S LEVEL

BUSINESS
BY KHUSHI MOTWANI
Table of Contents
Unit 1: Chapter 1 .....................................................................................................................................................2
Unit 1: Chapter 2 .....................................................................................................................................................4
Unit 1: Chapter 3 .....................................................................................................................................................7
Unit 1: Chapter 4 .....................................................................................................................................................9
Unit 1: Chapter 5 ................................................................................................................................................... 12
Unit 2: Chapter 10 ................................................................................................................................................. 13
Unit 2: Chapter 11 ................................................................................................................................................. 15
Unit 2: Chapter 12 ................................................................................................................................................. 18
Unit 3: Chapter 16 ................................................................................................................................................. 20
Unit 3: Chapter 17 ................................................................................................................................................. 23
Unit 3: Chapter 18 ................................................................................................................................................. 26
Unit 3: Chapter 19 ................................................................................................................................................. 30
Unit 4: Chapter 22 ................................................................................................................................................. 34
Unit 4: Chapter 23 ................................................................................................................................................. 35
Unit 4: Chapter 24 ................................................................................................................................................. 40
Unit 5: Chapter 28 ................................................................................................................................................. 42
Unit 5: Chapter 29 ................................................................................................................................................. 44
Unit 5: Chapter 30 ................................................................................................................................................. 45
Unit 5: Chapter 31 ................................................................................................................................................. 48
Unit 1: Chapter 1
Business: any organization that uses resources to meet the
needs of customers by providing a product or service that
they demand
Consumer Goods: the physical and tangible goods sold to the
general public like cars, drinks, machines
Consumer Services: the non-tangible products sold to the
general public like hotel accommodation, insurance services
Capital Goods: the physical goods used by industry to aid in
the production of other goods and services
Factors of Production
 Land: renewable and non-renewable resources of
nature
 Labour: manual and skilled workforce of the
business
 Capital: finances and man-made resources used in
production like computers, machines (also called
capital goods)
 Enterprise: risk taking individuals that combine the
other factors of production into a unit capable of
producing goods or services
Creating Value: increasing the difference between the cost of
purchasing raw materials and the price of the finished goods.
It requires effective management of resources. Mainly
customer focused businesses are successful in creating value
as customers are prepared to pay high prices for
products/services that exactly meet their needs
Added value: the difference between the cost of purchasing
raw materials and the price of the finished goods
Value created by a business is not the same as profit. If a
business can create increased value without increasing its
costs then profit will increase.
Increase Added Value by: developing the shop, increasing
quality of service, attractive packaging, establish brand
Economic problem: there are insufficient goods to satisfy all
of our needs and wants at any one time
Opportunity Cost: The next most desired product given up
becomes the ‘lost opportunity’ or opportunity cost
Role of an Entrepreneur
Entrepreneur: someone who takes the financial risk of
starting and managing a new venture
They have: had an idea for a new business, invested some of
their own savings and capital, accepted the responsibility of
managing the business and accepted the possible risks of
failure
Characteristics
 Innovation: attract customers in innovative ways
and present their business differently from others in
the same market. This requires original ideas and an
ability to do things differently.
 Commitment and Self-Motivation: willingness to
work hard, keen ambition to succeed, energy and
focus as it may take many hours each day with a lot
of work that needs to be done.
 Multiskilled: they will have to make/provide the
product/service, promote it, sell it and keep
accounts. These different business tasks require a
person who has many different qualities/skills with
keen and ability to learn more required skills.
 Leadership: lead by example and personality that
encourages people in the business to follow and be
motivated.
 Self-Confidence: setbacks occur and they must have
belief in themselves that the business would bounce
back from any setbacks and not be discouraged by
it.
 Risk Taking: willing to take risks in order to see
results. Often the risk is investing their own savings
into the new business.
Challenges
 Identifying Opportunities: difficult to identify a
market need that will offer sufficient demand for
their product to allow the business to be profitable.
 Sourcing Capital: it is crucial to raise the necessary
capital needed for a business. It is difficult as: lack
of sufficient own finance, lack of awareness of
financial support and grants available, lack of
trading record to present to banks of past business
success, poorly produced business plan that fails to
convince potential investors.
 Location: important point to consider is minimising
fixed costs and keeping break-even level of output
low. Few aspects to consider while working from
home: close to market potential, status of locality,
able to separate personal and work life, family
tensions.
 Competitions: Older and established businesses
with more resources and market knowledge is
experienced. However, by offering better customer
service, it is possible to overcome the cost and
pricing advantages that bigger businesses offer.
 Building Customer Base: The long-term strength of
the business will depend on encouraging customers
to return to purchase products again and again. By
offering personal customer service, pre and after
sale services and customer requests will help to
retain customers.
Why do businesses fail?
 Lack of Record Keeping: they believe it is less
important than meeting customer needs or think
they can remember everything. They need evidence
for taxes, when is the next customer due, whether
the cheque from a customer was received or
checking how many hours an employee worked. It is
advisable to keep paper records incase computer
crashes.
 Lack of Cash and Working Capital: capital is needed
for holding inventories, giving credit to customers,
paying suppliers and more. To avoid not being able
to do the same, construct a cash flow forecast and
keep it updates, increase capital at start up,
establish good relations with the bank so that short
term problems can be overcome and effective credit
control.
 Poor Management Skills: they may have not
developed leadership, cash management, planning,
communicating, marketing skills and more.
 Changes in the Business Environment: business
environment is dynamic (constantly changing) such
as new competitors, legal changes, economic
changes, technological changes (old fashioned)
Primary Sector: producing or extracting natural
resources to be processed by other firms
Secondary Sector: manufacturing or processing
products out of raw materials
Tertiary Sector: providing services
Impact of Enterprises in a Country
 Employment Creation: national level of
unemployment will fall and if the business
expands more jobs will be created to supply
them.
 Economic Growth: increase in gross domestic
product of a country and lead to an increase in
living standards. Increase in output and
consumption will lead to increase in tax
revenues for the government.
 Innovation and Technological: more innovative
and creativity are introduced and make the
business sector competitive and help advance.
 Exports: increase the country’s exports and
improve its international competitiveness.
Social Enterprise: a business with mainly social objectives
that reinvests most of its profits into benefiting society rather
than maximising returns to owners
Objectives (Triple Bottom Line)
 Economic: make a profit and reinvest into the
business with returning some to owners
 Social: provide jobs and support to the community
 Environmental: manage the business in an
environmentally sustainable way
Unit 1: Chapter 2
Industrialization: the growing importance of the secondary-
sector manufacturing industries in developing countries.
The importance of each sector is measured in terms of
employment/output levels as a proportion of the whole
economy.
Secondary Sector Activity Increasing Benefits
 Total national output (GDP) increases resulting in
increase of average standard of living
 Increase of output of goods can lead to lower
imports and higher exports
 More jobs created
 Expanding and profitable firms will pay more tax to
the government
 Value is added to the country’s output of raw
materials
Secondary Sector Activity Increasing Drawback
 More manufacturing business can create a huge
movement of people from countryside to towns
which leads to housing and social problems
 Imports of raw materials and components are
needed so country’s import costs will increase
Deindustrialization: the decline in importance of the
secondary sector manufacturing industries and an increase in
the tertiary sector
Reasons for Deindustrialization: rising incomes are
associated with higher living standards so customers spend
their extra income on services like hotels, financial services
rather than goods. As competition increases in developed
countries manufacturing businesses tend to be more efficient
and use cheaper labour which increases the imports of good
rather than domestic secondary firms
Public Sector: comprises organisations accountable to and
controlled by the government
Private Sectors: comprises businesses owned and controlled
by individuals or groups of individuals
Mixed Economy: economic resources are owned and
controlled by both private and public sectors
Free-Market Economy: economic resources are owned largely
by the private sector with very little state intervention
Command Economy: economic resources are owned,
planned and controlled by the government
Privatization: selling off public corporation to the private
sector
Public Goods: goods and services that cannot be charged for
(traffic lights) hence provided by public sector
Private Sector Businesses
Sole Trader Business in which one person provides the
permanent finance and has full control of the
business and is able to keep all of the profits.
It is likely to be very small and account for a
small portion of the total business turnover.
All sole traders have unlimited liability.
Mostly in retailing, car services, catering and
more.
Advantages: easy to set up, keep all profits,
complete control over business, based on
personal interests or skills, ability to establish
personal relationships with staff and
customers.
Disadvantages: unlimited liability,
competition from big firms, unable to
specialise because responsible for all aspects
of management, difficulty to raise capital,
long hours, lack of continuity (owner dies
then business dies)
Partnership A business formed by two or more people to
carry on a business together with shared
capital investment and responsibilities.
Important to choose the right partner
because errors and decisions of one partner
are faced by all partners of that business. All
partnerships are unlimited liabilities. Formal
Deed of Partnership: legal optional document
that provides agreement on voting rights,
distribution of profits, management role and
authority. Mostly in law and accountancy.
Advantages: partners can specialize in
different areas of business, shared decision
making, additional capital by each partner,
losses are shared.
Disadvantages: unlimited liability, profits are
shared, continuity (business reform if one
dies), not possible to sell shares to raise
capital.
Limited Three most distinct differences: limited
Companies liability, legal personality and continuity.
Ownership of the company is divided into
small units called shares. People buy these
shares and become shareholders of the
business. If the business fails the shareholder
only loses the amount of money invested and
not the total wealth. A company is recognized Kommentar [KM1]: Check from page
as a separate legal identity in law so in 67
matters of court cases, the case is filed
against the company itself and not the
owners.
Private A small to medium-sized business that is
Limited owned by shareholders who are often family
Companies members and this company cannot sell
shares to the general public. The word ‘Ltd’
or ‘Limited’ tells us that it has this legal form.
Shares will be owned by the original owners
and cannot be sold on the open market.
Existing shareholders can sell their shares
only with the agreement of all the other
shareholders.
Advantages: limited liability, separate legal
personality, continuity, retain control, raising
capital by selling shares to family and friends.
Disadvantage: legal formalities in
establishing the business, shares cannot be
sold to general public, end-of-year accounts
must be sent to the company’s house for
public inspection.
Public A limited company with the legal right to sell
Limited shares to the general public on the national
Companies stock exchange. The word ‘plc’ or ‘inc’ tells us
that is has this legal form. All advantages in
private limited companies + the ability to
raise large sums of capital by selling shares to
the public. Shareholders who own the
company appoint a board of directors to
control the management and decision
making of the business at the annual general
meeting. Possible to convert from public
limited companies back to private limited
companies.
Advantages: limited liability, separate legal
personality, continuity, retain control, raising
capital by selling shares to general public.
Disadvantages: legal formalities in
establishing the business, legal requirements
to disclose information to shareholders and
public, risk of takeover due to availability of
shares on the stock exchange, costs to create
the company.
Cooperatives Common in agriculture and retailing. All
members contribute to the running of the
business so workload, responsibilities and
decision making is shared, all members
having voting rights and profits are shared.
Advantages: buying in bulk so they may
benefit from economies of scale, working
together to solve issues efficiently,
motivation to all members as profits are
shared.
Disadvantages: poor management skills
unless professionals are employed, capital
shortage as no selling of shares, slow
decision making if all members have
contradicting perspectives.
Franchises A business that uses the name, logo and
trading systems of an existing successful
business. It is not a form of legal structure
but a legal contract between two firms.
The franchisee can decide which form of legal
structure to adopt.
Advantages: fewer chances of business failing
as it is already established, advice and
training is offered by the franchiser, national
advertising paid by the franchiser, supplies
are established and quality checked.
Disadvantages: share of profits to be paid to
franchiser, initial franchise license fee is
expensive, local promotions are paid by
franchisee, no choice of supplies or suppliers
to be user, strict rules hence reduced owner’s
control over business.
Joint Two or more businesses agree to work
Ventures closely together on a particular project and
create a separate business division to do so.
They are not mergers but can lead to a
merger. This is done because costs and risks
of a business venture are shared (when the
cost of developing new products is rising
rapidly), different strengths and experiences,
different major markets in different countries
can be exploited together with the new
product. Risks include different styles of
management and culture, errors and
mistakes might lead to blaming one another,
failure of one partner puts whole project at Kommentar [KM2]: Example given in
risk. page 28
Holding A business organisation that owns and
Companies controls a number of separate businesses,
but does not unite them into one unified
company. It is not a form of legal structure
but a common way for businesses to be
owned.
Shares: a certificate confirming part ownership of a company
and entitling the shareholder to dividends and certain
shareholder rights
Legal formalities in setting up a company to protect investors
and creditors
1. Memorandum of Association: states the name of the
company, the address of the head office, the
maximum share capital for which the company
seeks authorisation and the declared aims of the
business. Maximum share capital shows the
importance of one share and being aware of the
company’s aims allows shareholders to decide if
they want to be associated with it.
2. Articles of Association: this document covers the
internal workings and control of the business – for
example, the names of directors and the procedures
to be followed at meetings will be detailed.
Once these documents are completed satisfactorily, the
registrar of companies will issue a certificate of incorporation
Public Sector Businesses
Public Corporation: a business enterprise owned and
controlled by the state – also known as nationalised industry.
Advantages: managed with social objects rather than just
profits, loss making services is still operating if the social
benefit is great, finance is raised mainly by the government.
Disadvantages: inefficient due to lack of strict profit targets,
subsidies from government encourages insufficiencies,
government may interfere in business decisions for political
reasons.
Unit 1: Chapter 3
Investors in a firm may wish to compare the size of the
business with close competitors to compare the rate of
growth however there are two problems with this – there are
several ways of measuring and comparing business sizes and
they give different comparative results so a firm may appear
large by one measure but small by another, there is no
internationally agreed definition of what a small, medium or
large business is but the number of employees is often used
to make this distinction.
Different Measures of Size
1. Number of Employees: measure of the number of
employees in a business however the problem is
that a highly automated company will employ only
few people but might be able to produce a higher
output than average.
2. Revenue: total value of sales made by a business in a
given time period. It is less effective when
comparing firms in different industries as some
might be engaged in high value production such as
expensive jewels and others might be engaged in
low value production such as cleaning services. This
measure is needed to calculate market share.
3. Capital Employed: total value of all long-term
finances invested in the business. The larger the
business the greater the value of capital is required.
It is less effective when comparing firms in different
industries as two firms employing the same number
of employees may have different capital equipment.
Cleaner only needs cleaning supplies but an
optician needs expensive diagnostic and eye sight
measuring machines.
4. Market Capitalization: total value of company’s
issues shares: only for public limited companies.
The formula is Market Capitalization = Current
Share Price * Total Number of Shares Issued.
Share prices tend to change every day and a
temporary but sharp drop in share price could
appear to make the business seem smaller.
5. Market Share: sales of the business as a proportion
of total market sales. If a firm has high market share
it must be comparatively large however when the
size of the total market is small, high market shares
will not indicate a large firm. The formula is Market
Share = (Total Sales of Business/Total Sales of
Industry) * 100
6. Profit: not a good measure of business size but can
be used to assess business performance.
Why small firms are important?
 Jobs are created
 Small businesses come with new ideas and this
helps create a variety in the market and customers
benefit from greater choice
 Competition is created for larger businesses, if not
then large firms could exploit customers with high
prices and poor services
 Supply specialized goods and services to important
industries. Often being able to adapt quickly to the
changing needs of large firms
 Possibility to become established and expand and
the economy will benefit from large scale
organizations in the future
 Have lower average costs than large firms so this
benefit is passed onto the customer and costs could
be lower due to wage rates being lesser than
salaries paid in large firms.
Government assists small firms by
 Reduced rate of profit tax so that the retained
profits can be used for expansion
 Loan guarantee scheme is a government funded
scheme that guarantees the repayment of certain
percentage of a bank loan if they business fails and
this tends to make banks lend money to newly
formed businesses however the rates of interest are
higher than the market rates and the firm must pay
an insurance premium to the government
 Information, advice and support will be provided
through small firm agencies of the department for
business, innovation and skills
 In cities with high unemployment, government
finances the establishment of small workshops
which are rented to small firms at reasonable rents.
Aid is designed to help with marketing, operations,
keeping accounts and dealing with staff as business
cannot afford specialists, problems in short-term
and long-term finances, limited product range as
well as finding a suitable priced premises
Strengths of Family Businesses
Commitment: shows dedication in seeing the business grow
and passed on to the future generation hence members work
harder to reinvest profits into the business to allow it to grow
in the long term.
Reliability and Pride: family’s name and reputation is
associated with their products so they strive to increase the
quality of their output to maintain good relationship with
their stakeholders.
Knowledge continuity: a priority is made to pass on
knowledge, experience and skills to the next generation.
Weaknesses of Family Businesses
Success/Continuity Problems: most family businesses fail to
be sustainable. The high rate of failure can be explained by
the lack of skills or the splitting of management
responsibilities between family members.
Informality: little interest in setting clear and formal business
practises and procedures so as business grows it can lead to
inefficiencies and internal conflicts.
Traditional: lack of innovation could be a consequence as
Kommentar [KM3]: Page 39 example
they don’t want to change systems and procedures and
operate as it was historically run.
Conflict: problems within the family may reflect on the
Kommentar [KM4]: Example page 39
management of the business and make effective decisions
less likely.
Advantages of Small Businesses
 Managed and controlled by owners
 Offer personal service to customers
 Adapt quickly to meet changing customer needs
Disadvantages of Small Businesses
 Limited access to sources of finance
 Owners carry a large burden of responsibility
 Few opportunities for economies of scale
Advantages of Big Businesses
 Afford to employ specialists
 Benefit from economies of scale
 Access to several different sources of finance
 Risks are spread as products in many markets
 Afford research and development into new products
and processes
Disadvantages of Big Businesses
 Difficult to manage especially if geographically
spread
 Potential cost increase associated with large scale
production
 Slow decision making and poor communication
By growth of business: profits are increased as expanding the
business achieves higher sales, market share is increased and
gives greater bargaining power with suppliers and retailers,
economies of scales are increased, increase of power and
status and reduced risks of being a take-over target as the
business is too large for a potential predator company.
Internal Growth: expansion of a business by means of
opening new branches, shops or factories (also known as
organic growth). It can avoid problems of excessively fast
growth which tend to lead to inadequate capital
(overtrading) and management problems.
External Growth: Mergers and Takeovers – a company merges
with another company and its resources and operated under
one entity or control. In a take over the company takes over
the target company and makes it a subsidiary.
Unit 1: Chapter 4
A business aim helps to direct, control and review the success
of business activity. The most effective business objectives
meet the ‘SMART’ criteria
S: specific: objective should focus on what the business does
and directly apply to that business
M: measurable: objectives with quantitative value are proven
to be more efficient targets for directors and staff to work
towards
A: achievable: setting unachievable targets are pointless and
demotivates staff who are trying to reach these targets
R: realistic and relevant: objectives should be realistic when
compared with the resources of the company and be relevant
to the people who have to carry them out
T: time specific: a time limit should be set when an objective
is established
Corporate Aims: long-term goals that a business hopes to
achieve. The core central purpose of a business’ activity is in
its corporate aims
Benefits from established corporate aims: they become the
starting point for all the objects on which effective
management is based, develops a sense of purpose and
direction for the whole organization if they are clearly
communicated to the workforce, allow assessments to be
made of how successful the business has been in attaining its
goals, provides the framework within which strategies or
plans of the business are drawn up
Mission Statements: statement of the business’s core aims,
phrased in a way to motivate employees and to stimulate
interest by outside groups.
Benefits: informs people outside the business what the
central aim and vision are, prove to motivate employees
especially when the organization is looked upon (they want
to be associated), includes moral statements or values to be
worked towards, not meant to be detailed working objectives
but help establish what the business is about.
Drawbacks: too vague and general so they end up saying little
about the business or its future plans, based on public
relations (make stakeholders feel good about the
organization), very general so it’s common for two
completely different businesses to have similar vision
statements.
Vision statements appear in corporate plans, internal
company newsletters and magazines, advertising slogans
and more
Corporate Objectives: based upon the central aim or mission
of the business but are expressed in terms that provide a
much clearer guide for management action or strategy.
Common Corporate Objectives
1. Profit Maximization: it means producing at that level
of output where the greatest positive difference
between total revenue and total costs is achieved.
However, limitations of this objective are that it
focuses on high short-term profits and allows
competitors to enter the market and jeopardise the
long-term survival of the business, many business
analysts access the performance of a business
through return of capital employed rather than the
total profit figures, it may be an objective for owners
and shareholders but other stakeholders give
priority to other objects and it cannot be ignored, it
is difficult to assess whether the point of profit
maximization has been reached as prices or output
is constantly changing.
2. Profit Satisficing: aiming to achieve enough profit to
keep the owners happy but not aiming to work to
earn as much profit as possible.
3. Growth: usually measured in terms of sales or value
of output. Larger firms will be less likely to be taken
over and benefit from economies of scale. Managers
are motivated to see business achieve its full
potential by gain in higher salaries and fringe
benefits. However, limitations of this objective are
that expansion that is too rapid can lead to cash
flow problems, larger businesses can experience
diseconomies of scale, using profits to finance
growth can lead to lower short-term returns to
shareholders, growth can sometimes be away from
firm’s core activities and loss of focus and direction
for the whole organization.
4. Increasing Market Share: indicates that the
marketing mix of the business is proving to be more
successful than its competitors. It helps retailers to
stock and promote the best-selling brand, profit
margins offered to retailers will be lower than
competing brands as the shops are keen to stick it
leaving more profit for the producer, effective
promotional campaigns. Possible for an expanding
business to suffer from market share reductions Kommentar [KM5]: Page 49 example
if market is growing at a faster rate than the
business itself.
5. Survival: key objective of more new business start-
ups.
6. Corporate Social Responsibility (CSR): businesses
that consider the interests of society by taking
responsibility for the impact of their decisions and
activities on customers, employees, communities
and the environment while having objectives about
social, environmental and ethical issues there is
much greater adverse publicity given to the
business. Additionally, influential pressure groups
and legal changes forces businesses to change their
approach.
 7. Maximising Short-Term Sales Revenue: benefits
managers and staff when salaries and bonuses are
dependent on sales revenue. However, if increased
sales are achieved by reducing prices then the
actual profits of the business might fall.
8. Maximising Shareholder Value: these targets might
be achieved by pursing the goal of profit
Maximization. However, this puts the interests of
shareholder above stakeholders.
The setting of clear and realistic objectives is one of the
primary roles of senior management. Before strategy for
future action can be established, objectives are needed.
Without a clear objective, a manager will be unable to make
important strategic decisions
Stages in Decision Making:
1. Set objectives
2. Assess the problem or situation
3. Gather data about the problem and possible
solutions
4. Consider all decision options
5. Make the strategic decision
6. Plan and implement the decision
7. Review its success against the original objectives
Factors that determine the corporate objectives of a business
Corporate Culture: defined as the code of behaviour and
attitudes that influence the decision-making style of the
managers and other employees of the business. Culture is a
way of doing things that is shared by all those in the
organisation. It is about the people, how they perform and
deal with others, how adaptable they are in face of change. If
directors are aggressive in pursuit of their aims are keen to
take over competitors and care little about social or
environmental factors then the objectives of the business will
be very difficult to those of a business run by more people.
Size and legal form of the business: small business owners
may be concerned only with a satisfactory level of profit.
Larger business owners may be more concerned with the
rapid business growth to increase state and power of
managers. They are more concerned about their bonus,
salaries and fringe benefits than on maximising returns to
shareholders.
Public Sector or Private Sector: state owned organizations
tend not to have profit as major objective however private
sector business want to increase profits.
Number of Operating Years: newly formed businesses are
driven by the desire to survive but later once they are
established the business may pursue other objectives such as
growth and profit.
Divisional, Departmental and Individual Objectives: once
corporate objectives have been established they need to be
broken down into specific targets for separate divisions,
departments and individuals. These divisional goals must be
set by senior managers to ensure coordinate between
divisions, consistency with corporate objectives, adequate
resources provided to allow for successful achievement of
the objectives. Once divisional objectives are established
then departmental objectives, budgets and targets for
individuals workers are set by a process called management
by objectives (MBO).
 Management by Objectives (MBO): method of
coordinating and motivating all staff in an
organisation by dividing its overall aim into specific
targets for each department, manager and
employee.
If employees are communicated and aware of the targets
then: employees and managers achieve wider goals,
responsibilities are shared by interlinking their goals with
others in the company, managers stay in touch with their
employees’ progress by regular monitoring and training to
keep performance and deadlines on track easily
Ethical Code: also known as code of conduct is a document
detailing a company’s rules and guidelines on staff behaviour
that must be followed by all employees
Examples of Ethical Dilemma Kommentar [KM6]: Page 55

Following a strict ethical code can be expensive as: using

ethical suppliers add to business’s costs, not taking bribes to
secure business contracts can mean failing to secure
significant sales, limiting advertising child related products to
just adults may result in lost sales, accepting that it is wrong
to fix prices with competitors may lead to lower prices and
profits, paying fair wages may reduce a firm’s
competitiveness against businesses that exploit workers.
However, following a strict ethical code can: avoid potential
expensive court cases can reduce costs of fines, lead to good
publicity and increased sales, attract ethical customers,
awarded government contracts, well qualified staff may be
attracted to work
Unit 1: Chapter 5
Stakeholders: people or groups of people who can be
affected by and therefore have an interest in any action by an
organisation
Stakeholder Concept: the view that businesses and their
managers have responsibilities to a wide range of groups, not
just shareholders
Stakeholders: customers, suppliers, employees and their
families, local communities, government, lenders, special
interest groups
Responsibilities to stakeholders and impact on business
decisions
1. Customers: essential to satisfy customers’ demands
in order to stay in business for a long-term.
Decisions about quality, design, durability and
customer service should consider the customers’
objectives. They also have responsibilities to not
break the law concerning customer protection and
accurate advertising. Benefits: customer loyalty,
good publicity, good customer feedback.
2. Suppliers: good, reliable suppliers must be found
and given clear guidance on what is required as
poor quality or late will fail to satisfy customers. In
return, the business should pay promptly, place
regular orders and offer long-term contracts.
Benefits: supplier loyalty, meet deadlines and
special orders, reasonable credit terms.
3. Employees: providing training opportunities, job
security, paying more than minimum wages, good
working conditions, involve in some decision
making. Benefits: employee loyalty, low labour
turnover, employee suggestions to improve
efficiency and customer service, improved
motivation and effective communication.
4. Local Community: offer secure employment so that
there is less local fear of job losses, spend on local
supplies to generate more income, reduce the
transport impact of business activity and also keep
environmental effects to a minimum. If failed to
meet responsibilities the business faces serious
problems with plans to expand or may not attract
local customers. Benefits: most likely to give
planning permission to expand, contracts from local
council, acceptance of some negative effects caused
by business operations.
5. Government: pay taxes on time, complete
government statistical accurately, seek export
markets. Most likely to give planning permission to
expand, valuable government contracts, requests of
subsidies may be approved, licences to set up new
operations may be awards.
Corporate Social Responsibility
the concept that accepts that businesses should consider the
interests of society in their activities and decisions, beyond
the legal obligations that they have
Unit 2: Chapter 10
Manager: responsible for setting objectives, organising
resources and motivating staff so that the organisation’s
aims are met
What are managers responsible for?
1. Setting Objectives and Planning: Senior
management will establish overall strategic
objectives and these will be translated into tactical
objectives for the less-senior managerial staff.
2. Organizing resources to meet the Objectives: People
throughout the business need to be recruited
carefully and encouraged to take some authority
and to accept some accountability via delegation.
They also ensure that the structure of the business
allows for a clear division of tasks and each
department is organized to work towards the
common objective.
3. Directing and Motivating Staff: guiding, leading and
overseeing of employees to ensure that
organisational goals are being met. Motivated staff
will employ all of their abilities and make it more
likely to achieve aims.
4. Coordinating Activities: important to ensure
consistency and coordination between different
parts of each firm increases. The goals of each
department must work together to achieve a
common sense of purpose.
5. Controlling and Measuring Performance Against
Targets: management by objectives established
targets for all divisions and it is the management’s
responsibility to appraise the performance against
targets and take action if underperformance occurs.
It is important to provide positive feedback when
things keep going right.
Management Roles
To carry out these functions managers have to undertake
many different rules. 10 common rules have been identified
and divided into three groups: interpersonal roles (dealing
and motivating staff), informational roles (acting as a source,
receiver and transmitter of information) and decisional roles
(taking decisions and allocating resources)
Leadership: the art of motivating a group of people towards
achieving a common objective. Employees will want to follow
a good leader and will respond positively to them. A poor
leader will often fail to win over staff and will have problems
communicating with and organising workers effectively. They
have the desire to succeed and natural self confidence that
they will, they possess the ability to think beyond the obvious
and be creative, they are multitalented and have an incisive
mind that enables the heart of an issue to be identified rather
than the unnecessary details
Important Leadership Positions
Directors: elected by the shareholders in a limited company.
They are usually heads of major functional departments.
They are responsible for delegating within their department,
assisting in the recruitment of senior staff in the department,
meeting the objectives for the department set by the board of
directors and communicating these to their department.
Manager: any individual responsible for people, resources or
decision making are termed a manager. They will have some
authority over other staff below them in the hierarchy and
will direct, motivate and discipline staff in their department.
Supervisors: appointed by the management to watch over
the work of others. They have the responsibility of leading a
team of people working towards pre-set goals.
Workers’ Representatives: elected by the workers either by
trade union officials or as a representatives on work councils
to discuss areas of common concern with managers.
Leadership Styles: refers to the way in which manager takes
decisions and communicates with their staff.
 Autocratic Leadership: a style of leadership that
keeps all decision-making at the centre of the
organisation. Take decisions on their own with no
discussion. They set business objectives to
themselves, issue instructions to workers and check
that they are carried out. Workers become
dependent on their leaders for all guidance and will
not show any initiative. Motivation levels are low
and supervision of staff is essential.
 Democratic Leadership: a leadership style that
promotes the active participation of workers in
taking decisions. Engage in discussion with works
before taking decisions. Managers using this
approach need good communication skills
themselves to be able to explain issues clearly and
to understand responses from the workforce. This
may lead to better final decisions as the staff will
have contributed and can offer valuable work
experience. Workers will be motivated and
 committed as their experiences have been put into
consideration.
 Paternalistic Leadership (not a part of syllabus): a
leadership style based on the approach that the
manager is in a better position than the workers to
know what is best for an organisation. The
paternalistic manager will decide ‘what is best’ for
the business and the workforce but the delegation
of decision-making will be most unlikely. The leader
will listen, explain issues and consult with the
workforce but will not allow them to take decisions.
 Laissez-faire Leadership: a leadership style that
leaves much of the business decision-making to the
workforce. It allows workers to carry out tasks and
take decisions themselves within very broad limits.
This style could be particularly effective in the case
of research or design teams. Experts in these fields
often work best when they are not tightly supervised
and when they are given free rein to work on an
original project.
Theory X managers believe Theory Y managers believe
 Dislike work  Enjoyment from work
 Will avoid as from rest and play
responsibility  Will accept
 Not creative responsibility
 Are creative
Best Leadership Style depends on
 The training and experience of the workforce
 Amount of time available for consultation and
participation
 Attitude of managers
 Importance of issue under consideration
Informal Leaders: a person who has no formal authority but
has the respect of colleagues and some power over them.
People who have the ability to lead without formal power
because of their experiences, personality or special
knowledge
Emotional Intelligence: the ability of managers to understand
their own emotions and those of the people they work with to
achieve better business performance. This involves
understanding yourself, your goals, your behaviour, your
responses to people as well as understand others and their
feelings. There are four main EI competencies: self-awareness
(knowing what we feel is important and having a realistic
view of our own abilities), self-management (able to recover
from stress quickly and being trust worthy), social awareness
(sensing what others are feeling and being able to take their
views into account) and social skills (handling emotions in
relationships well and using social skills to persuade,
negotiate and lead)
Unit 2: Chapter 11

Motivation: the internal and external factors that stimulate
people to take actions that lead to achieving a goal.
The best-motivated workers will help an organisation achieve
its objectives as cost-effectively as possible. Unmotivated
staff will be reluctant to perform effectively and quickly and
will offer nothing but the absolute minimum of what is
expected. Motivation levels have a direct impact on the level
of productivity and thus the competitiveness of the business
Conclusion of the Hawthorne Effect
 Changes in working conditions and financial
rewards have little or no effect on productivity
 When management consults with workers,
motivation is improved as they take an interest in
their work
 Working in teams and developing team spirit can
improve productivity
 Groups can establish their own targets and these
can be influenced by the informal leader of the
group

Abraham Maslow and The Hierarchy of Human Needs

A hierarchy where individuals needs start on the lowest level
and once the level is satisfied they strive to achieve the next
level. Reversion is possible and once a need had been
satisfied it will no longer motivate individuals. Self-
actualization is not reached by many people but everyone is
capable of reaching their potential
Limitations: not everyone has the same needs, difficult to
identify the degree to which each need has been met and
F.W. Taylor and Scientific Management
which level the worker is on, money is necessary to satisfy
This approach has become known as ‘scientific management’
physical needs, self-actualization is never permanently
due to the detailed recording and analysis of results that it
achieved
involves
How to Improve Productivity (output per worker)?
1. Select workers to perform a task.
2. Observe them performing the task and note the key
elements of it.
3. Record the time taken to do each part of the task.
4. Identify the quickest method recorded.
5. Train all workers in this quickest method and do not
allow them to make any changes to it.
6. Supervise workers to ensure that this ‘best way’ is
being carried out and time them to check that the
set time is not being exceeded.
7. Pay workers on the basis of results – based on the
theory of economic man.

Economic Man: man was driven or motivated by money alone

and the only factor that could stimulate further effort was the
chance of earning extra money. This means paying workers a
certain amount for each unit produced. To encourage high
output, a low rate per unit can be set for the first units
produced and then higher rates become payable if output
targets are exceeded. Drawback is that workers will vary their
output according to their financial needs at different times of
the year
Elton Mayo and The Human Relations Theories
Hawthorne Effect: a series of experiments he and his team
conducted over a five-year period at the Hawthorne factory
of Western Electric Co. in Chicago. His work was initially
based on the assumption that working conditions had a
significant effect on worker’s productivity. Experiments were
undertaken to establish the optimum working conditions.
The output of a control group experienced no changes in the
working conditions and forced Mayo to accept that working
conditions in themselves were not that important in
determining productivity levels other factors were also
needed before drawing a conclusion
Frederick Herzberg and The ‘Two Factor Theory’
His research was based on questionnaires and interviews
with employees
Conclusions: job satisfaction resulted from five main factors
(also known as motivators): achievement, recognition, work
itself, responsibility and advancement. Job dissatisfaction
resulted from five main factors: company policy and
administration, supervision salary, relationships and working
conditions. These were termed ‘hygiene factors’
Motivating Factors (Motivators): aspects of a worker’s job
that can lead to positive job satisfaction
Hygiene Factors: aspects of a worker’s job that have the
potential to cause dissatisfaction
Job Enrichment: aims to use the full capabilities of workers
by giving them the opportunity to do more challenging and
fulfilling work
Two factor Theory for today’s business
1. Pay and working conditions can be improved and
these will help remove dissatisfaction about work
but they will not provide conditions for motivation
to exist.
2. Motivators need to be in place for workers to be
prepared to work willingly. Herzberg suggested that
they could be provided by adopting the principles of
‘job enrichment’. There are three main features of
job enrichment complete units of work: typically,
in mass production, workers assemble one small
part of the finished product. Herzberg argued that
complete and identifiable units of work should be
assigned to workers and that this might involve
teams of workers rather than individuals on their
own. These complete units of work could be whole
sub-assemblies of manufactured goods. Feedback
on performance: gives recognition for work well
done and could provide incentives to achieve more.
Range of tasks: give challenge and to stretch the
individual, a range of tasks should be given.
3. Businesses could offer higher pay, improved
working conditions and less handed supervision of
work. It would help remove dissatisfaction of work
but they will would soon be taken for granted.
David McClelland and Motivational Needs Theory
He is best known for describing three types of motivational
need
1. Achievement Motivation (n-ach): A person with the
strong motivational need for achievement will seek
to reach realistic and challenging goals and job
advancement. There is a constant need for feedback
regarding progress and achievement and a need for
a sense of accomplishment.
2. Authority/Power Motivation (n-pow): A person with
this dominant need is ‘authority motivated’. The
desire to control others is a powerful motivating
force – the need to be influential, effective and to
make an impact. There is a strong leadership
instinct and when authority is gained over other (it
brings personal status and prestige)
3. Affiliation Motivation (a-affil): The person with need
for affiliation as the strongest driver or motivator
has a need for friendly relationships and is
motivated towards interaction with other people.
He believed that ‘achievement-motivated’ people are
generally the ones who make things happen and get results.
However, they can demand too much from their staff in the
achievement of targets and priorities
Process Theories (not a part of syllabus except one below)
Emphasise how and why people choose certain behaviours in
order to meet their personal goals and the thought processes
that influence behaviour. Process theories study what people
are thinking about when they decide whether or not to put eff
ort into a particular activity
Victor Vroom and Expectancy Theory
Individuals choose to behave in ways that they believe will
lead to outcomes they value. He had three beliefs and even if
one belief is missing then workers will not have the
motivation to do the job. He states that individuals have
different sets of goals and can be motivates if they believe
that there is a positive link between effort and performance,
favourable performance results in desirable rewards, rewards
will satisfy an important need, desire to satisfy the need is
strong enough to make the work effort worthwhile
Expectancy Theory follows 3 beliefs
1. Valence: The depth of the want of an employee for
an extrinsic reward.
2. Expectancy: The degree to which people believe
that putting effort into work will lead to a given level
of performance.
3. Instrumentality: The confidence of employees that
they will actually get what they desire.
Financial Methods of Motivation
Time-Based payment to a worker made for each period
Wage Rate of time worked. Common way of paying
manual and non-management workers. A
time rate is set for the job and the total wage
is determined by multiplying the rate by the
time periods worked. This method offers
some security to workers but it is not
directly linked to the level of output or
effort.
Piece Rate a payment to a worker for each unit
produced. A rate is fixed for the production
of each unit and the workers’ wages
therefore depend on the quantity of output
produced. If set too low
it could demotivate the workers but if too
high it could reduce the incentives.
Salary annual income that is usually paid on a
monthly basis. Common way of paying
professional, supervisory and management
staff. The salary level is fixed each year and
it is not dependent on the number of hours
worked or the number of units produced.
Commission a payment to a sales person for each sale
made. Common way of paying a sales
person. It reduces security as there is no
basic pay if nothing is sold during a period.
Bonus a payment made in addition to the
Payments contracted wage or salary. Base salary is a
fixed amount per month so bonus payments
may be paid in addition based on a criteria
agreed between managers and workers.
Performance a bonus scheme to reward staff for above-
Related Pay average work performance. Common for
and Bonuses those whose output is immeasurable. It
requires regular target setting, establishing
specific objectives, annual appraisals of
performance against pre-set targets, paying
each worker a bonus according to the
degree of target exceeded.
Profit Sharing a bonus for staff based on the profits of the
business. Staff will feel more committed to
the success of the business and will strive to
 achieve higher performances and cost
savings.
Fringe benefits given by an employer to some or all
Benefits employees. These are non-cash forms of
reward. They include free insurance,
pension schemes, discounts and more.
Some of these fringe benefits are taxed.
Non-Financial Methods of Motivation
Job Rotation increasing the flexibility of employees
and the variety of work they do by
switching from one job to another.
Job attempting to increase the scope of a job
Enlargement by broadening or deepening the tasks
undertaken. It can include both job
rotation and job enrichment.
Job reduction of direct supervision as
Enrichment workers take more responsibility for
their own work and are allowed some
degree of decision making authority.
Three key features include complete
units of work, direct feedback on
performance to allow workers to be
aware of their progress and challenging
tasks offered which allows workers to
gain further skills and qualifications as a
form of gaining status and recognition.
Job Redesign involves the restructuring of a job to
make work more interesting, satisfying
and challenging. It is done by adding
and sometimes removing certain tasks
and functions. Closely linked to job
enrichment.
Training improving and developing the skills of
employees is an important motivator. It
increases the status of workers and gives
them a better chance of promotion to
more challenging tasks.
Quality Circles voluntary groups of workers who meet
regularly to discuss work-related
problems and issues. The meetings are
not formally led by managers or
supervisors they are informal and all
workers are encouraged to contribute to
discussions. Workers are usually paid for
attending and the most successful
circles may be rewarded with a team
prize.
Worker workers are actively encouraged to
Participation become involved in decision-making
within the organisation. The benefits of
participation include job enrichment,
improved motivation and greater
opportunities for workers to show
responsibility. However, it may be time
consuming to involve workers in every
decision.
Team-Working production is organised so that groups
of workers undertake complete units of
work. It can lead to lower labour
turnover, ideas from the workforce on
improving product and manufacturing
process, higher quality.
Target Setting closely related to the technique of
management of objectives. enable direct
feedback to workers on how their
performance compares with agreed
objectives as they helped identify and
establish it.
Delegation involve the passing down of authority to
and perform tasks to workers and allowing
Empowerment workers some degree of control over
how the task should be undertaken.
Unit 2: Chapter 12
Human Resource Management (HRM): the strategic approach
to the effective management of an organisation’s workers so
that they help the business gain a competitive advantage.
It aims to recruit capable, flexible and committed people,
managing and rewarding their performance and developing
their key skills to the benefit of the organisation. The purpose
of HRM is to recruit, train and use the workers of an
organisation in the most productive manner to assist the
organisation in the achievement of its objectives
Human Resource Management focuses on
 Workforce Planning: planning the future workforce
of the business.
 Recruitment and Selection: selecting appropriate
employees and inducting them into the business.
 Developing Employees: appraising, training and
developing employees at every stage of their
careers.
 Employment Contracts: preparing contracts of
employment and deciding how flexible they should
be.
 Ensuing HRM Operates Across Business: monitoring
and improving employee morale and welfare
including giving advice and guidance.
 Incentive Systems: developing appropriate pay
systems for different categories of employees.
 Monitoring: measuring and monitoring employee
performance.
Recruitment: the process of identifying the need for a new
employee, defining the job to be filled, the type of person
needed to fill it and attracting suitable candidates for the job.
Selection: involves the series of steps by which the
candidates are interviewed, tested and screened for choosing
the most suitable person for vacant post.
Recruitment and Selection are necessary when the business
is expanding and needs a bigger workforce or when
employees leave and they need to be replaced (also known
as labour turnover)
Steps of Recruitment and Selection Process
1. Establishing the exact nature of the job vacancy and
drawing up a job description: includes job title,
details of tasks to be performed, responsibilities,
place in hierarchy structure, working conditions and
assessment and performance of the job. Job
description is a detailed list of key points about the
job to be filled and is beneficial as it provides an
idea for potential recruits whether they are the right
type of person to apply for the job.
2. Drawing up a person specification: it is a detailed list
of the qualities, skills and qualifications that a
successful applicant will need to have. It helps in the
selection process by elimination applicants who do
not meet requirements.
3. Preparing a job advertisement: reflects the
requirements of the job and the personal qualities
needed. It can be displayed within the business
premises or in government job centres, recruitment
agencies and newspapers. Kommentar [KM7]: Example page 169
4. Drawing up a shortlist of applicants: a small number
of applicants are chosen based on their application
forms and personal details often contained in a CV.
References may have been obtained in order to
check on the character and previous work
performance of the applicants.
5. Selecting between applicants: Interviews are the
most common method of selection. Interviewers
question the applicant on their skills, experience
and character to see if they will both perform well
and fit into the organisation. Candidates are
assessed on their achievements, intelligence, skills,
interests, personal manner, physical appearance
and personal circumstances.
Benefits of Internal Recruitment
 Applicants may be already known to the selection
team.
 Applicants will already know the organization and
its internal methods.
 Quicker than external recruitment.
 Cheaper than using external advertising and
recruitment agencies.
 Staff will not have to get used to new style of
management.
Benefits of External Recruitment
 New ideas and practises brought into the business.
 Wider choice of potential applicants.
 Avoid resentment if existing colleague is promoted
above them.
 Standard of applicants could be higher than internal
staff.
Employment Contracts: a legal document that sets out the
terms and conditions governing a worker’s job.
It typically contains: employee’s work responsibilities and
main tasks, whether the contract is permanent or temporary,
working hours and level of flexibility expected, payment
method, holiday entitlement, number of notice days if they
wish to leave or make redundant
Labour Turnover: measures the rate at which employees are
leaving an organisation. The formula is Labour Turnover =
(Number of Employees Leaving in 1 year/Average Number
of Employees Employed) * 100. Higher the value, lesser
motivated the employees
Training: work-related education to increase workforce skills
and efficiency
Different Types of Training:
1. Induction Training: introductory training
programme to familiarise new recruits with the
systems used in the business and the layout of the
business site. Objectives include introducing them
to the people that they will be working with most
closely, explaining the internal organisational
structure, outlining the layout of the premises and
making clear essential health and safety issues.
2. On-the-Job Training: instruction at the place of
work on how a job should be carried out. Often
conducted either by the HR managers or
departmental training off icers. Watching or working
closely with existing experienced members of staff is
a frequent component of this form of training.
3. Off-the-Job Training: all training undertaken away
from the business. Could be a specialist training
centre belonging to the firm itself or it could be a
course organised by an outside body to introduce
new ideas that no one in the firm currently has
knowledge of.
Employee Appraisal: the process of assessing the
effectiveness of an employee judged against pre-set
objectives.
Dismissal: being dismissed or sacked from a job due to
incompetence or breach of discipline.
Unfair Dismissal: ending a worker’s employment contract for
a reason that the law regards as being unfair.
Redundancy: when a job is no longer required the employee
doing this job becomes unnecessary through no fault of their
own.
To show fair dismissal proof must be shown and they can
include: inability to do job after sufficient training,
continuous negative attitude at work, continuous disregard
of health and safety procedures, destruction of employer’s
property, bullying of other employees
Dismissal can be unfair when they include: pregnancy,
discriminatory reasons, member of a union, non-relevant
criminal records
Most HR departments will offer advice, counselling and other
services to employees who are in need of support. These
support services can reflect well on the caring attitude of the
business towards its workforce
Work-Life Balance: a situation in which employees are able to
give the right amount of time and eff ort to work and to their
personal life outside work
To achieve better work-life balance, businesses allow: flexible
working, teleworking, job sharing, sabbatical periods
(extended period of leave from work)
Equality Policy: practices and processes aimed at achieving a
fair organisation where everyone is treated in the same way
and has the opportunity to fulfil their potential.
Diversity Policy: practices and processes aimed at creating a
mixed workforce and placing positive value on diversity in
the workplace.
Unit 3: Chapter 16
Marketing: management process responsible for identifying,
anticipating and satisfying consumers’ requirements
profitably
Management Functions Involved in Marketing
 Market Research
 Product Design
 Pricing
 Advertising
 Distribution
 Customer Service
 Packaging
Markets: place or mechanism where buyers and sellers meet
to engage in exchange. Also refers to group of consumers that
is interested in a product, has the resources to purchase the
product and is permitted by law to purchase it.
Potential Market: total population interested in the product
Target Market: segment of the available market that the
business has decided to serve by directing its product
towards this group of people.
Value: a consumer will consider a product to be of good value
if it provides satisfaction at what is thought to be a
reasonable price.
Satisfaction: customer satisfaction is not always obtained
with very expensive products. A product might be so
expensive but functions average and the customer believes
that ‘good value’ has not been received is not customer
satisfaction.
Marketing Objectives: the goals set for the marketing
department to help the business achieve its overall
objectives.
Marketing Strategies: long-term plan established for
achieving marketing objectives.
Examples of Marketing Objectives (increase in)
 Market Share
 Total Sales
 Average number of items purchased per customer
visit
 Loyal customers
 Frequency of loyal customer shopping
 Number of New Customers
 Customer Satisfaction
 Brand Identity
To be effective, Marketing Objectives should
 Fit in with overall aim and mission of the business
 Determined by senior management
 Be realistic, motivating, achievable, measurable and
clearly communicated to all departments
Why are Marketing Objectives important?
 Provide a sense of direction for the marketing
department
 Progress can be monitored against targets
 Broken down targets allow for management of
objectives
 Form the basis of marketing strategy
Coordination between Marketing and Finance
 Finance department will use sales forecast of
marketing department to help construct cash flow
forecast and operational budgets
 Finance department will ensure that necessary
capital is available to pay for the agreed marketing
budget
Coordination between Marketing and Human Resources
 Sales forecast will be used by human resources to
help devise a workforce plan for all departments
 Human resources will ensure that recruitment and
selection of appropriately qualified and experienced
staff are undertaken to meet plans by the marketing
department
Coordination between Marketing and Operations
 Market research data will play a key role in new
product development
 Sales forecast will be used by operations
department to plan for the capacity needed
(purchase of machines and stock of materials
required for the new output level)
Market Orientation: an outward-looking approach basing
product decisions on consumer demand, as established by
market research. It gives a business customer focus.
It requires market research and market analysis to indicate
present and future customer demand as the consumer is put
first.
Benefits of Market Orientated
 Chances of newly developed products failing are
reduced
 Customer needs are being met appropriately then
they are more likely to survive longer and make
higher profits
 Constant feedback from consumers since market
research never ends
Product Orientation: an inward-looking approach that
focuses on making products that can be made and then
trying to sell them.
Why Product Orientated Businesses still exist?
They invent and develop products in the belief that they will
find consumers to purchase them. Pure research in this form
is rare but still exists. there is still the belief that if businesses
produce an innovative product of a good-enough quality,
then it will be purchased. They concentrate their efforts on
efficiently producing high-quality goods. They believe quality
will be values above market fashion.
Asset-Led Marketing: an approach to marketing that bases
strategy on the firm’s existing strengths and assets instead of
purely on what the customer wants. This is based on market
research too but does not attempt to satisfy all consumers in
all markets. Instead, the firm will consider its own strengths
in terms of people, assets and brand image and will make
only those products that use and take advantage of those
strengths.

Societal Marketing: this approach considers not only the
demands of consumers but also the effects on all members
of the public (society) involved in some way when firms meet
these demands.
It implies that
 Attempt to balance three concerns: company
profits, customer wants and society’s interests
 Difference between short-term consumer wants
(low prices) and long-term consumer wants and
social welfare (protecting environment or paying
workers reasonably)
 Aim to identify consumer needs and satisfy more
efficiently than competitors
 Lead to forms being able to charge higher prices as
benefiting society becomes a ‘unique selling point’
Demand: the quantity of a product that consumers are willing
and able to buy at a given price in a time period.
Supply: the quantity of a product that consumers are willing
and able to buy at a given price in a time period.
In free markets the equilibrium price is when demand equals
supply.
Equilibrium Price: the market price that equates supply and
demand for a product.
If price were higher than equilibrium price then there would
be unsold stocks (excess supply) and if prices are lower than
the equilibrium price then stocks will run out (excess
demand)
In Fig 16.1 it shows that as prices reduces demand increases
In Fig 16.3 it shows that as supply increases price increases
Demand
Level of demand varies with prices and may change due to
 Changes in consumers’ income
 Changes in price of substitute goods
 Changes in population size
 Fashion and taste changes
 Advertising and promotional spending
Supply
Level of supply varies with price and may change due to
 Cost of production
 Taxes imposed on suppliers by government
 Subsidies paid by government to suppliers
 Weather conditions and other natural factors
 Advances in technology
Features of Markets
 Location: Local Markets sell products to consumers
in the area where the business is located. They have
limited sales potential. Regional Markets cover a
larger geographical area and often expand into the
region so that they can increase sales. International
Markets offer the greatest sales potential.
Multinationals operate and sell in many different
national markets illustrates the sales potential from
exploiting international markets.
 Size: the total level of sales of all producers within a
market. It can be measured in two ways: volume of
sales (units sold) or value of goods sold (revenue). It
is important for three reasons: marketing manager
can assess whether market is worth entering, firms
can calculate their own market share, growth or
decline can be identified.
 Market Growth: the percentage change in the total
size of a market (volume or value) over a period of
time. Pace of growth depends on: general economic
growth, changes in consumer incomes and
development of new markets and products that
take sales away from existing ones, changes in
consumer tastes and factors, whether the market is
saturated or not. Kommentar [KM8]: What is
 Market Share: percentage of sales in the total saturation?
market sold by one business. It is the most effective
way to measure the relative success of marketing
strategy against its competitors. The product with
the highest market share is called brand leader. The
formula is Market Share = (Total Sales of
Business/Total Sales of Industry) * 100
Benefits of high market share: sales are higher and
could lead to higher profits, retailers will be keen to
stock the product and will be sold to them at a lower
discount rate resulting in higher sales level and may
lead to higher profitability, the fact that the brand is
the ‘market leader’ can be used in advertising.
 Competitors: The most common way of
competitiveness is price. Other forms (non-price) of
competition include customer service, location and
more.
Direct Competitors: businesses that provide the
same or very similar goods or services.
Indirect Competitors: businesses that provide in the
same industry but different alternatives or in
different markets.
Creating/Adding Value: the difference between the selling
price of a product and the cost of the materials and
components bought in to make it.
Marketing Strategies to increase added value
 create an exclusive retail environment that makes
customers feel important. This makes them feel
more prepared to pay higher prices as it convinces
them it is of higher quality.
 High quality packaging to differentiate the product
from other brands.
 Promote and brand the product so that it becomes a
‘must-have’ brand name that customers will pay a
premium price for.
 Create a ‘unique selling point’ (USP) that clearly
differentiates the product from other manufacturers
Unique Selling Point: the special feature of a
product that differentiates it from competitors’
products.
Product Differentiation: making a product
distinctive so that it stands out from competitors’
products in consumers’ perception.
Mass Marketing and Niche Marketing
Niche Marketing: identifying and exploiting a small segment
of a larger market by developing products to suit it.
Mass Marketing: selling the same products to the whole
market with no attempt to target groups within it.
Advantages of Niche Marketing: small firms may be able to
survive in a market that is dominated by larger firms, if
market is unexploited by competitors then niche can sell at
high prices and high profit margins, products can be used by
large firms to create status and image.
Advantages of Mass Marketing: enjoy lower average costs of
production due to economies of scale, run fewer risks then
Niche as they depend on consumer habits that tend to keep
changing.
Market Segment: a sub-group of a whole market in which
consumers have similar characteristics.
Market Segmentation (also known as differentiated
marketing): identifying different segments within a market
and targeting different products or services to them. It is
market oriented (customer focused). It needs to have a
consumer profile. There are three common bases for
segmentation.
Consumer Profile: quantified picture of consumers of a firm’s
products, showing proportions of age groups, income levels,
location, gender and social class.
1. Geographic Differences: Consumer tastes may vary
between different geographic areas and so it may be
appropriate to offer different products and market
them in ‘location-specific’ ways. Consumers
demand products geared towards their specific
needs. These geographical differences might result
from cultural differences.
2. Demographic Differences: demography is the study
of population data and trends and demographic
factors such as age, gender, ethnic background,
family size. Having decided on the most appropriate
one, it will be essential to gear the price and
promotion strategies towards this segment. Income
and Social Class are two very important factors
leading to market segmentation. Individuals Social
Class may have great impact on their expenditure
patterns.
Main Socio-Economic Groups in UK:
 Upper Middle Class
 Middle Class
 Lower Middle Class
 Skilled Manual Workers
 Working Class
 Casual, Part-Time workers
Marketing Acronyms for different Demographic
Groups
DINKY: double income no kids yet
NILK: no income lots of kids
WOOF: well off older folks
SINBAD: single income no boyfriend and desperate
3. Psychographic Factors: differences between
people’s lifestyles, personalities, values and
attitudes. Many of these can be influenced by an
individual’s social class too. For example, the
attitudes towards ethical business practices are very
strong among some consumers. Lifestyle is a very
broad term that relates to activities undertaken,
interests and opinions rather than personality. Many
firms advertise to appeal to customers who share
personality characteristics (activity holidays aimed
at outgoing people who wish to pursue dangerous
sports)
Advantages of Market Segmentation
 Define their target market precisely and design and
produce goods specifically aimed at these groups
leading to increased sales.
 Enables identification of gaps in the market (groups
on consumers that are not being targeted)
 Differentiated marketing strategies can be focused
on target market groups. This avoids wasting money
on trying to sell products to the whole market (some
customers have no intention of buying)
 Set correct prices and increase revenue and profits.
Limitations of Market Segmentation
 Research and development and production costs
might be high as a result of marketing different
product variations.
 Promotional costs might be high as different
advertisements and promotions needed for
different segments.
 There is danger when focusing on one or two limited
market segments that excessive specialization could
lead to problems if consumers in those segments
change their purchasing habits significantly.
 Extensive market research is needed.
Unit 3: Chapter 17
Market Research: this is the process of collecting, recording
and analysing data about customers, competitors and the
market
It helps analyse customer reaction to
 Different price levels
 Alternative forms of production
 New types of packaging
 Preferred means of distribution
The need for Market Research
1. Reduce the risks associated with new product
launches: by investigation potential demand for a
product/service, the business should be able to
assess the likelihood of a new product achieving
satisfactory sales. It is a key part of new product
development (NPD)
2. Predict future demand changes: businesses may
investigate social and other changes to see how
these might affect the demand of a product/service.
3. Explain patterns in sales of existing products and
market trends: managers can analyse the sales data
of existing products and conduct market research
and take effective action to reverse the decline in
sales/trends.
4. Asses most favoured designs, flavours, styles,
promotions and packaging for a product: enables a
business to focus on the aspects of design and
performance that customers rate most highly and
incorporate it into the final product. Market
Research can be used to discover: market size and
customer taste and trends, product strengths and
weaknesses, promotion used and its effectiveness,
competitors and their unique selling propositions,
distribution methods preferred by customers.
New Product Development
Market Research Process
1. Management Problem Identification: helps have a
clear idea of the purpose of the research or the
problem that needed investigation. For example,
size of potential market, why sales are falling, how
to break into the market of another country, how to
effectively overcome challenges of new
competitors, target customer groups. Without
setting out the problem, unnecessary data would be
gathered and might prevent the real issue from
being investigated.
2. Research Objectives: objectives are tied in with the
original problem and must be set in a way that they
can be achieved with all the information needed to
solve the problem. For example, how many people
are likely to buy the product in country X, if the price
of product X how will it increase sales volume, what
would be the impact of new packaging on sales of
the product, why are consumer complaints
increasing.
3. Sources of Data (primary and secondary): collects
information that is required and can be done in two
ways.
Primary Research: the collection of first-hand data
that is directly related to a firm’s needs.
Secondary Research: collection of data from second
hand sources.
Sources of Secondary Data
1. Government Publications: gives information about
population census, social trends, economic trends,
annual statistics, family expenditure survey.
2. Local Libraries and Local Government Offices: data
needed for small area such as local population with
details of total numbers and age and occupation
distribution, number of households, proportions of
the local population from different ethnic and
cultural groups.
3. Trade Organizations: they produce regular reports
on the state of the markets their members operate
in. For example, Engineering Employees Federation.
4. Market Intelligence Reports: detailed reports on
individual markets and industries produced by
specialist market research agencies. They are very
expensive and usually available in local business
libraries and contain key note reports, Mintel
reports and more.
5. Newspaper Reports and Specialist Publications:
marketing (this journal provides weekly advertising
data and customer ‘recall of adverts’ results), motor
trader, the financial times (features articles on key
industries and detailed country reports) and more.
6. Internal Company Records: previous customer sales
records, guarantee claims, daily weekly or monthly
sales trends, feedback from customers on product,
service, delivery and quality.
7. Internet: has access to data that have already been
gathered from sources above. Whenever research is
conducted from internet, the accuracy and
relevance must be checked.
Advantages of Secondary Research: obtain data cheaply,
identifies nature of market and assists with planning of
primary research, obtain data quickly, allows comparison
from different sources.
Disadvantages of Secondary Research: out of date, might not
be suitable due to collection for different purposes, data
collection methods and accuracy is unknown, might not be
available for newly developed products.
Methods of Primary Research
 Qualitative Research: research into the in-depth
motivations behind consumer buying behaviour or
opinions. It helps discover the motivational factors
behind consumer buying habits.
 Quantitative Research: research that leads to
numerical results that can be statistically analysed.
Sources of Qualitative Research
Focus Groups: a group of people who are asked about their
attitude towards a product, service, advertisement or new
style of packaging. Possible drawbacks include time wasting
and irrelevant discussion, it can also be difficult to analyse
and present. It could also lead to biased conclusions if
researchers leading or influencing the discussion.
Sources of Quantitative Research
1. Observation and Recording: count number of
people or cars that pass a particular location to
assess the best site for business. Observe people in
shops to see how many look at the new display or
products in shelves. However, if people are aware of
being watched they can behave differently and
researchers don’t get the opportunity to ask for
explanations.
2. Test Marketing: involves promoting and selling the
product in a limited geographical area and then
recording consumer reactions and sales figures. It
reduces the risk of new product launch failing
completely but the evidence is not completely
accurate if the total population does not share the
same characteristics and preferences in the selected
region.
3. Consumer Survey: involve directly asking
consumers or potential consumers for their
opinions and preferences. It can be both qualitative
and quantitative. There are four important issues for
market researchers to be aware of while conducting
customer surveys: who to ask, what to ask, how to
ask, how accurate it is.
 Systematic Sampling: the sample is selected by
taking every nth item from the target population
until the desired size of sample is reached. The
researcher must make sure that the chosen sample
does not hide a regular pattern and a random
starting point must be selected.
 Stratified Sampling: the target population may be
made up of many different groups with many
different opinions. These groups are called strata or
layers of the population and for a sample to be
accurate it must contain members of all these
strata.
 Quota Sampling: similar to stratified sampling.
Interviewees are selected according to the different
proportions that certain consumer groups make-up
of the whole target population. However, the
interviewer might be biased in their selection of
people in each quote (prefer to ask only very
attractive people)
 Cluster Sampling: when a full sampling frame list is
not available or the target population is too
geographically dispersed then cluster sampling will
take a sample from just one or a few groups and not
the whole population.
Method of sampling depends on the size and financial
resources of the business and how different consumers
are in their tastes between different age groups. Cost
effectiveness is important in all market research
decisions.

Sample: the group of people taking part in a market research

survey selected to be representative of the overall target
market

Probability Sampling Methods

Probability Sampling: involves the selection of a sample from
a population based on the principle of random chance. It is
more complex, time consuming and costly than non-
Non-Probability Sampling Methods
probability sampling. Reliable estimates can be made about
It cannot be used to calculate the probability of any
the whole market with less errors as sample are randomly
particular sample being selected. It cannot be used to make
selected and each unit’s inclusion in the sample can be
inferences or judgements about the total population and it
calculated.
must be analysed and filtered by the researcher knowledge
Common Probability Sampling methods
Common Non-Probability Sampling Methods
 Simple Random Sampling: each member of the
 Convenience Sampling: members of the population
target population has equal chances of being
are chosen based on ease of access (based on one
included. To select a sample we need: a list of all
location)
people in the target population, sequential numbers
 Snowball Sampling: the first respondent refers a
given to each member in the population, a list of
friend who then refers another friend and the
random numbers generated by a computer.
process continues. It is a cheap method of sampling
used by companies and is likely to lead to a biased
 sample as each respondent’s friends are likely to
have similar lifestyle and opinions.
 Judgemental Sampling: sample is chosen based on
who is thought to be appropriate to study. When
time is short and reports need to be made quickly.
 Ad Hoc Quotas: a quote is established and
researchers are told to choose any respondent they
wish to the pre-set quota.
All of these samples are likely to lead to less accuracy (less
representative of the whole population). Learn only
Random, Stratified and Quota Sampling (rest is not a part
of syllabus)
Open Questions: those that invite a wide-ranging or
imaginative response – the results will be difficult to collate
and present numerically (not a good idea) It allows
respondents to give their opinions
Principles to follow while designing a questionnaire
 Making the objectives of the research clear so that
questions can be focused on that
 Writing clear and not open questions
 Questions followed in a logical sequence
 Avoid questions that point to one answer
 Using easily understood language
 Include questions that allow classification (gender,
occupation)
Reasons why primary research may not be reliable
1. Sampling Bias: results from a sample may be
different from those if obtained by whole
population. This is sampling bias. The less care that
is taken in selecting a sample, the greater the degree
of statistical bias. The larger the sample, the greater
the chance confidence levels will be met.
2. Questionnaire Bias: when questions tend to lead
respondents towards one answer and because of
this the results are not accurate reflections of how
people act or believe.
3. Other Forms of Bias: include the respondent not
answering in a very truthful way because they do
not want to admit spending money.
Cost-Effective marketing could be loyalty card schemes as
they scan the total number and type of goods bought by a
consumer as well as their age, gender and income (initial
purchase of card). This allows retailers to target consumer
with advertisements and special offers they might be
interested in. This form of targeted marketing is not wasting
money on promotion while targeting the right group
Market Research produces data in both numerate and
descriptive forms and this is said to be raw and unprocessed
because it has not yet been presented or analysed in a way
that will assist the business in decision making
Averages
Representative measure of a set of data. It will us something
about the central tendency of data. Averages can be
calculated from mean, median and mode
Mean: calculated by totalling all the results and dividing by
the number of results
Median: the value of the middle item when data have been
ordered or ranked. It divides the data into two equal parts
Mode: values that recur the most. The value that occurs most
frequently in a set of data
Mean: (fx / f) = (frequency*value) / frequency
Median: order in cumulative frequency then divide total
cumulative frequency by 2 and the cumulative frequency
NOT crossed corresponding value is median
Mode: highest frequency
Measures of Spread of Data
Range: the difference between the highest and lowest value.
Main problem is that it can be distorted by extreme results.
Inter-Quartile Range: the range of the middle 50% of the.
data. It ignores the lowest 25% and highest 25% of data.
Upper quartile is highest value * ¾.
Lower quartile is highest value / 4.
InterQuartile is Upper Quartile – Lower Quartile.
Unit 3: Chapter 18
Marketing Mix: the four key decisions that must be taken in
the effective marketing of a product. (4Ps)
Customers require the right product at the right price with
effective promotion distributed at the right place. People
(skilled and motivated staff) and process (the way in which
customers accesses the service) are equally important
Role of Customers (4Cs)
Customer Solution: what the firm needs to provide to meet
customer’s needs and wants
Cost to Customer: total cost of the product including
extended guarantees, delivery charges and financing costs
Communication with Customer: up-to-date and easily
accessible two-way communication links to promote the
product and gain important customer market research
information
Convenience to Customer: providing easily accessible pre-
sales information and demonstration and convenient
location for buying the product
4Cs are the key feature of customer relationship
management.
Customer Relationship Management (CRM): using marketing
activities to establish successful customer relationships so
that existing customer loyalty can be maintained.
Long-Term Relationships with Customers by
 Targeted Marketing: giving each customer the
products and services they most need
 Customer Service and Support: building customer
loyalty
 Providing Information: about
product/material/quality/features
 Social Media: track and communicate with
customers. Trends are identified through social
media to allow more accurate decisions
Customer Expectations
 Quality
 Durability
 Performance
 Appearance
Product: the end result of the production process sold on the
market to satisfy a customer need. Includes consumer and
industrial goods and services. New Product Development is
based on attempting to satisfy consumer needs that have
been identified through research. It involves ‘research and
development’ costs and many of the products initially
developed will never reach the final market
Unique Selling Point: the special feature of a product that
differentiates it from competitors’ products.
Benefits of Unique Selling Point
 Effective promotion that focusing on the
differentiating feature
 Opportunities to charge higher prices due to
exclusive design/service
 Free publicity from business media reporting on
USP
 Higher sales than undifferentiated products
 Customers more willing to be identified with the
brand because it’s different
Brand: an identifying symbol, name, image or trademark that
distinguishes a product from its competitors.
Intangible Attributes of a Product: subjective opinions of
customers about a product that cannot be measured or
compared easily.
Tangible Attributes of a Product: measurable features of a
product that can be easily compared with other products.
Difference between Brand and Product
Product is s general term used to describe what is being sold.
Brand is the distinguishing name or symbol that is used to
differentiate one manufacturer’s product from another.
Branding can have a real influence and powerful impact in
minds of consumers giving the firm’s product a unique
identity.
Product Positioning: the consumer perception of a product or
service as compared to its competitors.
Product Portfolio Analysis: analysing the range of existing
products of a business to help allocate resources effectively
between them.
Product Life Cycle: the pattern of sales recorded by a product
from launch to withdrawal from the market and is one of the
main forms of product portfolio analysis.
Introduction: when the product has just been launched after
development and testing. Sales are low and may increase
slowly.
Growth: if the product has been effectively promoted and
well received by marketing, sales should grow significantly.
The reason for growth dying down include increasing
competition, technological chances making the product less
appealing, changes in consumer tastes.
Maturity/Saturation: sales fail to grow but they do not decline Pricing Levels set for a Produce will
significantly. Saturation of consumer durable products  Determine the degree of value added by the
because customers who want the product have already business to bought in components
bought it.  Influence the revenue and profit made by a business
Decline: sales will decline steadily because no extension due to impact on demand
strategy has been implemented or it has not worked so the  Reflect on marketing objectives of the business and
only option is replacement. help establish psychological image and identity of a
product
Consumer Durable: manufactured product that can be
reused and is expected to have a reasonably long life.
Extension Strategies: marketing plans to extend the maturity
stage of the product before a brand new one is needed. Aim
to lengthen the life of an existing product. For example,
selling in new markets, repackaging and relaunching the
product with new uses.

Uses of Product Life Cycle

 Assisting with Planning Marketing Mix Decisions:
when to advise a lower price of its product, in which
phase is advertising most important, when should
variations be made to the product. Final decisions
will also depend on competitor’s actions, state of
economy and marketing objectives of the business.
 Identifying Cash Flow: cash flow is negative during
development as costs are high but nothing has been
sold yet. At introduction the development costs
might have ended but heavy promotional expenses
are uncured and could continue into the growth
phase. As sales increase the cash flow should
improve. The maturity phase is likely to see the
most positive cash flows because sales are high and
promotional costs might be limited and spare
factory capacity will be low. As the product passes
into decline, price reductions and falling sales
contribute to reduce cash flows. If the business has
many products at its decline phase then
consequences of cash flow could be serious. D2 has a steeper gradient than D1. The prices of both are
increased by the same amount but the reduction in demand
 Identifying Balanced Product Portfolio: cash flow
is greater for product B than Product A. Total Revenue of
should be reasonably balances so there are
product A has increased but has fallen for B and can be seen
products at every stage and the positive cash flow of
by the size of the shaded areas. The relationship between
the successful ones can be used to finance the cash
price changes and the size of the resulting change in demand
deficits of others. Factory capacity should be kept
is known as price elasticity of demand.
constant levels as decline output of some goods is
replaced by increasing demand of recently
Price Elasticity of Demand: measures the responsiveness of
introduced ones. This is known as a balanced
demand following a change in price. The formula is Price
portfolio of products. Kommentar [KM9]: Example Sony
Elasticity of Demand = Percentage Change in Quantity
Demanded / Percentage Change in Price
Product Life Cycle and Product Portfolio Analysis Evaluation
Important tool for assessing the performance of firm’s
current product range. It is an important part of a marketing Value of Classification Explanation
audit (regular check on performance of firm’s marketing PED
strategy). Product Life-Cycle Analysis needs to be used 0 Perfectly Same amount demanded no
together with sales forecast and management experience to Inelastic matter the price.
assist with effective product planning. 0 to 1 Inelastic Change in demand is less than
Managing Product Portfolios effectively can help a business change in price. Firm can raise
achieve its marketing objectives. Product is just one part of price as not too much demand
the overall strategy needed to win and keep customers. Price, lost and increase in sales
promotion and place are also key factors in a successful revenue.
product. Without a well management Product Portfolio that 1 Unit Elasticity Change in demand is equal to
offers customers real and distinctive benefits, marketing change in price so total sales
objectives are unlikely to be achieved. will remain constant and sales
revenue will be maximised.
1 to Elastic Change in demand is greater
infinity than change in price. Firm can
lower its prices and pick up
more demand and increase
sales revenue.
Infinity Perfectly Elastic Large amount of demand falls
to 0 if price raised by smallest
amount
Factors determining Price Elasticity
1. Necessity of Product: the more necessary the
product, the less they will react to price changes.
Tend to make demand inelastic.
2. Similar Competing products/brands: large number
of substitutes allowing consumers to switch to
another brand if price increases.
3. Level of Consumer Loyalty: consumers will likely to
continue purchasing with price increase if having a
high degree or loyalty among consumers.
Businesses attempt to increase brand loyalty with
influential advertising and promotional campaigns
by making their product more distinct (product
differentiation)
Uses of Price Elasticity of Demand
 Accurate Sales Forecast: if a business is considering
a price increase to cover production costs then an
awareness of PED should allow forecast demand to
be calculated.
 Assisting in Pricing Decisions: if the PED of different
products is made aware then it could raise prices on
products with low PED (inelastic) and lower prices
on products with high PED.
Limitations of Price Elasticity of Demand
 PED assumes that nothing else changes. If a firm’s
sales rise due to price reductions, it may also be due
to competitors leaving the marketing or consumer
incomes rise. PED is not calculated accurately in
these situations.
 PED calculations will become outdated quickly
because consumer tastes changes and new
competitors enter the market.
 Not always possible to calculate PED. The data
needed for working it out might come from past
sales resulting in previous price changes and these
data could be old and market conditions have
changed. In case of new products, market research
will be relied upon to estimate PED by identifying
the quantities that a sample of potential customers
would purchase at different prices.
Determinants of Pricing Decisions
 Cost of Production: unit price must be able to cover
all the costs of producing that unit to be able to
make a profit. These costs include the variable and
fixed costs. Variable costs vary with number of units
such as raw materials and fixed costs do not vary
such as rents.
 Competitive Conditions: firm with a high market
share may be is likely to be a price setter for other
smaller firms in the market to follow. The more
competition, the more likely that prices will be fixed
similar to those fixed by other competitors.
 Competitors Prices: difficult to set a price different
from market leader unless true product
differentiation can be established.
 Business and Marketing Objectives: price must
reflect the other components of the marketing mix
that must all be based upon the marketing
objectives of the business. If it aims to be a market
leader through mass marketing then it needs to set
different price levels than niche marketing. If the
marketing objectives is to establish a premium
branded product then it will not achieve it by low
prices.
 New or Existing Product: a decision of skimming or
penetration strategy is to be adopted.
Pricing Methods Kommentar [KM10]: Page 272 read
Firms will assess their costs of producing or suppling each
unit and then add an amount to the calculated costs
 Mark-up Pricing: adding a fixed mark-up for profit to
the unit price of a product. Take the price they pay
to producers and add a percentage mark-up to
decide the price of the product.
 Target Pricing: setting a price that will give a
required rate of return at a certain level of
output/sales. The formula is Target Price = (Total
Cost and Expected Return) / Output.
 Full Cost Pricing: setting a price by calculating a unit
cost for the product (allocated fixed and variable
costs) and then adding a fixed profit margin.
 Contribution Cost Pricing: setting prices based on
the variable costs of making a product in order to
make a contribution towards fixed costs and profit.
 Competition Based Pricing: a firm will base its price
upon the price set by its competitors. Can be used
when price leadership (one dominant firm),
destroyer pricing (undercuts competitor’s price),
marketing pricing (based on study of conditions in
market and the actions of consumers are looked at
(customer based)
Market Orientation Pricing
 Perceived-Value Pricing: where demand is inelastic
and price is placed upon the product that reflects its
values as perceived by the consumers in the market.
The more prestigious brand name, the higher the
price.
 Price Discrimination: where it’s possible to charge
different groups of consumer’s different prices for
the same product. It is able to avoid the resale
between the groups when it does not cost to keep
groups of consumers separate.
 Dynamic Pricing: offering goods at a price that
changes according to the level of demand and the
customer’s ability to pay especially through E-
commerce.
Pricing Strategies
1. Penetration Pricing: setting a relatively low price
supported by strong promotion in order to achieve a
high volume of sales. This is done because they are
attempting to use mass marketing and gain a large
market share. If the product gains a large market
share then the price could slowly be increased.
 2. Market Skimming: setting a high price for a new
product when a firm has a unique or highly
differentiated product with low price elasticity of
demand. This aims to maximise short-term profits
before competitors enter the market with similar
products and to project an exclusive image for the
product.
Conditions for Perfect Competition
They are said to be the price-makers of the industry
 Perfect consumer knowledge about prices and
products
 Firms products are of equal quality
 Freedom of entry into and exit from the industry
 Many consumers and products and none is big
enough to influence prices on its own
Oligopoly Competition: a market that is dominated by few
producers
How Firms Compete in Oligopolistic Industries
 Price Wars to gain Market Share: might reduce long-
run competitions and reduced competition might
lead to higher prices eventually and could reduce
the pressure on firms to innovate with new
products. It can be very damaging to profits and
could lead to weaker firms being forced out of the
industry.
 Non-Price Competition: engage in fierce and
competitive promotional campaigns that are
designed to establish brand identity and dominance
 Collusion: few firms find it easy to collude. They are
declared illegal and are then subject to court action
and heavy fines.
Loss Leaders: often used by retailers. They set very low prices
for some products and expect that consumers will buy other
goods too and hope that profit earned by these other goods
will exceed the loss made on the low-priced ones.
Psychological Pricing: set prices just below key price levels to
make the prices appear much lower. $999 instead of $1,000. It
also includes the use of market research to avoid setting
prices that consumers consider to be inappropriate for the
style and quality of the product.
Pricing Decisions Evaluation
 Incorrect to assume to keep the same pricing
methods for all its products as different market
conditions for different products. It is important to
apply different methods to its portfolio of products
depending on costs of production and competitive
conditions within the market.
 Level of price has a powerful influence on consumer
purchasing behaviour.
 Little to gain in adopting low price strategy all the
time as consumers expect good value of product not
always low prices. All aspects of the marketing mix
integrated together must make the consumer
accept the overall position of the product and agree
that its image justifies the price charged for it.
 Complete brand image and lifestyle offered by the
product Is important as choices and incomes
increase. A lot price for prestige lifestyle could easily
destroy the image that the rest of the marketing mix
is attempting to establish.
Unit 3: Chapter 19
Promotion: the use of advertising, sales promotion, personal
selling, direct mail, trade fairs, sponsorship and public
relations to inform consumers and persuade them to buy. It is
about communicating with actual or potential customers.
The combination of all forms of promotion used by a
business for any product is known as ‘promotion mix’. The
amount a firm spends on promotion is known as ‘promotion
budget’
Promotional Objectives Aim to
 Increase sales by raising consumer awareness of a
product
 Remind consumers of an existing product and its
distinctive qualities
 Increase purchases by existing consumers or attract
new consumers
 Demonstrate the qualities of a product compared
with competitors
 Create or reinforce the brand image or ‘personality
of a product
 Correct misleading reports about the product and
reassure the public after the incident
 Develop the public image of a business through
corporate advertising
 Encourage retailers to stock and actively promote
products to final consumers
Promotion Mix: the combination of promotional techniques
that a firm uses to sell a product
Advertising: paid-for communication with consumers to
inform and persuade thorough media such as radio, TV
This is sometimes referred to as ‘above the line promotion’.
Above-the-Line Promotion: a form of promotion that is
undertaken by a business by paying for communication with
consumers.
It can be of two types
 Informative Advertising: adverts that give
information to potential purchasers of a product,
rather than just trying to create a brand image. This
information could include price, technical
specifications or main features and places where the
product can be purchased.
 Persuasive Advertising: adverts trying to create a
distinct image or brand identity for the product.
They may not contain any details at all about
materials or ingredients used, prices or places to
buy the product. Common where there is little
differentiation between products.
Trade Advertising: aimed at encouraging retailers to stock
and sell products to customers and promote them in
preference to rival products. Most likely to take place in trade
journals and magazines not available to consumers
Advertising Agencies: firms who advise businesses on the
most effective way to promote products
Stages in Devising a Promotional Plan
1. Research the market, establish consumer taste and
preferences and identify consumer portfolio
2. Advice on the most cost-effective forms of media to
attract these potential consumers
3. Use their own creative designers to device adverts
appropriate to the media to be used
4. Film or print the adverts used
5. Monitor public reaction to the campaign and feed
this back to the client to improve effectiveness of
future advice on promotion
Which media to use?
 Cost: TV, radio and cinema advertising can be very
expensive per minute of advert. The actual cost will
depend on the time of day that the advertisements
are to be transmitted and the size of the potential
audience. Marketing managers are able to compare
the cost of these media and assess whether they fall
within the marketing budget.
 Size of Audience: this will allow the cost per person
to be calculated. Media managers will provide
details of overall audience numbers at different
times of day or in different regions.
 Profile of Target Audience (age, income, interests):
this should reflect as closely as possible the target
consumer profile of the market being aimed for.
Children toys after 10 pm at night would not be
effective. Younger consumers are likely to be most
accessible on social media.
 Message to be Communicated: written forms of
communication are likely to be most effective for
giving detailed information about a product that
needs to be referred to more than once by potential
consumers. If an image-creating advert is planned
then a dynamic and colourful TV advert or YouTube
video could be more effective.
 Other Aspects of Marketing Mix: the link between the
other parts of the mix and the media chosen for
adverts could be crucial to success.
 Legal and Other Constraints: widespread ban on
tobacco advertising in Formula One grand prix
racing has forced many sponsors to use other media
for presenting their cigarette advertising. In addition
to legal controls, there are in most countries other
constraints on what advertisements can contain.
Firms tend to spend more when the economy is booming
than when it is in recession. It could be argued that
advertising is needed most when sales are beginning to
slow down or even decline due to economic forces
Sales Promotion: incentives such as special offers or
special deals directed at consumers or retailers to
achieve short-term sales increases and repeat purchases
by consumers. Generally aimed to achieve short-term
increases in sales but advertising aims to achieve returns
in the long run through building customer awareness’
 This is sometimes referred to as ‘below the line
promotion’.
Below-the-Line Promotion: promotion that is not a
directly paid-for means of communication but based on
short-term incentives to purchase.
Incentives under Sales Promotion
 Price Deals: a temporary reduction in price
 Loyalty Reward Programmes: consumer collect
points, air miles or credits for purchases and
redeem them for rewards
 Money-off Coupons: redeemed when consumer
buys the product
 Point-of-Sale Display in Shops
 BOGOF: buy one get one free
 Games and Competition
Personal Selling: member of the sales staff communicates
with one consumer with the aim of selling the product and
establishing a long-term relationship between company and
consumer.
Direct Mail: directs information to potential customers
(identified by market research) who have a potential interest
in this type of product.
Trade Fairs: marketing to other businesses to sell products to
the ‘trade’. These firms will then increase the chances of it
gaining increased sales to consumers.
Sponsorship: payment by a company to the organisers of an
event or team/individuals so that the company name
becomes associated with the event/team/individual.
Public Relations: the deliberate use of free publicity provided
by newspapers, TV and other media to communicate with
and achieve understanding by the public. The PR department
will also have the task of putting forward the company’s view
on incidents that might be damaging to image or reputation.
Sales Promotion and Advertising are not the same
Branding: the strategy of differentiating products from
competitors by creating an identifiable image and clear
expectations about a product. Aims of Branding include:
consumer recognition, making the product distinctive from
competitors, giving the product an identity or personality
that consumers can relate to. Benefits of Brand Identity
include: increase chances of brand recall by consumers,
clearly differentiate the product, allow establishments of
closely associated products with same brand name, reduce
price elasticity of demand, increase consumer loyalty to the
brand
Brand Extension: a strong brand identity can be used as a
means of supporting the introduction of new or modified
products
Marketing Budget: the financial amount made available by a
business for spending on marketing/promotion during a
certain time period
Marketing Budgets
 Percentage of Sales: the marketing budget for
expenditure will vary with the level of sales. If the
sales increase then the depart will add funds for
promotional activity. Major flaw in this method is
when sales are declining because of lack of
promotional activity then the amount for promotion
reduces too.
 Objective-Based: analysing what sales level is
required to meet objectives and then assesses how
much supporting expenditure is required to reach
such targets. This then becomes the promotion
budget.
 Competitor-Based: when two or more firms are
roughly the same size in terms of sales it is possible
that they will attempt to match each other in terms
of marketing spending. This can lead to spiralling
promotion costs as each tries to outdo the other’s
advertisements.
 What the Business can Afford: marketing budgets
will be set on the basis of what can be afforded aft er
all other forecast expenses have been paid for. This
method fails to take account of market conditions or
marketing objectives.
 Incremental Budgeting: taking last year’s budget
and adding on a percentage to reflect different sales
targets the new figure is set. It does not require
marketing managers to justify the total size of the
budget each year.
Effectiveness of Marketing can be assessed by
1. Sales performance before and after promotion: the
daily and weekly sales during and after the
campaign some conclusions could be drawn. The
results of this comparison could then be used to
calculate the promotional elasticity of demand.
2. Consumer awareness data: each week market
research agencies publish results of consumer
‘recall’ or awareness tests based on answers to a
series of questions concerning the advertisements
they have seen and responded too.
3. Consumer panels: useful for giving qualitative
feedback on the impact of promotions and the
effectiveness of advertisements.
4. Response rates to advertisements: record number of
hits and video sharing on websites. Number of tear-
off slips in newspapers and magazines.
Benefits of Promotional Expenditure
 Informs people about new products and helps
increase competition
 Helps create mass markets and assist in reducing
average costs of production through economies of
large-scale production
 Generates income for TV, radio and more that help
to keep prices lower
Drawbacks of Promotional Expenditure
 Waste of resources (could be used to lower prices
instead)
 Encourage consumer to buy goods that are not
needed
 Promotes consumerism (people judged by quantity
of goods owned)
 Encourages consumption (need to conserve limited
resources)
Channels depend on:
 Should it be sold directly to consumers?
 Should it be sold through retailers?
 How long should the channel be?
 Where should the product be available?
 Should internet be the main channel?
 How much will it cost to keep stocks?
 How much control does the business want over
marketing mix?
 How will the distribution channel support other
components of marketing mix?
Place is about how and where the product is to be sold to
a customer – transportation is about how the product is to
be physically delivered.

Introduction Informative advertising to make consumers

aware of product, sales promotion (free
samples and trial periods
Growth Some informative advertising and focus on
brand building and persuasive advertising,
sales promotion to encourage repeat
purchase, develop brand loyalty
Maturity Advertising of product differences, sales
promotion to encourage brand switching and
continued loyalty
Decline Minimal advertising apart from informing
about special offers, sales promotion

Packaging: the quality, design and colour of materials used in

packaging of products can have a very supportive role to
play in the promotion of a product

Functions of Packaging
 Protect and contain the product
 Gives information about contents, ingredients,
instructions and more
 Support the image created by other aspects of
promotion
 Recognition of the product

Channels of Distribution: chain of intermediaries a product
passes through from producer to final consumer
It is important because
 Consumers may need easy access to the firm’s
product to allow them to try before making a
purchase and return of goods
 Needs outlets for their products that give a wide
market coverage
 Retailers sell producer’s good but it will demand a
mark-up to cover their costs
Supply Chain: all businesses involved in getting products to
the final consumer
Advantages of Direct Selling: No markup/profit margin taken
by other businesses, complete control over marketing mix,
quicker, fresher food products, direct contact with
consumers allow useful market research.
Disadvantages of Direct Selling: storage and stock costs, no
retail outlets limit chances of consumers to see and buy, not
be convenient for consumers, no advertising or promotion
paid and no after sale services, expensive to deliver.
Advantages of One Intermediary: retailer holds stock and
pays, retailer has product displays and after sale services,
retailer close to consumers, producers can focus on
production.
Disadvantages of One Intermediary: intermediary takes profit
markup and could make product more expensive, producers
lose control over marketing mix, retailers sell products of
competitors too, producers have delivery costs to retailers.
Advantages of Two Intermediary: wholesalers hold goods and
buy in bulk from producer, reduces stock holding costs, pays
for transport costs to retailers, breaks bulk by bulking large
quantity and selling to retailers in small quantities, best way
to enter foreign markets where producers have no direct
contact with retailers.
Disadvantages of Two Intermediary: markup for another
intermediary, producer loses control over marketing mix,
slows down the distribution chain.
Factors influencing Distribution Channel
 Industrial products tend to be sold more directly
 Geographical dispersion of target markets
 Level of service expected by consumers
 Technical complexity of the product
 Unit value of the product
 Number of potential consumers
Trends in Distribution Channel
 Increase use of the internet
 Large supermarket chains perform functions of all
intermediaries
 Increasing variety of different channels
 Increasing integration of services where complete
package is sold to consumer
Internet Marketing: refers to advertising and marketing
activities that use the Internet, email and mobile
communications to encourage direct sales via electronic
commerce
Marketing Impact over the Internet
 Selling of goods directly to consumers (B2C) or other
businesses (B2B) as orders are placed online (e-
commerce)
E-Commerce: buying and selling of goods and
services by businesses and consumers through an
electronic medium
 Advertising using the company’s own website.
Adverts can be targeted at potential consumers
 Sales contacts are established by visitors leaving
their details and the company can use that data to
attempt to make a sale through communication
 Collecting market research data by encouraging
visitors to their website and provide important data
to aid in development of new products
 Dynamic pricing using online data about consumers
to charge different prices to different consumers
over the internet
Viral Marketing: use of social media sites or text messages to
increase brand awareness or sell products
Marketing managers try to identify influencers and create
viral messages that appeal to them and have a high chance of
being passed on to people who may be impressed that the
‘influencer’ has the product
Benefits of Internet Marketing and E-Commerce
 Inexpensive compared to ratio of cost and number
of potential consumers reached
 Reach worldwide audience for small proportion of
traditional promotion budgets
 Consumers leave important data on websites
 Accurate records can be kept (number of clicks or
different web promotions)
 Computer ownership and usage are increasing
 Lower fixed costs than traditional retail stores
 Dynamic pricing (different prices to different
consumers)
Drawbacks of Internet Marketing and E-Commerce
 Low speed internet connection and less ownership
 Consumers cannot touch, smell, feel or try tangible
goods
 Products may return if consumers dissatisfied with Kommentar [KM11]: What? Page 297
their purchase
 Cost and unreliable postal services may increase
costs
 Website must be kept up-to-date and user-friendly
and can be expensive to develop
 Worries about internet security may reduce future
growth potential
Integrated Marketing Mix: key marketing decisions
complement each other and work together to give customers
a consistent message about the product
Effective Marketing Mix Decisions
 Based on marketing objectives and affordable with
marketing budget
 Integrated and consistent with each other and
targets correct consumers
Unit 4: Chapter 22
Operations or Operations Management is concerned with the
use of resources called inputs (land, labour and capital) to
produce the output in forms of goods and services
Operations Managers are concerned with
 Efficiency of Production: keeping costs low with
competitive advantage
 Quality: suitable for the purpose intended
 Flexibility and Innovation: need to develop and
adapt to new processes
Added Value (creating value): the difference between the cost
of purchasing raw materials and the price the finished goods
are sold for
Factors for Added Value
 Design of the product: customers are prepared to
pay higher that offer better quality.
 Efficiency: reducing wastes and increasing
productivity will reduce costs per unit. Input
resources are combined and managed efficiently.
 Convince Customers to pay more: price is set more
than the cost to make it and customers are prepared
to pay it.
Stages before Selling
 Converting a consumer need into product efficiency
 Organizing operations so that production is efficient
 Deciding suitable production methods
 Setting quality standards and checking they are
maintained
Resources
Land: important of business location and the site chosen for a
business’s operations on the success of firms.
Labour: quality of the labour input will have a significant
impact on the operational success of a business. The
effectiveness of labour can usually be improved by training in
specific skills.
Capital: tools, machinery, computers and other equipment
that businesses use to produce the goods and services they
sell. Efficient operations depend on capital equipment and
the more productive and advanced the capital the greater the
chance of business success.
Intellectual Capital: intangible capital of a business that
includes human capital (skilled employees), structural capital
(databases and information systems) and relational capital
(good links)
Productivity: the ratio of outputs to inputs during production.
How efficiently inputs are converted into outputs.
Production: process of converting inputs into outputs.
Level of Production: the number of units produced during a
time period.
The formula for Labour Productivity is
Labour Productivity = Total Output in Given Period / Total
Workers Employed
The formula for Capital Productivity is
Capital Productivity = Output / Capital Employed
Rising Productivity Levels
1. Improve training of staff to raise skills: skilled staff
should be more productive efficiently. However, it
can be expensive and time consuming and highly
qualified staff could join competitors.
2. Improve worker motivation: due to motivation If the
increase productivity without an increase in labour
pay is seen then unit costs will fall.
3. Purchase more technologically advanced
equipment: it should allow increased output with
fewer staff.
4. More efficient managers.
It is possible for a business to achieve an increase in labour
productivity but to reduce total output too. If demand for the
product is falling, it might be necessary to reduce the size of
the workforce
Is raising productivity always good?
 If product is unpopular then productivity will not
guarantee success as product is unprofitable no
matter how efficiently it is made.
 Great effort from workers to increase productivity
can lead to increase in high wages demands.
 There is a difference between efficiency (measured
by productivity) and effectiveness.
Efficiency: producing output at the highest ratio of output to
input.
Effectiveness: meeting the objectives of the enterprise by
using inputs productively to meet customers’ needs.
Labour Intensive: involving a high level of labour input
compared with capital equipment.
Capital Intensive: involving a high quantity of capital
equipment compared with labour input.
Which approach to choose?
 Nature of the product and product image that the
firm wishes to establish.
 Prices of the two inputs (if labour costs are high then
using capital equipment is justifiable)
 Size of the firm and its ability to afford expensive
capital equipment.
Unit 4: Chapter 23
Problems Increasing Output
 Not enough capital
 Fewer workers
 Not enough customers
Operations Decisions Influenced by
 Marketing of factors
 Availability of resources
 Technology
1. Marketing: estimate or forecast market demands is
important as it is essential to match supply to
potential demand. This process is called operations
planning. If sales forecast is accurate then: outputs
will match closely to demand levels, inventory levels
are minimum, employ appropriate number of staff,
product right product mix.
Operations Planning: preparing input resources to
supply products to meet expected demand.
2. Availability of Resources: resources like land, raw
materials, labour, capital equipment. Location:
region that has abundant supply of necessary raw
materials. Production method: if employees are
good and wages are less then labour intensive
production is appropriate. Automation: if costs of
technology is falling then business can change to IT
based systems.
3. Technology: two most important technological
innovations have been CAD and CAM.
CAD: computer aided design – use of programs to
create 2D/3D graphical representations of physical
objectives.
CAM: computer aided manufacturing – use of
computer software to control machine tools and
machinery in manufacturing.
Computer Aided Design: mainly for the creation of detailed
3D models. CAD is also used throughout the engineering
process from design of products through analysis of
component assemblies to the structure of manufacturing
methods.
Benefits of CAD
 Lower product development costs
 Increased productivity
 Improved product quality
 Faster time-to-market
 Good visualization of final product
 Great accuracy so errors are reduced
 Easy re-design of design data for other product
applications
Drawbacks of CAD
 Complexity of the programs
 Need for extensive employee training
 Large amounts of computer processing power
required
 Can be expensive
Computer Aided Manufacturing: systems usually seek to
control the production process through automation. It is
controlled by computers so a high degree of precision and
consistency can be achieved.
Benefits of CAM
 Precise manufacturing and reduced quality problem
 Faster production and increased labour productivity
 More flexible production allowing quick changeover
from products
 Integrating with CAD, CAM allows more design
variants to be produced which means niche
products can be produced
Limitations of CAM
 Cost of hardware, programs and employee training
 Hardware failures can be consuming to solve
 Quality assurance is still needed
Operational Flexibility: the ability of a business to vary both
the level of production and the range of products following
changes in customer demand.
Flexibility can be Achieved by
 Increase capacity by extending building and buying
more equipment (can be expensive)
 Hold high stocks (can be damaged) Kommentar [KM12]: What page 350
 Flexible and adaptable labour force (may reduce
motivation)
 Flexible flow-line production equipment
Process Innovation: the use of a new or much improved
production method or service delivery method
Computer tracking of inventories by using robots in
manufacturing and faster machines to manufacture
microchips for computers. Using the internet to track exact
location of parcels being delivered and improve the speed of
delivery. The main benefit of process innovation is cheaper
production methods making the business more competitive
Product Innovation can create new market opportunities and
transform efficiency of manufacturing system and can aid to
added value
Production Methods
 Job Production: producing a one-off item specially
designed for the customer.
 Batch Production: producing a limited number of
identical products – each item in the batch passes
through one stage of production before passing on
to the next stage.
 Flow Production: producing items in a continually
moving process.
 Mass Customization: use of flexible computer aided
production systems to produce items to meet
individual customers’ requirements at mass-
production cost levels.

Job Production
In order to be called job production each individual product
has to be completed before the next product is started. At
any one time there is only one product being made. Job
production enables specialised products to be produced and
tends to be motivating for workers as they produce the whole
product. However, it tends to be expensive and takes a long
time to complete. Labour force needs to be highly skilled. It
can be slow but rewarding for workers.
Batch Production
The production process involves a number of distinct stages
and the defining feature of batch production is that every unit
in the batch must go through an individual production stage
before the batch as a whole moves on to the next stage. It
allows firms to use division of labour in their production
process and it enables some gain from economies of scale if
the batch is large enough. However, it tends to have high
levels of work-in-progress stocks at each stage of the
production process and may be boring and demotivating for
workers.
Flow Production
Process of flow production is used where individual products
move from stage to stage of the production process as soon
as they are ready. They are capable of producing large
quantities of output in a relatively short time and so it suits
industries where the demand for the product in question is
high and consistent. Labour costs tend to be low much of the
process is mechanized and there is little physical handling.
This can lead to minimization of input stocks through the use
of just-in-time stock control. However, the initial set up cost
is high and the work force tends to be bored, demotivated
and repetitive.
Mass Customization
Combines the latest technology with multiskilled labour
forces to use production lines to make a range of varied
products. Allows business to move away from mass identical
output and focus on differentiated marketing which allows
for higher added value.
Factors Influencing Production Methods
 Size of Market: if the market is very small then Job
Production is likely used. Flow Production is
adopted when the market for identical products is
large and consistent throughout the year. If Mass
Production is used in this way then mass marketing
methods will also have to be adopted to sell the
high output levels. If the market demands a large
number of units at different times of the year then
Batch Production might be appropriate.
 Capital Available: flow production line is difficult
and expensive to construct. Small firms not able to
afford this type of investment and are more likely to
use job or batch production.
 Availability of Resources: large scale Flow
Production requires a supply of unskilled workers
and a large, flat land area. If these resources are very
limited in supply then production method may have
to be adapted to suit the available resources.
 Market Demand: if firms want the cost advantages of
high volumes combined with the ability to make
different products for different markets, then mass
customisation would be most appropriate.
Problems Changing Job to Batch
 Cost of equipment need to handle large numbers in
each batch
 Additional working capital is needed to finance
stocks and work in progress
 Staff demotivation (less emphasis on workers skill)
Problems Changing Job/Batch to Flow
 Cost of capital equipment needed for flow
production
 Staff training to be flexible and multiskilled (if not
then repetitive tasks will lead to demotivation)
 Accurate estimates of future demands to ensure
that output meets demand
Location Decision Characteristics
 Strategic in Nature: long term and have an impact
on the whole business
 Different to reserve if error been made: due to costs
of relocation
 Highest Management Levels: not delegated to
subordinates
Optimal Location: business location that gives the best
combination of quantitative and qualitative factors
It is likely to comprise of: balanced high fixed costs with
potential sales revenue and convenience for customers,
balances low costs of a remote site with limited supply of
qualified labour, balances quantitative factors with
qualitative ones, balances opportunities of receiving
government grants with risks of low sales
High Fixed High break-even level of production, low
Site Costs profits and losses, fixed costs high
High Low contribution per unit produced, low
Variable Costs profits and losses, high unit variable costs
Low Problems with recruiting staff, staff
Unemployment turnover to be a problem, pay levels raised
Rate to attract and retain staff
High Average consumer disposable income may
Unemployment be low leading to low demand
Rate
Poor Transport Raise transport costs, inaccessible to
Infrastructure customers, difficult to operate just in time
stock manage due to unreliable deliveries
Quantitative Factors: these are measurable in financial terms
and will have a direct impact on either the costs of a site or
the revenues from it and its profitability
Quantitative Factors Influencing Location Decisions
 Capital Costs: best offices and retail sites may be
expensive. The cost of a building on a greenfield site
(never been developed before) must be compared
with the costs of adapting existing buildings on
developed site.
 Labour Costs: depends on whether the business is
capital or labour intensive. Lower wage rates
overseas encourage operations to be set up there.
 Sales Revenue Potential: level of sales made can be
depend directly on location (stores convenient to
potential consumers). Certain locations add status
and image to a business that may allow to add value
in the product.
 Government Grants: keen on attracting businesses
to locate to their country. Some countries provide
financial assistance to retain or attract new jobs in
areas of high unemployment.
Once Quantitative Factors have been identified and costs and
revenues have been estimated. Few techniques can be used
to assist in location decisions
1. Profit Estimates: by comparing estimated revenues
and costs of each location, the site with the highest
annual potential profit may be identified. However,
annual profit forecast alone are of limited use (need
to be compared with capital costs)
2. Investment Appraisal: these methods can be used to
identify locations with the highest potential returns
over a number of years. The simplest one is the
payback method which can be used to estimate the
location to return the original investment the
quickest. Calculating the annual profit as a
percentage of its original cost of each location is
useful too. However, they require estimate of costs
and revenues for several years for each location
which introduces a degree of inaccuracy and
uncertainty.
3. Break-Even Analysis: a straightforward method of
comparing two or more locations. It calculates the
level of production that must be sold from each site
for revenue to be equal to total costs. The lower the
break-even level of output the better that site is.
However, normal limitations of break-even is seen.
Qualitative Factors: non-measurable factors that may
influence business decisions
Qualitative Factors Influencing Location Decisions
 Safety: to avoid risks to public and damage
company’s reputation
 Room for Expansion: expensive to relocated if site is
small to accommodate expanding business
 Manager’s Preference: personal preferences
regarding desirable work and home environment
 Ethical Consideration: if relocation to a country with
weaker controls over worker welfare and
environment or making workers redundant
 Environmental Concerns: not move to a sensitive
environmental viewpoint as it could lead to poor
public relations and actions from pressure groups
 Infrastructure: transport and communication links
Location Issues
 Pull of the Market: less important with the
development of transport and communication
industries
 Planning Restrictions: authorities want businesses
as they provide employment at the same time they
want to protect the environment
 External Economies of Scale: cost reductions that
can benefit a business as the firm grows in one
region. Easier to arrange cooperation and join
ventures when businesses are located closely to
each other
Multi-Site Location: a business that operates from more than
one location
Advantages of Multi-Site Locations
 Greater convenience for consumers
 Lower transport costs
 Production based companies reduce the risk of
supply disruptions
 Opportunities for delegation of authority
 Cost advantage
Disadvantages of Multi-Site Locations
 Coordination problem between locations
 Potential lack of control and direction from senior
management
 Different cultural standards and legal systems in
different countries
 If sites are too close to each other they may be
danger where one store takes sales away from
another of the same business
Offshoring and outsourcing are not the same. Outsourcing
is transferring a business function (HR) to another
company. It is offshoring if this company is based in
another country.
Offshoring: the relocation of a business process done in one
country to the same or another company in another country.
Multinational: a business with operations or production
bases in more than one country.
Reasons for International Location Decisions
1. Reduce Costs: consider relocation to low wage
economies like India, China and Eastern Europe.
2. Access Global Markets: rapid economic growth in
less-developed countries create a huge market
potential for most consumer products.
3. Avoid Protectionist Trade Barriers: trade barriers are
taxes or other limitations on the free international
movement of goods and services. To avoid tariff
barriers on imported goods into most countries it is
necessary to set up operations within the country.
4. Other Reasons: substantial government financial
support to relocating businesses, good educational
standards and highly qualified staff and avoidance
of problems resulting from exchange rate
fluctuation.
Problems with International Location
1. Language and Communication: distance is a
problem for effective communication. The problem
is worse when some operations abroad use a
different language altogether.
2. Cultural Differences: important for the marketing
department as they play a role in determining what
goods to stock in relation to consumer tastes and
religious factors.
3. Level-of-Service Concerns: offshoring of call centres,
technical support centres and functions such as
accounting. Offshoring of these services has led to
inferior customer service due to time-difference
problems, time delays in phone messages, language
barriers and different practices and conventions.
4. Supply Chain Concerns: loss of control over quality
and reliability of delivery with overseas
manufacturing plants.
5. Ethical Considerations: loss of jobs when a company
locates all or some of its operations abroad.
Lower-cost locations may not always be the optimal location
if quality suffers or negative public reaction by low paid
workers then low costs may outweigh even the lower revenue
Scale of Operations: the maximum output that can be
achieved using the available resources – this scale can only
be increased in the long term by employing more of all inputs
Factors Influencing Scale of Operations
 Owners Objectives: small and easy to manage
 Capital Available: limited then growth is less likely
 Size of Market: small market will not require large
scale production
 Competitors: market share may be small if many
rivals
 Scope for Scale Economies: if they are substantial
like water supply then they are likely to operate on a
large scale
Producing More and Scale of Operations are not the same.
More can be produced from existing resources but changing
the Scale of Operations mean using more or less of all
resources
Economies of Scale: reductions in a firm’s (average) costs of
production that result from an increase in the scale of
operations
Economies of Scale
1. Purchasing Economies: bulk buying. Suppliers will
offer substantial discounts for large orders. This is
because it is cheaper for them to process and deliver
one large order rather than several smaller ones.
2. Technical Economies: large firms are more likely to
be able to justify the cost of flow production lines. If
these are worked at a high-capacity level then they
offer lower unit costs than other production
methods. The latest and most advanced technical
equipment (computer systems) is expensive and can
usually only be afforded by big firms.
3. Financial Economies: banks and other lending
institutions show preference for lending to a big
business with a proven track record and a
diversified range of products. Interest rates charged
to these firms are lower than the rates charged to
small businesses.
4. Marketing Economies: marketing costs obviously
rise with the size of a business but not at the same
rate. These costs can be spread over a higher level of
sales for a big firm and this offers a substantial
economy of scale.
5. Managerial Economies: small firms employ general
managers who have a range of management
functions to perform. As a firm expands it should be
able to afford to attract specialist functional
managers who should operate more efficiently than Kommentar [KM13]: Example page
general managers. The skills of specialist managers 363
and the chance of them making fewer mistakes.
Diseconomies of Scale: factors that cause average costs of
production to rise when the scale of operation is increased
Diseconomies of Scale
1. Communication Problems: poor feedback to
workers, excessive use of non-personal
communication media, communication overload
with the sheer volume of messages being sent and
distortion of messages caused by the long chain of
command.
2. Alienation of the Workforce: bigger the organisation
the more difficult it becomes to directly involve
every worker and to give them a sense of purpose
and achievement in their work. They may feel so
insignificant to the overall business plan that they
become demotivated and fail to give of their best.
3. Poor Coordination: expansion is associated with a
growing number of departments, divisions and
products. The number of countries a firm operates
in increases too. A major problem for senior
management is to coordinate and control all of
these operations. They could lead to higher
production costs.
Avoiding Diseconomies of Scale:
 Management by Objectives: assist in avoiding
coordination problems by giving each division and
department agreed objectives to work towards to
the aims of the business.
 Decentralization: gives divisions a considerable
degree of autonomy and independence. They will
now be operated more like smaller business units,
as control will be exercised by managers ‘closer to
the action’. Only really significant strategic issues
might need to be communicated to the centre.
 Reduce Diversification: less-diversified businesses
concentrate on ‘core’ activities may reduce
coordination problems and some communication
problems.
Unit 4: Chapter 24

Inventory (stock): materials and goods required to allow for

the production and supply of products to the customer
Inventories can be of 3 distinct forms
1. Raw Materials and Components: purchased from
outside suppliers and help in storage until they are
used in production. Can be drawn up anytime
allowing firms to meet increases in demand by
increasing the rate of production quickly.
2. Work-in-Progress: the production process will be
converting raw materials and components into
finished goods. During this process there will be
‘work in progress’ and this will be the main form of
inventories held. The value of work in progress
depends not only on the length of time needed to
complete production but also on the method of
production used.
3. Finished Goods: after completing the production
process goods may then be held in storage until sold
and despatched to the customer. These inventories
can be displayed to potential customers and
increase chances of sales.
Low Inventory Holding Costs
 Lost Sales: unable to supply customers from goods
held in storage then sales could be lost. It might lead
to future lost orders too.
 Idle Production Resources: if inventories of raw
materials and components run out then production
will have to stop. This will leave expensive
equipment idle and labour with nothing to do.
 Special Orders are Expensive: if an urgent order is
given to a supplier to deliver additional materials
due to shortages then extra costs might be incurred.
 Small Order Quantities: low inventory levels may
mean only ordering goods and supplies in small
quantities. By ordering in small quantities the firm
may lose out on bulk discounts and transport costs
could be higher as many deliveries have to be made.
Economic Order Quantity: the optimum or least-cost quantity
of stock to re-order taking into account delivery costs and
stock-holding costs

Problems of Ineffective Management

 Insufficient inventories to meet unforeseen changes
in demand
 Out-of-date inventories might be help if
inappropriate rotation system is not used
 Inventory wastage might occur (mishandling or
incorrect storage conditions)
 High inventory levels may result in excessive storage
costs and capital to be tied up
 Poor management of supplies purchasing function
can result in late deliveries and low discounts from
supplier

Inventory Holding Costs

 Opportunity Costs: working capital tied up in goods
in storage could be put to another use. Might be
used to pay off loans, buy new equipment or pay off
suppliers early to gain an early-payment discount.
The most favourable alternative use of the capital
tied up in inventories is called its ‘opportunity cost’.
The higher value of inventories held the more
capital is used to finance them and the greater the
opportunity cost will be.
 Storage Costs: inventories need to be held in
warehouses with special conditions. If finance has to
be borrowed to buy the goods held in storage then it
will incur interests. These costs add to the firm’s
overheads.
 Risk of Wastage and Obsolescence: if inventories are
not used or sold as rapidly as expected, then there is
an increasing danger of goods deteriorating or
becoming outdated.
Controlling Inventory Levels
 Buffer Inventory: minimum inventory level that
should be held to ensure that production could still
take place should a delay in delivery occur or should
production rates increase. Greater the degree of
uncertainty about delivery times then the higher the
buffer level will be. This will lead to greater costs
involved in shutting production down and
restarting.
 Maximum Inventory Level: limited by space or by the
financial costs of holding even higher inventories.
One way to calculate maximum level is to add the
EOQ of each component to the buffer level.
 Re-Order Quantity: number of units ordered each
time. Influenced by economic order quantity
concept.
 Lead Time: the normal time taken between ordering
new stocks and their delivery. The longer this period
the higher will be the reorder stock level. The less
reliable suppliers the greater the buffer stock level
will be.
 Re-Order Stock Level: level of stocks that will trigger
a new order to be sent to the supplier.
Just-in-Time Inventory Control
this inventory-control method aims to avoid holding
inventories by requiring supplies to arrive just as they are
needed in production and completed products are produced
to order. They require no buffer inventories
Requirements for Just-in-Time Inventory
 Relationship with Suppliers: suppliers must be
prepared and able to supply fresh supplies at very
short notice (short lead)
 Production Staff to be Multiskilled: each worker
must be able to switch to making different items at
very short notice so that no excess supplies of any
one product are made.
 Equipment and Machinery Flexibility: modern,
computer-controlled equipment is much more
flexible and adaptable and able to be changed with
no more than a different software program. Very
small batches of each item can be produced which
keeps stock levels to an absolute minimum.
 Accurate Demand Forecast: difficult for a firm to
predict likely future sales levels then keeping zero
inventories of materials, parts and finished goods
could be a very risky strategy. Demand forecasts can
be converted into production schedules that allow
calculation of the precise number of components.
 Latest IT Equipment: accurate data-based records of
sales, sales trends, reorder levels and so on will
allow very low or zero inventories to be held.
 Employer Employee Relationships: relations
problem could lead to a break in supplies and the
entire production system could grind to a halt.
 Quality: there are no spare inventories to fall back
on. It is essential that each component and product
must be right first time. Poor quality goods that
cannot be used will delay delivery.
Advantages of Just-in-Time
 Capital invested in inventory is reduced
 Costs of storage and inventory holding are reduced
Kommentar [KM14]: Which is?
and space is allowed for more productive purposes
 Less chance of inventories becoming outdated
 Greater flexibility to quickly change in consumers
demand or tastes
 Multiskilled and adaptable staff to work may gain
from improved motivation
Disadvantages of Just-in-Time
 Failure to receive supplies in time will lead to
expensive production delays
 Delivery costs will increase as frequent small
deliveries
 Order administration costs may rise as many small
orders are processed
 Reduction in bulk discounts offered
 Reputation of business depends on outside factors
such as suppliers
Unit 5: Chapter 28
Requirements of Finance
 Start-Up Capital: the capital needed by an
entrepreneur to set up a business
 Working Capital: the capital needed to pay for raw
materials, day-to-day running costs and credit
offered to customers. The formula is Working
Capital = Current Assets – Current Liabilities
 Expansion requires finance to increase the capital
assets held by the firm
 Expansion can happen while taking over another
business and finance is needed to buy out the
owners
 Pay for research and development of new products
or investing in new market strategies
Capital Expenditure: the purchase of assets that are expected
to last for more than one year
Revenue Expenditure: spending on all costs and assets other
than fixed assets (less than one year)
Illiquid: unable to pay its immediate or short-term debts.
Liquidity: the ability of a firm to be able to pay its short-term
debts.
Liquidation: when a firm ceases trading and its assets are
sold for cash to pay suppliers and other creditors.
No businesses can survive without inventories, accounts
receivables and cash in the bank
Raising finance is available by internal money raised from
business’s own assets or profits and external money is raised
from sources outside the business
Internal Sources of Finance
 Retained Profit: if the company is trading profitably
then tax is taken by the government and some is
paid to the owners or shareholders. If profit remains
then it is kept (retained) and becomes source of
finance for future activities.
 Sale of Asset: established companies find that they
have assets that are no longer fully employed. These
could be sold to raise cash. Some businesses will
sell assets that they still intend to use but which
they do not need to own. For these assets might be
sold to a leasing specialist and leased back by the
company. It will raise capital but there will be
additional fixed costs in the leasing and rental
payment.
 Reduction in Working Capital: when stock levels
increase and trade receivables are incurred working
capital can be reduced to finance these. However,
cutting back on current assets by selling inventories
or reducing debts may reduce firm’s liquidity.
External Sources of Finance
 Bank Overdraft: bank agrees to a business
borrowing up to an agreed limit as and when
required. It is the most flexible of all sources.
Amount raised can vary from day to day. The
overdrawn amount should always be agreed in
advance and always has a limit beyond which the
firm should not go. It carries high interest charge.
 Trade Credit: by delaying the payment of bills for
goods or services received a business can obtain
finance. Discounts are given for quicker pay and
supplier confidence will both be lost.
 Debt Factoring: selling of claims over trade
receivables to a debt factor in exchange for
immediate liquidity only a proportion of the value of
the debts will be received as cash. When a business
sells on credit it creates trade receivables and the
longer the time allowed to pay up the more finance
is needed to carry on trading.
Sources of Medium-Term Finance
 Hire Purchase and Leasing: hire purchase is an asset
that is sold to a company that agrees to pay fixed
repayments over an agreed time period – the asset
belongs to the company. Leasing is obtaining the
use of equipment or vehicles and paying a rental or
leasing charge over a fixed period – the asset
belongs to the leasing company. In leasing the
company will repair and update the asset as part of
their agreement.
 Bank Loan.
Sources of Long-Term Finance
Two main choices are debt or equity finance.
Equity Finance: permanent finance raised by companies
through the sale of shares
Debt Finance can be raised in two ways
 Long-Term bank Loans: loans that do not have to be
repaid for at least one year. These may be offered at
either a variable or a fixed interest rate. Fixed rates
provide more certainty but they can turn out to be
expensive.
 Long-Term Bonds or Debentures: bonds issued by
companies to raise debt finance with a fixed rate of
interest. A company wishing to raise funds will issue
or sell such bonds to interested investors. Th e
company agrees to pay a fixed rate of interest each
year for the life of the bond which can be up to 25
years.
Other Sources of Long-Term Finance
Grants: agencies that are prepared to grant funds to
businesses. They usually come with conditions attached like
location or number of jobs but if these conditions are met
then grants do not have to be repaid
Right Issue: existing shareholders are given the right to buy
additional shares at a discounted price
Advantages of Debt Financing
 Ownership of the company does not change as no
shares are sold
 Loans will be repaid so there is permanent increase
in liabilities
 Lenders have no voting rights at annual general
meetings
 Interest charges are an expense of the business and
are paid before tax reductions
 Gives shareholders a chance of higher returns
Advantages of Equity Capital
 Never has to be repaid it is permanent capital
 Dividends do not have to be paid every year but
interest on loans must be paid
Venture Capital: risk capital invested in business start-ups or
expanding small businesses that have good profit potential
but do not find it easy to gain finance from other sources.
Specialist organizations who are prepared to lend risk capital
to businesses. These risks could come from new technology
or complex research that other providers do not want to deal
with. They expect a share of future profits
Unincorporated Businesses: cannot raise finance from the
sale of shares and are most unlikely to be successful in selling
debentures as they are likely to be unknown firms. They will
have access to bank overdrafts and loans and credits. Any
owner in an unincorporated business runs the risk of losing
all their property if the firm fails
Microfinance: providing financial services for poor and low-
income customers who do not have access to banking
services
Crowd Funding: the use of small amounts of capital from a
large number of individuals to finance a new business
venture. Websites allow an individual to promote their new
business idea to many people who may be willing to each
invest a small sum. When the business is successful the crowd
funding investors will receive initial capital back with interest
or an equity stake in business and share in profits
Business Plan: a detailed document giving evidence about a
new or existing business and that aims to convince external
lenders and investors to extend finance to the business. They
help force owners to think long about the proposal, strengths
and potential weaknesses and give owners and managers a
clear plan of action to guide their decisions.
Factors Influencing Finance Choice
 Time Period: risky to borrow long-term finance to
pay short-term needs, permanent capital may be
needed for expansion, short-term finance would be
advisable to increase stocks or pay creditors.
 Cost: obtaining finance is never free, loans may
become expensive with rising interest rates, stock
exchange flotation can cost millions of dollars in
fees and promotion of share sales.
 Amount Required: share issues and sale of
debentures would be used for large capital sums,
small bank loans or reducing trade receivables
could be used to raise small sums.
 Legal Structure: risk of losing control and shares can
be used only by limited companies and only public
limited companies can sell shares to the public, if
the owner wants to retain control then sale of share
is unwise.
 Size of Existing Borrowing: higher the existing debts
the greater risk of lending more.
 Flexibility: variable need for finance needs a flexible
form of finance then a long-term and inflexible
source.
Unit 5: Chapter 29
Uses of Cost Data
 Business costs are a key factor in the profit
equation. Profit or losses cannot be calculated
without accurate cost data and they will be unable
to take effective and profitable decisions.
 Great importance to other departments as they use
cost data to inform pricing decisions.
 Keeping cost records allows comparisons to be
made and efficiency of a department or profitability
of a product may be measured and assessed over
time.
 Past cost data can help set budgets for the future
and act as targets to work on.
 Comparing cost data help managers make decisions
about resources used.
 Calculating cost of different options can assist in
decision making and improve performance.
Direct Costs: these costs can be clearly identified with each
unit of production and can be allocated to a cost centre. Two
most common direct costs in manufacturing are labour and
materials and in service businesses are cost of goods being
sold
Indirect Costs: costs that cannot be identified with a unit of
production or allocated accurately to a cost centre. They are
also referred to as overheads. Purchase of machines,
promotions, rents and cleaning (not in direct contact of
production)
Fixed Costs: costs that do not vary with output in the short
run
Variable Costs: costs that vary with output. Semi-variable
costs include both a fixed and a variable element (electricity
per unit used)
Marginal Costs: the extra cost of producing one more unit of
output
Not all direct costs are variable costs.
Break-Even Point of Production: the level of output at which
total costs equal total revenue neither a profit nor a loss is
made. It can be undertaken in two ways:
 Graphical Method: It consists of fixed costs (not vary
with output and must be paid regardless production
occurring), total costs (addition of fixed and variable
costs) and sales revenue (multiplying selling price
by output level)
Fixed cost is horizontal as it is constant, sales revenue starts
at origin because no sales are made then no revenue can be
made, variable costs start from origin because if no goods
produced no variables costs are present, total costs begins at
level of fixed costs. The point at which total costs and sales
revenue cross is the break-even point. Production levels
below the break-even point is a loss and production levels
above the break-even point is a profit.
Margin of Safety: the amount by which the sales level exceeds
the break-even level of output.
 Equation Method: the formula is
Break-Even Level of Output = Fixed Costs /
Contribution per Unit. if you want to determine a
target profit level and output required to meet it the
profit must be added to fixed costs
Break-Even can Assist in
 Marketing Decisions: impact of price increase
 Operations Management Decisions: purchase of new
equipment with lower variable costs
 Choosing between Locations’
Break-Even Usefulness
 Easy to construct and interpret
 Analysis provides guidelines at different rates of
output
 Comparisons can be made of two different options
 Equation produces a precise break-even result
 Assist managers when taking important decisions
Break-Even Limitations
 Assumption that costs and revenue are always
represented by straight lines is unrealistic. Not all
variables’ costs change directly with output and
revenue lines could be influenced by price
reductions
 Not all costs can be classified into fixed and variable
costs
 No allowance made for inventory levels and
assumed that all products are sold
 Unlikely that fixed costs remain unchanged at
different output levels
Unit 5: Chapter 30
Two more important types of accountants are financial and
management accountants. Financial Accountants prepare
the published accounts of a business with legal
requirements. They create a collection of daily transactions
and prepare reports and accounts (statement of financial
position, income statement and cash statement). This
information is used by external groups and is prepared once
or twice a year. Management Accountants prepare detailed
and frequent information for internal use by managers who
need financial data to control the firm and take decisions.
They analyse internal accounts and this information is only
made available to the managers (internal users).
Why stakeholders need accounting information?
How much did we buy from Managers and Suppliers
supplies and have been
paid?
How much profit did we Managers, Shareholders,
made last year? Tax Authorities
Is the business able to Managers and Banks
repay loans?
Did we pay wages last Managers and Workers
week?
What is the value of profit Managers and Shareholders
after all expenses which is
available for dividends?
Double Entry Principle: there are always two sides of a
transaction and this means the accounts of the business
must include it twice to ensure accounts are balanced
Accruals: arise when services have been supplied to a
business but have not yet been paid for at that time. If no
adjustments have been made for accrued expenses then the
profits have been overstated
Money Measurement Principle: all accounting data are
converted into money hence only items and transactions that
can be measured in monetary terms are recorded in the
business accounts
Prudence Concept (Conservatism): trained to be realistic
about the values. This concept states that accountants
should record losses as soon as they are anticipated and
profits should not be recorded until they have been realized
Realization Concept: all revenues and profits should be
recorded when the transaction has taken paid. Sales are not
recorded when an order is taken or when the payment is
made but when the services/goods have been provided
Income Statement (profit and loss account): shows the gross
and operating profit of the company. Details of how the
operating profits is split up between dividends to
shareholders and retained earnings (profit)
Statement of Financial Position (balance sheet): shows the
net worth or equity of the company. Difference between the
value of what the company owns (asset) and what it owes
(liabilities)
Cash-Flow Statement: where cash was received from and
what it was spent on
 Income Statement: records the revenue, costs and
profit (or loss) of a business over a given period of
time. Less detailed summary will appear in the
published accounts for external users as they are
available to competitors and detailed data could
give them insight into strengths and weakness.
Detailed income statement is produced for internal
users
Sections of Income Statement:
o Trading Account: shows gross profit (or
loss) made from trading activities. Revenue
is not the same as cash received. Revenue
(sales turnover): the total value of sales
made during the trading period. The
formula for revenue is Revenue = Selling
Price * Quantity Sold. Gross Profit: equal
to sales revenue less cost of sales. Only the
goods used and sold during the year will be
recorded in cost of sales. Cost of Sales: this
is the direct cost of the goods that were
sold during the financial year. The formula
for cost of sales is Cost of Sales = Opening
Stock + Purchases – Closing Stock.
o Profit and Loss Account: calculates
operating profit and profit for the year.
Operating Profit (net profit): gross profit
minus overhead expenses. Profit for the
Year (profit after tax): operating profit
minus interest costs and corporation tax.
o Appropriation Account: final section of the
income statement that shows how the
profit of the year is distributed between
owners in the form of dividends and
retained earnings. Dividends: the share of
the profits paid to shareholders as a return
for investing in the company. Retained
Earnings: the profit left after all deductions
including dividends have been made. This
is ‘ploughed back’ into the company as a
source of finance.
Uses of Income Statement
Measure and compare performance of the business
over time and ratios can be used to help this form of
analysis, actual profit data can be compared with
the expected profit level, bankers and creditors will
need this information to help decide whether to
lend money, prospective investors may asses the
value of putting money from the profit levels. Low
Quality Profits: one-off profit that cannot easily be
repeated or sustained. Just a fluke. High Quality
Profits: profit that can be repeated and sustained.
Slowly grows overtime and increases and stays for a
while.
 The titles of both accounts are important. Income
statement covers the whole financial year, financial
position is a statement of the estimated value of the
company at one moment of time (end of financial
year) Kommentar [KM15]: Page 458 explain

 Statement of Financial Position: records the net

wealth or shareholders’ equity at one moment of
time. The aim of most businesses is to increase the
shareholders equity by raising the value of the
business assets more than increase of liabilities.
Shareholders Equity (shareholders’ fund): total
value of assets – total value of liabilities. Asset: an
item of monetary value that is owned by a business.
Liability: a financial obligation of a business that it is
required to pay in the future. Shareholders’ Equity is
the permanent capital of the business (not be repaid
unless company ceases). Shareholders Equity
comes from two main sources: share capital (the
total value of capital raised from shareholders by
the issue of shares) and retained earnings (also
known as reserves)
Terms:
o Non-Current Assets (fixed assets): assets to
be kept and used by the business for more
than one year.
o Intangible Assets: items of value that do
not have a physical presence (patents,
trademarks; intellectual property.
Intellectual Property: the amount by which
the market value of a firm exceeds its
tangible assets less liabilities – an
intangible asset)
o Current Assets: assets that are likely to be
turned into cash before the next balance-  Other Accounts:
sheet date. 1. Cash-Flow Statement: record of the cash
o Inventories: stocks held by the business in received by a business over a period of time and
the form of materials, work in progress and the cash outflows from the business. Third and
finished goods. final main account published in the annual
o Trade Receivables (debtors): the value of report and accounts. It focuses not on profit or
payments to be received from customers net worth but on how the company’s cash
who have bought goods on credit. position has changed over the past year. Helps
o Current liabilities: debts of the business understand why a profitable business might be
that will usually have to be paid within one running out of cash.
year. 2. Chairman’s’ Statement: general report on the
o Accounts Payable (creditors; trade major achievements of the company over the
payables): value of debts for goods bought past year, the future prospects of the business
on credit payable to suppliers. and how the political and economic
o Non-Current Liabilities: value of debts of environment might affect the company’s
the business that will be payable after prospects.
more than one year. 3. Chief Executive Report: more detailed analysis
o Goodwill: arises when a business is valued of the last financial year. Broken down by area
at or sold for more than the balance-sheet of main product division with major new
value of its assets. projects, any closures or realizations that
o Working Capital: the formula is Working occurred.
Capital = Current Assets – Current 4. Auditor’s Report: report by an independent firm
Liabilities. of accountants on the accuracy of the accounts
and the validity of the accounting methods
Companies have to publish the income statement used.
and financial position for the previous financial year
 5. Notes to the Accounts: main accounts contain
only the basic information needed to assess the
position of the company. They do not contain
precise details. These and other details are
contained at the end of the annual report and
accounts in the ‘notes to the accounts.
Ratio Analysis
 Profitability: Profit Margin Ratios (compare the
profits with revenue)
 Liquidity: measure of how easily a business could
meet short-term debts.
Profit Margin Ratio: how successful the management of a
business has been in converting sales revenue to gross profit
and operating profit. It can be increased by reducing direct
costs (quality might be at risk, purchasing machinery will
increase overhead costs, retraining so profit loss, motivation
levels could fall), increasing price (total profit could fall if
consumers switch to competitors, image might be damaged),
reducing overhead costs (cheaper resources could damage
image, sales could fall more than fixed costs if promotion is
cut, low salaries or fewer staff can reduce efficiency of
business
 Gross Profit Margin = (Gross Profit / Revenue) *
100. Greater the ratio lesser effective in controlling
costs. Ratio could be low because it is adapting low
price strategies to increase sales or it has high costs
of sales. Margin can increase by reducing cost of
sales while maintain revenue or increasing revenue
without increasing cost of sales. It is a good
indicator of how effectively managers have ‘added
value’.
 Operating Profit Margin = (Operating Profit /
Revenue) * 100. Greater the ratio greater the
overheads. It can be reduced by reducing overhead
expenses while maintain sales or increased sales
without increasing overhead expenses.
Liquidity Ratios: asses the ability of the firm to pay its short-
term debts. They are not concerned with profits but with the
working capital of the business. It can be increased by
selling/lease fixed assets for cash (leasing charges will add to
overheads and reduce operating profit margin), selling
inventories for cash (reduce gross profit margin if sold at
discount and difficulty in meeting changing demand levels),
increase loans for working capital (increase the interest
costs)
 Current Ratio = Current Assets / Current
Liabilities. Recommended result is between 1.5 to
2. Below this could mean that if all of its short-term
creditors demanded repayment at the same time it
would be unlikely especially if assets cannot be
converted into cash quickly. Above this would
suggest too many funds are tied up in unprofitable
inventories, trade receivables and cash and would
be better placed in profitable assets.
 Acid Test Ratio (quick ratio) = (Current Assets –
Inventories) / Current Liabilities. Clearer picture of
firm’s abilities to pay short-term debts as
inventories are not included in calculations and they
have no certainty to be sold in short-term. Results
below 1 is a caution as it means that the business
has less than 1 liquid asset to pay 1 short-term debt.
Limitations of Ratio Analysis
 Gives an incomplete analysis of financial position
 Ratio resulted of its own is very limited (needs to be
compared with others)
 Comparing results should be done with caution
(different valuation methods)
 Poor results highlight potential business problems
 Qualitative nature is not measured
Why in need for accounting data?
 Business Managers: measure performance to
compare targets and competitors, take decisions,
control and monitor operations, set targets and
budgets.
 Banks: decide whether to lend money, assess
whether to allow increase in overdraft, decide
whether to continue overdraft or loans.
 Creditors: see if business is secure and liquid
enough to pay debts, assess whether business is a
good credit risk, decide whether to ask early
repayment of outstanding debts.
 Customers: assess whether business is secure,
determine whether they will be assured of future
supplies, establish whether there will be security of
spare parts and service facilities.
 Government and Tax Authorities: how much tax is
due, determine likelihood of expansion (creating
economic gain), asses danger of closing down
(creating economic problems), confirm if business is
staying within law.
 Investors: asses value of business and their
investment, establish profitability, what shared of
profits investors are receiving, potential growth,
whether to buy shares or not, selling their part of
share or not.
 Workforce: secure enough to pay wages and
salaries, likelihood of expansion, whether jobs are
secure, average wage.
 Local Community: see if business profitable and
likelihood of expansion.
Details not Published: details of sales and profitability of each
good/service, research and development plans, precise
future plans, performance of each department, impact on
environment and local community, future budgets or
financial plans
Window Dressing: presenting the company accounts in a
favourable light – to flatter the business performance. These
include selling assets, reducing amounts of depreciation of
fixed assets, ignoring bad debts, giving higher stock levels,
delaying paying bills until after accounts published
Kommentar [KM16]: Ideal ratio?
Unit 5: Chapter 31
Cash Flow: the sum of cash payments to a business (inflows)
less the sum of cash payments (outflows)
Liquidation: when a firm ceases trading and its assets are
sold for cash to pay suppliers and other creditors.
Insolvent: when a business cannot meet its short-term debts.
It is vital because: new businesses are offered much less time
to pay suppliers than large businesses, banks and lenders
may not believe new owners as they have no trading record
(they will expect payment at the agreed time), finance is tight
so not planning accurately is significant
It is common for profitably businesses to run out of cash. This
shows that cash and profit are not the same
Cash Inflows: payments in cash received by a business or
from the bank
Cash Outflows: payments in cash made by a business
Forecasting Cash Flows: trying to estimate future cash
inflows and outflows.
Forecasting Cash Inflows: owners own capital injection bank
loan payments (agreed by the bank in amount and timing),
customer’s cash purchases, trade receivables payments.
Forecasting Cash Outflows: lease payment for premises,
annual rent payment, utilities bills, labour cost payments,
variable cost payments.
Cash Flow Forecast: estimate of a firm’s future cash inflows
and outflows.
Net Monthly Cash Flow: estimated difference between
monthly cash inflows and cash outflows.
Opening Cash Balance: cash held by the business at the start
of the month.
Closing Cash Balance: cash held at the end of the month
becomes next month’s opening balance.
Cash Flow Forecasts Sections
1. Cash Inflows: records the cash payments to the
business
2. Cash Outflows: records the cash payments made by
the business
3. New Monthly Cash Flow and Opening and Closing
Balance: net cash flow for the period and the cash
balances at the start and end of the period
Limitations of Cash Flow Forecasting
 Mistakes can be made in preparing the revenue and
cost forecasts
 Unexpected cost increases can lead to major
inaccuracies in forecasts
 Wrong assumptions can be made in estimating sales
of business
Causes of Cash Flow Problems
 Lack of Planning: these help in predicting future
cash problems.
 Poor Credit Control: department keeps a check on
customer’s accounts and if it inefficient then trade
receivables can lead to bad debts not being
identified. Credit Control: monitoring of debts to
ensure that credit periods are not exceeded. Bad
Debts: unpaid customers’ bills that are now very
unlikely to ever be paid.
 Allowing Customers too long to pay Debts:
customers will go for credit terms because it
improves their cash flow. Allowing customers too
long to pay means reducing short-term cash inflows
which could lead to cash-flow problems.
 Expanding Rapidly: pay for expansion, wages,
materials and more. Overtrading can lead to cash
flow shortages. Overtrading: expanding a business
rapidly without obtaining all of the necessary
finance so that a cash-flow shortage develops.
 Unexpected Events: unforeseen increases in cost
could lead to negative net monthly cash flows.
Two ways to improve cash flow: increase cash inflows and
reduce cash outflows
Increasing Cash Inflows
Overdraft Interest rates can be high
Short-Term Interest costs have to be paid and loan must
Loan be repaid by due date
Sale of Assets Selling quickly can be low in price, assets
might be required later for expansion and
assets could be used as collateral for future
loans
Sale and Leasing costs add to annual overheads, loss
Leaseback of potential profits if assets rise in price,
assets could be used as collateral for future
loans
Reduce Credit Customers may purchase from firms that
Term offer extended credit terms
Debt Only 90% to 95% will be paid by debt
Factoring factoring company (Reduces Profit)
Reducing Cash Outflows
Delay payment to Reduce discount offered with purchase,
creditors demand cash on delivery or refuse to
supply if risk is great
Delay spending Efficiency may fall if outdated and
capital equipment inefficient equipment is not replaced
and expansion becomes difficult
Use leasing Asset is not owned by the business;
leasing charges include interest that
adds to annual overheads
Cut overhead Future demand may be reduced by
spending that failing to promote the product/service
don’t directly effectively
affect output

Creditors: suppliers who have agreed to supply products on
credit and who have not yet been paid.
Debtors: firms who have been supplied products on credit
and who have to yet pay.
Trade Receivables can be Managed
 Not extending credit period
 Selling claims on trade receivables to specialists
 Discover whether new customers are credit worthy
 Offering a discount to customers who pay promptly
Trade Payables can be Managed
 Increasing range of goods/services bought on credit:
unpaid creditors may reduce to supply and this may
cause production hold ups and discounts might be
lost.
 Extend period to pay: improves working capital.
Suppliers may be reluctant to supply
products/services.
Inventory can be Managed
 Keeping smaller inventory levels
 Using computer system to record sales
 Efficient inventory control, inventory use and
inventory handling so reduced losses to damager,
wastage
 Just-in-Time inventory ordering
Cash can be Managed:
 Use of cash flow forecasts
 Wise use of excess cash
 Planning for periods where there might be too little
cash
Working Capital
 Business requirements for working capital will
depend on a number of factors
 Too much liquidity is wasteful
 Too little liquidity can lead to business failure
 Managing working capital is not just about looking
after cash (timings of cash received and spent are
important)