BS notes

Section 1

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Topic 4: Types of business organisation

Unincorporated businesses:

Businesses that are not legally registered as companies

1. Sole trader
A business organisation owned, financed and controlled by a single person. They can employ
other workers, but they are the only one who invests in a business.

Advantages Disadvantages
All profit goes to the owner Unlimited liability
Easy to set up Hard to raise finance
Less amount of capital needed Responsible for all the debts
Maintain privacy Full responsibility of the business
Full control, easy and quick decision making No continuity
High personal interest Lack of expertise

2. Partnership
It is a legal agreement called the deed of partnership between two or more (generally up to
20 people) to jointly own, manage and finance a business and share its profits.
The deed of partnership includes details about finance provided by each partner, the
percentage of profit each partner will receive, salary entitlements, holidays, registered name
and address.

Advantages Disadvantages
Less individual risk, Shared risk of Unlimited liability
ownership
Easier to raise capital as compared to sole Partners have to share profit
trader
More expertise than a sole trader Conflict in decision making can arise making
the process slower
More continuity than sole proprietorship Capital might not be enough
Maintains privacy
Easy to establish

There are different types of partners, mainly active partner who provides investment,
manages the business, shares profits as well as loss and dormant partner who provides
investment and shares profits and losses but does not take part in management. Other
partners include nominal partner, partner by estoppel, partner in profit only, minor partner
and partner with limited liability.
 Sole trader Vs Partnership

Sole trader Partnership Both

One owner only
Makes all the decisions
Owner is the only source of
finance
More than 1 owner
Decision making is shared
Can attract investment
Bound by a deed of
partnership
Unlimited liability
Maintain privacy
Hard to raise finance
Lack of continuity
Ease of establish

Incorporated businesses:

These are officially registered companies and have a separate legal identity to their owners. In India,
these companies register at the ministry of corporate affairs.

1. Joint-stock companies
The two main features that differentiate between incorporated and unincorporated
businesses is limited liability and their ability to issue shares.
 Limited liability: The owners will not be personally held responsible for the debts a
business has. If a business fails to return money, it will face legal action and lose its
assets, but the personal property of the owner cannot be seized. This is known as
the veil of corporation.
 Issuing shares: Businesses can issue shares to raise finance. Shareholders are people
who invest in the business to earn shares. These shares determine how much of the
business they own. They receive dividends based on their investment. Shareholders
also elect a board of directors. The more the shares someone has, the higher their
voting power.

a) Private limited companies:

They can issue shares only to the people known by the owners (friends and family).
This allows the ownership to be kept private.
They have two legal documents
- Articles of association which details the responsibilities of the internal members
of the company
- Memorandum of association which details external information of the business
such as the registered name, address, share structure, etc.

They have to host annual general meetings (AGMs)

Advantages Disadvantages
They have limited liability They need to release financial
information; their accounts need to be
audited by external accountants adding
to the running costs of the company.
High capital Legal documents and restrictions
More continuity Conflict in decision making
More expertise, they can employ AGMs are expensive
specialist directors
Easy to maintain control compared to a
 PLC

AGM: At an AGM, the directors of the company present an annual report containing
information for shareholders about the company's performance and strategy.
Shareholders with voting rights vote on current issues, such as appointments to the
company's board of directors, executive compensation, dividend payments, and the
selection of auditors.

b) Public limited companies:

Public Limited Companies (PLCs) issue shares to the general public through stock
exchanges.

Advantages Disadvantages
More capital than any other legal Difficult to retain enough profit to
ownership reinvest in the business and share
amongst the shareholders
Managerial economies of scale Easy to lose control
Limited liability Need to release financial information
and an annual report which is visible to
its competitors
More legal restrictions.

2. Co-operative society
Defined as a union of 10 or more people united voluntarily to meet their economic, social or
cultural needs through a jointly owned and democratically controlled enterprise.
They aim to serve the members for mutual benefits and are not profit oriented.

3. Franchises
A franchise is an agreement between two existing organisations that allows the new
business called the franchisee to trade under the name of an existing business (franchisor) as
a separate legal identity.
A franchisor provides the franchisee with an existing customer base, free marketing,
management training, an established supply chain and an established brand image in
exchange for an initial set up cost and yearly royalties.

Franchisor Franchisee
Advantages Disadvantages Advantages Disadvantages
Faster rate of Most of the profit Everything is Limited ability to
expansion goes to the already provided make decisions
franchisee
Receives an initial Risk in the Easy to obtain The franchise may
payment fee reputation of the finance not suit the local
business market
Earns yearly Existing customer
royalties base
Less on job time Reduced risk of
failure
4. Joint ventures
Joint venture is an agreement between two existing organisations to jointly own a third
business.
Why?
- When a business wants to enter a new market and has little knowledge it
chooses to merge with an established brand in the local market who has vital
knowledge and form a joint venture rather than increase its risks of failure.
- Some businesses form a joint venture simple to share expertise and resources.

Advantages Disadvantages
Shared risks Conflict of interest
Shared expertise + resources Split profits
More capital investment Slow decision making
 Section 2

2.1

Motivating employees

Why work?

 To earn money
 To serve the community
 To have a purpose
 To achieve dreams
 To earn respect

What is motivation?

Motivation is the desire to achieve a certain outcome or result. The more the desire to achieve a
goal is the harder they will work to achieve an outcome. No two people are motivated in identical
ways.

Why are well motivated employees important?

 More productivity
 Improved quality
 Reduced labour turnover
 Less absenteeism
 Less engagement in industrial action against the business

(Labour turnover can be defined as the overall change in the number of people employed in a
business entity during a particular period.)

The end result would be a competitive advantage over other businesses.

Motivation theories put forward:

 Abraham Maslow’s hierarchy of needs.

He suggested that work fulfils an important role in satisfying human needs.

He suggested that all human beings have similar human needs and that these needs have an
order of priority.
 Self
actu
alis
Morality, creativity, problem solving,
atio spontainity, realisation of potential
n
nee
Esteem ds Self esteem, achievement,
respect for others, confidence.
needs
Social/belonging Friendship, family,
teamwork
needs
secuirty related to body,
Safety Needs employment, resources,
family, health and property

Food, water,
Physical needs shelter, sleep

- Physical needs: At the base of the hierarchy are physical/physiological needs. These are
the basic needs for human survival such as water, food, shelter and rest. They are placed
at the bottom as they are the most important and they need to be provided first. Work
helps to satisfy these needs by providing money to buy food, water and shelter.
- Safety needs: After their physical needs have been met, they seek safety needs. This
includes feeling safe in a job workspace, freedom from stress, job security and stability
in their lives. With money that they earn from working people can afford to live in a safe
accommodation and save money for future.

- Social needs: Maslow suggested that once people start to meet their physical needs and
once they feel safe, they desire a sense of belonging. They like to belong to groups and
have friends and be part of a family. Work helps to satisfy these needs as it provides
employees with an environment to interact and talk with people with shared goals and
aims. Teamwork encourages and supports relationships between colleagues.

- Esteem: Once their social needs are met, Maslow argued that people desire self-esteem.
Self esteem of an individual grows when they are proud of what they have achieved.
Work helps in achieving self esteem as it gives the employees targets and projects to
work on and a sense of achievement when they are successful on completing the task on
time.

- Self-actualisation: The final level of pyramid, self-actualisation refers to the people’s

need to fulfil their potential. It is the ultimate sense of achievement and the feeling that
they have achieved something with their life. It is usually achieved outside of work but
for some people the job they do can be a very powerful source of self-actualisation.

Real life application of Maslow’s theory: As a manager how will you use The Maslow's Theory to
motivate your workers.

 Physical needs can be met by

 “According to Maslow’s pyramid, the first priority is for the physical needs of the workers to
be satisfied. This includes food, shelter, water, transport etc. As a manager, I would ensure
that the workers receive enough salary in order to survive and take care of the basic needs
of themselves and their family. I would also ensure the availability of drinking water in the
workspace and giving them lunch breaks or access to the cafeteria in order to eat. If any
worker is not able to meet their physical needs but has showcased exemplary work, I would
consider providing them assistance financially depending on the budget and funds
received.”
 Safety needs:
Next is looking after their safety needs. If my work requires the workers to expose
themselves to the outdoors such as construction or mining, it would be necessary for me to
provide the workers with safety training and safety equipment. Along with this workplace
safety can also include if the workers feel safe in the office around their peers. Actions such
as bullying and sexual harassment that make an employee feel uncomfortable will not be
accepted in the office, awareness sessions will be provided.

 Social needs:
Third in the pyramid is social needs. Maslow suggested that after the employees are
physically supported and feel safe in the work environment, they start to desire a sense of
belonging. To ensure that the workers meet social needs, I would make quality work groups
instead of only individual assignments so that the employees have a sense of belonging. In
order to have quality circles, it is important for me to ensure that the workers are aware
about following the safety needs and do not practice bullying. These quality work groups will
also be based on their skills and work area in the company in order to have efficient,
productive work done, improve their collaboration, communication skills and to make the
employee feel included.
 Esteem needs:
In addition to the above points, Maslow suggested that people require self esteem in order
to stay motivated. Self-esteem is building self-confidence. This can be done when an
employee feels proud of themselves due to an achievement. As a manager I can build the
self-esteem of employees by expressing gratitude by saying “thank you” for every
completed assignment of them and by handing out employee of the month certificates with
a small cash price. Also, achievable targets and goals should be set according to the
employees potential, upon completing the task they will gain esteem.
 Self-actualisation:
Lastly, Maslow stated that self-actualisation is extremely important. When people feel the
ultimate sense of achievement and they know they have fulfilled their potential. This
includes boosting skills such as morality, creativity, critical thinking, etc. This can be done
by assigning challenging yet finish able tasks to motivate the employee to get out of their
comfort zone and use their potential to the best. When an employee has shown consistent
and regular good work and meets the requirement of a higher position in the workplace, a
promotion will be considered.

Problems with the theory:

 There will always be exceptions to the general theory, example artists and musicians will
seek creativity before financial rewards
  Not all needs need to be satisfied within the workplace, some people might prefer
leisure activities as a source of self-actualisation
 Not everyone is alike so what motivates one person, example money might not motivate
the other.

 Frederick Winslow Taylor’s theory

He believed that all managers could identify the best way to complete a task through
scientific observation and conclusion. Based on this he made a few suggestions.

 Managers should study the tasks carried out by an employee and the time taken to do it,
unnecessary movement and sub tasks should be removed.
 Employees should be given tasks based on their abilities with specific instructions on how to
do it. Not completing the task on time and with proper quality should result in a
punishment.
 Employees should be financially rewarded for being efficient. You should pay more to those
who produce more.
His basic argument was that employees are motivated using money. These ideas form the basis
of the mass production factories today.

Problems:
 It assumes that there is a scientific ‘best way’ to organise production.
 Employees are simply expected to be a part of a machine.
 Approach suggests that the managers should control the employees.
 Taylor’s theory ignores the role of work in satisfying an individual’s personal and social
needs.
 Works only for the secondary sector.

 Frederick Herzberg’s two factor theory

After conducting research, he concluded that there are two factors affecting employee
motivation: Motivators and Hygiene factors.
To sum up his observations, if hygiene factors are absent, it causes demotivation, however their
presence do not provide motivation. Once the hygiene factors are met, motivators help to
motivate the employees.
 Hygiene factors:

Just as poor hygiene can cause illness, the absence of hygiene factors such as fair pay,
job security, good relationships with colleagues and supervisors, safe working conditions
etc, will cause dissatisfaction and demotivation to work.

If these problems can be avoided, they will prevent work from being a painful
experience, however they alone cannot motivate people.
  Motivators:

Once the hygiene factors are in place, Herzberg argued that the factors like sense of
achievement, interesting work, recognition of effort, responsibility, opportunities for
promotion and self-improvement will help in motivating people in a workplace. This
means people will want to come to work and enjoy working.
Conclusions:
Firstly, a business must ensure that all hygiene factors are being met in order to avoid
dissatisfaction.
Secondly, Jobs must be designed to be meaningful and interesting allowing the employees to do
their jobs well.

Similarities and differences between Herzberg’s and Maslow’s theory

Methods of motivation
To motivate their employees businesses, use a combination of financial and non-financial
rewards.

Financial Non-financial
rewards rewards

Time Fringe
rates benefits

Incentive Job
schemes design
Financial rewards:
Businesses reward their employees financially in a number of ways which have their own benefits
and drawbacks.
Wages (these fall under hygiene factors)
 Piece rates:
The employees are paid based on the number of output units (products) they produce.
There is no guaranteed level of basic pay, no sickness pay and no holiday pay. This is
commonly used in manufacturing industries such as the clothing industry.
In theory the harder the person works the more money he/she gets.
However, piece rates are criticized as
- Speed of output becomes more important than the quality of products.
- Even employees who work hard do not have guaranteed payment, for example
if demand falls and the production slows down they will not be paid.
- This way of payment does not satisfy an individual’s personal or social needs.
- Employees who are paid using this method are generally reluctant to adapt to
any changes in the work practice even if it is for their safety if it slows down
their production.

 Time rates:
With time rates employees are paid with the length of time they work for. This may be
an hourly rate, common in the retail sector or a weekly wage. Working overtime, may
be paid at a higher rate.
The main advantage of this is that it encourages the employees to work for the quality of
the product and not the quantity of the production. However, this is no reward for those
who work the hardest, so the employees may do the bare minimum.
Salary (these fall under hygiene factors):
- Employees on a salary system are paid an agreed sum for a year.
- There is more flexibility in the number of hours worked in a day, week or a month.
- They like the time rates are criticised for not providing any incentive to work hard.

Incentive schemes (motivators):

Businesses use several ways to improve the financial incentive to encourage the employees to work
harder. These include bonuses, performance related pay, commission, profit share and share
ownership.
 Bonuses:
A bonus is a general term for an additional financial reward provided to an employee.
Examples include:
- Piece rate bonus: An additional amount for each unit of output an employee produces
above a stated target.
- One off payment: It is a lump sum paid to an employee, a team or the entire workforce
as a reward for their efforts. This may be a seasonal bonus such as holiday bonus or a
reward for attendance, quality or service.
Bonuses act as an incentive as the offer the prospect of reward for additional commitment
or achieving targets. However, if the employees expect bonuses as a part of their payment
package, it loses its motivating factor. Additionally, bonuses can cause jealously within
employees
 Commission:
It is a fee paid to an employee, usually for a sale. For example, in car dealerships, where the
production company makes the car and the customer buys it, the salesperson is given a
percentage of the selling price for making a successful sale. Used in sales all over the world.
  Performance related pay:
Another type of bonus scheme is the PRP or performance related pay. This provides financial
reward to an employee for meeting agreed, individual targets. Closely linked to an appraisal
where an employee gets his/her performance evaluated.
Commonly used in executives (senior management) both in public and private sectors. In
the sense that PRP provides a reward for the ‘output’ of managers, equivalent to price rates
for employees.
Disadvantages include:
- Potential conflict between employees and management regarding the achievement of
targets and level of reward.
- It encourages people to work for themselves not for the team.
- PRP needs to be in a large proportion to the salary to have a significant impact. Example
paying a manager received $100,000 yearly a $100 PRP will likely be a cause of
demotivation.
- PRP ignores the fact that many motivation theorists claim that money is only a small part
of what encourages employees to work.

 Profit share:
With profit share schemes employees are offered a part in the annual profits of an
organisation. In contrast to PRP, profit share encourages employees to work collectively, as a
team, for the benefit of the whole organisation. However, the success of profit share
schemes depends on if there is any profit at all and how much profit is being shared.

 Share ownership:
Incentive schemes that provide shares as a reward produce similar benefits to profit share
schemes. As shareholders, employees benefit financially from the success of the business,
and hence will be motivated to work towards it. Common in start up companies or high tech
firms.
Non-financial rewards:
Fringe benefits:
In addition to the financial rewards many businesses often non-financial rewards as a part of the
employee’s basic package. These are called fringe benefits and may include a company car, private
medical insurance, discount on company products, a company laptop and mobile phone, free or
discounted lunch, free or discounted childcare, access to leisure and social facilities and an
allowance for accommodation.
Fringe benefits have become increasingly popular as a part of an employee’s overall payment
package – particularly for management and executive positions.
They are significant for a number of reasons.
 Status

Fringe benefits help to give jobs more presitge (status).

Boosts the esteem needs identified in the Maslow's hierarchy of needs.

Motivation

Just as important as money is whether people feel valued at work and the
quality of the working environement. Fringe benefits help to meet these
needs.

Labour Retention

Many fringe benefits make life easier for the employees. If they have a quality
working life they are less likely to look for other jobs.
This helps reduce costs of hiring new employees and cost of training.

Cost

The value of a fringe benefit is often higher for an employee than a firm.

Job design:

According to Maslow’s and Herzberg’s theory, rewards(whether financial or non-financial) are not
enough to motivate employees. Other needs also need to be met, Maslow’s higher order and
Herzberg’s motivators suggest that personal rewards are just as important as direct rewards.
Job design is therefore crucial to motivation. A job should be designed to be meaningful and
interesting. Therefore, each employees job should provide the following:
Job rotation:
The process of switching an employee between jobs and tasks over a period of time is called job
rotation. This helps prevent boredom, and multitasking improves the flexibility of the organisation.
This could however also result in the employee becoming less practised in any one task and
becoming less productive. Moreover, switching the employee between equally routine tasks does
not necessarily make the job more motivating than performing just one routine task.

Job enlargement:
Allowing employees to perform more tasks in a production process enables them to see the
complete product. This is known as job enlargement. The theory is that employees gain greater
satisfaction by performing more tasks and seeing the end result of their efforts.
Job enlargement itself isn’t a solution, giving more work to employees can cause resentment if they
feel they are being asked to work harder without any reward.

Job enrichment:
To overcome the problems of job rotation and job enrichment methods have been tried to make the
job more challenging and rewarding. Called job enrichment, the methods include:
- Allowing employees to use, develop and demonstrate different skills
- Enabling employees to take responsibility for their actions and work environment.
Difficulties that arise are:
- Job enrichment is difficult to achieve for all job roles. For example, unskilled manual jobs
such as simple production line job may be difficult to enrich as it is limited in scope and
difficulties. Once an employee has mastered the basic skill, it becomes very difficult to
make the job more challenging. In this situation job rotation may be more relevant.
- Equally, some employees do not want their jobs to be enriched and are happy
performing the simple tasks assigned to them.

 Training
Training employees helps them improve their skills and gain new ones.
1. On the job training: This is carried out in the place of work of the employee. This is provided
by the employees already working in the business, often a senior. This method can be
cheaper as the training is being provided by an already employed worker, however the skills
may be limited.
2. Off the job training: This is where the employee go to a place away from their workplace to
undergo training from an external trainer. This will cost the firm extra money but will
provide them with new, useful skills making the firm more flexible and efficient.
Training employees improves and increases their skills and efficiency and makes them feel
valued. This could lead to more motivated employees and hence a greater output generated and
more profits in the long term.

Empowerment:
Giving the employees the power to make decisions that could affect their working life is known
as empowerment. This could include decisions regarding how and when the work is done and
taking responsibility of those decisions.
Empowerment is at the centre of Herzberg’s theory of motivation. Not only can empowerment
motivate, but it can also make the best out of the workforce by utilising their talents and ideas. If
the people who know about the issues involved make decisions, they could be better than the
decisions managers could make.
However, it can cause problems in real life:
- Managers may give only little empowerment as they do not trust the workforce.
- Firms may use empowerment as an excuse remove management levels in order to cut
costs.
- Poses the danger that coordination and control may be lost. Conflicts in decision making
may become very common. This could lead to expensive mistakes and lack of strategic
decision making.

Teamworking:
Teamworking helps to meet the employees social needs for interaction and friendship in a
workplace. It includes:
- Organising the employees into small groups
- Setting objectives for each team to achieve
- Giving the team responsibility and rewards for targets achieved, such as improved
quality.
- Training employees to be able to carry out any role within a team.
 Benefits include job satisfaction, higher productivity, reduced labour turnover, less absenteeism,
improved product quality and improved employee flexibility.

 Opportunities for promotion:

All methods of motivation are limited in their effectiveness if there are no opportunities
for employees to progress up the level of job/business through promotion.
Promoting employees helps to ensure they stay as they believe they can grow within the
businesses and can develop a better career in their current workplace.
This also helps the business to save money as they don’t need to advertise for new
employees.
However, it does depend on the job a business has to fill.
The method of motivation used depends on the type of business and the employees within the
business.

2.4 – Internal and External communication

Effective communication

Communication is the passing on or exchange of information from a sender to a receiver. For

communication to be effective the message must be transferred correctly without any
misunderstandings. As in businesses communication is crucial as messages need to be constantly
passed whether internally or externally, effective communication is very important.

Factors businesses need to consider before communicating:

- Which method suits best: writing, calling, etc

- What are the needs of the receiver: urgent? – oral
- External influences that could slow down communication: post card getting lost
- Duplicating communication: first sending letter then following up using phone call

Stages of communication

1) Message is created by sender

2) Method or channel used to send the message is selected by sender
3) Receiver receives the message
4) Feedback given or action taken by receiver

**Once message has been received, the business should follow up with feedback to see their
message has been understood and not assume as it could lead to serious mistakes.

Benefits of effective communication

- Employees feel valued (as feedback is taken)

- Employees will work more efficiently as they have proper instructions, and do not have
to wait too long for answers and agreements. Increases time management.
- Customers who receive constant communication (marketing – creating engagement) will
become more loyal automatically allowing the business to secure more sales.
Communication Methods:

Can occur internally (within the business) or externally (with a stakeholder).

Or it can be classified as formal and informal (Both can take place internally as well as externally).

Business communication is usually formal when the message is official and needs to be presented
professionally. Done by the managers and owners to avoid any errors in formal messages and
prevent negative reputation.

Informal communication is done on regular basis, using less professional language. Often done in
shorthand (not full sentences).

Internal:

1) Email – electronic messages sent via internet. Sent within a business by managers to
employees or employees to employees.

Advantages:
- Quick and easy to send
- Sender can add “receipt” to the email so they know when the receiver has read it

Disadvantages:

- People may not check email regularly and may not respond as quickly
- Employees may just end up answering emails instead of doing other tasks if there are
too many people communicating via email.

2) Memorandum (memo) – Short message that contains key information, usually done via
email or paper.

Advantages:
- Can be sent to all employees or specific departments without being altered.
- Very easy and quick to write as they are short.

Disadvantages:

- Difficult to know if the receiver has read the memo if sent on paper. Can get lost too.
- Emailed memos may be checked too late and the content becomes out of date.

3) Reports – used to communicate findings of a project of investigation. Often produced for

new ideas.

Advantages:
- Offer insight into a research topic
- Look professional and suitable for formal situations

Disadvantages:

- Very time consuming to research and write

- Offer lot of information which is hard to summarise
- People may not read the entire report
4) Letter – communications that contain vital information for example employee may receive
signal to a pay rise.

Advantages:
- Can be sent to more than one person
- When used to praise employees, it can be used as a moral booster as they are formal
and professional.
Disadvantages:
- Can be used as errors, as they are formal and official they can be used to prove their
point, for example if they were promised a rise and not given one.

5) Newsletter – a summary of news articles and updates that are useful to employees. May use
a newsletter to keep employees up to date with any changes, upcoming events or awards
won (achievements).

Advantages:
- Very quick to read and contain a lot of information
- Can boost morale by highlighting employee success
Disadvantages:
- Some employees may not read the newsletter and hence not know the news
- Quite expensive to produce

6) Poster – visual method that shows key information in a simple way. Few words and plenty of
images, often use them to highlight important events.

Advantages:
- Quick and easy to produce
- Can be seen by a lot of people at once for a very small amount
Disadvantages:
- No guarantee that everyone will see it
- A poster can be confusing if not read properly or not enough details are given

7) Fax (facsimile) – allows written documents, images and notes to be sent via a phone line.
The receiver’s machine will print the document out, email communication has replaced this
method in most cases.

Advantages:
- Quick way to send hard copy of a document to another person
- Can be delivered to all places all over the world in a few seconds.
Disadvantages:
- Can be unreliable, cannot guarantee receival
- Delays can occur if phone line is busy
- Many business are no longer equipped to use this communication
 8) Meetings – allows a group of people to communicate with each other and make decisions
quickly and effectively. Agendas will be handed out and the minutes (summary of decisions)
produced at the end.

Advantages:
- Face to face meetings allow people to voice concerns, show emotions and voice their
opinions. This allows for more productive discussions and quicker decisions.
Disadvantages:
- Domination during meetings can occur not all employees get the chance to speak.
- Meetings can be time consuming and do not always produce an outcome

9) Telephones – used a lot on daily basis

Advantages:
- Quick and direct and can help to discuss something that is too sensitive.
- Allows to talk to people who are too far away

Disadvantages:

- It isn’t always answered so an important message can be missed.

External:

1) Email – Can now be used as formal communication and attaching documents.

Advantages:
- Cheaper with the same layout and formatting.
- Quick communication
- Can be saved for future reference

Disadvantages:

- Not always written as carefully

- Can be sent to the wrong person

2) Letters – important for business’s image as it helps communicate with all stakeholders but
any errors may lead to bad reputation.
Advantages:
- Gives professional image of businesses and show that it values its stakeholders
Disadvantages:
- Time consuming to write
- Expensive to send

3) Newsletters – Many stakeholders look at the company’s newsletter and it is used to show off
new projects, employee achievement or other business-related news.
Advantages:
- Cheap and cost effective to communicate to large number of people
- Can be used to boost the image of a business
Disadvantages:
- Not all stakeholders may read the newsletter
4) Advertisements – May place adverts in a range of media to inform stakeholders of important
information, new products or offers.

Advantages:
- Creative, fun and attractive
- Easier to target customers
Disadvantages:
- Can be expensive

5) Websites – Businesses ranging from sole traders to limited companies have websites that
will attract customers.

Advantages:
- Cheap to develop
- Allow people to see products, news and contact details
Disadvantages:
- Not everyone uses internet
- Websites can crash if not updated or there are technical problems

6) Telephone – Many large businesses have call centres for customers to ring and small
businesses have direct link.

Advantages:
- Cheap when face to face is not available
Disadvantages:
- Poor connection results in hard to hear and difficult to understand
- Can take long if people aren’t near their phone

7) Video conferencing – often used to communicate with groups in other countries. Allows
businesses to keep the same company ethos and connect over multiple cities.

Advantages:
- Allows both to see each other and understand body language
- Cheaper to communicate at a distance than to send the employee to the other office
Disadvantages:
- Difficult to find time that suits both parties
- Technology is expensive

8) Text messages – are used by many organisations to contact stakeholders about important
updates. This is a direct way of communicating that can target specific people. Relies on
contacts being up to date.
Advantages:
- Cheap
- Include key information
- Majority have access to phone when away from computer, so communication can
happen on the go.
Disadvantages:
- Misinterpretation occurs frequently
 9) Social media – Fastest growing communication method. The businesses use it to inform
stakeholders in many different ways. It is often used to target younger audiences.

Advantages:
- Quick, efficient, and specific
- Younger customers
- Creative, fun  good business image
Disadvantages:
- Elderly customers generally do not use social media
- Not all customers will get internet on a daily basis

10) Applications – Used by many businesses to communicate and interact with their customers.
It is also a platform where customers can purchase products, review and comment along
with finding information.

Advantages:
- Quick and accessible by anyone who has a phone or tablet
- Relatively cheap way
Disadvantages:
- Not all customers have a phone or tablet

Communication barriers:

There are some barriers that businesses have to face on a daily basis that need to be overcome.

1) The method use: Methods need to be chosen appropriate to the situation. If an employee
was fired over a text, it would upset him as the method chosen was informal. Basically, if an
informal method is used to communicate a formal message it will result in the stakeholder
reacting badly.
2) The language used: If the wrong vocabulary is used the receiver might not understand the
message. For example, a lot of technical terms are used in an advertisement, the customer
will not understand it. Additionally, if an MNC is putting slogans in other countries, it needs
to be careful as the translation and interpretation may be different.
3) Culture: Messages can be interpreted differently or misunderstood as many cultures
perceive things differently. For example, in China it is considered rude ask questions like “do
we have a deal?” as it comes off as impolite.
4) Emotions and enthusiasm: Emotions can highly impact how a person perceives a message,
an angry person will have different interpretations. The tone of the speaker also affects the
interpretation of the message.
5) Amount: If there is way too much information in a letter or advertisement, it could result in
boredom and the receiver may stop listening.
6) Length of chain: If a message is passed through several people before reaching the final
receiver, the words can be altered and the message changed.
7) Losing messages: Some messages may be lost in the process like fax machines.
8) Technical process: Some office equipment may stop working stopping the message from
being sent
All of these problems can be solved if the business is willing to put in efforts, time and
resources.

As communication is so important and a huge part of daily business activities, businesses need to
train employees how to communicate and what method to use in order to avoid errors and solve
the issue. They also have to invest heavily in their communication equipment. This is expensive
however the long term benefits are greater than the costs.

Problems with poor communication

They can cause major damage to the business.

In short term issues may include missing payment to suppliers, reducing wages and losing
customers. In long term business may lose so many customers and/or suppliers that it is forced
to close.

Other issues:

1) Employees are unhappy with their managers as they feel not listened to – this is why
communication between employee and managers is required: to increase morale and
business retention.
2) Customers do not get a quick enough reply and the business develops a poor reputation: this
concerns the customer service department, the customer may move to a competitor
3) Orders are missed or are incorrect – could severely impact cash flow

9)
 Section 3

Topic 1: Role of marketing (Identifying customer needs and building customer loyalty; satisfying
customer needs)

What is marketing?

The management process responsible for identifying, anticipating and satisfying customer
requirements profitably.

Marketing is all about being customer focused. Ensuring that the product/service satisfies customer
needs and wants or else it will not be bought.

1. Market orientation: Focusing on the needs of customers. Here the business will start by
identifying the customer needs and wants and then design a product based on that. This
analysis of the current customer demands will shape decisions regarding product design,
price, promotion and distribution.
2. Product orientation: Opposite to market orientation. Here the firm designs a product
independently of known customer needs and then uses marketing to persuade the
customers to buy their product. This approach is common with technology.

Modern marketing is not just about getting new customers it is about maintaining customer loyalty
and building good relationships with them.

Brand loyalty: It is a regular purchase of one brand by a customer. Relationship marketing involves
communicating with the customers regularly and encouraging repeat purchases.

Building relationships is not only about selling them the product. Customers need to be engaged and
reminded of the brand.

- Businesses build relationships with their customers through personalised

promotions (informing the target audience about the merits of a
product/service to persuade them to buy it) and rewards that encourage them
to keep coming back.
- They also need to have a strong customer service department to help deal with
any queries or issues raised. This helps keep the customers happy and builds a
positive image of the brand.
- Many firms use social media to have a two way communication with the
customers in an attempt to develop trust.

By engaging customers through social media, live text-ins, retail store loyalty cards and even through
internet ads businesses can build a brand image and strength brand loyalty.

Brand image: The personality given to a product though marketing activities.

Satisfying customer needs:

- Adding value: To add value is to be able to sell the product for more than its cost
of production. This can be done by a unique design, better quality goods, more
efficient goods, marketing and making it convenient. Marketing is crucial to add
value as it creates willingness to pay for the product.
 - USPs (Unique selling points): It is not enough for the business to satisfy customer
needs. It needs to be better than its competition. In order to achieve a
competitive advantage a business should identify its USP – a feature of either
the product, image, price, promotion or distribution that is superior to its
competitors. A successful USP will enable the customers to identify the reason
of purchase of a brand and will encourage them to do so. Even if the product is
not unique it is the job of marketing to ensure that the product stands out from
its competitors.

3.3 – Marketing mix

It is the combination of product, price, promotion, and place that a firm uses to make its product or
service more appealing to customers.

Also known as the 4Ps

Price:
Product:
Pricing
Quality,
stratergy and
Packaging
price
and Branding
elasticity

Place
Promotion: Market
Adverts, coverage,
relationships distribution
channel

A successful marketing mix meets customer needs, is consistent and secures competitive advantage.

All elements are equally important; however marketing mix is a skill wherein the business may mix
two or three elements to determine its success.

Product :

Developing products that customers actually want or need is the key to success.
New product development
It is expensive, however essential for survival and it can offer better quality product than its
competitors. Spending money on new products is called as research and development
(R&D) – it brings together science, imagination, and marketing to inventing new product
ideas and prototypes.
Branding

It refers to the use of a name, symbol or design to identify a particular company’s product and to
help maintain or increase sales.

Brand image is the personality given to a product through marketing activities. It is created to appeal
and attract a specific market segment.

It is used to

 Create and maintain loyalty: repeat purchasing.

 Expand product ranges: can enter new market as customers have trust
 Differentiate products
 To aid recognition
 To gain price flexibility allows the firm to charge more

Packaging

Sometimes referred to as the fifth P, it is used to

 Promote the product

 Differentiate the product
 Protect the product from damage
 Communicate information
 Make it convenient to use
 Make the product easy to store/display

Initial purchase can be entirely driven by its packaging or appearance

Product life cycle

Introduction:

After research and development, the product is launched into the market. Costs will be high
and sales will be low. The product is unlikely to make any profits at this stage. Marketing will
focus on creating awareness.

Characteristics:

 Low sales
 Low profit
 Negative cash flow
 Few competitors
 High marketing expenditure
 Skimming or penetration pricing strategy used
 Basic product
 Promotion focuses on awareness
 And there are only a few/one outlet(s)

Growth:

Sales begin to grow, and competitors enter the market. Having covered its development
costs, the product may become profitable. Marketing will focus on the brand [reference and
new features may be added to the product.

Characteristics:

 Growing sales
 Highest profit
 Positive cash flow
 Growing competitors
 High marketing expenditure
 Price is cut or increased depending on introduction strategy
 Improved product
 Promotion focuses on generating brand preference
 Number of outlets increasing

Maturity:

Sales grow at a decreasing rate and then stabilise as the market saturates (no new
customers enter the market). Competition is at peak so differentiating is required.

Characteristics:

 Slow growing sales

 High but declining profit
 Positive cash flow
 Many competitors
 Falling marketing expenditure
 Competitive pricing strategy used
  Differentiated product
 Promotion focuses on retaining brand loyalty.
 High number of outlets.

Decline:

Sales for most products eventually fall. New and more innovative products may be
introduced pr consumer tastes might change, meaning the demand for this product will
change. The product will be simplified to reduce production costs. They often are withdrawn
from sale.

Characteristics:

 Declining sales
 Low profit
 Positive but falling cash flow
 Falling competitors
 Low marketing expenditure
 Low prices
 Basic product
 Promotion becomes more targeted
 Falling number of outlets

Extension strategies:

- Find new uses for the product

- Change the product
- Increase promotion
- Encourage increased usage

Price :

Factors influencing price:

 Cost of production
 Type of customer
 Amount of competition
 Objectives of the business
 Where product is in its life cycle

Pricing methods:

 Cost plus – Most common. The average cost of one item is calculated and the mark up
(profit margin) is added to give the final selling price.
Benefits: Simple, easy to use
Limitations: Customer expectations or geographical differences are ignored, some products
may become more expensive than competitor’s products.
  Competitive pricing – The price is set at the same level as other products in the market at a
level customers are willing to pay.
Benefits: Matches customer expectations.
Limitations: No advantage in terms of price.
 Penetration pricing – When product is first launched into the market, the prices are low to
attract the customers.
Benefits: Helps firm gain sales in early stage/competitive markets.
Limitations: Customers expect to the prices to stay low and might not fit brand image
 Price skimming – Where a product is launched in the market, the prices are high as when
they are new, they are desirable. It is a good way to recover costs. New technologies often
use this pricing.
Benefits: Gain maximum profit early in product’s life, establish high quality image.
Limitations: Price may be too high for some customers, a price reduction can damage brand
image.
 Promotional pricing – Reducing the price to attract customers is known as promotional
pricing. Methods include buy one get one free (BOGOF) or money off coupons.
Benefits: Increase sales in short term, increase brand awareness, customers stock up the
product.
Limitations: Reduces profit margins, harm brand images.
 Premium pricing – high pricing is used when the product has a significant competitive
advantage. Where a strong brand image has been developed.
 Discriminatory pricing – Different pricing are charged at different groups.
 Geographical pricing – Pricing is according to the location.

Factors affect the price customers are willing to pay:

 USP
 Brand image
 Product quality
 Customer service
 Speed of service
 Availability
 Section 4

Topic 4.2.2: Economies and diseconomies of scale

When a business grows it experiences advantages and disadvantages, this is called as economies and
diseconomies of scale

Economies:

1) Purchasing: The power to buy in bulk reduces costs

2) Technical: The business has access to more technology which increases efficiency
3) Managerial: The business can now employ experts and managers to better handle business
activities and decisions.
4) Marketing: The marketing can be spread over larger areas and more money can be allocated
for the same
5) Financial: They have more access to fund sources such as bank loans

Diseconomies:

1) Poor communication: As the business grows the levels of hierarchy increases which makes it
harder to communicate effectively to employees. Now the information will go through many
people before reaching the employee hence chances of miscommunication increase.
2) Lack of commitment from employee: As the interaction between managers and employees
decrease, they may start to feel less valued and hence can lead to lower productivity and
lack of commitment.
3) Weak coordination: larger businesses find it harder to coordinate both their employees and
their resources in the most efficient way.
4) Increased need for delegation: As more work needs to be finished the manager cannot do
everything by himself so he needs to delegate more work to the employees while still being
responsible for the completion of the task, if the employee doesn’t complete it on time or
with low quality it will lead to inefficiencies.
 Section 5

Topic 1: Funds and sources of finance

Sources of finance and where and how a business gets the money it needs to trade, grow and
survive. It needs money to start up, for working capital( purchase of day to day items) and to
expand.

Main sources of finance can be categorised 2 ways.

1. Debt: where the money needs to be paid back, with interest.

2. Equity: Commonly referred to as raising money by issuing shares or the owners private
funds.

Further they can be divided into Internal and External finance.

1. Internal Sources of Finance

- Owner’s funds: A sole trader or members of a partnership may inject more of
their own money into the business.

Advantages Disadvantages
Quick interest free source of finance Grater risk for the owners

- Retained Profit: Once a business starts to earn profit it can use this profit to
reinvest in the business, this helps avoid interest rates and costs of external
finance. It is however only available if the business earns profits, and the
owners don’t want it for themselves.

Advantages Disadvantages
Provides a quick interest free source Not always available
of finance
The owners receive less reward for
their risk

- Working Capital: Working capital is the money available for immediate use.
Reducing inventory purchases and encouraging trade receivables to pay on time
increases the working capital available. This can be used as a source of finance.
However, a business must ensure it does not have cash flow crisis.

Advantages Disadvantages
Efficient management of cash is good Money is not always available
practice
A firm must ensure that it has enough
inventory to meet the customer
demand.

- Sale of assets: Selling assets that are not in use currently generate immediate
funds for the business.
 Advantages Disadvantages
It enables the firm to generate large The firm loses the use of the asset
sums of money instantly
Only available if the asset can be sold

- Friends and family

- Inheritance

2. External Sources of finance

Short term finance: Used to fund revenue expenditure (expense occurred to the business for
maintain day to day activities) and paid back within a year.

Long term finance: Used to fund capital expenditure (expense incurred to a business for
acquiring a new asset or enhancing the use of an existing one) and generally paid back over
a period longer than a year.

- Bank loans: Banks lend money to a business and charge high interest. They are
repaid in fixed instalments over a certain period of time. They can be lent on a
o Short Term: less than a year
o Medium Term: 1-5 years
o Long term: 5-20 years
They are lent only if the banks approve, hence the businesses need to prove
their credibility,
Banks require security (An item of value, which the bank can sell if the debtor
fails to repay the loan)

Advantages Disadvantages
Quick and easy to arrange Can be expensive if the amount is too
large and interest rates are high
Can be arranged for different times and Banks are not willing to give small
amounts businesses loans as it has less security
and less credibility.
If businesses are unable to pay back, the
asset claimed for security can be
seized/repossess by the bank.

- Overdrafts: It is when you have an agreement with the bank to overdraw from
the bank account and the bank is ready to pay for that much money. This is used
to cover up for cash shortages. However, this money needs to be paid back at
high interest within a few days.

Advantages Disadvantages
Cheaper than bank loans High interest rates, expensive over
a longer period.
More flexible and easy
 Advantages
It provides businesses with a
quick access to funds
The business does not need to
worry about collecting the debts
Disadvantages
The firm does not receive the
entire amount recovered. The
riskier the debt the more amount
retained and lower the
percentage received.

- Trade credit: You buy a good or property from someone and pay after a certain
period of time (usually 30, 60 or 90 days) as per mutual understanding. Interest
rates can be applied. There is no interference from the bank.

- Leasing: By hiring an asset instead of purchasing it the business reduces the

finance it needs to raise. There is a fixed price to be paid (usually monthly) to
lease an asset for a particular period of time. After the time period is over the
business returns the asset of can renew the leasing contract. Leasing companies
are responsible for maintaining and replacing the asset if damaged. It is useful
for equipment that goes out of date very quickly. This can be expensive over a
long term.

- Hire purchase: Similar to leasing an asset but the business now owns the asset
after all payments are made. The methods of payment are EMIs (equated
monthly instalments) and foreclosure (earlier than the time decided). This
makes hire purchase cheaper than leasing but without the benefits of flexibility.

- Sale and lease back: Businesses use sale and lease back to resolve short term
cash flow crisis. The business sells an asset but later leases it back from the
owner as per mutual understanding. It generates immediate cash and the
business still retains the use of the asset.

- Mortgaging:
- A mortgage is a loan to buy real estate.
- The security is provided by the property that the loan is used to purchase.

Meaning: If one defaults on the payment, the bank may sell the property to
recover its investment.

- Monthly payments must be made on a mortgage and the full payment

needs to be made before it is due (15, 20 or 30 years)
- Some mortgages have a fixed interest rate, while others may have a variable
interest rate.

- Issuing shares: The businesses that issue shares divide their business’ equity into
small percentages called shares. These shares are affordable and can be bought.
Shareholders are people who buy the shares and invest in the business in
 exchange for a part of the ownership. There are two types of shareholders:
Equity shareholders and Shareholders by preference.

o Equity shares: Main source of raising finance and they signify ownership
in a company. They receive dividends at a fluctuating rate. Their
payment is settled after the preference shareholders. Equity
shareholders have all rights to vote in an AGM. Risk in equity shares is
higher.
o Preference shares: These shares guarantee the investor fixed rate of
dividends. Preference shareholders are only lenders of money not
owners. They receive payment before equity shareholders and will
guaranteed be repaid. They do not have voting rights in the AGM. The
risk associated with preference shares is less. These shares are generally
expensive to buy.

When a company earns shares:

The company

1 earns
investment per
share sold

2
They use this
money for
growth.

3 Profts are
earned

Dividents are

4 paid back to
the
shareholders

The same can happen if a company incurs loss, the equity shareholders will also
have a loss.

- Issuing debentures: Debentures are a long term loan (often 15-25 years) lent to
a limited company. Interest rates are usually cheaper than bank loans.

- Government grants: It is a one time payment by the government to a business

for the aiding in the business expense. It helps in the improvement of the
national economy. Only available to specific businesses in specific regions. These
grants are not paid back.

- Government subsidies: Subsidized goods are necessities which need to be

affordable to the general public, but the cost of production is too high, hence
the government asks to reduce the price of the product or pays for a part of the
amount. Ex: LPG gas is a subsidised good.
 - Venture capitalists: They are specialist finance providers who invest in small
more risky businesses and do not ask for security. However, they want to
indulge in the business activities, and they loan money in return for a part of
ownership or part of profits. They also provide advice which helps inexperienced
owners.

- Business angels: They give money or help to a business both financially and as an
advisor. They do not come into the business to earn profits but to help them
grow. They might take some money later on as goodwill.

- Micro finance: small amount of money is lent. It is common within villagers and
rural areas. This loan is given often without the need to provide security.

- Crowdfunding: Collecting very small amounts of money from the general public
to start a project that benefits all of them.

General stuff:

 If a debtor cannot pay back the debt due to unexpected situations it can submit
papers to the court and the court can declare them as bankrupt. In this case the
court auctions off the properties of the debtor and pays the creditor using this
money.

 A check can bounce for several reasons such as there is less money in the account,
the information is incorrect (date, name), the cheque is damaged and if the bank is
suspicious about it.

 Creditor: The person who gives his/her money to someone else. The person who the
money is owed back to.

 Debtor: The person who takes the money as a loan. The person who owes the
money back to someone.

 When credit transactions take place a legal document is created (Bills of exchange)
where the name of the creditor, debtor, the amount and the dates are mentioned in
written with official stamp and signature.

 Equity is the amount of capital invested or owned by the owner of a company. 

 Caveat Emptor: Buys be careful

 Caveat Venditor: Sellers be careful

Topic 2: Factors affecting choice of finance

1) Availability of internal funds

2) Length of time
3) Cost
4) Size and legal form of business
5) Control
6) Amount required
7) Existing loans
8) Security