Professional Documents
Culture Documents
1 – Business Activity
The word ‘business’ is very familiar to us. We are surrounded by businesses and we could not imagine our
life without the products we buy from them. So what is a business, or what is business studies? Here’s the
very posh definition for it: “the study of economics and management”
Not clear? Don’t worry; by the end of this chapter, you should be getting a clear picture of what a business
is.
Opportunity cost
Opportunity cost is the next best alternative forgone by choosing another item. Due to scarcity, people are
often forced to make choices. When choices are made it leads to an opportunity cost
SCARCITY → CHOICE → OPPORTUNITY COST
Example: the government has a limited amount of money (scarcity) and must decide on whether to use it
to build a road, or construct a hospital (choice). The government chooses to construct the hospital instead
of the road. The opportunity cost here are the benefits from the road that they have sacrificed
(opportunity cost).
Factors of Production
Factors of Production are resources required to produce goods or services. They are classified into four
categories.
Land: the natural resources that can be obtained from nature. This includes minerals, forests, oil and gas.
The reward for land is rent.
Labour: the physical and mental efforts put in by the workers in the production process. The reward for
labour is wage/salary
Capital: the finance, machinery and equipment needed for the production of goods and services. The
reward for capital is interest received on the capital
Enterprise: the risk taking ability of the person who brings the other factors of production together to
produce a good or service. The reward for enterprise is profit from the business.
Specialization
Specialization occurs when a person or organisation concentrates on a task at which they are best
at. Instead of everyone doing every job, the tasks are divided among people who are skilled and efficient at
them.
Advantages:
Workers are trained to do a particular task and specialise in this, thus increasing efficiency
Saves time and energy: production is faster by specialising
Quicker to train labourers: workers only concentrate on a task, they do not have to be trained in all
aspects of the production process
Skill development: workers can develop their skills as they do the same tasks repeatedly, mastering it.
Disadvantages:
It can get monotonous/boring for workers, doing the same tasks repeatedly
Higher labour turnover as the workers may demand for higher salaries and company is unable to keep up
with their demands
Over-dependency: if worker(s) responsible for a particular task is absent, the entire production process
may halt since nobody else may be able to do the task.
Business is any organization that uses all the factors of production (resources) to create goods and
services to satisfy human wants and needs.
Businesses attempt to solve the problem of scarcity, using scarce resources, to produce and sell those
goods and services that consumers need and want.
Added Value
Added value is the difference between the cost of materials bought in and the selling price of the
product.
This is, the amount of value the business has added to the raw materials by turning it into finished
products. Every business wants to add value to their products so they may charge a higher price for their
products and gain more profits.
For example, logs of wood may not appeal to us as consumers and so we won’t buy it or would pay a low
price for it. But when a carpenter can use these logs to transform it into a chair we can use, we will buy it
at a higher cost because the carpenter has added value to those logs of wood.
How to increase added value?
Reducing the cost of production. Added value of a product is its price less the cost of production. Reducing
cost of production will increase the added value.
Raising prices. By increasing prices they can raise added value, in the same way as described above.
But there will be problems that rise from both these measures. To lower cost of production, cheap labour,
raw materials etc. may have to be employed, which will create poor quality products and only lowers the
value of the product. People may not buy it. And when prices are raised, the high price may result in
customer loss, as they will turn to cheaper products.
Branding
Adding special features
Provide premium services etc.
In a practical example, how would you add value to a jewellery store?
Primary sector: this involves the use/extraction of natural resources. Examples include agricultural
activities, mining, fishing, wood-cutting, oil drilling etc.
Secondary sector: this involves the manufacture of goods using the resources from the primary sector.
Examples include auto-mobile manufacturing, steel industries, cloth production etc.
Tertiary sector: this consists of all the services provided in an economy. This includes hotels, travel
agencies, hair salons, banks etc.
Up until the mid-18th century, the primary sector was the largest sector in the world, as agriculture was the
main profession. After the industrial revolution, more countries began to become more industrialized and
urban, leading to a rapid increase in the manufacturing sector (industrialization).
Nowadays, as countries are becoming more developed, the importance of tertiary sector is increasing, while
the primary sector is diminishing. The secondary sector is also slightly reducing in size (de-
industrialization) compared to the growth of the tertiary sector . This is due to the growing incomes of
consumers which raises their demand for more services like travel, hotels etc.
Public sector: where the government owns and runs business ventures. Their aim is to provide essential
public goods and services (schools, hospitals, police etc.) in order to increase the welfare of their citizens;
they don’t work to earn a profit. It is funded by the taxpaying citizens’ money, so they work in the interest of
these citizens to provide them with services.
Example: the Indian Railways is a public sector organization owned by the govt. of India.
Business plan
A business plan is a document containing the business objectives and important details about the
operations, finance and owners of the new business.
It provides a complete description of a business and its plans for the first few years; explains what the
business does, who will buy the product or service and why; provides financial forecasts demonstrating
overall viability; indicates the finance available and explains the financial requirements to start and operate
the business.
Business growth
Businesses want to grow because growth helps reduce their average costs in the long-run, help develop
increased market share, and helps them produce and sell to them to new markets.
There are two ways in which a business can grow- internally and externally.
Internal growth
This occurs when a business expands its existing operations. For example, when a fast food chain opens a
new branch in another country. This is a slow means of growth but easier to manage than external growth.
External growth
This is when a business takes over or merges with another business. It is sometimes called integration as
one firm is ‘integrated’ into the other.
A merger is when the owner of two businesses agree to join their firms together to make one business.
A takeover occurs when one business buys out the owners of another business , which then becomes a
part of the ‘predator’ business.
External growth can largely be classified into three types:
Horizontal merger/integration: This is when one firm merges with or takes over another one in the
same industry at the same stage of production. For example, when a firm that manufactures furniture
merges with another firm that also manufacturers furniture.
Benefits:
Reduces number of competitors in the market, since two firms become one.
Opportunities of economies of scale.
Merging will allow the businesses to have a bigger share of the total market.
Vertical merger/integration: This is when one firm merges with or takes over
another firm in the same industry but at a different stage of production. Therefore, vertical
integration can be of two types:
Backward vertical integration: When one firm merges with or takes over another firm in the same
industry but at a stage of production that is behind the ‘predator’ firm. For example, when a firm
that manufactures furniture merges with a firm that supplies wood for manufacturing furniture.
Benefits:
Merger gives assured supply of essential components.
The profit margin of the supplying firm is now absorbed by the expanded firm.
The supplying firm can be prevented from supplying to competitors.
Forward vertical integration: When one firm merges with or takes over another firm in the same
industry but at a stage of production that is ahead of the ‘predator’ firm. For example, when a firm
that manufactures furniture merges with a furniture retail store.
Benefits:
Merger gives assured outlet for their product.
The profit margin of the retailer is now absorbed by the expanded firm.
The retailer can be prevented from selling the goods of competitors.
Conglomerate merger/integration: This is when one firm merges with or takes over a firm in a completely
different industry. This is also known as ‘diversification’. For example, when a firm that manufactures
furniture merges with a firm that produces clothing.
Benefits:
Conglomerate integration allows businesses to have activities in more than one country. This allows the
firms to spread its risks.
There could be a transfer of ideas between the two businesses even though they are in different
industries. This transfer of ideas could help improve the quality and demand for the two products.
Drawbacks of growth
Difficult to control staff: as a business grows, the business organisation in terms of departments and
divisions will grow, along with the number of employees, making it harder to control, co-ordinate and
communicate with everyone
Lack of funds: growth requires a lot of capital.
Lack of expertise: growth is a long and difficult process that will require people with expertise in the field
to manage and coordinate activities
Diseconomies of scale: this is the term used to describe how average costs of a firm tend to increase as it
grows beyond a point, reducing profitability.
Type of industry: some firms remain small due to the industry they operate in. Examples of these are
hairdressers, car repairs, catering, etc, which give personal services and therefore cannot grow.
Market size: if the firm operates in areas where the total number of customers is small, such as in rural
areas, there is no need for the firm to grow and thus stays small.
Owners’ objectives: not all owners want to increase the size of their firms and profits. Some of them
prefer keeping their businesses small and having a personal contact with all of their employees and
customers, having flexibility in controlling and running the business, having more control over decision-
making, and to keep it less stressful.
Partnerships
A partnership is a legal agreement between two or more (usually, up to twenty)people to own, finance
and run a business jointly and to share all profits.
Advantages:
Easy to set up: Similar to sole traders, very few legal formalities are required to start a partnership business.
A partnership agreement/ partnership deed is a legal document that all partners have to sign, which forms
the partnership. There is no need to publish annual financial accounts.
Partners can provide new skills and ideas: The partners may have some skills and ideas that can be used
by the business to improve business profits.
More capital investments: Partners can invest more capital than what a sole trade only by himself could.
Disadvantages:
Conflicts: arguments may occur between partners while making decisions. This will delay decision-making.
Unlimited liability: similar to sole traders, partners too have unlimited liability- their personal items are at
risk if business goes bankrupt
Lack of capital: smaller capital investments as compared to large companies.
No continuity: if an owner retires or dies, the business also dies with them.
Limited Companies (Joint-stock companies)
These companies can sell shares, unlike partnerships and sole traders, to raise capital. Other people can buy
these shares (stocks) and become a shareholder (owner) of the company. Therefore they are jointly owned
by the people who have bought it’s stocks. These shareholders then receive dividends (part of the profit; a
return on investment).
The shareholders in companies have limited liabilities. That is, only their individual investments are at risk
if the business fails or leaves debts. If the company owes money, it can be sued and taken to court, but it’s
shareholders cannot. The companies have a separate legal identity from their owners, which is why the
owners have a limited liability. These companies are incorporated.
(When they’re unincorporated, shareholders have unlimited liability and don’t have a separate legal identity
from their business).
Companies also enjoy continuity, unlike partnerships and sole traders. That is, the business will continue
even if one of its owners retire or die.
Shareholders will elect a board of directors to manage and run the company in it’s day-to-day activities. In
small companies, the shareholders with the highest percentage of shares invested are directors, but directors
don’t have to be shareholders. The more shares a shareholder has, the more their voting power.
Joint Ventures
Joint venture is an agreement between two or more businesses to work together on a project. The
foreign business will work with a domestic business in the same industry. Eg: Google Earth is a joint
venture/project between Google and NASA.
Advantages
Reduces risks and cuts costs
Each business brings different expertise to the joint venture
The market potential for all the businesses in the joint venture is increased
Market and product knowledge can be shared to the benefit of the businesses
Disadvantages
Any mistakes made will reflect on all parties in the joint venture, which may damage their reputations
The decision-making process may be ineffective due to different business culture or different styles of
leadership
Franchises
The owner of a business (the franchisor) grants a licence to another person or business (the
franchisee) to use their business idea – often in a specific geographical area. Fast food companies such as
McDonald’s and Subway operate around the globe through lots of franchises in different countries.
ADVANTAGES DISADVANTAGES
Setting objectives increases motivation as employees and managers now have clear targets to work
towards.
Decision making will be easier and less time consuming as there are set targets to base decisions on. i.e.,
decisions will be taken in order to achieve business objectives.
Setting objectives reduces conflicts and helps unite the business towards reaching the same goal.
Managers can compare the business’ performance to its objectives and make any changes in its activities
if required.
Objectives vary with different businesses due to size, sector and many other factors. However, many
business in the private sector aim to achieve the following objectives.
Survival: new or small firms usually have survival as a primary objective. Firms in a highly competitive
market will also be more concerned with survival rather than any other objective. To achieve this, firms
could decide to lower prices, which would mean forsaking other objectives such as profit maximization.
Profit: this is the income of a business from its activities after deducting total costs. Private sector firms
usually have profit making as a primary objective. This is because profits are required for further
investment into the business as well as for the payment of return to the shareholders/owners of the
business.
Growth: once a business has passed its survival stage it will aim for growth and expansion. This is usually
measured by value of sales or output. Aiming for business growth can be very beneficial. A larger business
can ensure greater job security and salaries for employees. The business can also benefit from
higher market share and economies of scale.
Market share: this can be defined as the proportion of total market sales achieved by one business.
Increased market share can bring about many benefits to the business such as increased customer loyalty,
setting up of brand image, etc.
Service to the society: some operations in the private sectors such as social enterprises do not aim for
profits and prefer to set more economical objectives. They aim to better the society by providing social,
environmental and financial aid. They help those in need, the underprivileged, the unemployed, the
economy and the government.
A business’ objectives do not remain the same forever. As market situations change and as the business
itself develops, its objectives will change to reflect its current market and economic position. For example,
a firm facing serious economic recession could change its objective from profit maximization to short term
survival.
Stakeholders
A stakeholder is any person or group that is interested in or directly affected by the performance or
activities of a business. These stakeholder groups can be external – groups that are outside the business or
they can be internal – those groups that work for or own the business.
Internal stakeholders:
Shareholder/ Owners: these are the risk takers of the business. They invest capital into the business to
set up and expand it. These shareholders are liable to a share of the profits made by the business.
Objectives:
Shareholders are entitled to a rate of return on the capital they have invested into the business and
will therefore have profit maximization as an objective.
Business growth will also be an important objective as this will ensure that the value of the shares will
increase.
Workers: these are the people that are employed by the business and are directly involved in its activities.
Objectives:
Contract of employment that states all the right and responsibilities to and of the employees.
Regular payment for the work done by the employees.
Workers will want to benefit from job satisfaction as well as motivation.
The employees will want job security– the ability to be able to work without the fear of being
dismissed or made redundant.
Managers: they are also employees but managers control the work of others. Managers are in charge of
making key business decisions.
Objectives:
Like regular employees, managers too will aim towards a secure job.
Higher salaries due to their jobs requiring more skill and effort.
Managers will also wish for business growth as a bigger business means that managers can control a
bigger and well known business.
External Stakeholders:
Customers: they are a very important part of every business. They purchase and consume the goods and
services that the business produces/ provides. Successful businesses use market research to find out
customer preferences before producing their goods.
Objectives:
Price that reflects the quality of the good.
The products must be reliable and safe. i.e., there must not be any false advertisement of the
products.
The products must be well designed and of a perceived quality.
Government: the role of the government is to protect the workers and customers from the business’
activities and safeguard their interests.
Objectives:
The government will want the business to grow and survive as they will bring a lot of benefits to the
economy. A successful business will help increase the total output of the country, will improve
employment as well as increase government revenue through payment of taxes.
They will expect the firms to stay within the rules and regulations set by the government.
Banks: these banks provide financial help for the business’ operations’
Objectives:
The banks will expect the business to be able to repay the amount that has been lent along with the
interest on it. The bank will thus have business liquidity as its objective.
Community: this consists of all the stakeholder groups, especially the third parties that are affected by the
business’ activities.
Objectives:
The business must offer jobs and employ local employees.
The production process of the business must in no way harm the environment.
Products must be socially responsible and must not pose any harmful effects from consumption.
Public- sector businesses
Government owned and controlled businesses do not have the same objectives as those in the private
sector.
Objectives:
Financial: although these businesses do not aim to maximize profits, they will have to meet the profit
target set by the government. This is so that it can be reinvested into the business for meeting the needs
of the society
Service: the main aim of this organization is to provide a service to the community that must meet the
quality target set by the government
Social: most of these social enterprises are set up in order to aid the community. This can be by
providing employment to citizens, providing good quality goods and services at an affordable rate, etc.
They help the economy by contributing to GDP, decreasing unemployment rate and raising living
standards.
This is in total contrast to private sector aims like profit, growth, survival, market share etc.
For example, workers will aim towards earning higher salaries. Shareholders might not want this to
happen as paying higher salaries could mean that less profit will be left over for payment of return to the
shareholders.
Similarly, the business might want to grow by expanding operations to build new factories. But this might
conflict with the community’s want for clean and pollution-free localities.
Motivation
People work for several reasons:
Have a better standard of living: by earning incomes they can satisfy their needs and wants
Be secure: having a job means they can always maintain or grow that standard of living
Gain experience and status: work allows people to get better at the job they do and earn a
reputable status in society
Have job satisfaction: people also work for the satisfaction of having a job
Motivation is the reason why employees want to work hard and work effectively for the
business. Money is the main motivator, as explained above. Other factors that may
motivate a person to choose to do a particular job may include social needs (need to
communicate and work with others), esteem needs (to feel important, worthwhile), job
satisfaction (to enjoy good work), security (knowing that your job and pay are secure-
that you will not lose your job).
Why motivate workers? Why do firms go to the pain of making sure their workers are
motivated? When workers are well-motivated, they become highly productive and
effective in their work, become absent less often, and less likely to leave the job, thus
increasing the firm’s efficiency and output, leading to higher profits. For example, in
the service sector, if the employee is unhappy at his work, he may act lazy and rude
to customers, leading to low customer satisfaction, more complaints and ultimately a
bad reputation and low profits.
Motivation Theories
F. W. Taylor: Taylor based his ideas on the assumption that workers were motivated by
personal gains, mainly money and that increasing pay would increase productivity (amount
of output produced). Therefore he proposed the piece-rate system, whereby workers get paid
for the number of output they produce. So in order, to gain more money, workers would
produce more. He also suggested a scientific management in production organisation, to
break down labour (essentially division of labour) to maximise output
However, this theory is not entirely true. There are various other motivators in the modern
workplace, some even more important than money. The piece rate system is not very
practical in situations where output cannot be measured (service industries) and also will lead
to (high) output that doesn’t guarantee high quality.
Motivating Factors
Financial Motivators
Wages: often paid weekly. They can be calculated in two ways:
Time-Rate: pay based on the number of hours worked. Although output may increase,
it doesn’t mean that workers will work sincerely use the time to produce more- they may
simply waste time on very few output since their pay is based only on how long they
work. The productive and unproductive worker will get paid the same amount,
irrespective of their output.
Piece-Rate: pay based on the no. of output produced. Same as time-rate, this doesn’t
ensure that quality output is produced. Thus, efficient workers may feel demotivated as
they’re getting the same pay as inefficient workers, despite their efficiency.
Salary: paid monthly or annually.
Commission: paid to salesperson, based on a percentage of sales they’ve made. The higher
the sales, the more the pay. Although this will encourage salespersons to sell more products
and increase profits, it can be very stressful for them because no sales made means no pay at
all.
Bonus: additional amount paid to workers for good work
Performance-related pay: paid based on performance. An appraisal (assessing the
effectiveness of an employee by senior management through interviews, observations,
comments from colleagues etc.) is used to measure this performance and a pay is given based
on this.
Profit-sharing: a scheme whereby a proportion of the company’s profits is distributed to
workers. Workers will be motivated to work better so that a higher profit is made.
Share ownership: shares in the firm are given to employees so that they can become part
owners of the company. This will increase employees’ loyalty to the company, as they feel a
sense of belonging.
Non-Financial Motivators
Fringe benefits are non-financial rewards given to employees
Company vehicle/car
Free healthcare
Children’s education fees paid for
Free accommodation
Free holidays/trips
Discounts on the firm’s products
Job Satisfaction: the enjoyment derived from the feeling that you’ve done a good job.
Employees have different ideas about what motivates them- it could be pay, promotional
opportunities, team involvement, relationship with superiors, level of responsibility, chances
for training, the working hours, status of the job etc. Responsibility, recognition and
satisfaction are in particular very important.
So, how can companies ensure that they’re workers are satisfied with the job, other
than the motivators mentioned above?
Job Rotation: involves workers swapping around jobs and doing each specific task for
only a limited time and then changing round again. This increases the variety in the work
itself and will also make it easier for managers to move around workers to do other jobs if
somebody is ill or absent. The tasks themselves are not made more interesting, but the
switching of tasks may avoid boredom among workers. This is very common in factories
with a huge production line where workers will move from retrieving products from the
machine to labelling the products to packing the products to putting the products into huge
cartons.
Job Enlargement: where extra tasks of similar level of work are added to a worker’s job
description. These extra tasks will not add greater responsibility or work for the employee,
but make work more interesting. E.g.: a worker hired to stock shelves will now, as a result of
job enlargement, arrange stock on shelves, label stock, fetch stock etc.
Job Enrichment: involves adding tasks that require more skill and responsibility to a
job. This gives employees a sense of trust from senior management and motivate them to
carry out the extra tasks effectively. Some additional training may also be given to the
employee to do so. E.g.: a receptionist employed to welcome customers will now, as a result
of job enrichment, deal with telephone enquiries, word-process letters etc.
Team-working: a group of workers is given responsibility for a particular process, product
or development. They can decide as a team how to organize and carry out the tasks. The
workers take part in decision making and take responsibility for the process. It gives them
more control over their work and thus a sense of commitment, increasing job satisfaction.
Working as a group will also add to morale, fulfill social needs and lead to job satisfaction.
Opportunities for training: providing training will make workers feel that their work is
being valued. Training also provides them opportunities for personal growth and
development, thereby attaining job satisfaction
Opportunities of promotion: providing opportunities for promotion will get workers to
work more efficiently and fill them with a sense of self-actualisation and job satisfaction
Organizational Structure
Advantages:
All employees are aware of which communication channel is used to reach them with
messages
Everyone knows their position in the business. They know who they are accountable to and
who they are accountable for
It shows the links and relationship between the different departments
Gives everyone a sense of belonging as they appear on the organizational chart
The span of control is the number of subordinates working directly under a manager in
the organizational structure. In the above figure, the managing director’s span of
control is four. The marketing director’s span of control is the number of marketing
managers working under him (it is not specified how many, in the figure).
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Line Managers have authority over people directly below them in the organizational
structure. Traditional marketing/operations/sales managers are good examples.
Staff Managers are specialists who provide support, information and assistance to
line managers. The IT department manager in most organisations acts as staff
managers.
Management
So,, what role do manager really have in an organization? Here are their five primary
roles:
Planning: setting aims and targets for the organisations/department to achieve. It will give
the department and its employees a clear sense of purpose and direction. Managers should
also plan for resources required to achieve these targets – the number of people required,
the finance needed etc.
Organizing: managers should then organize the resources. This will include allocating
responsibilities to employees, possibly delegating.
Coordinating: managers should ensure that each department is coordinating with one
another to achieve the organization’s aims. This will involve effective communication
between departments and managers and decision making. For example, the sales department
will need to tell the operations dept. how much they should produce in order to reach the
target sales level. The operations dept. will in turn tell the finance dept. how much money
they need for production of those goods. They need to come together regularly and make
decisions that will help achieve each department’s aims as well as the organizations.
Commanding: managers need to guide, lead and supervise their employees in the tasks
they do and make sure they are keeping to their deadlines and achieving targets.
Controlling: managers must try to assess and evaluate the performance of each of their
employees. If some employees fail to achieve their target, the manager must see why it has
occurred and what he can do to correct it- maybe some training will be required or better
equipment.
Leadership Styles
Leaderships styles refer to the different approaches used when dealing with people
when in a position of authority. There are mainly three styles you need to learn: the
autocratic, democratic and laissez-faire styles.
Autocratic style is where the managers expects to be in charge of the business and
have their orders followed. They do all the decision-making, not involving
employees at all. Communication is thus, mainly one way- from top to bottom. This is
standard in police and armed forces organizations.
Democratic style is where managers involve employees in the decision-making and
communication is two-way from top to bottom as well as bottom to top. Information
about future plans is openly communicated and discussed with employees and a
final decision is made by the manager.
Laissez-faire (French phrase for ‘leave to do) style makes the broad objectives of the
business known to employees and leaves them to do their own decision-making and
organize tasks. Communication is rather difficult since a clear direction is not given.
The manger has a very limited role to play.
Trade Unions
A trade union is a group of workers who have joined together to ensure their interest
are protected. They negotiate with the employer (firm) for better conditions and
treatment and can threaten to take industrial action if their requests are denied.
Industrial action can include overtime ban (refusing to work overtime), go slow
(working at the slowest speed as is required by the employment contract), strike
(refusing to work at all and protesting instead) etc. Trade unions can also seek to put
forward their views to the media and influence government decisions relating to
employment.
Benefits to workers of joining a trade union:
strength in number- a sense of belonging and unity
improved conditions of employment, for example, better pay, holidays, hours of work etc
improved working conditions, for example, health and safety
improved benefits for workers who are not working, because they’re sick, retired or made
redundant (dismissed not because of any fault of their own)
financial support if a member thinks he/she has been unfairly dismissed or treated
Benefits that have been negotiated for union member such as discounts on firm’s products,
provision of health services.
Disadvantages to workers of joining a trade union:
Recruitment
Job Analysis, Description and Specification
Recruitment is the process from identifying that the business needs to employ someone up to the point
where applications have arrived at the business.
A vacancy arises when an employee resigns from a job or is dismissed by the management. When a vacancy
arises, a job analysis has to be prepared. A job analysis identifies and records the tasks and
responsibilities relating to the job. It will tell the managers what the job post is for.
When a person is interested in a job, they should apply for it by sending in a curriculum vitae (CV) or
resume, this will detail the person’s qualifications, experience, qualities and skills.The business will use
these to see which candidates match the job specification. It will also include statements of why the
candidate wants the job and why he/she feels they would be suitable for the job.
Selection
Applicants who are shortlisted will be interviewed by the H.R. manager. They will also call up the referee
provided by the applicant (a referee could be the previous employer or colleagues who can give a
confidential opinion about the applicant’s reliability, honesty and suitability for the job). Interviews will
allow the manager to assess:
the applicant’s ability to do the job
personal qualities of the applicant
character and personality of applicant
In addition to interviews, firms can conduct certain tests to select the best candidate. This could include
skills tests (ability to do the job), aptitude tests (candidate’s potential to gain additional skills), personality
tests (what kind of a personality the candidate has- will it be suitable for the job?), group situation tests (how
they manage and work in teams) etc.
When a successful candidate has been selected the others must be sent a letter of rejection.
The contract of employment: a legal agreement between the employer and the employee listing the
rights and responsibilities of workers. It will include:
the name of employer and employee
job title
date when employment will begin
hours to work
rate of pay and other benefits
when payment is made
holiday entitlement
the amount of notice to be given to terminate the employment that the employer or employee must give to
end the employment etc.
Employment contracts can be part-time or full-time. Part-time employment is often considered to be
between 1 and 30-35 hours a week whereas full-time employment will usually work 35 hours or more a
week.
Advantages to employer of part-time employment (disadvantages of full-time employment to employer):
Training
Training is important to a business as it will improve the worker’s skills and knowledge and help the
business be more efficient and productive, especially when new processes and products are introduced. It
will improve the workers’ chances at getting promoted and raise their morale.
The three types of training are:
Induction training: an introduction given to a new employee, explaining the firm’s activities, customs
and procedures and introducing them to their fellow workers.
Advantages:
Time-consuming
Wages still have to be paid during training, even though they aren’t working
Delays the state of the employee starting the job
On-the-job training: occurs by watching a more experienced worker doing the job
Advantages:
It ensures there is some production from worker whilst they are training
It usually costs less than off-the-job training
It is training to the specific needs of the business
Disadvantages:
The trainer will lose some production time as they are taking some time to teach the new employee
The trainer may have bad habits that can be passed onto the trainee
It may not necessarily be recognised training qualifications outside the business
Off-the-job training: involves being trained away from the workplace, usually by specialist trainers
Advantages:
A broad range of skills can be taught using these techniques
Employees may be taught a variety of skills and they may become multi-skilled that can allow them to
do various jobs in the company when the need arises.
Disadvantages:
Costs are high
It means wages are paid but no work is being done by the worker
The additional qualifications means it is easier for the employee to leave and find another job
Workforce Planning
Workforce Planning: the establishing of the workforce needed by the business for the foreseeable future in
terms of the number and skills of employees required.
They may have to downsize (reduce the no. of employees) the workforce because of:
Introduction of automation
Falling demand for their products
Factory/shop/office closure
Relocating factory abroad
A business has merged or been taken over and some jobs are no longer needed
They can downsize the workforce in two ways:
Dismissal: where a worker is told to leave their job because their work or behaviour is unsatisfactory.
Redundancy: when an employee is no longer needed and so loses their work, through not due to any fault
of theirs. They may be given some money as compensation for the redundancy.
Worker could also resign (they are leaving because they have found another job) and retire (they are getting
old and want to stop working).
Communication Methods
Verbal methods (eg: telephone conversation, face-to-face conversation, video conferencing, meetings)
Advantages:
Written methods (eg: letters, memos, text-messages, reports, e-mail, social media, faxes, notices,
signboards)
Advantages:
Visual Methods (eg: diagrams, charts, videos, presentations, photographs, cartoons, posters)
Advantages:
No feedback
May not be understood/ interpreted properly.
Speed: if the receiver has to get the information quickly, then a telephone call or text message has to be sent.
If speed isn’t important, a letter or e-mail will be more appropriate.
Cost: if the company wishes to keep costs down, it may choose to use letters or face-to-face meetings as a
medium of communication. Otherwise, telephone, posters etc. will be used.
Message details: if the message is very detailed, then written and visual methods will be used.
Leadership style: a democratic style would use two-way communication methods such as verbal mediums.
An autocratic one would use notices and announcements.
The receiver: if there is only receiver, then a personal face-to-face or telephone call will be more apt. If all
the staff is to be sent a message, a notice or e-mail will be sent.
Importance of a written record: if the message is one that needs to have a written record like a legal
document or receipts of new customer orders, then written methods will be used.
Importance of feedback: if feedback is important, like for a quick query, then a direct verbal or written
method will have to be used.
Formal communication is when messages are sent through established channels using professional
language. Eg: reports, emails, memos, official meetings.
Informal communication is when information is sent and received casually with the use of everyday
language. Eg: staff briefings. Managers can sometimes use the ‘grapevine’ (informal communication among
employees- usually where rumours and gossips spread!) to test out the reactions to new ideas (for example, a
new shift system at a factory) before officially deciding whether or not to make it official.
Communication Barriers
Communication barriers are factors that stop effective communication of messages.
A market consists of all buyers and sellers of a particular good.
What is marketing?
By definition, marketing is the management process responsible for identifying, anticipating and satisfying
consumers’ requirements profitably.
Market Changes
Why customer spending patterns may change:
change in their tastes and preferences
change in technology: as new technology becomes available, the old versions of products become outdated
and people want more sophisticated features on products
change in income: the higher the income, the more expensive goods consumers will buy and vice versa
ageing population: in many countries, the proportion of older people is increasing and so demand for
products for seniors are increasing (such as anti-ageing creams, medical assistance etc.)
The power and importance of changing customer needs:
Firms need to always know what their consumers want (and they will need to undertake lots of research and
development to do so) in order to stay ahead of competitors and stay profitable. If they don’t produce and
sell what customers want, they will buy competitors’ products and the firm will fail to survive.
Why some markets have become more competitive:
Globalization: products are being sold in markets all over the world, so there are more competitors in the
market
Improvement in transportation infrastructures: better transport systems means that it is easier and
cheaper to distribute and sell products everywhere
Internet/E-Commerce: customers can now buy products over the internet form anywhere in the world,
making the market more competitive
How business can respond to changing spending patterns and increased competition:
A business has to ensure that it maintains its market share and remains competitive in the market. It can
ensure this by:
maintaining good customer relationships: by ensuring that customers keep buying from their business
only, they can keep up their market share. By doing so, they can also get information about their spending
patterns and respond to their wants and needs to increase market share
keep improving its existing products, so that sales is maintained.
introduce new products to keep customers coming back, and drive them away from competitors’ products
keep costs low to maintain profitability: low costs means the firm can afford to charge low prices. And low
prices generally means more demand and sales, and thus market share.
Mass Marketing: selling the same product to the whole market with no attempt to target groups with in it.
For example, the iPhone sold is the same everywhere, there are no variations in design over location or
income.
Advantages:
Larger amount of sales when compared to a niche market
Can benefit from economies of scale: a large volume of products are produced and so the average costs will
be low when compared to a niche market
Risks are spread, unlike in a niche market. If the product isn’t successful in one market, it’s fine as there are
several other markets
More chances for the business to grow since there is a large market. In niche markets, this is difficult as the
product is only targeted towards a particular group.
Limitations:
They will have to face more competition
Can’t charge a higher price than competition because they’re all selling similar products
Market Segmentation
A market segment is an identifiable sub-group of a larger market in which consumers have similar
characteristics and preferences
Market segmentation is the process of dividing a market of potential customers into groups, or segments,
based on different characteristics. For example, PepsiCo identified the health-conscious market segment and
targeted/marketed the Diet Coke towards them.
If questions are not clear or are misleading, then unreliable answers will be given
Time-consuming and expensive to carry out research, collate and analyse them.
Advantages:
Interviewer is able to explain questions that the interviewee doesn’t understand and can also ask follow-
up questions
Can gather detailed responses and interpret body-language, allowing interviewer to come to accurate
conclusions about the customer’s opinions.
Disadvantages:
The interviewer could lead and influence the interviewee to answer a certain way. For example, by
rephrasing a question such as ‘Would you buy this product’ to ‘But, you would definitely buy this
product, right?’ to which the customer in order to appear polite would say yes when in actuality they
wouldn’t buy the product.
Time-consuming and expensive to interview everyone in the sample
Focus Groups: A group of people representative of the target market (a focus group) agree to provide
information about a particular product or general spending patterns over time. They can also test the
company’s products and give opinions on them.
Advantage:
Time-consuming
Expensive
Opinions could be influenced by others in the group.
Observation: This can take the form of recording (eg: meters fitted to TV screens to see what channels are
being watched), watching (eg: counting how many people enter a shop), auditing (e.g.: counting of stock in
shops to see which products sold well).
Advantage:
Inexpensive
Disadvantage:
Only gives basic figures. Does not tell the firm why consumer buys them.
Secondary Market Research (Desk Research)
The collection of information that has already been made available by others. Second-hand data about
consumers and markets is collected from already published sources.
Sales department’s sales records, pricing data, customer records, sales reports
Opinions of distributors and public relations officers
Finance department
Customer Services department
External sources of information:
Government statistics: will have information about populations and age structures in the economy.
Newspapers: articles about economic conditions and forecast spending patterns.
Trade associations: if there is a trade association for a particular industry, it will have several reports on
that industry’s markets.
Market research agencies: these agencies carry out market research on behalf of the company and provide
detailed reports.
Internet: will have a wide range of articles about companies, government statistics, newspapers and blogs.
How carefully the sample was drawn up, its size, the types of people selected etc.
How questions were phrased in questionnaires and surveys
Who carried out the research: secondary research is likely to be less reliable since it was drawn up by others
for different purpose at an earlier time.
Bias: newspaper articles are often biased and may leave out crucial information deliberately.
Age of information: researched data shouldn’t be too outdated. Customer tastes, fashions, economic
conditions, technology all move fast and the old data will be of no use now.
Tally Tables: used to record data in its original form. The tally table below shows the number and type of
vehicles passing by a shop at different times of the day:
Charts: show the total figures for each piece of data (bar/ column charts) or the proportion of each piece of
data in terms of the total number (pie charts). For example the above tally table data can be recorded in a bar
chart as shown below:
The pie chart above could show a company’s market share in different countries.
Graphs: used to show the relationship between two sets of data. For example how average temperature
varied across the year.
3.3 – Marketing Mix
Marketing mix refers to the different elements involved in the marketing of a good or service- the 4 P’s-
Product, Price, Promotion and Place.
Product
Product is the good or service being produced and sold in the market. This includes all the features of the
product as well as its final packaging.
Types of products include: consumer goods, consumer services, producer goods, producer services.
Can create a Unique Selling Point (USP) by developing a new innovative product for the first time in the market.
This USP can be used to charge a high price for the product as well as be used in advertising.
Charge higher prices for new products (price skimming as explained later)
Increase potential sales, revenue and profit
Helps spreads risks because having more products mean that even if one fails, the other will keep generating a profit
for the company
Disadvantages:
At these different stages, the product will need different marketing decisions/strategies in terms of the 4Ps.
Extension strategies: marketing techniques used to extend the maturity stage of a product (to keep the
product in the market):
Finding new markets for the product
Finding new uses for the product
Redesigning the product or the packaging to improve its appeal to consumers
Increasing advertising and other promotional activities
The effect on the PLC of a product of a successful extension strategy:
Price
Price is the amount of money producers are willing to sell or consumer are willing to buy the product for.
Penetration pricing: Setting a very low price to attract customers to buy a new product
Advantages:
Competitive pricing: Setting a price similar to that of competitors’ products which are already available in the market
Advantage:
Price might be set higher than competitors or more than customers are willing to pay, which reduces sales and
profits
Loss leader pricing/Promotional pricing: Setting the price of a few products at below cost to attract customers into
the shop in the hope that they will buy other products as well
Advantages:
Price Elasticity
The PED of a product refers to the responsiveness of the quantity demanded for it to changes in its
price.
PED (of a product) = % change in quantity demanded / % change in price
When the PED is >1, that is there is a higher % change in demand in response to a change in price, the PED
is said to be elastic.
When the PED is <1, that is there is a lower % change in demand in response to a change in price, the PED
is said to be inelastic.
Producers can calculate the PED of their product and take suitable action to make the product more
profitable.
If the product is found to have an elastic demand, the producer can lower prices to increase
profitability. The law of demand states that a fall in price increases the demand. And since it is an elastic
product (change in demand is higher than change in price), the demand of the product will increase highly.
The producers get more profit.
If the product is found to have an inelastic demand, the producer can raise prices to increase
profitability. Since quantity demanded wouldn’t fall much as it is inelastic, the high prices will make way
for higher revenue and thus higher profits.
Place
Place refers to how the product is distributed from the producer to the final consumer. There are different
distribution channels that a product can be sold through.
Distribution
Channel Explanation Advantages Disadvantages
– Delivery costs
may be high if
there are
customers over a
wide area
– All of the profit is – All storage costs
The product is sold to the earned by the producer must be paid for
consumer straight from the – The producer controls by the producer
manufacturer. A good example all parts of the – All promotional
is a factory outlet where marketing mix activities must be
products directly arrive at their – Quickest method of carried out and
Manufacturer own shop from the factory and getting the product to financed by the
to Consumer are sold to customers. the consumer producer
– The retailer
takes some of the
profit away from
the producer
– The producer
loses some control
– The cost of holding of the marketing
The manufacturer will sell its inventories of the mix
products to a retailer (who will product is paid by the – The producer
have stocks of products from retailer must pay for
other manufacturers as well) – The retailer will pay delivery of
who will then sell them to for advertising and other products to the
customers who visit the shop. promotional activities retailers
Manufacturer For example, brands like Sony, – Retailers are more – Retailers usually
to Retailer Canon and Panasonic sell their conveniently located for sell competitors’
to Consumer products to various retailers. consumers products as well
Promotion
Promotion: marketing activities used to communicate with customers and potential customers to inform and
persuade them to buy a business’s products.
Aims of promotion:
Sales Promotion: using techniques such as ‘buy one get one free’, occasional price reductions, free after-sales
services, gifts, competitions, point-of–sale displays (a special display stand for a product in a shop), free samples etc.
to encourage sales.
Below-the-line promotion: promotion that is not paid for communication but uses incentives to encourage consumers
to buy. Incentives include money-off coupons or vouchers, loyalty reward schemes, competitions and games with cash
or other prizes.
Personal selling: sales staff communicate directly with consumer to achieve a sale and form a long-term relationship
between the firm and consumer.
Direct mail: also known as mailshots, printed materials like flyers, newsletters and brochures which are sent directly
to the addresses of customers.
Sponsorship: payment by a business to have its name or products associated with a particular event. For example
Emirates is Spanish football club Real Madrid’s jersey sponsor- Emirates pays the club to be its sponsor and gains a
high customer awareness and brand image in return.
ADVANTAGES DISADVANTAGES
The operations department in a firm overlooks the production process. They must:
Use the resources in a cost-effective and efficient manner
Manage inventory effectively
Produce the required output to meet customer demands
Meet the quality standards expected by customers
Productivity
Productivity is a measure of the efficiency of inputs used in the production process over a period of time.
It is the output measured against the inputs used to produce it. The formula is:
Businesses often measure the labour productivity to see how efficient their employees are in producing
output. The formula for it is:
Businesses look to increase productivity, as the output will increase per employee and so the average
costs of production will fall. This way, they will be able to sell more while also being able to lower prices.
Ways to increase productivity:
improving labour skills by training them so they work more productively and waste lesser resources
introducing automation (using machinery and IT equipment to control production) so that production is
faster and error-free
improve employee motivation so that they will be willing to produce more and efficiently so.
improved quality control and assurance systems to ensure that there are no wastage of resources
Inventory Management
Firms can hold inventory (stock) of raw materials, goods that are not completed yet (a.k.a work-in-
progress) and finished unsold goods. Finished good stocks are kept so that any unexpected rise in demand
is fulfilled.
When inventory gets to a certain point (reorder level), they will be reordered by the firm to bring the level
of inventory back up to the maximum level again. The business has to reorder inventory before they go too
low since the reorder supply will take time to arrive at the firm
The time it takes for the reorder supply to arrive is known as lead time.
If too high inventory is held, the costs of holding and maintaining it will be very high.
The buffer inventory level is the level of inventory the business should hold at the very minimum to satisfy
customer demand at all times. During the lead time the inventory will have hit the buffer level and as
reorder arrives, it will shoot back up to the maximum level.
Lean Production
Lean production refers to the various techniques a firm can adopt to reduce wastage and increase
efficiency/productivity.
Overproduction– producing goods before they have been ordered by customers. This results in too much
output and so high inventory costs
Waiting– when goods are not being moved or processed in any way, then waste is occurring
Transportation-moving goods around unnecessarily is simply wasting time. They also risk damage during
movement
Unnecessary inventory-too much inventory takes up valuable space and incurs cost
Motion-unnecessary moving about of employees and operation of machinery is a waste of time and cost
respectively.
Over-processing-using complex machinery and equipment to perform simple tasks may be unnecessary
and is a waste of time, effort and money
Defects– any fault in equipment can halt production and waste valuable time. Goods can also turn out to
be faulty and need to be fixed- taking up more money and time
By avoiding such wastage, a firm can benefit in many ways
less storage of raw materials, components and finished goods- less money and time tied up in inventory
quicker production of goods and services
no need to repair faulty goods- leads to good customer satisfaction
ultimately, costs will lower, which helps reduce prices, making the business more competitive and earn
higher profits as well
Now, how to implement lean production? The different methods are:
Kaizen: it’s a Japanese term meaning ‘continuous improvement’. It aims to increase efficiency and reduce
wastage by getting workers to get together in small groups and discuss problems and suggest solutions.
Since they’re the ones directly involved in production they will know best to identify issues. When kaizen is
implemented, the factory floor, for example, is rearranged by re-positioning machinery and equipment so
that production can flow smoothly through the factory in the least possible time.
Benefits:
increased productivity
reduced amount of space needed for production
improved factory layout may allow some jobs to be combined, so freeing up employees to do other
jobs in the factory
Just-in-Time inventory control: this technique eliminates the need to hold any kind of inventory by
ensuring that supplies arrive just in time they are needed for production. The making of any parts is done
just in time to be used in the next stage of production and finished goods are made just in time they are
needed for delivery to the customer/shop. The firm will need very reliable suppliers and an efficient
system for reordering supplies.
Benefits: Reduces cost of holding inventory
Warehouse space is not needed any more, so more space is available for other uses
Finished goods are immediately sold off, so cash flows in quickly
Cell Production: the production line is divided into separate, self-contained units each making a part of the
finished good. This works because it improves worker morale when they are put into teams and
concentrate on one part alone.
Methods of Production
Job Production: products are made specifically to order, customized for each customer. Eg: wedding cakes,
made-to-measure suits, films etc.
Advantages:Most suitable for one-off products and personal services
The product meets the exact requirement of the customer
Workers will have more varied jobs as each order is different, improving morale
very flexible method of production
Disadvantages:Skilled labour will often be required which is expensive
Costs are higher for job production firms because they are usually labour-intensive
Production often takes a long time
Since they are made to order, any errors may be expensive to fix
Materials may have to be specially purchased for different orders, which is expensive
Batch Production: similar products are made in batches or blocks. A small quantity of one product is made,
then a small quantity of another. Eg: cookies, building houses of the same design etc.
Advantages:Flexible way of working- production can be easily switched between products
Gives some variety to workers
More variety means more consumer choice
Even if one product’s machinery breaks down, other products can still be made
Disadvantages:Can be expensive since finished and semi-finished goods will need moving about
Machines have to be reset between production batches which delays production
Lots of raw materials will be needed for different product batches, which can be expensive.
Flow Production: large quantities of products are produced in a continuous process on the production line.
Eg: a soft drinks factory.
Advantages:There is a high output of standardized (identical) products
Costs are low in the long run and so prices can be kept low
Can benefit from economies of scale in purchasing
Automated production lines can run 24×7
Goods are produced quickly and cheaply
Capital-intensive production, so reduced labour costs and increases efficiency
Disadvantages:A very boring system for the workers, leads to low job satisfaction and motivation
Lots of raw materials and finished goods need to be held in inventory- this is expensive
Capital cost of setting up the flow line is very high
If one machinery breaks down, entire production will be affected
Factors that affect which production method to use:
The nature of the product: Whether it is a personal, customized-to-order product, in which case job
production will be used. If it is a standard product, then flow production will be used
The size of the market: For a large market, flow production will be required. Small local and niche markets
may make use of batch and flow production. Goods that are highly demanded but not in very large
quantities, batch production is most suitable.
The nature of demand: If there is a fair and steady demand for the product, it would be more suitable to
run a production line for the product. For less frequent demand, batch and job will be appropriate.
The size of the business: Small firms with little capital access will not produce using large automated
production lines, but will use batch and job production.
Scale of production
As output increases, a firm’s average cost decreases.
Economies of scale are the factors that lead to a reduction in average costs as a business increases in size.
The five economies of scale are:
Purchasing economies: For large output, a large amount of components have to be bought. This will give
them some bulk-buying discounts that reduce costs
Marketing economies: Larger businesses will be able to afford its own vehicles to distribute goods and
advertise on paper and TV. They can cut down on marketing labour costs. The advertising rates costs also
do not rise as much as the size of the advertisement ordered by the business. Average costs will thus
reduce.
Financial economies: Bank managers will be more willing to lend money to large businesses as they are
more likely to be able to pay off the loan than small businesses. Thus they will be charged a low rate of
interest on their borrowings, reducing average costs.
Managerial economies: Large businesses may be able to afford to hire specialist managers who are very
efficient and can reduce the business’ costs.
Technical economies: Large businesses can afford to buy large machinery such as a flow production line
that can produce a large output and reduce average costs.
Diseconomies of scale are the factors that lead to an increase the average costs of a business as it grows
beyond a certain size. They are:
Poor communication: as a business grows large, more departments and managers and employees will be
added and communication can get difficult. Messages may be inaccurate and slow to receive, leading to
lower efficiency and higher average costs in the business.
Low morale: when there are lots of workers in the business and they have non-contact with their senior
managers, the workers may feel unimportant and not valued by management. This would lead to
inefficiency and higher average costs.
Slow decision-making: As a business grows larger, its chain of command will get longer. Communication
will get very slow and so any decision-making will also take time, since all employees and departments may
need to be consulted with.
Businesses are now dividing themselves into small units that can control themselves and communicate
more effectively, to avoid any diseconomies from arising.
Break-even
Break-even level of output is the output that needs to be produced and sold in order to start making a
profit. So, the break-even output is the output at which total revenue equals total costs (neither a profit
nor loss is made, all costs are covered).
A break-even chart can be drawn, that shows the costs and revenues of a business across different levels of
output and the output needed to break even.
Example:
In the chart below, costs and revenues are being calculated over the output of 2000 units.
The fixed costs is 5000 across all output (since it is fixed!).
The variable cost is $3 per unit so will be $0 at output is 0 and $6000 at output 2000- so you just draw a
straight line from $0 to $6000.
The total costs will then start from the point where fixed cost starts and be parallel to the variable costs
(since T.C.= F.C.+V.C. You can manually calculate the total cost at output 2000: ($6000+$5000=$11000).
The price per unit is $8 so the total revenue is $16000 at output 2000.
Now the break-even point can be calculated at the point where total revenue and total cost equals– at an
output of 1000. (In order to find the sales revenue at output 1000, just do $8*1000= $8000. The business
needs to make $8000 in sales revenue to start making a profit).
Advantages of break-even charts:
Managers can look at the graph to find out the profit or loss at each level of output
Managers can change the costs and revenues and redraw the graph to see how that would affect profit
and loss, for example, if the selling price is increased or variable cost is reduced.
The break-even chart can also help calculate the safety margin- the amount by which sales exceed break-
even point. In the above graph, if the business decided to sell 2000 units, their margin of safety would be
1000 units. In sales terms, the margin of safety would be 1000*8 = $8000. They are $8000 safe from
making a loss.
Margin of Safety (units) = Units being produced and sold – Break-even output
Break-even can also be calculated without drawing a chart. A formula can be used:
Quality Control
Quality control is the checking for quality at the end of the production process, whether a good or a
service.
Advantages:
Eliminates the fault or defect before the customer receives it, so better customer satisfaction
Not much training required for conducting this quality check
Disadvantages:
Still expensive to hire employees to check for quality
Quality control may find faults and errors but doesn’t find out why the fault has occurred, so the it’s
difficult to solve the problem
if product has to be replaced and reworked, then it is very expensive for the firm
Quality Assurance
Quality assurance is the checking for quality throughout the production process of a good or service.
Advantages:
Eliminates the fault or defect before the customer receives it, so better customer satisfaction
Since each stage of production is checked for quality, faults and errors can be easily identified and solved
Products don’t have to be scrapped or reworked as often, so less expensive than quality control
Disadvantages:
Expensive to carry out since quality checks have to be carried throughout the entire process, which will
require manpower and appropriate technology at every stage.
How well will employees follow quality standards? The firm will have to ensure that every employee
follows quality standards consistently and prudently, and knows how to address quality issues.
Total Quality Management (TQM)
Total Quality Management or TQM is the continuous improvement of products and production
processes by focusing on quality at each stage of production. There is great emphasis on ensuring that
customers are satisfied. In TQM, customers just aren’t the consumers of the final product. It is every
worker at each stage of production. Workers at one stage have to ensure the quality standards are met
for the product in production at their stage before they are passed onto the next stage and so on. Thus,
quality is maintained throughout production and products are error-free.
TQM also involves quality circles and like Kaizen, workers come together and discuss issues and
solutions, to reduce waste ensure zero defects.
Advantages:
quality is built into every part of the production process and becomes central to the workers principles
eliminates all faults before the product gets to the final customer
no customer complaints and so improved brand image
products don’t have to be scrapped or reworked, so lesser costs
waste is removed and efficiency is improved
Disadvantages:
Expensive to train employees all employees
Relies on all employees following TQM– how well are they motivated to follow the procedures?
How can customers be assured of the quality of a product or service?
They can look for a quality mark on the product like ISO (International Organization for Standardization).
The business with these quality marks would have followed certain quality procedures to keep the
quality mark. For services, a good reputation and positive customer reviews are good indicators of the
service’s quality.
4.4 – Location Decisions
Owners need to decide a location for their firm to operate in, at the time of setting up, when it needs to
expand operations, and when the current location proves unsatisfactory for some reason. Location is
important because it can affect the firm’s costs, profits, efficiency and the market base it reaches out to.
to encourage businesses to set up and expand in areas of high unemployment and under-
development. Grants and subsidies can be given to businesses that set up in such areas.
to discourage firms from setting in areas of that are overcrowded or renowned for natural
beauty. Planning restrictions can be put into place to do so.
5.1 – Business Finance: Needs and Sources
Finance is the money required in the business. Finance is needed to set up the business, expand it and
increase working capital (the day-to-day running expenses).
Start-up capital is the initial capital used in the business to buy fixed and current assets before it can start
trading.
Working Capital finance needed by a business to pay its day-to-day running expenses
Capital expenditure is the money spent on fixed assets (assets that will last for more than a year). Eg:
vehicles, machinery, buildings etc. These are long-term capital needs.
Revenue Expenditure, similar to working capital, is the money spent on day-to-day expenses which does
not involve the purchase of long-term assets. Eg: wages, rent. These are short-term capital needs.
Sources of Finance
Internal finance is obtained from within the business itself.
Retained Profit: profit kept in the business after owners have been given their share of the profit. Firms
can invest this profit back in the businesses.
Advantages:
– Does not have to be repaid, unlike, a loan.
– No interest has to be paid
Disadvantages:
– A new business will not have retained profit
– Profits may be too low to finance
– Keeping more profits to be used as capital will reduce owner’s share of profit and they may resist the
decision.
Sale of existing assets: assets that the business doesn’t need anymore, for example, unused buildings or
spare equipment can be sold to raise finance
Advantages:
– Makes better use of capital tied up in the business
– Does not become debt for the business, unlike a loan.
Disadvantages:
– Surplus assets will not be available with new businesses
– Takes time to sell the asset and the expected amount may not be gained for the asset
Sale of inventories: sell of finished goods or unwanted components in inventory.
Advantage:
– Reduces costs of inventory holding
Disadvantage:
– If not enough inventory is kept, unexpected increase demand form customers cannot be fulfilled
Owner’s savings: For a sole trader and partnership, since they’re unincorporated (owners and business is
not separate), any finance the owner directly invests from hos own saving will be internal finance.
Advantages:
– Will be available to the firm quickly
– No interest has to be paid.
Disadvantages:
– Increases the risk taken by the owners.
External finance is obtained from sources outside of the business.
Debenture issues: debentures are long-term loan certificates issued by companies. Like shares, debentures
will be issued, people will buy them and the business can raise money. But this finance acts as a loan- it will
have to be repaid after a specified period of time and interest will have to be paid for it as well.
Advantage:
Can be used to raise very long-term finance, for example, 25 years
Disadvantage:
Interest has to be paid and it has to be repaid
Debt factoring: a debtor is a person who owes the business money for the goods they have bought from
the business. Debt factors are specialist agents that can collect all the business’ debts from debtors.
Advantages:
Immediate cash is available to the business
Business doesn’t have to handle the debt collecting
Disadvantage:
The debt factor will get a percent of the debts collected as reward. Thus, the business doesn’t get all of
their debts
Grants and subsidies: government agencies and other external sources can give the business a grant or
subsidy
Advantage:
Do not have to be repaid, is free
Disadvantage:
There are usually certain conditions to fulfil to get a grant. Example, to locate in a particular under-
developed area.
Micro-finance: special institutes are set up in poorly-developed countries where financially-lacking people
looking to start or expand small businesses can get small sums of money. They provide all sorts of financial
services
Crowd funding: raises capital by asking small funds from a large pool of people, e.g. via Kickstarter. These
funds are voluntary ‘donations’ and don’t have to be return or paid a dividend.
Short-term finance provides the working capital a business needs for its day-to-day operations.
Overdrafts: similar to loans, the bank can arrange overdrafts by allowing businesses to spend more than
what is in their bank account. The overdraft will vary with each month, based on how much extra money
the business needs.
Advantages:
Flexible form of borrowing since overdrawn amounts can be varied each month
Interest has to be paid only on the amount overdrawn
Overdrafts are generally cheaper than loans in the long-term
Disadvantages:
Interest rates can vary periodically, unlike loans which have a fixed interest rate.
The bank can ask for the overdraft to be repaid at a short-notice.
Trade Credits: this is when a business delays paying suppliers for some time, improving their cash position
Advantage:
No interests, repayments involved
Disadvantage:
If the payments are not made quickly, suppliers may refuse to give discounts in the future or refuse to
supply at al
Debt Factoring: a debtor is a person who owes the business money for the goods they have bought from
the business. Debt factors are specialist agents that can collect all the business’ debts from debtors.
Advantages:
Immediate cash is available to the business
Business doesn’t have to handle the debt collecting
Disadvantage:
The debt factor will get a percentage of the debts collected as reward. Thus, the business doesn’t get
all of their debts.
Long-term finance is the finance that is available for more than a year.
Leasing: this allows a business to use an asset without purchasing it. Monthly leasing payments are instead
made to the owner of the asset. The business can decide to buy the asset at the end of the leasing period.
Some firms sell their assets for cash and then lease them back from a leasing company. This is called sale
and leaseback.
Advantages:
The firm doesn’t need a large sum of money to use the asset
The care and maintenance of the asset is done by the leasing company
Disadvantage:
The total costs of leasing the asset could finally end up being more than the cost of purchasing the
asset!
Cash flow is not the same as profit! Profit is the surplus amount after total costs have been deducted from
sales. It includes all income and payments incurred in the year, whether already received or paid or to not
yet received or paid respectfully. In a cash flow, only those elements paid by cash are considered.
Cash Flow Forecasts
A cash flow forecast is an estimate of future cash inflows and outflows of a business, usually on a month-
by-month basis. This then shows the expected cash balance at the end of each month. It can help tell the
manager:
how much cash is available for paying bills, purchasing fixed assets or repaying loans
how much cash the bank will need to lend to the business to avoid insolvency (running out of liquid cash)
whether the business has too much cash that can be put to a profitable use in the business
Example of a cash flow forecast for the four months:
The cash inflows are listed first and then the cash outflows. The total inflows and outflows have to be
calculated after each section.
The opening cash/bank balance is the amount of cash held by the business at the start of the month
Net Cash Flow = Total Cash Inflow – Total Cash Outflow
The net cash flow is added to opening cash balance to find the closing cash/bank balance– the amount of
cash held by the business at the end of the month. Remember, the closing cash/bank balance for one
month is the opening cash/bank balance for the next month!
The figures in bracket denote a negative balance, i.e., a net cash outflow (outflows > inflows)
Increase bank loans: bank loans will inject more cash into the business, but the firm will have to pay
regular interest payments on the loans and it will eventually have to be repaid, causing future cash
outflows
Delay payment to suppliers: asking for more time to pay suppliers will help decrease cash outflows in the
short-run. However, suppliers could refuse to supply on credit and may reduce discounts for late payment
Ask debtors to pay more quickly: if debtors are asked to pay all the debts they have to the firm quicker,
the firm’s cash inflows would increase in the short-run. These debtors will include credit customers, who
can be asked to make cash sales as opposed to credit sales for purchases (cash will have to be paid on the
spot, credit will mean they can pay in the future, thus becoming debtors). However, customers may move
to other businesses that still offers them time to pay
Delay or cancel purchases of capital equipment: this will greatly help reduce cash outflows in the short-
run, but at the cost of the efficiency the firm loses out on not buying new technology and still using old
equipment.
In the long-term, to improve cash flow, the business will need to attract more investors, cut costs by
increasing efficiency, develop more products to attract customers and increase inflows.
Working Capital
Working capital the capital required by the business to pay its short-term day-to-day expenses. Working
capital is all of the liquid assets of the business– the assets that can be quickly converted to cash to pay
off the business’ debts. Working capital can be in the form of:
cash needed to pay expenses
cash due from debtors – debtors/credit customers can be asked to quickly pay off what they owe to the
business in order for the business to raise cash
Cash in the form of inventory – Inventory of finished goods can be quickly sold off to build cash inflows.
Too much inventory results in high costs, too low inventory may cause production to stop.
5.3 – Income Statements
Accounts are the financial records of a firm’s transactions.
Final Accounts are prepared at the end of the financial year and give details of the profit or loss made as
well as the worth of the business.
Profit
Profit = Sales Revenue – Total cost
When the total costs exceed the sales revenue, then a loss is made.
Profit is not the same as cash flow! Profit is the surplus amount after total costs have been deducted from
sales. It includes all income and payments incurred in the year, whether already received or paid or to not
yet received or paid respectfully. In a cash flow, only those elements paid in cash immediately are
considered.
Income Statement
An income statement is a financial document of the business that records all income generated by the
business as well as the costs incurred by the business and thus the profit or loss made over the financial
year. Also known as profit and loss account.
Check whether the equations on the right are satisfied in this balance sheet!
SHAREHOLDERS EQUITY = TOTAL ASSETS – TOTAL LIABILITIES
Gross Profit Margin: this calculates the gross profit (sales – cost of production) in terms of the sales, or
in other words, the % of gross profit made on each unit of sales revenue. The higher the GPM, the
better. The formula is:
Net profit Margin: this calculates the net profit (gross profit-expenses) in terms of the sales, i.e. the %
of net profit generated on each unit of sales revenue. The higher the NPM, the better. The formula is:
Liquidity Ratios: liquidity is the ability of the company to pay back its short-term debts. It if it doesn’t
have the necessary working capital to do so, it will go illiquid (forced to pay off its debts by selling assets).
In the previous topic, we said that working capital = current assets – current liabilities. So a business needs
current assets to be able to pay off its current liabilities. The two liquidity ratios shown below, use this
concept.
Current Ratio: this is the basic liquidity ratio that calculates how many current assets are there in
proportion to every current liability, so the higher the current ratio the better (a value above 1 is
favourable). the formula is:
Liquid Ratio/ Acid Test Ratio: this is very similar to current ratio but this ratio doesn’t consider
inventory to be a liquid asset, since it will take time for it to be sold and made into cash. A high level of
inventory in a business can thus cause a big difference between its current and liquidity ratios. So there
is a slight difference in the formula:
Uses and users of accounts
Managers: they will use the accounts to help them keep control over the performance of each product or
each division since they can see which products are profitably performing and which are not.
This will allow them to take better decisions. If for example, product A has a good gross profit margin
of 35% but its net profit margin is only 5%, this means that the business has very high expenses that is
causing the huge difference between the two ratios. They will try to reduce expenses in the coming
year. In the case of liquidity, if both ratios are very low, they will try to pay off current liabilities to
improve the ratios.
Ratios can be compared with other firms in the industry/competitors and also with previous years to
see how they’re doing. Businesses will definitely want to perform better than their rivals to attract
shareholders to invest in their business and to stay competitive in the market. Businesses will also try
to improve their profitability and liquidity positions each year.
Shareholders: since they are the owners of a limited company, it is a legal requirement that they be
presented with the financial accounts of the company. From the income statements and the profitability
ratios, especially the ROCE, existing shareholders and potential investors can see whether they should
invest in the business by buying shares. A higher profitability, the higher the chance of getting dividends.
They will also compare the ratios with other companies and with previous years to take the most
profitable decision. The balance sheet will tell shareholders whether the business was worth more at the
end of the year than at the beginning of the year, and the liquidity ratios will be used to ascertain how risky
it will be to invest in the company- they won’t want to invest in businesses with serious liquidity problems.
Creditors: The balance sheet and liquidity ratios will tell creditors (suppliers) the cash position and debts of
the business. They will only be ready to supply to the business if they will be able to pay them. If there are
liquidity problems, they won’t supply the business as it is risky for them.
Banks: Similar to how suppliers use accounts, they will look at how risky it is to lend to the business. They
will only lend to profitable and liquid firms.
Government: the government and tax officials will look at the profits of the company to fix a tax rate and
to see if the business is profitable and liquid enough to continue operations and thus if the worker’s jobs
will be protected.
Workers and trade unions: they will want to see if the business’ future is secure or not. If the business is
continuously running a loss and is in risk of insolvency (not being liquid), it may shut down operations and
workers will lose their jobs!
Other businesses: managers of competing companies may want to compare their performance too or may
want to take over the business and wants to see if the takeover will be beneficial.
Economic Objectives
Here, we’ll look at the different economic objectives a government might have and how their
absence/negligence will affect the economy as well as businesses.
Maintain economic growth: economic growth occurs when a country’s Gross Domestic Product (GDP)
increase i.e. more goods and services are produced than in the previous year. This will increase the country’s
incomes and achieve greater living standards.
Effects of reducing GDP (recession):
As output falls, fewer workers will be needed by firms, so unemployment will rise
As goods and services that can be consumed by the people falls, the standard of living in the economy
will also fall
Achieve price stability: inflation is the increase in average prices of goods and services over time. (Note
that, inflation, in the real world, always exists. It is natural for prices to increase as the years go by. In the
case there is a fall in the price level, it is called a deflation) Maintaining a low inflation will help the
economy to develop and grow better.
Effects of high inflation:
As cost of living will have risen and peoples’ real incomes (the value of income) will have fallen (when
prices increase and incomes haven’t, the income will buy lesser goods and services- the purchasing
power will fall).
Prices of domestic goods will rise as opposed to foreign goods in the market. The country’s exports will
become less competitive in the international market. Domestic workers may lose their jobs if their
products and firms don’t do well.
When prices rise, demand will fall and all costs will rise (as wages, material costs, overheads will all
rise)- causing profits to fall. Thus, they will be unwilling to expand and produce more in the future.
Reduce unemployment: unemployment exists when people who are willing and able to work cannot find a
job. A low unemployment means high output, incomes, living standards etc.
Effects of high unemployment:
Unemployed people do not produce anything and so, the total output/GDP in the country will fall. This
will in turn, lead to a fall in economic growth.
Unemployed people receive no incomes, thus income inequality can rise in the economy and living
standards will fall. It also means that businesses will face low demand due to low incomes.
The government pays out unemployment benefits to the unemployed and this will rise during high
unemployment and government will not enough money left over to spend on other services like
education and health.
Maintain balance of payments stability: this records the difference between a country’s exports (goods
and services sold from the country to another) and imports (goods and services bought in by the country
from another country). The exports and imports needs to equal each other, thus balanced.
Effect of a disequilibrium in the balance of payments:
If the imports of a country exceed its exports, it will cause depreciation in the exchange rate– the value
of the country’s currency will fall against other foreign currencies (this will be explained in detail here).
If the exports exceed the imports it indicates that the country is selling more goods than it is consuming-
the country itself doesn’t benefit from any high output consumption.
Reduce income equality/achieve effective income redistribution: the difference/gap between the incomes of
rich and poor people should narrow down for income equality to improve. Improved income equality will
ensure better living standards and help the economy to grow faster and become more developed.
Effects of poor income equality:
Inequal distribution of goods and services- the poor cannot buy as many goods as the rich- poor living
standards will arise.
Government Economic Policies
Government can influence the economic conditions in a country by taking a variety of policies.
Fiscal policy is a government policy which adjusts government spending and taxation to influence the
economy. It is the budgetary policy, because it manages the government expenditure and revenue.
Government aims for a balance budget and tries to achieve it using fiscal policy.
Increasing government spending and reducing taxes will encourage more production and increase
employment, driving up GDP growth. This is because government spending creates employment and
increases economic activity in the economy and lower taxes means people have more money to consume
and firms have to pay lesser tax on their profits. On the other hand, reducing government spending and
increasing taxes will discourage production and consumption, and unemployment and GDP will fall.
Monetary policy is a government policy that adjusts the interest rate and foreign exchange rates to influence
the demand and supply of money in the economy, and thus demand and supply. It is usually conducted by
the country’s central bank and usually used to maintain price stability, low unemployment and economic
growth.
Increasing interest rates will discourage investments and consumption, causing employment and GDP
to fall (as the cost of borrowing-interest on loans – has increased, and people prefer to earn more interest by
saving rather than spend). Similarly, reducing interest rates will boost investment, consumption,
employment, and thus GDP.
Supply-side policies: both the fiscal and monetary policies directly affect demand, but the policies that
influence supply are very different. It can include:
Privatisation: selling government organizations to private individuals- this will increase efficiency and
productivity that increase supply as well encourage competitors to enter and further increase supply.
Improve training and education: governments can spend more on schools, colleges and training centres so
that people in the economy can become better skilled and knowledgeable, helping increasing productivity.
Increased competition: by acting against monopolies (firms that restrict competitors to enter that
industry/having full dominance in the market- refer xxx for more details) and reducing government rules and
regulations (often termed ‘deregulation’), the competitive environment can be improved and thus become
more productive.
For more details on government policies, check out our Economics notes.
*EXAM TIP: Remember that economic conditions and policies are all interconnected; one change will lead
to an effect which will lead to another effect and so on, like a chain reaction in many different ways. In your
exams, you should take care to explain those effects that are relevant and appropriate to the business or
economy in the question*
How might businesses react to policy changes? It will depend varying on how much impact the policy
change will have on the particular business/industry/economy. Here are a few examples:
6.2 – Environmental and Ethical Issues
Social responsibility is when a business decision benefits stakeholders other than shareholders i.e. workers,
community, suppliers, banks etc.
This is very important when coming to environmental issues. Businesses can pollute the air by releasing
smoke and poisonous gases, pollute water bodies around it by releasing waste and chemicals into them, and
damage the natural beauty of a place and so on.
WHY BUSINESSES WANT TO BE WHY BUSINESSES DO NOT WANT
ENVIRONMENT- FRIENDLY TO BE ENVIRONMENT-FRIENDLY
Consumers are becoming socially-aware High prices can make firms less
and are willing to buy only environment competitive in the market and they could
friendly products. lose sales
Governments, environmental
organisations, even the community could
take action against the business if they Businesses claim that it is the
do serious damage to the environment government’s duty to clean up pollution
Externalities
A business’ decisions and actions can have significant effects on its stakeholders. These effects are termed
‘externalities’. Externalities can be categorized into six groups given below and we’ll take examples from a scenario
where a business builds a new production factory.
Sustainable development is development that does not put at risk the living standards of future
generations. It means trying to achieve economic growth in a way that does not harm future generations.
Few examples of a sustainable development are:
using renewable energy- so that resources are conserved for the future
recycle waste
use fewer resources
develop new environment-friendly products and processes- reduce health and climatic problems for future generations
Environmental Pressures
Pressure groups are organisations/groups of people who change business (and government) decisions. If
a business is seen to behave in a socially irresponsible way, they can conduct consumer boycotts (encourage
consumers to stop buying their products) and take other actions. They are often very powerful because they
have public support and media coverage and are well-financed and equipped by the public. If a pressure
group is powerful it can result in a bad reputation for the business that can affect it in future endeavours, so
the business will give in to the pressure groups’ demands. Example: Greenpeace
The government can also pass laws that can restrict business decisions such as not permitting factories to
locate in places of natural beauty.
There can also be penalties set in place that will penalize firms that excessively pollute. Pollution
permits are licenses to pollute up to a certain limit. These are very expensive to acquire, so firms will try to
avoid buying the pollution permit and will have to reduce pollution levels to do so. Firms that pollute less
can sell their pollution permits to more polluting firms to earn money. Taxes can also be levied on polluting
goods and services.
Ethical Decisions
Ethical decisions are based on a moral code. It means ‘doing the right thing’. Businesses could be faced
with decisions regarding, for example, employment of children, taking or offering bribes, associate with
people/organisations with a bad reputation etc. In these cases, even if they are legal, they need to take a
decision that they feel is right.
Taking ethical/’right’ decisions can make the business’ products popular among customers, encourage the
government to favour them in any future disputes/demands and avoid pressure group threats. However, these
can end up being expensive as the business will lose out on using cheaper unethical opportunities.
Globalization
Globalization is a term used to describe the increases in worldwide trade and movement of people and
capital between countries. The same goods and services are sold across the globe; workers are finding it
easier to find work by going abroad for work; money is sent from and to countries everywhere.
Some reasons how globalization has occurred are:
Increasing number of free trade agreements– these are agreements between countries that allows them to
import and export goods and services with no tariffs or quotas.
Improved and cheaper transport (water, land, air) and communications (internet) infrastructure
Developing and emerging countries such as China and India are becoming rapidly industrialized and so
can export large volumes of goods and services. This has caused an increase in the output and opportunities
in international trade, allowing for globalisation
Advantages of globalisation
Allows businesses to start selling in new foreign markets, increasing sales and profits
Can open factories and production units in other countries, possibly at a cheaper rate (cheaper materials
and labour can be available in other countries)
Import products from other countries and sell it to customers in the domestic market- this could be more
profitable and producing and selling the good themselves
Import materials and components for production from foreign countries at a cheaper rate.
Disadvantages of globalisation
Increasing imports into country from foreign competitors- now that foreign firms can compete in other
countries, it puts up much competition for domestic firms. If these domestic firms cannot compete with
the foreign goods’ cheap prices and high quality, they may be forced to close down operations.
Increasing investment by multinationals in home country- this could further add to competition in the
domestic market (although small local firms can become suppliers to the large multinational firms)
Employees may leave domestic firms if they don’t pay as well as the foreign multinationals in the
country- businesses will have to increase pay and conditions to recruit and retain employees.
When looking at an economy’s point of view, globalisation brings consumers more choice and lower
prices and forces domestic firms to be more efficient (in order to remain competitive). However,
competition from foreign producers can force domestic firms to close down and jobs will be lost.
Protectionism
Protectionism refers to when governments protect domestic firms from foreign competition using trade
barriers such as tariffs and quotas; i.e. the opposite of free trade.
Import quota is a restriction on the quantity of goods that can be imported into the country.
Tariffs are taxes on imports.
Imposing these two measures will reduce the number of foreign goods in the domestic market and make
them expensive to buy, respectively. This will reduce the competitiveness of the foreign goods and make it
easy for domestic firms to produce and sell their goods. However, it reduces free trade and globalisation.
Free trade supporters say that it is better to allow consumers to buy imported goods and domestic firms
should produce and export goods and services that they have a competitive advantage in. In this way, living
standards across the globe will improve.
Multinational Companies (MNCs)
Multinational businesses are firms with operations (production/service) in more than one country. Also
known as transnational businesses. Examples: Shell, McDonald’s, Nissan etc.
Why do firms become multinationals?
To produce goods with lower costs– cheaper material and labour may be available in other countries
To extract raw materials for production, available in a few other countries. For example: crude oil in the
Middle East
To produce goods nearer to the markets to avoid transport costs.
To avoid trade barriers on imports. If they produce the goods in foreign countries, the firms will not have
to pay import tariffs or be faced with a quota restriction
To expand into different markets and spread their risks
To remain competitive with rival firms which may also be expanding abroad
Advantages to a country of a multinational setting up in their country:
The jobs created are often for unskilled tasks. The more skilled jobs will be done by workers that come
from the firm’s home country. The unskilled workers may also be exploited with very low wages and
unhygienic working conditions.
Since multinationals benefit from economies of scale, local firms may be forced out of business, unable to
survive the competition
Multinationals can use up the scarce, non-renewable resources in the country
Repatriation of profit can occur. The profits earned by the multinational could be sent back to their home
country and the government will not be able to levy tax on it.
As multinationals are large, they can influence the government and economy. They could threaten the
government that they will close down and make workers unemployed if they are not given financial grants
and so on.
Exchange Rates
The exchange rate is the price of one currency in terms of another currency.
For example, €1= $1.2. To buy one euro, you’ll need 1.2 dollars. The demand and supply of the
currencies determine their exchange rate. In the above example, if the €’s demand was greater than the
$’s, or if the supply of € reduced more than the $, then the €’s price in terms of $ will increase. It could now
be €1= $1.5. Each € now buys more $.
A currency appreciates when its value rises. The example above is an appreciation of the Euro. A
European exporting firm will find an appreciation disadvantageous as their American consumers will now
have to pay more $ to buy a €1 good (exports become expensive). Their competitiveness has reduced. A
European importing firm will find an appreciation of benefit. They can buy American products for lesser
Euros (imports become cheaper).
A currency depreciates when its value falls. In the example above, the Dollar depreciated. An American
exporting firm will find a depreciation advantageous as their European consumers will now have to pay less
€ to buy a $1 good (exports become cheaper). Their competitiveness has increased. An American
importing firm will find a depreciation disadvantageous. They will have to buy European products for more
dollars (imports become expensive).
In summary, an appreciations is good for importers, bad for exporters; a depreciation is good for
exporters, bad for importers; given that the goods are price elastic (if the price didn’t matter much to
consumers, sales and revenue would not be affected by price- so no worries for producers).