1.1.

1 THE MARKET
MASS MARKET
• Aimed at general population with a
generic product
• Large scale production
• Potential for large sales revenue
• Possible high competition, need to be
competitive on price in order to
succeed
+ EOS and lower average unit costs
+ Straightforward; everyone equally
targeted
+ Large volume of sales means high sales
revenue. This can be used for research
and development
- High competition
- Homogenous products need to be
differentiated through marketing, this
can be expensive
- High volume production isn’t flexible to
demand changes
NICHE MARKET
• A subset of the main market; addresses
specialist needs
• Few competitors but limited numbers of
potential customers
• Businesses will have to compete on quality
and customisation in order to succeed
+ Low volumes but high profit margins
+ Charge premium price
+ Easier to target customers
+ Small scale production can be flexible and
follow trends
+ Less competition than in mass markets
- Very risky as demand may not be constant
- Higher unit costs so no EOS

MARKET SIZE AND MARKET SHARE

• Market size can be measured through:

DYNAMIC MARKETS
- VOLUME OF SALES: total quantity sold
• One that is subject to rapid or continuous
by business
changes
- VALUE: total amount consumers
• Businesses need to understand the changing
spent on product
nature of a dynamic and must adapt in order
• Market share: the proportion (%) of a
to remain competitive
market that is taken by a business, product
ADAPTING IN A DYNAMIC MARKET or brand. It can be used as a measure of
success
• Being flexible in the way the business
operates
• Market research to have better understanding
of the market MARKET SHARE:
• Investment in new technology, people,
SALES OF A BUSINESS X100
products
TOTAL SALES IN THE MARKET
• Continuous improvement

Innovation is key; gain first mover advantage

➔ Leads to greater profits
BUT expensive, research, analysis of trends

1
 1.1.2 MARKET RESEARCH
PRIMARY RESEARCH
• Original data gathered by researcher
• Information does not exist yet; research
collected first hand
+ Up to date information; reliable
+ Tailor to meet business needs
+ Better for two-way communication and follow
up questions
+ Better way to collect qualitative data
- Time consuming
- Expensive to conduct
- Low response rates can distort findings
- Is sample representative?
- Questions can be biased/create bias responses
SECONDARY RESEARCH
• Research that already exists. Conducted by
another organisation
+ Easily accessible and a good starting point
+ Less time consuming
+ Better to collect quantitative data
- Detailed reports can be expensive
- Not always up to date or tailored to business
needs
MARKET ORIENTATION

The consumer is the most important factor

PRODUCT ORIENTATION
Product is developed with quality/functions
in mind but not necessarily in line with
customer requirements
Focus on what business is good at BUT it
may not sell well
when providing products for the market, in
other words, the business has a sensitivity to
customer requirements.
This helps business to respond to customer
needs BUT needs can be fast changing, which
this could be costly or potentially weaken the
brand

USES OF MARKET RESEARCH BENEFITS + LIMITATIONS OF MARKET RESEARCH

• Assess potential demand; sales forecasting + Reduces risk and cost of making poor decisions
• Cash-flow forecast + To react to and prepare for changes in the
• Product development market
• Budgeting + To become market orientated
• Production/workforce forecast - Often biased
- Small sample limits reliability
MARKET SEGMENTATION - Collecting data is time consuming
- Cost effective; are costs worthwhile?
• An identifiable group of individuals (or part of a market) where
consumers share a characteristic or need
• E.g. demographic (gender, age etc.), geographic, behavioural,
psychological, race, income
• Use it to develop a product/target a specific group through
marketing BUT can you meet the needs of everyone?

Allows a business to:

+ Differentiate from competitors
+ Develop and build brand
+ Identify and satisfy needs of specific customers

2
 1.1.3 MARKET POSITIONING
MARKET MAPPING

Technique used to understand how products/businesses are viewed relative to competitors, based on
two relevant characteristics
+
+ Decide where to position new products High quality
+ Gain better understanding of competition
+ Gain understanding of customer perceptions
- Often perceptions of businesses may not fit into the model
- New entrants will change the market

DIFFERENTATION
Low price High price

Product differentiation is the process of making a product

PURPOSE OF PRODUCT DIFFERENTIATION

Features of a product to convince consumers to
buy it. This gives product added value
e.g. features, packaging, branding, reputation, customer
service
This is linked to a unique selling point (USP);
something that sets the business apart from
competitors
ADDED VALUE: the difference between the price charged
and the cost of inputs required to create the
product/service
Adding value can be achieved by:
DESIGN: new/unique technology or design
features
PRODUCTION: achieving quality and efficiency
adds value
- Quality will ensure a higher price can be
charged (differentiation advantage)
- Efficiency helps cut costs of the input (cost
advantage)
MARKETING: creating an image that makes the
product more desirable (brand differentiation)
Adding value is closely linked to the concept of profit.
The more value a business can add to their
products/services, the higher the price and the greater
the profit margin
Low quality
COMPETITIVE ADVANTAGE
A sustainable way the the business can
keep its products/services ahead of
competition in the long term
E.g. price, innovation, quality, reliability,
advertising, brand image, customer
service, convenience, customisation
Competitive advantage is achieved by using
resources to achieve either:
- COST ADVANTAGE; a business has skilled
worked force and efficient operations
- DIFFERENTIATION ADVANTAGE; resources
are used to create superior value for the
consumer/brand strength.
BENEFITS + LIMITATIONS OF ADDING VALUE:
+ Charge a premium price, this would
increase profit
+ Protection against competitors offering
lower prices
+ Create customer loyalty
- Are customers prepared to pay extra
for it?
- Sacrificing volume for value?

3
 1.2.1 DEMAND
DEMAND: is the amount of a good that consumers are willing
and able to buy at a given price

FACTORS AFFECTING DEMAND:

• Changes in the price of substitutes

- If a similar unbranded product was sold at a lower
price, this will affect demand of the branded item;

demand will decrease for the branded product
• Change in price of complementary products
- Complementary goods are products which are
used together, examples of these would include
petrol and a car, smartphones and apps, printer
and print cartridges. If the price of one of the items,
such as printers, goes down, then more of the other
product, this being print cartridges, may be bought.
• Changes in consumer incomes
- If salaries go up, then the demand for
products/services may increase
• Fashion, tastes and preferences
- These factors could increase sales for certain items
such as types of foods
• Advertising and branding
- If there is a successful advertising campaign, then
the demand for items may go up
• Demographics
- For example, the age of the population will
influence the demand for certain goods
price
Quantity demanded
• External shocks
- These factors are beyond the control
of the business. This could include the
arrival of a competitor in the market,
changes in legislation, climate
• Seasonality
- This is the demand for goods at
different times of the year e.g. higher
demand of ice cream in the summer,
or higher demand of gloves and
scarves during winter

Fall in demand
Increase in demand
(shift inwards/to the left)
(shift outwards/to the right)
price
price

D1

D2
D3
D1
Quantity demanded

Quantity demanded
Any of the above factors could affect demand. For
example, a successful advertising campaign could
increase demand.
Helpful reminder:
An easy way to remember this is D for demand and
D for downwards. This is because the line slopes
diagonally downwards

4
 1.2.2 SUPPLY
SUPPLY: is the amount of a goods and services provided at a
given price by companies in a market over a given time
period

FACTORS AFFECTING SUPPLY:

• Cost of production
price

- Wages, raw materials, energy, rent etc.

- Increase in costs = decrease in supply
- Decrease in costs = increase in supply
• New technology
- Mechanization and automation; enables faster
production so supply increase as more efficient
• Indirect taxes
- E.g. VAT, tariffs
Quantity - An increase makes it less appealing to supply so
supply decreases
• Government subsidies
- E.g. grants
- Lower costs of production so this increases supply
• External shocks
Helpful reminder: - E.g. oil price change, legal change i.e. working
An easy way to remember this is S for supply hours
and S for sky. This is because the line slopes - Can negatively effect supply e.g. cost of oil
diagonally upwards towards the sky. increases so this adds to costs and reduces supply

S3
S1
S1
S2
Increase in supply

(shift outwards/to the

right)
price

price

Decrease in supply

(shift inwards/to the

left)

Quantity Quantity

5
 1.2.3 MARKETS
The price in a market is set where the wishes of the consumers are matched exactly with those of producers.
This is known as the equilibrium as it is where supply and demand meet.

S1
price

price
S1
S2

P2

P1 P1

P2

D2

D1 D1

Q1 Q2 Quantity Q1 Q2 Quantity

Increase in demand Increase in supply

(shift outwards/to the right) (shift outwards/to the right)

If demand increases, then prices will rise. This is If supply increases, then prices will fall. This is
because producers will react by putting up their because there will be excess supply and producers
prices. The opposite will happen if there is a fall in will lower their price in order to sell all their goods. The
demand. opposite would happen with a fall in supply.

S2
S1
price
price

S1

P2

P1
P1

P2

D1

D1

D2
Quantity
Q2 Q1 Quantity Q2 Q1

Decrease in demand Decrease in supply

(shift inwards/to the left) (shift inwards/to the left)

6
 1.2.4 PRICE ELASTICITY OF
DEMAND
Price elasticity of demand (PED) is the responsiveness of demand to a change in price.

The graph opposite represents how, for some

Elastic product
goods, a price change will result in a larger
Inelastic product percentage change in the quantity demanded.
These would be elastic goods. For others, a smaller
percentage change in the quantity demanded
would mean that they are inelastic goods.
price

D1 PED
D2
% CHANGE IN QUANTITY DEMANDED
% CHANGE IN PRICE
Helpful reminder:
An easy way to remember this
equation is that you Queue
(quantity demanded) before
Quantity
you Pee (price)
Price elastic goods are more responsive to a change in price.
ELASTIC INELASTIC
Between -1 and - infinity Between 0 and -1

PRICE INCREASE Leads to a bigger percentage Leads to a smaller percentage

decrease in quantity decrease in quantity
demanded. Revenues fall demanded. Revenues rise

PRICE DECREASE Leads to a bigger percentage Leads to a smaller percentage

increase in quantity demanded. increase in quantity demanded.
Revenues rise Revenues fall
Note: PED is ALWAYS negative due to an inverse relationship between price and demand. As one goes
up, the other goes down.
SIGNIFICANCE OF PED TO A BUSINESS:
FACTORS INCLUENCING PED:
• Helps understand how sensitive consumers are to a
• DEGREE OF PRODUCT DIFFERENTIATION: no
change in price
difference = easy to switch therefore
• Sales forecasting; if you increase price, would the
elastic demand
business have lower revenue? This would mean that
• NUMBER OF SUBSTITUTES: more substitutes =
the business would need to lower costs
more elastic
• If they lower cost to boost demand, will they earn
• LUXURY OR NECESSITY? luxury = more
more revenue?
elastic, necessity = more inelastic
• Pricing strategy; if rivals lower price, how will it affect?
• COST OF SWITCHING BETWEEN PRODUCTS:
• Can you make products more inelastic?
higher cost = more inelastic demand
- More advertising; stronger brand
• PERCEIVED VALUE OF BRAND
- More unique product, harder to switch?
- Take over rival firms; less substitutes

7
 1.2.5 INCOME ELASTICITY OF
DEMAND
Income elasticity of demand (YED)is the responsiveness of demand to a change in incomes. The change in
economy is outside the control of the business.

YED
NORMAL GOOD
• Demand rises as incomes rise but relatively inelastic % CHANGE IN QUANTITY DEMANDED
• Positive number between 0 and 1 % CHANGE IN INCOME
• These products might be seen as a necessity
• Examples: milk, bread
LUXURY GOOD
• Demand rises as incomes rise but relatively elastic
• Positive number greater than 1
• Examples: exclusive resorts, business class travel, luxury
cars
INFERIOR GOOD
• Demand falls as income rises or demand rises as income
falls
• It is a negative number
• Examples: supermarket own brands, bus transport

FACTORS INFLUENCING YED:

• NECESSITY OR LUXURY?
- Necessity = inelastic, luxury = elastic
• ATTRACTIVENESS/BRAND POWER
- Strong brand power means people will still buy the
products even if incomes are squeezed
• PROPORTION OF INCOME SPENT ON IT
- The larger the proportion, the more sensitive you are to
changes in income (more elastic)
• FUTURE EXPECTATIONS
- i.e. state of economy, job security

SIGNIFICANCE OF YED TO A BUSINESS:

- Sales forecasting; look at potential changes in
income and assess impact
- Financial planning
- Need for investment/expansion?
- How is it financed; is a loan needed?
- More employees needed?
• Product diversification
- Does the business need a more income
inelastic/elastic product?

8
 1.3.1 PRODUCT/SERVICE
DESIGN
DESIGN MIX
• Combination of factors needed to create an effective design
• E.g. aesthetics, function, cost
WHY IS THE DESIGN MIX IMPORTANT?
• Good design mix gives a business a
competitive advantage over rivals
Design, style, appearance.
Benefits that a product/service
It is about making the
provides.
product desirable.
How well the product/service
It can enable premium
meets the needs or solves
pricing.
problem for which it is intended
for.

COST Encapsulates all production costs.

Minimum cost to make? Can it be
produced for a lower cost than
their competitors?

CHANGES TO MEET SOCIAL TRENDS: + Develop competitive advantage/USP over rivals

• Concern over resource depletion:
- Waste minimisation
- Re-use
- Recycling
• Ethical sourcing
- Buying supplies/products that are produced
with fair working conditions, pay for workers
and minimal impact on environment
+ Gain stronger brand image/reputation. Seen as
socially responsible
+ Lower costs reducing waste/cheaper raw
materials
- May increase cost of production
- May lead to increase price
- Do customers care? Aesthetics, function and
price more important?

9
 1.3.2 BRANDING AND
PROMOTION
PROMOTION
• Process by which people are
ABOVE THE LINE ADVERTISING
encouraged to buy an organisation’s • Advertising to a mass audience e.g. TV, cinema,
product/service
newspaper, online etc.
• Promotion to inform, persuade and
+ reach large audience quickly
remind
- very expensive
• Attracts customers
- may target wrong audience and therefore
• Offers an ‘incentive’ for customers to
advertisement may be considered unsuccessful
buy and a waste of money
BRANDING
• A characteristic name or symbol that BELOW THE LINE ADVERTISING
distinguishes one product from • more personal advertising to smaller/niche markets
• used to develop
another supplier. Includes
attitudes/awareness/communicate information
characteristics and what it stands for
• A strong brand can be achieved + more personal connection with their customers and
through investment in successful this could lead to a loyalty towards the business
+ can target promotion
promotion
- targeting different types of culture can be difficult
WAYS TO BUILD A BRAND
BENEFITS OF STRONG BRANDING
• Focus on a unique selling point
• Advertise; frequent and repeat messages + Adds value to product
• Sponsorship and endorsement + Enables premium pricing
• Social media + Reduces price elasticity of demand
- Direct contact with consumers and
(more inelastic)
targeted contact
- Rapid spread of message + Builds trust
+ Makes it a ‘natural’ choice for
consumers
TYPES OF BRANDING + Recognition
• PRODUCT BASED
+ Brands can be sold
- Unique logo, packaging
• PERSONAL
- Strong association with an individual that represents the value of the business
• CORPORATE
- Promote the overall business values that then run into the products they sell

CHANGES TO REFLECT SOCIAL TRENDS

• Viral marketing: fast spreading and far reaching

+ Free (?)
- Short lived
• Emotional branding: seeks to create a bond between consumer and product
- Long lasting attachment to product is a strong brand loyalty
• Social media

10
 1.3.3 PRICING STRATEGIES
COST-PLUS
• The cost to produce the products are worked out then the money is added on top
• Add a profit margin as a monetary value or add a percentage mark-up
• Considers profit margin business is willing to accept
+ Easy to calculate and justify
- Ignores PED, product not market orientated

COMPETITIVE PRICING
• Products/services prices are in line with competitors
• Business has no market power to set a different price
• Customers judge product/service on ‘non-price’ factors such as quality
• Used in very competitive markets and helps avoid price wars
+ Scope to develop non-price factors
- Shows a weak brand/product differentiation

PRICE SKIMMING
• Product priced high to begin with as it has a desirable factor
• Customers want it when its new
• Usually applies to technology with short product lifecycle
+ Greater profit early on
- Ineffective as new competitors appear

PENETRATION PRICING
• Setting prices really low on a new product
• Designed to encourage sales and to persuade customers to try the product
• Low prices should gain business more market share
• Prices rise once loyalty established
• Applies to new product attempting to enter market
+ Establishes foothold in the market
- Low profit and to some symbolizes poorer quality

PREDATORY PRICING
• Purposely lower prices so that any competitor cannot make a profit if entering the market/drive out
existing businesses. Normally businesses with high market power can do this
• Often so low they make a loss on each item sold
+ Creates a dominance
- Only works with strong brand/elastic product or a business in a strong financial position

PSYCHOLOGICAL PRICING
• E.g. £1.99 instead of £2 to appear cheaper
• Attracts those looking for value
• High value items like luxury cars avoid pricing just below but instead may price higher to match
customers’ expectations
+ Can compete against rivals
- Cheap means poor quality to some

11
 Level of competition (number of substitutes) USP/amount of differentiation

Brand strength

PED; how sensitive is the

FACTORS TO DETERMINE
product? Potential to
PRICING STRATEGY
change price

Stage of product life cycle

Need for profit
(new/old?)

DISTRIBUTION
1.3.4 DISTRIBUTION
• Process in getting the right product/service to consumer in the right place
• Distribution is one of the 4Ps of marketing – “Place”
➔ Often silent P but pivotal to business success
Retailer

Manufacturer Wholesaler Retailer Consumer

Agent Wholesaler Retailer

MANUFACTURER > AGENT > WHOLESALER > RETAILER > CONSUMER

• Some manufacturers who wish to sell into another country may use an agent who will speak
the language and understand regulations
• Disadvantage of agents is that this makes the supply chain longer which can push up price
to the final consumer

MANUFACTURER > WHOLESALER > RETAILER > CONSUMER

• Manufacturer sells to wholesaler in large quantities
• Wholesaler breaks bulk orders into smaller quantities so independent retailers will buy
• Added benefit of wholesaler is that they can offer trade credit terms to small retailers
• Wholesalers store, break down bulk and offer a distribution service for manufacturers

12
 MANUFACTURER > RETAILER > CONSUMER
• Most manufacturers like to sell to a retailer
• Retailers are spread giving the manufacturer a wide distribution and large volume of sales
• Retailers provide customers with specialist service

MANUFACTURER > CONSUMER

• Direct method
• Made easier with rise of online retailing
• Manufacturer can sell at a lower price/have a higher profit margin

INFLUENCES ON DISTRIBUTION
• Some want control of distribution for image purposes i.e. preserve
exclusivity, restrict offers
• Others want wide scale distribution for consumer convenience
• Profit; each level incurs costs. This means that the business receives a
lower price for their product
• Social change
• Nature of the product i.e. the business would want the fastest
distribution method if the product goes out of date quickly
• Scope/scale; products sold internationally may require larger
distribution

ONLINE DISTRIBUTION
• Enables niche products to reach a wider audience
• Low barriers to entry as set up costs are small; no ‘bricks’
required
• Can cater to a far greater geographically dispersed market
• Builds relationships through more personalized service
• Target specific segments much easier
• Opportunities for personalisation

BENEFITS OF ONLINE DISTIBUTION

FOR BUSINESSES FOR CUSTOMERS

+ Do not have to meet the costs of operating + Benefit from lower prices as businesses pass on
retail stores lower costs
+ Lower start-up costs make it easier for + Can shop 24/7
small businesses to launch + Usually a wider choice available
+ Can make sales 24/7 + Can compare products
+ Can offer goods to much wider market

13
 1.3.5 MARKETING STRATEGY
PRODUCT LIFECYCLE

Enables to identify strategy for product

i.e. pricing, promotion, distribution

INTRODUCTION: launching the product

to market.
involves high costs in research, testing
and marketing.
Price may be low to initiate sales.
Heavy promotion

GROWTH: rapid growth in sales and

profits.
Investment in promotion to ensure sales
remain buoyant. Price may increase.
New varieties and distribution methods.
Business must keep up with demand
growth

MATURITY: sales are near their highest

point, but the rate of growth is slowing
down.
The rate may be slowing down from
intense competition from new entrants
(they may be offering lower prices).
Business may consider cutting prices to
maintain demand for their products.
Promotions will decrease. Focus on
retention of customers and repeat
purchase
DECLINE: final stage of the cycle, sales
begin to fall. Lower production
THE VALUE OF PRODUCT PORTFOLIO ANALYSIS:
+ Useful analysis tool for business with wide product range
+ Useful for making decisions about where funds should be
allocated
+ Can be used to predict future sales and therefore plan
production/distribution
- Products and markets are complicated and don’t
necessarily follow a pattern
- Does not provide clear solutions
- Simplifies what could be complex

Advertising; try to gain a new audience

EXTENSION STRATEGY: may be used to re-launch
or remind current audience
the product to boost new growth
Adding value; add new
➔ Product focus features to current
- Re-design Examples of extension
product
- Cheaper/less risky than creating a strategies
new product
- Keeps product in maturity stage New packaging
➔ Promotion focus
- Rebranding, new packaging,
discounts etc. Price reduction; more
Explore new markets; selling in
- Attracting new users (target different attractive to customers new geographical area or target
groups)
different segments
- New markets

14
 Relative market share BOSTON MATRIX

The Boston Matrix is a model which helps businesses

RISING STAR QUESTION MARK
analyse their portfolio of businesses and brands. The
Boston Matrix is a popular tool used in marketing and
business strategy.
Market growth rate

CASH COW: successful products in mature markets

CASH COW DOG
RISING STAR: possibly leading brand in the market.
Distribution must be efficient to ensure availability. May
be in growth phase. Increase production. Lower pricing
to encourage demand or price skimming. Needs
heavy investment
+ Profitable
-Requires expensive investment to maintain position
and fend off rivals
DOG: invest to revitalise or discontinue product as it is in
a declining market. Pricing would be low and no
promotion. Dogs may generate enough cash to break-
even, but they are rarely, if ever, worth investing in.
+ Could still provide a small amount of profit/ scope for
re-branding
-No profit?
MARKETING STRATEGIES
Set of plans that aim to achieve a specific
marketing objective e.g. become a market
leader, build customer loyalty, increase market
share etc.
MARKETING STRATEGIES:
FOR MASS MARKET
• Generic product, marketed same way to everyone
• Lacks differentiation; heavy focus to create brand power
• Low risk regarding selling in volume and distribution but high risk
regarding number of competitors and price based competition
• Heavy advertising/promotion
with relatively little need for investment. They
generate high revenue that can be invested in other
areas. They need to be managed for continued profit
- so that they continue to generate the strong cash
flows that the company needs for its Stars
+ Little further investment
-Could be at the end of lifecycle
QUESTION MARK/PROBLEM CHILD: fast growing
market but not yet an established product.
Could be in the introduction phase of the
product life cycle. Requires heavy investment
to develop. Usually lots of competition from
rival brands. Pricing could be low to
incentivise demand
+ Huge potential for growth and revenue
-Requires investment to grow brand
THE VALUE OF THE BOSTON MATRIX:
+ A useful tool for analysing product
portfolio decisions
+ Only a snapshot of the current position
+ Has little or no predictive value
- Market growth is an inadequate measure
of a market's attractiveness
- The focus on market share and market
growth ignores issues such as developing
a sustainable competitive advantage
- Product life cycle varies
MARKETING STRATEGIES:
FOR NICHE MARKET
• Caters for small subset of market
• Little competition, small scale
production and distribution
• Scope for higher prices and more
targeted marketing/promotion
• More likely to sell direct to
customers

15
MARKETING STRATEGIES FOR:
BUSINESS TO CONSUMER (B2C)
• Selling to public; products more important
than relationships
• Brand and image is vital
• Play on emotion to affect buying
behaviour
• Mass distribution/larger markets
• One off purchases
• Examples of B2C marketing: retailing,
family tourism, personal banking
Customer service
Developing customer loyalty allows
for higher prices to be charged Customer incentives;
loyalty
1.4.1 APPROACHES
TO STAFFING
EMPLOYEES AS AN ASSET
• Train them; develop skills, productivity
• Involve them in decision making
• Better staff retention; saves recruitment costs
• Add value to product i.e. better level of
customer service
• Invest in working conditions
• Job security
FLEXIBLE WORKFORCE:
• MULTISKILLING
- Workforce that can be moved around from
one job to another
+ Less staff needed, use them more efficiently
increasing productivity, variety for employee
- Greater training cost, lack of specialisation
• OUTSOURCING
- Process of contracting an external business
to carry out a specific function or task on
businesses behalf
- E.g. HR, finance
+ Lowers costs, more efficient
- Loss of control, quality issues
16
BUSINESS TO BUSINESS (B2B)
• Selling to other businesses
• Less style, more substance
• Greater focus on quality/low prices
• Tailored services, reliable
• Build relationships
• Examples of B2B marketing: business
banking, wholesaling, commercial
property
Ease of access
DEVELOPING
CUSTOMER LOYALTY
Good communication; inform
customers of new products
Emotional attachment
EMPLOYEES AS A COST
• Limited motivation, low productivity
• Low morale, higher turnover
• Increase likelihood of redundancies
• Pay minimum to workers
• Centralise decision making
• Find ways to maximise output while minimising
staff costs
• PART-TIME/TEMPORARY WORKERS
- Part time work is less than full time.
May be weekend or evening work
+ Increase staff for busy periods, saves
costs
- Less efficient, employee may want
more hours
- Temporary workers can be full
time/specific contracted time
+ Recruit seasonally, easier to get rid of
workers
- Lack of certainty for employee
 Overall for flexible working
• FLEXIBLE WORKING/HOME WORKING
- Flexible, not traditional hours + Allows to respond to short term changes in
+ Gain life balance, improve demand
recruitment/retention + Specialist jobs can be done by experts
- Still need core times covered, who do not have to be permanently
inconsistency for planning? employed
- Home working, all/part of job from + Easier to manage staffing costs
home - Employees may not feel committed to
+ Reduced office costs, less time company if not permanent contract
wasted (travelling), convenience - Communication can be a problem
- Distraction? Trust? Less scope for - Outsourced work may be of lower quality
teamwork
BARGAINING METHODS
1. COLLECTIVE BARGAINING
DISMISSAL AND REDUNDANCY
It is a negotiated process where trade unions
DISMISSAL
and businesses discuss and agree on pay,
• Individually focused
working conditions etc. The principle is that
• May be fired/dismissed due to absenteeism,
gross misconduct, breach of contract workers have more power and influence when
negotiating
• Immediate; no financial pay off
+ Saves time/costs negotiating with multiple
REDUNDANCY
people, employees have more power
• Effects groups of employees
- Slow, lots of conflict
• Workers' job no longer exists; lack of business,
restructuring, replaced by technology
2. INDIVIDUAL BARGAINING
• Can be voluntary
Negotiate own pay and conditions.
• Statutory payment required based on length
Agreements may differ from one worker to the
of service
next
EMPLOYEE REPRESENTATION + Bespoke solution, less conflict
Employee representation involves collective - Little power
representation of employees.
• TRADE UNION
- An organisation established to protect
BENEFITS + DRAWBACKS OF EMPLOYEE REPRESENTATION
and improve economic and working
+ Increased empowerment and motivation of the
conditions of workers
workforce
- Focus on negotiations through collective
+ Employees become more committed to the
bargaining
objectives and strategy of the business
• WORK COUNCILS
+ Better decision-making because employee-
- Forum within business where workers and
experience and insights taken into account
managers meet to discuss issues relating
- Time consuming; potentially slows decision
to conditions, pay and training
making
- Builds cooperation with managers
- Conflicts between employer and employee
- Involves employees in key business
interests may create resistance to necessary
decisions
change in the business
• EMPLOYEE COMMITTEES
- Managers may feel their authority is being
- Group of employees meeting together to
undermined
focus on specific issues within the
workforce. They may not be recognised
or attended by managers

17
 1.4.2 RECRUITMENT
SELECTION AND TRANING
The recruitment process is expensive but worth it if it attracts employees
Identify vacancy
who add value. Costs involve advertising, interviewing and training

INTERNAL RECRUITMENT EXTERNAL RECRUITMENT

+ Quicker, cheaper + New ideas Undertake job description
+ Motivates employees + Wider range of candidate and person specification
+ Less risk as greater + Bringing in skills required saves
awareness of employee training costs
skills - Longer process
+ Less training required - Need to induct/get used to Advertise vacancy
- Lack of new ideas culture
- Stagnant culture - More expensive
- Demotivates internals who
COST OF RECRUITMENT don’t get role Candidates apply and
• Cost of adverts, agency fees shortlisted and then
• Low productivity while new employee inducted
interviewed
• Loss of management time taken up for recruitment
process
• Higher staff turnover = higher recruitment costs
TRAINING Successful candidate
INDUCTION: part of recruitment and selection process as new employees offered job and signs
need to be trained up so can do job effectively. Ensures new employee is: contract of employment
- Familiar with workplace
- Able to do the job
- Feels part of the organisation

ON-THE-JOB TRAINING
e.g. mentoring, coaching, job rotation, OFF-THE-JOB TRAINING
apprenticeships e.g. training course, external course
+ Cheaper + Wide range of skills taught
+ Easier to organise + High quality provision
+ Less lost productivity + Greater employee focus as not
+ Can directly apply learning straight to the distracted from daily job
job - Costs; courses, travel,
- Opportunity cost for time of staff involved accommodation
- Low priority; quality issue? - Lost productivity
- Lack of new ideas - Relevance of course sometimes isn’t
- Pass on mistakes currently being made particular to job

COST OF TRAINING
• Productivity will fall as employees are away from the workforce
• Training one of the first expenses a business cuts to save money, but investment in employee
training is long term strategy
• Danger if employee leaves organisation so then the investment is lost

18
 1.4.3 ORGANISATIONAL
DESIGN
ORGANISATIONAL STRUCTURES
• Organisations need structure to be effectively run
• Employees need to have responsibility for certain areas/actions to ensure customer needs are met

HIERARCHY
• A system in which members of an organisation or society are ranked according to relative status or
authority
• Top = more authority, greater decision making responsibilities (authority is having the power in
decision making and to give orders)
• More levels = communication can be slower/understanding of ‘shop floor’ issues is harder

CHAIN OF COMMAND
• The system where instructions are passed from one
person to another; flow of power/authority
• Refers to the levels in the hierarchy
• Can delegate tasks to those subordinate to them in
hierarchy (delegating is giving someone else
responsibility to perform asks)

SPAN OF CONTROL
• The number of people directly under the control of
a person
• Wider span means you have more people to
manage
➔ Greater decision making powers and
responsibility
➔ Could add stress/lack of control
• Narrow span means fewer people are below you
➔ Manage workers closely and control
actions, minimising mistakes
➔ Less motivation in job/feelings of
micromanaging

CENTRALISATION
• Decision making is kept at the centre such
as by senior managers
• Standardized decisions applied to all
• Top down approach
+ Cost effective – bulk buying; EOS
+ Consistency of decisions
+ Appropriate for situations where managers
have knowledge and workers are low skilled
+ Suited to authoritarian leadership styles
+ More suitable in times of crisis
- Inflexibility
- Can account for local tastes/trends
- Lack of creativity; staff dissatisfaction

19
DECENTRALISATION
• Decision making is delegated down to
shop/factory/regional level; delegated to managers
in charge of regions etc.
+ Scope to make more personalised decisions
+ Encourages bolder thinking/risk taking
+ Effective where local teams are best placed to make
decisions to meet customer needs
+ Appropriate where business spread over wide
geographic area and local trends/needs important
+ Effective at reducing senior managers
+ Allows for flexible working conditions and supports
job enrichment
- Inefficiency in buying; may lead to DEOS
- Risk of errors
- Lack of consistency

TYPES OF STRUCTURE
TALL STRUCTURE
FLAT STRUCTURE
• Lots of layers
• Few levels of hierarchy
• Long chain of command
• Short chain of command
• Narrow span of control
• Wide span of control
+ High levels of control
+ Fast communication
+ Reduces risks
+ In touch with customers and workers to remain
+ Promotional opportunities
competitive
- Communication takes a long time
+ More motivating for staff
- Slow decision making; less responsive to
- Harder to control
needs of customers
- Scope for errors
- Demotivating; lacks creativity
- More demanding role
- Expensive as lots of managers

MATRIX STRUCTURE
• Used in a business with multiple products and
projects going on
• Key where projects need lots of coordination
between functions
• Breaks down barriers between departments
• Teams are formed to carry out a specific
project
+ Motivational
+ Flexible
- Can be expensive
- Can be difficult to coordinate

OVERALL:
• New businesses often have flat structures with no hierarchy
• Growth creates new layers
• More layers = increase cost of salaries
• Delayering: taking out layers and reduce chain of command. It is cost saving, empowers staff,
better communication. A way of reconnecting with staff/customers BUT job losses, skill shortage,
too wide span of control
• Structure is vital; ensures responsibilities are clear and ensures coordination. Creates motivation
for employees; opportunity for progress

20
 1.4.4 MOTIVATION
IMPORTANCE OF MOTIVATION TO A BUSINESS
• Highly motivated staff leads to: greater productivity, less wastage, higher profitability
• If employees are demotivated, they may: lack commitment/loyalty to the business, have high
absenteeism, low productivity
This may lead to: high labour turnover or industrial disputes
Scientific management
Employees driven by
financial incentives
TAYLOR
• Main form of motivation is higher wages
• Improving productivity and efficiency of
workforce
• Given elementary training and clear
instructions on how to complete a task
• Taylor’s approach: identify most efficient
methods of production and then spot the
most efficient workers and see why they are
so good. Train the remaining workers to work
like the best and then pay workers based on
productivity
+ Focus on efficiently and improved
competitiveness
+ People can be motivated solely by money
+ The application of Taylor’s principles reduces
the need for as many employees as MASLOW
productivity is raised
- Managers maintain close control and
supervision so this may demotivate them
- Autocratic style of management
21
Human relations
Employees driven by
needs to meet social
needs
MAYO
• Employees have social needs and these
must be fulfilled through their work
• Social interactions outside working hours are
important
• Focus on needs of employees rather than
organisation
+ Workers not simply motivated by financial
incentives
+ Social interactions outside of working hours
are important
+ Efficiency can be achieved through teams
and team working
- More freedom means less control over
workers
- Individual responsibilities could cause stress
or pressure
• Focuses on psychological aspects of motivation
comes from within an individual. Role of managers is
to unlock motivation
• Considers both financial and non-financial
• There are five levels of human needs which
employees need to have fulfilled at work
• Only once a lower level of need has been fully met,
would a worker be motivated by the opportunity of
having the next need up in the hierarchy satisfied
• A business should therefore offer different incentives
to workers in order to help them fulfil each need in
turn and progress up the hierarchy of needs
+ Simple to understand
+ Takes into account human nature
- Not all individuals think the same way
- Difficult to measure
 1.4.4 MOTIVATION
HERZBERG
• Hygiene factors are important so far as
satisfactory presence of them will not lead to
dissatisfaction of employees. However,
hygiene factors do not motivate employees,
they are only identified as motivators.
• Employers must secure hygiene factors
before they will be able to develop means of
motivating employees
• Hygiene factors include: pay, job security,
work conditions. When factors are optimal,
job dissatisfaction is eliminated, however,
they do not increase job satisfaction
• Motivators leading to satisfaction include:
personal growth, recognition, support
+ Flexible
+ Simple; allows to priorotise hygiene/motivators
- Ambiguity of elements; in different environments
it can be difficult to identify an element as a
hygiene factors/motivator

FINANCIAL MOTIVATORS
• PIECE-WORK
- Paid per unit produced
+ Incentive to be productive
+ Can create flexibility around when work is down
- Mistakes, quality issues
- Must not fall below minimum wage
• COMMISSION
- Money earned on top of basic salary
- Paid based on achieving sales target
+ Incentivises staff, sees pay link to performance
- Income isn’t consistent, pressure selling
- Focus taken away from areas such as customer
service
• PERFORMANCE RELATED PAY (PRP)
- Reward for job-related targets; if staffs work is
above average
+ Reward for good performance
+ Encourages review of employee performance
- Inconsistency of awards, scope to be
subjective
- Can be demotivating
- Can be expensive

• BONUS
- Paid for meeting targets, quality performance
+ Incentive to produce over a period of time
- Scale of bonus can negatively impact behaviour

• PROFIT SHARE
- Paid annual dividend based on businesses level of
profit
+ Encourages team work and efficiently, creates
loyalty
- Long term; does it create high enough incentive?
Depends on profitability of business

22
 1.4.4 MOTIVATION
NON-FINANCIAL MOTIVATORS
• DELEGATION/EMPOWERMENT
- Delegation; tasks allocated to different workers
by managers who then manage the task
- Empowerment; worker also has scope to decide
what the task should be
+ Motivates managers to make decisions
+ Improves sense of responsibility
+ Make employees feel involved
- Managers sometimes allocate tasks to
unsuitable workers; risk of bad decisions, may
slow down decision making and consistency
across business
• CONSULTATION
- Employees made to feel part of decision
making process
+ Boosts morale; get new views
- Demotivating if views are not acted on
• TEAM WORKING
- In order to benefit from social aspects of task
motivation
+ Creates multi-skilled teams, flexibility
+ Improved purpose or commitment to job
- Tension, clash of ideas/culture
- Ineffective workers
• FLEXIBLE WORKING
- Offering a variety of working patterns so that
employees can achieve a work life balance
+ Equal opportunities
+ Can cut on employment costs
- Scheduling; need core hours covered, difficult
to control
- Difficult to build team spirit
• JOB ENRICHMENT
- Giving employee greater variety of tasks of
higher responsibility
+ Can motivate by giving workers a challenge
- It may be beyond skills or may be seen as
more work
• JOB ROTATION
- Moving employees from one task to another
+ Multiskilled workers can do more than one
- Jobs not any more challenging, lower
productivity if not a specialist

COSTS; if profits are low then

SKILL LEVEL; more skilled may require unable to offer bonuses
more delegation and job enrichment

METHODS OF MOTIVATION

NATURE OF ORGANISATION;
creative = empowerment
competitive = commission
SKILL LEVEL OF MANAGERS
ASSESSING METHODS OF MOTIVATION:

By increasing employee motivation, this could lead to an increase in customer service, labour
productivity, product quality and employee relationships with managers. It could also decrease
absenteeism, labour turnover, labour cost per unit and recruitment costs

23
 1.4.5 LEADERSHIP
LEADERSHIP MANAGEMENT
Action of leading a group of people or Process of dealing with or controlling
an organisation, or ability to do this things or people
• Sets objectives • Puts plans into action
• Inspires • Operates short term
• Strategic • Works in set budget
• Make difficult decisions • Coordinates plans
• Innovate • Reactive
• Proactive

TYPES OF LEADERSHIP LAISSEZ-FAIRE

AUTOCRATIC
• Top down approach
• Little delegation to staff
• LINK: Taylor
+ Fast decision making
+ Clear communication, control
+ Good for low skilled workforce
- Employees are undervalued, demotivate
DEMOCRATIC
• Employees involved in decisions and
listened to
• Delegation of responsibilities
• LINK: Herzberg
+ Employees feel values, motivated
+ Improves retention/recruitment
+ Develop team spirit
+ Can collect ideas
- Takes time to make decisions, isn’t
responsive in dynamic markets
• ‘Let it be’
• Senior managers/leaders busy/lazy so decisions
taken by junior staff
• Empowers workers to create new
solutions/different ways of working
+ Motivates, autonomy to make own decisions
+ Creative, promotes talent
- Disorganised, confused communication;
deadlines may be missed
- Poor productivity
PATERNALISTIC
• Attention to views/needs of workers
• Father figure; interested in well being of
employees
• Consults and listens BUT leader takes
decisions
• LINK: Mayo and Maslow
+ Recognition leads to motivation
+ More productive
- Limited ability to influence decisions (quite
autocratic)
- Can have low levels of motivation
- Leader may come across as unsure

24
 1.5.1 ROLE OF AN
ENTREPRENEUR
RUNNING A BUSINESS SUCCESSFULLY
• Attention to detail on all areas from customer service to finance
• Be objective; see problems as much as success
• Be strategic; think about long term as well as short term
• Genuinely care about what you do
INTRAPRENEURSHIP (INNOVATION WITHIN A BUSINESS):

DEVELOPING/EXAPNDING An employee within a business who takes risks to solve a

WHY EXPAND? problem/design something new
• Increased demand; higher sales • Have freedom and opportunity to develop their
• Lack of space ideas and use creativity to innovate
• Saturated local market • Add value and gives business competitive
• Greater finance required advantage
+ Drives innovation
HOW? + Promotes new ways of doing things
• New product/service + Increases productivity/efficiency
• Technological development + Reduces waste
• More staff/higher skilled staff + Increases profitability
• New contracts
• Geography; new shops HOW DO BUSINESSES ENCOURAGE INTRAPRENEURSHIP?
• Take on more finance; loan, investor • Give employees ownership of projects
• Make risk taking and failure acceptable
• Train employees in innovation
ENTREPRENEURS • Give employees time outside the confines of job
is a person who is willing to take a risk in setting up description
and growing their own business. They see business • Encourage networking and collaboration
opportunities to make money and to meet the wants • Reward entrepreneurial thinking and activity
and needs of society
BARRIERS TO
ENTREPRENEURSHIP:
FINANCIAL
PERSONAL
- Lack of start up capital
- Lack of skills/beliefs
- Lack of collateral
- Risk averse/ fear of
- Lack of willingness to lend
failure
(e.g. loans)
- Lack of ideas
- Bad credit rating
ECONOMIC
- Strong competition LEGAL/POLITICAL
- Economic downturn - Regulations; health and
- Lack of credit safety
available - Lack of political will to
- Tax rates encourage
entrepreneurialism
- Lack of support based on
background/gender

25
 1.5.1 RUNNING A BUSINESS
RISK: UNCERTAINTY:
• Exposure to harm/loss • Situation when something is not known
• Can be managed: market research, planning, • Need for contingency plan; what to do IF
knowledge something happens
• Entrepreneurs look at size of risk relative to • Important to have reserves/alternative; e.g.
rewards to make decisions stock, money

Entrepreneurs can reduce risk and prepare for uncertainty by: carrying out detailed research, producing
detailed plans, analysis external influences and developing a contingency plan

1.5.2 ENTREPRENEURIAL
MOTIVATES/CHARACTERISTICS
SKILLS
CHARACTERISTICS
• Effective communication
• Creative • Team working
• Hard working • Problem solving
• Resilient • Organisation
• Takes initiative • Numeracy
• Self confidence • IT
• Risk taking • Management
• Commitment

NON-FINANCIAL
INDEPENDENCE
INCENTIVES TO START YOUR OWN BUSINESS
Be own boss; sense of achievement/satisfaction
FINANCIAL
PROFIT MAXIMISATION HOME WORKING
To generate as much wealth as possible - Saves costs, time and builds flexibility however
there are distractions and lack of socialisation
PROFIT SATISFICING
Just enough to maintain business/satisfy ETHICAL STANCE
entrepreneur - Run a business to support ethical principles e.g.
Good for keeping happy stakeholders animal rights
- Workers: higher wages
- Customers: lower prices SOCIAL ENTERPRISE
- Shareholders: still get dividends - Running a business for social cause or to support
the community. It creates a USP that attracts
customers

26
 1.5.3 BUSINESS OBJECTIVES
OBJECTIVES: are medium/long term plans to coordinate business and acts as targets
They are set to:
• Provide quantifiable steps to achieve aims SMART TARGETS
• Clarify direction Specific
• Measure success against targets Measurable
• Motivate employees to achieve Agreed
• Reward employees Realistic
Time-related
COMMON OBJECTIVES
• SURVIVAL • COST EFFICIENCY
- Most likely for new firms; reduce high risk - Reduce expenses to lowest level to help
activities survival and profit
- Focus on finding customers/ building loyalty - Key for business with low product
- Also for financial problems, new competition differentiation
• PROFIT MAXIMISATION - Lower wages/less jobs, lower quality, less
- Produce at a level that maximises profit spending on advertisement
- Need to grow business • EMPLOYEE WELFARE
- Better than taking loan, need to pay - Vital for staff retention
shareholders - Creates loyalty and greater productivity
• SALES MAXIMISATION • CUSTOMER SATISFACTION
- Good for continuous target setting - Generates loyalty
• HIGH MARKET SHARE - Positive reputation
- Get customers now, focus on profit later • SOCIAL OBJECTIVES
- Established brand, makes shops want to - Improves perceptions of business that will
stock product increase sales
- Good indicator for investors

IMPORTANCE OF PROFIT MAXIMISATION

Profit is one of the main incentives of running a business. Profits can be reinvested to help the business grow
and keep up with demands of the ever-changing business environment. It also secures long-term success.

1.5.4 FORMS OF BUSINESS

LIMITED LIABILITY
Risk limited to size of your investment
- No threat to personal possessions

UNLIMITED LIABILITY
Risk extends beyond initial investment to whole debt of business
- Can lead to bankruptcy

27
 BUSINESS FORMS PARTNERSHIP
SOLE TRADER • Between 2-20 partners
• Owned by one owner • Similar issues by sole trader but
• Typically small businesses greater shared responsibilities,
• Easy to start up rewards and risk
• Owner keeps all profits • Unlimited liability
• Unlimited liability + Easy to set up
+ Easy to set up + Easier to raise capital than sole
+ All profits kept trader
+ No information made public + Partners contribute with a range of
+ Personal service skills
- Unlimited liability + Shared problems
- Difficult to raise money - Unlimited liability
- No EOS - Disagreements; control, sharing
- Lack of skills in certain areas profits etc.

PRIVATE LIMITED COMPANY (LTD) PUBLIC LIMITED COMPANY (PLC)

• Friends and family can buy shares
• Expand by selling more shares
• Limited liability
+ Limited liability
+ Can raise more capital by selling
more shares
+ Can be run by managers if owners
don’t want to
- Accounts cannot be kept private
- More difficult to set up
- Creates greater risk taking
• Can raise capital by selling shares to
public
• Ability to takeover other businesses
• Can lose control of the business
• Limited liability
+ Limited liability
+ Finance easier through shares
+ Easier to get EOS
- Accounts cannot be kept private
- Greater external pressures such as
media
- Focus on share price and profit can
bring short term focus

FRANCHISE
• Individuals buy rights to sell goods and services of FRANCHISEE
well-established company + High levels of support
• Allows business to expand without owners taking + Marketing cost is covered
direct responsibility for each branch + Established brand image
+ Equipment supplied
FRANCHISOR + Lower risk
+ Rapid expansion - No flexibility
+ Source of revenue - Need to share financial rewards
+ Skilled franchisee’s can be used to expand - A share of sales goes back to the
business franchisor
- Risk of franchisee damaging brand if not run
effectively

28
 1.5.5 BUSINESS CHOICES
OPPORTUNITY COST: the cost of the next
best alternative given up
Example: benefit lost from launching a
new advertising campaign instead of
investing in employee training
Key resources: money and time
TRADE OFF: compromise or loss of
another option
Example: improving productivity may
lower quality
Need to consider strategic decisions;
high volume and low quality vs low
volume and high quality

1.5.6 ENTREPRENEUR TO
LEADER
PROBLEMS ENTREPRENEURS FACE:
- Rapid growth; stress on systems
- Production; coping with extra demand
- Cash flow; danger overtrading
- Space; need for more room
- People; increased hours
OVERCOMING DIFFICULTIES
- Stress management
- Education; qualifications
- Mentor; gain advice and support
- Delegate and trust; utilise qualified
employees to lighten load and take
responsibility

DIFFICULTIES OF BECOMING A LEADER:

- Accept responsibility and adjust mindset
- Need qualities such as confidence
- Sharing ownership and control of business
- Stress; larger responsibility

29
 1.2.1 SOURCES OF FINANCE
REASONS FOR RAISING FINANCE:
• To start-up a business
• To pay debts
• To help a business over a slow
trading period
• To expand
• To buy stocks

INTERNAL FINANCE EXTERNAL FINANCE

RETAINED • No good for start up FRIENDS + • Available to sole traders and
PROFIT • All profits kept for re- FAMILY partnerships as well as Ltd.
investment/ don’t pay out Companies by selling shares
dividends • May want a say in the business/
+ No interest interest on repayment/dividends
+ Flexibility on how it’s used + Low cost
- Is there enough? + Lower risk
- Opportunity cost e.g. + Greater trust?
shareholder dividends + No credit score required
- Could lose some control of the
business/ a share of the profit
OWNERS • Can be owners own savings BANKS • Banks may lend a loan to a
CAPITAL or assets used business to start-up or for growth
• Good source for sale • They need collateral; something
trader/partnership that can be used to repay the loan
+ No interest if the business fails to pay it back
+ Free source examples: property, vehicle,
- Could lose personal personal asset
investment + Large amounts can be obtained
- Is there enough? - Need to pay interest
- Risk of non-payment; need to
provide collateral

SALE OF • Selling items that the business PEER TO • Fast-growing way for businesses to
ASSETS already owns; machinery, PEER raise loan finance without having
land, vehicles FUNDING to use the traditional banking
+ Raises money AND reduces sector
ongoing costs • Raising a loan from a group of
+ Improves capital utliisation individuals or institutions and is a
figure very flexible source of borrowing
- Business loses the benefit of + Interest rates often lower = lower
the asset costs
- Can be hard to obtain

30
 EXTERNAL FINANCE
BUSINESS • Individuals with ‘spare cash’
ANGELS seeking longer term investment
• Provide funding in exchange for a
share of the business (equity
based)
• Also provide knowledge and
expertise in running businesses but
can be positive
+ Possible large scale investment
+ Advice and possible knowledge
- Loss of say over business
CROWD • A large number of people fund a
FUNDING project over the internet making
small investments
• Can donate, lend or invest
+ Can be cheap and easy to set up
- Not suitable for raising large
amounts of money; unreliable

1.2.2 METHODS OF FINANCE

BANK • Loan = money borrowed that
LOAN need to be paid back with
interest
• Interest can be fixed or variable
over period of loan
+ Can be large amounts
+ Time to repay
- Interest increases costs
- Risk of non-payment; collateral
needed
SHARE • Option for limited companies
CAPITAL • Sell more shares in business to
raise money
+ No interest charges
+ Can raise large amounts
- Give up share of profit in forms
of dividends in long term
- Only available to Ltd/Plc
OVERDRAFT • Bank allows a business to spend
money they haven’t got
• Sends bank balance into
negative figures
• Equal to short term loan
• Interest charged if overdraft
used
+ Helps short term cash flow
problems
+ Flexible way to fund working
capital
- High interest rates
- Can become dependent on it
LEASING • Gain use of asset i.e. vehicles or
machines without buying it
• Asset owner responsible for
repairs, upkeep etc.
• For a set time period; item can
be upgraded
+ No lump sum payment means
cash stays in business; low
opportunity cost
- Can end up paying more than if
you bought it, can never own
asset

31
 VENTURE • Money invested into business
CAPITAL by business angels/investment
funds
• Done for a return; i.e. profit,
share of the business, a say in
the running
+ Can obtain large amounts
+ Knowledge and expertise
gained
- Loss of control/profits; loss of
independence
GRANTS • Given by EU/government or a
charity
• Designed to support start
up/growth
• Used for specific reasons i.e.
area of high unemployment
+ Doesn’t have to be paid back
+ No loss of control of the
business
- Competitive, hard to get
- Generally given for social,
environmental or economic
benefits
1.2.3 LIMITED LIABILITY
LIMITED LIABILITY
• Business only liable for their original
investment should the business fall into debt
- Protection for their personal
assets/finances
• Business and owner can own separate assets
• Business can sell shares to shareholders
- Ltd; to friends/family only
- Plc; to general public
• Encourages more risk taking with finance
• Sources of finance: share capital, retained
profit, venture capital, business angels, bank
loan
32
TRADE • A business buys something e.g.
CREDIT raw materials but given time to
pay for it
• Typically 30 to 90 days
• Allows time to utlise it, earn
money from it to be able to pay
it off
+ Helps cash flow by keeping
money in the business and be
able to generate revenue
+ Possible discounts for early
repayment
- Only used for supplies
- Reputation can be damaged if
payments not made
UNLIMITED LIABILITY
• If a business has debts, the owner must pay
even if this means selling their own
possessions to find the money
• Relates to sole trader and partnership
• They are unable to sell shares in the business
• Collateral is needed to secure finance e.g.
security a loan against a house
• Sources of finance: Personal savings, retained
profit, mortgages, bank loan, peer to peer
lending, crowd funding, grants, overdrafts
 2.1.4 THE BUSINESS PLAN
THE BUSINESS PLAN
Looks into the future
Focus on:
• MARKETING PLAN; market research,
market mapping, promotion methods
• OPERATIONAL PLAN; production
methods, materials needed
• FINANCIAL PLAN; finance needed,
projections of revenue and costs (cash
flow forecast)
CASH FLOW FORECASTS
• Cash flow forecasts will show the expected
income and expenditure of the business over
the coming year
• Money in = sales, loans, interest, assets sold etc.
• Money out = supplier payments, wages, loan
repayments etc.
Cash flow is vital, e.g. to pay suppliers to produce to
sell to get revenue

• Helps an outsider understand the INTERPRETTING CASH FLOW FORECASTS:

business - Are inflows greater than outflows?
• Attracts investors; potential rewards - Surplus/deficit? Use in business or get financing?
• Persuade lenders; assess risk - Trend? One-off?
• Set out strategic direction/set - Enough cash revenues to cover unexpected
objectives costs?
- Are debtors paying quick enough? Increase
sales?
USE OF CASH FLOW FORECASTS:
AS A STAND ALONE TOOL AS PART OF A BUSINESS PLAN
• Spots problems with payments/sales revenue • Investors can see financial viability of the
• Identifies shortfalls in cash business
• Assesses ability to pay suppliers/employees • Identifies when capital injection may be
• Identifies when financial support may be required
needed • Allows investors to compare to actual
• Identifies when to undertake marketing/make performance
capital purchases
THE CAUSE OF CASH FLOW PROBLEMS INCLUDE:
• Overtrading
BENEFITS + LIMITATIONS • Allowing too much trade credit to customers
+ Support an application for lending • Poor credit control
+ Support the budgeting process • Inaccurate cash-flow management
+ Identify any potential cash flow crisis • Unforeseen costs
- Inaccuracy; figures are
estimates/forecasts, can be wrong • Delay payments
- Bias; overinflate inflows/underestimate SPEED UP INFLOWS to suppliers
outflows to make business look better • Increase trade
- Updates; needs regular updating or data • Incentivise early credit
becomes inaccurate; dynamic market repayment by giving agreements with
customers a discount suppliers
but static document
• Reduce trade credit • Cut costs
- Unexpected events; can disrupt forecast
i.e. economic circumstances, social given to customers
• Sell off stock at a
trends
discounted price to
- Focus; no account made for profitability, SLOW DOWN OUTFLOWS
productivity, efficiency free up cash
• Inject fresh capital
into business IMPROVING CASH FLOWS

33
 2.2.1 SALES FORECASTING
FACTORS AFFECTING SALES FORECASTS:
CONSUMER TRENDS
SALES FORECASTING • May not take into account changing
• Sales forecasts go onto a cash flow forecast consumer trends
• Used to see if business will need to increase • Research documents from the likes of Mintel
their productive capacity (produce more, buy can help a business to identify an upcoming
more factory space) trend
• The business may need to employ more • Shows and trade fairs are also ways that a
workers based on a forecast business can research what might be new
• May see that they need to start a promotional popular products
activity if sales are forecast to drop • E.g. seasonal variations, fashion, long term
• Budgets can be set around forecasts trends

SETTING SALES FORECASTS:

Base it on: ECONOMIC VARIABLES
• Prior sales figures • Exchange rates; can vary price/cost of
• Market research/trends imports/exports
• Pre-orders • Interest rates; impacts on disposable
• Expectations incomes
• Inflation; erodes consumer buying power
and increases costs
• Unemployment rate; reduces overall
DIFFICULTIES OF SALES FORECASTING demand
- No historical data/historical data may not • GDP growth rate; indicates health of overall
reflect future performance economy
- Dynamic markets are hard to predict
- Seasonality/climate may affect sales ACTIONS OF COMPETITORS
- Fluctuations in demand due to; sales • May affect sales forecasting
promotion, fashion etc. • Customers can switch quickly without much
- New entrants into markets will impact sales warning
• E.g. launch a new/improved product; they
run a new marketing campaign; change
pricing strategy
• Similarly, closure of a competitor might lead
to an increase in sales

2.2.2 SALES,REVENUE,COSTS
SALES VOLUME SALES REVENUE
This is the quantity of products sold in a specific Money into the business through sales. May also be
period e.g. a year known as turnover, or just sales
SALES REVENUES
PRICE PRICE X QUANTITY

34
 COSTS
• These are vital to a business to be able to
sell TOTAL COSTS = FIXED COSTS + VARIABLE COSTS
• Costs need analysing as low profitability TOTAL VARIABLE = AVERAGE VARIABLE X OUTPUT
can be linked to high costs AVERAGE VARIABLE = VARIABLE COSTS
• Can be split between fixed and variable OUTPUT
costs

FIXED COSTS VARIABLE COSTS

• Costs that DO NOT vary with level of • Costs that DO vary with level of output or
output or sales sales
• E.g. rent, interest on loan, salaries, • E.g. raw materials, wages, commission,
insurance, advertising energy costs, fuel
• These are problems if sales are not high
as they have to be paid regardless of the
businesses situations

Variable
costs
costs

costs

Fixed
costs

Output Output

2.2.3 BREAKEVEN
BREAKEVEN
It is the point at which total revenue equals total costs. BREAKEVEN = TOTAL FIXED COSTS
The business is making neither a profit nor a loss CONTRIBUTION PER UNIT
• The break-even output is the point at which a
business’ revenue generated through the sales
of its products will cover the total costs
• Expressed as an amount of output NOT a CONTRIBUTION
monetary amount The difference between the selling price and how
• It is the minimum number of products that need much it costs to make the item
to be sold to cover costs; helps set targets
CONTRIBUTION = SELLING PRICE – VARIABLE COST
MARGIN OF SAFETY PER UNIT
It is the difference between the break-even point
and the current level of output
TOTAL CONTRIBUTION = CONTRIBUTION PER UNIT X
MARGIN OF SAFETY = TOTAL OUTPUT – NUMBER OF UNITS SOLD
BREAK EVEN POINT

35
 Variable BENEFITS OF BREAKEVEN ANALYSIS:
+ Can be used to analyse the impact of varying
costs
customers, prices and costs on a business’ profit
+ Simple and easy to use
+ Useful guideline to help business make
Total costs decisions
costs

LIMITATIONS OF BREAKEVEN ANALYSIS:

- It is static analysis; only a snapshot
- It assumes that every item produced it sold
Fixed - It assumes all items sold for the same price
costs - It assumes variable costs are constant but bulk
buying means costs can come down
MARGIN OF SAFETY - Fixed costs may be shared across a portfolio of
products
Output
- Simplifies a complex process; multiple products

2.2.4 BUDGETS
BUDGETS
• A financial plan to agree a spending limit
within a business
OR
• A financial plan to agree a planned level of
revenue/profit
• Budgets are based on the objectives of the
business
• Managers must think ahead; no unlimited
funds
• Usually done over next 12 months
Purpose:
• PLANNING; anticipate problems/develop
solutions
• COMMUNICATES KEY OBJECTIVES; e.g. cost
control or revenue generation
• MOTIVATION FOR MANAGERS to be in control
of their own budget
• GIVES POWER to make financial decisions to
those in the best position to make them
• CONTROL; budgets are set against
objectives/targets and can be used as a
comparison tool to measure success
TYPES OF BUDGETS
HISTORICAL BUDGET
• Set for the business using previous financial
figures
+ Realistic in that it is based on last years’
sales/expenditure
+ Adds effects of inflation in the budget
BUT
- Business is dynamic so the figures may be
wrong
- Assumes things remain the same
- Reduces incentive to see potential
savings/encourages similar spending habits
ZERO BASED BUDGET
• Numbers are set to zero; based on potential
+ Takes away all historical assumptions
+ Based on current needs, encourages forward
thinking
BUT
- Hard to prepare = costs more
- Higher chance of unrealistic/risky budgets
- Causes more disagreements

36
VARIANCE ANALYSIS
Analyse the budget set against what actually
happened
• FAVOURABLE VARIANCE
- Costs lower than expected
- Revenue/profit higher than expected
• ADVERSE VARIANCE
- Costs are higher than expected
- Revenue/profit lower than expected
ANALYSIS FOR VARIANCE:
- How significant is the variance?
- How predictable was it that it would happen?
- Is it a trend?
- Potential impact of a business?
- Likely to investigate only large variances and
target where greatest improvements can be
made
BUT
- What if budget was set incorrectly in first place?

DIFFICULTIES OF BUDGETING:
Jan £ Feb £ Mar £
- Often fixed for a year and often inflexible
Budgeted 19,000 20,000 30,000 but business dynamic
income - Can be inaccurate/unreasonable; only as
accurate as data in which its based off
Actual 16,600 22,000 19,000 - Tendency to spend up to the limit
income - Time consuming to prepare, monitor and
Variance 2,400 2,000 11,000 control
- Unrealistic/reduced budgets can be
Favourable or Adverse Favourable Adverse demotivating
adverse? - Can make managers short term and short
sighted; budget driven rather than
customer driven
- For some industries its difficult to plan
ahead because of large unplanned
changes

2.3.1 CALCULATION OF PROFIT

PROFIT
it is the money left in the business after all expenses
have been paid PROFIT = TOTAL REVENUE – TOTAL COSTS
- Important source of finance for developing the POINT
business
- Not all businesses make profit

IMPROVING PROFITABILITY
• INCREASE REVENUE • REDUCE COSTS
- Increase prices (dependent on - Reduce production costs
PED) - Improve efficiency
- Reduce process - Use capital more fully
- More marketing; cost relative to - Eliminate unprofitable processes
benefits - Reduce variable costs; better
- Add value to product deals with suppliers
- Lower overheads

37
STATEMENT OF COMPREHENSIVE INCOME Item Figure Calculation Comments
£m
Also known as profit and loss account. It provides
a summary of profit or loss made during the year
• Prepared at the end of trading year Revenue 500 Value of all the sales in the
• Source of information for year

owners/shareholders
• Comparison with previous Cost of 200 Cost of raw materials
years/competitor performance Sales

Gross Profit 300 Revenue –

GROSS PROFIT cost of sales
• Expressed as a monetary amount; the
higher the better Fixed 100 Cost of running the business,
• Cost of sales are the raw materials required overheads fixed costs
to make product (costs) /
• These are variable costs Expenses
• Monitor costs of sales to ensure they are
not disproportionally high relative to Operating 200 Gross Profit –
revenue Profit Expenses
• Shows profit made on trading activity
Interest 10 On loan repayments for
costs example

SALES REVENUE – COSTS OF SALE

Taxation 20 E.g. Corporation tax

Profit for the 170 Operating What you have left!

OPERATING PROFIT Year (Net profit –
• Accounts for other expenditure in the Profit) interest/tax
business e.g. rent; fixed costs
• Higher the better
• As a business expands, the fixed costs
become lower as a proportion of total NET PROFIT
costs • Final profit for business
• Takes into account of performance more • Adjusts to interest payments business has
fully; takes into account direct and indirect to make
costs
GROSS PROFIT – EXPENSES OPERTING PROFIT – INTEREST/TAX

38
 2.3.2 STATEMENT OF
FINANCIAL POSITION
STATEMENT OF FINANCIAL POSITION
Also known as the balance sheet. It is a
document showing what a business owns (assets)
and what it owes (liabilities)
• It is a snapshot of what a business is worth
at a particular time (one day); financial
strength of a business
• Shareholders, lenders, suppliers use the
balance sheet to judge financial position
of the business
LONG TERM (not linked to liquidity)
NON-CURRENT ASSETS
• NOT expected to be sold within the next year of
trading
• E.g. vehicles, property (tangible)
• E.g. patents, trademarks, goodwill (intangible)
SHORT TERM (covers liquidity)
CURRENT ASSETS
• Short term assets which are likely to be turned
into cash within next year of trading
• E.g. stock/inventory, debtors (trade
receivables), cash in bank
NET CURRENT ASSETS = CURRENT ASSETS – CURRENT LIABILITIES USES OF BALANCE SHEET ANALYSIS:
The working capital a business has
NET ASSETS = TOTAL ASSETS – TOTAL LIABILITIES
The value of the business
LIQUIDITY
The measure of how able to business is to pay
immediate/short term debt
• The ability of a business to turn its assets into
cash
• Some assets are more ‘liquid’ than others
WHAT DOES LIQUIDITY TELL US ABOUT A BUSINESS?
- Indicates to an investor the ability of the
business to pay its debts
- Suppliers can see if they will receive the money
they are owed
39
• The document shows the sources of the
funds in the business and how those funds
have been used
• Plc and Ltc have to publish these by law
Why does it balance?
To own an asset, you have to be able to fund it.
Funded through liabilities (e.g. loan, credit) or
capital put into the business
Asset = CAPITAL + LIABILITIES
NON-CURRENT LIABILITIES
• Debts which are NOT expected to be
paid off within the next year of trading
• E.g. bank loan, mortgage
CURRENT LIABILITIES
• Debts expected to be paid within next
year of trading
• E.g. creditors (trade payables), other
borrowings e.g. short term loans and
overdrafts
+ See business’ worth (equity)
+ For investors to see business
potential
+ Identify problem areas
LIMITATIONS OF BALANCE SHEET ANALYSIS:
- Overvaluing assets (depreciation)
- Intangible assets are hard to put
value on
- Snapshot of one day; it is static
- Banks and investors will see if the
business has enough resources to pay
its debts
VITAL: current assets need to cover current
liabilities
Measured by current ratio or acid test ratio
CURRENT RATIO
• Working capital ratio
• 1.5:1 – 2:1 business has plenty of working capital
to meet its day-to-day bills
• above 2:1 too much money tied up in assets
that are not making any money
• below 1.5:1 might be a liquidity problem
➔ but many retail stores operate at 1:1 as
they have fast moving stocks and
generate cash from sales
CURRENT RATIO = CURRENT ASSETS
CURRENT LIABILITIES
MANAGING WORKING CAPITAL
Similar to improving liquidity
- Minimising stock levels
- Produce products for sale faster
- Minimise credit to customers
- Get increased credit for suppliers
WAYS TO IMPROVE LIQUIDITY:
• Reduce the amount of stock the business
holds; get finished goods dispatched faster
• Reduce credit period offered to customers,
encourages early repayments
• Pay suppliers later on agreed credit terms
• Use overdraft facility
• Increase long term borrowing and clear
short term debts
2.3.3 BUSINESS FAILURE
INTERNAL
• POOR EFFICIENY/PRODUCTIVITY; high
average costs, poor usage of machinery
• MARKETING FAILURE; lack of market
research or market anticipation
• FINANCIAL FAILURE; insufficient cash
flow/retained profit. Inaccurate planning.
High current liabilities (poor working
capital)
• SYSTEMS FAILURE; IT or production.
Machinery breakdown/unreliable supply
40
ACID TEST RATIO
• Harsher test of liquidity because you
cannot guarantee to sell all stocks
- Perishable/goes out of date
- Depreciates in value
- Goes out of trend
Less than 1:1 then current asset (minus stock)
do not cover liabilities. Could mean problems
for the business but some retailers have 0.4:1
ACID TEST RATIO = CURRENT ASSETS - STOCK
CURRENT LIABILITIES
WORKING CAPITAL
The funds that a business has to meet its day to
day expenses e.g. pay suppliers/wages/energy
bills
Low working capital indicates that the business
could have trouble paying bills
- Cause of failure, even if profitability is
strong
- Need to be prepared for unexpected
events e.g. rising costs of raw materials
EXTERNAL
• DYNAMIC MARKET CHANGE THAT GIVES
RIVALS A COMPETITIVE ADVANTAG; quick
technological change not adopted to
• COMPETITOR ACTIONS; effective
marketing/pricing etc. enables a new
entrant/rival to dominate the market
• LEGISLATION; e.g. national minimum wage,
sugar tax
• RECESSION; fall in disposable incomes, hits
elastic products
FINANCIAL REASONS
• RUNNING OUT OF CASH
- Operating under breakeven point so
outflows are bigger than inflows;
paying suppliers quicker than receiving
debtor payments
- Loss of a contract to supply a business NON-FINANCIAL REASONS
which they are overly dependent on • LACK OF EFFECTIVE MANAGEMENT
- Overtrading; expanding too quick for - Poor planning, poor recruitment or
inflows to keep up with outflows motivation strategies
required to produce a product - Failure to adopt to changes in the market
• LIQUIDITY PROBLEMS i.e. technological
- Liabilities > assets - Legal issues
- Investments are not giving any returns
e.g. new factory, a takeover that’s
failed
- High unsustainable debt level

2.4.1 METHODS OF
JOB PRODUCTION
PRODUCTION
Produce one item at a time e.g. wedding cakes,
dentist visit BATCH PRODUCTION
+ Bespoke, highly flexible Used to make more than one item at a time
+ High quality Production can be switched over to make something
+ Very motivated staff different on the same production line
- Skilled labour is expensive; labour intensive e.g. bakery
- Wide range of tools is required + Bulk production means lower costs
- Long lead time + Production can be changed to meet customer
- High selling cost (premium price) needs or fluctuations in demand
FLOW PRODUCTION + Standard production of items means it can be
Continuous process until finished. Used where large mechanised = less labour
quantities are made e.g. car manufacturing, packaged + Employees specialise so become good at
foods their job
+ Average costs are lower because higher volumes + Lower skilled workforce means lower wages
being made can be paid
+ Economies of Scale can be achieved - Small batches carry higher average unit costs
+ Capital intensive – works constantly (EOS)
+ Low skilled workers required - Workers may be less motivated with repetitive
- High set up costs to buy the factory and work
machinery - Idle time between batches needs to be
- Low motivation of staff due to repetitive tasks managed as this is wastage
- Break downs and lost production can be costly - Higher stock levels required
- No scope to differentiate product
- Needs lean production / JIT stock control to limit
stock required

41
 CELL PRODUCTION
Line split into small teams (cells). Each cell is
responsible for certain parts of production. Cells link
together to produce a final good
e.g. vehincles
+ Improved communication – less confusion
+ Multi skilled adaptable staff
+ Job enrichment – motivation
+ High quality outcomes as cells responsible for
specific parts
- Constant pressure to produce more, faster
- Equipment may not be used as effectively as
in flow production
- Allocation of jobs needs to fit to size /
capability of cell – can be a misallocation
PRODUCTIVITY
• Production = total amount produced in a
given time
• Productivity = output per input (this could be a
person or machine, per hour)
• It is a measurement of efficiency
LINK BETWEEN PRODUCTIVITY AND COMPETITVENESS:
• High productivity:
• Enables lower prices = increased sales and
revenue
FACTORS INFLUENCING PRODUCTIVITY:
• More competitive against rivals = increased
market share
• If prices kept the same, profits increase
• BUT
• Be mindful that increased productivity could
be at the expense of quality
EFFICIENCY
• Maximising output whilst minimising costs and
waste
• Helps businesses to be more productive and
therefore competitive
• Produce where average costs are at their lowest
(AC = TC/Output)
BENEFITS OF IMPROVED EFFIENCY:
+ Labour productivity increases
+ Unit costs fall
+ Profit margins increase
+ Improved flexibility
+ Ability to charge lower prices = improve
competitiveness
42
FACTORS CONSIDERED WHEN CHOOSING A METHOD
OF PRODUCTION:
• The target market - what kind of product or
service do customers want?
• The state of production technology - can
labour be replaced by machinery?
• The need for efficiency - how important is it for
the business to minimise unit costs
• Availability of resources: e.g. cash, working
capital, space, skilled labour
• Competition - how do competitors use
production to gain advantage?
• The need for flexibility
• How important is product quality to the
consumer?
•
PRODUCTIVITY = OUTPUT PER TIME PERIOD
INPUT PER TIME PERIOD
LABOUR PRODUCTIVITY = OUTPUT PER TIME PERIOD
NO. WORKERS/HOURS WORKED
CAPITAL PRODUCTIVITY = OUTPUT PER TIME PERIOD
NO. WORKERS
• Employee training
+ They become more effective/quicker
- Cost, time away from the job
• Motivation for staff, e.g. financial, e.g.
commission (Taylor) and non-financial, e.g.
job enrichment (Hertzberg)
+ Increased speed of work
- Costs, can lead to demotivation for some
employees and quality can be sacrificed
• Invest in more/better capital
+ Increased output per worker and can
replace workers (less mistakes, can work
longer)
- Expensive, can lack flexibility
• Better quality raw materials
+ Less waste of rejected products
- Costs likely to rise
• Improved organisation of production, e.g.
cell production, shift patterns
+ Increased speed, less wastage
- Short term disruption to production
 HOW TO IMPROVE EFFICIENCY:
Reduce costs, e.g.
• Staff redundancies – front line or support services
– Customer service suffer?
• Reduce wage costs, e.g. switch production to a low wage country or switch labour for capital
– Ethics? Job losses?
– High starting costs and transport costs getting goods to market
• Product redesign – make it easier/cheaper to produce
– Care not to move away from customer needs
• Reducing waste
– Does cost of waste reduction outweigh benefits?

LABOUR INTENSIVE PRODUCTION (MAINLY HUMANS) CAPITAL INTENSIVE PRODUCTION (MAINLY MACHINES)
+ Tailor production to customer requirements + Tailor production to customer requirements
+ Flexible production + Flexible production
+ Low initial costs + Low initial costs
- High average costs - High average costs
- Low productivity - Low productivity

OVERALL:
• Increased productivity = greater efficiency
= greater profit
• BUT
• Need for quality goods / services
• Need for controlled costs
• Need for effective marketing to create
demand
• Productivity and efficiency normally a
greater priority in manufacturing / mass
production where improvements can have
significant impact on costs/profit
WASTE MINIMISATION
• Inventory; too much stock
• Defects; faulty products
• Overproduction; producing too much
• Over processing; adding features that
don’t add value
• Motion; unnecessary movement of workers
• Transport; unnecessary movement of
products/materials

43
 2.4.2 CAPACITY UTILISATION
CAPACITY UTILISATION
The proportion of current output compared to maximum output as a %
in a given period

• Less than 100% = spare capacity Low utilisation may be due to:
• Aim for 90% - scope to respond to changes in the market that • Low demand for products
increase demand • New technology not being
• Allows for maintenance of capital and training of staff used yet (i.e. better machines)
• Higher the number, the better a business is using its assets (e.g. • Poor efficiency
machinery, labour)
• This lowers per unit costs (more efficient) and can lead to
greater profit

IMPLICATIONS OF UNDER UTILISATION IMPICATIONS OF OVER UTILISATION

• Increased costs per unit – likely to lead to • Need for staff to do overtime – raises
higher prices costs
• Negative image – i.e. restaurant having • Impact of brand reputation
empty tables, stadium having empty seats • Breakdown of machines / tiredness of
• Unmotivated staff staff affecting quality
• Rationalisation • Inability to perform maintenance on
– Redundancies machinery (no down time) – loss of
– Reduced hours production during repairs more
– Sale of assets significant
– Partial shutdown • No scope to increase production to cope
with increased demand / new orders
WAYS TO IMPROVE CAPACITY UTILISATION (loss of potential sales/expansion)
• INCREASE DEMAND
- Advertise/promote
Unit costs

- Cut prices
- Launch a new product
• CUTTING CAPACITY
- Reduce staffing hours / staff numbers (redundancies)
- Change shift patterns, i.e. stop a night shift
- Use temporary staff rather than permanent staff – greater
flexibility in their use
- Use smaller premises
- Sell assets / rent out to other businesses
• INCREASE CAPACITY
- Invest in new machinery / labour / factory
- Increase staffing hours / take on new staff (could be
temporary) Output
- A business could contract out some production to another As capacity utilisation increases,
company if the problem is over utilisation
unit costs will fall as the business
gains EOS. Unit costs may rise as
the business approaches
maximum capacity due to DEOS.

44
 2.4.3 STOCK CONTROL
STOCK
• the value of products kept by a business at any one TYPES OF STOCK CONTROL
time Just-in-case
• it is also called inventory • Keep stock in reserve to cope
• there are three types of stock: raw materials, work in with late supplier delivery / spike
progress and finished goods in demand for the product
• it needs to be controlled for efficient management of Just-in-time
the business • Inputs only arrive when they are
needed

BUFFER STOCKS
Buffer stocks of stock are held to:
• Cope with unforeseen rises in demand for the product
• Cope with supplier problems, i.e. late delivery
In a Just-in-time system, a business holds very small or no buffer
stocks at all

IMPLICATIONS OF…
OVERSTOCKING
UNDERSTOCKING
• Space required for storage
• Lost production
• Financial cost of stock, e.g. storage, security,
• Lost sales/revenue
insurance (opportunity cost - money could
• Loss of customers to competitors
be used elsewhere in the business)
• Inefficient use of workers
• Possibility of damage / perishability
• All the above leads to a loss of reputation
(consider difference between a supermarket
and a car dealership)
• All the above leads to a loss of
competitiveness

45
LEAN PRODUCTION
• “Produce more using less” HOW?
• Eliminate waste as this is a cost, e.g. • High input from staff about the production process
- stop over-production (quality circles, continuous improvement)
- reduce waiting time • High quality supplies – strong relationships with
- limit movement of labour suppliers
- lower buffer stocks • JIT and waste management
- eliminate defective products • Cell production often used
• Lowering costs leads to lower prices and a competitive
advantage WASTE MINIMISATION
• Heavily influences by the Japanese (Toyota) • getting rid of anything that
• Enables faster product development and ability to be doesn’t add value to a product
first to market • Consider use of time, resources
and materials
• JIT forces business to be more
JUST-IN-TIME (JIT) efficient
• Inputs into production arrive only when they are needed
• Workers need to work constantly
• Meet demand exactly in time, quality and quantity
on new resources with little time
• Deliveries only when needed and used immediately
wasted (low lead time)
– More deliveries, less delivered • Less stock is wasted (no
• It is demand/orders that prompt production, not stock level
overproduction) and there is less
• Works well with fast moving consumer goods, i.e.
waste from production
supermarkets
Lean production aims to eliminate the 7
+ Less waste
deadly wastes:
+ Saves storage costs
1. Over production
+ Lower financial costs means lower average costs of
2. Waiting time
production
3. Transportation time
+ Less need to ‘sell off’ excess stock
4. Over processing
- Requires excellent relationships with suppliers – susceptible
5. Overstocking
to delivery problems
6. Excess motion
- External shocks – weather, demand spikes
7. Product quality
- High IT costs to manage re-order levels
- No bulk buying discounts

2.4.4 QUALITY
QUALITY
• A definition is relative to the customer’s expectations so
is hard to measure CONSEQUENCES OF POOR QUALITY
• Base level – a fit for purpose product that works - Product recalls– expensive to
• Trade off – between quality and price (higher quality = undertake AND correct
higher price) - Damaged brand reputation
• Quality leads to a competitive advantage in a market - Legal costs of problems stemming
• Allows for loyalty, premium pricing from poor quality
• Not just the product but before and after sales, location
(the overall buying experience)

46

QUALITY CONTROL
• Quality inspectors check that standards
have been met at the end of the production
process
+ Ensures that quality standards are met and
the customer does not receive a sub-
standard product
+ Detection rather than prevention
- Could be a lot of waste – fault is only
identified at the end of the production
process
- Expensive – could be a full time job
Q Q
Start End
QUALITY CIRCLES
• Groups of workers involved in the production
process meet
• Aim to identify potential improvements in
how things are done (suggested by the
people doing it)
• Covers the whole supply chain
+ Empower workers and increases motivation
- BUT need for training and success depends
on how seriously ideas are taken
KAIZEN
• ‘continuous improvement’
• Involves lean production, TQM, quality
circles…
• Emphasis on making things consistently
better in small increments rather than settling
for ‘good enough’
• Often sees workers in cells
+ Cheaper than one off R&D based changes
+ Increased productivity, reduced waste,
reduced costs = competitive advantage
- BUT voluntary so needs trust and workers
may not see it as their responsibility
47
QUALITY ASSURANCE
• Design systems to prevent mistakes/poor
quality
• Common procedures/standards that are
followed by all workers
• Checking as you move through the process
rather that at the end
• Done by all workers – self assessment important
+ Less wastage at the end and motivates workers
(empowerment)
- BUT can workers be trusted? Box ticking
exercise? Are they consistent?
= quality check
Q
Q Q
Start End
TOTAL QUALITY MANAGEMENT (TQM)
• A philosophy – involves the whole
organisation
• Workers striving to get things ‘right first time’
• Requires teamwork, open communication
and commitment to improving
• Teams = quality chains – treats other teams
as customers
+ Spot problems early, have zero defects, gain
a strong reputation and increases employee
motivation
+ Leads to lower costs and a competitive
advantage
- BUT needs staff commitment, training and
being adaptive can be expensive in the
short term
QUALITY MANAGEMENT
+ Enhances reputation
+ Encourages repeat business and
market share growth
+ Added value allows for premium
pricing
+ Motivating for workers = increased
productivity
+ More likely to be able to sell products
in retailers
 2.5.1 ECONOMIC INFLUENCES
THE BUSINESS CYCLE
• The natural rise and fall of the size of the
economy that occurs over time
• The size of an economy is measured by Gross
Domestic Product = the value of goods and
services produced in the economy
• Helps us measures economic growth
• Confidence is key in an economy – for spending
and investment

BOOM PEAK
Economy starts to pick up after High rates of economic growth
a period of decline and production
• Rising investment • High profits TROUGH
• Higher wages • Demand > supply Prolonged period of economic decline
• Higher consumer • Pressure on prices • More redundancies
spending • Pressure on resources • Very low consumer spending
• Low unemployment • Businesses fail
RECESSION • High levels of unemployment
Output starts to fall, growth declines
• High costs = low investment
• Lost confidence – low spending INFLATION
• Unemployment increases • A sustained rise in the general price level
• Production declines as demand falls • It measures changes in prices from one
year to the next
IMPACT OF THE BUSINESS CYCLE
• One measurement is called the
• In an expansion, businesses who provide a more
consumer price index
expensive/luxury product do better
• It is done by analysing the cost of a
– Higher disposable income – goods with a
basket of goods (over 700 items from
positive YED purchased
multiple sellers) monthly and comparing
• In a recession, businesses who provide a cheaper
it to the cost a year before
product do better
– Lower incomes – goods with a negative YED
• 3% means prices are 3% more expensive
(inferior) purchased
than 12 months ago
• Hence the growth of discount stores / discounted
• Money is ‘worth less’ (so wages need to
products in recent years
rise)
COMPARING DATA • A change from 3% to 2% means prices
• Measures like inflation and exchange rates are are still rising but at a slower rate
often shown as Index Numbers • Target inflation is 2%
• Base year = 100
IMPACT OF INFLATION
• All changes are then measured against the base
 Costs of production (raw materials)
year
increase meaning businesses might
• It allows for better comparisons of data
have to increase the selling price
2010 Basket of goods cost Index number  If UK inflation is higher than other
countries, it will decrease the
base year competitiveness of our goods
compared to foreign goods
2010 £130.50 100  The value of workers wages is
eroded, causing them to demand
2015 £173.23 132.7
higher wages
 All above linked to profit
 The value of loans is eroded (this is a
good thing)
 Retained profits if kept for long
periods of time become worth less
48 (i.e. they will buy less in the future)
INTEREST RATES GOVERNMENT SPENDING + TAXATION
Cost of borrowing money • Businesses need to monitor what
Businesses pay more back than they borrowed when Government do in relation to taxation
taking out a loan and spending (known as fiscal policy)
Reward for saving money due to the impact it might have on them
Money added to savings accounts – incentive to give • A decrease in tax and/or an increase in
banks your money government spending can lead to the
creation of extra income/spending that
Bank of England: benefits a business
- Raise interest rates during boom/peak of • An increase in tax and/or a decrease in
economic cycle government spending takes money out
- Lower interest rates during recessions / of the economy and therefore negatively
troughs affects a business

INTEREST RATES INCREASE INTEREST RATES DECREASE

• Consumers save more
• Consumers have less disposable income due
to higher repayments on debt = lower
spending
• Business costs like mortgages and loans go up
so profit is squeezed
• Borrowing is more expensive so less loans are
taken out to use for investment (i.e. new
capital) = long term impact on productivity
and efficiency
• Consumers spend more (saving is less
desirable)
• Consumers have more disposable income
due to lower repayments on debt = increased
spending
• Business costs like mortgages and loans go
down so profit can go up
• Borrowing is less expensive so more loans are
taken out to use for investment (i.e. new
capital)

EXCHANGE RATES
METHODS TO AVOID UNCERTAINTY
• The amount of a foreign currency that can be purchased
with one unit of the domestic currency • Fixing interest rates on long term loans –
• Value changes based on demand and supply costs (there may be a fee) but gives
• They have an effect on: certainty
– Cost of exported goods – UK goods sold abroad • Hedging – agreeing a price to buy things
– Cost of imported goods in the future, now
Foreign goods sold in the UK – Estimate what the price may be,
Raw materials needed for production e.g. cost of oil for fuel (airlines do
• Appreciation (stronger) – domestic currency buys more this)
foreign currency – Estimate what the exchange rate
– E.g. £1=$1.5 is now £1=$1.6 might be (importers/exporters do
• Depreciation (weaker) – domestic currency buys less this)
foreign currency
– E.g. £1=$1.5 is now £1=$1.3

Helpful reminder:
SPICED for exchange rates
Strong Pound Imports Cheaper
Exports Dearer

49
 2.5.2 LEGISLATION
LEGISLATION
Laws passed by Parliament / the EU
- Rules a business has to adhere to
EMPLOYEE PROTECTION
• Protect employee rights at work
• Equality Act 2010 covers age, disability,
gender reassignment, marriage and civil
partnership, pregnancy and maternity, race,
religion or belief, sex, and sexual orientation.
• Also areas such:
– Pay – minimum levels, frequency
– Contracts – recruitment, redundancy
– Time – holiday, maternity/paternity,
hours
• Restricts businesses ability to ‘do what it wants’ CONSUMER PROTECTION
with staff
COSTS
• Financial cost of paying the requirements
• Administration and legal advice required
• Reduced flexibility of employees
• Less competitive against foreign firms where
laws are more lax
BENEFITS
+ Higher employee motivation
+ Reduced labour turnover / absenteeism
+ Avoid fines for failing to comply
+ Positive reputation
+
ENVIRONMENTAL PROTECTION
• An area where there are costs to a business
with very little in the way of benefits directly to
the business
• BUT benefits to society in general
• Examples:
– Restricted use of some materials
– Emissions requirements
– Ability to recycle the product
• Fines / reputational damage for failing to meet
required standards
• Key problem is the differing levels of laws
across the world impacting on
competitiveness of business where regulations
are high
– Creates higher prices and less
competitiveness
50
CONSUMER PROTECTION
• Designed to create a ‘level playing field’ – all
businesses have to meet the requirements
– No one firm can have a competitive
advantage by not meeting the law
(e.g. lower costs)
• Goods must be made to a good quality – links
to production costs and quality management
• Goods have to be properly labelled and
described correctly in advertising
– Can’t make claims that aren’t true
– Can’t miss out relevant information
• Impact on cost of replacement/repair and
reputational damage if legislation not adhered
to
• Designed to create a ‘level playing field’ – all
businesses have to meet the requirements
– No one firm can have a competitive
advantage by not meeting the law
(e.g. lower costs)
• Goods must be made to a good quality – links
to production costs and quality management
• Goods have to be properly labelled and
described correctly in advertising
– Can’t make claims that aren’t true
– Can’t miss out relevant information
• Impact on cost of replacement/repair and
reputational damage if legislation not adhered
to
COMPETITION POLICY
• Aims to create the environment for effective
competition between multiple firms
• Enforced by the Competition and Markets
Authority
• Investigate mergers and takeovers to assess
impact on consumers
• Can stop the action or force changes, e.g.
forces sale of assets
• Prevent anti-competitive practices, i.e. a cartel
HEALTH AND SAFETY
• Employers must provide safe premises and
machinery / protect worker health
• Costs to the business: training,
changing/provision of equipment, fines for
failing to meet standards
But long term gains
+ Fewer staff absences
+ Less compensation for injuries
 2.5.3 THE COMPETITIVE
ENVIRONMENT
COMPETITIVE ENVIRONMENT
• How competitive businesses are with other businesses
that make the same/similar product
• E.g. Apple – v- Samsung
• E.g. Local hairdressers
• Monopoly = one business with over 25% of the market
• High economies of scale (e.g. bulk buying discounts),
charges higher prices
• Market with a few large businesses = Oligopoly, e.g. IMPACT ON MARKETING METHODS
supermarkets • High competition requires:
• Large number of customers, strong product development 1. More marketing
2. Innovative marketing
• Competition from other businesses will impact on - Consider cost compared to
decision making in terms of: benefits
– Nature of the ownership of the business
– Nature of product or service sold
– Product range offered
– Pricing polices
– Marketing methods

IMPACT ON OWNERSHIP IMPACT ON THE PRODUCT

• Being competitive may require • Greater competition requires:
innovation • A USP
• This requires funding • Adding value to the product/service
• Can lead to development into Ltd and • Innovation
plc status
• Different if competition is mainly local

IMPACT ON PRODUCT RANGE IMPACT ON PRICING

• Greater competition may lead to a
wider range of products
• Attract new customers / get existing
ones to buy more
• The market may be quite narrow – how
easy is this to compete in?
• E.g. generic products/services like
hairdressing
• Greater competition leads to more
competitive pricing
• High market power can squeeze
supplier margins (dairy farmers and
supermarkets)
• Businesses exposed to risk of
penetration/predatory pricing

IMPACT OF COMPETITION ON BUSINESS:

+ Improved efficiency; reduce average costs
+ Increase innovation
+ Wider product range
- Fall in prices; leads to lower profit margins
- Increases cost of promotion
- Can lead to businesses acting unethically

51
 3.1.1 CORPORATE OBJECTIVES
MISSION STATEMENTS CORPORATE OBJECTIVES
• A business has overall aims/objectives • Corporate objectives should flow from
over the medium/long term the mission statement
• A mission statement is a short way of a • Usually set by senior management for
business expressing their main aims the whole company (e.g. Board of
• It is a statement of purpose, setting out Directors)
values, vision – ‘inspiring’ • Should reflect purpose, values,
standards and strategy
DEPARTMENT FUNCTIONAL OBJECTIVES • So can be linked to profit, sales,
• Each department will set their own innovation, market share, environment,
objectives which should flow from the ethics
corporate objectives
• This will help the business to achieve its
corporate objectives
• Individual worker objectives are then
set from the department objectives –
creates an environment where
everyone is working towards the same
goals

CRITICAL APPRAISAL OF MISSION

STATEMNETS/CORPORATE AIMS
PROBLEMS
- Vague, ambiguous
WHAT IT SHOULD DO
- Unrealistic
• Differentiate business to rivals
- Leads to conflicts / inconsistencies of
• Inspire, motivate
application
• Understood and supported by staff
- Can become outdated as the market
• Provides direction/focus for all stakeholders
changes

3.1.2 CORPORATE STRATEGY

CORPORATE STRATEGY USES OF USING THE ANSOFF MATRIX
• Medium/long term plan to achieve the • Identify all your current products/services
corporate objectives and their markets
Influenced by: • Consider future options for expansion using
- Internal factors – finance, talent, strengths the matrix
- External factors – economy, environment, - Consider opportunities, associated costs,
government benefits and risks.

EVALUATION OF ANSOFFS MATRIX

+ Simple to use and understand
+ Observe all possible alternatives
+ Helps to analyse risk
- Large PLCs will need much more analysis and there may be thousands of sub options for strategies.
- Ignores actions of competitors
- Needs to be done alongside a SWOT and a PESTLE analysis

52
 Existing Product or Service New Product or Service

Market Penetration Product or Service Development

Increase sales of existing product to the
existing market. Sell more to the same
Existing customers, i.e. pricing, advertising,
Market promotion, loyalty schemes
+ Low risk, builds on existing
knowledge
- Low rewards, not significant growth
Market Development
New product or service developed for existing
market: means R&D of new products to sell to your
existing customers
+ Higher returns that penetration
- Higher risk based on new product
Diversification

Existing product or service sold to new
market, i.e. geographical, demographics
New + Greater rewards than penetration
Market - Risk of new market (poor
knowledge) is higher
New product or service sold in new markets
+ Potentially high returns, new market reduces
risk of stagnant existing market
- Very high risk, cost of development, lack of
experience

PORTER’S STRATEGY
LOW COST OPERATOR HIGH DIFFERENTIATION
• Michael Porter suggested that there are four generic business strategies that would get
competitive advantage. These were: MASS
• LOW COST LEADERSHIP; making products MARKET at the lowest cost, may include outsourcing, lean
management, standard no frills low cost products
• HIGH DIFFERENTIATION; the product NICHE
or service is unique and the USP adds value to the product
• NICHE MARKET; the product or service MARKETwill serve a very small specific niche, high costs are passed
on to customers, no close substitutes
• Mass Market; product/service serves a high number of customers
LIMITATIONS
Businesses
- Onewho failedcan
business to select oneacross
operate of these strategies would be in danger and “stuck in the middle”
more than one section
• -Niche market
Markets low
are cost – budget
dynamic and evolve
provider
ratherfor a small
than beingsection
static of
customers
• Niche market high differentiation
– specialised provider for a small
section of customers (possibly
high value)
• Mass market low cost – budget
provider for most customers
• Mass market high differentiation –
added value to a mass product

53
PORTFOLIO ANALYSIS (BOSTON MATRIX)
USES
• Helps decide future strategy and budgets
• Helps analyse future opportunities or problems
with their product portfolios
• Resources can then be transferred, i.e. the
surplus cash from cash cows to the stars and
the question marks, and to close down or sell
off the dogs.
LIMITATIONS
- High market share does not always lead to
high profits. There are high costs also
involved with high market share
- Growth rate and relative market share are
not the only indicators of profitability
- Too simplistic – more than four cells?

KAY’S DISTINCTIVE CAPABILITIES STRATEGIC

• Idea = turn a strength into an advantage that’s
hard to copy
• John Kay argued that distinctive capabilities
could:
– Create added value
– Give a business competitive
advantage
Methods:
• Architecture – effective relationships with
employees, suppliers, customers
• Reputation – through the customer experience
• Innovation – bringing inventions to market by
using skills
• Long term direction of the business
• What the business will do to meet its aims and
objectives
• Pro-active decision making
• Forward thinking, future planning
TACTICAL
• Short or medium term decisions
• How the business will implement its strategy
• Reactive to competitor actions
• Present day thinking, what is happening now
that needs dealing with

3.1.3 SWOT ANALYSIS

• STRENGTHS; Internal factors within a business that can help it achieve its objectives
• WEAKNESSES; Internal factors that could prevent a business from achieving its objectives
• OPPORTUNITIES; External business circumstances that can help it achieve its objectives
• THREATS; External problems that may prevent a business from achieving its objectives

Note – it is useful to benchmark your business against competitors by completing a SWOT

STRENGTHS WEAKNESSES

• USP • Poor marketing / reputation

• Marketing / Reputation • Human resources (lack of skills /
• Human resources (skills) too many workers)
• Resources • Lack of resources
• Innovation • Lack of innovation
• Finances • Lack of financial resources
• Efficiency / Productivity • Poor efficiency / productivity

54
 OPPORTUNITIES THREATS

• Changing demography / • Opportunities are also threats

social trends
• Improving technology
• Economic factors – strong
GDP / incomes / trade with
the rest of the world
• Legislation changes
so the list is the same
• I.e. poor economic growth /
declining incomes / Brexit
• Migration / Ageing population
• Environmental legislation

SWOT USES
Tactical decisions
• Convert weaknesses into strengths
• E.g. hire new workers, get a loan/overdraft, lease a new machine
Strategic decisions
• Take advantage of opportunities / respond to threats
• E.g. Innovate to produce a new product responding to social trends, invest in new technology to
increase productivity

EVALUATION
+ Easy to complete
+ Provides a snapshot to act upon (health check)
- Doesn’t provide solutions
- Needs to be up to date or risks being irrelevant
- If done by management, can be bias/unreliable

3.1.4 IMPACT OF EXTERNAL

INFLUENCES
PESTLE
• Analysis tool - looks at external factors THE CHANGING COMPETITIVE ENVIRONMENT
and how they may have an impact on • SWOT/PESTLE need to be dynamic –
the business markets are constantly changing
• This aids • External impact on businesses is
– Objective setting significant – they need to react to this
– Strategic and tactical decision • Maximise the gains from good times and
making minimise the impact of challenging times
• E.g. changing social tastes, globalisation,
shortening of product life cycles, price
pressures

55
 A business should examine how they may be affected by:

P OLITICAL
– A change in government (consider
philosophies)
– Government intervention polices
– Influence of the EU on trading
– Tax rates (Business Rates, VAT, Corporation tax)
– Tariffs (when importing into the UK)

E CONOMIC
A business should analyse how they may be affected by
– An increase in interest rates
– An increase in inflation
– Unemployment rates
– Recession
– The business cycle

S OCIAL
A business should analyse how they may be affected by
changes in social factors
– A change in demographics and its impact on
products produced and markets (e.g. aging
population)
– Culture mix changes in the UK (e.g. halal,
organic food)
– Social trends (e.g. views on plastic)

T
A business could examine the impact of new technologies
ECHNOLOGICAL on their operations, for example;
– Automation, new robotics and how it can
improve productivity
– Innovations in the industry
– Research and development in the industry
– New computer systems
– Trading online

L EGAL
A business should assess how they may be impacted by
changes in legislation for example;
– Health and safety at work act
– Data Protection Act / GDPR (General Data
Protection Regulation – May 2018)
– Sale of Goods Act
– Sex/Race/Disability Discrimination Act

E
NVIRONMENTAL
A business could analyse their environmental challenges
that may face the business;
– Climate change
– Weather (e.g. in farming and tourism)
– Sustainable production / recycling
– Habitat preservation
56
 PORTER’S FIVE FORCES
Porter argued that there were 5 forces (or factors) which
determine the profitability of an industry.
1. Bargaining power of suppliers
2. Bargaining power of customers
3. Threat of new entrants
4. Threat of substitutes
5. Rivalry among existing businesses
RIVALRY AMONGST EXISTING FIRMS IN THE INDUSTRY
• Degree of marketing/promotion
• Ability to keep prices/costs down
• Levels of innovation
• Mergers / takeovers
If there is intense rivalry in an industry, it will
encourage businesses to engage in
• Price wars (competitive price reductions),
• Investment in innovation & new products
• Intensive promotion (sales promotion and
higher spending on advertising)
All these activities are likely to increase costs and
lower profits.
THREAT OF SUBSTITUTES
• Continuously invest in R&D and develop
patents
• Buy up patents of rivals and shelve to
prevent product production
• Increase the elasticity of your product
The extent of the threat depends upon
• The extent to which the price and
performance of the substitute can match
the industry's product
• The willingness of customers to switch
• Customer loyalty and switching costs
If there is a threat from a rival product the firm will
have to improve the performance of their
products by reducing costs and therefore prices
and by differentiation.
57
THREAT OF NEW ENTRANTS
• Create barriers to entry to prevent new
entrants, e.g.
– Heavily advertise to build strong brands
– Competitive/predatory pricing
If new entrants move into an industry they will gain
market share & rivalry will intensify.
If barriers to entry are low then the threat of new
entrants will be high, and vice versa.
Examples of barriers to entry; EOS available to existing
firms (lower unit costs make it difficult for smaller
newcomers to break into the market and compete
effectively), product differentiation (strong USP and/or
brand increases customer loyalty and make it difficult
for entrants to build market share)
BARGAINING POWER OF SUPPLIERS
• Limit power of suppliers by looking for
new suppliers
• Backward vertical integration - merge
or takeover the supplier
If a firm's suppliers have bargaining power, they will:
• Exercise that power
• Sell their products at a higher price
• Squeeze industry profits
Suppliers find themselves in a powerful position when:
• There are only a few large suppliers
• The resource they supply is scarce
• The cost of switching to an alternative supplier
is high
• The product is easy to distinguish and loyal
customers are reluctant to switch
 BARGAINING POWER OF CUSTOMERS
• Forward vertically integrate
Powerful customers are able to exert pressure to drive
down prices, or increase the required quality for the
same price, and therefore reduce profits in an industry.
Customers tend to enjoy strong bargaining power
when:
• There are only a few of them
• The customer purchases a significant
proportion of output of an industry
• They can choose from a wide range of supply
firms
• They find it easy and inexpensive to switch to
alternative suppliers
OBJECTIVES OF GROWTH
3.2.1 GROWTH
1. TO ACHIEVE ECONOMIES OF SCALE
• Economies of scale (EOS) occur when unit
costs or average costs fall as a result of an
increase in the level of output of the business.
• This can increase the profit margins of the
business OR they can choose to reduce prices
to gain more market share
WHY IS EOS A GOOD THING?
Can lead to:
- Higher profit margins (as it costs less per item to
make your product, you will have more profit)
- More funds for investment or for giving
shareholders higher dividends – means it will be
easier to attract investment in the future
TYPES OF EOS:
• Managerial Economies
• Marketing Economies
• Risk Bearing Economies
• Technical Economies
• External Economies
• Purchasing Economies
• Financial Economies
58
USES OF PORTERS FIVE FORCES
• Helps analyse current market position
• Use alongside SWOT/PESTLE
• Use to make tactical/strategic decisions to
meet objectives
BENEFITS
+ Important tool for understanding the forces that
shape competition within an industry
+ Useful for helping business to adjust their
strategy to suit their competitive environment
+ Improve potential profit
LIMITATIONS
- It is static – markets are dynamic and evolve
- Doesn’t account for increasing / decreasing
size of a market
- Ignores things like legal aspects that are in
other models
2. INCREASED MARKET POWER OVER CUSTOMERS
AND SUPPLIERS
• This is the short to medium term objective which
flows from the longer term objective of the
business to increase profitability
• Suppliers have less choice over where to sell
their products (e.g. dairy farmers with their milk)
• Customers have less choice over where to buy
from
• Link back to Porter’s 5 Forces model
3. INCREASED MARKET SHARE AND BRAND
RECOGNITION
• Greater control and influence over the market
– Higher sales
• Stronger consumer loyalty
• Done by innovating or investing in marketing
4. INCREASED PROFITABILITY
• Measurement of efficiency
PROBLEMS ARISING FROM GROWTH
1. DISECONOMIES OF SCALE (DEOS)
• As the business grows they may expand the
scale of production beyond the minimum
efficient scale
• At this point the average costs per unit starts to
RISE as production RISES
Internal DEOS:
- Co-ordination – departments, strategy,
processes
- Motivation of workers – lower productivity,
output
External DEOS; overcrowding in industrial areas,
traffic congestion, price of land and labour rises
Problems a business might face from DEOS:
• Poor communication; as the business expands
communicating between different departments
and along the chain of command becomes
more difficult. Results in workers having less
clear instructions from management
• Lack of motivation; Workers can often feel
more isolated and less appreciated in a larger
business and so their loyalty and motivation
may diminish. This may lead to lower employee
motivation which results in lower productivity
levels and an increase in average labour costs
per unit
• Lack of coordination/control
3.2.2 MERGERS AND
TAKEOVERS
REASONS FOR MERGERS/TAKEOVERS:
• Tactical reasons;
– Ensure an increase in market share
– Access to technology
– Access to staff
– Access to intellectual property such as
patents
• Strategic reasons;
– Access to new markets
– Improved distribution networks
– Improved brands
59
2. INTERNAL COMMUNICATION
• As the size of the workforce increases there will
be less face-to-face communication
• Takes a long time for messages to get through
as there are many layers of management
• Less effective communication
– Means mistakes made
– Means more wastage
– Therefore, higher average unit costs
3. OVERTRADING
• Overtrading is where a business accepts
more orders than it can cope with
• This can result in cash flow problems
• For example:
– Accept a large order
– Paid by the customer in 3 months’
time
– Can’t accept another order as they
will have no cash to buy stock with
MERGER
• A merger is when two businesses have agreed
to join forces to make a new company
• Negotiated but ‘desirable’ to both parties
TAKEOVER
• Friendly - a struggling business is rescued
(white knight takeover)
– Facebook buying WhatsApp for
example
• Hostile - if another business gets over 50%
shares they can takeover management and
control
HORIZONTAL INTEGRATION
• Merging with another business at the same
stage of production (i.e. a competitor)
+ Market share gained
+ Economies of scale as production will be similar
+ Reduce your competition in the market
- Possible diseconomies of scale
- Culture clash makes working together difficult
- Initial cost and ongoing if redundancies
required
CONGLOMERATE
• A conglomerate merger / takeover is a
business integrating with another in a different
market to them
• Can be known as Diversification
• Spreads risk across a wider product portfolio
– Consider product life cycle / Dogs on
the Boston Matrix
FINCANCIAL REWARDS OF MERGERS/TAKEOVERS
+ Economies of scale - better deals because of
increased order size, bulk-buying discounts
+ Increased revenue and market share (effective
in mature markets)
+ Reduced competition
+ Cross-selling - when the two companies
involved in the deal sell each others products
and services, increasing sales
+ Diversification – moving into new / emerging
markets
+ Acquiring unique capabilities / resources –
technology, human capital, patents
+ International expansion - acquiring a local
competitor helps to get over culture issues,
government policy, regulation
- Move into a new trading bloc to avoid tariffs
PROBLEMS OF RAPID GROWTH
- Outgrow your premises
- Productivity can decrease / lower employee morale
- There may be a shortage of cash to meet expansion costs
- Reactive management rather than proactive
- Drop in quality of your products and services
- Increase in staff turnover – loss of vital knowledge as staff leave
60
VERTICAL INTEGRATION
• Integrating with another business in the same
market but at a different stage of production
FORWARD VERTICAL
• Integrating with a business involved in the next
stage of production
E.g. Food manufacturer integrates with a chain
of shops
BACKWARD VERTICAL
• Integrating with a business involved in the
previous stage of production
E.g. A cereal business integrates with a farm
+ Guaranteed place to:
- Get materials from
- Sell your product
+ Control of the supply chain – reduced costs /
greater efficiency
- Knowledge of the market? Risk of failure
- Financial cost
FINCANCIAL RISKS OF MERGERS/TAKEOVERS
- Original purchase cost and cost of changes
(branding)
o Gearing = % of long term finance based
on debt
- Diseconomies of scale
- Redundancies of duplicate staff
- Cost if it all goes wrong
OTHER PROBLEMS WITH MERGERS/TAKEOVERS
- Clash of cultures
- Possible move away from core competencies
of original business may cause issues of control
- Unreliable merger partners
- Overtrading
- Lack of understanding of local markets leading
to wrong promotional message
 3.2.3 ORGANIC GROWTH
ORGANIC GROWTH
• Organic growth means that the business has grown from within
• No purchasing of / merging with other businesses

METHODS OF ORGANIC GROWTH

• This may be through:
1. Increasing the product range
2. Opening more branches (domestically and internationally)
3. Taking on more staff
Link this to Ansoff, e.g. market/product development, diversification

ADVANTAGES OF ORGANIC GROWTH DISADVANTAGES OF ORGANIC GROWTH

+ Cheaper than merging – less strain on cash
flow / debt
+ Retains the company culture
+ Can be planned strategically
- Leads to more sustainable growth
- Long period between investment and return
on investment
- Growth may be limited / dependent on
reliability of sales forecasts
- Can miss out on rapid opportunities
- Lack of knowledge of new
markets/countries

3.2.4 REASONS FOR STAYING

SMALL
REASONS TO STAY SMALL
• Lower costs
– Staffing, taxation thresholds
• Provide a personal service
• Flexibility to respond to customer needs
• Control of business / reputation
• Objectives of owners

HOW TO SURVIVE AS A SMALL BUSINESS

1. PRODUCT DIFFERENTIATION STRATEGY OF SMALL BUSINESSES
• Creates value; highlights quality or durability of the product
• Non-price competition; a differentiation strategy will focus on other ways of attracting customers such
as taste and style
• Brand loyalty; a differentiation strategy can gain customer loyalty
• No perceived substitute; a differentiation strategy that focuses on quality and design may give the
impression that there are no suitable substitutes in the market place

USPs OF A SMALL BUSINESS

• USP stands for unique selling point

• It is a way of promoting the features of the product or service of the business, e.g.:
– Quality
– Customer service (Kay’s Distinctive Capabilities)
– Delivery
– Technical features or functions

61
2. FLEXIBILITY IN RESPONDING TO CUSTOMERS’ NEEDS
• A small business can gain significant competitive advantage over larger companies if it responds
quickly to customer’s needs
• It can do this by:
– Market research
– Gaining feedback
– Tracking social media
– Collect data on customer transactions
– Collaborate with customers to produce new products or services

3. SMALL BUSINESS SURVIVAL THROUGH CUSTOMER SERVICE

• Consumers appreciate businesses that give them more for their money
• E.g. Efficient service, fast delivery and flexible payment terms

4. E-COMMERCE
• Increasing sales are internet based
• Low cost – limited start up costs
– No need for premises etc.
• Huge potential market to sell to
• Sell through Ebay / Amazon / own website

3.3.1 QUANTITATIVE SALES

FORECASTING
Date Sales Three Three
TIME SERIES ANALYSIS
months month
• Analysing a series of historic data to identify
total average trends and create a forecast for the future
• Uses moving averages
January 400
January 400
The average goes in
the middle of the three
February 500 556.6 months February 500

March 770 1670 723.3 March 770

April 900 2170 400+500+770 = 1670 = 556.6

3 3
3
500 + 770 + 900 = 2170 = 723.3
May 600
3 3
3
Step 1 – smooth the raw sales data from the table
by calculating a 3 month moving average. Take the
first 3 months data and calculate an average.
Step 2 – Now leave out the first month and calculate
the average for the next three months
62
 FOUR QUARTER MOVING AVERAGE
• The same system can be applied to four periods, i.e. quarterly
• This is good for eliminating seasonal factors (e.g. impact of
Christmas, summer...)
• Note – the average can be placed in either the second or third
Date Sales 4 quarter month of the four (below is in the second) OR centred across the
moving data
average
VARIANCE
• Difference between the quarter figure and the average for that
2016 Q1 400 period
• Variance = Sales (in the Quarter) – 4 Quarter moving average
2016 Q2 500 642.5
• To work out the variance, find the difference between the
average and the quarter
2016 Q3 770
Date Sales 4 quarter moving average Variance
2016 Q4 900
2016 Q1 400
2017 Q1 600
2016 Q2 500 642.50 -142.50
2017 Q2 700
2016 Q3 770 692.50
2017 Q3 1,100
2016 Q4 900 742.50

2017 Q4 1,500

400+500+770+900 = 2570 = 642.5

REASONS FOR THE VARIANCE 4 4 3
3
• Helps to see the performance of the business in a given month compared to an average of a
particular period
• Look at the quarter – seasonal variations?
• E.g. Winter sports business will have negative variance in the summer
• E.g. Ice cream business will have negative variance in the winter
• Average variations can be calculated over time, i.e. add up Q4 variances over time and find
average variance
SCATTER GRAPHS AND CORRELATION
• Scatter graphs show one variable against another variable to
help show if a correlation exists between the two
• Extrapolation = predicting the future using the trend line
• Extend it beyond the data to see the long term trend
BUT
• Is this realistic?
- Market changes, external shocks…
LIMITATIONS OF QUANTITATIVE SALES FORECASTING TECHNIQUES
- Past performance is no guarantee of the future
Consider:
• Competitor activities, i.e. new entrants not taken into account
• External shocks, i.e. weather events, war
• Impact of marketing / viral media campaigns
• Impact of technological change on the market
• Demographic changes, i.e. population
• Legal changes, i.e. impact of Brexit on tariffs (and costs)
• Businesses need to also undertake SWOT and 63 PESTLE analysis
 3.3.2 INVESTMENT APPRAISAL
INVESTMENT APPRAISAL
• Investment is a strategic process (not tactical)
• There are ways of determining the potential success of an investment over a period of time
• Each needs a cash flow to determine success

SIMPLE PAYBACK = SUM INVESTED

SIMPLE PAYBACK NET CASH PER TIME PERIOD
Works when the net cash per time period is consistent

Cash In Cash Out Net Cash Flow Cumulative Cash Flow

NOW £60,000 (£60,000) (£60,000)

Year 1 £30,000 £10,000 £20,000 (£40,000)

Year 2 £30,000 £10,000 £20,000 (£20,000)

Year 3 £30,000 £10,000 £20,000 0

Year 4 £30,000 £10,000 £20,000 £20,000

Year 5 £30,000 £10,000 £20,000 £40,000

e.g. 60000 = 3 years to payback

20000
PAYBACK= INVESTMENT OUTSTANDING X 12
IN YEAR CASH FLOW

Cash In Cash Out Net Cash Flow Cumulative Cash Flow

NOW £40,000 (£40,000) (£40,000) Payback occurs in Year 3

There is £5,000 left at the start of
the year and in year cash flow is
Year 1 £20,000 £5,000 £15,000 (£25,000) £12,000

£5,000 x 12 = 5 months
Year 2 £30,000 £10,000 £20,000 (£5,000) £12,000
so payback in 2 years 5 months

Year 3 £36,000 £24,000 £12,000 £7,000

64
 ASSESSMENT
• Prediction of when investment is paid back / starts to make a profit
• Shorter payback period = lower risk
• Businesses can consider different options and pick the fastest / set a payback limit

PROS
+ Simple method
+ Easy to interpret
+ Allows for a comparison if cash is limited

CONS
- Promotes short term thinking
- Ignores qualitative aspects, i.e. what is best for customers
- What happens after the period?
- Based on projections

AVERAGE RATE OF RETURN (ARR)

• Looks at the average annual net profit from the investment compared to the initial investment
• Gives you a % return figure – the higher the better

Cash flows (£000s) Proposal 1 ARR = AVERAGE ANNUAL PROFIT X 100

INITIAL INVESTMENT
Year 0 (£80)

Year 1 £30 1. Add up all the cash inflows from years

1-5 = £150,000
Year 2 £40 2. Then minus the original cost of the project
Cost of project is (£80,000) = £70,000 5-year profit
Year 3 £30 3. Then divide this by the number of years the project runs for:
70000 = 14000
Year 4 £30 5
4. Now take this figure and divide it by the cost of the project:
Year 5 £20 14000 x100 = 17.5%
80000

ASSESSMENT
• ARR enables:
– A comparison of multiple investments
– Consideration of the risks
– Consideration of the time period
• Compare the annual return to alternatives like other investments / keeping money in the bank

PROS
+ Looks at cash flow over the life of the investment
+ Focus is on profit
+ Easy to compare

CONS
- Projections may be inaccurate
- It ignores the time it may actually need to gain a benefit from the investment
- Value of money in the future is eroded (by inflation)

65
DISCOUNTED CASH FLOW – NET PRESENT VALUE (NPV)
OPPORTUNITY COST
• ‘the value of next best alternative given up’
• For investment, we look at what money it brings us in the future
• BUT
• Money ‘loses’ value over time
– Inflation

DISCOUNTED CASH FLOW

• = process of calculating what the present value is of the money an investment would earn in the
future
– This is the Net Present Value
• It is better to get the money quicker as it has lost less of its value

Project Z Project Y

Year Net Cash Discount Present Net Cash Discount Present

Flow factor Value Flow factor Value

0 (£250,000) 1.00 (£250,000) (£250,000) 1.00 (£250,000)

1 £50,000 0.91 £45,500 £200,000 0.91 £182,000

2 £100,000 0.83 £83,000 £100,000 0.83 £83,000

3 £200,000 0.75 £150,000 £50,000 0.75 £37,500

NPV= £28,500 NPV= £52,500

Look for the highest value out of the two NPVs,

in this case the better option is project Y

ASSESSMENT
• A realistic assessment given the changing value of money
• Investors can vary the discount rates

• If the NPV is positive = worthwhile investment

• If the NPV is negative = investment not worthwhile
• If the NPV is 0, other considerations need to be looked at such as strategic plans

PROS
+ More accurate than payback and ARR
+ Considers opportunity cost of investment
+ Scenarios such as discount rates can be altered

CONS
- Complicated!
- Only allows a comparison if initial investment is the same amount

66
 LIMITATIONS OF INVESTMENT APPRAISAL
- Based on cash flow forecasts that can be wrong
- The further into the future you go, the less reliable the data
- Doesn’t consider other factors:
- Objectives – short term or long term gain?
- Financial position – how much debt have you already?
- Risk – is it in a new market? (Knowledge/expertise?)
- Social/ethical impact of investment – low returns but high reputational gain / corporate social
responsibility

3.3.3 DECISION TREES

DECISION TREES
• Models used to help businesses make decisions
• Analyses the probability of a success in a choice of strategies, e.g. launching a new product,
running a marketing campaign
• Uses estimates and probabilities
• Calculates the net gain

• Identify options
Step 1

• Add possible outcomes

Step 2

• Add costs, outcome probabilities and

Step 3 financial results

• Calculate expected values and net gains

Step 4

67
 Success
£15
0.2 million
Launch a new Failure
product £1m £2 million
0.8
A

B Success
Start a marketing £7
campaign on the old 0.4
product £500,000 million
Failure
£1 million
0.6

PROS
The expected value of option A:
+ Allows for a range of options and probabilities /
(0.2 x 15m) + (0.8 x 2m) = £4.6m
uncertainty
+ Forces managers to consider scenarios/risk
Net gain of option A = expected value – cost of
allowing for informed choice
decision
+ Good if similar scenarios have occurred before
£4.6m - £1m = £3.6m
(i.e. more accurate estimates)

The expected value of option B: CONS

(0.4 x 7m) + (0.6 x 1m) = £3.4m - Decision tree does not take into account
unforeseen costs and circumstances such as
weather / a change in interest rates
Net gain of option B = expected value – cost of - Question the accuracy of estimates / probabilities
decision o Optimism
£3.4m - £500,000 = £2.9m o Bias
- Ignores qualitative aspects such as corporate
Therefore, the best option would be project A as it has goals
the highest values

68
 3.3.4 CRITICAL PATH ANALYSIS
CRITICAL PATH ANALYSIS
• Shows a sequence of activities
• A management tool which helps a business to complete a task given all the tasks that need to be
performed
• Identifies the earliest at which certain tasks can start based on the length of vital tasks so it can be done
in the shortest time possible
• Possible delays can be spotted
• Sometimes called a Network diagram

USES
• Building projects
• Launching a new product
• Installing new technology
• Advertising campaigns

PROS
+ Stakeholders will be able to see the total time frame for the project to be completed
+ Vital in fast moving markets
+ Parallel activities can be scheduled
+ Reduces capital tied up in resources waiting around to be used
+ Can arrange delivery of resources to arrive / arrange for labour to come in when needed
+ Good for cash flow and budgeting

CONS
- All the data in the network diagram is based on estimates and can quickly become inaccurate
- e.g. if the weather turns bad on a building project or suppliers fail to turn up with a delivery
- The drawing up on a diagram is time consuming it may be quicker to get on with the project
- Project still needs managing effectively

0 3 11 14 18
0 3 11 14 18

Earliest start time (EST) –

ANALYSIS
based on completing the

0 previous activity • When nodes are the same top and

1
bottom there is no spare time so these
tasks are critical

0
• If these tasks are delayed they will delay
the whole project
Latest finish time (LFT) – • The critical path is the shortest possible
longest time it will take to time it will take to do a project
Node number • Businesses should focus resources on the
complete the tasks
tasks in the critical path
69
FLOAT TIME

• Float time = time that a task can be

delayed without causing delay to the
next task (=spare time)
• Allows some slippage in tasks if
1 5
resources need to be focused on the
critical path tasks 4 5 6 4
1 5
The LFT is 54 and the EST is 15, the duration
42
is 12 days
Float = LFT – duration – EST
4
Float = 54 - 12 -15 = 27

3.4.1 CORPORATE INFLUENCES

CORPORATE TIMESCALE
• Corporate timescales refer to strategy and the expectation of when a return on investment will be
achieved
• Short termism = prioritise short term rewards over longer term development (tactical)
• Long termism = focus on sustained growth for rewards in the future (strategic)

WHY WOULD A BUSINESS BE SHORT TERMIST? HOW DOES THIS AFFECT THE BUSINESS BEHAVIOUR?
• Profit focus – need to report results • Lack of investment into:
• Shareholder pressure (dividends) • Current products
• Bonus culture / Target setting focus • Future products
• Need to survive current conditions • New technology
• New markets – e.g. overseas
• Workers – skill development

LONG TERMSIM EVALUATION

• Sustainable growth • Over ambitious – loss of focus on what is
• Investment into key areas such as technology successful NOW
and people • Open to impact of external shocks
• Research and development at the forefront of • Costs compared to revenue generated
planning • Long term plan needs short term goals / steps
• Focus on meeting customer needs
• Incorporates corporate social responsibility
• Considers ethical behaviour of the business in
decision making

70
 3.4.2 CORPORATE CULTURE
EVIDENCE BASED DECISION MAKING
• Also known as the Scientific approach
• Decisions relating to the business are based
on evidence and data which is valid and
trusted information
• Uses processes like decision trees and sales
forecasting data
STRONG CULTURE
• Strong cultures have good communication with
their employees
• They have a focus on core values
• Recruitment and training tries to find individuals
who best fit the culture of the business (creates
low staff turnover)
• The culture is usually based around the history,
tradition and founders of the business
POWER CULTURE
• In a power culture there is a central figure
that will make decisions
• There are few rules and procedures
• There is a competitive attitude amongst
employees to gain power
+ Quick decision making, less bureaucracy
- Employee dissatisfaction, hostility
TASK CULTURE
• In a task culture the focus is a project that
needs to be completed
• A team of experts working together
• Power comes from those who can
accomplish the tasks and have the expertise
+ Flexible, focus on customer needs in fast moving
industries, creative
- Control can be difficult (lack of leadership)
71
SUBJECTIVE DECISION MAKING
• Decisions relating to a business which are
based on personal perspectives, feelings
and opinions
• More entrepreneurial focus
• Involves higher risk (but higher returns?)
WEAK CULTURE
• A weak culture often leads to business failure
• It will exhibit a demotivated workforce
• There will be inconsistent customer service
• It may be poorly managed
• It will be very bureaucratic and lack flexibility to
respond to dynamic markets
ROLE CULTURE
• Decisions are made through well established
rules and procedures
• The power to make decisions comes from
the job title (Tall structure)
• This is a very bureaucratic culture and may
involve lots of paperwork
• E.g. civil service (public sector in general?
Think about this school…)
+ Security and specialist knowledge development
- Slow decisions, frustrating for employees
PERSON CULTURE
• Individual culture where the business serves
the worker, not the other way around
• Individual considers themselves more
important than the business
• There is often a client focus, e.g. lawyers,
architects
+ Creative, emphasis on client/market needs
- Staff hard to manage, high turnover, conflict
between business and individual objectives
HOW CORPORATE CULTURE IS FORMED
• The role of the founders/owners • The business environment / PESTLE
– Decisions based around their ethos or – Environmental issues (plastic) for
influence? example
– Management style • Human resources
• The nature of the business and the products it – Recruitment and retention
sells – Rewards; individual bonuses – v – team
– High quality / budget prices rewards
– Family run, large plc? – Benefits
• The degree to which products sold have – Hours
changed over time • Attitude to customer service

DIFFICULTIES IN CHANGING AN ESTABLISHED CULTURE

WHY CHANGE THE CULTURE? - Strong cultures are hard to change, because a
• Declining profits/sales culture is ingrained
• Low standards – product development / customer o In attitude, values, communication
service - Additionally, cultures vary across different areas of
• Loss of market share the business
• Staff turnover / disputes o Sales = commission based
• Inconsistent leadership o Customer Service = support based
- Need to reset goals/aims and objectives across
entire business

3.4.3 SHAREHOLDERS V
•
STAKEHOLDERS
A stakeholder is anyone who has an interest in the business, or who may be affected by the activities
of the business
• Shareholders hold shares in a business giving them voting rights
– They are also a stakeholder

INTERNAL AND EXTERNAL STAKEHOLDERS

• Internal - Groups or individuals within an organisation who have an interest in the business
e.g. employees, managers, shareholders
• External - Groups or individuals outside of an organisation who have an interest in the business
e.g. customers, suppliers, banks, local community, competitors

STAKEHOLDER AND SHAREHOLDER INFLUENCES

SHAREHOLDER APPROACH
• Business should maximise returns for investors
• Focus on profit
• They can vote on running of business
• Appoint Directors to run the business
+ Increased revenue/profits
- Ignores other aspects that give competitive advantage in long run, i.e. research/innovation, short term
focus, ignores other stakeholders, not sustainable

STAKEHOLDER APPROACH
• Longer term focus
• Sustainable growth more than profit
• Security of the business
+ Creates motivation for staff, stronger brand perception, long term development
- Slower growth and decision making, risk of losing investors
72
 Stakeholder Objectives

Customers Low prices, high quality goods

Suppliers High prices for their supplies, regular payment, long term relationship

Employees Higher pay and job security

Managers Larger budgets, job promotion

Competitors More customers, loyalty

Local community Less congestion, pollution, nice visual appearance

Shareholders / Board Dividends / higher share prices (Profit)

of Directors

Banks Receive loaned money back, higher rates

3.4.4 BUSINESS ETHICS

ETHICS
• Ethics - principles that govern a
person’s behaviour/conduct or the conducting of
an activity
• Moral ‘rights from wrongs’ CONFLICTS
• Business ethics - the system of acceptable • Morals – v – profit
business behaviours and principles that are • New product: revenue gained – v – potential
applied in the commercial world to guide negative image of company (resources used?)
decision making. • Ethical sourcing: ethically sound – v – lower
costs
HOW TO BE ETHICAL? • Ethical treatment: higher wages – v – costs /
• Customers – charging a fair price profit
• Suppliers – paying a fair price • Selling the company: personal gain – v – loss of
• Environment – minimising waste, effective use of jobs/change of image
resources
• Production – sourcing of appropriate resources
• Employees – paying a fair wage, correct
treatment
• Taxation – paying their fair share
• Technology – e.g. fracking, GM food – met
legislative requirements

73
 CORPORATE SOCIAL RESPONSIBILITY
• A company's sense of responsibility towards the community and environment (both ecological and
social) in which it operates
• Requires them to act ethically, within the law and contribute to others (philanthropic)

ADVANTAGES OF CSR:
+ Happy customers; more loyal to a CSR business
+ Happy staff; more motivated and productive workers who are proud of the business
+ Happy investors; more funding and investment will become available, many investors seek CSR
businesses
+ Good PR; public relations which show the business in a positive light (brand image)
+ Cost reductions; in not having to re-hire staff, in energy saving, in reducing waste, in keeping loyal
customers

DISADVANTAGES OF CSR:
• Reduced profit – due to higher costs, can mean higher prices = loss of competitive advantage
• Reduced growth - moral reasons for not going into certain countries / markets / lost innovation
• PR tool – actions speak louder than words!
• Do people care enough?

3.5.1 INTERPRETTING
FINANCIAL STATEMENTS
STATEMENT OF COMPREHENSIVE INCOME (PROFIT AND LOSS ACCOUNT)
• A financial document showing the company revenue/income over the year and their costs and
expenditure

STAKEHOLDER INTEREST
• Shareholders – want to know the final profit figure which dividends will be paid out on
– Acceptable level of profit?
• Potential Investors – want to know the profitability of the business
– Is it worth investing or will it be a risk?
– Trends over time
• Rival business – enables comparison with them / the industry
• Employees and managers – may wish to know the expenses of the business / profit related pay?
• Finance providers (banks) – is the business viable to lend to?
• Directors – satisfy legal requirements

Note – other information might be needed to quantify findings, i.e. previous years results, performance of
other businesses, external factors like the state of the economy

GROSS PROFIT = SALES REVENUE – COST OF SALES

OPERATING PROFIT = GROSS PROFIT – EXPENSES

NET PROFIT = OPERATING PROFIT – TAX/INTEREST

74
 STATEMENT OF COMPREHENSIVE INCOME; KEY INFORMATION

Sales Sales revenue or sales turnover is the money made by the business in normal
trading, this is only recorded when goods are delivered to customers

Cost of sales Cost of sales, or cost of goods is the direct costs to make the goods that have
been sold; raw materials , wages, labour

Administrative / Expenses are costs not involved in producing the goods; advertising,
Operating promotion, wages of admin staff
expenses

Interest / taxation Interest cost on loans / taxation costs like corporation tax

STATEMENT OF FINANCIAL POSITION (BALANCE SHEET)

• By law a plc and a ltd company in the UK have to produce a statement of financial position and a
statement of comprehensive income in their financial accounts and publish them
– They are ‘incorporated’, i.e. a separate legal entity
• A balance sheet is a snapshot on one day (the day the balance sheet is written)
– Shows the value of the business; everything it owes and everything it owns
• Where ASSETS = LIABILITIES PLUS CAPITAL (EQUITY)
• What did the money in the business get spent on?
• The two sides must balance – hence the term balance sheet

KEY POINTS
• Assets: resources that a business owns and uses.
• Non-current (fixed) assets: buildings, machinery; things used again and again over a period of time,
not expected to be sold within 12 months
• Current assets: are used up in production, such as stock of raw materials. They can also be money
owed by debtors. Liquid assets are cash, or expected to be converted to cash within 12 months
• Liabilities: are the debts of the business i.e. what it owes to other businesses, individuals and institutions
• Current: e.g. overdraft, trade creditors
• Non-current: e.g. mortgage/loans

STAKEHOLDER INTEREST
• Governments will use the financial information to calculate the amount of tax (VAT and corporation
tax) that a company has to pay
• Shareholders will analyse the accounts and decide whether their investment capital is being used
effectively
• Directors and senior managers will use the accounts to assist their medium and long-term planning
• Potential investors will analyse the accounts to determine whether or not the company would make a
good investment
• Creditors will use the accounts to ascertain the company’s ability to pay their bills

75
STATEMENT OF FINANCIAL POSITION; KEY INFORMATION

Fixed assets An item that the business owns that it intends to use for more than one year in trading
e.g. van, machine

Current assets Items in the business which it intends to turn into cash within a year, include stock,
debtors, cash

Stock Stock includes work in progress and finished goods not yet delivered to customers

Debtors and Debtors owe the business and will pay within a year, a prepayment may be on a bill
Prepayments that has to be paid in advance of the year it is used

Creditors Creditors are suppliers to the business that money is owed to

Capital Share capital, amount of money paid by shareholders for shares when originally
reserves and issued, not the current value of shares
share capital
Capital reserves are the increase of some fixed assets, for example land may be worth
more now than it was purchased for years ago, that value must go somewhere

3.5.2 RATIO ANALYSIS

CURRENT RATIO = CURRENT ASSETS
CURRENT RATIO CURRENT LIABILITIES
• This is also known as the working capital ratio
• The ideal is around 1.5:1 and 2:1
• Below 1.5:1 the business might not have enough working capital to cover all their bills
• Above 2:1 and the money in the business is tied up and not being used efficiently
• Assets are not working for the business, e.g. too much cash in the bank / stock that might go
off CURRENT RATIO = CURRENT ASSETS - STOCK
CURRENT LIABILITIES
ACID TEST RATIO
• The acid test ratio = quick ratio
o The most commonly used ratio to judge the financial health of a business
• Stock is excluded because it may perish or be obsolete or not worth the stated value
• A result of less than 1:1 means that the current assets do not meet their current liabilities and
they will struggle to pay their bills

76
 GEARING RATIO = NON-CURRENT LIABILITIES x100
CAPITAL EMPLOYED
GEARINGA RATIO
• Capital employed comes from the statement of financial position (balance sheet)
= NON-CURRENT LIABILITIES + TOTAL EQUITY (CAPITAL AND RESERVES)
You may just be given the capital employed figure
• The answer should be expressed as a percentage %

• The gearing ratio looks at the long-term finance of the business and where it comes from
• It measures the proportion of money invested in a business that is financed by long-term borrowing
• A result of over 50% means the business is highly geared, most of the money comes from loans, this
is very risky for a potential investor
– Risk of interest rates increases (but ok if rates are low)
– Possible defaulting on repayments
• A result between 25% and 50% means the business has normal gearing
• Less than 25% means it is low geared and most of the money comes from the owners
– More likely to borrow to expand

CHANGE THE GEARING

DECREASE IT INCREASE IT
• Make more profit • Paying higher dividends (reduces
• Repay long term loans retained profit)
• Retain more profit (don’t pay • Convert short term debt to long term,
dividends) i.e. loans

ROCE RATIO = OPERATING PROFIT x100

CAPITAL EMPLOYED
ROCE (RETURN ON CAPITAL EMPLOYED) RATIO
• Capital employed is the resources the business has available to it
• Return on Capital Employed is a measure of the profitability of the business
– i.e. what it gets out of its resources
• If you were considering investing in a business you might calculate the ROCE % and then compare
this against a bank savings plan (less risky) of x%
• The higher the ROCE figure the better
• Demonstrates how hard the business made the money invested work
• You need to see a trend to analyse this

INTERPRETING RATIOS TO MAKE BUSINESS DECISIONS

• Payback, Decision Trees etc. used to see if the investment is worthwhile
• Ratio analysis = CAN WE AFFORD IT?
• Consider how you fund something:
1. Use working capital, i.e. cash
• Worsens liquidity rations (Current ratio/Acid test)
2. Borrow it (loans)
• Worsens gearing ratio (risk?)
3. Sell assets to fund it
• No negative impact on ratios BUT does it leave the business short in the future/impact on
productivity?

77
 LIMITATIONS OF RATIO ANALYSIS
- Ratios are a snapshot at a point in time
o You need multiple data to see trends over time (think of ratios like shoes – you need two)
o Some markets are dynamic and business finance sees constant change
- Industry context – how do they compare to rivals?
o Fast moving stock means a very low current ratio
- External shocks – what was the market like in that time period? Recession?
- The ratios are only as good as the information provided
o Risk of bad debt (i.e. debtors not paying)?
o Past indicators, not future indicators
- Profit quality?
o Is it sustainable? Caused by one off events? E.g. sale of an asset / section of a company
- No qualitative information considered
o I.e. Quality of product / staff / brand value / culture and ethos….

3.5.3 HUMAN RESOURCES

WHY DO EMPLOYEES MISS WORK OR QUIT THEIR JOBS?
• Illness/family reasons/statutory time (maternity/paternity) …
• Employees feel the job or workplace is not what they expected.
• There is a mismatch between the job and person.
• There is too little coaching/support and feedback.
• There are too few growth and advancement opportunities.
• Employees feel devalued and unrecognised.
• Employees feel stress from overwork and have a work/life imbalance.
• There is a loss of trust and confidence in senior leaders.

LABOUR PRODUCTITIVY= TOTAL OUTPUT PER TIME PERIOD

NUMBER OF WORKERS OR HOURS WORKED
LABOUR PRODUCTIVITY
• Productivity is output per worker and it measures the efficiency of the workforce
• A business will seek to increase productivity to reduce the average cost per unit to produce
• This improves competitiveness
• Labour productivity can be improved through kaizen, TQM, lean production

LABOUR TURNOVER
• Some departments/markets may naturally have a high turnover so context is important (e.g.
retailing/hospitality)
• Turnover should be measured against historical figures in the business
• High labour turnover may be due to poor recruitment, weak induction, lack of challenge in the job
and low pay rates
• If labour turnover is rising year on year management should see this as a red flag and investigate it
• New staff bring new ideas/skills BUT cost of recruitment/training high

LABOUR TURNOVER = NUMBER OF EMPLOYEES LEAVING x100

AVERAGE NUMBER OF EMPLOYEES

78
LABOUR RETENTION
• High – indication of high motivation / satisfaction with staff
• You need regional / industry averages for context
• Helps build strong teams, improve productivity and customer service

LABOUR RETENTION = NUMBER OF EMPLOYEES STAYING x100

AVERAGE NUMBER OF EMPLOYEES

ABSENEEISM
• High levels = low productivity/efficiency
• Possible low staff morale or job satisfaction
• This can be caused by; poor management, stress at work through role overload or under load, lack
of recognition or poor working conditions
• Some absenteeism is natural but too much and it could cost the business in terms of lost orders and
poor customer relations
• Absenteeism can be improved through job enlargement, job rotation, incentive schemes, flexible
working etc.
ABSENTEEISM = NUMBER OF WORK DAYS LOST THROUGH ABSENCE x100
TOTAL POSSIBLE DAYS WORKED

HUMAN RESOURCE STRATEGIES

• FINANCIAL REWARD
- Commission – sales jobs e.g. car sales
- Overtime (on an hourly/weekly wage) & Bonuses (on a salaried wage – could be for loyalty)
- Piece rate – paid by results e.g. per garment knitted (Taylor’s Scientific approach)
- Fees – one off payment for work completed, for example editing a book
- BUT costs, require monitoring

• EMPLOYEE SHARE OWNERSHIP

- Gives employees a stake in the business by allowing them to purchase shares
- This links their performance to the financial gain of share ownership
- Encourages long term service and motivation to support the business
- BUT only useful if business issues shares

• CONSULTATION STRATEGIES
- E.g. quality circles, working groups
- Employees are motivated by being consulted (asked for their opinion) on matters relating to
work, e.g. pay, conditions, business decisions
- Engagement reduces turnover / absenteeism through involvement
- BUT time consuming, subjective

• EMPOWERMENT STRATEGIES
- Giving power/authority to people (increasing trust)
- Hertzberg’s two factor theory – develop the motivators
Examples:
- Training staff
- Delegation of responsibility
- Flexible working
- Feedback / Effective communication
- Increases employee sense of worth BUT cost, requires skill / balance to get right

79
3.6.1 CAUSES AND EFFECTS OF
CHANGE
CAUSES OF CHANGE
CHANGES IN ORGANISATIONAL SIZE
• Domestic or international expansion
• Organic/Inorganic growth
• Downsizing
Issues the business will face as a result are
- Maintaining the company culture
- Motivating staff during the expansion
- Increased labour costs with hiring of new staff
- Training of new staff
- Impact on communication

POOR BUSINESS PERFORMANCE

• Poor sales, low profits, low productivity or slow expansion
Issues the business will face as a result;
- The business will need new objectives and a new direction
- The business will need some new strategies to compete (Ansoff’s Matrix)
- The business will need to look at what is necessary to improve performance this may mean
delayering/redundancies

NEW OWNERSHIP
• Change of ownership – to ltd or plc status
• Takeovers / Mergers
Issues the business will face as a result;
- Increased number of shareholders who have a say in the running of the business
- New legal responsibilities
- There may be significant role duplication (two marketing managers for example) so there may
need to be redundancies
- There may be a clash of cultures
- There may be issues of communication between the two businesses as they change and merge
- Is the brand identity clear/strong?

THE MARKET AND OTHER EXTERNAL FACTORS (PESTLE)

• Changes from any of the different areas
Issues the business will face as a result;
- Increasing their research and development budget
- Develop their product portfolio
- Change objectives
- Adjust working practices to adhere to new rules

TRANSFORMATIONAL LEADERSHIP
• New CEO, Chairman, Finance Director
Issues the business will face as a result;
- A new business culture which challenges managers to develop new ways of thinking
- Possible resistance to change

80
POSSIBLE EFFECTS OF CHANGE
CHANGE ON COMPETITIVENESS
A business that is undergoing change may need to;
- Be aware of competitors actions and be prepared to react to them
- Benchmark with similar businesses to make sure they are keeping up
- Invest in R&D to keep innovating and bringing new products to market
- Investigate new and emerging markets e.g. BRIC economies, expanding EU

CHANGE ON PRODUCTIVITY
A business that is undergoing change may need to;
- Invest in new equipment and machinery
- Change production methods
- Change quality management methods
- Retrain managers so their skills meet the new technologies used

CHANGE ON FINANCIAL PERFORMANCE

A business that is undergoing change may need to;
- Compare sales estimate with available production capacity
- Budget for necessary increases in staff and capacity
- Produce new cash flow forecasts
- Discuss how to raise any extra capital

STAKEHOLDERS
Stakeholders may be effected by change:
- Employees may feel unsure about their future
- Managers may be worried about duplicate roles and redundancies, or possibly see the
change as positive with new opportunities
- Shareholders may be reluctant to invest while there is a period of change happening, until
circumstances are more settled within the business
- Customers may be delighted with the new range of products and improved quality
- Suppliers may see the change as an opportunity to renegotiate old contracts with more
favourable terms

3.6.2 KEY FACTORS IN CHANGE

• ORGANISATIONAL CULTURE • SIZE
- Strong cultures are hard to change SMALL FIRMS
- Change needs to work with the culture to + Less workers to deal with
maximise potential success + Multi skilled approach makes them more flexible
- Change needs embedding – resistance comes BUT
from ‘not understanding’ or ‘not agreeing’ - Stronger team focus – resistance as a group
- Get employees to take ownership of the change - Individuals are more invested in the business so have
stronger opinions
• SIZE OF ORGANISATION
- Effective communication is required LARGE FIRMS
- Strong participation of middle management is + Change can be cascaded down management
required to get the message across channels
- Is it easier to change in small firms? + Lower chance of individuals having impact
- Does a narrow span of control help? BUT
- Harder to compromise
- Message gets lost on its way down
- Different departments work in different ways

81
• SPEED OF CHANGE • DISRUPTIVE CHANGE (OUTSIDE THE BUSINESS)
STEP CHANGE - Change in whole market (PESTLE):
- Significant and occurs rapidly - Political decision, e.g. Brexit
- Decisive - Economic – downturns/booms
- Often when a business is struggling - Social – trends, i.e. healthy lifestyle
BUT - Technological – e.g. on demand viewing
- May see strong opposition - Legal – changes in the law
- Creates high stress - Environmental – e.g. rise is sustainable energy

• INCREMENTAL CHANGE
- Small, regular changes
- Not obvious MANAGING RESISTANCE TO CHANGE
- Goes with strategic development of the business • Educate / Communicate
- Little resistance - Why the change is needed
BUT • Involve workers in decision making
- Significant change takes longer = risk of - Get them to buy into ideas / come up
losing/not gaining competitive advantage with the ideas
• Negotiate / Incentivise
- May involve some form of compromise
• Manipulate / Coerce
- You may need to use authority for the
long term good

3.6.3 SCENARIO PLANNING

SCENARIO PLANNING
• Creating plans/solutions for unpredictable
events to cover critical elements of business
• Consider different futures and plan actions to
reduce risk/take advantage of an opportunity
1. Identify possible issues/future trends
2. Build scenarios – what could happen?
3. Plan a response
4. Identify probability/most likely incidents
(decision trees can be used)
5. Put in place a plan for the scenario if it
happens

IDENTIFYING KEY RISKS THROUGH RISK ASSESSMENT

NATURAL DISASTERS
• Significant loss of infrastructure (i.e. factories)
• Loss of the supply chain
• Loss of raw materials
LOSS OF KEY STAFF
• Loss of demand for the product
• Loss of expertise / leadership
• Loss of values
IT SYSTEMS FAILURE
• Loss of income generation
• Key risks include:
• Problem of replacing – do they exist, where does the
• Impact on customers making/receiving
person come from?
payments
• Impact on customers placing orders
• Leaking of sensitive data / Loss of data
• Consider use of firewalls / back ups / server
82
access
RISK MITIGATION
RISK ACCEPTANCE
RISK LIMITATION
• Cost of preparing for it is higher than the risk
• Acknowledge it may happen so plan to limit
itself
problems
• Often small businesses follow this
• E.g. IT back ups that can be recovered
• E.g. Have stocks of a product / raw material or
RISK AVOIDANCE
back up supplier
• Actually doing something to stop the risk
• E.g. Train staff to replace others
• E.g. monitor trends / politics - pull out of a
country / market
RISK TRANSFERENCE
• E.g. due diligence (checking before a
• Move risk to someone else
takeover)
• E.g. Buy insurance like public liability
• E.g. Outsource a function like Payroll

BUSINESS CONTINUITY
• Business Continuity = capability of the business to continue to operate/sell/produce following a
setback
• Impact analysis – know what might happen
• Recovery strategy – what do you then need to do?
• Put together the strategy
• Testing and training of the strategy to ensure it works
• E.g. Stockpiling in case UK ports see delays post Brexit
• E.g. having alternative suppliers of key supplies
• E.g. have stock located off site
• E.g. data backed up on remote servers

SUCCESSION PLANNING
• Succession planning = identifying and developing internal staff to potentially replace a key leader /
fill a key position when someone leaves
• How do you do this?
• Job share / enrichment / enlargement
• Job shadowing
• Effective training / gaining qualifications
• Ensuring your structure allows for replacements

+ Seamless transition – saves recruitment costs

+ Internal people know the business – experience of previous success/failure
- Same ideas (notion of ‘fresh blood’)?

SCENARIO PLANNING – OVERALL SUMMARY

+ Reduce the negative impact of changes
E.g.
+ Less disrupted supply
+ Less lost sales
+ Less reputational damage
- Can’t stop negative impact overall
- Trade off / opportunity cost of undertaking scenario planning
- Hard to know if plan is effective before carrying it out

83
 4.1.1 GROWING ECONOMIES
GLOBALISATION
• The process of the world becoming more interconnected
• Increased trade around the world – goods/services/culture
• Increased ability to become ‘multinational’ leading to more competition

GDP GROWTH
• GDP = Gross Domestic Product
• The value of all goods and services produced in an economy
• Measured quarterly – gives an indication of the economic success of a country
• Measured in $ to enable comparison of countries
• Note – done using Purchasing Power Parity (PPP)
– This takes into account cost of living in each country to make it more accurate
– E.g. cost of living lower in less developed country so money ‘buys more’
– Taking into account PPP increases developing countries GDP and lowers developed countries
GDP
• Per capita = per head (GDP / Population)

EMERGING ECONOMIES
• Characterised by:
• Rapid growth
• Industrialisation
• Increasing openness to trade
• Greater stability – political/social

IMPLICATIONS OF ECONOMIC GROWTH

OPPORTUNITIES FOR BUSINESSES
• New market = expansion, sales and profit
– Increased wealth = more elastic demand
• Extension to a product life cycle by accessing new market
• Mergers/Takeovers and strategic partnerships
• Low cost labour – outsourcing of production to lower average costs
• Access to raw materials
• Reduced transport costs to get products to markets if they set up overseas
• Tax breaks and incentives given by LEDCs to encourage business to set up
• Glocalisation – adapting products to meet the needs of the regional culture to develop brand
power/loyalty

OPPORTUNITIES FOR INDIVIDUALS

• Employment prospects higher
– Possible migration opportunities
– Move from primary sector to secondary/tertiary
• Higher average incomes = better standard of living
• Improved public services (government revenue increases from business tax)
– Schools, health care
• Foreign Direct Investment by businesses improves local infrastructure
– Roads, communications
BUT
- Loss of jobs in higher income countries
- E.g. call centre jobs outsources to other countries
- Exploitation of resources/people (brand damage, e.g. Nike production techniques, fashion sector)
- Inequality within a country gets worse – business leaders prosper at the expense of the cheap worker

84
INDICATORS OF GROWTH
GDP PER CAPITA
• Gives an indication of the level of growth in a country (over time) and standards of living
• You need to consider Purchasing Power Parity to account for the cost of living
• PROBLEM – doesn’t inform us of the equality in the country
GDP PER CAPITA = GDP
POPULATION
LITERACY
• Literacy levels are a key indicator of the economic growth of the world’s countries
WHY IS IT IMPORANT?
• Literate workers are more productive
• They are richer and therefore buy more goods and services

HEALTH
WHY IS IT IMPORTANT?
• Workers are more productive (less sick days taken)
• Work for longer so contribute more to businesses
• Richer so consume more goods and services

HDI
• Human Development Index
• Measure of economic growth but includes non-income factors
• It combines; life expectancy, education and income of the population (weighted indices)
• 0-1
• Closer to 1 the better
• BUT average so no account for imbalances within the country/quality of life/quality of education

85
 4.1.2 INTERNATION TRADE
AND BUSINESS GROWTH
SPECIALISATION
• = doing one thing really well rather than lots of things ok
• Countries specialise based on (natural) resources, skill levels of labour, climate
• Specialisation is done based on comparative advantage – the ability to do something more
efficiently (at a lower opportunity cost) than something else
• Specialise to create competitive advantage; sustainable to keep ahead of competition

COMPETITIVE ADVANTAGE
• Businesses specialise to create a competitive advantage
• This is a sustainable way of keeping ahead of competition
• Advantage may come from a local source, i.e. a raw material (grapes in wine production)
• Or from local skills/knowledge, i.e. engineering
• Or size of labour market

PROS CONS
+ Higher output - Over reliance – susceptible
+ Better quality to downturns in the market
+ More efficient - Dynamic specialisation –
+ Economies of scale other countries become
o Lower average costs better at it
+ Greater profit per item

FDI
• FDI = Foreign Direct Investment
• Inward FDI – a foreign company investing into the UK
• Outward FDI – a UK company investing into another country
• Greenfield FDI – set up a new operation
• Brownfield FDI – buy a local company

REASONS WHY
• Lower corporation tax
• Incentives like subsidies are given
• Be closer to the market to sell products (fast growing?)
• Avoid a saturated market
• Reduce transport costs and avoids tariffs
• Take advantage of local resources / skills

POTENTIAL ISSUES
• Lack of understanding of the local market
• Are incentives long term?
• Dynamic market – changing preferences / economic circumstances

86
 4.1.3 FACTORS CONTRIBUTING
TO INCREASED
GLOBALISATION
REASONS FOR MOVING TO INTERNATIONAL BUSINESS
• Ansoff’s Matrix – Market development (existing product, new market)
• Expansion strategy (Product Life Cycle)
• Revenue, profit
• Economies of scale

REDUCTION OF INTERNATIONAL TRADE BARRIERS/TRADE LIBERALISATION

• The process of removing / reducing trade barriers to enable free trade between countries
• E.g. removal of tariffs, quotas and non-tariff barriers
• Enables businesses to sell in other countries on an even level with domestic businesses
• OECD (Organisation for Economic Cooperation and Development) suggest trade liberalisation brings:
– More exports
– Higher GDP
– Job creation
– Higher real wages
• Hugely significant if goods produced across multiple countries

WORLD TRADE ORGANISATION

• Supports trade liberalisation working to reduce trade barriers – negotiator and mediator
• E.g. reduce the level of common tariffs applied by trading blocs
• Enforces trade rules and manages disputes between countries
• Power to make judgements against countries
• Most Favoured Nation clause – if you have a rule for one member, it should be in place for all
members

POLITICAL CHANGE
• New agreements
• Impact – increased free trade between more countries than ever before

• Breakdown of Communism, e.g. Russia created a new market

• Opening up of China, creating trade opportunities
• Increased willingness of countries to work together, e.g. trading blocs, WTO, regional agreements
• ALL increased market size, access to markets, access to lower costs

REDUCED COST OF TRANSPORT AND COMMUNICATION

• Communications – mobile/satellite technology, video calling, internet = rapid spread of information
and knowledge
• Ability to outsource work to cheaper workers through effective communication
• Transport – technological advancement of fuel efficiency and speed means goods move faster and
less expensive around the globe
• Containereisation
• Uniform boxes
• Easier to move in ports / transport – faster, more efficient
• Doubling the size more than doubles the carrying capacity

87
INCREASED SIGNIFICANCE OF GLOBAL COMPANIES
• Multinational – glocalise product
• Transnational – one product
+ Attracted by cheap labour, access to resources and better distribution
+ Spread knowledge, culture
- BUT at the expense of local, small scale business

INCREASED INVESTMENTMENT FLOWS (FDI – FOREIGN DIRECT INVESTMENT)

• When businesses spend money across different countries
• Made possible by easier flow of money across the globe
+ Creates jobs, supply chain benefits and skills are transferred
- BUT greater risk exposure (think of the financial crisis and its spread)

MIGRATION
• From rural to urban areas for manufacturing / service jobs
• Across countries seeking better standard of living – improves domestic labour pool
• Trend towards restricting migration?
• FDI/Multinationals actually takes jobs to people rather than them migrating to look for jobs

GROWTH OF THE GLOBAL LABOUR FORCE

• Globalisation has increased choice of worker
• Offshoring – transferring production to other countries to save money (high wage to low wage)
• Filling a skills gap with foreign workers

STRUCTURAL CHANGE
• UK – manufacturing was a third of economy in 1950. Now it is 10%
• Loss of industry to other countries
– Rise of service sector to replace it
• Korea – 1960s. Very poor and agricultural based
• Move to manufacturing through industrialisation

Pros Cons

+ Employment = greater wealth and consumerism - Risk – lack of market knowledge

(increased demand)
+ Increased profit for firms – leads to greater - Costs of setting up abroad / tariffs /
innovation standards to meet
+ Wider market to sell to – spreads risk across - Increased competition leads to
markets lower prices / revenues
+ Economies of Scale/Efficiency = lower prices - Loss of workers to different
countries
+ Sharing of knowledge across businesses –
structural development (infrastructure)
+ Effective use of resources and specialisation –
outsourcing opportunities

88
 4.1.4 PROTECTIONISM
PROTECTIONSM
• An attempt by a country/trading bloc/region to restrict trade with another country
• Done where there are concerns about a trade imbalance, i.e. imports are much greater than exports

TARIFFS
• A tariff is a tax placed on an import
– Increases its price (ultimately for the consumer)
– Decreases its demand
• Tax aims to restrict imports
• Idea – consumers switch to a domestically produced product
• Can help governments to raise revenue

WHY IMPOSE A TARIFF?

• Protects local business from foreign competition
– Young business can get into market
– Old, inefficient business can stay in the market
• Can stop poor quality products entering the economy
• Limit dumping – where foreign goods ‘flood’ domestic market at cheap prices (often below cost of
production)
• Can be used to limit environmental problems
• For the Government:
– Raise revenue
– Correct a trade imbalance (imports>exports)

IMPACT ON BUSINESS
DOMESTIC BUSINESSES
• Increased demand for their product over foreign competition
• They become more competitive
• More revenue, profit and growth
FOREIGN BUSINESSES
• Loss of demand = loss of revenue
• A reduction in production can mean loss of jobs

+ Job creation and job security

+ More profitable businesses
+ Supports economic growth (GDP)
+ Government can use tax revenue to improve services / infrastructure
- Inelastic PED renders tariff ineffective
- Consumers pay higher prices – loss of disposable income on other things
- Reduced trade opportunities due to retaliation
- Overreliance on the tariff by domestic producers

89
IMPORT QUOTAS
• A quota is a physical limit on the quantity of a good imported into a country
• Aim is to increase the share of the market available for domestic products (made in the home country)

WHY ARE THEY IMPOSED?

• Enables predictable import levels from others
• Restrict dumping
• Protect a key domestic industry, e.g. agriculture

IMPACT ON BUSINESSES
DOMESTIC BUSINESSES
• Enables them to take a greater share of the market
• Stops price from being forced down by excess supply
FOREIGN BUSINESSES
• Loss of market share
• Loss of revenue / profitability

+ Job creation / security

+ Stronger domestic growth (GDP and business profit)
+ Better trade balance – much easier to predict than tariffs
- Hard to decide on appropriate quota level
- Creates reliance on the quota = inefficient businesses
- Retaliatory quotas = reducing trading opportunities for all

OTHER TRADE BARRIERS

• Trade agreements between nations often focus on tariffs/quotas
Other ways include:
• Product quality requirements restricting certain products that don’t meet the standards required
• Subsidies or tax breaks given to local producers to make their goods more competitive

SUBSIDIES
• Money is given to local producers to support production
– Low/interest free loans
• This makes the local goods cheaper on the domestic market
• This artificially raises the price of foreign goods relative to domestic goods therefore reducing demand
for them
+ Raises demand for local producers, increasing revenue
+ Increases competitiveness on the international market
+ Reduces reliance on imported products
- Expensive for the Government
- Creates inefficient producers – over reliant on the subsidy
- Encourages retaliatory subsidies

GOVERNMENT LEGISLATION
• Designed to protect consumers and restrict imports
• Can stop dangerous/unethical practices, or deliberately make it harder to sell a product in a market
Product related areas of focus:
- Ingredients (could be a complete ban)
- Labelling
- Packaging
- Design
- Performance (e.g. emissions)
+ Less competition for domestic firms
- Possible retaliation
+ Higher profit
- Higher prices
+ Job creation / security
- Less choice for consumers
90
 4.1.5 TRADING BLOCS
TRADE LIBERALISATION
• Protectionism seeks to restrict trade
• Trade liberalisation – the process of breaking down trade barriers and making trade easier
• A major factor in the process of globalisation

TRADING BLOCS
• Intergovernmental agreement to reduce regional trade barriers
• Aim to have no restrictions and have common laws to reduce friction of trade

TYPES OF TRADING BLOCS

• Free Trade area = no barriers to trade between each other. Each country sets their own barriers
against other non member countries
• Customs Union = no internal barriers + a common external barrier against others
• Common (Single) Market = is a Customs Union + freedom of movement of labour and capital
• Economic and Monetary Union - adoption of a single currency / harmonised economic policies (e.g.
tax rates)

EXPANSION OF TRADING BLOCS

• Trading blocs expand when new members join
• EU reached 28 members prior to Brexit
• More countries mean more cooperation and more trade benefits
• You can be a member of more than one trade bloc

91
EU FACTS
• EU has 28 member states
• Started in 1951
• Has a combined market of 500 million customers
• It has established a single market amongst its members
• This means there is free circulation of goods, people and money in the EU (no tariffs or barriers)
• Combined GDP of c. 16% of global economy
• 19 members also make up the Eurozone

ASEAN FACTS
• The Association of South East Asian Nations (ASEAN) – set up in 1967
• 10-member diverse international body that represents more than 600 million people living in the
region.
• Free trade agreements with China, Japan, Korea, India, Aus and NZ – vital geographical partners
• GDP per capita for Indonesia/Vietnam grown over 300% in last 30 years (three times faster than UK)

NAFTA FACTS
• Members: Canada; Mexico; United States
• Started 1994
• Ha nearly 30% of global GDP
• Mexico a middle income country – benefitted from business setting up there (cheaper labour) BUT
suffered re. agriculture
• Trump hostile to NAFTA – blames it for loss of US jobs
• Now called USMCA

IMPACT ON BUSINESSES OF TRADING BLOCS

THE ADVANTAGES FOR BUSINESSES INSIDE A TRADING BLOC

+ No barriers to trade means it is easier to export to other countries
+ Wide market to sell to
+ Access to large workforce, particularly skills not available domestically
+ Protection from cheap imports from outside the bloc
+ Likely that infrastructure will improve, i.e. links between cities/countries
Think economies of scale

THE DISADVANTAGES FOR BUSINESSES INSIDE A TRADING BLOC

- Greater competition – inefficient businesses miss out
- May have to adhere to new rules/laws, e.g. Health & Safety, Labour laws
- Internal problems become magnified, i.e. Eurozone crisis with Greek bailout or low commodity prices
across a bloc
- Increased costs of importing raw materials if outside the trading bloc

THE PROBLEMS FOR BUSINESSES OUTSIDE THE TRADING BLOC

- Prices are forced up due to tariffs – lack of competitiveness
- Increased costs to meet legal requirements / standards
- Preference of ‘local’ goods/services within the bloc
- Harder to access resources from inside the bloc

92
 4.2.1 CONDITIONS THAT
PROMPT TRADE
PUSH FACTORS
• Relates to unfavourable domestic market characteristics
– Pushes businesses to look overseas
Reasons;
• Saturated domestic markets – Ansoff ‘market development’
– Lack of domestic market growth
– Easier if new market has similar characteristics (e.g. language)
• High domestic competition
– E.g. smaller UK business sees MNC enter UK market
• End of the product lifecycle at home (see later)
• Increased risk in domestic market, i.e. fear of economic circumstances (low GDP growth)

PULL FACTORS
• Attractive features of an overseas market (emerging markets)
• E.g. Jaguar Land Rover moving into Chinese market
• Reasons:
• Significant sales opportunities
• Opportunity to gain EOS by expanding overseas
– Centralised production – huge purchasing eos
– Cheaper wages – lower average costs
– Lower tax, less regulations
• Opportunity to exploit competitive advantages in new markets, i.e. reputation, quality, lack of
existing rival
• Risk spreading – reduces overdependence on sales in domestic market by moving to expanding
markets

OFFSHORING
• A business relocating part of its business overseas (WHERE)
– Activities still undertaken by the business
• Typically, manufacturing
• Can be customer service, e.g. call centre, accounting, legal
Key reasons:
+ Take advantage of low labour costs in manufacturing
+ Be closer to specialist suppliers
+ Cost efficiencies, i.e. transport costs
+ They might have better skills
+ It has to be more economical to produce goods abroad and transport them to the UK than to pay
UK wages to be profitable
Problems;
- Public perceptions
- Poor customer service levels
- Level of training required
- Risk to intellectual property – theft of ideas
- Culture / Language barriers

93
OUTSOURCING
• This is where a business function is contracted out to a third party business (WHO)
• Could be domestically or abroad
+ Takes advantage of specialist skills
+ Cost savings, efficiencies gained
• E.g. market research, legal work, accountancy or even human resources functions
• A common example is call centres in places like India
Problems;
- Public perceptions (again)
- Loss on control over delivery of the service
o Quality problems
o Reputational damage
- Commitments contractually – hard to get out of
- Culture/Language barriers

EXTENDING THE PRODUCT LIFECYCLE (sell abroad)

• Do this to counter maturity/decline in domestic market
• Continues profitability of an existing product (no redesign/R&D required)
• Low risk strategy
• Gain loyalty in a new market to extend the product further (Ansoff – market development)
BUT
- Cost of marketing to establish brand
- Cost of exporting goods/materials to the market
- Language/cultural barriers
o Need for Glocalisation?

4.2.2 ASSESSMENT OF A
COUNTRY AS A MARKET
MARKET ATTRACTIVENESS
• A business wants to set up overseas
• What do they look for? Key indicators?
• Factors to consider:
• levels and growth of disposable income
• ease of doing business
• infrastructure
• political stability
• exchange rate

LEVELS AND GROWH OF DISPOSABLE INCOME

• = the amount of money left after tax has been deducted
• Can use GDP per capita to analyse
• Look for growth rates in this indicator and trends over time then compare with others
• As people get wealthier, they spend money differently
• Move to non necessity products / services
• Is growth sustainable?
• Look at debt levels – gives an idea on future tax levels and public spending

EASE OF DOING BUSINESS

• Efficiency of businesses
• Look at indicators such as starting a business / days to get electricity
• Significant – tax levels and systems
• Raw materials needed to be imported? Look at border delays (links with infrastructure)
94
INFRASTRUCTURE
= the underpinnings of an economy
E.g.:
• Communication – internet, phone lines, mobile reception
• Transportation links – roads, rail
• Entry points (airports/seaports)
• Warehousing facilities

POLITICAL STABILITY
- Impact on the relationship between government and business
- Focus on key indicators of how businesses can operate:
- Tax regulations
- Labour market restrictions – minimum wage, ease of hiring/firing, hours worked
- ‘Red tape’ / Bureaucracy – paperwork required, rules to comply with
- Corruption – levels of financial bribery required to ‘do business’

EXCHANGE RATES
• = Price of one currency against another
• Large impact of businesses operating internationally
• Long term trends tend to lead to a consistent rate
• BUT short term spikes/drops impact on WHEN it is a good time to invest or not

To decide which market a business is looking to go into, a business may undertake:

• SWOT analysis
• Analyse PESTLE factors
• They can also look at the market
– Number of existing competitors – market shares
– Brand power
– Maturity of the market in that country

4.2.3 ASSESSMENT OF A
COUNTRY AS A PRODUCTION
LOCATION
COST OF PRODUCTION
• Depends on factors such as:
• Labour costs
• Access to raw materials
• Utility costs, i.e. gas, electricity, water
• Inflation rates
• CONSIDER – the product being made
– Less labour intensive means less focus on labour costs and more on skills

SKILLS/EDUCATION
• Businesses need to analyse what skills they need
• Locate in most appropriate place, i.e. high skilled engineers needed / low skilled low cost labour
• Look at overall education levels, number of graduates, specific skills of workforce

INFRASTRUCTURE
• Does the country have adequate:
• Road 95
• Rail
• Sea
AVAILABILITY
• Low unemployment rate can mean a shortage of workers
• Leads to higher wages
• Higher unemployment rate means a greater pool of workers to choose from – drives down wages
• BUT balance this with skill base of the labour force

INFRASTRUCTURE
• Does the country have adequate:
• Road
• Rail
• Sea
• Air transport systems
• To enable exports and imports?
• Does the country have suitable buildings and premises where the goods could be manufactured?
• Does the country have a reliable power system?

LOCATION IN TRADING BLOC

• Set up production within a trading bloc
• Avoids import tariffs/quotas as goods can be sold within the trading bloc
• Access to raw materials without tariffs as well
• Some businesses may start production in a country as a way into a trade bloc

GOVERNMENT INCENTIVES
• The government of a country may offer incentives for businesses to set up there
• E.g.
• Lower corporation tax rates – less profit lost
• Subsidies/grants – lowers production costs
• Lower employment tax rates, e.g. national insurance contributions
• Less restrictive planning laws

EASE OF DOING BUSINESS

• Looks at levels of regulations that may hinder a business
• Covers areas such as:
• Starting a business
• Getting electricity
• Trading across borders
• Look to set up in a country which makes it easier for you to produce (less bureaucracy)

POLITICAL STABILITY
• Frequency of government changes –relate to tax rules, laws, trade policy
• Military power
• Risk of terrorism
• Kidnapping of employees
• Less stability acts as a deterrent to setting up production

NATURAL RESOURCES
• Important to consider WHAT you need and WHO has it
• Then set up close to the resources
• Minimises transport / border costs
• Lowers costs of production – gives you a competitive advantage

LIKELY RETURN ON INVESTMENT

• Consider NPV, ARR etc. as a means of deciding on the investment
• Setting up production overseas is expensive – building, capital required, staffing, overseeing
• Should you consider the market for selling as well as production? (this may mean setting up
somewhere more expensive)
• Qualitative factors – language, culture, time zones
• Consider opportunity cost and risk versus reward
96
 4.2.4 REASONS FOR GLOBAL
MERGERS OR JOINT
VENTURES
• Global Merger – voluntary coming together of two businesses from different countries
• Joint venture – two or more parties from different countries pooling resources on a project/activity
with shared ownership, returns and risk
– Utilise complementary strengths

REASONS TO UNDERTAKE A GLOBAL MERGER/JOINT VENTURE

• (rather than setting up yourself)
• Low brand awareness outside of domestic market
• Cultural barriers / language
• Lack of market knowledge
• Exporting costs / tariffs

SPREAD RISK OVER DIFFERENT COUNTRIES/REGIONS

• Costs are shared and expertise is shared to reduce risk of failure
• Growth is rapid (inorganic), key in developing markets

ENTERING NEW MARKETS/TRADE BLOCS

• Options:
• Organic – grow yourself, slow
• Inorganic – buy a rival, fast but expensive
• Joint venture – work alongside a local business
• China – won’t allow foreign takeovers of Chinese business so joint venture the only option
• Gain knowledge and experience of local partner by entering into a joint venture
• Production is already set up, access to materials already established
• Avoids tariffs / initial expensive R&D if the product is beyond the existing portfolio

ACQUIRING NATIONAL/INTERNATIONAL BRAND NAMES AND PATENTS

• Provides instant market share
• Strength of brand makes accessing new markets easier
• Acquiring patents give access to technology without having to develop it
• Useful strategy if your cash cow is about to become a dog (find a new Star)

SECURING RESOURCES/SUPPLIES
• Such as land and raw materials
• E.g. Chinese businesses buying into African economies to secure iron ore, copper etc.
• Backwards vertical process
• Beneficial if suppliers have been acting unethically, i.e. child labour, environmental issues
- You now control this process
- Ensures protection of brand name

MAINTAINING/INCREASING GLOBAL COMPETITIVENESS

• Competitiveness - the ability to compete with other businesses
• Dynamic markets – stand still and get overtaken
• Mergers/JVs can keep businesses ahead of the competition – size is key to gain economies of scale
• Can reduce competition in the market rapidly
97
PROBLEMS WITH A GLOBAL MERGER/JOINT VENTURE;
- Cost of financing merger / JV
MAINTAINING/INCREASING GLOBAL COMPETITIVENESS
• Competitiveness - the ability to compete with other businesses
• Dynamic markets – stand still and get overtaken
• Mergers/JVs can keep businesses ahead of the competition – size is key to gain economies of scale
• Can reduce competition in the market rapidly

PROBLEMS WITH A GLOBAL MERGER/JOINT VENTURE;

- Cost of financing merger / JV
- Diseconomies of scale
- Culture clashes / different management styles
o Ineffective communication
- Managing different goals/objectives
o Misguided strategic decisions could be made

4.2.5 GLOBAL
COMPETITIVENESS
EXCHANGE RATES
THE IMPACT OF MOVEMENT IN EXCHANGE RATES ON INTERNATIONAL BUSINESS
• Impact is on imports and exports
• Stronger = appreciates
• Weaker = depreciates
• SPICED

APPRECIATION
• Negative for exporters – prices rise for their goods
• Options – could lower prices to counteract BUT loss of revenue
• Good for those that import raw materials
- Cheaper costs – could make more profit per unit or lower prices
• Problem - rise of foreign competition as they appear cheaper when bought from overseas

DEPRECIATION
• Positive for exporters – their prices appear cheaper so increase in demand
– They could maintain prices and still see an increased revenue
• Bad for those that import raw materials
– Higher costs per unit – is this passed onto customers or do you accept lower profits?
• Foreign competition declines as they appear more expensive

EFFECT ON EXCHANGE RATE DEPENDS ON:

• Inflation; high UK inflation reduces the positives of a stronger £
• Recession; reduces impact of changes as demand for things are low regardless of the rate
• PED; If goods are price inelastic then the price change won’t effect demand
• Raw materials; effect of appreciation or depreciation depends on how many raw materials the
business buys
• Competition; effect of appreciation or depreciation depends on how competitive the market is
that the business trades in
• Fixed contracts for currency – pre determined and don’t change with fluctuations

COMPETITIVE ADVANTAGE
COST COMPETITVENESS 98
• Porter’s Strategic Matrix – competitiveness from being either a lowest cost operator or having
high differentiation, in a mass or niche market
COMPETITIVE ADVANTAGE
COST COMPETITVENESS
• Porter’s Strategic Matrix – competitiveness from being either a lowest cost operator or having
high differentiation, in a mass or niche market
• Cost leadership = being the lowest cost operator in the market

- Efficient (lean) production - e.g. Ryanair have faster plane turnaround times
- High capacity utilisation
- Highly trained employees
- Waste minimisation
- JIT stock control
- Outsourcing – 3rd party ownership
- Offshoring – moving activities to another place
- Vertical integration

DIFFERENTIATION
• With this strategy a business will produce a unique product or give a unique service
• With a uniqueness the business can charge a premium price to its market segment
• Vital if the core product is essentially the same – create a uniqueness in other ways

SKILL SHORTAGES
• A skills shortage is when there is a lack of workers with the right qualifications in the industry
• Businesses which follow a differentiation strategy are more vulnerable to skills shortages as
they will require more skilled staff
– Design, innovating, product development
• This can lead to outsourcing/offshoring or recruiting from abroad
• Requires investment by businesses and governments

4.3.1 MARKETING
GLOBAL MARKETING
• Increasing number of MNCs and globalisation mean more thought required on marketing
• Need a global marketing strategy to fit the objectives, market and product of the business

HOW A GLOBAL BUSINESS:

• Grows global sales – new products into new markets or take existing product into new markets
• Increases profits – increase global selling price or reduce marketing spend
• Builds brand image – increase global advertising

GLOBAL MARKETING STRATEGY

• A business doesn’t differentiate its products or marketing between countries.
• The same product is sold in many countries
• Global product for a global marketplace – same message for all

+ Economies of scale (production/distribution) = lower average costs

+ Brand recognition / consistency
+ Speed of message
- Ignores differences in:
- Needs/How the product is used
- Competitive environment
- Legal structure
- Culture

99
Why?
• Increases sales, builds stronger reputation and loyalty
GLOCALISATION
• Describes products/services that are both developed and sold to global customers but designed to
suit the needs of local markets.
• “think global, act local”
• Involves the MNC personalising marketing

Why?
• Increases sales, builds stronger reputation and loyalty
• Products can be made locally which reduces costs and acts as a marketing tool
- Time consuming; more research required
+ Attracts more consumers in the market; increase sales - Higher unit costs
+ Brand recognition; loyalty - Waste of money if not successful
+ Avoid ethical issues - Less consistent

DIFFERENT MARKETING APPROACHES

ETHNOCENTRIC
• A business which believes that a success story in one country can translate to all other
countries in which it operates
• Products sold without adaptation – global products
+ EoS, low marketing costs with little market research required
- Lack of market orientation may cost sales, brand image, loyalty

POLYCENTRIC
• Adapting the marketing mix to maximise sales in different countries.
• Each host country is unique
• Each subsidiary business in each country should develop its own marketing strategy
+ Increased sales, loyalty, brand recognition
- Higher average costs, significant research requirements

GEOCENTRIC
• A mixed approach
• Brand on a global basis and cater for individual markets where required
+ Still gain EoS – may shift production to regional level
- Danger – clarity of strategy. Getting the wrong approach gives the problems of both systems

GLOBAL 4 Ps
PRODUCT
• Increase in global travel and media means people expect the same product the world over
• BUT
• Room to ‘tweak’ the product to suit, i.e. changing the level of sugar

PLACE
• Channels of distribution likely to involve wholesaler / producing in the new countries
• BUT
• International distribution may also involve an agent – knowledge of local systems

PROMOTION
• Can use a single message globally
• Supports brand recognition
• BUT
• Needs to consider language, culture, political climate

PRICE
• Unlikely a single price can be charged around the world
• Different standards of living
• Costs like tariffs, tax rates to be considered
100
 4.3.2 NICHE MARKETS
NICHE MARKETS
• A smaller part of a large market where products/services focus on a specific need/want
• Global niche market - target a specific range of people in a country across the global market
– Numbers in each country make it viable overall

CULTURAL DIVERSITY
• 'Cultural Diversity' means a range of different societies or people of different origins, religions and
traditions all living and interacting together.
• Businesses need to recognise and respect these when undertaking global marketing
• E.g. Attitudes towards alcohol/tobacco
• E.g. Attitude towards dress/sex
• E.g. What is popular, e.g. sport
• E.g. cultural differences, e.g. white used to mourn by Hindus where we see it as bridal

FEATURES OF GLOBAL NICHE MARKETS

• Customers with very specific wants/needs
• Requires excellent customer service
• Profit is prioritised rather than market share
• Innovation to create exclusivity / high quality
• Occurs more at the luxury end of the market – exclusivity crosses borders easily
• E.g. custom built/designed cars, furniture, clothing etc.

SELLING IN A GLOBAL NICHE MARKET

+ There is less competition and greater customer loyalty in niche markets
+ Targeting global markets reduces average costs
+ Low PED, prices are likely to be higher and therefore profits may be greater
+ Risk may be reduced
- Individual market attention required may reduce possible global economies of scale
- E.g. Some products may require unique ingredients or production techniques
- Co-ordination and communications may be more difficult across differing brands and markets

MARKETING MIX TO SUIT GLOBAL NICHE MARKETS

• High end luxury niche products can be marketed the same across the world
• A number of individual niche markets can add up to a significant market for a business
• Lower end, non-luxury products are much harder to market
• You need knowledge of the local market, tastes, trends

101
 4.3.3 CULTURAL SOCIAL
FACTORS
• All markets are different and require varying the marketing mix
• The level of adaptations will depend on the differences between markets
• E.g. UK product to Australia less problematic than UK to Indonesia

CULTURAL DIFFERENCES
• Culture = set of values/beliefs
• Simple personal interactions can vary widely
• E.g. Japan – exchange business cards before a meeting starts
• Consider religious beliefs
• E.g. how adverts portray / dress people

DIFFERENT TASTES
• Large scale market research is required to understand markets
• E.g. Japan and Kit-Kats – wouldn’t sell their flavours anywhere else in the world

LANGUAGE
• Need for employees to speak in the local language to effectively transmit the message
• Consider also relationships with suppliers, regulators/local government

UNINTENDED MEANINGS
• Happens particularly with translated messages
• Word for word, literal translation has a different meaning
• Or a poor understanding of local slang or uses of words
• Local competition won’t be making such errors

INAPPROPRIATE/INACCURATE TRANSLATIONS
Problems:
• Wrong words being used
• It sounds like something else in the local language
• Slang – can’t be checked against a direct translation

INAPPROPRIATE BRANDING AND PROMOTION

• Danger – it doesn’t meet the needs of the locals or, worse, offends
• Words or images need consideration

ETHNOCENTRISM
• “evaluation of other cultures according to preconceptions originating in the standards and customs
of one's own culture.”
• Dangerous for a business to fall into this – can lead to mistakes

102
 HIGH/LOW CONTEXT CULTURES
High Context Communication Needs:
Low Context Communication Needs:
• Establish social trust first
• Get down to business first
• Value personal relations and good will
• Value expertise and performance
• Agreement by general trust
• Agreement by specific, legalistic
• Negotiations slow and ritualistic
contract
• Negotiations efficient as possible

4.4.1 THE IMPACT OF MNCS

MULTINATIONAL CORPORATION
• MNC = a company that owns or controls production or service facilities in more than one country
• Has a central head office that coordinates operations (often in developed countries)
• Achieved through FDI

WHY?
• Domestic saturation – seek new markets
• Cheaper production – offshoring
– Labour (wage rates)
– Tax rates
– Legislation
• Access to (natural) resources
• Economies of Scale
IMPACT OF MNCS ON THE LOCAL ECONOMY
1. Local labour
+ MNCs pay higher wages than average non MNC business (World Bank estimate 6%)
o Positive multiplier –they spend this money
+ Creates jobs
+ Training for workers is substantial AND there is skill transfer to other labour/businesses improving
economy overall
+ Corporate standards are set in relation to worker conditions (need to seem fair / corporate social
responsibility)
BUT
- Lack of Trade Union representation (if it does develop, this isn’t in MNC interests)
- Job cuts for those working in local competitors
- Profit pressure reduces quality of working conditions

2. Local Business
+ Technology transfer improving working practices (efficiency and competitiveness)
+ Supplementary businesses – supply the MNC so creates growth (supply chain)
+ Opportunities for partnerships / joint ventures
+ Forces innovation
BUT
- Creates shortage of workers for other local businesses
- They can’t compete with the MNC and potentially go out of business
- Methods become outdated and lose ability to entice workers
103
 3. Local community / environment
+ Corporate Social Responsibility drives support programs, investment into projects by the MNC
+ Ethical sourcing, Fair Trade to support producers and protect MNC reputation / brand
+ Scrutiny from pressure groups and consumers
BUT
- Pressure of low costs / high profit causes unethical decisions/actions

IMPACT OF MNCS ON THE NATIONAL ECONOMY

1. Trade
Balance of payments
= Export revenue – Import expenditure
• One MNC in a small economy (measured by GDP) has a significant impact
• FDI is a positive inflow and money earnt from goods exported is a positive inflow
• BUT withdrawal of funds (profits sent back to home nation) or imports sucked in by MNCs creates a
deficit
• Deficit = weakens currency (can cause inflation)
• Surplus = positive inflow, strengthens currency

2. Government
+ FDI flows helps improve infrastructure – new factories, transport networks
+ Positive multiplier – creates new jobs giving higher incomes which increases spending
+ Raises tax revenue for the Government that can be spent on hospitals, schools etc. = increased
standard of living
BUT
- MNC profit outflows back to ‘home’ country in the long term
- Jobs created are low skilled
- Tax avoidance through transfer pricing
o Move sales / profits to countries with lowest tax rates
- Over dependent on the MNC – if they leave, it can create a large gap in the economy

3. Technology/skill transfer
• Sharing progress and ideas around the world
• Economy benefits from increased efficiency / productivity and less waste
• More innovation leads to economy being more competitive globally

4. Business culture
+ MNCs strive for progress, profitability
+ Brings professionalism to the economy – processes and ways of doing things
+ Raises the quality of home businesses
BUT
- Not guaranteed – some MNCs unethical in approaches, i.e. resources, finance
• Environmental damage
• Working conditions for workers

5. Consumers
+ Choice
+ Greater quality, lower prices
BUT
- Consumer rebellion against corporate brands?
- Loss of culture

104
 4.4.2 ETHICS
ETHICS
• Ethics define a businesses conduct in dealings and underpin decisions that are made
• Right or wrong? Good or bad?
• Ethics usually set around external factors, i.e. a code, guidelines
• Morals are more personal
• A business uses Corporate Social Responsibility to ensure they are more ethical

STAKEHOLDER CONFLICT
• Centres around profit
• Limit wages, little effort on conditions/respect for laws, paying less to suppliers, tax avoidance
• = greater profit
BUT
• Impact on those stakeholders is overly negative (can become unethical)
• Consumers are starting to demand higher standards
• Pressure groups are highlighting key issues

PAY AND WORKING CONDITIONS

• Pay based on costs of living (living wage) – ethically sound
• Pay based on skills – ethically sound
• BUT a wide pay gap between management and workers?

WASTE DISPOSAL
• i.e. from by-products, chemicals, excess plastic
o Can be toxic/harmful to humans, wildlife
• Getting rid of this correctly/legally/safely is expensive so lowers profit
• Temptation is to dispose of it in a unethical manner (cheaper)

105
 4.4.3 CONTROLLING MNCS
• Control = set laws/codes; restrict/allow actions
• Influence = try to change behaviour for positive reasons
• Control
– Governments; law making
– Shareholders; they control who runs the business
• Influence
– Pressure groups; campaigns, awareness
– Consumers; demand for the product

WHY DO MNCS NEED CONTROLLING?

• Safety – i.e. less rigorous laws, standards in LEDCs can cause problems
• Short termism – i.e. extraction of minerals causing fast usage of finite resources
• Weakening of local cultures – i.e. overpowering western influence and tastes
• Lack of commitment to a country – i.e. footloose MNCs that can move countries easily

HOW CAN THE ACTIONS OF MNCS BE CONTROLLED?

The actions of MNCs can be controlled by
• legal challenges/rulings/court cases brought by governments to force MNCs to change behaviour
• campaigns by pressure groups forcing compliance/change
• public opinion and boycotts which impact on sales and bring pressure
• adverse media coverage that mobilises public opinion against the MNC
• use of social networks to orchestrate a boycott that could hit sales

POLITICAL INFLUENCE
• MNCs can lobby governments
– Direct contact with politicians
– Funded research to support their agenda
• Stronger in LEDCs where MNCs have greater significance on GDP / economic growth
• MNCs often ones with technological expertise to unlock a country’s natural resources, e.g. oil, minerals
• MNCs dynamic - react faster than governments, i.e. transfer pricing strategies (movement of money
around the world to maximise returns)

CONTROLLING
• Direct state ownership of the industry (nationalisation)
– Run the business in the best interests of society
• Place Tariffs / Quotas on goods from MNCs
• Subsidise local businesses to reduce their costs and enable them to compete
BUT
• Expensive
• Governments not best placed to run businesses and goes against capitalist thinking

LEGAL CONTROL
• Legislation is key – e.g. Health and Safety, Trade Descriptions Act, Equality Act
• Ensure they are binding – risk of fines, jail if not adhered to
• Laws can increase costs for MNCs
• Prevents them acting in unethical ways – e.g. child labour may be ‘accepted’ part of society
• CMA (Competition and Markets Authority) – prevent mergers / takeovers if market share is greater than
25%

CONTROLLING
• Taxation – close loopholes to prevent MNCs exploiting tax law for profit
– E.g. Amazon and sales in Luxembourg, Facebook, Starbucks etc.
• Taxation – make MNCs pay for damage through environmental taxes
• Environmental laws powerful – emissions, waste management
BUT
106
• Overly onerous = loss of MNC to another country
– How ‘brave’ are governments?
 CONTROLLING
• Taxation – close loopholes to prevent MNCs exploiting tax law for profit
– E.g. Amazon and sales in Luxembourg, Facebook, Starbucks etc.
• Taxation – make MNCs pay for damage through environmental taxes
• Environmental laws powerful – emissions, waste management
BUT
• Overly onerous = loss of MNC to another country
– How ‘brave’ are governments?

PRESSURE GROUPS
• E.g. Greenpeace, Amnesty International, Extinction Rebellion
• Pressure groups formed by concerned individuals / groups who attempt to change behaviour of MNCs
– Often have a particular focus
• Strategies:
- Lobby the government to demand change
- Protest march
- Publicity stunts to draw attention to the problems
- Consumer boycott
- Set up campaigns to change public opinion

CONTROLLING
In an MEDC:
• Greater democracy, effective political systems
• Better educated population
• Higher standards, i.e. regulations
• Problem in LEDCs:
• Pressure group seen to be enforcing ‘western’ standards
– E.g. environmental concerns – v – strong economic growth

SOCIAL MEDIA
• Fast spreading of information
• Reaches a large audience rapidly
• Raises awareness, creates discussion
• Can target customers of particular MNCs
• Tweets, images, campaigns
- ‘Viral’
- Turn a scare into a crisis in minutes!
- Name and shame – impact on reputation / brand image
• Direct contact with MNC
BUT
• Significance of impact?
• Speed of story appearing = speed of departure from public eye
• In some countries, social media is managed

107
 EQUATIONS YOU NEED TO
THEME ONE
KNOW
THEME TWO
MARKET SHARE = SALES OF A BUSINESS X100 SALES VOLUME = SALES REVENUES
TOTAL SALES IN THE MARKET PRICE

PED = % CHANGE IN QUANTITY DEMANDED SALES REVENUE = PRICE X QUANTITY

% CHANGE IN PRICE

YED = % CHANGE IN QUANTITY DEMANDED TOTAL COSTS = FIXED COSTS +

% CHANGE IN INCOME VARIABLE COSTS

TOTAL VARIABLE = TOTAL COSTS –

FIXED COSTS
BREAKEVEN = TOTAL FIXED COSTS
CONTRIBUTION PER UNIT
TOTAL VARIABLE = AVERAGE
VARIABLE X OUTPUT

CONTRIBUTION = SELLING PRICE –

VARIABLE COST PER UNIT
AVERAGE VARIABLE = VARIABLE COSTS
OUTPUT
TOTAL CONTRIBUTION = CONTRIBUTION
PER UNIT X NUMBER UNITS SOLD
PROFIT = TOTAL REVENUE – TOTAL
COSTS
MARGIN OF SAFETY= TOTAL OUTPUT –
BREAKEVEN POINT
NET PROFIT = OPERATING PROFIT –
INTEREST/TAX
GROSS PROFIT = SALES REVENUE –
COST OF SALE
NP MARGIN = NET PROFIT X100
SALES REVENUE
GP MARGIN = GROSS PROFIT X100
SALES REVENUE
CURRENT RATIO = CURRENT ASSETS
CURRENT LIABILITUES
OPERATING PROFIT = GROSS PROFIT –
EXPENSES

ACID TEST RATIO = CURRENT ASSETS - STOCK

OP MARGIN = OPERATING PROFIT X100 CURRENT LIABILITUES
SALES REVENUE

108
 WORKING CAPITAL= CURRENT ASSETS – CAPITAL PRODUCTIVITY = OUTPUT PER TIME PERIOD
CURRENT LIABILITIES NO. MACHINES

PRODUCTIVITY = OUTPUT PER TIME PERIOD CAPACITY UTILISATION = ACTUAL OUTPUT X100
INPUT PER TIME PERIOD MAXIMUM OUTPUT

LABOUR PRODUCTIVITY = OUTPUT PER TIME PERIOD

NO. WORKERS/HOURS WORKED

THEME THREE
GEARING RATIO = NON-CURRENT LIABILITIES X100
CAPITAL EMPLOYED

LABOUR PRODUCTIVITY = OUTPUT PER TIME PERIOD

ROCE RATIO = OPERATING PROFIT X100 NO. WORKERS/HOURS WORKED
CAPITAL EMPLOYED

LABOUR TURNOVER = NO. EMPLOYEES LEAVING X100

CAPITAL EMPLOYED = TOTAL EQUITY + AVERAGE NO. EMPLOYEES
NON-CURRENT LIABILITIES

ABSENTEEISM = NO. WORK DAYS LOST THROUGH ABSENCE X100

TOTAL POSSIBLE DAYS WORKED

109