity – in case of death of any shareholder, the business
business doesn’t
doesn’t stop but
but continues.
continues.
Differences:
1. the public
public limited co. sh ares are
are sold to general
general public
public throu gh stock exchange.
exchange. But Pvt.
Ltd. co. shares
shares are only sold to fa mily me mbers or friend
friend s. Risk
Risk of ta keover
keover of plc.
plc. is
more
2. AGMS are are not in pvt.
pvt. L td but only i n plc.
plc. KSC 100 means 100 top companies,
companies, i.e. those
those
which
which are
are most active
active traders
traders to t heir share
share p rices in crease
crease or decre
decre ase affect
affect s a lot.
Bullish
Bullish is tr end increa
increa se in sh are price. Beari sh trend de crease
crease in share
share prices
prices plc –
devoice between ownership and control
• avoiding risk of takeover
•min
minimis
imis e lolosses
ses.
Menu of Ass
A Levels
Name, Address, Authorized Share Capital

Basic Aims
Articles of Ass
No. of Directors, AGM
Prospectus – basically an advert
A Levels
QUESTION:
Q. Why might a private limited company be converted into a public limited company?
Ans. A private limited company

company is one in which shares are sold only only to friends and family
family while
the shares
shares of a publ public
ic limite
limitedd comp
company
any can be soldsold to the genera
generall publ
public
ic thro
through
ugh the
Stock Exchange.
Exchange. This is the main r eason for a private limited company to be conv erted
into a public limited company or plc.
The issue of shares to the public ca n raise very large sums of capital (finance). (finance). This can
prove
prove very beneficia
beneficiall fo r the owners
owners of a r apidlyapidly expandin
expandin g private
private ltd. company
company who
need
need fina
financncee in
in a shor
shortt per
perio
iod
d of
of tim
time.
e. This
This mean
meanss th
th at alon
alongw
gwit
ith
h hav
havin
ingg all
all the
the
advantages of a private
private limited company,
company, like limited liability and separate
separate legal
legal identity,
a plc. also has a Stock Exchange listing.
So the business can not only sell shares to th e general public public but the flexibility of shares
shares
is an additional attraction to the sha reholders. Due to this flexibility, the shareholders
shareholders can
quickly
quickly sell
sell t heir share
shares s (transferr
(transferring
ing ofof shares)
shares) if they
they wish t o, which
which is not
not possible
possible for
the shareholders of a private limited company.
Then finally
finally the owners of the privat e limitedlimited company who are converting
converting to a plc. also
know that once their aims are fulfilled
fulfilled,, th ey can convert
convert back to a private
private limited
limited
company.
The
The addi
addititio
o nal
nal capi
capita
ta l is not
not only
only used
used for for expa
expansnsio
ion
n but
but to incr
incree ase
ase effi
effici
cien
en cy b y
moderniz
modernizing ing and buying
buying new
new machi nery.
nery. It could also be u sed to diversify
diversify by take-ove
take-over r
and mergers or starting a different product type.
Q. Why might a public limited company be converted to a private limited company?

company?
Ans. There are several

several reasons for a p lc to be co nverted to a private limited. The major major
reason is the divorce between
between ownership and control. Due to the large a mount of shares
sold,
sold, the
the nu mber of owners
owners increa
increa se, meaning
meaning that the orig inal owners
owners will not be the
sole investors.
investors. Then the control
control or management
management of of a p lc is in the hands of the board of
dire
direct
ctor
ors
s (B ODs)
ODs) sele
select
ct ed at the
the annu
annual
al gen
gen eral
eral meet
meetinin gs (AGM
(AGMs)s).. So the
the or igin
iginal
al
owners could feel that they have lost control of the business
business and to regain
regain it may wish to
convert to a private limited company.
The risk of takeover of a plc is very high as shares are sold to the public and if one g roup
controls more than
than 51% of shares, t hen ownership
ownership may cha nge hand. HoweverHowever this risk
is very minute in a private limited company.
Also the plc’s trend to have short term
te rm aims due to the investors only being interested in
quick gains. So if the or iginal owners
owner s of th e plc foresee the business going go ing into losses
due to damage to long-term
long-term invest
invest ment plans,
plans, then they
they may convert
convert back to a private
limited company to minimize losses.
A Levels
QUICK TIPS:
Co-operatives
Workers retail / consumer – associations made by retailers
manufacturing service
members th at work for mutual benefits and ha ve shares but vote is only one for a me mbers
slightly informal in nature.
Retail: They can buy together from the wholesaler so get better discounts.
Holding Company
Company is a f irm that buys shares of several companies.
companies. They control the shares i.e. if
they expect shares price to rise they sell the
the sh ares and if they expect
expect prices
prices to drop they buy.
buy.
They can also sell the assets as they are part owners.
Charities – non
non – pr ofit
ofit orga
organi
niza
zati
tion
ons.
s. Wor
Wor k on do nati
nation
ons
s and
and char
charit
itie
ies
s– welf
welfar
are
e and
and
distribution of products.
PUBLIC SECTOR
1. Central Government Organizations
Organizations
Defence, Central Bank
2. Local - WAPDA
State Bank – gives regulations such as interest rates
installments
leasing rates
commercial banks must follow these
Economic system
An economy is a fra mework or s ystem that attempts to tackle andand solve the basic
economic problem of scarcity i.e. what should be produced, how should it be produced
and for when should it be produced.
produce d. To make these decisions differen t countries have
different economic systems.
1. Market Economy / Free / Price – private ownerships – resources

resources are allocated according
to consumer demand – profit motive
2. Planned Economy / Command
3. Mixed
nece
necessssit
itie
ies
s are
are prod
produ
u ced
ced less
lesser
er whil
while
e busi
busine
ness
ss are
are in grea
greate
terr amo
amoun
unt.
t. No dire
direct
ct
government intervention,
intervention, prices are set by the market forces – demand & supply.
ADV
- consumers sovereignty
- more efficient utilization of factors of production
- effective labour
- increased competition – low price – low inflations
- more variety – better quality products
DISADV
- less necessities and more luxury goods
- large gap between rich and poor no equal dist
- formation of monopolies – increase price – inflation and fall in living standards.
A Levels
Q. Explain the differences between a sole trader and a partnership.
Ans. A sole trader is an individual

individual or a single person who o wns, controls and runs the
business. The partnership, on the other hand, is a business owned and controlled by two
or more (upto 20) members called partners.
The sole trader invests all the capital into the b usiness due to which the capital is limited
only to the owners savings, profits and any any oth er income
income source. The sole sole trader
trader also
also
gets
gets toto kee
kee p all
all the
the prof
profit
its
s or is lia
liabl
blee for
for all
all debt
debts.s. In
In a par
partn
tner
ersh
ship
ip,, more
more cap capitital
al is
is
availabl
available e as more peopl
peopl e are are investi
investing. ng. The profits
profits made
made and any losses
losses incur
incurredred are
shared among the partners. Also there t here are greater chances of expansion in a partnership
as compared to sole traders.
t raders.
A sole trad er is the only person who who owns an d so ha s to take care of all a spects like
marketing, accounting
accounting i.e. he / she might have t o do things he / she is n ot good at. But in
a partner
partnership
ship,, greate
greaterr chance
chances s of speciali
specializati
zati on are availab
availab le as
as the dif ferent
ferent partn
partn ers
may sepcialise in different areas of business functions.
Even though both sole t raders and partnerships have unlimited liability, there is a limited
partnership. In this one member has unlimited liability and so runs the b usiness while the
others are sleeping partners and have limited liability.
For the sole trader business, if the owner becomes becomes sick or takes a holiday, holiday, the business
stops working
working while
while in a partner
partnership
ship,, the other
other partners
partners caca n take
take care
care of the
the busines
business s
and keep it running in case of unfitness or absence of a partner.
Then ifif a problem arises for a sole trader, trader, he has no one to discuss it with and and financial
costs of the consultants would be too high. But in a partnership, the p artners can discuss
problems amongst
amongst themselves and and may co me up with a solution solution with out the need of any
advisors.
Also since partnerships are larger than sole trad trad ers and work on a great er scale so t hey
could even
even benefit from the econo mies of scale. Therefore, Therefore, it means
means that the average
average
cost of running a partnership could be lower than sole traders in general.
Sinc
Since e a sole
sole trad
traderer is sing
single
le pers
person on,, he
he isis abl
able e to
to est
estab
abli
lish
sh clo
clo se rela
relati
tion
ons s wit
wit h his
his
customers. He talks directly to them and enjoys their confidence. Therefore, a sole trader
can meet the exact exp ectations of the customers. But in a partnership, partnership, due to greater
greater
number
number of of people
people workin
working g togeth
together,er, the
the person
personal al conta
contact
ct with
with the
the cust
cust omers
omers mighmigh t be
difficult
difficult and a subord
subord inate
inate would
would h ave to to be e mployed
mployed into talk with and deal deal with the
customers.
A sole trade r also is able to do a work of his o wn choice a nd gain per sonal satisfaction
from itit while
while in a partnersh
partnership, ip, all
all the different
different partn
partners
ers must
must agree
agree oneone sort
sort of busin
busin ess
regardless of their personal interests and satisfaction.
9707/1,2 – Business Studies Unit 1: Business & Environment
A Levels
BUSINESS ORGANIZATIONS
MARKET ECONOMIES
QUICK TIPS
PLANNED ECONOMY / COMMAND
- all major assets are owned by government
- state ownership
- prices are set by the government
- no profit motive
- increase in economic growth – welfare of the society
- resource allocation according to government plan.
ADVANTAGES
- high employment
- equal distribution of services
- inflation controlled
- necessit ies are produced
- no private monopoly
- no consumer or employee exploitation
exploitati on
- less exploitation of resources
- no duplication of resources (e.g. a successful good is produced by several people)
DISADVANTAGES
- low efficiency
- no variety – no competition
- quality is low
- slow decision – making – bureaucracy
- exploitation of the resources by the government for their own benefits.
MIXED ECONOMY
Only few essential sectors of society in government control

- defence
- education & health services.
The rest with private sector
Best form of economy as competition is present and distribution of resources also occurs.
INTERNATIONAL TRADE
- trade betwe
tween two countries leading to globalization because of bett er
communication
communication and transportation.
transportation.
Multinationals are a part of International Trade.
Benefits
- speciali
specialisati
sation
on – produce
produce only what you are expe rt in. One country
country is efficient
efficient in on e
so costs are reduced and price are lower.
- Relationships on even political level improve.
- Economies of scale – lowering costs – prices are reduced further – GDP increases
- Standard of living increases
- Technology transfer and training
- Increased competition – more choice
– more jobs so unemploymen
unemploymentt goes down.
A Levels
Drawbacks:
1. Overspeci
Overspecialisa
alisation
tion – restriction
restriction to o ne aspect
aspect so in case of war peopl
people
e are deprive
deprive d of
of
the good. Keep on gaining knowledge.
2. decline in domestic production
- difference to compete with foreign goods
3. Exploitation of labour
labour by multinationals
multinationals
4. diseconomies
diseconomies of scale
- difficult to control, communicate and co-ordinate
- finance problem as some country might have very high inflation
- too much hardwork
5. balance of payment
payment deficit – exports are higher than
than imports
6. inflation – if demands
demands becomes
becomes very high. If GDP
GDP increases
increases  living standard increase 
per capital income increases  too much purchase

7. Dumping
Dumping – when too many goodsgoods by
by foreig
foreigners
ners are sold t o us
us at
at very
very low prices
prices our
our
domestic industries is killed.
Protection Measures
- tariffs, taxes are imposed
- Quotas – quantity is fixed in short limits
- Embargo – complete ban of trade on a country
- Voluntary Export limitati on – countries them selves say that they won’t export more
then a certain limit
MULTINATIONALS
They have a head office

office in one country while
while t heir operating
operating branches
branches and / or factories are in
different countries
Government have to bear them because
- they provide employment
- they invest and so help in building economy
- they give tax revenues
ADV of Multinationals
Multinationals
- getting
getting over the tariffs
tariffs and import
import duties-red
duties-reduce
uce transport
transport costs – nea rness
rness to the
market – cheap labour
- economies of scale – lower costs of production
Transportation

 Cost / unit
- market knowledge is better
- nearness to natural resources / rawmaterials
rawmaterials
- diversification – reducing risks – compensation of losses
- influence the government policies
- government
government grants if it wants to attract investors
- expansion of profits.
DISADV of Multinationals
Multinationals
- a percentage of profits as well as taxes to the government
government (payments)
- to maintain quality standards, they need to train, so high costs.
- Language and cultural differences
- Diffe
fferenc
rencee in econ
econo
omies
mies – e.g
e.g. worki
rking in a cou
country
ntry which
ich is dev elop
elopin
ing
g and
underdeveloped
Co-ordination
Co-ordination and communication
communication is difficult
A Levels
ADV for the host country

country
1. increased employment
2. GDP increases
3. economic growth
4. standard of living
5. increased competition
6. improves quality and efficiency
7. controls prices
8. increases variety and choices
9. technology transfer
10. better trained labour
11. revenue to the government
12. foreign investments increase
13. relationships between host and guest companies improve p olitically and
economically
14. balance of payment surplus
DISADV for the host country

1. decline in domestic industries
2. unemployment
unemployment increase
3. monopolies can be created by multinationals
multinati onals
4. control prices which can increase / inflation increase
5. balance of payment deficit
6. cultural damages – problems related to cultural identity
7. exploitation of labour – extended working hours
8. depletion of natural resources
9. profit is sent back – high percentage of profits sent to the parent country
10. pollution
11. influenc
influence e o n gover
govern
n ment policies
policies – no
no comp
comp ensation
ensation if t hey close
close as
as peopl
people
e are
are
unemployment
A Levels
TYPES OF ECONOMIC SYSTEM
Q. Explain
Explain with advan
advantage
tage s and disadvan
disadvantage
tagess the free mark et and planned
planned economie
economies.
s.
Which type of economy in your opinion is the best for your country.
Ans. FREE MARKET ECONOMYECONOMY

A free market economy
economy is one in which all economy resources, and business sectors are
owned,
owned, controlle
controlledd and run by privat
privat e individuals
individuals or companie
companies.s. There is no govern
govern ment
control or extremely limited control in this economy. However, no such economy e xists in
any
any cou
count
ntry
ry thou
though
gh USA
USA isis clo
close
sest
st to it.
it. In this
this type
type of econ
econom
omy,y, th e res
resou
ourc
rces
es are
are
allocated to different products according to the demand
demand of t he consumers. Also Also the main
objective of business in free market
market economy
economy is profit – as h igh profits
profits as
a s are efficie ntly
possible.
ADVANTAGES
Since such an economy is driven driven by a profit mot ive so businesses
businesses are motivated to work
harder. Therefore they are more more ef
ef ficient as th ey want
want as
as high productivity as possible
possible
because this would lower costs and so increase profits.
The labour is also more efficient as training is provided periodically to improve the skills skills
of workers to increase
increase p roductivity. Also the lab our is highly motivated
motivated a s it may rec eive
bonuses and extra wages for hard work.
Then there is a lot of competition in free economy
economy as anyone could start up a business in
any sector they wantwant so this means that pr ices remain low as each businessbusiness owners’
owners’ try
to beat the other in sales. Since prices are low, inflation will also be low.
Also a major advantage
advantage is con sumer sovereignty.
sovereignty. This means that more
more of those g oods
are produced
produced which
which a re required
required and demanded
demanded by the consumers
consumers.. This leads
leads to
efficient allocation of
of re sources as the best possible
possible use of the land, la bour, and capital
is made to get the maximum maximum out put required
required to satisfy
satisfy the wants
wants and needs
needs of
customers.
Cont
Contininuo
uous
us tech
techno
nolo
logi
gica
call adva
advanc
ncem
emenentt take
take s plac
place
e as busi
busine
ness
ss try
try to find
find f ew
techniques and logics to improve the efficien cy of workers as well as make better
utilization of
of the scarce resources
resources of production. This would lead to increased
increased GDP that
leads to economic growth.
Also a very wide variet
variet y of produc ts are available for the consumers to choose choose from
which are
are of the best quality possible at the the lowest prices
prices possible.
p ossible. This leads
leads to r ise in
living standards of the population.
DISADVANTAGES
The major disadvantage
disadvantage is the large gap that exists between the rich and poor sector s of
society.
society. Th e busine
busine sses in free marketmarket eco nomy concentra
concentrate te on those with higher
higher
incomes as profit is the main motive.
motive. So the rich become richerricher while th e poor beco
becomes
mes
poorer which could lead to an average fall off in the living standards.
In the free economy, more luxury g oods are produced as t hey give hig her profits while
necessities are less. This means
means tha t the poorer people may not get services and goods
which
which form
form the basic
basic n eeds
eeds of sur
sur vival
vival like
like food
food,, water
water,, shelt
shelter,
er, hea
hea lth servic
services
es and
education.
Another big disadvanta ge is t he fo rmation of monopolies is possible as mergers and and
take-overs occur unco ntro ntroll
lled
ed.. Th e mon
monop opol
olie
ies
s coul
could
dt hen
hen char
charge
ge high
higher
er pric
prices
es
exploiting their position as the sole dealer in in a certain market.
market. This co uld lead to rise inin
inflation and so a fall in living standards that could lead the economy into recession.
Also the resources
resources are exploited in the fr ee economy as du du plication of products occurs
occurs
so in the e nd wasta
wastage
ge of resour
resourcesces and
and quic
quickk exha
exhaust
ustio
io n of of scar
scarce
ce resou
resource
rcess could
could
occur.
A Levels
PLANNED MARKET ECONOMY

This is the t ype of economy in which all all resources
resources are owned,
owned, controlled
controlled and run by the
state or gov
gov ernment.
ernment. It is also known as the co mmand mmand economy. There There is virtually
virtually no
private sector activity in this type and the main objective of the government is the w elfare
of society. However,
However, non e of such economies
economies really exists and the close st examples are
that of North Korea and Cuba and even in these there is a lot of private activity.
ADVANTAGES
There is very less wastage of resources since the government produces only as much as
needed
needed by the people.
people. So no duplicati
duplicationon of products
products occurs
occurs an d so no wasteful
wasteful
competition takes place.
Another major advantage
advantage is that there’d
there’d be high employment
employment as the government seeks to
provide as many jobs as possible because this would keep the community happy and the
government intact.
Then
Then inin a p lanned
lanned eco nomy,
nomy, there
there is equa
equa l dist
distrib
ributi
ution
on of goods
goods and servic
services
es fo r all
all
socio-economic
socio-economic levels
levels of
of society
society to f ulfill the ba
ba sic needs
needs of everyone. T his reduces
reduces the
gap between
between the rich and poor sectors
sectors of economy.
economy. It may be that
that certain
certain goods
goods are
provided for free to t he very poor members.
Since
Since the governme
government nt controls
controls price
price s, this means
means that
that there’d
there’d be no hig
hig h prices
prices and so
inflation will be low. This would lead to economic growth which is a major majo r objective of the
government.
Then since private activity is nearly non-existent, it means that that there’d be no private
monopolies that could exploit the consumers.
Also private businesse
businesse s have short-term ai ai ms, while the government
government can do long -term
planning and work for the benefit of the country in the long-run.
DISADVANTAGES
Since
Since gove
governm
rnmentent does
doesn’n’tt run the
the econ
economy
omy fofo r profit
profit,, there
there is nearly
nearly no
no motiv
motivati
atioo n to
work hard
hard in emplo
employeeyee s and the the business
businesse e s t end to be
be very ineffi
inefficie
cie nt so there
there is very
very
low productivity.
productivity. Also th e labour is very inefficient
inefficient as it knows
knows that whether
whether or not it
works, wages would be given to them. The labour can’t trained and if dismissed from the
job, it has no where
where to go.
Also, there is no comp etition in a government economy. economy. So there is no incent ive for
technological
technological advancement. This means that costs of production might be high that could
lead to higher prices
prices and so losses for government controlled economy. economy. It could also in
the long-run lead to inflation.
Even
Even thou
thougg h it is said
said that
that reso
resour
urceces
s last
last lo ngernger in a plan
plannenedd econ
economomy,
y, yet
yet thei
their
r
utilizatio
utilizationn is not effici
efficien
en t as there
there is no motive
motive to work properly
properly.. The labour
labour knows
knows tha t
whether they come come late
late or early,
early, do their jobs
jobs oror not, they would get their their salaries.
salaries. Also
frustration is felt in those employees who are by nature hard workers as they get no extra
returns in any form i.e.: monetary or non-monetary.
There since
since the government
government decidesdecides what
what to pr oduce and and in what quantity,
quantity, this means
means
that the dede mand of of consumer is n ot taken int o account.account. I t also means
means that people of all
levels
levels get t he same go ods so the quality quality and packagin
packaging g o f goods
goods q uality
uality of services
services
would be very low. low. It also means tha tha t the consumers are left with no choice and have no
variety as over the entire country the same things are produced.
The decisions
decisions taken are very very slow and bureaucratic.
bureaucratic. This is because
because t he approval
approval of all
all
leve
levelsls of gove
governrnme
mentnt from
from thethe bot
bottt om to up must must be taketakenn for
for whic
which h a lot
lot of ti me is
needed.
needed. Then the the impleme
implementatintation
on of the
the decisio
decision n is also
also very
very slow
slow and so the ch anges anges
take a long time to be visible. Therefore economic growth is very slow.
ECONOMY FOR MY COUNTRY

In my
my opinio
opinion,
n, the
the best type of eco
eco nomy fo r my country.
country. Pakistan
Pakistan would be the mi xed
econo
economy.
my. In this
this pr
pr ivate
ivate sect
sector
or owned
owned and co ntroll
ntrolled
ed priv
priv ately
ately and
and th e pub
public
lic se ctor,
ctor,
owned and run by government.
A Levels
It is the best type

type because
because asas a developing
developing country Pakista
Pakistann has a large
large percentage
percentage of
population in rural
rural areas
area s while the elite society is also there. Therefore the private sector
is required for efficient b usinesses that
that form pro fits and provide
provide variety a s well as luxury
goods and are also involved in exporting and importing, leading to economic growth. The
public
public se ctor
ctor is requir
require
e d to produc
produced
ed chea
cheapp g oods
oods of basic
basic need
needs s for
for the benefi
benefitt and
welfare of t he rural so ciety as well as provide education a nd health services. It is also
needed to keep a control over defence.
In Pakistan state intervention is needed to prevent people from illegal illegal activities and the
th e
private sector is required to counter the corruption in the public sector.
A Levels
MULTINATIONALS
Q. Evaluate the impact of multinationals

multinationals on the host country.
Ans. Multinational companie

companie s are those that have their head head office in on e country while
operating br anches are spread in several count ries. This means that they produce i.e.
manufacture the good or service in several countries in their factories. So an exporting or
importing
importing business
business is n ot a multinati
multinational onal unless
unless it produce
produce s goods goods in other other countr
countr ies.
Usually the headhead offices of these multinationals
multinationals are are in developed
developed countries like like USA and
Europe
Europe whil
while e their
their bran
bran ches
ches are in devel developioping
ng or third
third world
world coun
countri tries.
es. Exam
Example ples
s of
multinationals
multinationals include MacDonalds,
MacDonalds, Pizza Hut, Toyota.
Multinatio
Multinationals
nals ca n be very beneficia
beneficiall to t he ho ho st countr
countr ies in many
many ways.ways. The major
major
adva
advantntag
agee is that
that they
they prov
providideee mplo
mploymymen entt to the
the loca
locall work
workfoforc
rce.
e. In deve
develo lo ping
ping
coun
countrtrie
ies
s th ere
ere are
are hig
hig h rate
rates s of unem unempl ploy
oyme
mentnt that
that creacreate
te a lot
lot of burd
burden en on thethe
government and the economy,economy, as benefits like free food, food, clothes
clothes or or even
even money
money h as to
be give
givenn to
to the
the unem
unempl ploy
oyeded.. So
So by by pro
provi
vid
d ing
ing inc
incre
reas
ase e d emp
emplo loym
ymenentt opp
oppor ortu
tu niti
nities
es,,
unemployment rates are decreased and so burden on economy is also lessened.
Since more people are working and the total number of products produced in the country
is increasin g so this means that the GDP (Gross Domestic Product) as the output output of
multinationals is now also included
included in the natio nal production.
production. Increase in GDP lea ds to
economic growth.
growth. This leads to the increase increase in p er capital income of the people so t here
is a rise in
in t he living standards
sta ndards of the general populationpopulation as as people havehave more money to
spend.
As the mul tinationals are employi ng local people, people, it would result in their g aining
experience. Not only only this but multin
multin ationals are established
established companies with standard standard to
maintain for which they require skilled skilled workers.
workers. So they train and provide provide facilities to the
employees which would improve the efficiency and productivity of the people.
The multinationals
multinationals also provide additional
additional competition to the local firms. This increased increased
competition and and the wider
wider variety of choice available available to custcust omers keeps the prices low
while product quality increases. This also controls inflation.
Also the multinationals are very efficient efficient and technologically
technologically advanced.
advanced. They ha ve better
machines as well a s better production techni ques. So a technology transfer take s place
as the local firms, in ord er to increaincrea se their competitiveness try to take advantage of the
new technology. Because of this th e quality of the local pr oducts increase and so does
the effi
efficie
ciency
ncy and
and prod
prod uctivi
uctivity
ty of the
the local
local fir
fir ms and
and they
they would
would abl abl e to impro
improve ve their
their
image in the global market.
New local factories and industries
industries co uld be set u p in order to supply certain machines machines or
spare parts for the working multinationals.
multinationals. This would crate additional additional jo bs and and also
also an
increase in the incomes.
A future major advantage
advantage is the foreign investment coming into the ho st country by the
setting
setting up o f a multinat
multinationa
ionall compa
compa ny. This This increas
increaseses the f oreign
oreign curre
curre ncy reserv
reserveses of
the country that could be used to pay back debts or to import goods.
Not only
only thi
thi s but
but the multin
multinati
ationa
onals ls increa
increase se th e reve
revenu nueses of the govern
governmen ments ts of th e
countr
country y as t axes
axes are
are given
given by the the mult
multina
inatio
tional
nal s on th th eir sales
sales asas well
well as
as profi
profitt s. Also
Also
they
they pay
pay land
land rents
rents for the area
area o n which
which they
they ha ve set up their their operat
operatinging base
base or
factory.
The manageme
management nt expe
expe rtise of the the local
local comm
comm unity
unity improv
improves es as
as multina
multination
tionals
als have
better management ideas. So qualifications and skills of local managers are bettered and
they may replace the foreign managers and supervisors and so gain experience.
If the multin
multin ationals
ationals export
export their goo ds to nearb nearb y countries
countries,, then the the exports
exports of the host
country increases, that that could lead
lead to t o additional
additional foreign exchange
exchange earnin
earnin gs and also to a
balance of payment surplus once the exports are more than imports.
Lastly, relations
relations with the parent
parent country of t he multinationals improves both politica politica lly as
well as economically.
economically.
A Levels
Howeve
However, r, multin
multinati
ationa
onals ls also
also have
have some
some major
major draw
drawbacbacks,ks, the main main bein
beingg declin
decline e in
domestic industries. Since multinationals are well-established industries with an excellent
brand image and reput ation and are highly efficient, they soon soon face th e local businesses
businesses
to close down. Local businesses
businesses may not be able to compete compete with the giant company company a s
consumers are quickly attracted towards the ‘big name’ of the multinational.
This
This closur
closur e of lo cal b usines
usinessesses means
means that that hundre
hundreds ds of jobsjobs are lost lost that
that can’t
can’t b e
covered
covered up by jobs pr ovided ovided by multinati
multinationalonals.
s. So this would would lead to an incre incre ase in
unemploy
unemployment ment that wo uld becomebecome a burden
burden on the country’s country’s economy.
economy. Also as the
output
output ofof local
local indus
industritrie
e s becom
becomes es less,
less, this
this mea
means ns that
that GDP
GDP would
would decre decrease
ase asas the
total output
output of the count
count ry decreas
decreases.es. This
This would
would cause
cause a major major decreas
decrease e in e conomic
conomic
growth. So the per capita income of the people may actually fall resulting in the fall of the
living standards of the people
The multinatio
multinationals
nals cou ld alsoalso form monopoli
monopolies es in
in their
their particula
particularr indu
indu stries
stries in the host
country by eliminating
eliminating competition. So So t hey could exploit th eir advantageous
advantageous position posit ion by
controlling prices. They could could charge very high prices which could lead to an increase in
inflation. This again decreases economic growth as well as living standards.
Then the
the multinat
multinationa
ionalsls could
could explo
explo it the loca
loca l labour
labour by giving
giving low
low wages
wages to keep keep their
their
profits high.
high. They may not take car e of the wor wor king conditions
conditions of the workers and could
also force long working hours upon them. They know that the governments of developing
countries could be forced to listen to them because multinationals are very powerful and
have sales
sales and profits exceeding
exceeding the economies
economies of countries. They know know that the host
countr
country y requir
requires
es their
their invest
investmementnt and if they they are monop
monopoli olies
es then
then they they have
have the
additi
addition
onal
al a dvanta
dvantage ge ofof being
being a much
much need
needed ed busine
business ss f or the the host
host countr
country. y. So
So they
they
could influence government
government decision to a great extent.
A great dra wback is th e depletion of the natural resources resources of the host country as as
multin
multinati
ationa
onals
ls utiliz
utilize
e th ese scarce
scarce resour
resources ces t o carry
carry out their
their produ
productiction
on in the host
host
coun
countrtrie
ies.
s. Not
Not onl
onlyy this
this but
but all
all the
the profprofit
its
s m ade
ade by by mul
multi tina
nati
tion
onal
alss is
is sen
sentt b ack ack to th
th e
parent country
country while the profits of th e closed closed do wn domestic
domestic busine
busine sses had had been
been kept
in the country.
country. So this meansmeans thatthat there is an overalloverall decline
decline in th e investments
investments in th e
country
country because
because profits
profits of local
local bu sinesses
sinesses are re-invested
re-invested and and boost
boost up the country country’s
’s
economy.
Also the multinationals
multinationals being foreign cause major major damages to the cultu cultu ral identity of the
host count
countrr y e.g.
e.g. the fast
fast food
food culture
culture in
in east
east ern countr countrie ie s is the
the result
result of copyin
copying g the
western culture. Also the adverts on T.V.s and b ill boards use themes that are not a part
of the host country.
country. These
These may be very expen expen sive and so result result in th e trade
trade balance
balance
deficit of the host country slowing down economic growth.
Concluding,
Concluding, I think
think that it would
would be best to let multinationals
multinationals set up in a country a s their
benefits are very much required required by devel
developin
opingg countri
countries.
es. However,
However, st rong and pr oper
meas
measur ures
es must
must be ta ken ken to mon
mon itor
itor thei
theirr a ctiv
ctivit
ity
y so
so tha
tha t the
theyy don
don’t ’t gain
gain too
too much
much
influence over
over the government.
government. In th is way ec onomic growth would occur in the country
and yet the drawbacks would be minimized.
A Levels
INTERNATIONAL TRADE
Q. List the protection measures against international

international trade and explain any two of them.
Ans. International trade

trade means the impo
impo rting and ex porting of g oods and services bet ween
countries. In creased import for any country would mean the balance of payment deficit
de ficit
and may also result in decline of local industries. There governments may impose certain
protection measures against imports that are:
a) Tariffs
b) Quotas
c) Voluntary limits
d) Embargo
TARI
TARIFF
FFS:
S: T hey
hey are
are ta xes
xes on
on imp
impo
o rts
rts tha
thatt must
must be give
given
n by
by an
an y co
co mpan
mpanyy imp
imp orti
orting
ng
goods
goods of a certain
certain amoun
amountt as fixed
fixed by the la
la w. They make
make the import
imports
s more e xpensive
xpensive,,
increasing its price and so lowering its demand in the country.
QUOTAS
QUOTAS:: T hey are
are the
the limits
limits imp
impose
osedd on the
the phys
physica
icall qu antity
antity or
or the valu
value
e of go ods.
ods.
This prevents the goods
goods being imported
imported in any la rger quantity so
so as to prevent dumping
dumping
of goods in the country.
A Levels
THE SIZE OF THE BUSINESS
Ways to measure:
1. Sales turnover
2. Profits
3. No. of employees
4. Capital Employed
5. Market Share
6. Market Capitalization
7. Others: agriculture – land area
hospitals – no. of rooms or no. of customers.
There is no best way to measure the size of business. Also the comparison should be
amongst businesses of the same industry in the same conditions. At least two to three
ways should be used.
If the no. of employees is more then the size would be larger expectedly. However, the
limitation is that a business using capital intensive methods would have fewer no. of
labour e.g. if packaging is manual then lot of labour is required but if packaging is
automated, then less no. of employees are received.
Capital employed may be higher in new businesses due to large investment.
Sales – if turnover is high then business is large but if a business produces luxury goods,
then profit margin is high and sales volume may be not high.
Profit may not be made in a very large firm due to several reasons.
Total Sales of company

Market Share = × 100
Total Sales of industry
It’s the percentage of a market captured by a company. If the share of a market is higher
its called a market leader.
Limitations:
- Declining of sales of large – scale firm.
- Increase in shares of a small – scale
scale firm which a consumer
consumer likes more.
- Handicrafts (e.g.) is a small scale industry
industry so network is
is small.
small. So itit means that
market leader is a small firm holding large amount of capital.
Market Capitalization – related to share on Stock Exchange.

= Current share price
×
Total no. of shares issued
e.g. Rs 10/share × 100 shares
= 1000 rupee share or market capitalization
Limitations:
- Large firm but may have become plc recently so not large shares.
- Stock market fluctuation is high
high so charge in share
share price
price is
is very misleading.
misleading.
Only established companies have trends in their market capitalization but unestablished
companies shares price fluctuates a lot.
A Levels
BUSINESS EXPANSION
Growth of the business

expand internally or externally
INTERNAL EXPANSION
- opening new branches
- increasing no. of employees
- re-investing profits.
EXTERNAL – Integration: mergers and take-over.

Merger is when two firms willingly combine their assets, liabilities, employees and management
style.
Take – over is when one firm buys out another firm and the identity is lost but at times brand
names are kept.
Friendly take-over is when some one willingly sells out the business.
Hostile takeover occurs in public limited company; through stock exchange. If any body buys
more than 50% of the shares. Higher prices are kept for sellers to sell and get extra money.
TYPES OF INTEGRATION (External Integration)

Vertical, Horizontal, Conglomerate
Conglomerate
DISADVANTAGE OF INTEGRATION
- Competition is decreased.
- Losing of jobs and employee frustration as changes in management – Managerial
problems.
A Levels
SIGNIFICANE OF SMALL BUSINESS ORGANIZATION
For a small business no. of employees < 50.
Advantage to the firm:

- easier to control
- easy to set up / start
- personalized
personalized relationships with customers & staff
- higher motivation – staff relations
- enthusiasm and excitement of being in growth state
- better knowledge of market conditions
- less taxes
- easier to locate problems within the business
- less interference of the government
- more independent in decision – making
- lower management costs
- flexible in nature as they can charge quickly with the demand of customers
- monopolized in local area as are very conveniently
convenientl y approachable
Advantages to the consumers:

- personalized
personalized service
- convenient
convenient for the buyer
- ease of availability
- credit purchasing / facility
- door – to – door service / delivery
- cheaper goods
- after – sales service
Advantages to the economy:

- increases employment
- increases competition for large scale firms
- prices controlled
- stable inflation
- improves GDP
- increases economic growth
- higher standards of living
- government revenue
- small – scale firms of today are large scale firms of tomorrow – future progress of
economy is ensured / expected
- prevent situations that could lead to large – scale firms monopolizing
monopolizing
Problems:
- difficulty in obtaining finance
- difficulty in marketing products
- expenditure
- limited products
- difficult to compete
- no economies of scale
- capacity problems / demand satisfaction problem
- lack of skilled labour
- low sales / profits
- difficult in producing varieties
BUSINESS GROWTH
Expansion
Internal external
(integration
Hostile
- takeovers Friendly
- mergers
Types of integration:
1. Horizontal integration Forward

2. Vertical
Vertical integration backward
3. Conglomerate integration
4. Lateral integration: when two firms at the same stage of production but are
diversified
type of a horizontal like soap and ice-cream i.e. having the same suppliers due
to a single integration source of raw materials
Business growth means increasing the scale of operation, expanding production
and increasing the sales and profits of any firm.
Business expansion is of two types
1. Internal Expansion
2. External Expansion
INTERNAL EXPANSION
It means expanding the business from within by using its own internal factors of
production. It means increasing the number of employees, increasing the production of
existing products or services, launching new products or services by finding new
markets, opening new outlets or factories and increasing the quantity of goods sold.
This growth can be quite slow, however, it can avoid the problems of rapid expansion
(excessive fast growth) which tends to lead to inadequate capital (overtrading) and
managerial problems associated with bringing two businesses together that might have
very different cultures attitudes and leaderships styles.
EXTERNAL EXPANSION (External integration)
External growth is achieved through integration i.e. from mergers and takeovers of firms
from either the same or different industries. Integration leads to rapid expansion which
might be essential in a competitive and expanding market. However, it often leads to
financial, marketing, managerial and control problems. These are caused by the need for
different managerial systems to deal with a bigger organization and due to conflicts
between the two corporate cultures and business ethics.
TYPES OF INTEGRATION
A. Horizontal Integration
It occurs when two firms which are in exactly the same line of business and at
the same stage of production process joined together.
ADVANTAGES
1. Common knowledge of the market in which they operate.
2. Reduced risk of failure.
3. Eliminates competition
4. Possible economies of scale
5. Greater power over suppliers
6. Similar skills of employees
7. Less managerial problems as compared to vertical or conglomerate mergers.
8. Scope for rationalizing production i.e. concentrating output on one site as
opposed to two or more.
DISADVANTAGES
1. They lead to monopoly and higher prices.

2. If the production procedures are different into two companies, then technical and
managerial problems might occur.
3. Previous relationships with suppliers or distributors of one firm might suffer.
4. Control problems might occur.
5. Financial problems related to longer size might occur.
6. Rationalising may bring bad publicity.
B. Vertical Integration
Vertical Integration can be forwards or backwards. Forward vertical integration is

with a business in the same industry but at a next stage in the production
process i.e. with a customer of the existing business e.g. a car manufacturer
merging with a retailer (showroom). Vertical backward integration is with a
business which is operating at a previous stage of a production process i.e. with
a supplier of the firms e.g. leather garment manufacturer merging with an
organization that manages cattle to get the leather. Or if retailer merges with a
manufacturer.
ADVANTAGES – FORWARD INTEGRATION
1. Greater control over promotion and pricing of the products.

2. Eliminates the profit margin in expected by the firm in the next stage of the
production process.
3. Greater confidence in production planning.
4. Gives a secure competition free outlet.
DISADVANTAGES:
1. Lack of experience in this sector of the industry.

2. Can be expensive to manage on its own as compared to dealing with a
specialized competition.
3. Consumers may suspect uncompetitive activity and react negatively.
ADVANTAGES – BACKWARD INTEGRATION
1. Gives greater control over the quality, price and delivery times of the suppliers.
2. Eliminates the profit margin demanded by another supplier.
3. Encourage joint supply and development for improved quality of supplies.
DISADVATNAGES:
1. Lack of experience of managing a supplying company.

2. Supplying business may become complacent due to having a guaranteed
customers.
3. Supplies might be more expensive as compared to another business with larger
economies of scale.
C. Conglomerate Integration or Diversifying mergers
This integration is between firms in completely different lines of business. A firm

might fear a loss of market share due to greater competition. As a result is might
try to explore different opportunities to minimize
min imize or diversify risks.
ADVANTAGES
1. Reduces risks of losses.

2. Reduced risk might take the business into a faster growing market.
3. Profit margins can be increased due to other businesses.
4. Market share can be increased because of the increased.
DISADVANTAGES
1. Risk of failure might increase due to the lack of experience in the new market.
2. Entry problems might occur.
3. If the business is new then its difficult to lower down the prices as compared to
the established competitors.
REASONS FOR MERGERS
1. Growth in the economy and expectations of higher profits.

2. Active stock markets.
3. Greater competition in the service sector leads to many financial institution
mergers.
4. Deregulation and literalization of markets.
5. Increased and of globalization.
6. Improvements in the information and communication technology.
7. Economic problems in some countries made their firms cheaper for the
developed country organization.
8. Quick and easy way to expand so companies can increase their market share in
a short period of time.
9. Buying a business is sometimes cheaper than growing internally. Internal growth
is costly and it takes time.
10. It is a profitable way to utilize available cash or other idle resources.
11. A businesses might buy another to consolidate its position in the market and to
avoid takeover.
12. It’s a way to enter the international market.
13. Economies of scale can be achieved. The effect of the reduced costs can be
transferred to prices to increase the sales of the company. If the effects is not
transferred still profits can be increased.
14. It is the way of asset stripping which is generally very profitable.
TAKEOVERS
Takeovers in plcs can occur because their shares are traded openly and anyone can
buy them. One business can acquire another by buying 51% of the issued shares either
from the stock exchange or strictly from the exciting shareholders. When a takeover is
complete, the company that has been bought loses its identity and becomes a part of the
buying company. Private limited companies however cannot be taken over unless the
majority shareholders invite others to buy their shares. So this takeover is friendly and
not hostile.
Takeovers of plcs often result in sudden increases in share prices due to the volume of
buying by the predators and also speculation by the investors. If more than one firm is
attempting to takeover a company, then this can result in a very sharp increase in the
share prices as the two buyers bid up the prices.
REVERSE TAKEOVERS
Reverse takeovers usually occur when a small firm takes over a larger one. It’s a friendly
takeover as a smaller firm doesn’t have enough funds to buy a larger firm against its will.
The larger company may allow this takeover due to the smaller company’s future
potential to grow or due to the unprofitable conditions of the larger company at present.
DE-MERGERS
It is where a company sells of a significant part of its existing operations. A company

might choose to break up due to the following reasons:
1. raise cash to invest into the remaining sections.
2. concentrate its efforts on a narrower range of activities.
3. avoid rising costs and inefficiency by being too large.
4. take advantage of the fact that the company has a higher share valuation when
split into two components then it does when operating as one.
ASSET STRIPPING
Some takeovers result in asset – stripping. The asset – stripper aims to buy another
company at a market price lower than the value of the firm’s total assets. It then sells off
the profitable parts of the business and closes down those which are unprofitable which
activity has often been criticized since it leads to unemployment and uncertainity in those
sections which are closed down.
BUSINESS GROWTH
Q.1. Define synergy. Explain it with respect to integration.
(5)
Ans. Synergy literally means that the “whole is greater than the sum of individual
parts.” This in terms of integration means that when two businesses merge
together their profitability, efficiency and effectiveness would increase to more
than the combined profitability of the separate businesses. This can be because
the economies of scale of the larger merged business is greater (e.g. purchasing)
then could be gained by either of the business. This would lead to far lower costs
and increase profitability. Also marketing and distribution costs can be saved by
using the same sales outlets and sales teams. Finally if the businesses merged
are similar then they could share their research and development ideas and
technologies. This would result in higher efficiency.
Q.2. Explain the problems of rapid growth of businesses

businesses and suggest
suggest ways to deal
deal
with these problems.
(20)
Ans. Expansion is one of the major objectives of private private businesses

businesses which means
increasing in size in terms of number of employees, outlets, higher market share,
etc. It is needed to remain dynamic and competitive against other companies.
However too fast or rapid growth can lead to problems especially through
external growth i.e. mergers or takeovers. The problems caused are financial,
managerial, marketing and loss of control by original owners.
Business expansion, whether internal or external is expensive. Therefore rapid
expansion can be very financially draining on a business i.e. on its financial
resources. Rapid expansion would require fixed additional capital such as bigger
factories, machinery etc. It would also require large working capital. Also
takeovers are partialarly expensive because buying more than 51% of the issued
shares of a company would require a lot of each. A business in order to get the
required finance may take large long – term bank loans. Such borrowing may
cause it to become highly geared over after the merger and large sums of
interest payment may have cause a big problem. On solution to this financial
problems would be through use of internal sources of finance such as retained
profits, so long – term borrowing could be avoided. Then finance could be raised
through share issue but it could mean loss of control. In case of a takeover, offer
shares in the new business rather making a cash offer to the shareholders of the
target business. But this could only be in case of a friendly takeover.
Another major problem caused by rapid growth is managerial problems. Rapid
expansion means larger operations, more employees and more divisions. The
present managers may not be able to cope with problems of controlling a larger
business with a larger organizational structure and greater number of hierarchy
levels. Also when two businesses integrate, there may be duplication of certain
division and departments. Due to this a lack of co-ordination may occur between
departments and the management may find it difficult to control the expanding
business effectively. In addition to it, the original owner of a business or that of a
business or that of the larger business (in case of integration) may find it difficult
to adapt to being a traditional manager. In case of integrating businesses, both
organizations may have different corporate cultures. E.g. one may be following
an autocratic culture where employees do not give their feedback and do not
participate in making decision. The culture of the other might be democrate
where employees take an active apart in the business decision. Thus there may
be clash of culture and employees may find it difficult to settle and adjust.
Management would have to make employees adapt to the integration too.
Strategy to deal with such a problem might be to build new management
structures and systems according to the requirements of the expanding business.
Also a policy of delegation and empowerment would reduce pressure on staff
and they could concentrate on strategic issues instead of difficulties of running a
day–to–day business. A company expanding its divisions could benefit from
decentralization. This would enable national divisions to use a degree of
autonomy and would motivate managers alongwith giving them a clear focus.
Since a lot of burden falls upon the original owner, he would have to decide the
most important areas of management in which he has to personally remain
involved while he should relaxed control over others e.g. the original owner
should concentrate more on to the extent the company needs to remain
diversified, which operations he should close down and which he needs to
continue. These are the more strategic decisions. Others such as daily
purchasing and daily rent & tightening should be left to lower management.
Then several marketing problems are also faced. First and foremost is that rapid
growth leads to sudden increase in the products. This would require new
marketing strategies which have to be quickly developed in order to maintain
competitiveness. The original marketing strategy would no longer remain
appropriate for a larger organization with a wider range of products. E.g. a
marketing strategy for a product portfolio of four products would fail to effectively
manage a portfolio of eight products that has formed because of the expansion.
Also in the expansion results to growth from national to international markets, it
would be unsuccessful if market strategies are not suitably adapted. It may be
that prices may have to be changed for the products to sell in the international
market, also changes may need to be appropriately made to package designs in
accordance to the culture of different countries. At times even brand names have
to be changed. For all these things, extensive market research should be
immediately undertaken. The results would show what should be done such as
adopting focused marketing strategies for each specific product or each country
operated in the expanding business especially if its through takeover, would have
to completely change its advertisements as the taken over business has lost its
identity. Thus any shops and markets of that business would have to be
redesigned and all its marketing strategies altered.
Finally rapid growth may result in loss of control by original owners. It is most
likely to occur if a sole trader takes on partners or if a private limited company
converts to a public one. In both these cases, there is an increase in the numbers
of owners due to which control is divided between the raw owners / shareholders
especially in the latter case where several new owners introduce capital into the
business. This is an unavailable consequence of changing legal structure to gain
additional capital. It also occurs within public limited companies when a large
issue of shares occurs due to which owned to is diluted.
Business growth, due to bring an important objective, is one faced by managers
at least once during their business era. Managers must therefore evaluate
whether growth is desirable objective for achieving the aim of maximizing returns
to investors. The cost of growth, especially external growth (integration) can
easily outweigh the hoped for benefits. Also expanding the company too swiftly
can overstretch both management and financial resources. It this problems
becomes too seniors, then rapid retrenchment (cutting back)n of activities may
become necessary and this could lead to negative
n egative publicity and negative reaction
from stakeholders. The pace of growth, the form that it should take and how the
consequences of expansion are dealt with are some of the most vital issues for
any manager to be concerned with.
A Levels
HIERARCHY OF OBJECTIVES
Starts with broad aims and targets and narrows down to individual objectives.
Corporate aim / Vision


Mission Statement

Corporate Objectives

Divisional Objectives

Departmental
Departmental objectives

Individual Targets
Corporate aim – basic goal or general goal or purpose of the organization e.g. establishment
as an ethical firm or maximize shareholders value and returns.
Mission Statement – purpose of organization stated in words. When the philosophy and at
times core systems. They may be technical or emotional theme based.
KODAK: We make memories old – we form films and pictures.
They are displayed at several places so employees and visitors can see.
ARGUMENTS:
Negative : Its not true – contradicting
contradicting performance goods things are said but never done
– very vogue can’t be transferred into achievable facts.
facts.
Positive: - served as a formality – norms of corporate world
- provides direction to employees get to know their purpose and framework of
how to work
- may help increase profits
Corporate objectives – set for whole organisaiton

organisaiton
- Survival
- Growth
- Increasing market share
- Maximizing profits
- Social, environmental
environmental and ethical considerations.
considerations.
They are very specific and SMART
Specific
Measurable
Agree
Realistic
Timetabled
They should provide framework and guidance to set other objectives.
Divisional objectives: these are usually based on geographic division though could be based on
product lines.
Departmental: they are for each of the markets, production and other functional
department.
Individual: monthly basis.

Strategies – long – term plans to achieve the objectives, general and broad.
Tactics – short – term – specific and narrow e.g. advertising magazines,

magazines, channels and so on.
A Levels
CORPORATE OBJECTIVES
Factors which determine the corporate objectives:

1. corporate culture
2. size and legal form of the business
3. public or private sector businesses
4. the age of the business
5. financial strength of the business
CORPORATE OBJECTIVES
Q. List any six types of corporate objectives a business can set. Explain with their benefits
and possible limitations, the following two corporate objectives:
a. profit maximization
b. growth
Ans. Corporate objectives are the goals of of the whole

whole organization
organization.. They are the outcomes or
largest that the business wants to gain in order to achieve its aims. They are specific,
agreed upon by everyone involved, measurable, realistic or achievable and are time
specific. Six types of corporate objectives are:
i) Survival
ii) Profit maximization
iii) Growth
iv) Increasing shareholder
shareholder value
v) Increasing market share
vi) Social, ethical and environmental
environmental considerations
considerations
PROFIT MAXIMISATION
This is the main objective assumed for all established private sector organizations. It
means to produce at the output level where there is the greatest possible difference
between sales revenue and total costs.
The major benefit is that greater returns are given to the investors or shareholders of the
business. It means that the risk-takes of the business are satisfied so more people would
be willing to invest into the business and so raise capital. Another support is that higher
profits may mean greater re-investment into the business by which other objectives like
growth could be achieved. Also it is thought as the most rational thing to achieve
greatest possible profits as otherwise it would be a missed opportunity.
However there are several limitations to it. The owners of small firms may not wish to
expand to the extent of reaching profit maximization point. They would be more
interested in retaining control and could be satisfied with their current level of profits and
lifestyle. They could also want to keep their revenue below VAT levels as well as not
employ more workers. Firms also usually opt for sales maximization and by this decide
their profit targets. Profit maximization is an aggressive short-term objective that would
cause competitors to enter the market and endanger long-term survival. So firms usually
keep long-term profits as their objective. Also it is very difficult to gather all the
information such as costs, prices and demand to determine the precise maximization
point. Also the pressure of objective of other stakeholders like workers and community
make profits maximization impractical. Then performance of company is divided by
return on capital employed rather than profits.
GROWTH
The growth of businesses is the increase in sales and market share of the business
which is usually also an increase in the total output level of the business. There are
A Levels
several benefits to many stakeholders because of the growth and expansion of a

business.
The growth of a business results in its becoming more competitive. Growing demand
leaves survival no more a concern. Larger firms are able to dominate a market, enjoy
monopoly power to a certain extent and raise prices too. They are less prone to take-
overs and also benefit from economies of scale. Growing businesses are able to benefit
from diversification and so reduce risks. They are able to introduce new ranges of
products so if one range fails, there are many others and so the entire business doesn’t
fails. Managers are highly motivated as they have greater status get high salaries and
fringe benefits if they make the growing business work to full potential. Directors and
managers also have more power and recognition. The employees part of an expanding
business may find their jobs more secure (if capital intensiveness isn’t used) and could
also get higher wages and so may be greatly motivated. Growth may also give higher
profits and so greater returns to investors (shareholders and owners).
But growth has its own drawback. If business grow beyond a certain size, they may face
diseconomies
diseconomies of scale because of poor communication and frustration amongst workers.
Too rapid expansion may result in severe cash flow problems that could cause a
profitable business to become insolvent. Also increase in sales may have been possible
only by reduction in profit margins. So even though the business grow, it has lower profit
margins. So even though the business grew, it has lower profits and so low returns to
investors. Then the business may be re-investing a higher percentage of profits to grow
which would result in anger amongst the owners / shareholders. Finally it may be that
moving into new markets away from the ‘core’ activities would result in a loss of focus
and unacomplishment of the central aim of the organization leading to a loss of direction
as well. This would result in inefficiency, low productivity and increased costs.
A Levels
CONSTRAINTS ON BUSINESS OBJECTIVES & STRATEGIES

Constraint – a constraint on business activity is a factor that limits or restricts particular courses
of action’s or strategies.
1. Internal Constraints result from the policy and strength of the business itself and are
usually
controlable.
- Strengths
- Weaknesses
- Policy (Business)
- People and their behaviour
2. External Constraints are limits on business activity from outside the business and are
usually beyond the direct control of the business.
- Economic Constraints
- Political Constraints
- Technological
Technological Constraints
- Legal Constraints
- Social, Ethical and Environmental Constraints
Economic Influences
Macro – economic objectives of a government
1. maintaining economic growth
2. controlling inflation
3. reducing unemployment
4. to maintain
maintain the balance of payment
5. to stabilize exchange rate
Economic growth – increase in the real GDP of a country in a particular period of time,
usually one year. Real GDP is the nominal GDP minus affects of inflation. Benefits
 increase in production
 increase in employment
 increase exports so
  balance of trade
  balance of payment surplus
 increase in purchasing power
  increase in prices
 investment: local as well as foreign increases.
Negative
 price increase – types inflation
 other countries may impose protection measures
 tariffs, quotas
 increase costs
A Levels
Real Overheating Boom

GDP
Boom Growth
Recession
Slump
time
Boom – may lead to increase in prices that causes fall in aggregate demand and so
employment is reduced and so overall GDP falls
f alls and purchasing power decreases.
At slump – strong investors buy stock at this point as stock prices are low so they know
that profits once grow the stocks would be very high.
2. Inflation – general and persistent rise in the levels of prices over a particular period of
time.
Causes of Inflation.
(a) cost – push inflation
(b) demand – pull inflation
(c) monetarist view of inflation
(a) This is when costs of production increases e.g. fuel price rises, raw materials
increase, higher wages so prices are increased.
(b) Monetarist view is that when money supply increases so prices increases, interest
rates decrease, installment buying is encouraged so flow of money increases so
aggregate demand increases that pushes the prices.
Government monetary policy is related to the money supply

- reflationary / expansionally
expansionally monetary policy
- deflationary / contractionary monetary policy
Reflationary – government decreases rates,  installment buying  leasing, 

Reflationary
borrowing,  spending and so overall money supply increase. So all these measures
increases demand so production will increase.
Deflationary – government increases interest rates

 leasing,  installment buying,  spending,  borrowing so over all
money supply decreases so all these measures decreases demand to
lower inflation.
Deflation – decrease in price

Dis-inflation – level of prices are going up but at a slower rate than before.
Slump inflation – increase in inflation, so employees have to be laid off because of

cost of production, cause of slump.
Traditional relation is, when inflation is high unemployment is low.

A Levels
Fiscal policy of governments:
Government budget: government Revenue – Taxation

high taxes government
government Expenditure – Social Welfare,
 disposal income Defence, distribution of wealth / serve
 prices fall  demand falls   reduces economy
3. Unemployment
is a situation where people who are willing and able to work cannot find proper jobs. (or
appropriate jobs)
Types:
(i) Cyclical Unemployment
(ii) Structural Unemployment
Unemployment
(iii) Frictional
Friction al Unemployment
(iv) Seasonal Unemployment
(v) Technological
Technologic al Unemployment
(vi) Regional Unemployment
(vii) Voluntary Unemployment
Unemployment
(viii) Residual Unemployment
1. Cyclical is due to recession in overall economy.

2. Deindustrialization.
Deindustrialization. Structural is due to any reason a industry (e.g. textile) is decline.
Even in tertiary sector
3. When people switch jobs so in between time is frictional.
4. When employment situations change due to season e.g. agriculture, woolen
garments in summer, construction when projects are being made so once completed
the people are unemployed.
5. Technological
Technological is due to automation i.e. when industries become capital – intensive.
6. When factories move from one region to another so unemployment
unemployment in the left region.
When unemployment occurs in any one region.
7. Voluntary is when people choose not to work because of unemployment
unemployment benefits
even though they are able to work. (willing & able but want to delay) e.g. wanting for
a higher salary pay.
8. Residual is due to disabilities of people i.e. when they become physically and
mentally disabled but to only a certain extent. These are people with simple
disabilities.
Impacts of Unemployment
1. lowered aggregate is demand – due to decrease in purchase power as incomes are low
as unemployment & . Due to this output decreases.
2. lesser tax revenues
revenues for the government
government – government
government expenditure increases,
increases, burden onon
working population increases.
3. social costs – crime rate , frustration  and suicide , measures against government.
4. wastage ofof a very imp. factor of production labour  production possibility curve not
production i.e. labour
achieved  efficient utilization of FOPs is not possible. Unemployment means
exploitation of employees are possible as they are desparate. So low wages rates.
5. balance of Payments
It is a summary of all the payments made by a country and proceeds taken by a country
over a particular period of time which is one year. It is actually the monetary record of
transactions of one country with the rest of the world. It is a summary of cash flows.
Surplus of bop
o government invests the money into some other country.
give loans to other countries
A Levels
o put in reserves
deficit of bop
o take loans from other countries (IMF, WTO, World Bank)
o invite investors to invest in country
o take out money from reserves
Impacts of bop deficit
o liabilities increase
o bankruptcy
o interest payments increase
o economy can go to a slump
o foreign exchange rate decrease as demand of currency falls
o reserves go down so output decrease

unemployment
unemployment increases
Impacts of bop surplus
o inflation increases due to money supply increases and value of money
decreases.
o Trading countries can impose protection measures.
Important aspect, goods
o Current A/C – visible trade & invisible trade
o Capital A/C – big foreign investments air bus. sector / loans
o Other investments – bank transactions, remittances
EXCHANGE RATES
o It is the value of one currency against another currency appreciation
appreciation – spend less
of currency to buy
o Increase of value spend less to buy one unit of another
o Currency depreciation
o Decrease in value – spend more of currency to buy one unit of another
o Depends on demand and supply of currency
A Levels
MACRO – ECONOMIC POLICIES
Q. Explain macro – economic policies of the government.

- monetary policy
- fiscal policy
- exchange rate policy
Ans. The macro – economic

economic policies
policies of the government
government are those that affect the overall
economy of a country. There are three types of macro – economic policies.
policies.
(i) Fiscal policy
(ii) Monetary policy
(iii) Exchange rate policy
FISCAL POLICY
This policy is related to the government budget which is the government income through
taxation, its expenditure as well as borrowing. This policy is used to control the
aggregate demand as well as inflation to stabilize the economy i.e. avoid many
unwanted slumps or booms that may be bad for overall economic growth.
When the economy is in recession and the rates of unemployment are high, this means
that two of the objectives of government are not being met which are economic growth
and low unemployment. To counter this, the government would increase its spending by
constructing new hospitals and schools. The government would also reduce direct and
indirect taxes which are corporation tax, income tax and value added tax respectively.
This would result in a rise of disposable income i.e. an increase in the purchasing power
of the public. Therefore, the aggregate demand for goods and services would increase.
So there would be an increase in the industrial output i.e. a rise in GDP. Also
employment would increase as more people are required to produce the increased
output. However, if the economy is booming and is in danger of overheating then there
may be very high rates of inflation and current account deficit. It may be due to a very
high aggregate demand. So to counter this, the government would reduce its
expenditure by cutting back on road construction. Also, higher taxes could be imposed
like income tax or value – added tax (this would increase price). Due to this the
consumer demand falls as their disposable income is decreased. These measures would
control the excessive economic growth and current account deficit would reduce.
MONETARY POLICY
This policy is related to the changes in interest rates that causes an increase or
decrease in money supply. This in turn works for the regulation of inflation and so the
economic growth is kept in check.
When inflation is increasing and is forecasted to reach levels beyond that which the
government wants, then deflationary or contractionary monetary policy is used. So the
central bank or state bank increases the interest rates. This leads to decrease in leasing,
installment buying and borrowing of money as no one wishes to pay higher rates of
interest. There is also a fall in spending and so the money supply is reduced. Therefore,
the overall aggregate demand falls and this would lead to a decrease in inflation as
prices are lowered. Also the existing loans and mortages would now take up a greater
part of the income as interest on them increases. This further reduces the disposable
income of the customers and is another factor that leads to fall in aggregate demand.
demand.
On the other hand, if the inflation rates are too low, then the government would decrease
the interest rates. This would encourage the customers to buy good especially houses,
cars and machinery on borrowed loans, by leasings and through installment buying as
less interest has to be paid. Also the interest on existing loans and mortages would
decrease and so the disposable income of customers increase. Therefore, they are able
to buy more products and so the aggregate demand increases. This would push up
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prices leading to higher rates of inflation. This is called reflationary or expansionally

monetary policy.
Controlling inflation so that prices don’t increase a lot nor decrease too much sustains
the real GDP and so cause continuous economic growth that also keeps levels of
unemployment low.
EXCHANGE RATE POLICY

Exchange rate is the price of one currency or the value of a currency in the terms of
another currency. The policy of the government would be to decide if they want it to float
or to be fixed.
A floating exchange rate is determined by the demand and supply of the currency in the
international market. If the demand increases, then the exchange rate appreciates as its
value increases e.g. when the interest rates of the country are high. This is good for the
importing businesses as they buy more in the same amount of money. However, when
the demand falls, then the currency depreciates and its value falls e.g. if 60 Rupees =
US$1 and the US$ depreciates then 50 Rupees = US$ 1. This shows that the value of
rupee appreciates as less is to be given in return of $1. This is good for exporters.
However, too many fluctuations in the exchange rate prove bad for domestic industries
and its the government’s duty to keep the rates stable.
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FURTHER ECONOMIC CONSTRAINTS
Labour Market: one of a types of market

Factors determining the demand of labour:
1) Demand for the finished product
(labour has a derived demand) i.e. influenced by a demand of finished good.
2) The effects of technology or the price and efficiency of labour saving machinery.
Price of machinery efficiency  of machinery  then demand of unskilled labour  and
demand of skilled labour .
3) The trend of the industry to increase capital intensity.
Factors effecting supply of labour:

1) population size
2) mobility of labour For the economy
3) %of working population
4) no. of people who are not willing to work
5) unemployment
6) wage rate offered by particular industry.
7) availability of suitable labour in other industries
8) level of unemployment
unemployment (structural unemployment
unemployment To the industry
Unemployment  supply  people are ready to work
even at lower wages
If there is skill surplus then wages will decline and if there is skill shortage then wages
will rise.
To cover skill shortages

1) To hire more trained staff
2) Training your existing employees
Advantages of hiring new training employees
1) Saves time
2) New employees can bring new ideas to business.
Disadvantages
1) frustration would be created because they (existing employees) will think that
they should be trained rather then training new person.
2) cost of training increases.
State intervention to handle labour market D

1) government set up a minimum wage rate S
if government increases the level of wage
rate then supply would be more but
demand would be less so employees
from A to B will become unemployed.
S D
A↔B
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MARKET FAILURE
Market failure – when the resources are not utilized efficiently.

Resources can be underutilized i.e. when resources are not fully used
Resources cannot be over utilized.
Types of market failure

f ailure (examples)
(examples)
1. External cost (effect on good, consumers and workers)
2. Inadequately trained labour (effect on govt., consumer and companies)
3. Exploitation by monopolies
MANAGEMENT
Functions of management
1. Planning
2. Organizing
3. Co-ordinating
4. Motivating and Leading
5. Controlling
6. Staffing
7. Communicating
Management is the process by which a manager allocates and controls resources of a

business.
Management is getting people to do their work effectively and efficiently to achieve the
organizational objective. Management is the process of planning, organizing, co-
ordinating, motivating & teaching, controlling, staffing and communicating the resources
of production to achieve the organizational objectives.
Planning – deciding today what to do in future

→ it is setting objectives – aims to achieve in a certain time period
→ in order to firm strategies
→ and tactics
corporate objectives should be specific, achievable, realistic, time tabled and

measurable. They are specific aims of the whole corporate. They should be relevant,
communicated and agreed upon.
corporate → divisional→ departmental → individual targets. Strategies are long – term

plans of action to achieve an objective and are broad / general.
Factors affecting the corporate objectives
1. Size and position of the business & its legal form.

2. Public or private sector business (Business vs. State)
3. Competitor’s
Competitor’ s objectives
4. Time period
5. Corporate Culture – business ethics (moral values e.g. min wage rate)
- leadership style
- task culture or people’s culture
- organizational structure
MANAGEMENT – CORPORATE CULTURE
Q. Explain the link between corporate culture and business behaviour. (14–16)
Ans. Corporate or organization

organization culture
culture is a set of values
values and beliefs
beliefs that are shared
shared by
people and groups in an organization. It is the pattern of shared beliefs, attitudes,
assumptions and values which shape the way people act and interact. It is the
code of behaviour and attitudes that influence the decision – making style of the
managers and other employees. Therefore the business dealings or the business
behaviours with stakeholders is clearly affected by the corporate culture of the
business.
Task – oriented corporate culture causes the management to be very strictly and
autocratic with its employees as it is only concerned about tasks being completed
and targeted and targets being achieved. In such a culture, the dealings with
customers and suppliers are usually very fair. Customers are given all orders on
time with the highest quality goods the company is able to produce. Suppliers are
dealt with fairness and are expected to give all deliveries on time as asked.
However, strictness with employees mean that disciplinary measures are taken
immediately against absenteeism. Management is very particular about work
timings and punctuality and wants highest productivity. This can cause
demotivation amongst employees as too much control prevents fulfillment of self-
esteem and employees don’t feel part of the business. This may pass onto the
production by poor quality maintenance. Switching and high labour turnover may
become a problem as would bad publicity. Very strict culture may cause
management to forget that employees too could be customers of the firm. Being
too supervising over them and a centralized control may cause them not to buy
the firm’s products. This is a loss of potential customers.
A democratic or decentralized
decentralized culture encourage the involvement
involvement of employees
in the business. It asks for the ideas of workers. This encourages innovation and
also solves problem within the business since workers have a hands on
experience. So they are better able to understand certain areas such as
production than the management does. This would mean that the business would
have an edge over the competitors and may remain more dynamic. There would
be flexibility in its dealing with customers too and may be more friendly towards
them. They may offer alternations in the time when debtors could payback and
may allow suppliers to flexible delivery time. However, this may result in high bad
debts and cause disruptions in supply. However, such cases are rare and usually
democratic firms have high motivation due to delegation and decentralization.
Such firms have good reputation amongst the general community for their good
behaviour towards customers and well treatment of employees.
A culture of following the limits of legal regulations
regulations also has affects upon the
behaviour. This means that if the law has a minimum legal wage, then
management may not set higher pay rates despite high profits. This may be a
very negative culture as it promotes conservative attitude where employees don’t
try to work to their full potential and are demotivated. In such a culture, customer
may be demanded cash payments for all purchases if laws making credit – giving
services necessary are not in place. Though all taxes are paid exactly, the
government may still not be satisfied due to low contributions to society welfare
despite high growth. Pollution may be prevented only to the level that laws state
despite the ability to reduce furthur. All this may result in bad publicity and poor
It is a system which includes establishing the required business outcome and co-
ordinating and motivating workers to assist in the achievement of this aim. This
method involves translating the overall aim of the business to specific targets for
divisions, departments and individuals. It can be an effective way of delegating
authority and motivating staff. It is done through discussion and agreement from
every level of the organization and hierarchy then all the advantages of a
motivated workforce can be gained. However, if the objectives and targets are
merely imposed from the top management, then motivation levels are low.
Therefore, to achieve the true benefits of MBO good communication and
democratic style of leadership is preferred.
BENEFITS OF MBO
1. Increased job enrichment and motivation

2. Strategies can be implemented quickly
3. Co-ordinated and consistent approach
4. Decreased conflicts
5. Improves the understanding of the whole system
6. Monitory performance becomes easier. (deviation is identified)
7. Helps in setting priorities
DRAWBACKS
1. Time consuming
2. Objectives can become outdated quickly as compared to the dynamic nature of
environment.
3. Setting targets doesn’t guarantee success.
4. Very careful and able leadership is required which is generally difficult to get.
STRATEGIES
⇒ Focused Strategies
⇒ Corporate Strategy
⇒ Marketing Strategy
→ Cost – Leadership → lowest cost of good sold in the market –
cheapest good
→ Differentiation
→ Focused → to concentrate on one particular area.
→ When originally used this is called penetration pricing in introductional stage of
product life cycle
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STAKEHOLDERS
Q. Discuss the conflicts of objectives amongst the stakeholders of the business.
Ans. Stakeholders are individuals

individuals or
or groups
groups of people
people who
who have a direct or indirect
indirect interest in
the running of the business. They are the owners/shareholders, directors, workforce,
customers, suppliers, competitors, government, banks and the community as a whole.
Each of the groups have different objectives and are affected differently by the business
activity. Due to the differences of their objectives, conflicts may arise amongst the
stakeholders.
One type of conflict may be between owners and directors. The directors of a company
are the actual managers. They control and plan the resources and are the actual
decision makers. Their main objectives would be to retain control and increase their
status and power. This would be possible by increased growth of the organization. So in
order to achieve their interests they might overlook the interests of the owners or
shareholders who are the real risk takers as they have invested into the company. So,
the shareholders would want greater returns in the form of dividends while the directors
may decide that less dividends should be paid and greater percentage of profits re-
invested to induce technological change. Also the directors may be paying themselves
higher salaries and organizing their time to meet their own interests. This would result
only in a satisfactory level of profits while the owners would want a higher level of profits.
This conflict is the major reason of the divorce between ownership and control in the
limited companies.
Conflicts also occur between the interests of the owners and the workforce. The
workforce wants higher salaries and wages. They also want good working conditions like
hygiene as well as moderate temperatures which would include fans. They would want
proper safety equipments and clothing if their jobs are dangerous as in nuclear power
plants. All these things would increase costs of the business and reduce profits while
owners want higher profits and may even be thinking of reducing the wags and salaries.
This also causes a conflict of workforce and managers / directors. The directors would
want to keep prices low while the costs of satisfying the objectives of the workforce
would force price to increase and the sales would drop. The director whereas want sales
increase. The directors and owners may also want to increase the production which they
may want to increase the working hours of the employees or introduce technological
change and use more efficient machinery. This would again be in conflict with the
objectives of the workforce who would want fever working hours and job security while
more capital
capital - intensive
intensive methods
methods mean the redundancy
redundancy of workers that that lead to
frustration and insecurity.
Conflicts may also arise between the suppliers and the owners or directors. The directors
and owners want increased working capital for the development of innovative products
and upgrading of older products to increase market demand and share. For this they
may wish to buy goods on credit for longer periods of time. However the suppliers on the
other hand would want to receive payment on time specially if they are small business
because this causes severe hardships for the small suppliers as they too have to pay
their employees and return loans. There it may be that suppliers aren’t able to deliver the
goods on time and are delayed. The owners and directors want the supplies to be
delivered on time as late deliveries halt production and cause many difficulties for a
business including wastage of time.
Customers and business may also disagree on several aspects. The major area of
conflict is the price. The owners and directors wish to maximize profits for which they
may increase prices if the quality of product is good or if too many resources of
production had to be used. The customers however, want to have the best quality of
products at a low price. If there is competition in the market as is the case with clothes,
then prices are low. However, when competition is low like in the computer market then
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customers are forced to pay higher prices charged by owners. Then at times customers
may not be satisfied with the quality of goods they bought as they may not be what
customers had expected seeing the adverts. So the customers may wish to return the
goods and receive a refund. However, the owners and directors may not agree to accept
the returned goods or may not wish to return the money to the customer. Also,
customers like to have after – sales service for certain expensive goods such as electric
gadgets e.g. mobiles or MP3 player. However, the business in order to save costs may
not offer these services or if the gadget breaks down after its first weak of use, conflict
occurs if the owners refuse to investigate the matter or compensate the customer.
One other type of conflict is between the owners and the community. The community
wishes to live in a clean and pollution. – free environment. It would want the industries
and factories located away from residential areas and nature parks. However, conflict
occurs if the owners decide to start a factory close to houses. This would cause a lot of
noise pollution firstly because of construction and then because of the running of the
factory. Air pollution is also possible from smoke-emitting factories that endanger the
health of the community. So the community would rise against the business and may
form pressure group to ruin the reputation of the business which is the last thing the
owners want as it results in falling sales and profits and loss of goodwill. Also the
community wishes the businesses to run in an environmentally friendly manner and
dispose of its wastes clearly. This would decrease the profits as costs of the business
increases a limit expansion chances which is conflict with the owners and directors
objectives. The community would also want a business to run ethically and may rise
against it if they use animals to do research e.g. for testing new food types. This would
be against the objectives of owners who wish to research new types of products and
must use the animals experimentally. A business activity would always lead to conflict
due to the diverse objectives of the stakeholders. A good strong and successful
management is one which is able to deal with all the stakeholders and still run the
business efficiently by reaching agreements to minimize conflicts e.g. the owners could
get employees to agree on them with good working conditions to show that they are
cared for. Profit – sharing with employees could be done in good years to increase their
loyalty. For this the owners shouldn’t chose aggressive objectives like maximizing profit
but keep it at a moderate level!
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CORPORATE CULTURE
Culture followed by an organization e.g. informal culture where people are easy – going so most
probably less aggressive objectives.
It is the way things are done in a business e.g. democratic culture where objectives are
discussed.
DEFINITION:
- The pattern of shared beliefs, attitudes, assumptions and values which shape the
way people act and interact which strongly influence the way that things get done.
- It is the code of behaviour and attitudes that influence the decision – making style of
the managers and other employees of the business. It is actually the way of doing
things that is shared by all those in the organization.
organization.
Factors that determine the corporate culture:

1. The philosophy and personality of the leader.
2. The history and tradition of the organization.
organization.
3. The nature of activities of the business.
4. The structure of the organization.
organization.
5. The focus of management (Task culture – Theory X) or
(people culture – Theory Y)
1. If the leader is authoritative or autocratic then he doesn’t consult the employee but
imposes his decisions. Employees therefore won’t give opinions as to the decision
making and would be afraid. There is very less communication. So this will lead to
jobs switching. If the organization doesn’t take care of the employees because
employees feel loyalty to organizations that give them proper working conditions
alongwith pay. Conspiracies and secret grouping are also possible.
However, at times it is necessary to work fast as there is no time, then it would be
better if no discussions are held to make decision.
2. History and tradition involves the reputation of the business. If the reputation is good
and there has been continuous growth in the past, then the employees would want to
become a part of it as the culture would be of job security. Traditions would include
dress codes e.g. informal dressing on Saturdays. It would also include get togethers
and dinners for both employees and management.
3. nature of activity is the type of activity a business is in e.g. in media related business
there is an open culture. Here a lot of communication
communication and interaction between people
occurs and is necessary for programs to be made and discussions held. However, in
manufacturing organizations, there may be a very monotonous atmosphere. Only
tasks would be set for employees and very less interaction may occur. This is closed
culture.
Nature of activity would also depend on the scale of organizations, whether large
scale or small scale and they are multinationals.
multinationals. This affects the culture by e.g. close
contact with customers in small scale organizations. Then businesses following
ethical and environmental regulations would reflect it in their organization by working
clearly and friendly.
4. The structure means the organizational
organizational structure of the organization starting with the
CEO on top. If the structure is centralized, this means the organization is autocratic
with all decisions made at the top levels of management. If structure is de-centralised
then the culture is more democratic with employees and lower levels or organization
involved in decision – making. The narrower and longer structures means less
communication. Broader structure means more discussions as greater no. of
subordinates
subordinates under one person. It is the hierarchy of an organization.
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5. Focus means the focus of management and the choice of managerial theories they
select to implement and follow in the
t he organization 2.
Theories X and Y. Theory X: Employees are in nature lazy and wouldn’t work unless
and until clear orders are given to them and punishments decided if they don’t follow
the orders. Money or monetary reward is the main resources or incentive they wok
for. They do not wish to have responsibility. When tasks are set, they must be
completed by hook or by crook. There is a lot of negotiating. Also such workers
require a lot of supervision.
Theory Y: employees, subordinates or people in general are responsible and are
able to make decisions. They need monetary reward alongwith non-monetary areas.
They also like slight leniency. They don’t need a lot of monitoring and are easily
motivated. They like to given the will to make decisions and like being given
responsibility.
No particular theory is best. They must be made to work together. However, control
is necessary. Theory is that control should be strict and rigid so that work is done on
time and there is minimal absenteeism.
Theory Y managers believe consideration should be given and interaction is good for
decision making and delegation of responsibilities should also be exercised.
Leaders may also use certain tools like lying and black – mailing as well as cheating.
However if they are honest and don’t use these then employees too are usually
honest. No one really teaches the culture but the juniors of an organization usually do
what their seniors do.
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STRATEGY
Type of strategies:
- Corporate strategies
- Divisional / Departmental Strategies
- Global strategies
e.g. in multinationals there is a change of strategy, then the entire strategy worldwide is affected.
Quality standards globally should be maintained.
- Generic Strategies
(Cost Leadership, Differentiation, Focus)
Cost Leaderships means that leading in terms of cost i.e. by cutting down costs raise profits but
not by raising prices e.g. China is following this. So prices of its products are low and quality
good. However, the quality standards change from country to country. Due to this exports of
China are spread throughout the world.
Differentiation – setting up a strategy to make the company’s product different from others by
introducing unique features. Keep on innovating different products.
Focus only on one market segment e.g. diamonds are only for higher class and they don’t deal
with mass-market. Research on drugs for specific patients is-focus-strategy while precautions
are for mass-marketing.
mass-marketing.
Factors on which strategy depends:

1. Strengths of a business
2. Competitive
Competitiv e environment
3. Resources available
4. Company objectives
1. Strength would be the financial strength as well as the type of people working – whether
good or bad.
2. Resources available
available decide the type of equipment
equipment used so how innovative
innovative a product
could be made e.g. adverts.
3. company objectives – growth,

growth, expansion, profits
SWOT Analysis – Strategic analysis

The process of reviewing existing plans and identifying new opportunities and risks
associated with them is known as strategic analysis
Strengths internal
Weaknesses - resources of a business
Opportunities external
Threats - e.g. Free Gwador Port
but too many imports.
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CORPORATE CULTURE
Q. Write a comprehensive
comprehensive note on corporate culture.
Ans. Corporate culture is one of the factors that determine

determine the corporate objectives of an
organization. It is the pattern of shared beliefs, attitudes, assumptions and values which
shape the way people act and interact. It is the costs of behaviour and attitudes that
influence the decision making style of the manager and other employees. It is actually
the way of doing things that is shared by all those in the organization e.g. at Microsoft,
the employee dress casually and work long hours. This is their culture or the norms of
their business life.
Corporate cultures may be created by business leaders as part of their strategy to
increase the efficiency of a business and its competitive advantage. The cultures may
also influence decision – making. e.g. insurance companies encourage caution and
conservation so that employees don’t take risky decisions. There are several factor that
determine the corporate culture of an organization: the philosophy and personality of the
leader, the history and tradition of the organization, the nature of activities of business,
the structure of the
t he organization and the focus of management.
Autocratic and authoritative leader would cause a culture of no discussions before
decision – making to flourish. The leader to CEO would set all strategies and tasks that
everyone from managers to employees would have to follow. The workforce would be
afraid to voice its opinions that would lead to frustration and a culture of high labour
turnover and absenteeism amongst employees. Job switching would be common.
However, if the leader encourages employees (e.g. in a computer company) to perform
tasks in creative ways then this would become a positive culture. The employees may be
able to come up with innovative ideas for products and gain advantage over other
competitors. Also, if the leaders are honest and don’t use tools like lying, cheating and
black-mailing then a culture of honesty would be attached to the organization as
employees too tend to be honest. It is basically the tendency of juniors to follow their
seniors. Therefore if the leader is one who believes in discussions to gain better ideas for
the running of the business, the employees are eager to participate in talks.
Every organization has its history and tradition. The organization may have a casual
dress code for Saturdays. It may hold get together for employees once every month
which would give a feeling of care and loyalty to workers for the company. The history of
an organization may to some extent reflect its objectives. An organization which has
grown continuously in the past would have several of its workers for years and so a
culture of job security would prevail. If the business is profitable then it may have a
culture of profit – sharing amongst employees.
employees.
Nature of business activity affects its culture greatly. If the business takes care of
environmental considerations, then the employees may be very particular about the
recycling of papers, switching off lights for conservation of energy and being very tidy at
their workplace. If the business is a media network, then it would have an open culture.
There would be a lot of communication between workers and many discussions take
place in order to come up with the best ideas for program preparations. However in
manufacturing businesses there is closed culture. The working atmosphere is very
monotonous as there are no discussions. The workers are given tasks that must be
completed and they tend to be very serious and no interaction is required.
The organizational structure also plays an important role in corporate culture
determination. It is the hierarchy of an organization with the CEO (Chief Executive
Officer) on top. If there is a centralized structures this would means that all decisions,
whether of strategic importance or of day–to–day business, would be taken at the top
levels of management. They would then be passed down the chain of command and
must be acted upon by lower level of management and employees. So this would cause
a culture of fear and instant obedience without discussions in the organization.
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However, if the structure is decentralized then lower management would also take
decisions and workers would be delegated responsibility. The culture would be of
interaction and dutifulness.
Finally the focus of management decides the culture. If it follows managerial theory X,
then this would mean that workers are thought of being generally lazy. Their main and
only incentive is money / monetary reward. They don’t want responsibility and must be
ordered about and just given tasks to be completed in a limited time in whatever way but
the job must be completed on time. This is task culture. On the other hand the theory Y
managers believe that people in general are responsible. They don’t like too much
supervision and wish to be able to make decisions. They like being delegated and
receive non-monetary rewards too. This is people’s culture. Several types of culture exist
depending on the type of leadership. Adaptive cultures are those where managers are
able to introduce changes in corporate cultures according to changes in outside
environment. They are most suitable for the modern business world. In them employees
are encouraged to take entrepreneurial decisions, is decentralized and has close
relations to customers. Inert cultures are those that can’t adapt to changes and follow old
norms. Usually decisions are centralized. Solidarity and sociability are other ways of
explaining cultures. Solidarity is the unity amongst workers to get things done while
sociability is the friendliness amongst employees. High sociability and low solidarity is
the culture of networked organizations, while mercenary organizations have low
sociability and high solidarity e.g. Pepsi Co. Fragmented organization have both low
solidarity and sociability while communal organizations have high solidarity and high
sociability and so are more cohesive, goal – oriented and have shared values.
Corporate cultures that are strong and clear and are influential in the corporation have
several benefits. The employees gain a feeling of identity and have a sense of being a
part of the organization.
organization. This makes workers flexible and increase their ability to adapt to
changes in the company or difficulties it may face. They help workers to identify amongst
themselves. Due to this greater teamwork is possible and employees are more unified.
This also helps employees feel committed to the organization so labour turnover and
absenteeism is low. This may enable higher productivity and efficiency. So industrial
relation problems are low and employees are highly motivated. The cultures also enable
employees to understand what they are required to do as well as what the business
activity is about. So misinterpretations and lack of understanding, instructions may be
prevented. The cultures enable management
management to set up corporate strategy as it provides a
control of the employee behaviour. It may also provide a sense of direction to the
workers.
However there are certain limitations to corporate cultures. It is not always true that
economic performance is improved by minimal culture gap. The organizations with
strong cultures are as likely to prove a successful as those with a weak culture because
there are several external influences such as fashion trend changes that cultures can do
nothing about. Also a business could have a number of sub-cultures existing together. In
certain cases they may co-exist in harmony while in others there may be a conflict
between the different interests and opinions. Then while lack of strong centres due to
decentralization
decentralization is common, corporate cultures may not be able to exist where temporary
and part – time workers are appointed. Also the fast changing working practices could
alienate some workers socially. This may be seem as negative as a corporate cultures
doesn’t exist yet for business life, it is positive.
People don’t do things at times because it is a culture established by their senior
management but because it is their interest, beliefs and philosophy.
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UNIT 1 REVISION QUESTIONS
Q. Using examples, distinguish between a currency appreciation and a currency

depreciation. (4)
Ans. The currency

currency appreciation
appreciation is the rise in the value of one country’s currency
currency in
in terms of
another currency, e.g. if the pound sterling’s exchange rate in terms of us Dollar is £1 =
$1.5 and the pound appreciates, then the new rate would be £1 = $2. This means that
currency appreciation enables the appreciated currency to buy more of another currency.
A currency depreciation is the fall in the value of one country’s currency as compared to
another currency e.g. if in the previous example instead of appreciating, the pound
sterling had depreciated, then the new exchange rate could be £1 = $1.25. The pound is
able to buy 25 pence less i.e. the depreciated currency buys less of the other currency.
A currency appreciation occurs due to the increase in demand of a currency due to
which it becomes short in supply which may be because of higher interest rates. A
currency depreciation occurs when demand decrease.
Q. Explain the difference between fiscal policy and monetary policy (2)
Ans. Fiscal policy

policy is the government’s
government’s policy
policy on budget (i.e.
(i.e. spending
spending and borrowing) and
taxation. Monetary policy on the other hand is the government’s policy on interest rates
and bank loans restriction.
Fiscal policy is able to control the aggregate demand of goods and services in the
country by increasing or decreasing direct taxes like income or corporation tax and
indirect taxes like value added tax on product. This serves to control disposable income
and controls inflation. The fiscal policy is also used to prevent current balance deficit by
increasing taxes and reducing spending on imports.
The monetary policy, however, controls the supply of money in the economy. It is used to
control inflation in relation to prices. The decrease in interest rates and fewer instructions
on loans, credit purchase and hire purchase enables more money to be available that
pushes up prices. It is used to expand the economy by allowing the money to circulate
among the lower income classes of society too.
Q. Assume that your country is given the chance of joining a common currency scheme with
other nations. Discuss the issues involved in making such a decision.
Ans. Common currency means using a single currency across a trade block or a group of
countries instead of the local currencies (e.g. euro). The major issue to be kept in mind
would be the exchange rate fluctuations faced by the Pakistan rupee due to having a
floating exchange rate. Once a common currency is joined then there are no fluctuations
with all those countries that use the same currency.
Fixed exchange rate means that the importing businesses
businesses and exporting businesses can
easily sell and buy. The imports of raw materials are easier to calculate and so costs of
production are easier to find. Also the uncertainty of exchange rate is removed and
changes of unexpected chances in demand for Pakistan’s exports reduced as there is a
single currency. So the exporting businesses are able to easily find accurate operating
profits and sales.
Since a common currency is shared, it causes a reduction in cost as the local currency
doesn’t have to be converted to pay for imports which requires giving commission to
banks e.g. if Pakistan and India were to have the same currency, the India wouldn’t have
to convert Indian rupees into Pakistan rupees to pay for agricultural and sports imports
but could easily pay in the common currency.
Common currency leads to price transparencies. Suppliers which supply best at lowest
prices can easily be found as all businesses have same currency and so prices are
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easily checked. Customers too easily find the best product at good value. Competitors
can easily see where their business stands as comparing is easier. Companies can also
know the prices that other businesses in the same industry charge.
The choices of goods and services for customers increase. Also the foreign investments
which Pakistan greatly requires would be more forthcoming if it had a common currency
as there are less exchange rate fluctuation to worry about.
However, Pakistan must keep in mind the costs for such a conversion like the changing
of all accounting system into the new currency. Then the redesigning of the packaging
and new adverts as well as retraining of staff to handle the new currency. It may also be
that a Central Bank is set up to keep the affairs of the common currency and it may
decide the interest rates and monetary policy which may not be good for Pakistan (i.e.
The State Bank of Pakistan has reduced powers). This may mean that Pakistan isn’t
able to maintain its own inflation rates but must agree on the general rates.
Common currency could mean too much competition from more developed countries
with better technology and products that could prove bad for the local industries.
Therefore, all these issues must be kept in mind and all benefits and drawbacks
calculated before a decision is made to join a common currency.
Q. How might a depreciation of a country’s currency lead to benefits for its industries?
Ans. The depreciation

depreciation of a country’s currency
currency means
means that
that its value falls
falls against
against that
that of another
currency. E.g. The current exchange rate of pound sterling against US Dollar is £1 = $3.
The value of pound depreciates. It is now £1 = $2 i.e. the pound is weaker. This would
make the exports of England cheaper. If England exported a machine of £300 worth. It
would have cost $900 to United States at the original rate. However, at the new rate, the
same machinery would cost $600. Thus at this lesser prices the united states may
increase its import of England’s machines which would increase England’s value of
exports and give a greater balance of payments surplus.
At the same time imports would appear more expensive. If England imported a curtain of
$30 it would have cost £10 at the original rate. But at the new rate it costs £15. This
would be beneficial as it would reduce the imports of England and encourage use of
local materials. This may increase the GDP and employment.
Q. Choose 1 ex. of market failure and explain its significance to business – decision
making.
Ans. One example

example of market
market failure
failure is the failure
failure to find
find the true total costs of production
including the external (social) costs such as pollution (air, water and noise). This has to
then be borne by the rest of society. The business must think of this failure before
making decisions as not caring for the pollution may give a bad name to the business
and pressure groups at the same time as running the reputation would also force the
business to pay for the costs. So it would be better if the business accounted for these
costs instead of paying forcibly and losing customers.
The government is also affected if the business doesn’t take care of external costs as the
voters gave the government vote also for maintaining a clean and pollution – free
environment. So if the business doesn’t take into account these external costs the
government may impose taxes and fine, impose strict limits on pollution levels so its
better if the business thinks of this market failure beforehand during decision
decision – making.
Q. Write a note on technological

technological advancements
advancements impacts on today’s business.
Ans. Technology is the creative process which uses human, scientific and material resources
to solve problems and generate better efficiency. An important area of technology is IT,
Information Technology which is the recording and use of information by electronic
means. The advancements in technology creates new opportunities as well as threats
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and the major business areas affected are communication, product technology, cost of
production, human resources and the market.
In communication, the major impact has been caused by computers and Internal. Within
an organization, people communicate via telephone, e-mails and can hold meetings
across countries by video – conferencing. The internet is becoming increasingly
increasingly common
as an interface between customers and the business and customers place orders either
over the net (e-commerce) or by an interactive television technology called Teletext.
Such changes have reduced the retail floor space considerably as well as made
communication
communication extremely fast. It has also meant that information is collected, stored and
sent quickly which saves money and makes sure information is passed correctly.
Advanced technology has had many changes in production and manufacturing. The use
of (AD – Computer Aided Design) CAM (Computer Aided Manufacturing), CMC
(Computer Numerically Controlled)
Controlled) production. The designs produced are more accurate
that after being viewed as 3D can be altered and tested for faults cheaply and so make
them easier to be produced. Then the use of robots in production lines means that boring
but essential repetitive tasks can be carried out accurately and quickly which may not be
possible for humans due to lack of motivation and tiredness. The nature of the
technology creates new products and new demands. The invention of the computer led
to a market in computerized games.
Even though technology can’t be cheap due to its complexity and rise in fixed costs, the
prices are falling. This is because of the volume of production that has spread fixed costs
and reduced unit costs of production. It is because businesses have merged for mass
production for a global market and so it has become easier to be effective, efficient and
fast. Since labour hasn’t increased due to the machines and capital intensity, the labour
productivity has increased and thus reduced unit costs.
The technology industry is a big human employer and at the same time has affected
human resources of many industries. There have been redundancies as certain staff
(e.g. workers on production levels) aren’t required. Changes of methods has replaced
people at all levels. But at the same time many new job opportunities have been created
(e.g. computer specialists and machine operators). There is de – skilling as certain skill
like designing and crafts are done by computers. But workers have become multi –
skilled as they become flexible so that they are able to work with the needs of the new
technology. It has caused changed attitudes to career choice and a rise in small
organizations as redundant people get together to employee themselves. Delayering in
organizational structures has occurred since computers have taken over roles of middle
management alongwith team working. It has created a shortage of computer engineers
and programmers while the acceptance of change has increased.
In marketing there has been a change in nature of products as well as an increase in
variety. The way we shop has changed like over the internet instead of going to retail
outlets. Pricing ways are different. First products are expensive but once they are
common in market, they become very cheap. Competition has increased and made
survival difficult for low technology firms. New ways of distribution have emerged as the
world becomes a single market and so delivery of products safely has become faster as
well as their availability has increased, then prices reduced while they remain fresh. The
high disposable income of some has meant large sales and a healthy entertainment,
holiday and leisure industry. Transactions are dealt with differently as bank accounts are
present and payments are made via debt and credit cards. There is an increase in home
banking. Health and medicine have improved considerably as many more life saving
drugs and surgeries can be done easily and so increase life spans.
However technology has –ve effects too. The major is the increasing need of strict data
protection as our data becomes compiled like personal interests, lifestyle and work. Data
legislation controls the spread of such data but has to change quickly to regulate new
ways of hacking and accessing data. The cost of software has increased due to the
speed with which it changes and becomes obsolete within months of being made and so
there are large costs of updating software incurred. Training costs are also high. The
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increased dependency on computer systems mean that system failure leads to a total
failure on production gives a bad reputation to business. The technology has been
resisted by workers representatives due to the insecurity of jobs that they create. Skills of
workers are outdated and either they are redundant or have to be retrained in other
skills. There are certain ill effects to health like computer glare and an increase in
dangerous radiations. There is a resistance to the continuous changes in technology
from old managers as their skills become obsolete. The management of change is also
difficult as it has led to management being exercised in lower levels of organization
which is particularly difficult in organizations
organizations with a culture of centralized authority. Due to
the increased competitiveness of markets, assets become obsolete quickly and a lot has
to be invested on new ones. The management has to time carefully the purchasing of
assets so that the business is atleast able to cover its cost. Technological literacy is still
a problem especially in third world countries where people aren’t even simple literates,
let alone computer literates.
MOTIVATION
Employees turnover  the rate at which labour leaves particular job.
Indicators of non-motivated staff
 low profit
 inefficiency
 low productivity
 more absenteeism
 laziness
 low product quality etc
Motivation
It is a desire that pushes an individual to work well. It is an influence that causes people
to behave in a particular way. There is positive and negative motivation. Positive
motivation related to monetary and non-monetary rewards and negative motivation is
referred to punishment and penalties.
Gains of Motivation
For the Workers For the organisation

1. keen to be at work 1. improves efficiency
2. takes pride in business 2. low absenteeism rates
performance 3. punctual and regular staff
3. displaced positive attitude 4. lower labour turnover
4. regular and punctual 5. minimum complains
5. accepts responsibility 6. lower level of accidents
6. willing to accept changes rather 7. workers respond to orders and
than resist them the leaders so it is easy to
7. shows highest level of implement strategies in turn to
commitment achieve desired objectives
8. gets personal satisfaction out of 8. improved quality of goods with
work less wastage
9. makes suggestion for 9. changes are accepted so the
improvement organisation becomes dynamic
10. higher productivity 10. contribution of ideas and higher
productivity
11. higher outputs and profits
Motivation
Q.1. Give the indicators of poor staff motivation.
Ans. There are several indicators which would show that

that low morale exists
exists amongst
employees.
 Absenteeism – Greater number of days that employee doesn’t attend to
the job due to no feet of loyalty to work.
 High labour turnover – More workers leave the job for others as they don’t
derive job satisfaction.
 Lateness – Employees aren’t bothered about punctuality and are take for
work.
 Low and falling labour productivity – workers don’t work hard or efficiently.
 Low product quality – Workers don’t concentrated on work and no quality
maintenance and faults occur.
 Low profit – Since productivity is low average cost are higher and output
is low so owners get less return.
Q.2. Make a note on productivity
Ans. Productivity is the number of units produced by each worker and is calculated by
the following formula:
total no. of output
Pr oducitivty per wor ker =
total no. of wor ker s
This is labour productivity. There are other types of productivity like capital
productivity and multi factor productivity which measures the efficiency of these
factors of production.
High loabour productivity may be an indicator of a well-motivated workforce. It is
because workers which derive job satisfaction and feel that they receive good
financial rewards are encouraged to work harder and efficiently. Well trained
workers due to on-the-job training and off-the-job training like workshops would
also be efficient.
Better machinery and technology also improves a firms productivity. It allows
output to increase in less have
h ave as production is quickes, less faulty and accurate.
The effectiveness of management also affects productivity. If managers are
efficient then they would allocate resources properly the deliveries of supplies &
raw materials would be on time and co-ordinator would be good.
Higher productivity results in lower costs of production and could lead to greater
profits if prices aren’t reduced by the same ratio as costs have decreased.
However, it must be remembered that the increase in productivity shouldn’t be at
the expense of quality. The quality must be maintained so that sales are higher
and customers are getting the value of their money and are satisfied.
MOTIVATIONAL THEORIES
1. F.W. Taylor’s Scientific Management (1911)

2. Elton’s Mayo’s Hawthorne Effect (1932)
3. Abraham Maslow’s Need Hierarchy (1954)
4. McGregor’s Theory X and Theory Y (1960)
5. Herzberg’s Two Factor Theory (1969)
Taylor’s Scientific Management

The approach of establishing an idea or a hypothesis, than standing and
recoding performance at work, altering work methods and re-recording
performance is known scientific management. Taylor’s scientific principles
designed to reduce inefficiencies of workers and manager. It creates a
partnership between managers and workers which reduces conflicts.
Approach
The concept of an economic man:
1. This theory revolves around the assumption that workers only motivated
through money or monetary rewards.
2. A fair day’s pay for a fair day’s work.
3. Bonuses andand rewards should be related with performance.
4. This is based on principles of work study. Work study is defined as the
system to find out the best possible way (with the exact nos. of employees
and time needed) to perform and complete a particular task in the most
efficient manner.
Scientific Methods
1. Select groups of workers.
2. Observe and note the key elements
3. record time
4. Eliminate unnecessary or redundant elements
5. Identify the quickest method
6. train workers accordingly
7. Include time for tests and breaks
8. Supervise the performance again
9. Paid according to the results
Drawbacks
1. It doesn’t take into account individual differences.
2. There is no guarantee that the best way will suit everyone.
3. It had considered people at work more as machines with financial needs
rather than humans with social needs.
4. Workers can get demotivated and frustrated.
5. A lot of competition amongst the colleagues can give rise to conflicts.
Maslows Need Hierarchy
1. When one need is satisfied then only individuals move onto the next level.
2. If one level of need is being satisfied then that category of needs will
become inferior or less important.
3. Self actualization, although people are capable of reaching this stage, is
practically very difficult to achieve.
4. Reversion is also possible e.g. if a businessman is working at self-esteem
needs but suddenly suffers from a great financial loss. He can come back
to safety & security needs.
Limitations of Maslows Theory

1. Very difficult to delivermine which level an individual accurately at.
2. Needs differ in individuals.
3. very difficult to determine whether a particular set of need has been
satisfied or not.
Mc-Gregors Theory X and Y
Theory X Theory Y
1. People dislike work and 1. People enjoy their work
will seek to avoid it. and seek responsibility of
2. Workers are un-ambitions, motivate properly.
lazy, irresponsible and not 2. They do not need to be
to be trusted. directly controlled all the
3. Workers have to be time.
controlled and directed by 3. Workers have many base
the management. need which includes
4. They require monetary monetary as well as social
rewards & money is their esteem and self-
largest motivator. actualization needs so they
should be given
appropriate rewards.
4. Management must create a
situation where workers
can show job knowledge.
Theory X Theory Y
Acceptance of Theory X Acceptance of Theory Y
1. Autocratic leadership 1. Democratic leadership
(authoritarian) and laissez fairee.
2. Traditional 2. More flexible
organisationals organizational
structures structure
3. Scientific management 3. Decentralised decision
4. centralized decision making
making 4. A search for
5. A stress on extensive appropriate ways of
rewards external i.e. motivating a
can be seen. workforce
5. Stess on intrusic /
factors of the
Hertzberg’s two factor Theory
1. Hygiene factors (dissatisfiers) (create dissatisfaction and must be eliminated)

 unfavourable or strict company policy
 bad relationship with the colleagues as well as supervisors
 poor working conditions
 inadequate salary and wage structure
 no opportunities for development
 lack of job security
 treatment workers receive on their job (unfavorable)
2. Motivators
 sense of achievement and recognition
 sharing of responsibility i.e. delegation
 liberty to perform the job
 opportunities of career advancement and promotion
 changes of self – development and grooming
 options of gaining more experience
 bonuses, allowances and other fringe benefits
3. Evaluation of Herzberg’s Theory

 some doubt that the result of Herzberg’s theory have had a significant
impact on business
 however, team working is now much more wider, spread with whole units
of work being delegated
 workers tend to be made much more responsible for the quality of then
own work
 Group meetings allow two ways communication are often favoured
 Above all there is little doubt that his work and the publicity given to the
research conclusions led to a hastening of the trends that may have
occurred much more slowly without his intervention
4. Elton Mayo’s Hawthorne Effect

Experiments were conducted on factory workers to determine how far – reaching
were the effects of changing working conditions on workers and their productivity.
 A control group was set up whose working conditions weren’t changed at
all
 Other groups were established that bad varying high tuning heating, rest
periods, and other working conditions.
The experiments were to determine the optimum working condition but the result
was surprising.
 Productivity rose in all groups (those who had bad as well as those who
had good condtions) including the control groups
This proved that:
 working conditions weren’t alone imp. in determining productivity
 other factors had to be investigated before conclusion
Other experiments were conducted an assembly hire workers
 changes were made at twelve – week intervals to rest period, canteen
food, payment systems, assembly layout & other conditions
 the new changes were firstly discussed with workers
 at the end, working conditions were returned to as they were before trial.
The result was a significant rise in output or productivity of workers.
5. Conclusions of Hawthorne Effect
 changes in working conditions and financial rewards have little no effect
on productivity
 when management consults with workers and takes interest in their work,
then motivation is improved
 working in teams and developing a team spirit can improve productivity
 there is +ve motivational effect when some control over their working lives
is given to workers such as breaks
 groups can establish their own targets and nouns and these can be
greatly influenced by the informal leaders of the group.
FINANCIAL REWARD AND NON-FINANCIAL REWARD
Financial Rewards
1. Time rate / hourly wage rate

2. Price rate
3. Salary
4. Commissions
5. Performance – related pay
6. Profit – sharing
7. Fringe benefits / parks
Non - financial Rewards
1. Job enlargement
2. Job rotation
3. Job enrichment
4. Team working
5. Quality circles
6. Target setting
7. Delegation
8. Appreciation and recognition by the organization (onwards)
Job enlargement – in those that are not too skilled like manufacturing firms – this
prevents monotony and makes it feel part of whole organization (job rotation)
Job enrichment could be promotions in same department and make it more detailed.
Team working – e.g. Matrix structure – share of ideas so creativity increases – social
needs are satisfied i.e. better relationship.
Conflicts can occur – delays occur – waste of time
Quality circle – Japanese management concept – meetings are concluded even of

workers on machines as they have hands on experience and can get suggestion to
improve anything in organisation so quality of products, services and public relations
improved.
Target setting (Management by objectives – MBC) set realistic objectives after

discussions and then communicate the aim.
This makes it clear to employees what they are to achieve i.e. what is required of
them. If you achieve a target you get rewards.
FINANCAIL REWARDS
Q. Explain what is meant by financial rewards and discuss with advantages and
disadvantages the following:
1. time rate
2. piece rate
3. performance – related pay
Ans. Financial rewards

rewards are those rewards in which payment is given to workers or
monetary rewards are given. These rewards are regarded as necessary for
motivation according to Taylor’s Scientific Management and Theory X by which
workers do work as a means to an end. Theory want the monetary rewards for
buying the needs of life like food, clothes, shelter and some wants.
The necessity of financial rewards is recognized by all theorists as means to live
a life, but the difference is over whether financial rewards are the only source of
motivation. They include, time-rate, piece-rate, salary, commission, performance
– related pay, profit – sharing and fringe – benefits.
TIME-RATE
This is monetary payment to the manual and clerical workforce according to the
time an individual spends on a job. Usually, an hourly wage rate is fixed
according to what other workers in the market receive for a particular job. This is
then multiplied by the number of hours worked. Payment is made weekly. It may
be that 35 hours a week is a fixed requirement which all workers must conform
too. However, if some more enthusiastic workers wok for a greater time then they
receive over-time which is at a slightly higher rate.
Advantages:
The major benefit is that it is very easy to calculate the wage that a worker would
receive for a week.
The worker doesn’t rush a job which proves extremely useful for specialist tasks
or difficult one as workers also maintain high quality standards since they know
the it doesn’t matter if they haven’t produced several units since wage is given
according to time.
Time – rate is also a guarantee of income and so makes work feel secure about
receiving wages. They know that they’d still get the pay even if production is
halted due to an unprediction breakdown in the process.
It is very suitable to give to workers whose output units cannot be determined
e.g. the value of the work of a doctor or a teacher is very difficult to decide. So
they get pay according to the time they spent. However, they receive annualized
payments.
They are also fairer than price-rates when situations exist in which employees
cannot control the speed at which they work (e.g. dependency on the speed of
machines).
Also it is easy to adjust the pay level according to the job status of the worker i.e.
the skills required may be different. So this rate is flexible to account for changes
of such differences.
Disadvantages:
The workers may delay their job in order to increase their work hours and get
higher pay. This may result in inefficiency and loss of productivity as workers laze
around and work slowly for overtime as high payment is made.
Also as there is no reward for working fast, the workforce may take too much
time to complete a job and so there may be need for additional supervision.
Then if the production is halted completely, the workers would still have to be
paid wages if they have come to work despite no untis being produced.
PRICE – RATE
This system is the giving of monetary rewards to the workers according to the
number of units produced by an individual.
A fixed rate of wage for every unit is given and so the total wage is found by
multiplying the rate by the output. This ensures that wages are paid only for the
work that they employees do. It is regarded as an incentive for the workforce as
the more they produce, the higher wages they get. This system is also known as
Payment by Result.
Advantages:
It is a very easy way to reward employees for whom the value of output can
easily be calculated, e.g. workers in a textile factory.
Workers are encouraged to work quickly to produce more and so there is high
productivity and no time wastage as workers don’t try to delay work.
The working atmosphere is highly competitive as each worker tries to produce
more in lesson time.
The cost of labour for each unit is determined beforehand and so the total costs
of production can be determined.
Therefore the setting of prices is easy.
Disadvantages:
For piece rate to be used fairly amongst all workers, the products being made
should be of the same type quality and standard and should require the same
skills. If each product is different, then piece rate is inappropriate.
It may also be that workers may compromise on the quality of goods in order to
rush through the job to produce a greater number of outputs for higher rewards.
In case of failure of machinery, the output produced would drop considerably and
workers who are willing to work and are present on the job will have no basic
salary to fall to and may have to go without wages until production starts again.
This aim fair for workers as it was an unavoidable situation.
Workers may decide to achieve a certain level of pay for themselves as sufficient
and so may not be motivated to work harder or faster. They would only work upto
a certain level and get the wages.
Workers may also become rigid by this system of pay as so may lose their
willingness to accept charges if it affect their level of pay.
Then it is also difficult to decide the best rate for each unit of output so that
workers get good wages. There is also a continuous trade union pressure hat
piece rate results in tower wages.
PERFORMANCE – RATED PAY

This scheme is used to reward workers who have performed well and reached
targets on time or exceeded the targets in addition to their basic salary, they get
an extra bonus or monetary reward. It is usually used to motivate employee
whose value of work cannot be judged quantitatively. Such employees are in the
lower and higher level of management.
Such a pay reflects the importance given to an individual employee and her
performance. For PRP to be possible an individual is given a target or set
objectives to be achieved annually. At the end of the year, an appraisal or
services of performance occurs by comparing it to the objectives worker is now
paid according to her placement in the perform category which is done by the
degree of achievement or exceeding of targets. Then the extra bonus is given.
Advantages:
PRP is a source of motivation to staff to be improve their performance and
efficiency in order to seek the extra financial rewards.
The annual appraisal provides a chance of feedback on the performance of
workers and whether they are performing to their fullest potential. But just once
an year isn’t enough to find out exactly where are employee stands and if its in
need of job enrichment then is it possible.
Since objectives are set for workers at an individual level, all of them feel a sense
of direction and purpose to work towards.
Disadvantages:
Since the seniors are appraising the work and giving rewards, it may be that the
employees feel an increased control over themselves, as seniors may not give
the bonus unless employees conform to them.
It is not guaranteed that additional financial rewards will motivate an employee. It
may be that employees don’t want more pay and to wouldn’t be motivated to
improve the performance.
Then if some workers receive frequented and high bonuses, the other employees
could accuse managers of favoritisms which negatively affects the relationship of
subordinates & managers.
Also due to the competition and rivalry to do better than others, the team spirit of
the organisation could be damaged due to jealousy of colleagues receiving
higher pay.
NON-FINANCIAL REWARDS
Q. Explain what is meant by non – financial rewards and explain the following:
1. job enlargement
2. quality circles
3. target setting
Ans. Non-financial rewards are those rewards that

that are given to workers to motivate
them but do not involve any monetary rewards. They are needed for the job
satisfaction of employees. They are required according to the motivation theories
of Herzberg’s two factor, McGregor’s Theory Y, Hawthorn’s effect and Maslows
need hierarchy for the workers social, self-esteem and self actualization needs.
These have proven that money alone is not an effective motivator and that
workers are not machines but have many other requirements.
It is also not possible to use individual reward scheme in teams. The non-
financial rewards include job enlargement, job rotation, job enrichment, team
working, quality circles, target setting, delegation and appreciation by the
organisation.
JOB ENLARGEMENT
It is the increase of the scope of the job so as to provide broader and deeper
tasks. It is for unskilled or semi-skilled workers as in manufacturing firms. It can
include both job rotation and job enrichment. Job rotation is when workers switch
jobs e.g. on a production line after a set time. This allows them to handle more
jobs and breaks the routine. Job enrichment is organizing work in such a way
that employees are able to use their fullest abilities and do work with lesser
supervision. They are given more responsibility. They are provided with tasks of
similar nature to original ones but more challenging. They may also be allowed to
take some decisions e.g. allowing the shopkeeper to arrange products on
shelves along with cleaning and keeping a record of their quantity.
Advantages:
Job enlargement provides variety to the workers and so they don’t get bored or
find their work monotonous.
They feel themselves a greater part of the process and business as they are
carrying out more than one task and may be encouraged to become more
efficient.
They may find that they are given responsibility and they could feel trusted which
may make them more loyal to the business.
As workers may be carrying out tasks related to the entire production process,
they would derive greater satisfaction of having seen the entire process along
with the end result.
As the workers have performed more tasks, they would have increased their
skills as well as gained greater experience and so increased their opportunities
for the future.
Since workers feel more satisfied with their job, there would be less labor
turnover and absenteeism and so the effieciency of the business would increase.
Disadvantages:
Even though productivity may increase, however, it may be countered by the
time taken for workers to learn and adjust to the new jobs during which
productivity would have been lost or slowed down.
Their motivation isn’t guaranteed. It may be that the additional task is as boring
as the one before which leaves no motivating factor.
Not all workers feel ready to do new jobs as they aren’t sure of their abilities and
whether they’d be able to perform the new tasks efficiently.
QUALITY CIRCLES
Quality circles are small groups of workers in the same area of production who
meet regularly to study and solve production problems. They not only deal with
the quality of product and its improvements but about the production process as
a whole and any problems with it. They are not led by a proper manager and so
are considered as informal meetings of workers. There may be several teams on
a single line. Each team tries to find the solutions to problems and presents their
researches and results to the management. The management may then
implement the best result not only in the production line but across the whole
organisation as per the nature of the solution.
Advantages:
• Quality circles allow the successful participation of the entire staff in the
decision – making.
• They provide responsibility to workers and offer many challenges to give
the workers a deeper sense of trust and satisfaction.
• They make the workers feel part of the organisation and workers are
more willing to work and follow targets that they have themselves helped
to decide.
• Workers have had hands-on experience and are in the best position to
understand the problems and so are best able to provide solutions to
exactly meet the situation and can therefore greatly improve efficiency of
the organisation.
Since the most successful circles are also rewarded by the management, this
would make workers feel appreciated and recognized.
Disadvantages:
• There may be time wastage if the groups call their meetings a bit too
frequently and keep on requesting changes.
• A feeling of jealousy may be created between the successful and other
groups that may affect the team spirit of the entire organization.
• The major limitation of Quality circles is the willingness of employees to
make them. Sometimes employees are not willing to take on the
responsibility or may just not willing to try to come up with ideas and be
creative.
TARGET – SETTING
It is related to the techniques of management by objectives (A2 topic). This is the
setting of targets for each division, department and individual by dividing the
overall aim of the organization.
This process should be undertaken after discussion and agreements with
workers at each level. This would enable the best possible delegation of
responsibility and authority. This is according to Theory Y where workers like
responsibility and wish to work. This enables greater motivation.
Advantages:
• As targets have been discussed with managers and workers, which
means that there is involvement of staff which is a great motivating force
as it makes employees feel part of the decisions.
• Also as managers and workers know exactly what they have to do they
feel a sense of direction and purpose? They are able to fully utilize their
time in the best manner possible. As they could see what they are doing,
they feel their importance and their value to the organization.
• Since all departments and individuals have objectives as their key focus,
they know exactly what they are aiming for. This should avoid any
conflicts and ensure a co-ordinate approach.
• The targets also act as a control. By comparing the work of the
employees with their set targets, their performance is known i.e. what
they have achieved by a particular date.
Disadvantages:
• The division of the overall aim all the way down to individual targets is
only possible after consultation with the entire workforce. This could prove
very time–consuming and slows down production until targets are set.
• New objectives are required all the time as targets become out dated
quickly. So if the economic environment changes then checking workers
performance with the fixed targets is pretty useless as targets have to be
updated in accordance with the economic changes.
• Setting targets doesn’t guarantee their fulfillment. Managers also have to
keep in mind the resource allocation and staff training so that the set
targets could actually be achieved.
MANAGEMENT AND LEADERSHIP
Definition
 Management is the attainment of organizational goals in an efficient and

effective manner by planning, organizing, coordinating, leading and
controlling the humans as well as artificial capital.
 It is the achievement of objectives with the help of effective utilization of
resources.
 Management is the art of getting things done through people
 Management is the art of getting people to do their work efficiently and
effectively to achieve the organizational objectives.
Managerial functions
1. Planning – deciding for future, setting & discussing objectives, formulating

tactics.
2. Organizing – capitalize and prioritize resources, making departments.
3. Staffing – hire people according to requirements.
4. Coordinating – getting proper communication to all departments & getting
every one orientated.
5. Leading / Commanding
6. Controlling – (a) setting targets / standards (b) measuring performance
according to
to set standards (c) analyzing the results
Management process
1. Setting objectives
2. Organizing the work
3. Motivating employees
4. Job measurement
5. Developing people – training, feedback, grooming, attend workshops.
Management roles
1. Interpersonal roles
2. Information roles
3. Decision-making roles
1. Interpersonal – managers are a link between workers and organization as

well as customers and organisation like see to their problems and suggestion
as well as feedback.
2. Decision–making – decisions have to be taken day in day out and mostly for
the employees that who is efficient? How to motivate them or punish them as
well as when to hold the decision.
Managers act on the behalf of the owners, however they are the leaders and
they should work in partnership with the subordinates also. They ensure the
corporate values in an organisation and they are responsible for the
achievement of objectives.
LEADERSHIP
Definition
Leadership is the art or process of influencing people so that they perform the assigned
tasks willing by, effectively and efficiently. Its is the role adopted by managers when
bending workers towards the goals of the organisation. It is the ability to command (in an
organisation)
Qualities of a good leader
1. Positive self-image and natural self-confidence.

2. Ambitions – they have a desire to succeed.
3. Able to get to the core of the other problems – intelligent.
4. Creative thinkers.
5. Innovative
6. Charismatic and dynamic – good personality.
7. Inspiring for other.
8. Generally expert in one field and well informed in others.
9. Effective communication skills.
10. Good analytical abilities.
11. Can delegate effectively.
12. Decision making power.
13. Organizational ability.
14. Risk bearing capacity – willing to risks and face the consequences.
15. Motivating for others.
16. Role models for their subordinates.
17. Dependable.
18. Dominant
19. Energetic
20. Persistent
Difference between managers and leaders
MANAGERS LEADERS
• Functionaries • Innovators
• Protect their operations • Advance their operations
• Accept responsibility • Seek responsibility
• Control Employees • Trust employees
• Competent • Creative
• Specialist • Flexible
• Minimize risk • Take calculated risks
• Accept speaking opportunities • Generate speaking opportunities
• Set reasonable goals • Set challenging goals
• Pacify • Challenge
• Strive for a comfortable working • Strive for exciting working
environment environment
• Use power cautiously • Use power forcefully
• Delegate cautiously • Delegate enthusiastically
enthusiastically
• View workers as employees • View workers as potential
followers
LEADERSHIP
Important leadership positions in a firm

 Director
 Manager
 Supervisor – e.g. of Factory floors
 Workers’ Representatives / Leader of the Trade Union
Leadership Styles
1. Autocratic / Authoritarian leadership
2. paternalistic leadership
3. democratic leadership Persuasive
4. laissez–faire leadership Constructive
3.  Persuasive – when leader leads the employees by telling then the

negative
Positive and allowing them to select.
4.  Appropriate for creative business – architecture – art galleries – artists

 Scientists given broad guidance
Informal Leaders
They are the leaders of informal organisation.
 They are the people who have the ability to lead without formal power perhaps
because of their experience, personality or special knowledge. They may have
more influence over the activities of the group then formal leaders especially
when the formal leaders are inefficient.
Factors affecting the leadership styles

 type of the workforce – skilled or unskilled
 personality of the leader
 group personality
 group size
 the task itself or the nature of the job
 the tradition of the organisation or its corporate culture
 time factor
Autocratic / Authoritarian Leadership

 leader retains all authority and responsibility
 takes all decisions
 gives little information to staff
 assign people to clearly defined tasks
 primarily a downward flow or one – way communication
 requires greater supervision of workers who have very limited knowledge
of the business
 expects compliance from workers
 such leadership results in prompt, orderly and predictable performance.
Drawbacks
 de-motivates staff who want to contribute and accept responsibility
 stifles individual initiative as no chance to participate
 decisions do not benefit from staff input who can offer valuable hands on
experience
Possible Applications
 defense forces and police where quick decisions are needed and the
‘scope’ for ‘discussion’ must be limited
 in times of crisis when decisive action might be needed to limit damage to
the business or danger to others
Paternalistic Leadership
 they are father–like leaders
 similar to autocratic leadership except importance to welfare of workers is
given
 managers do what they think is best for their workers
 some consultation might take place but final decisions are taken by the
managers
 some fearible chances of two–way communication
Drawbacks
 some workers will be dissatisfied with the apparent attempts from leader
to consult, while not having any real power or influence
 experienced–workers will want more delegated authority
Applications
 used by managers who have a genuine concern for workers interests but
feel that managers know best in the end. When workers are young,
unskilled and untrained, this might be an appropriate style.
Laissez–Fire Leadership
 means to let them do it
 managers delegate virtually all authority and decision making powers
 relaxed atmosphere where employees carry out activities freely to the
best of their abilities within broad limits
 permits self–starters to do things as they see fit without interference
Drawbacks
 workers may not appreciate the lack of structure and direction in their
work as this could lead to a loss of security
 the lack of feedback – as managers may not be closely monitoring
progress – may be de-motivating
Applications
 when managers are too busy (or lazy) to intervene
 where the work requires creativity like architecture
 appropriate in research institutions where experts are more likely to arrive
at solutions when not constrained by narrow rules or management
controls
Demcoratic Leadership
 encouraging participation in decision making
 could be • Persuasive
• leader has made a decision but takes time to persuade
others that it is a good idea
• Consultative
• Leaders consult others about their views before making
a decision. The decision takes into account the views
 leaders delegates a great deal of authority while retaining responsibility
 work is divided and assigned on basis of participatory decision–making
 workers given information about business to allow full staff involvement
 active two-way communication to allow staff feedback
 enhances personal commitment and gives higher morale
Drawbacks
 consultation is too time–consuming and at times quick decisions needed
 certain issues such as job losses are too sensitive or new product
development are too secret to be consulted
Applications
 it is most likely to be useful in business that expect workers to contribute
fully to the production and decision–making process, there by satisfying
their higher order needs
 an experienced and flexible workforce will be likely to benefit most from
this style
 in situations that demand a new way of thinking or new solution then staff
input can be very valuable
Democratic leadership style:
⇒ pervasive – convincing to choose a particular option

⇒ consultative – discussing all options
MOTIVATIONAL THEORIES
Motivation is the process by which workers are induced or given the incentive to work
harder to raise their productivity to achieve the objectives of the firm e.g. through
monetary and non-monetary rewards:
Different Theories
A. Taylor’s Scientific Management

⇒ work study
→ method study & work measurement
B. McGregor’s Theory X and Theory Y
⇒ X – autocratic, centralization
⇒ Y – democratic, decentralization, delegation
C. Maslows Need Hierarchy
⇒ Self – actualization
⇒ Self - esteem
⇒ Social Needs
⇒ Social Needs
⇒ Security Needs
⇒ Physiological Needs
D. Herzb’s Two – Factory Theory
⇒ motivators
⇒ hygiene factors
E. Elton Mayo’s Hawthone Effect
⇒ working conditions is not essential for productivity
⇒ involvement of workers in decision – making is necessary
9707/1,2 – Business Studies Unit 2: People in Organisations
A Levels
HUMAN RESOURCE MANAGEMENT
Definition
It is the modern term used for the personnel function of the organisation which includes a wide
range of responsibilities
responsibilities such as recruitment, selection, training and appraising the employees in
order to increase this efficiency so that they can work together to achieve the organisation goals.
HRM is broader and more for reaching in scope as compared to the traditional personnel
department.
Q. Explain the difference between the traditional personnel department and human
resource management.
Ans. The human

human resource
resource management
management (HRM) has evolved evolved from the personnel department
and its main purpose is to recruit, train and utilize the personnel of the business is such a
way so to give maximum productivity.
However, there are major differences between the two since the HRM is broader and
more far – reaching while personnel department was responsible just for recruiting,
training, discipline and welfare of staff.
TRADITIONAL PERSONNEL DEPT. HUMAN RESOURCE MGMT.
• Advisory and administrative • Strategic

• Not central to the organisation • Seen as essential
• Mediating role between • A central management role
management and workforce • All managers and supervisors are
• The preservation of specialists human resource managers
• Emphasis on written rules and • Stress on flexibility
procedures • Consultation and participation
• Collective bargaining & • Team–based structure
negotiations • Individual rewards and benefits
• Management hierarchy • Loosely defined jobs
• Collective rewards & benefits • Employees are to be nurtured
• Tightly defined jobs • The learning organization
• Employees must be monitored
• Controlled access to training
Due to the above – mentioned factors, the traditional personnel departments tended to be:
• rather bureaucratic in their approach with an inflexible approach to staff

issues
• focused on recruitment, selection and discipline rather than development and
training
• reluctant to give any HR roles to any other functional managers
However, the human resource management focuses on

planning the workforce need of the business
•
recuriting and selecting appropriate staff, using a variety of techniques

•
appraising, training and developing

• developing staff at every stage of their careers
developing appropriate pay systems
• for different categories of staff
measuring and monitoring staff performance
•
involving all managers in the development of their staff – emphasizing that

•
this is not just the job the HR department

A Levels
Functions of human resource management:

management:
1. Human resource planning or workforce planning

2. Recruitment and selection
3. training and development
4. performance appraisal
5. developing appropriate
appropriat e rewards and pay systems
6. Involving all managers in the development
development of their staff.
Other Functions
1. Advisory and guidance roles

2. drawing up contracts of employment
3. discipline and dismissal of employee
4. Informing staff about redundancies
redundancies
Human Resource Planning
Systematic process of planning human resources requirement for the organisation.

organisation.
 Estimates demands for numbers and skills of employees, depends

depen ds on org
objectives e.g. expansion, diversification
diversification
 Estimates existing supply
 Accounts for e.g. staff learning, productivity, gains, new working practices,
promotions
 Assess external labour market e.g. availability of employees in the area
 Take action e.g. train, recircuit, transfer, make redundancies, promote etc.
Training and development
The key objectives are:

1. to help new employee reach the level of performance
performanc e expected from an experienced
worker
2. to provide a wide pool of skills for the organisation
organisation
3. to develop a knowledgeable,
knowledgeable, committed and informed workforce
4. to deliver high quality services
5. training bridges the gap between the actual performance,
performance , knowledges and skills and
the desired performance, knowledge and skills
Types of training
1. Induction training
2. on–the– job training
3. off–the– job training
A Levels
Limitations of Training
1. time–consuming
2. expensive – payment for travel
– costs of preparing
preparing presentation
3. trained employees can leave the organisation and this fear makes managers hesitant
Prevention
 sharing of costs between business and workers
 make a contract – workers can’t leave the job after training for a certain time
 if contract is broken, then workers have to pay the penalty
performance Appraisal
Objectives of performance appraisal are:
1. to improve the performance of the employee

2. to provide feedback to the individuals
individuals about their performance
3. to recognize the future training needs
4. to develop individuals’
individuals’ corporate careers
5. to identify employees for advancements
advancements and promotions
6. to identify any problem areas in the staff
Factors influencing Organisations performance appraisal
output per certain time period

1. labor productivity =
total no. of wor ker s (employee)
it can also be calculated by the value of output which would show the contribution of
each employee according to the money it is giving to the business. Then the wages of
employees could be determined if they are according to the value.
In service sector, productivity is measured only by the value of goods e.g. in hotel, the
rooms which are vacant are useless or wastage of the productivity
2. Late–coming – Not punctual
3. Absenteeism rate
4. Labor turnover = No. of employees leaving the organisation in
a particular period of time × 100
No. of total employees in that particular time
that were hired (Av. no. of people employed)
This gives the to percentage of people leaving the organisation
5. Waste levels – the greater the wastage i.e. damaged good so this means that employees
are careless
6. Customer complaints
7. Achievement of targets
A Levels
Methods or ways to improve performance

Continuous appraisal on regular basis
Continuous training
Encouraging Quality circles
Cell production and autonomous work groups
Other financial and non-financial
non-financial rewards
 Sales meeting, marketing staff meeting – regular basis

 Business environment
environment is dynamic – skills of staff should be updated
 Quality circles – part of TQM – Total Quality Management quality management is
responsibility
responsibility of all departments
Labor Management Relations Trade Unions

Trade unions can be defined as an organization of employees with the objective of protecting
their interests at work.
Functions of Trade Unions

Negotiating with the employers on behalf of all the members about the appropriate pay and
working conditions at job as well as their job security. This process is known as collective
bargaining.
Acting as a channel of communication between employers and employees so that grievances

can be heard and views expressed.
Providing assistance to individual members about their work–related

work–related problems.
Helping employees participate in the process of decision making.

 Protecting discrimination, unfairness
Providing a source of support and legal representation in case of a dispute between the
employers and the employees
Benefits to employers
1. Saves time as management have only to deal with trade union instead of all workers.
2. Managers also
also work more
more efficiently due to the pressure of
of trade unions.
unions.
3. Workers work harder / more
more motivated.
Types of Trade Union
1. Crafts Union – workers only to a particular skill

2. Industrial
Industria l Union – unskilled labor / manual work
3. General Unions – very big / manual but from several industries
4. White – collar Unions – for service Industries / clerical / administration
administration insurance
Professional / Occupational Unions – for highly professionally qualified unions – medical /
engineer / educational – related to one particular field.
TRADE UNIONS
Privatization is the transfer of public sector resources to the private sector. It is the
process of selling the state owned and control
TRADE UNIONS
Trade unions can be defined as all organizations of employers with the objective of
protecting their interests at work and negotiating their problems as the top management.
FUNCTIONS OF TRADE
1. Negotiating with the employees on behalf of the members about the appropriate
pay and working conditions at job as well as the job security issues. This process
is known as collective bargaining.
2. Acting as a channel of communication between employees and employers so
that grievances can be heard and views can be expressed.
3. Providing assistance to individual members about their work related problems.
4. Helping employees participate with the decision making process.
5. Sources of support and legal representation in case of a dispute with the
employers.
TYPES OF TRADE UNIONS
1. Craft unions
2. Industrial unions
3. General union
4. White–collar union
5. Occupational or professional unions / association
APPROACHES OF LABOUR – MANAGEMENT RELATIONS
1. Autocratic management style (take it or leave it attitude with workers)

2. Collective Bargaining with powerful unions and major employers and their
associations.
3. Co-ordination between labour and management in the recognition – that
successful competitive businesses will ultimately be beneficial to the owners,
managers and workers.
* Autocratic generally do not allow trade unions – only possible in compact and
closed organizations. Lock out by employers i.e. not allowing workers to work.
THREE LEVELS OF COLLECTIVE BARGAINING
1. Individual or team level (small level bargaining)

2. At a business level (of firms or different branches)
3. At a national level (bargaining with govt. officials)
ARBITRATION: (when collective bargaining fails)

It is to resolve industrial disputes. It is process where a third party tries to resolve the
industrial disputes by offering a compromise. It can be approached by either the
employer or the trade union.
E.g. ACAS – Advisory, Conciliation and Arbitration Services. A Case Study of Trade
Union’s Development (PS) UK Experience
JOB EVALUATION:
This is a formal process of comparing jobs so that a rank order is obtained based upon
the demands of each job.
Delegation
Delegation means the assigning of tasks to others. As a business grows and expands, the
scope of operational activities becomes more elaborate and complex. Therefore, for
efficient and effective expansion, day-to-day operational tasks need to be delegated to
subordinates so that the senior management can then focus on major strategic and policy
related decisions. However, the senior management should monitor the performance of
subordinates to ensure that work is carried out in accordance with company goals and
policies. This would require two-way communication and reporting systems. Delegation
also acts as a non-monetary motivating factor for willing (Theory Y) employees because
they are encouraged by more responsibility and importance. Thus, delegation enables
effective growth and expansion because workload can be shared.
Difficulties in delegation can occur either if managers are reluctant to delegate work to
others or if subordinates are reluctant to accept delegation. Managers may be reluctant to
delegate due to job insecurity i.e. fear of being replaced by subordinates, or they might
not have confidence in their subordinates’ capability. In the long run, this would severely
limit what managers can accomplish.
On the other hand, subordinates might be reluctant to accept delegation either because
they might be reluctant to work hard (Theory X), or they might fear criticism or even
dismissal due to mistakes. Lack of training might also cause reluctance among
subordinates to accept delegation. These problems can be resolved by the HRM
department by devising suitable motivation schemes and incentive plans for employees.
Human Resource Planning (H.R.P)
Human Resource Planning (H.R.P) is the process of forecasting the workforce
requirements of the business for future years.
It looks at how many employees the business will require in the future, as well as the type
of employee that will be required (e.g. graduate trainees, skilled-manual and supervisors).
H.R.P. also ensures that the ‘right’ employee is in the ‘right’ job, to ensure maximum
efficiency and effectiveness of the workforce.
Clearly the process of H.R.P. 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. This can
be done in a number of ways:
1. Using past data (e.g. if the workforce has grown at 4% per year over the past 3 years,
this trend may well continue).
2. Analysing the expected levels of customer demand and sales (e.g. more employees will
be required if the number of customer orders is estimated to rise significantly).
3. Estimating the level of labour turnover. For example, if the number of employees that
are expected to leave the business next year is 50 (due to retirement or transfers), then the
business will have to recruit many new employees to replace those that are leaving.
4. 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).
5. Expected changes in working practices. For example, if a manufacturing business is

wishing to change its production technique from labour-intensive to capital-intensive,
then it is not likely to require many new employees in the future.
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. This can be done
by promoting those employees who have already demonstrated their potential and
effectiveness in their current posts.
These employees have the advantage of already knowing about the systems and the
routines of the business, but they would still require the relevant training and
development in order to prepare them for their new, more senior positions.
Alternatively, the business may decide to fill these (and more junior) positions from
outside the business.
There are a number of factors, however, that will affect the availability of external
labour for a business:
1. The rate of unemployment in the area.
2. The extent of the infrastructure in the area (e.g. price and availability of housing or
availability of public transport).
3. Government incentives and subsidies (paying the training costs for the business).
4. The availability of workers with the necessary skills and qualifications.
5. The number of competitors in the area.
However, there are a number of problems associated with Human Resource

Planning, including:
1. Will the ‘new’ employees mix effectively with the existing workforce?
2. Changes in the external environment (e.g. a recession) could lead to the business
having to make redundant several of the recently-appointed employees.
It will always be difficult for a business to accurately forecast the number of new
employees that it will require, because both the business-world and the internal
requirements of the organization are very dynamic.
Management by Objectives
What is MBO?
Management by objectives (MBO) is a systematic and organized approach that allows
management to focus on achievable goals and to attain the best possible results from available
resources. It aims to increase organizational performance by aligning goals and subordinate
objectives throughout the organization. Ideally, employees get strong input to identify their
objectives, time lines for completion, etc. MBO includes ongoing tracking and feedback in the
process to reach objectives.
MBO was first outlined by Peter Drucker in 1954 in his book 'The Practice of Management'. In
the 90s, Peter Drucker himself decreased the significance of this organization management
method, when he said: "It's just another tool. It is not the great cure for management
inefficiency... Management by Objectives works if you know the objectives,
objectives, 90% of the time you
don't."
Core Concepts
According to Drucker managers should "avoid the activity trap", getting so involved in their day
to day activities that they forget their main purpose or objective. Instead of just a few top-
managers,
managers , all managers should:
• participate in the strategic planning process, in order to improve the implementability of
the plan, and
• implement a range of performance systems, designed to help the organization stay on the
right track.
It is all too easy for managers to fail to outline and agree with their subordinates what it is that
everyone is trying to achieve. MBO is a process that requires precise written description of goals
and timelines for their monitoring and completion. It is a sensible substitute for just good
intentions. The process requires that the manager and the subordinate agree to what the employee
must attempt to achieve in the period ahead and it is important for employees to believe in the
objectives and understand what they are. Thereafter, managers and employees should regularly
communicate to ensure that the objectives are being met as agreed and will be completed on
time. Reliable management information systems (MIS) are needed to establish relevant
objectives and monitor their penetration across the organization.
Organizations have scarce resources and so MBO ultimately helps to achieve the best resource
allocation effort.
MBO is often achieved using set targets or goals. MBO introduced the SMART criteria i.e.
objectives for MBO must be Specific, Measurable, Agreed, Realistic and Time-specific.
Topic: Motivation - Theories
There are a number of different views as to what motivates workers. The most commonly held views or theories are
discussed below and have been developed over the last 100 years or so. Unfortunately these theories do not all reach
the same conclusions. Therefore, the HRM department needs to rely on a combination of these theories in order to
devise varied motivation schemes from time to time and for employees at different positions and nature of job.
Taylor
Frederick Winslow Taylor (1856 – 1917) put forward the idea that workers are motivated mainly by pay. His Theory
of Scientific Management argued the following:
Workers do not naturally enjoy work and so need close supervision and control
Therefore managers should break down production into a series of small tasks
Workers should then be given appropriate training and tools so they can work as efficiently as possible on one set
task.
Workers are then paid according to the number of items they produce in a set period of time- piece-rate pay.
As a result workers are encouraged to work hard and maximize their productivity.
Taylor’s methods were widely adopted as businesses saw the benefits of increased productivity levels and lower unit
costs. The most notably advocate was Henry Ford who used them to design the first ever production line, making
Ford cars. This was the start of the era of mass production.
Taylor’s approach has close links with the concept of an autocratic management style (managers take all the
decisions and simply give orders to those below them) and Macgregor’s Theory X approach to workers (workers are
viewed as lazy and wish to avoid responsibility).
However workers soon came to dislike Taylor’s approach as they were only given boring, repetitive tasks to carry
out and were being treated little better than human machines. Firms could also afford to lay off workers as
productivity levels increased. This led to an increase in strikes and other forms of industrial action by dis-satisfied
workers.
McGregor
According to McGregor, workers can be classified into two categories, Theory X and Theory Y.
Theory X type workers basically dislike work and are therefore reluctant to work hard. Money is the only motivator
for them but even then they have to be supervised and pushed to work hard. The threat of being dismissed for poor
performance may be necessary as a way of getting such employees to work productively.
Theory Y type w orkers are self-motivated and derive pleasure from working. While monetary benefits are
important, it isn’t the only motivator for them because they are motivated by more work responsibility as it makes
them feel important.
Mayo (Hawthorne Effect)
Elton Mayo (1880 – 1949) believed that workers are not just concerned with money but could be better motivated by
having their social needs met whilst at work (something that Taylor ignored). He introduced the Human Relation
School of thought, which focused on managers taking more of an interest in the workers, treating them as people
who have worthwhile opinions and realising that workers enjoy interacting together.
Mayo conducted a series of experiments at the Hawthorne factory of the Western Electric Company in Chicago
He isolated two groups of women workers and studied the effect on their productivity levels of changing factors
such as lighting and working conditions.
He expected to see productivity levels decline as lighting or other conditions became progressively worse
What he actually discovered surprised him: whatever the change in lighting or working conditions, the productivity
levels of the workers improved or remained the same.
From this Mayo concluded that workers are best motivated by:
Better communication between managers and workers ( Hawthorne workers were consulted over the experiments
and also had the opportunity to give feedback)
Greater manager involvement in employees working lives ( Hawthorne workers responded to the increased level
of attention they were receiving)
Working in groups or teams. ( Hawthorne workers did not previously regularly work in teams)
In practice therefore businesses should re-organise production to encourage greater use of team working and
introduce personnel departments to encourage greater manager involvement in looking after employees’ interests.
His theory most closely fits in with a paternalistic style of management.
Maslow
Abraham Maslow (1908 – 1970) along with Frederick Herzberg introduced the Neo-Human Relations School in the
1950’s, which focused on the psychological needs of employees. Maslow put forward a theory that there are five
levels of human needs which employees need to have fulfilled at work.
All of the needs are structured into a hierarchy and only once a lower level of need has been fully met, would a
worker be motivated by the opportunity of having the next need up in the hierarchy satisfied. For example a person
who is dying of hunger will be motivated to achieve a basic wage in order to buy food before worrying about having
a secure job contract or the respect of others.
A business should therefore offer different incentives to workers in order to help them fulfill each need in turn and
progress up the hierarchy. Managers should also recognize that workers are not all motivated in the same way and
do not all move up the hierarchy at the same pace. They may therefore have to offer a different set of incentives
from worker to worker.
Herzberg
Frederick Herzberg (1923-) had close links with Maslow and believed in a two-factor theory of motivation. He
argued that there were certain factors that a business could introduce that would directly motivate employees to
(Motivators).
work harder (Motivators ). However there were also factors that would de-motivate an employee if not present but
employees to work harder ( Hygiene factors)
would not in themselves actually motivate employees factors)
Motivators are more concerned with the actual job itself. For instance how interesting the work is and how much
opportunity it gives for extra responsibility, recognition and promotion. Hygiene factors are factors which ‘surround
the job’ rather than the job itself. For example a worker will only turn up to work if a business has provided a
reasonable level of pay and safe working conditions but these factors will not make him work harder at his job once
he is there. Importantly Herzberg viewed pay as a hygiene factor which is in direct contrast to Taylor who viewed
pay, and piece-rate in particular
Herzberg believed that businesses should motivate employees by adopting a democratic approach to management
and by improving the nature and content of the actual job through certain methods. Some of the methods managers
could use to achieve this are:
Job enlargement – workers being given a greater variety of tasks to perform (not necessarily more challenging)
which should make the work more interesting.
Job enrichment - involves workers being given a wider range of more complex, interesting and challenging tasks
surrounding a complete unit of work. This should give a greater sense of achievement.
Empowerment means delegating more power to employees to make their own decisions over areas of their
working life.
Personnel Effectiveness
Many businesses spend a significant proportion of their total costs on their workforce (e.g. interviewing costs, training, pay,
and fringe benefits). Businesses will, therefore, 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.
There are four main measures that a business can use in order to measure the effectiveness of its employees:
Turnover . This measures the number of employees who leave a business per year, expressed as a percentage of
1. Labour Turnover.
the total number of people employed. It is calculated using the following formula:
Labour turnover = Number of employees that leave per year x 100

Total number of staff employed
A high labour turnover rate could be a sign that the workforce have low levels of job satisfaction and motivation. This could be
due to poor wages, poor management techniques, or better remuneration packages being offered by competitors. This high rate
will inevitably lead to the business having to spend a large amount of money on recruitment and training of new employees.
Absenteeism . This measures the proportion of the workforce who are absent from work in a particular period of time. It is
2. Absenteeism.
calculated using the following formula:
Number of employees absent per period x 100

Absenteeism =
Ideally, the business would wish the figure to be as low as possible, since a high figure could indicate that the employees have
low rates of morale, job satisfaction and motivation.
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.
3. Labour Productivity.
Productivity . This reflects the efficiency of the workforce, and it is measured by the amount of output per worker.
It is calculated using the following formula:
Labour Productivity = Total output

Total number of workers
It can be argued that labour productivity is the most important measure of employee effectiveness, since it directly affects the
average cost of production and, therefore, the competitiveness of the business.
An increase in labour productivity will benefit the business since it means that more output can be produced for a given
amount of inputs, hence the production cost per unit will fall.
4. Waste levels.
levels . ‘Waste’ products refers to lost and damaged raw materials, poor quality output which has to be reworked,
and output which has to be discarded due to its poor workmanship. It is calculated using the following formula:
Quantity of material wasted

If a business has a high percentage of ‘waste’ products, then this could be due to a poorly trained workforce with low levels of
both motivation and job satisfaction. In this case, the business should ensure that the employees are all adequately trained for
their specific tasks, and investigate any other reasons for the poor quality of the output.
It is vital that the reasons for this are discovered quickly, since the effect on customer loyalty and reputation could be
3. Labour Productivity.
Productivity . This reflects the efficiency of the workforce, and it is measured by the amount of output per worker.
It is calculated using the following formula:
Labour Productivity = Total output

Total number of workers
It can be argued that labour productivity is the most important measure of employee effectiveness, since it directly affects the
average cost of production and, therefore, the competitiveness of the business.
An increase in labour productivity will benefit the business since it means that more output can be produced for a given
amount of inputs, hence the production cost per unit will fall.
4. Waste levels.
levels . ‘Waste’ products refers to lost and damaged raw materials, poor quality output which has to be reworked,
and output which has to be discarded due to its poor workmanship. It is calculated using the following formula:
Quantity of material wasted

If a business has a high percentage of ‘waste’ products, then this could be due to a poorly trained workforce with low levels of
both motivation and job satisfaction. In this case, the business should ensure that the employees are all adequately trained for
their specific tasks, and investigate any other reasons for the poor quality of the output.
It is vital that the reasons for this are discovered quickly, since the effect on customer loyalty and reputation could be
disastrous if the business supplies poor quality output to its customers.
OPERATIONS MANAGEMENT (PRODCUTION MANAGEMENT)

Production takes place when a business takes input, carries out a production process and
produces output. In other words it is the conversion of resources such as raw materials or
components into goods and services. Production can be done at primary, secondary or tertiary
levels.
Inputs Production Outputs

Land Process Goods
Raw Labour Services
Materials Capital Conversion
Conve rsion
Components Enterprise
Operations management is a wide range term which indicates the management of production
process. It deals with issues like what to produce, what production methods to be used, how to
control quality, how to maintain inventory or stock, location and size of the firm and how to make
production more efficient.
ADDED VALUE OR VALUE ADDED

It is the difference between the cost of bought in components and the price charged for the
OPERATIONS MANAGEMENT (PRODCUTION MANAGEMENT)
Production takes place when a business takes input, carries out a production process and
produces output. In other words it is the conversion of resources such as raw materials or
components into goods and services. Production can be done at primary, secondary or tertiary
levels.
Inputs Production Outputs

Land Process Goods
Raw Labour Services
Materials Capital Conversion
Conve rsion
Components Enterprise
Operations management is a wide range term which indicates the management of production
process. It deals with issues like what to produce, what production methods to be used, how to
control quality, how to maintain inventory or stock, location and size of the firm and how to make
production more efficient.
ADDED VALUE OR VALUE ADDED

It is the difference between the cost of bought in components and the price charged for the
finished product. Value added is not the same as profit. To calculate profit, we need to subtract
wages (labour costs) financial costs and overheads. Value added can be calculated by the
following formula:
Value = Sales – External
added revenue Expenditure
External expenditure does not include the cost of land, labour and capital of the organization.
IMPORTANCE OF OPERATIONS MANAGEMENT

One major reason for the growing importance of operation management is the need for firms the
compete more effectively in the market. To become the leader of the market, most areas of
concern revolve around the ask and quality of production. With the help of operations
management, firms produce better quality products at reasonable costs and can get a chance of
gaining more market share.
LOCATION OF THE FIRM

Location is the general area selected for a particular business. Its choice is likely to involve a
detailed process of analyzing alternatives through investment appraisal and other cost benefit
analysis.
Industrial location is the geographic positioning of our operation in relation to its customers
resources, employers, employees and other markets organizations faces problems in finding out
the best location for their business and choice can be critical for success. Location decisions also
depend upon the type and size of the business. The best location is one which has comparatively
low cost of production and therefore should provide the opportunity to maximize return on
investments in terms of sales and profits.
FACTORS INFLUENCING THE LOCATION (OF BUSINESS) DECISION

Types:
Quantitative – tax, cost, etc
Qualitative – availability of labour, legal cultural
1. Population and demand in the market
2. Number and location of competitors
3. Availability and cost of labour
4. Availability and cost of raw materials
5. Degree of government intervention
6. Rent and cost of land
7. Physical features, weather and quality of land
8. Personal preference and interest of the owners
9. Industrial inertia – locating in a congested area where there are already several
similar industries
10. External economies of scale
11. Availability of infrastructure, transportation and communication facilities
12. Availability of natural resources and utilities
13. Financial incentives
 by govt. as regional policy grants
 profits more, cash surplus, loans are easy
ISSUES REGARDING INTERNATIONAL LOCATION
A multinational organization has to make key decisions about location as they are dealing with a
wide range of local and international markets. Following issues are considered while making this
decision:
1. Trade barriers
2. Exchange rates
3. Political stability
4. Legal boundaries
5. Language and cultural barriers
6. Ethical considerations
7. Market opportunities
8. Availability of labour
9. Financial incentives
10. To build a strong corporate image worldwide
Multinationals are growing very rapidly and represent a significant source of industrial
development in countries throughout the world. Benefits of multinationals to host countries are as
follows:
1. increased employment
2. GDP increases
3. economic growth
4. standard of living
5. increased competition
6. improves quality and efficiency
7. controls prices
8. increases variety and choices
9. technology transfer
10. better trained labour
11. revenue to the government
12. foreign investments increase
13. relations between host and guest countries improve politically and economically
14. balance of payment surplus
OPERATIONS MANAGEMENT
PRODUCTIVITY
PRODUCTION
Production is the measured quantity of output that a firm produces in a given period of time.
EFFICIENCY
Efficiency is how well resources such as raw material, labour and capital can be used to produce
a product or a service. Efficiency can be measured through the following ways
Output per period
1. labour productivity (output per worker) =
labour employed in that period
2. capital productivity (output per unit of capital)

Output per period
=
quantity / value of capital employed in that period
3. multi factor productivity =

Output per period
cos ts of (raw material + labour + capital ) employed in that periods
current output
4. capacity utilization = 100
×
Max. capacity
5. added value = sales = external expenditure
PRODUCTIVITY
It is the means of the ratio of output to any of the firm’s inputs. Productivity is an efficiency
measure. If a firm becomes more productive, it becomes more efficient. Following are the ways in
which productivity levels can be increased.
1. improve the training of staff to raise skill levels.

2. purchase more technologically advanced equipment to increase the capital
productivity
3. improve employee motivation
4. change the layout of work
5. improve working conditions
6. more efficient management
Raising productivity is not always a guarantee for success. It does not crate demand among the
customers so it is the quality of management which determines the success of any policy.
Discuss and evaluate work study as a method of improving labour efficiency-
METHODS OF PRODUCTION
TYPES
1. Job Production
2. Batch Production
3. Flow Production
4. Mass Customization innovations of mass / flow production
5. Cell Production
JOB PRODUCTION
It involves the production of a single product at a line. It is generally used when orders for
products are small and different from each other. Production is organized in such a way that one
job is completed
completed at a time and then you start the next job or the nextnext product. Examples
Examples includes
tailors, a doctors’ client, design bridal wear, contractor constructing a building, bridge or flyover.
ADVANTAGES DISADVANTAGES
6. Unique items can be produced 1. It is time-consuming

time-consuming
7. Motivated workforce 2. Highly skilled labour is required
8. Better satisfaction of customers which is difficult to get and is
9. Organisation of job is simple as expensive
co-ordination communication, 3. Benefits such as bulk buying
supervisor and inspector can be cannot be achieved.
regularly and easily carried out. 4. Economics of scale is not possible
5. It is generally labour – intensive
which again increase the
production cost
BATCH PRODUCTION
It involves the production of products in separate batches or quantities where the products in a
batch go through the whole production process together. This method may be used when
demand for the firms products expand. Products can be produced in very large or very small
batches depending on the level of demand. Production process is divided into a number of
operations. E.g. furniture manufacturer making 100 chairs followed by 100 tables, houses bring
built in sets of 20s or 30s, baker making birthday cake, doughnuts, breads in groups or sets.
15. flexibility (each batch can be 10. careful planning and co-
different) ordination is needed which is
16. employ as can concentration one difficult to manage.
operation rather than the whole 11. work force may be less motivated
task. as compared to job production.
17. less variety of machinery as 12. more complex machinery is
products are standarlised in one required as labour is not that
batch. skilled.
18. labour of lower skills can also be 13. if batches are small than unit costs
employed / managed. are high.
19. it results in partly finished 14. money will be tied up in work in
products so you can respond to progress so cash flow problems
demands quickly. can occur.
20. more economic of scale as
compared to job production.
FLOW PRODUCTION / MASS PRODUCTION
Main features of flow production
a. large quantities are produced

b. simplified or standardized products
c. a semi-skilled workforce specializing in one operation only is generally employed
d. large amounts of machinery and equipment is required
e. large stocks of raw materials and components may be kept
Examples:
Washing powders
Printing newspapers
Tea and coffee
21. unit costs are reduced as firms 1. high initial set up cost of capital
gain from economics of scale intensive, high technology
22. highly automated production production lines.
process minimizing need for 2. work is boring, demotivating and
labour and so reducing costs. repetitive.
23. the need to stockpile finished 3. wide product range isn’t
goods is reduced available.
24. constant output rate makes input 4. inability to meet all customers
planning easy needs
25. use of JIT and stock control. 5. independence in entire system
26. quality is consistent and high and means breakdowns in one area
easy to check at various stages of cause entire system to breakdown
the process
MASS CUSTOMIZATION
Several important recent developments in the production process have occurred which try to
combine the advantages of job production (namely worker satisfaction and product variety) with
the benefits on flow production like lesser units costs. One such innovation to mass production is
mass customization which uses advances in technology like
• Computer aided design (CAD)
• Computer aided manufacture (CAM)
The new technology combined with multi skilled labour has allowed the production of a range of
varied products.
The main features or key paints of mass customization are as follows:
• allows focused or differentiated marketing to be used in the strategy
• allows for higher added value
• changes only a few components to meet specific needs of the customers while
others are kept same
• maintains low unit cost but providing grater product choice due to advanced
flexible robotic machinery which can make a range of products
• examples include the Pepsi Twist and Diet Pepsi variations of the basic drink
“Pepsi”
• another example is of shampoos e.g. Sunsilk providing pro-vita variations as well
as anti dandruff, silky hair, and dry hair specials
• drawback: Redesigning could be very expensive in practice
CELL PRODUCTION
Cell production fully known as cellular production is a form of flow production but it involves
dividing the workplace into “cells”. The cells are a number of self-contained mini production units.
Each cell occupies an area on the factory floor and focuses on the production of a “product
family”.
A product family is a group of products which requires a sequence of similar operations e.g. metal
body part of machine may have to be cut, punch, weld and dispatch.
An individual cell consists of a team of multi-skilled staff with a team leader. The cell may be
responsible for tasks such as designing, schedule planning, maintenance and problem solving as
well as the manufacturing tasks. The performance of each individual cell is checked against
preset targets which would include things as output levels, quality, lead times and cash targets.
Cells are responsible for the quality of their own complete units of work. The advantages of
cellular production are:
1. flour space is released because cells use less space than a linear production line
2. product flexibility is improved
3. lead liens are cut
4. movement of resources and handling time is reduced
5. there is less work – in – progress
6. teamworking is encouraged
7. worker commitment and motivation improve
8. leads to higher increase in productivity
9. there may be a safer working environment and more efficient maintenance.
CAPACITY UTILISATION
MAXIMUM CAPACITY
Maximum capacity is the highest output level possible from a business over a particular period of
time.
CURRENT OUTPUT
The actual output that firm is producing at present is known as its current output.
CAPACITY UTILISATION
It is the actual output as the proportion of the maximum capacity of the business. It measures the
firms’ operational efficiency and shows the current output as a percentage of the maximum output
the firm can produce. increased capacity utilization will spread the fixed costs over more units of
output which as a result lowers down the average cost per unit.
Disadvantages related to continuous maximum capacity

1. workers can get demotivated and tried at full capacity all the time. No relaxation time
2. machinery can get stressed out and get damaged quickly. It would require higher
maintenance for which again workers are required
3. if always working on full capacity then orders may have to be turned down saying that
maximum capacity is being used. So priorities may have to be taken into account
4. especially in service sector, if hotels and hospitals are always full then potential
customers may be turned away and loss of existing customers
• So firms working at maximum capacity should think about expanding its
operations or closing down certain areas of operations
Q.1. A production house has installed a machine which has the maximum capacity of
producing 2000 units per year. Today reached the level of 80%, 75% and 90% capacity
utilization in years 1,2, 3 respectively. Calculate yearly production for these years:
Current Output
Capacity Utilisation = ×100
Max.PossibleOutput
80
Year 1: = × = 1600 units
100
75
Year 2: = × 2000 = 1500 units
100
90
Year 3: = × 2000 = 1800 units
100
Q.2. A food processing plant is capable of working 20 hours per day. Calculate the capacity
utilization for the following situation:
1. when the plant is working for 14 hours a day

2. when the production lunch operating in two eight hour shifts per day
14
1. Capacity utilization = ×100 = 70%
20
8+8
2. Capacity utilization = ×100 = 80%
20
COST, REVENUE AND PROFIT ANALYSIS

Cost Analysis:
Cost analysis is important to:
1. analyze profitability
2. make respective decision for various departments
e.g. pricing decisions for marketing departments
3. make comparisons with past records
4. assess efficiency
5. set budgets in future
6. set target returns for future
Classification of costs
Costs can be classified in the following ways
1. By type (whether they are direct or indirect costs)
2. By behaviour (according to the effect of change in output)
e.g. foxed, variable, semi-variable or step-fixed costs.
3. By function (according to the bus function they are associate with)
e.g. production, administration selling & personnel cost.
4. By the nature of resource for material to how
DIRECT COSTS
Direct costs are costs which can be identified with a particular product or process e.g.
raw materials, packaging and direct labour.
INDIRECT COSTS
Indirect costs or overheads are usually associated with performing a range of tasks or
producing a range of products. It is not possible to associate then directly with a particular
product or production process e.g. rent, insurance, salaries of managers, etc. – factory
overheads.
FIXED COSTS
They are the costs which stay the same at all levels of output in the short run e.g.
insurance, heating bills, as well as capital costs such as factories and machinery. They
remain same whether the business process nothing or works at full capacity.
Costs
D It is worth nothing that fixed here means
F.C. that the costs don’t increase as a result
of change in output in the short run.
O Output
VARIABLE COSTS
Costs of production which increase directly as output rises are called variable costs e.g.
raw materials, fuel, packaging and wages. If the firm does not produce anything than
variable costs will be zero.
Notice that the graph is linear i.e. it is an

upward sloping straight line.
TOTAL COST:
If fixed and variable costs are added together they show total cost of a business. The
cost of producing at any given level of output is total cost.
Cost
F.C. =$10,000
T.C. V = $10 / unit
q = 100
T.C. = ?
T.C. = F.Cr V.C.
F.C. = 10,000 +1000
= $11,000
Output
STEP–FIXED COST
Step–fixed cost illustrates what happens to fixed costs over a longer period of lime. E.g. if
a firm is at full capacity but needs to raise production it might decide to invest in more
equipment. The new machine + raise overall fixed costs as well as capacity. The rise in
fixed costs is shown by a step with graph.
Costs
F.C.
Output
SEMI–VARIABLE COSTS
Some production costs are not entirely fixed or variable. E.g. labour. If a firm employs a
member of staff on permanent basis, no matter what level of output, then this is fixed
cost. But if the same member is asked to work overtime, then this extra cost is variable.
AVRAGE COST:
T .C . T .F .C .
A.C. A.F.C. =
Units of Output Output
T .V .C .
A.V.C. =
Output
MARGINAL COST
Δ in T .C .
M.C. =
Δ in Output
Marginal cost is the cost of increasing output or the extra cost incurred by producing one
more unit.
REVENUE:
R = price / unit × No. of units sold
The amount of money which a firm receives from selling its product is referred to as
revenue. It is found by multiplying the number of units sold by the price of each unit.
PROIFT
P = Revenue – Total Cost
Profit is the surplus which is left after the costs are deducted from the sales revenue. All
firms operate to make profits to provide returns for their owners.
LOSS
L = Total Cost – Revenue
It is the excess amount of total costs which is found after deducting the revenue from the
costs.
BREAK – EVEN POINT
T.R.
Deviation:-
T.R. = T.C. p = price / unit

p × q = F.C. + V.C. q = quantity in units
pq = F.C. + vq v = variable cost / unit
q (p – v) = F.C. F.C. = fixed cost
F .C .
q= where (p – v) is the contribution per unit.
p − v
formula to calculate B.E. level of output in units.

B.E. levels of sales = q BE × price
Margin of safety = Current Output – B.E. Output
m arg in of safety
M.O.S. in % = ×100
Break even
It target profit is given, how to find required quantity:
F .C .T arg et Pr ofit

q=
Contributi on
BREAK – EVEN ANALYSIS
Exercises
(Business Studies: Bruce R. Jewell, page 398)
Q.1.a. Contribution is the difference between setting price and variable costs because this
difference contributes to the total fixed costs of the business and its profits
Contribution = Selling price – Variable Cost

= £ 10 - £ 4
=£6
Fixed Costs
b. Break even point =
Contributi on
90,000
=
6
= 15,000 units
Fixed Costs + T arg et Pr ofit

c. Current output =
Contributi on
90,000 + 270,000
=
6
360,000
=
6
= 60,000 units
d.i. Sales revenue = price × quantity

= 10 × 60,000
= £ 600,000
ii. Sales after implementation of proposal

= 25% (current output) + Current Output
= 25% (60,000) + 60,000 = 75000 units
Sales Revenue = 75,000 × 9
= £ 675,000
e.i. change in revenue = New revenue – Original revenue
= £ 675,000 - £ 600,000
= £ 75,000
ii. Change in costs:

Original Costs = 60,000 (4) + 90,000
= £ 330,000
New Costs = 75,000 (4) + 90,000
= £ 390,000
Change = New Costs – Original costs

= 390,000 – 330,000
= £ 60,000
f. Yes, it should because the resulting change in revenue is higher i.e. increases more than
the increase in costs. This would cause the profits to increase by £ 15,000.
Q.2.a. At price A = £ 2.20
Fixed Costs
BEP =
Contributi on
1200,000
=
2.2 −1.25
= 1,263,158 units
At price B = £ 2.00
1200,000
BEP =
2.2 −1.25
= 1,600,000 units
At price C = £ 1.80
1200,000
BEP =
1.7 −1.25
= 2,666,667 units
b. Margin of safety = Current Output – Break even output

For Price A:
Most at full capacity = 2700,000 – 1,263,158
= 1,436,842 units
Most at current output = 2600,000 – 1,263,158

= 1,336,842 units
For Price B:
= 1100,000 units
Most at current output = 2600,000 – 1, 600,000

= 1000,000 units
For Price C:
= 518,182 units

= 418,182 units
For Price D:
= 33,333 units

= 66,667units
i.e. output is below BEP

so there is no margin of safety
c. For Price A:
Profit at full capacity = MOS × Contribution
= 1436842 × 0.95
= £ 1,364,999.90
Profit at current output = 1336842 × 0.95

= £ 1,269,999.90
For Price B:
Profit at full capacity = 1100,000 × 0.75
= £ 825,000.0
Profit at current output = 1000,000 × 0.75

= £ 750,000.0
For Price C:
= £ 285,000.1
Profit at current output = 418,182 × 0.55

= £ 230,000.1
For Price D:
= £149,99.85
Loss at current output = 66,667 0.45

= £ 30,000.15
BEP
d. BE output (%age) = ×100
Current Outpue
For Price A
1263158
%BEP at full capacity = ×100
2700,000
= 46.8%
1263158
% BEP current output = ×100
2600,000
= 48.6%
For Price B
1600,000
2700,000
= 59.3%
1600,000
2600,000
= 61.5%
For Price C
2,181,818
2700,000
= 80.8%
2,181,818
2600,000
= 83.95%
For Price D
2,666,667
2700,000
= 98.8%
2,666,667
2600,000
= 102.6%
EALUATION OF BEA
Advantages:
1. Charts are relatively easy to construct and interpret.
2. It provides useful guidelines to management on break – even points, safety margins
and profit or loss levels at different levels out output.
3. Comparisons can be made between different options by constructing new chars to
show changed circumstances.
4. The equations produce precise output, break-even and price results.
5. It helps in making decisions of choosing a particular location or setting a particular
price.
Disadvantages:
1. The assumption that costs and revenue are always, expressed in straight lines is
unrealistic. Not all variable costs change directly or smoothly with output. Even revenue
can be curved line which can cause two break – evens which makes the analysis
useless.
2. Not all cost can be classified into fixed and variable costs. The introduction of semi-
variable cost will make the technique much more complicated.
3. There is nono allowance made for stock levels on the break – even charts is assumed that
all units produced are sold which is an unlikely situation.
4. It is also unlikely that fixed cost would remain unchanged at different output levels.
BRUCE JEWELL

Exercises:
3.a.i. Contribution = Selling Price – Variable Cost
= £ 0.60 - £ 0.20
= £ 0.40
Fixed Costs
ii. Break – even point =
Contributi on
20,000
=
0.40
= 50,000 units (mugs)
iii. Margin of Safety = Current Output – Break – even point

= 90,000 – 50,000
= 40,000
iv. Profits at full capacity = Margin of Safety × Contribution

= (120,000 – 50,000) × 0.40
= 70,000 × 0.40
= £ 28,000
Total Cost + T arg et Pr ofit

b. Quantity =
Selling Pr ice
40,000 + 120,000 (0.2) + 40,000
=
Selling Pr ice
84000
Selling Price =
120,000
Selling Price = £ 0.70
= 70p

Q.4. Break – Even graph for Smith Limited
Fixed Costs
b.i. Break – even output =
Contributi on
1,000,000
=
10 − 2
1,000,000
=
8
= 125,000 units
ii. Margin of safety = Current Output – Break – even output

= 150,000 – 12500
= 25000 units
iii. Profits = 25,000 x 8 (MOS & Contribution
= £ 200,000
1.8 m
1.4 m
1.0 m
0.1 m
0.2 m
0 50 100 140 200
Profit from Graph

= Total Revenue = Total Costs
= 1800,000 – 1400,000
= 400,000
d. The marketing manager’s proposal is a good idea as the profit level is higher than before
by (400,000 – 200,000) £ 200,000 as the variable costs continue to be lesser than selling
price.
The drawback is that the break – even won’t be a problem. Therefore the proposal should
be implemented.
The margin of safety has also increased which is another proof of the higher profit levels.
It must evertheless be kept in mind that it is being assumed that sales would increase.
There is no knowledge of customer demand being given. So market research must be
undertaken to find the trend in the demand. If it is increasing and the business is sure to
require the higher output level then only should the manager’s proposal be put into.

Q.5.ai. Monthly profit = Total Revenue – Total Costs
= $150,000 (21) – [800,000 + (4) 150,000]
= 3,150,000 – 2900,000
= £ 250,000
Fixed Costs
ii. Break even level =
Contributi on
800,000
=
21 − 14
800,000
=
7
= 114,286 units
Fixed Costs + T arg et profit
bi. Output =
Contributi on
800,000 + 200,000
=
21 −14
1000,000
=
7
= 142,857 units
Fixed Costs + T arg et profit

ii. Output =
Selling − V .C .
800,000 + 200,000
= 100,000
Selling Pr ice −14
1000,000
Selling price - 14
100,000
Selling price = 10 + 14
= £ 24

6.a. Break – even graph for Richardson Pen-Company
2.5 m
2.0 m
1.5 m
1.0 m
0.5 m
0 1m 2m 3m 4m 5m
b. Contribution = selling price – variable cost

= £ 0.50 - £ 0.30
= £ 0.20
Fixed Costs
c.i. Break-even output =
Contributi on
500,000
=
0.20
= 2500,000 units
ii. Margin of Safety = Current Output – Break even output

= 5000,000 – 2500,000
= 2500,000 units
iii. Profit at full capacity = Margin of safety x Contribution

= (Current Output (full capacity) – BE Output) x contribution
= (6000,000 – 250,000) x 0.2
= £ 700,000
d. Since the extra pens that have to be produced will continue to give a contribution of £ 0.5
to wards the fixed costs as well as profits of the firm. Also the business isn’t utilizing or
working at its full capacity and has capacity to produce another 1 million pens, therefore
taking this order world also improve its capacity utilisation.
Also, the extra plus have a fixed cost of £10,000 which after being covered, the order still
generates a profit of £15000 which would go towards the final profits of the firm.
Therefore, if there is no other order, then Richardson Pen Company should take up the
order.
However, it must keep in mind that £ 10,000 aren’t the only fixed costs that have to be
taken into account. Therefore other costs as well. Also when other customers get to know
of this special offer then they may also ask the company to reduce prices to £35 for them
instead of the usual £ 50. So if the company knows how to deal with such a situation,
then it should take up the order.

Q.7ai. Contribution is the difference between the selling price and variable costs. This amount
shows how much each units produced contributes to the fixed costs and then the target
profit.
ii. Break even point is the place or the level of output at which there is no profit nor loss i.e.
the total costs is equal to the total revenue.
iii. Margin of safety is the difference between the current output and the break even output
showing the area of profit.
bi. Contribution = Selling price – Variable Cost

= 0.15 – 0.10
= £ 0.05
Fixed Costs
ii. Break even output =
Contributi on
1000,000
=
0.05
= 20,000,000
= 20 million units
iii. Margin of Safety = Current Output – Break even output

= 32 million – 20 million
= 12 million
iv. Profits = Margin of Safety x contribution

= 12,000,000 x 0.05
= £ 600,000
c. Yes, Davidson should accept the smartprice contract in the absence of the Goodprice
after. This is because the variable cost of 10 pence is still below the selling price offered
of 11 pence. So even though the profits for these 5 million units would be less than that
from the standard price, however, these units would also contribute towards the fixed
costs i.e. the fixed cost would how be spread over 37 million units instead of 32 million.
Therefore, the profits would also be higher.
Accepting the smartprice offer would also improve the capacity utilization by 12.5% which
would otherwise be wasted for that year. Also overall productivity is increased as the
same machinery was being used to produce 82 m units before and now of ten the
acceptance of offer it would produce 37 m units.
However, certain assumptions are made. Firstly that there would be no rise in fixed costs
as capacity is available. At times even then F.C. increases e.g. yearly electric or gas
supplies. Also variable costs are assumed constant while it may be that extra labour has
to be appointed or overtime paid.
d. The Goodprice offer in essence is excellent when seen quantitatively. It allows capacity
utilization to reach 95% which is a very good level. Also the price is only 1p less than the
standard price and is generating a very good level of profit of £240,000. This also means
that the safety margin of the business improves by 6 million units.
However, the other customers may also pressurize the business to sell them at 14 pence
instead of 15 pence when they hear of this contract. This wasn’t a problem with
smartprice contract since they would sell under ‘own be and’ i.e. no one would know of
the real manufacturers nor of the lower price contract. So if Goodprice offer leaks out
then profit margin may fall. Also Goodprice wants a too – year contract. It may be that the
next year demand rises and the company may be able to sell at the standard price.
However due to the contract the business would have to lose profits the next way.
Therefore careful market research into sales turned is required.

Q.8ai. Contribution = Selling price – Variable Costs
= 500 – (100 – 200)
= 500 – 300
= £200 / units
Fixed Costs
Contributi on
110,000
=
200
= 550 units
iii. Profits = Margin of Safety x Contribution

= (2000 – 550) x 200
= 1450 x 200
= £290,000
Fixed Cost + T arg et Pr ofit

b. Output =
Selling price − Variable Cost
110,000 + 150,000
2000 =
Selling price − 300
260,000
Selling price – 300 =
2000
Selling price = 130 + 300
Selling price = £430

Q.9.ai. Sales revenue at BEP = BE output x Price per unit
= 100,000 x 2.50
= £250,000
ii. Variable Costs = Total Costs – Fixed Costs

= 250,000 – 40,000
= £210,000
iii. Contribution per unit = Selling price – Variable Costs
= 2.50 – 210,000/100,000
= 2.50 -2.1
= £0.40
Fixed Costs − T arg et Pr ofit

b. Output =
Contributi on
40,000 + 66,000
=
0.40
106,000
=
0.40
= £265,000
c. Loss = Margin of loss x Contribution

= (100,000 – 90,000) x 0.40
= 10,000 x 0.40
= £4000
d. New fixed costs = 40000 + 25% x 40,000
= £50,000
50,000
New BE output =
0.40
= £125,000
Current Output
Q.10.ai. Capacity Utilization = ×100
Full Capacity
12 million
= ×100
15 million
= 80%
Fixed Costs
Contributi on
5000,000
=
1.40 − 0.70
5000,000
=
0.70
= 7142,857 units
iii. Margin of Safety = Current Output – Break even Output

= 1200,000 – 7142857
= 4857,143 units
iv. Profits = Margin of Safety x Contribution

= 4857, 143 x 0.70
=£3400,000
Total Costs
v. Unit Costs =
Total Units
5000,000 + 12000000 (0.70)
=
12000000
13400000
=
12000000
= £1.12
b. Super market chain offer:
Quantity = 1 million units
Price = 80p = £0.8
Since the company has a capacity utilization of 80%, it may be tempted to accept the
offer which would improve the capacity utilization to 86.7% which means an improvement
in productivity. Also the selling price in the contract is higher than the variable cost. So
this means that all of the extra units sold do contribute towards the fixed costs and profits
i.e. they won’t generate a loss.
However, 80 pence is 60 pence less than the standard price of £1.40. So if existing
customers team of the offer and stand demanding a similar treatment then the business
may find it very difficult of may be impossible to earn any profits at all.
Also if the company is purposefully charging higher prices to establish exclusivity of
brand then lower prices could destroy the image. Also these lower priced goods may leak
into higher priced market and result in complete disithursioning of certain customers who
may think the lower price a symbol of low quality.
So the firm must weigh its advantages and disadvantages of the contract. If it is sure that
its other customers are loyal and won’t complain nor its image is going to be damaged
them I would strongly recommend it to accept the contact as the offer does increase
sales and profits and marginal safety and prevents the extra capacity available from
being wasted.
COSTS, BREAK-EVEN & COSTING METHODS
(Business Studies: Stimpson, page 332)

ACTIVITY
SITE A
Fixed Costs
Break – even =
Contributi on
60,000
=
6 .3
= 20,000 units
Safety margin = Current Output – Break even

= 40,000 – 20,000
= 20,000
Maximum profit = Safety margin – Contribution

= 20,000 x 3
= $60,000
SITE B
80,000
Break – even =
6 − 2.50
= 22.857 units
Safety margin = 50,000 – 22,857

= 27143 units
Maximum profit = 27,143 x 35

= $95,000
2. As can be seen from the lable, SITE A has lower fixed costs than SITE B and so it has a
lower break – even output i.e. the point until which the business must produce to cover all
its costs and so not have a loss (nor profit). This means that for SITE B, the firm must
produce 22,857 units to avoid losses which is 2,857 units higher than the BE level of
sales of Site A.
However, a larger capacity of production is available at SITE B and so the safety margin
that the firm achieves when producing at high capacity is greater than that of SITE A.
This also gives the firm locating at SITE B to have a higher chance of profit pen product
as the contribution towards profit is higher than at SITE A by (3 – 2.50), $0.50 on each
product. So the maximum profit on SITE B is £95,000 which is £35,000 more than the
chances of maximum profit that the firm locating at SITE A has.
Therefore, if the business has high demand for the product it aims to produce, then I
would advise the firm to locate on SITE B due to the higher capacity avail able as well as
the higher maximizing profit opportunities.
3. Five other factors affecting the locating decision are:-

i. Information:- the quality of the communication links and the transportation facilities
available.
ii. Industrial inertia:- the frequency of similar industries in the same area which could be
beneficial due to supply of qualified staff.
iii. Financial incentives:- like grants from the government in accordance with their regional
policy.
iv. Physical features, weather and quality of land:- e.g. if land can withstand the factory
structure i.e. is not swampy.
v. Personal preference and interest of the owners:- looking for certain quality of life benefits
like schooling and medical facilities.
(Business Studies: Peter Stimpson, page 333)
ACTIVITY
Option 1 T.R.
(a)
400
T.C.
300
V.C.
200
100 F.C.
0 2000 4000 6000 8000 10000
Units Produced
Break – even output = 4500 units
Option 2 T.R.
300
T.C.
200
V.C.
100
60 F.C.
0 2000 3000 4000 6000 8000
Units Output
Break – even output = 3000 units
ARITHMETIC CHECK ON BEP:

Fixed Costs
Option 1: Break – even =
Contributi on
54000 + 27000
= = 4500
40 − (10 + 12)
54000 + 6000
Option 2: Break - even =
40 − 20
= 3000
Option 1:
Maximum profit = Total Revenue – Total Costs
= 10,000 (40) – [81000 + 10000(22)]
= 400,000 – 301,000
= $99,000
Option 2:
Maximum profit = 75000 (40) – [60,000 + 75000 (20)]
= 300,000 – 210,000
= $90,000
Option 1:
Margin of Safety = Current Output – Break–even Output
=7000 – 4500
= 2500 units
Option 2:
Margin of Safety: = 7000 – 3000
= 4000 units
b. Fixed costs are 20% higher

T.C. = 209 x 81000 + 81000
= 162000 + 81000
= $97,200
(a)
400
T.C.
300
V.C.
200
100 F.C.
0 2000 4000 6000 8000 10000
Units Produced
From the chart

Break – even point ≈ 5000 units – 5500 units
Verification
Fixed Costs
BEP =
Contributi on
97,200
=
40.22
= 5400 units
c. Since the new machinery is being purchased which would work faster and more
efficiently so this would result in increased productivity and so the labour cost per unit
may fall. It may also be that less labour is required. The since there is less wastage of
raw materials so this would lower the cost of material again leading to a fall in variable
cost as due to efficient use less material is required per product.
Fixed Costs
Break – even point =
Contributi on
54000 + 8000
=
(10 + 12) − 2.50
62000
=
19.5
= 3179 units
PROBLEMS OF CLASSIFICATION OF COSTS
1. Labour costs can not be easily classification into direct variable costs or indirect costs
e.g. if the season for a particular type of good is of them it is not possible to lay of all the
workers that were appointed on a particular production line. It is not practical to make
workers redundant when the reason ends and then expect them to join again when
reason begins. So these workers would still have to be paid even if production was zero,
and the wages would have to be indirect costs since they aren’t related to any one
particular product. Same is the case in case of machinery breakdown.
2. Also not all costs can be classified directly into fixed costs or variable costs e.g. line rent
and electricity charges. It may be that a fixed line rent has to be paid annually while the
per phone call charges vary. Also electricity standing charge is fixed while per unit
consumed cots vary. So these are semi – variable costs which have to be taken into
account when preparing BEP chants and finding BEP.
3. Also it is wrong to equate variable costs with direct costs and fixed costs with indirect
costs. E.g. Depreciation and rent are both fixed cots but the former can be directly
associated with a particular product while factory rent is can’t. Also despite both being
variable costs, energy costs can’t be directly related to specific types of production while
raw material costs can.
WORK STUDY
Definition:
Work study is an attempt to find the best or most efficient way of using labour, machines and
materials. It includes a number of techniques which are all directed towards improving the
productivity of labour. F.W. Taylor’s scientific management is said to have formed the basis of
work study methods. Taylor presented the argument that by observing and analyzing the different
work methods and rates, it would be possible to deduce the most productive and efficient way of
working or continuing production.
Work Study Techniques:

There are two techniques involved in work study:
• Method Study
• Work Measurement
Method Study
It involves identifying all the specific activities in a job, analyzing them and finding the most
effective way of undertaking a task or job. This could be an existing job or a new one.
However, method study usually aims at the progress of existing work practices.
STAGES INVOLVED IN METHOD STUDY

1. the selection of the task which is required for analysis
2. observing the current method of carrying out the task wile making notes of the
material flow, worker movement as well as the equipment layout.
3. analyzing the collected data
4. suggestion of improvement of the method e.g. reducing movement of partly finished
goods round the factory.
5. putting the new method into practice
6. recording the impact of the new methods on productivity
BENEFITS OF METHOD STUDY
i. identify an optimum way to carry out a task
ii. improve the layout of the factory or the workplace to enable the most efficient use of
the available space
iii. minimize effort and reduce fatigue
iv. improve the effectiveness of process
v. improve the use of labour, machines and materials
Work Measurement
It involves recording output levels using different methods and arriving at a standard or target
time for each task. It aims to measure how long workers take to perform each task.
STAGES INVOLVED IN WORK MEASUREMENT

1. decide on the task to be recorded
2. record the time taken for the task
• allowances for necessary stoppages must be taken into acc.
3. rate the performance against standard performance of an average, experienced,
motivated worker. Workers may exceed the scale
4. establish the average time for a job (if done by an average trained and competent
worker)
BENEFITS OF WORK MEASUREMENT

i. working out price rates if this type of payment system is used
ii. establish the costs of particular activities to help with accounting\
iii. help with the planning of production schedules
iv. achieve results in the least time
v. help to judge future performances by comparisons
In summary work study means identifying the best work method and then using work
measurement to find the effort needed to carry out a task to an acceptable standard.
The results can be used to design incentive schemes and determine staffing levels.
Evaluation of Work Study

Introducing work study programs is not easy. Work study assessors are often disliked by
employees.
The major problem is the workers resistance to this process. Workers feel that observing and
analyzing their work habits is part of inspection of individual practices and so they feel distrust.
Therefore stress should be put by higher management that work study is infact a method of
improving efficiency and determining the task length. It is not appraisal of individuals and so no
disciplinary measures can arise from it.
Workers generally feel less secure because they think that redundancies will arise due to work
study as better methods may mean less labour requirements. Also they find difficulty in changing
or adapting to changes to practices they are at ease at. Their fears can be alleviated by involving
the staff in the work study through discussions on areas requiring improvement and benefits of
efficiency.
Accurate measurements are difficult as staff may work fast during study to impress and increase
their wages or slowly to increase the set standard time. Therefore, skilled consultants should be
able to identify workers at an unusually high or slow pace during work study.
9707/1,2 – Business Studies UNIT 4: Operations Management
A Levels
PRODUCTION PLANNING
The role of production function is to turn inputs into outputs by changing factors of production into finished
goods and services as efficiently as possible. The role of production planning is to establish short-term
and long-term production schedules. In order to observe efficient production functions, the production
planning must be realistic and achievable. Production controls also play a vital role in efficient production
function. It ensures that the plans made are being properly followed and deadlines are timely met.
Following are the ares of control:
1. Cost Control
2. Progress Control
3. Stock Control
4. Quality Control
STOCK MANAGEMENT – STOCK CONTROL
Basic objective of stock control is to minimize cost of stock by maintaining adequate

adequate levels of stock. Firms
have the following reasons for holding stock:
1. Stock of raw materials is kept in order to meet production requirements
2. Stock of work in progress co maintained to continue the production process and allowing
greater flexibility and better utilization of time and machinery.
3. Stocks of finished goods is maintained in order to provide services and to meet customer
demands on time
4. Stocks of equipment and spares are kept in order to support sales and production
5. For valuation purposes
6. To control cash tied up in stocks
7. To control wastage
COSTS OF HOLDING HIGH LEVELS OF STOCK

1. Opportunity
Opportunity cost as capital is tied up in stored stocks.
2. Storage Costs
3. Spoilage Costs
4. Administration
Administration and financial costs e.g. insurance
5. Risk of wastage in case of lower demands in the market
6. Risk of thefts
COSTS OF HOLDING INADEQUATE OR LOW LEVEL OF STOCK

1. Lost sales (also known as out of stock costs)
2. Idle production resources
3. Special and sudden orders could be expensive as the firm is less able to cope with
unexpected shortages
4. Firm holding very low level of stock may have to place more number of orders. This will raise
local ordering costs and the advantages of bulk buying cannot be achieved
STOCK CONTROL TECHNIQUES

STOCK CONTROL CHARTS (Graphical Approach)
50 Max stock level
40
30
20
10 Minimum stock level
A Levels
0
2 4 6 8 10 12 14 Time (weeks)
Lead Time
MINIMUM STOCK LEVEL

Also called buffer stock. This is the minimum number of stock that should be held to ensure that
production could still continue in case of a delay in the delivery of raw materials.
MAXIMUM STOCK LEVEL

It is the maximum amount of stock kept and is limited by space or the financial costs of holding higher
levels. One way to calculate this is to add the EOQ (Economic order quantity)
quantity) to the minimum stock level.
REORDER LEVEL
This is the level of stock at which a new order is placed with the supplier. The quantity of this order or the
re-order quantity will be influenced the EOQ concept.
LEAD TIME
It is the amount of time it takes for a stock purchased to be placed, achieved, inspected and made ready
for use. The longer the lead time, the higher the minimum level of stock needed.
RESOURCE QUANTITY
It is the quantity of stock that is ordered at the re-order level. Management will seek to discover the ro-
order quantity that minimizes the total cost of holding and ordering
ordering the stock. If
I f stocks are purchased
purchased from
an outside supplier the optimum level is known as economic order quantity (EOQ). If the orders are
obtained from internal suppliers, the equivalent is known as economic batch quantity.
Therefore EOQ is defined as the order quantity which minimizes the balance of costs between stock
holding costs and re-order costs. EOQ is the point where the total cost is minimizes. It can be calculated
with the help of the following formula:
2OD
EOQ =
h
where O = Ordering Cost

D = Annual Demand
h = Holding Cost of one unit per annum
JUST-IN-THE INVENTORY CONTROL (JIT)

Just in time or JIT involves both production and stock control systems. For this the work flow has to be
scheduled very precisely so that minimal amount of work-in-progress has to be held. JIT does not require
A Levels
any buffer stocks to be held. The components arrive just at the time that they are needed and the finished
goods are delivered to customers as soon as they are completed.
JIT is basically a Japanese approach towards production and is an important part of the team production
on the Kaizen approach.
JIT production has reversed the conventional approaches to manufacturing.
A Levels
REQUIREMENTS FOR JIT PRODUCTION

If the business really wishes a successful introduction of JIT production then it must make sure that a few
very important requirements of JIT are met:
1. Excellent relationships with suppliers
JIT production essentially depends upon the very precise delivery of raw materials and other
suppliers. Therefore, the business suppliers should be ready to supply at a very short lead
time. The firm therefore can have only one or two suppliers at the most for mutual benefits.
2. Employee flexibility
The workers a employees of the business have to be multi-skilled and should be able to
switch jobs quickly so that no excess stocks of goods built up while those in demand are
produced quickly for orders to be met.
3. Flexibility
Flexibilit y of machinery
Old fashioned equipment can only produce one type or range of product in large quantities.
Modern, computerized machinery is required for JIT production as it can produce a wide
variety of products just by changing a single software. This adaptability would produce small
batches of single products to keep the stocks to
t o a minimum.
4. Accurate demand forecasts

This would enable to produce a reliable production schedule which would help in the
calculation of precise number of goods to be produced over a certain time. If forecasts or
demand is fluctuating then keeping no tocks would be a very risky strategy.
5. Extensive use of IT
Computerised records of sales, sales trends and stock levels would allow minimal stocks to
be held. Electronic communication with suppliers would enable accurate delivery of supplies
6. Employee commitment
Workers must work smoothly for JIT to be effective. Therefore empowerment i.e. giving
employees power to undertake decisions as well as team working is essential for worker
motivation as well as for the meeting of customer orders.
7. Strict Quality control or zero-defect
zero-defect
Since there are no spare stocks, therefore goods have to be produced correctly the first time
otherwise customer orders will not be completed on time.
BENEFITS OF JIT This also is part of evaluation

i. the right quantities are produced or purchased at the right time
ii. higher quality
iii. improved customer service
iv. reduced space requirement leads to reduced storage costs
v. system flexibility leads to quicker response to change in demand
vi. space released from stock holding used for more production purposes
vii. reduction in manufacturing
manufacturing lead time
viii. increased equipment
equipment utilization
ix. simpler planning systems
x. increased worker participation
xi. multiskileld and adaptable staff gain from improved motivation
xii. continuous emphasis on improvement and problem solving
xiii. less chance of stock being outdated or obsolescent
obsolescent
xiv. less stock reduces risk of damage and wastage
xv. reduces capital invested or tried in stock and reduces opportunity
opportunity cost of stock holding
xvi. higher multi factor productivity
xvii. higher profits due to overall decrease in costs
Evaluation does not only mean disadvantages. It includes advantages.
A Levels
Evaluation of JIT Disadvantages

Disadvantages
JIT is not suit for all businesses at all times. It is a very expensive system to implement
implement i.e. it has very high
start-up costs. Other control systems are often referred to as JIC-Just in case as stock are kept tin case
they are required. JIT requires a very different organizational culture than this.
There are several problems that have to be overcome for successful JIT working:
i. requires a high degree of delegation
ii. requires change in the philosophy and culture of business
iii. advantages
advantages of bulk buying are lost
iv. business is vulnerable to a break in supply including breakdown in machinery
v. doesn’t work in case of irregularly used parts or specially ordered materials
vi. reputation depends significantly on outside factors
vii. requires atmosphere of close cooperation and mutual trust between work force and managers
viii. delivery costs rise as frequent small deliveries are essential
ix. purchasing requires reliable and flexible suppliers
x. order admin costs rise as so many small orders need to be processed
However JIT is an important aspect of the move to wards lean production and is definitely a
principle which is widely accepted.
LEAN PRODUCTION
It is an approach to production developed in Japan. Its aim is to reduce the quantity of resources used up
in production. Lean production uses les of everything including factory space, materials, stocks, suppliers,
labour, capital and time. It is the term used to describe the concept of managing the production process
more efficiently with minimum of resources. The objective is to eliminate wastage of resources and time
from original stock ordering through to the financial customer service.
With the help of this production method better quality and variety of output with fewer resources is
produced with less wastage and less duplication. Lean means cutting out anything in the production
process which adds complicity cost and time and does not add nay value for the customers. With team
production the number of defective products is reduced, lead times are cut down and reliability improves.
It involves the range of practices designed to improve productivity and quality and to reduce wastage of
resources.
FEATURES AND PRACTICES RELATED TO LEAN PRODUCITON

1. Simultaneous engineering
2. Flexible specialists
3. Just-in-time
Just-in-ti me manufacturing and stock control techniques
4. Kaizen production
5. Karban system
6. Empowerment
7. Time-based management
8. Team-working
9. Quality circles
10. Cellular or Cell Production
QUALITY MANAGEMENT
Quality could be described as those features of a product or a service that allow it to satisfy customers
needs wants and expectations.
Quality does not necessarily mean the best that can possible be produced because high costs will then
make the product unsaleable. Therefore a high quality product is one that best fulfills the particular needs
of consumers at a price that they are willing to pay. Consumers judge quality every time they purchase,
therefore the minimum standard demanded by consumers is that the product should work and fit to the
purpose intended.
Quality might be assessed on the basis of physical appearance design, specifications, reliability,
durability, suitability, special features, after sales services, image and reputation.
Advantages of producing high quality products and services are as follows:
1. Consumer loyalty
2. Low level of complaints (reduces costs)
3. Longer product life cycles
4. Less promotion efforts may be required
5. High price can be charged
A Levels
6. Better corporate image

7. Generates future sales in other product lines also
QUALITY CONTROL
It means inspecting and checking the work to ensure that products and services come up to an agreed
standard of quality. It is an important element in production control through its identification and scrapping
of unsuitable output. The method of production, employed workforce, technology and management style
affect the quality of goods being produced.
QUALITY CONTROL TECHNIQUES

1. Inspection and testing
2. Random sampling
3. Involving the work force in making their own decisions about quality checking
4. Quality control charts and statistical measures to control quality
BUSINESS EXPANSION
ECONOMIES OF SCALE
Business expansion by employing more of a few or all the factors of production is referred to as
an increase in the scale of operation / production.
The advantages that a business achieves by producing at a large scale are known as economies
of scale. They are the educations in a firm’s average cost of production (unit costs)
TYPES
1. Internal Economies of scale
2. External Economies of scale
INTERNAL ECONOMIES OF SCALE

They are the benefits of growth that arise when a business grows from within. They are:
1. Purchasing economies
2. Production or technical economies
3. Financial economies
4. Marketing economies
5. Risk – bearing economies
6. Information economies
7. Managerial economies
EXTERNAL ECONOMIES OF SCALE
They are the benefits or the reduction in costs which any business in an industry might enjoy as
the industry as a whole grows in size. They are:
1. Emergence of skilled labour force
- supply of labour is high – low wage rates
- less need to train
- efficient and productive labour – less avg. costs
2. Training courses in local educational institution
3. Co-operation among the firms
4. Government support
5. Ancillary or supportive business emerge
6. More specialization can take place (Disintegration) – focus on core activities
DISECONOMIES OF SCALE
The factors that increase the average costs as a firms scale of operation increases beyond a
certain size are known as diseconomies of scale.
TYPES
1. Internal Diseconomies of scale
2. External Diseconomies of scale
INTERNAL DISECONOMIES OF SCALE

They are the disadvantages of expansion that arise when a business grows from within. They
are:
1. Communication problems
2. Managerial problems
3. Co-ordination problems
4. Control problems
5. Alienation of the workforce
6. Technical or efficiency related diseconomies
EXTERNAL DISECONOMIES OF SCALE

They are the disadvantages or increases in costs which any business in an industry might face as
the industry as a whole grows in size. They are:
1. Overcrowding in industrial problems
- Traffic congestion
2. Price of the factors of production might rise as firms complete for a limited amount of
resources.
3. Firms can pressurize the government policies for their own benefit
4. Inflation increases
- demand increases
- salaries high – purchasing power high
5. Overcrowding
- pollution increases
- skilled labour shortages due to high competition
Average Costs Curve
Costs
Economic
O Output
APPROACHE STO AVOID DISECONOMIES OF SCALE

1. Management by Objectives
2. Decentralisation
3. Reduced diversification
diversificatio n to control co-ordination and communication problems

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9707/1,2 – Business Studies U ni t 1: Business & Environment

BUSINESS AND ENVIRONMENT

Resources / Factors of Production

Economy – Inflation, unemployment, Interest rates

GDP is the value of all the products

Secondary  Tertiary transition is called Deindustrialisation

Private sector – private individuals

Public sector – owned and controlled by government

Private sector – Sole traders

They are non-tang

Also called extraction industry.

Also termed as Manufacturing

Another name is the service sect or. They include

10. PUBLIC SECTOR

11. PRIVATE SECTOR

14. BUSINESS FUNCTIONS

a. PRODUCTION: This de als with the actual

b. RESEARCH & DEVELOPMENT: It is to find out the exact requirements of customers as

QUICK TIPS: BUSINESS ORGANISATION

- Central Government Organization

- profit and loss sharing

Partnerships can be limited only upto 20 people

Capital sources are still few as compared to Ltd. companies.

Limited Companies – common to both types

Name, Address, Authorized Share Capital

Ans. A private limited company

Q. Why might a public limited company be converted to a private limited company?

Ans. There are several

1. Market Economy / Free / Price – private ownerships – resources

Q. Explain the differences between a sole trader and a partnership.

Ans. A sole trader is an individual

Only few essential sectors of society in government control

Multinationals are a part of International Trade.

per capital income increases  too much purchase

They have a head office

ADV for the host country

DISADV for the host country

TYPES OF ECONOMIC SYSTEM

Ans. FREE MARKET ECONOMYECONOMY

PLANNED MARKET ECONOMY

ECONOMY FOR MY COUNTRY

It is the best type

Q. Evaluate the impact of multinationals

Ans. Multinational companie

Q. List the protection measures against international

Ans. International trade

THE SIZE OF THE BUSINESS

Total Sales of company

Market Capitalization – related to share on Stock Exchange.

Growth of the business

EXTERNAL – Integration: mergers and take-over.

TYPES OF INTEGRATION (External Integration)

SIGNIFICANE OF SMALL BUSINESS ORGANIZATION

For a small business no. of employees < 50.

Advantage to the firm:

Advantages to the consumers:

Advantages to the economy:

1. Horizontal integration Forward

EXTERNAL EXPANSION (External integration)

1. They lead to monopoly and higher prices.

Vertical Integration can be forwards or backwards. Forward vertical integration is

ADVANTAGES – FORWARD INTEGRATION

1. Greater control over promotion and pricing of the products.