Contents

Topics Page Number

4 – 38
UNIT 1
39 - 61
UNIT2
62 - 76
UNIT 3
77 - 95
UNIT 4
96 – 110
UNIT 5
111 - 113
Answering Techniques
113 - 116
Sample answers
116
Tips to smash Business examination

117
Questions to try

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 Unit: 1 BUSINESS ACTIVITY AND INFLUENCES ON BUSINESS

CHAPTER 1: WHAT IS BUSINESS ACTIVITY?

Basic definitions:

Business: organization that produces goods and services.

Goods: physical products such as toys.

Services: non-physical products such as, banking services.

Needs: basic goods that are required for human survival.

Wants: desires for goods and services which are infinite.

Scarcity: resources with limited availability.

The purpose of business activity

The main purpose of a business is to provide goods and services and satisfy the needs and wants of
consumers with availability of resources while making a profit. However, different business exists for
different reasons:

Private enterprise

 Owned by individuals or groups of individuals

 They are private sector businesses.
 Main aim is to make profits.
 Examples: Sole traders.

Social enterprise

 Nonprofit making organizations

 Exists for serving the society and good causes other than profits
 Examples: Clubs and Charity organizations

Public enterprise

 Owned and controlled by the central or local government

 They are public sector businesses
 Their main aim is to provide goods and services that private sectors may be incapable of providing
(i.e. serving unprofitable regions)
 Examples: Free education and health care

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Business Stakeholders

A stakeholder is an individual or group who have interest in the operation and running of a business.
Different stakeholders have different reasons for their interests:

Owners

 To make sure that they get financial returns (i.e. profits or dividends) their investments and risk
of starting a business venture.

Customers

 To make sure they get the best quality products for reasonable prices.

Employees

 To make sure they have good working conditions

 To demand for higher wages or salaries if the business is doing well
 Job securities and opportunities for promotion

Managers

 In order to lead teams such as marketing, finance, human resource and production
 Make key decisions (Because often owners give managers the responsibilities to take key
decisions in large corporations)
 Solving problems
 Settling disputes and motivating workers
 Demanding for higher salaries if the business is performing well.

Financiers

They lend money to the business in times of difficulties and when businesses first star trading. They
may have an interest in the business in order to make sure that the business is able to make the
repayments in the future.

Suppliers

 They may want to know whether the business is able to make the payments for the goods
supplied.
 Also to make sure that the consumers make regular orders

The local community

 Employment opportunities and increased pay if business performs well.

The government

 Employment in order to lower the unemployment level in an economy

 Taxes from businesses and employees.
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In order to survive in a competitive business environment, all businesses must make sure that they adopt
the new technology and fashions that may emerge and satisfy their consumers from time to time for
example, by carrying out market research (discussed later)

CHAPTER 2: BUSINESS OBJECTIVES

Basic definitions:

Objectives: goals or target set by a business

Profit maximization: making as much profit at a given period of time

Dividends: share of profit paid to shareholders in a company

Profits satisficing: making enough profits to satisfy the needs of the owner

Revenues: money generated from sale of goods and services

Large businesses: Business that employs more than 250 people

Small businesses: business that employs less than 50 people

Importance of clear objectives

Why do businesses need to have clear objectives?

 Employees need something to work towards and if they had objectives then everyone in the
organization may have the common goal and can achieve it easily.
 Owners need motivation in order to keep the business running. If not the may allow the business
to drift.
 Objectives help business owners to assess their weaknesses and take necessary steps to
overcome them and achieve their objectives easily.
 Objectives also help to decide where to take the business and what steps are required I order to
make the business successful.

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FINANCIAL OBEJECTIVES

All businesses are like to set clear objectives they may be financial or non-financial. The businesses in
the private sector have the main objective as to make profits but there are other financial objectives to
consider such as:

Survival

One of the main objective of many small businesses is survival in the first few years of their trading.
This is because they may be operating in a competitive environment in which they may threatened by
trading conditions such as, competition. Some other reasons may be because they may find it difficult to
persuade banks and other financial institutions to lend them money as these institutions may find it risky
to lend as they may fear small businesses being unable to repay back.

Revenue

Some of the business owners may want their businesses to grow significantly in order to enjoy the
benefits of growth in revenues. Examples: economies of scale, larger market share etc. Many
stakeholders may want the business that they have stake on, to grow as they may enjoy benefits such as
employment opportunities, tax revenues etc.

Increase market share

All businesses may want to build a higher market share. This is because when they have a higher market
share they will be able to charge higher prices, increase their reputation and win over their competitors
all of which will help them increase their revenues and therefore, increase their profits. They will also
be able to dominate the market.

Financial security

Most business may not want to make huge amount of profits but may make profits that may be
satisficing for the owner. One reason is because the owners may not want to take risk of expanding their
business as they have to go through many lengthy legal procedures which may consume time and cost a
lot. Another reason could be that some owners may run lifestyle based business that’s the business may
be simple and based on the way they live. It could be that they may want to work for themselves instead
of working under others and give more time to their family.

Non- financial objectives

Some businesses may have non-financial objectives which may depend on the nature of the business and
the owner. Some of them are as follows:

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Social objectives

 Social objectives are designed to improve the well-being of humans. Most public service business
such as government owned businesses aim to provide public services. However, these services may
not be of high quality as they may be produced at lower costs. This is because the products are
not charged for or may be charged a very low price. Examples: Government schools.
 Some businesses operate as charity organizations and other non-profit making organization as
they may aim to bring positive impacts to the society such as to eradicate poverty.

Private sector businesses may also want to take some kind of social responsibility by using the extra
amount of profit that they generate in order to improve their relations with the society (i.e. public
relations which will be discussed later) and to earn a higher profile. And some business may have this as
their objective for example, being environmentally friendly.

Personal satisfaction

Some people may want to work for themselves as they may find it uncomfortable to work for others such
as, an employer. This may bring satisfaction for them. There are other people who want to develop their
interests and hobbies into business. For example, famous players like Ronaldo, messi and so on may want
to start their own training clubs and earn money. In this way they can see their own ideas being successful
and enjoy the independence that they may have.

Challenge

Some people may love to take challenges and may try starting a business. As starting is very challenging.
Even after facing many failures and finally becoming successful, they may want to take more challenges
and risks as they become more motivated by this. They may do this moving to an overseas market etc.

Independence and control

Do you like to be instructed to do your work? NO! Right.

Some people may want to be independent and do their work as they wish. They may not want other people
to interfere in their work and be instructed. They may want to take control of their own futures and
achieve their objectives. These people may invest in building up a business although, the likelihood of
success is very less but this may be appealing for them as their objective is to be independent and make
all key decisions by themselves.

Why might objectives change as business evolves?

As businesses operate in a competitive environment their objectives may change frequently depending on
the environment and external factors example, changes in consumer spending patterns.

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Market conditions

Market conditions can change from time to time. For example, new entrants can enter into the market and
offer better quality products for cheaper which may result in businesses losing their market share. If the
business wants to keep their products competitive then they may have to lower their prices below the cost
or so on. Survival will become more important if businesses are facing threats by competitors

Technology

Technology is evolving in the last 30 years and more businesses have to operate efficiently in this modern
world. Businesses can purchase more machineries and produce more. This way business have to change
their objectives as to increase their production as to enjoy lower costs.

Performance

Business may face times of great profitability followed by times of difficulties. Businesses have to change
their objectives according to their performance. For example, at times of profitability business can set
objectives such as, expansion or increase in revenues. However, at times of difficulties businesses can set
objectives such as, survival. Objectives may evolve according to the business situations.

Legislation

Legislations imposed by governments may influence the objectives of the business. For example, more
businesses are becoming environmentally friendly which is because of the emerging legislation for
protecting environment.

Internal reasons

Businesses may change their objectives due to other reasons such as changes in the form of business for
example, if they change from sole trader to private limited company they may have to increase their
production and so on.

Objectives are always important for businesses. Without objectives there are less chances of business
being successful. Financial and in-financial objectives may play a key role in the running of the business.

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 CHAPTER 3: SOLETRADERS, PARTNERSHIPS, SOCIAL ENTERPRISES AND FRANCHISES

BASIC DEFINITIONS

Labor: people employed in a business used in production

Unincorporated: business in which there is no legal difference between the owner and the business. Ex:
sole trader

Incorporated: business that has separate legal identity from that of the owner’s. Ex: Limited liability
companies

Unlimited liability: owner of the business is personally liable for all business debts

Limited partnership: this is where some partners contribute to the business and enjoy the benefits but
doesn’t take active role in running of the partnership business.

Limited liability: business owner is only liable for the original amount invested

Cooperative: organization in which all the people working own equal share of it

Consumer cooperative: cooperatives that’s owned by consumers

Worker cooperative: cooperatives that are owned by workers

Who are entrepreneurs?

Entrepreneurs are the owners of the business who had invested money in the business and is responsible
for bringing up all the 3 factors of production together and producing the products more effectively.

Key roles of entrepreneurs

 They are innovators. They bring out a lot of business ideas and try to make the products using
their business ideas and earn money out of it.
 Entrepreneurs are responsible for bringing together the 3 factors of production (i.e. land, labor,
capital) and organizing them.
 They are the key decision makers. They make different types of decision Ex: price fixing etc.
 They are risk takers. They risk their money although they know that if the business wasn’t
successful they will have to lose their money. However, if the business is successful they will earn
profits.

Unincorporated and incorporated given in basic definitions

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Features/Advantages and Drawbacks of a sole trader

A sole trader is business that’s being owned by a single person who takes the risk of running
the business and meets all expenditures by himself and keeps all profits to himself if earned.

Advantages
Owner keeps all the profits
Simple to set up with no legal requirements
More flexible as they can easily adopt
changes
The owners can offer personal services as
they are smaller businesses
Drawbacks
Unlimited liability
Long hours and very hard work
May struggle to raise finance
No continuity- business dies with the
owners death

For more advantages and drawbacks refer book page 21. Edexcel usually don’t ask for
more than 3 or 4 advantages. You need to elaborate each advantage and drawback.

Partnership businesses

A partnership business is owned by 2 or more owners. A maximum number of 20 people can stay in a
partnership. Owners share the responsibility of running the business while also sharing the profits/losses
earned. Partners draw up a deed of partnership before beginning which shows the amount of profits that
each partner is entitled to receive, interests on capital, interests on drawings and if salaries are given to
specific partners for their huge contribution to the business.

Advantages Drawbacks
Easy to set up with no legal requirements Unlimited liability
More capital can be raised with more Profits are to be shared
partners contributing
Job of running the business is shared Partners may have conflicts and leave the
business
Financial information is not published Partnerships are still tended to be small

Limited partnerships

In a limited partnership, partners have limited liabilities. There will be some partners who contribute
financially but may not take active role in the running and managing of the business and they are known to
be as sleeping partner. However, one partner in this type of business may have unlimited liability and he
may be given additional benefits.

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Franchises

 Franchise is a business which a franchisor owns.

 Franchisor is the owner of the franchise owns.
 Franchisee is the one who trade under the name of the franchisor.

This type of business structure suits someone who has the money to start a business but is unable to
start due to the lack of business ideas and innovation skills. However, this is an expensive method to
start a business as the franchisee has to pay a very large amount of money to the franchisor in order to
trade under their name.

Advantages/Drawbacks to the franchisor

Advantages
Faster method of growth
Cheaper method of growth
Franchisees take some of the risks
Franchisees are more motivated than
employees
Drawbacks
Profits are to be shared with franchisee
Poor franchisee can damage reputation
Costs of support may be high
Franchisee can get merchandise from
somewhere

Advantages/Drawbacks to the franchisee

Advantages Drawbacks
Less risk Profits are to be shared
Back up support is given Strict contracts are to made with the
franchisor
Set up costs are predictable Lack of independence
National market may be organized Expensive method to start a business.

Social enterprises

Aim: is to improve the social and environmental well-being rather than making profits.

Examples: charity organizations such as: UNICEF, Corporative etc.

Types of Social enterprises

1. Worker cooperative

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 2. Consumer cooperative
3. Charities

CHAPTER 4: LIMITED COMPANIES AND MULTINATIONALS

BASIC DEFINITIONS

Limited companies: business organizations that have separate legal identity from that of the owner’s

Certificate of incorporation: document that’s required before a new business can start trading

Private limited company: It’s a company that’s owned by family and close friends, they have limited
liability and do not trade in the stock market

Stock market: market for share in PLCs

Public limited company: Company that’s owned by outsiders and trade in the stock market. They are very
large businesses

Multinational company: Large business that have their headquarters in one country and their operation
facilities all over the world.

FEAUTURES OF LIMITED COMPANIES

 The owners have limited liability.(see the basic definitions for the previous chapter)
 The business can raise capital by selling its shares. Each shareholder owns a number of shares
and these owners contribute to the running of the business.
 Shareholders elect a group of board members headed by a chair person in order control the
running of the business.
 They pay corporation taxes while sole traders and partnerships pay income taxes.
 There is a legal procedure to form a limited company.

To form a limited company there must be a minimum of 2 people and a maximum of unlimited. The owners
must submit 2 documents that is the memorandum of association and the articles of associations to

13
the registrar of companies. If their documents were accepted they will get a certificate of
incorporation which will allow them to trade as a limited company.

Private limited companies

Features

 Company name ends with LTD or limited

 Shares can only be transferred to family members or close friends
 Family owned businesses
 Directors run the business instead of the share holders

Advantages
Limited liability
More capital can be raised
Business continues even if shareholders die
Has more status that sole trader
Drawbacks
Financial information has to be made
published
Expensive and time consuming to firm
Takes time to transfer shares
Cannot raise huge amounts of money as
PLCs

Public limited companies

As per the specification, you just have to read and have a small idea of why going public can be
expensive, you won’t be tested in the exams.

Advantages
Large amounts of capital can be raised
Can exploit Economies of scale
May be able to dominate the market
Have a very high reputation
Drawbacks
Setting up costs are expensive
Control is lost to outsiders
Financial information is to be published
Managers take control rather than owners

Multinational companies

Features

 Huge Assets
 Highly qualified and experienced managers and staffs
 Powerful advertising capabilities
 Lower costs (Economies of scale)
 Highly advanced technologies
 Highly influential both economically and politically.
 Ownership and control is centered in the host countries
 Examples: McDonalds, KFC, Cadbury etc.

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 CHAPTER 5: PUBLIC CORPERATIONS

BASIC DEFINITIONS

Public corporation: A business or an organization that’s owned and controlled by the government

Privatization: it is a transfer of a state owned assets to the private sector

Subsidies: Government offering financial benefits for firms in order to make them do something.
Example: offering subsidies to produce more electric cars to reduce pollution.

Features

 State owned: Government is responsible for the running and managing the corporation.
 Created by law: They are created by an act of parliament.
 Incorporation: They are incorporated business and have a separate legal identity.
 State funded: Government invests capital to these organization which is often from the tax
revenues.
 Provides public services: There main aim is to provide a quality service to the public in a very low
price or for free. Example: Free health care services.
 Public accountability: These organizations are to provide reports of the progress of the business
and are accountable to the general public as they are they are the ones who funded the
organization through the taxes paid.

Main reasons for government owning the public corporations

 Avoid wasteful duplications: It would be a waste of resources if the government privatizes these
industries to the private sector as there may be competition and therefore, many business will
start to offer the same service which would cause congestion in the country. Example: Railway
services
 Maintain control of strategic industries: Governments do not privatize these industry as they
fear that outsiders from other countries can purchase and exploit the industries and produce
lower quality services.
 Save jobs: As the main aim of the private sector businesses is to make more profits they may
lower the costs by laying off workers which will result in higher unemployment level so in order to
protect the workers the government do not privatize these industries.
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  Serve unprofitable regions: If for example, the electricity services was being privatized then
the private firms may not supply the electricity services to the remote areas as they may fear
the rise in costs. Therefore, these people living in those areas will not get electricity. Hence the
government wants avoid this and make services available for all.
 Fill the gaps left by the private sector: the services provided by the private sector businesses
are charged for a higher price. So, only those who could pay are able to enjoy the benefits while
the ones who are unable to pay are excluded hence, the government wants to ensure that
everyone enjoys the benefits.

Drawbacks of government owning businesses

 Cost to the government: When the public corporations faces losses they would have to be funded
by the tax payers. Hence, the general public doesn’t support this as the government have to forgo
spending on other parts of the economy which could probably decrease the economic growth rates
in the country.
 Inefficiency: As there is no competition or less competition for these public corporations they
become more inefficient as a result. This increase the lead times and delays the train services
and so on. The productivity decreases as the corporation has no motivation to be efficient.
 Political interference: public corporations are often disturbed by the political interference. This
is because when governments changes the policies and the way to run the corporations changes.
 Difficulty to control: As some corporations are extremely huge and employ millions of people
they would experience diseconomies of scale hence, costs may arises and eventually, taxes are
likely to rise. Also coordination become much more difficult.

Public corporations may earn profits. These profits are used to improve a country’s infrastructure,
education and health care services. In this way, more people will get employed, more life expectancies
and finally higher economic growth rates. Their main source of finance is the tax revenues earned from
people.

Privatization

It is the transfer of public assets to the private sector. There are many reasons for this which are
discussed later.

Different forms of privatizations

 Sale of public corporations: This is when a government sells the business that are owned by the
government to the private sector or general public. One way of doing this selling shares.
 Deregulation: This involves removing restrictions and encouraging competition with the public
corporations.
 Contracting out: This involves the government allowing the general public to bid for the
businesses that are previously owned by the public sector and purchase them.
 The sale of land and properties: This is when the government sells the lands or properties that
were previously owned by the government while also give some discounts.

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Reasons for privatizations

 To generate income: This is because when the public corporations are sold the government can
raise a lump amount of money which could be used to fund huge government projects such as,
construction a huge bridge etc.
 To reduce inefficiencies: this is because the private sector businesses are more efficient as
they have to be in order to increase their consumer satisfaction and generate more profits.
 As a result of deregulation: Legal barriers are to be removed hence, more business are required
to compete with the public corporations.
 To reduce political interferences: There won’t be changes in policies and investments are freely
made and government will not interfere in the business.

CHAPTER 6: APPROPRIATENESS OF DIFFERENT KINDS OF OWNERSHIPS

Factors affecting the different kinds of ownership

 Growth: if a business wants to raise more finance then they will have to change their legal status
in order to persuade financial institutions to lend money. For example, if a sole trader wants raise
additional capital they can change to a partnership business in which they will be easily able to
raise capital by admitting new partners.
 Size: Many small businesses are sole traders. Medium-sized businesses are private limited
companies often owned by families and close friends while large businesses employing millions of
workers all over the world can be public limited companies or Multi-nationals such as TOYOTA
 Need for finance: It is similar to growth in order raise more capital business owners change
their legal status.
 Control: some people want independence so they operate as sole traders. And when they admit
new partners then they become partnership businesses and each partner will have a say in the
decision making. In limited companies, shares can be bought therefore, control is lost to outsiders
however, and by purchasing the most shares the control can be kept. But still the other
shareholders should have a say in decision making process.
 Limited liability: If the owners of businesses are more concerned about protecting their finance
then they can change to limited companies as their money that is originally invested will only be
lost rather than their financial possessions in case of a loss.

Other factors affecting the appropriateness of different kinds of ownerships

 The type of business: Example: Accountants can set up a partnership, a grocery shop could be as
a sole trader etc.
 Plans to use profits: If dividends are to be paid then it could be a limited company, or if salaries
are to be paid to owners it could be a partnership etc.
 Stakeholders: For example: Employees in a private limited company may discourage a shareholder
form going public to the concerns about the future and so on.
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Objectives can be another factor influencing the form of ownership

 Independence and control: If the owners want to be independent and adopt changes more
flexibly and enjoy all profits made by the business sole trader would be most appropriate.
 Control: If a group own a business and afraid to lose their control by moving into the public and
trading in stock exchange market then private limited company or partnership business will be the
most appropriate.
 Growth: Companies that want to grow significantly and exploit economies of scale and enjoy cost
benefits and trade worldwide then a large public limited company or multinational company would
be the most appropriate.

CHAPTER 7: CLASSIFICATION OF BUSINESSES

Primary sector

Businesses in the primary sector are mostly involved in the extraction of natural resources. For example,
Agriculture, fishing and forestry are primary sector business activities. This is where the raw materials
for making the products are being extracted.

Secondary sector

Businesses in this sector involves manufacturing of the goods using the raw materials extracted from
the primary sector. The goods that are produced in the secondary sector tends to be semi-finished or
finished goods. They are sold on to the tertiary sector businesses. Examples of businesses operating in
the secondary sector includes: textile production, chemical industries and car production.

Tertiary sector

This sector is most commonly known to be as services sector as the products are being sold or services
are being offered. It includes various kinds of services for example, banking services, transport services
and leisure services.

Interdependence of the sectors

Businesses in each sector are interdependent on the other sectors. For example, a car manufacture is
dependent on the vehicle seller for their sales. And the aluminum manufacturer is dependent on the car
manufacturer for their sales as aluminum is used for manufacturing cars and so on. In the modern world
interdependency is huge.
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Changes in the sectors

Different sectors grow and decline at different times due to the costs, changes in demand patterns and
fashion and tastes. In most developed economies the percentage of workers employed in the primary
sector will be very less compared to the secondary sector. While in developing economies the percentage
employed in the tertiary sector will be significantly higher than the primary sector workers. Even in
country, different sectors may decline and grow for example, the decline/de-industrialization of the
secondary sector.

Reasons decline in the manufacturing/secondary sector in developed countries

 Advancement in technologies has meant that less workers are required as more machinery have
replaced workers. Hence, unemployment in these sectors fall.
 People may prefer to spend more on the service sector rather than the secondary sector as they
may feel that the demand for manufactured products have fallen significantly in last few years.
 There are fierce competitions that are emerging from countries like Brazil which makes these
developed countries feel that they cannot succeed in outcompeting these countries.
 As the countries develop, the government spends more on the public services which again adds up
to the growth of service sector.

CHAPTER 8: DECISIONS ON LOCATIONS

Basic definitions

Brownfield sites: areas of land that were once used for urban developments.

Green field sites: remote areas which is usually on the outskirts of the town.

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Trade blocs: group of countries who are located in the same region and they join together to abolish all
trade barriers.

Factors influencing the location of the business

 Proximity to the market: business that produce large and heavy products must locate close to
their consumers as, if they locate far from their consumers then this will increase their
transport costs and therefore, decrease their profits. Other businesses that provides services
such as, café or restaurants should locate their business in residential areas if they wanted more
sales.
 Proximity to labor: labor intensive businesses who require large number of workers can locate
their premises in countries where labor is cheap. For example, India and china are considered to
be more attractive to labor intensive businesses as they have high unemployment rates and
therefore, workers are ready to work for lower wages and salaries with poor working conditions.
This might reduce their costs and increase the profits for businesses. However, this can
unethical.
 Proximity to materials: Businesses that purchase a huge amount raw materials example, car
manufacturers can locate their premises close to their suppliers to reduce the carriage inwards
costs more commonly known as transport costs. Also, some businesses that require large plot of
land may setup their premises in areas where the land is cheap or in areas where taxes are lower
or green field or brown field sites.
 Proximity to competitors: some large businesses may locate closer to their competitors in order
to attract the consumers of their rivals when there is an excess demand. However, some small
businesses may operate away from competitors in order to earn higher profits and increase their
market share.

The nature of business activities

 Services: business must ensure that they have proper parking facilities and is more convenient
for the consumers. Some service providers’ especially fast food restaurants, have developed drive
through facility to help overcome congestions.
 Office based businesses: If a business employs thousands of people it’s more preferable for
them to locate in residential areas despite the increase in costs. This is because the employees
may want to purchase their meals from the restaurants nearby as there may be many choices as
there many restaurants available in these areas. If they locate in remote areas by considering
the costs then this will result in employees not being able to satisfy basic survival needs and
therefore, employee satisfaction may reduce hence, staff turnover increases.
 Manufacturing and processing: Locations for these businesses can vary. Different
manufacturers have different needs. Locations can vary according to the factors such as, labor,
raw materials, proximity to showrooms and costs.
 Agriculture: these types of business may require a large amount of land therefore, they may
locate their businesses in areas in which huge plots of land are available. However, not all will want

20
 the same type of land to grow vegetables as each vegetable will have specific conditions required
so they may locate in different areas as per the conditions required. Businesses in the fishing
industries may locate in areas near the coasts.

Impact of internet on locations

Technology has improved and this has been an advantage for many businesses all around the world. One
of them is the internet. Internet has made it easier for purchasing and selling products. Availability of
internet means that buyers and sellers can communicate without the need of a market or face to face
communications. Sellers can sell their products worldwide without any need for a premise. Buyers have
more choices as they can gain access to almost all shops around the world. However, the need for
greater quality network with high speed computer will and has increased. But the costs have fallen
significantly as the cost of premises have totally decreased. This method is called e-commerce.

Legal controls

Government may intervene and try to influence decision of the location of businesses. There are many
reasons for this:

 To avoid congestions through extra developments.

 Minimizing impact on local communities. Example: noise pollution, air pollution etc.
 To encourage manufacturers and other businesses to locate in areas of high unemployment.
 Offering financial incentives for businesses to locate on specific areas for development of those
areas.
 To attract more foreign direct investments.

Trade blocs

Many businesses try to avoid trade barriers such as tariffs that is tax that is imposed on imports to
make it expensive and quotas that is the physical restriction of the supply of imports. In order to avoid
this they locate their premises inside a trade bloc, which is an area where trade barriers are abolished.
Hence, this makes it easier for business to import raw materials and reduces the costs of production and
therefore, increases the profits.

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 CHAPTER 9: GLOBALISATION

BASIC DEFINTION

Globalization: growing integration of the world’s economies.

Saturated market: to offer so much of a product for sale that there is more than people want to buy.

Hostile takeovers: takeovers that the company being taken over doesn’t want or agree.

Concept of Globalization

In today’s world firms and people are behaving as though there is just one market. For example, people
are free to live in any country of their choice, firms can borrow money from any countries and people can
work at different places and products could be manufactured at the most cost effective country
considering the costs of raw materials and labor. This development is called globalization.

Features

 Goods and services can be traded freely between countries as trade barriers are being avoided
as more countries are moving into trade blocs and the world trade organization is encouraging
countries to remove all trade barriers.
 People are free to live and work in any country they choose. This has increased the expatriates in
many countries.
 There are high level of interdependence between nations. This means the events in one country
are likely to affect the events in other countries.
 Capital can flow freely between nations. This means firms and people can save their savings in
other countries bank accounts.
 There is a free exchange of technology and intellectual property rights that is the knowledge
and creative idea of people that have commercial values.

Reasons for globalization

 Development in technology have helped to boost globalization. Modern devices allow businesses to
transfer data from one corner of the world to other with no cost within a fraction of seconds
through emails.
 International transport levels has improved in recent years. The costs of flying from one country
to another has reduced and number of destinations has increased.
 There has been a huge amount of deregulation. This has helped many domestic industries to
become more competitive and improve their international competitiveness and remove trade
barriers and enjoy free trade.
 Increase in tourism has led more people to try goods and services produced by other countries
and enjoy the better quality. Hence, this increase globalization.

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  Many firms decided to sell abroad as to increase their global market share or if their market is
saturated.

Globalization and the government

There is a high level of interdependence between countries and their governments in helping increase
globalization. For example,

 Countries cannot trade if international borders were kept close.

 International trade can be restricted if government put up trade barriers.
 People can be free to live and work only if borders are open.
 Firms can’t develop their businesses overseas if planning permission was denied.

Advantages of globalization to businesses

 Access to larger markets: this means that businesses can sell their products to wider consumer
base and therefore increase their revenues and earn higher profits while increasing their global
market shares.
 Lower costs: This means that businesses are able to choose the most cost effective location in
terms labor, raw materials and premises. India and China have become popular among businesses
for offering lower wage cost due to the higher unemployment rates.
 Access to labor: globalization has allowed businesses to employ skilled and highly qualified
workers from all around the world. If there is a shortage of labor in the domestic industry then
businesses will be able to recruit labors from different countries and allow them to work from
their homes with the use internet and virtual private network (VPN). As there is a large pool of
workers looking for employment opportunities this results in wages decreasing and therefore,
labor costs falls.
 Reduced taxation: as globalization has boosted business can locate their operations in other
developing countries and locate their headquarters in countries where taxes are lower hence, less
costs.

Drawbacks of globalization

 Competition: as trading globally has increased significantly in the last few years this has resulted
in more business in the global market. And therefore, the competition has increased widely which
means that business trading in the global market will have a reduced profit margin.
 International takeovers: Globalization makes it easier for businesses in one country to take over
the business in other countries. Companies are more vulnerable to these take overs and some

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 smaller companies experiences a hostile takeover (see the basic definitions above) which is an
aggressive act.
 External costs: globalization has resulted in many negative impacts on the environment. Such as:
air pollution and water pollution. However, the government has taken initiatives to reduce the
pollution caused using taxation.

For more drawback see book page 70

CHAPTER 10: THE IMPORTANCE AND GROWTH OF MULTINATIONALS

Multinationals are taking up around 66% of the global exports and 10% of the world’s GDP. There are
many reasons for multinational companies to emerge. Some of them are outlined below:

 Economies of scale: As multinationals produce a huge quantity of products they purchase raw
materials in bulks. This allows the suppliers to reduce the cost of a single unit and therefore, the
average costs falls. Hence, this allows MNC’s to produce more products.
 Marketing: As MNC’s make huge profits they invest more on advertising their products. This
increases the consumer awareness of their product and increases their brand loyalty. Hence, they
become more successful in their home country and then globally.
 Technical and financial superiority: As MNC’s are huge businesses they enjoy superiority that is
the quality of being better, more skillful and having more power. This is because they employ the
most qualified workers, advanced technology and also have resources to diversify and take risks.
They have more power politically and economically.

Benefits to a business of becoming a MNC

 Larger consumer base: this means that MNC’s can sell their products to many consumers globally
and increase their global sales and market share. This will help them to increase their profit
margins and have competitive edge over their competitors.
 Lower costs: As MNC’s can gain access to the economies of scale this will result in their costs of
production falling. Transport costs are also likely to fall if they locate near factories and
suppliers. They can borrow money at lower rates as they are huge and can easily persuade
financial institutions.

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  Higher profile: as MNC’S emerge their reputation increases this is because their products
become more recognizable worldwide. Hence, their global revenues increases which also increase
their profits.
 Avoiding trade barriers: this is a potential benefit to the MNC as they set up their operations all
over the world. They can set up in countries which are part of trade blocs such as, EU, NAFTA or
so on. Hence, this will reduce the costs and increase their revenues.
 Lower taxes: MNC’s can set up their operations and headquarters in countries where their taxes
are lower. This will reduce their costs and increase their profit margins.

Benefits of multinational companies (MNC’S) to country

 Increase in income and employment: when MNC”s come into the country they require labor for
their new operations. Hence, they may recruit new workers from the host country and these
workers will be given training and wages will be quite high. Hence, the income of these workers
will increase resulting in improved living standard and GDP.
 Increase in tax revenues: this is because the profits earned by MNC’s are taxed by the host
country’s government and therefore, the government earns higher tax revenues and therefore,
they can spend these revenues on the economy which will increase their economic growth.
 Increase in exports: as MNC’s are global giants they will export more and this will add up to the
host country’s exports and therefore, improve the current account balance.
 Transfer of technology: MNC’s provide technical help and training to their suppliers and also help
them to purchase the most updated machineries.
 Improvement in human capital: MNC’s provide training for people in less developed countries and
the government may spend more on education and training in order to attract MNC’s. This results
in more trained and educated workforce which helps to boost economic growth.

Drawbacks of multinational companies

 Exploitation of labor: as MNC’s employ labors from the host countries they offer poor working
conditions and lower pay because the people are ready to work at any conditions due to the lack
of employment opportunities.
 Environmental damage: as MNC’s are more involved in the extraction of resources from the
ground and releasing polluting gases from factories and sending out waste materials to the rivers
and lakes this results in water pollution, air pollution and noise pollution.
 Repatriation of profits: this is where a MNC returns the profits made in the host country to
their home country which is usually a developed country. Hence, in this way the host country
loses. However, the host country’s government can tax the profits to get at least a small portion.

For more advantages and drawbacks refer book page 76-78

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 CHAPTER 11: INTERNATIONAL TRADE AND EXCHANGE RATES

BASIC DEFINITIONS

Exports: goods and services sold overseas

Imports: goods and services bought from overseas

Visible trade: goods

Invisible trade: services

Balance of trade: difference between the visible exports and visible imports

Exchange rate: value of a currency in terms of another currency

Appreciate: rise in the value of a currency in terms of another currency

Depreciate: fall in the value of a currency in terms of another currency

International trade

International trade is the exchange of capital, goods, and services across international borders or
territories. It creates a lot of benefits which includes, competition, consumer choices and cheaper
products. International trade allows:

 Countries to obtain goods that cannot be produced domestically or cheaply.

 Increase the consumer choices.
 Countries to sell off the excess of commodities.

Visible trade is the trade in physical goods while invisible trade is the trade in services. The balance of
trade is visible imports – visible exports.

Exchange rates

Different countries have different currencies. So, in order to exchange a currency with another we will
have to calculate the value of the currency in terms of another currency.

If we want to convert US Dollar to UK pounds, then the exchange rate at June 2019 is as follows:

$1 = £0.79

Therefore, if we want to calculate how many pounds will we get if we

exchange $4 to pounds,

We need to cross multiply it to get £3.16

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Fall in exchange rates (Depreciation)

Changes in the exchange rates could have impacts on the demand for exports and imports and the
current account balance (balance of trade). When the exchange rate falls from £1 = $1.50 to £1=$1.20

Changes in exports: exports become cheaper in UK as the prices fall and demand increases.

Changes in imports: imports become more expensive because the prices increases.

Impact on current accounts: current account balance improves.

Rise in exchange rates (Appreciation)

When the exchange rate rises from £1 = $1.50 to £1=$1.20,

Changes in exports: exports decreases as now they become more expensive for US.

Changes in imports: imports increases as they become cheaper as prices are lowered

Impact on current accounts: current account balance worsens.

International competitiveness and exchange rates

When exchange rates rises then business that export will have to suffer losses while businesses that
imports raw materials will benefit a lot as the costs may fall. While when exchange rates fall exporters
will benefit while importers may have increased costs. If there was a sustained period of depreciation in
an economy this means exporters will have increased revenues and the country’s unemployment level may
fall along tax revenues may increase. However, choices will be restricted as imports are expensive hence,
standard of living decreases therefore, economic growth rates reduces.

If the exchange rates were continuously changing this will result in business unable to predict the future
costs and profits which causes an uncertainty. Budgeting becomes more difficult for businesses.

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 CHAPTER GOVERNMENT OBJECTIVES AND POLICIES

Basic definitions

Barriers to entry: restrictions which means its difficult for new firms to enter the market.

Mergers: 2 or more businesses joining together to form one large business

Dumping: where businesses sells goods in another country below the costs.

Trade barriers: measures designed to restrict the trade.

Quotas: physical limits on the quantity of imports allowed into the country.

Subsidies: financial support given to a domestic producer to help compete with an overseas firm.

Tariffs: a tax that makes the imports more expensive.

Administrative barriers: use of strict health and safety regulations to make the imports more awkward.

Interests: prices of borrowed money and the reward to savers.

Government spending and taxation

The government of many countries spends a huge amount of money on the public services. For example,
education, healthcare and infrastructure. The higher the spending level the more the businesses benefit.
This is because incomes of people increases and therefore, they may have more disposable income and
would purchase more products, hence, the profits rises.

Government earns a huge amount of revenue from taxes and these taxes are of 2 types. One is the
direct taxes that are levied on the income or profits of individuals or businesses. Example: income tax
and corporation tax. While the other tax is the indirect tax which means the taxes that are levied on
the producers of products but are indirectly passed on to consumers through higher prices. Examples:
VAT, excise duties.

Governments can use fiscal policy that is the making changes to the taxation and government spending in
order to stimulate the aggregate demand in an economy. For example: when the taxes are lower people
have more incomes hence, they may purchase more which will increase the profits for businesses.

Constrains on public spending

In the recent year’s government have decided to reduce the amount they spend on the public. These
have had great impacts on businesses:

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  As many employees will be dismissed in order for public sector organizations to cope up with the
increase in costs, this will result in businesses losing out as workers may lose their income hence,
profits for businesses reduce.
 Private sector businesses (construction companies) that carry out government infrastructure
work will lose their business if the government cancel the projects such as building schools or so
on.

How can government affect business activity?

 Infrastructure provision: as the government spends money on the infrastructure such as: building
schools and motorways the private construction companies may get projects which may help in
increasing their revenues and profits. Also, the employees may get increase in salaries and wages
and therefore, they may have more disposable incomes hence, purchase more which will result in
an increase in the profits for businesses.
 Legislations: without the government intervention the businesses may not meet the needs of the
stakeholders. One of the role of the government is to provide a legal framework in which business
can operate and ensure that vulnerable groups are protected. They have imposed some laws such
as:

Consumer protection: consumers want the best product with the best quality at the reasonable
prices. They want accurate and clear information. Government needs to ensure that businesses don’t use
any anti-competitive legislation that may exploit the consumers. Such as: increasing the prices higher
than they would be in a competitive market. Some of the consumer laws in UK are: sale of goods act,
food safety act.

Competition policy: government tries to promote competition by:

 Encouraging the growth of small firms: this can be done by providing subsidies or grants and
making them more competitive and able to compete with the larger firms.
 Lowering the barriers to entry: so that more firms will find it easier to enter into the market and
therefore, consumer choices increase while prices reduces.
 Introducing anti-competitive legislations: these laws are designed to restrict the formation of
monopolies or mergers which may exploit the consumers by increasing the prices.

Environmental legislation: business activities may have negative impacts on the environment for
example: air pollution caused burning of coal and water pollution caused by sending of waste materials to
rivers and lakes. The approach used by the government is to impose strict laws with huge penalties which
are big enough for business to be encouraged to cause less pollution.

 Trade policy: the governments of many countries find international trade to be a disadvantage
and due to this they impose trade barriers to protect the domestic industries which are known to
be as protectionism. Reasons why government uses protectionism: protect the jobs of citizens
working domestic industries, avoid inflow of harmful products and protect infant businesses.

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There are 4 types of protectionism the government can use: tariffs, quotas, subsidies and
administrative barriers. (See basic definitions). Another approach in which government can influence is
businesses is through forming a trade bloc in which businesses will be able to sell and buy product with
no forms of trade barriers which will reduce their costs. Some of the benefits of trade blocs are:

 Access to wider markets

 Lower costs due to economies of scale
 Protection from large MNC’s from outside the blocs

However, drawbacks are that regional monopolies may form which may exploit the consumers and
conflicts may occur.

Effects of interest rates on businesses and consumers spending (monetary policy)

Monetary policy is the use of interest rates and money supply to stimulate the aggregate demand in an
economy. Higher interest rates means more expensive to borrow money and more worthy to save money.
Lower interest rates means cheaper to borrow money and less worthy to save money.

Effects on businesses: when interest rates are higher, the costs of borrowing will increase which will
result in consumers having less disposable income and therefore, they may purchase less which will
decrease the profits for businesses. Furthermore, as interest rates rises costs may increase if the
business has borrowed money and this will increase their costs of production and therefore, lower their
profits. Moreover, as interest rates increases consumers will save more as to gain the reward and
purchase which will again is a loss for the business.

Effects on consumer spending: savers will be hit if interest rates are lower and therefore, may save
less. As more consumers depend on the interest or reward that they get from savings now they will have
to borrow more. Additionally, demand for goods and services may fall as interest rates increases as more
consumers purchase using the borrowed money. However, when interest is higher it becomes expensive
to borrow and therefore, may not borrow and purchase lower quality products which will decrease the
living standards.

For more impacts on consumers and businesses refer book page 95 and 96 as edexcel may not ask
more than 3 impacts.

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 CHAPTER 13: EXTERNAL FACTORS

Basic definitions

Urbanization: process of constructing more building on villages.

Capital intensive: using more machineries than labor

Market orientated: when a business concentrates more on its consumers rather than products

Sustainable developments: idea of that people must satisfy their basic needs for survival and improve
their living standards ensuring that they don’t compromise the quality of life for future generations.

Pressure groups: groups or organizations that try to influence the opinions of ordinary people and
persuade the government to take actions

The nature of external factors

There can be many impacts on businesses when external factors occur. However, businesses have no
control over these factors and therefore, they may have positive or negative consequences.

They can fall into various categories which are explained below.

Social factors

Businesses have to adjust with the changes that may occur in the societies, examples include:

 Increased consumer awareness: nowadays, as technology has been advancing consumers are having
many choices and make their purchases over the internet. This has allowed many business to publish
their information online and set up e-commerce businesses. Businesses are becoming more market
orientated.
 Changing demand patterns: as the lifestyles of people changes according to the modern era this
results in changes in goods that they want. For example, more consumers want the most advanced
products that doesn’t require any human action such as: automated cars.
 Increased numbers of woman at work: woman have now changed their roles from childcare to
work. This has resulted in an increase in the supply of labor.
 More part time workers: as the number of people taking part time works have increased more
income is required by these people this has resulted in an increase in goods and services purchased.
This also has increased the flexibility for businesses.
 Urbanization: as in many developing nations more people have moved from rural areas to towns and
cities which has increased labor supply and profits of many businesses.

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Technology

As technology have been evolving in last few decades this has resulted in huge impacts on businesses which
is considered to be more efficient, beneficial and saves more time.

Some of the examples are:

 In the primary sector: the use of pesticides by the farmers have helped the crops to grow faster
and safely.
 In the secondary sector: the use of robots have helped to increase the productivity of labors and
save more time although machineries are expensive.
 In the tertiary sector: banks have used ATM machines to make it easier for consumers to withdraw
money and other transactions without the need of coming into banks.

More businesses become capital intensive as machineries have been replaced labors and this decreases
the costs of labor. Business usually welcome technological developments as there benefits outweigh the
drawbacks:

 It saves time
 Reduces the costs as employment in labor reduces
 Productivity increases
 Development in social media has improved the communications and reduce the costs of advertising.

Environment

As most businesses produces a lots of waste materials and causes a lot of pollution such as:

Air pollution, water pollution and noise pollution.

 Global warming: most business factories emits carbon dioxide gas which is a greenhouse gas which
can contribute to global warming. Also as the economy develops this results in more cars and
airplanes to different destinations which again increases global warming.
 Habitat destruction: some of the businesses build factories and other operations in habitats of
many animals. Such as forests. This results in deforestation which means that many trees are being
cut down. This is habitat for many animals such as birds.
 Resource depletion: as oil, coal and gas are non-renewable resources they are running out and can’t
be replaced.
 Sustainable development: this means that people should satisfy their needs and increase their living
standards. If they don’t then this will result in reduction in the quality of life. When businesses
develop they use more of the non-renewable resources which may disappear and there would be no
left for the future generations.
 Businesses can reduce the environmental issues by using environmentally friendly products and
reduce the greenhouse gases produced.

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Political

Businesses are affected by political factors. These factors can influence businesses that are operating
in stable, democratic counties. However, in unstable countries although the government is corrupt there
are many pressure groups that monitor the business and ensure that the country benefits. Some
examples include:

 In 2015, some felt that Greece might leave the EU. This could have disrupted financial markets
and created a great deal of uncertainty in the Eurozone.
 A new government may be elected which is very pro-business. This might encourage more people
to become entrepreneurs. It might also mean that more foreign investment can be attracted.

CHAPTER 14: MEASURING SUCCESS IN BUSINESS

Basic definitions

Capital employed: amount of money that is being invested in the starting of the business usually or in the
middle.

For any business, it is unlikely that the owners will not want to know whether their business is successful.
In order to measure the success of businesses there are 7 ways which have their advantages and
drawbacks. These are listed below:

Revenue

Revenues could be used to judge if the business is successful. For example, if the revenues increases year
by year this can indicate that the business is successful. In the same way, if a business sets an objective
to increase their revenues generated by say 5% in the following year and if they had achieved this then
this again ensures the owner that the business is becoming successful. Businesses can also compare their
revenues with their competitors in the same industry. The advantage of this is that it is easy to calculate
revenues as it is readily available in the income statement however, the drawback is that the costs of
production is not taken into account.

33
Market share

When a business have increased market share it is easier to dominate the market and earn higher profits.
This would raise the profile of the business. If a business increases its market share from year to year
this means that they are winning the consumers from the rivals as they may have a competitive edge which
clearly differentiates their products from that of the rivals. Therefore, they are considered to be
successful. The advantage of this method of measuring success is that, if their market share increases
then the owners can ensure that their products are satisfying to consumers. However, collecting
information for market share could be very challenging as a lot of information may be required and their
not in numbers.

Customer satisfaction

If consumers are satisfied then a business is considered to be successful. When customers satisfaction
increases this results in higher revenues and profits. As many businesses are becoming market orientated
this results in them focusing more on the consumers rather than their products. Owners of businesses can
collect these information by providing consumers’ questionnaires and monitoring the customers’ complaints
that they may post on social media and take necessary steps to overcome their weaknesses and benefit
the business. The advantage of this method is that it is more appropriate as business can ensure that their
consumers are really satisfied from the products supplied. However, the drawback could be that the
information provided by the consumers may be biased or the fashion and tastes changes all the time.

Profits

Another possible method of measuring success could be the profits that are made by the business. If the
profits increases year by year this may mean that the business is successful. The advantage of this method
is that the profits could be compared with the rivals’ profits. Also, the profits can be measures more
effectively for small business as there are figures and are easily available in the income statements and
also considers the costs. However, the drawbacks are that the profits of businesses are often depending
on the size of the business. If the business is huge then the profits made may be huge and cannot be
compared with small rivals. It also may be possible to make higher profits if there is no competition in the
market.

Growth

The objectives of many small businesses is to grow. If the business is growing from year to year this may
mean that they are successful. It could be measured in 4 different ways:

 Turnover/ revenues: when the revenues increases this means that the business is growing and also
the costs are increasing with the increase in the production.
 Number of employees: as the output level increases the number of people employed also increases.
When the number of employees increases year by year this means that the business is successful.

34
  Market share: for a business like apple that has about 80% of fthe market share may considered
to be huger than a rival such as Alcatel that may have about 20% of the market share.
 The amount of capital employed: if the amount that the owner invested in the business is higher
and then the business is considered to be successful.
 EU definitions of size: as per the EU definition of size. ( you can find it below )

The advantage of this method is that it is easier to measure growth as it is in figures while the drawback
is that business try to use shortcut methods to grow very fast and as a result they fail.

Owner/ Shareholder satisfaction

Owners judge the success of the business by the amount of money that they get in return for the
capital that they have invested and if it increases year by year then it is considered to be successful.
Shareholders judge the success of the business by the increase in their dividends payments year by
year and if it increases then they consider the business to be successful. This is mainly for shareholders
in public limited companies. However, in private limited companies the shareholders judge the success of
the business by the increase in salaries and survival in the market as they are owned by close friends and
family members.

Employees’ satisfaction

Employees judge the success of the business in their perspectives. If they get higher salaries or more
facilities and a pleasant working environment with more job security then the business is considered to
be successful. However, it is not always possible to make a business successful in the eyes of the
employees because sometimes businesses may have to lay of staffs and this may mean higher profits
however, in the eyes of employees it may mean that a business is not successful.

When a business sets objectives this makes it easier to judge the success of the business because if these
objectives are met then a business can be considered to be successful. Further importance of objectives
is available in the notes for chapter 2.

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 CHAPTER 15: REASONS OR BUSINESS FAILURES

There are various reasons why businesses fail and one main problem is due to the lack of cash. Some
business tart with insufficient capital which is known to be as undercapitalized hence, they eventually
run out of cash and are unable to raise funds from financial institutions as they cannot persuade them
and financial institutions find it risky to lend money to these businesses.

Reasons for businesses to fail

1) Cash flow problems

 Overtrading: some businesses accept orders which they are incapable of producing. For example,
if a business has its monthly output to be as 15000 units and if they accept an order from
another for about 15500 units then it would be impossible to produce and finally this will lead to
failure to produce as well as losing out cash. They may try to do this as they may want to increase
their profits.
 Investing too much in non-current assets: Some businesses invest too much in non-current
assets while it is much cheaper to lease them. Hence, they run out of cash.
 Allowing too much of credit: some businesses allow their consumers a credit period which is
known o be the amount of time that consumers have to pay the amount that they owe for the
products consumed. If a business allows too much of credit period this may results in many
irrecoverable debts. And may eventually be forced to borrow the money as consumers may delay
the payments.
 Over borrowing: many businesses borrow money in order to start a business, purchase resources
or many other reasons. When businesses borrow more money this may result in them having more
interests which may eventually increase the costs and then which will force them to increase
their prices.
 Seasonal factors: some businesses have higher revenues in certain time of the year. For example,
farmers may have increased crops in spring. Os for the rest of the year they must trade without
any income flowing in hence, cash may be lost and eventually fail.

36
  Unexpected expenditures: for example, a tax company may walk into a business and charge an
amount of tax for producing products that may cause diseases such as obesity this will increase
the costs. And businesses didn’t even know about it. These unexpected expenses may cause a
business to run out of cash.
 External factors: Consumers’ fashions, tastes, demand patterns may change from time to time.
This may result in businesses to struggle while some other businesses may benefit. So, these are
out of control of businesses hence they may have insufficient cash at this time.
 Poor financial management: when a manager is recruited for running a company, the company
must ensure that the recruited manager is capable and has experience. Because if the wrong
person is recruited this may result in he/she spending too much on particular things and
eventually run out of cash.

2) Lack of finance

Some businesses underestimate the importance of cash. This may eventually result in businesses to fail.
As some businesses start without cash which is previously said to be as undercapitalization. They may
not have money for long and may finally borrow money which may increase their costs and force them to
increase their prices for the products hence, results in lower market share. Many restaurant owners do
this as they underestimate the need for money to start-up new restaurants.

3) Not competitive
 New entrants: it may be very challenging for new entrants to enter into an established market.
This is because the rivals may use destroyer pricing and bring out superior products or their
products may not match the needs and wants of the consumers. Hence, they may eventually fail.
 Ineffective costs control: when the costs increases the profits may decrease. Some the reasons
for the costs to be higher than the profit are that they may be too small to exploit the
economies of scale, they may be using wasteful resources, paying too much for unwanted
resources and due to external factors.
 Ineffective marketing: some businesses fail because of many reasons. Some of them are because
of launching products that don’t satisfy the needs of consumers or using inappropriate marketing
strategies or inappropriate pricing strategies or investing heavily on unwanted marketing
campaigns.
 Lack of business skills: most small businesses fail because their owners or managers are having
less skills or experience to run a businesses in a competitive environment. As they are the
decision makers their work depends on their ability to make a decision and if their decision fails
then the business fails.
 Poor leadership: many companies employ managers. They must ensure that the managers that are
being employed are skillful, motivational and have a good knowledge of that field. If they employ

37
 managers that have no experience in this field this may result in them taking wrong decisions
which may lead a business to fail.

4) Failure to innovate

As technology evolves many businesses fail to innovate as they may fear the increased costs of research
and development. They may not be updated with the latest technology and consumers may want their life
styles to be easier, faster and automated. And as consumers needs are not met this may result in lower
profits as revenues may fall. And the rivals may introduce new products which are more automated and
adopt the latest technology and therefore, may increase their market share. If the businesses are
unable to keep up with the latest technology then they may eventually fail.

Next Chapter P.T.O

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 UNIT 2: CHAPTER: 16: THE IMPORTANCE OF GOOD COMMUNICATION IN BUISNESS

Basic definitions

Communication channels: the route through which the messages pass from the sender to the recipient.

Communication is sending and receiving message which includes a sender and a recipient. Communication
can take place in various forms such as:

1) Downward communications: the messages passed from the top of the management such as
directors to the blue collar workers or employees. Examples: instructions
2) Upward communications: messages which are passed from the bottom of the hierarchy such as:
employees or workers to the top management such as: managers. Examples: complains
3) Horizontal communications: the talk or communication that takes place between the workers of
the same hierarchy. Examples: discussion of work.

Importance of upward and downward communication

 Upward communications help managers and directors to understand the requirements of the
employees.
 It also helps staffs to feel valued.
 Downward communications allows managers to command, control and organize.
 It also helps employees to look for their managers for leadership and guidance.

Internal and external communication

Internal communication takes place inside a business between employees. Example: manager warning to a
subordinates. External communication is the communication between the business and an outsider.
Example: a statement from the credit card company.

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Formal and informal communications

Formal communication in business is when the business use recognized channels to communicate. While
informal communications is when the non-approved channels are used and are mostly of gossips and
rumors.

Formals groups are the groups that are formed by the business, examples: departments while informal
groups are the groups that are formed outside the business or not appointed by the business examples:
employees who meet outside the workplace.

Advantages of communications between informal groups: more cooperation and encouragement.

Drawbacks: leaders of informal groups have more than the leaders of formal groups.

Importance of good communications

Communication is important because if internal communication is poor this can lead to problems such as:
message may not be understood, mistakes may occur, costs will increase and profitability lowers. As a
result, motivation suffers hence, staff turnover increases. Poor external communications may result in
damages to the reputation of the business and also increase costs.

Methods of communications

1) Face to face communications

This takes place when information could be exchanged between people who can see each other and may
exchange information verbally. Examples: discussion between an employee and a manager for a project.

Advantages Disadvantages
Allows immediate feedback Negative body language could be a barrier
Encourages corporations A record of information cannot be kept for
future
Saves time Non-relevant information may be included

2) Written communication

There are different types of written communications such as:

 Letters: they can be used to send private information and the messages can be expressed and are
flexible. The advantage is that people can read it at times when no one is next to them (especially
for warnings and other private messages). However, it may take time and poor writing skills can
be a barrier.

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 Reports: they can be short, complex or detailed and can be used to send numerical data and
graphical data. Advantage is it is easier to read and understand the progress of the business
however, they should be accurate and carefully constructed.
 Memorandums: they can be used to send short messages. Advantage is that it is easier to
distribute to all employees and make them aware of the events taking place. However, information
is not detailed.
 Forms: they are used to communicate routine information. Advantage is that it is easier to get
information however, they may be inflexible and out of date.
 Noticeboards: they can be used to pass on information to a large number of people. Advantage is
that it is cheaper. However, they are opened to abuse.

3) Electronic communications
 Emails: it allows businesses and individuals to communicate while exchanging ranges of information
such as: documents, photos or videos. Advantage is that it could transfer information from one
corner of the world to another within a fraction of a second. However, it might ignored as people
get 1000’s of mails each day.
 Internet: it can be used for communications with employees inside the business and customers.
Businesses can use the internet to get feedback of the product they have produced and to make
improvements to the products. Advertising can also be done.
 Mobile phones: they can be used to communicate with employees who move around frequently.
Modern phones allow to access the internet, social media, emails and others which makes this a
valuable method of communication.
 Social media: business can use social media to communicate with their consumers. One of the
main thing that business can do in the social media is to advertise their products as it can reach
millions of people worldwide, cheaper method, faster method and an easier method. They can get
feedbacks about their products and can use to improve and satisfy the needs and wants of
consumers
 Intranets: intranet is a server that is used for communication inside the business with the
employees. Advantage is that sudden changes of meeting schedules or other events can be
uploaded.
 Video conferencing and teleconferencing: video conferencing allows people in different parts of
the world to communicate face to face. This allows a lot of information to be discussed.
Teleconferencing is similar but all people are linked using the telephones. This makes it easier for
people in different parts of the world to communicate.
 Public address systems: these are often in supermarkets. Messages can be spoken in
loudspeakers and everyone can hear them.
 Electronic noticeboards: messages, pictures and videos can be displayed in these boards. They
can be used to communicate information with the visitors and employees. However, they may be
opened to abuse.

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 CHAPTER 17: BARRIERS TO COMMUNICATION IN BUSINESSES

Basic definitions

Jargon: this is a word or a phrase that is used between members of a specific group but will be
meaningless to others.

Barriers to communications

 Lack of Clarity: it is important that the message is to be clear and precise with good writing and
speaking skills. If not the message is likely to be ignored or misunderstood.
 Technological breakdowns: businesses must ensure that the technical faults are always resolved
immediately as they occur. Because lots of transactions are happening online which means there is
higher percentage that there may be losses if technical faults occurs.
 Poor communication skills: when communicating face to face some people have poor verbal skills.
This makes a barrier between the 2 parties and the message may not be understood. Some of the
listeners may not be attentive in a large meeting due to boredom and eventually may be misled as
they may not obtain full information said. Some people are poor writers and they may not use
proper words to express what they say and finally leading to misunderstandings.
 Jargons: employees in specific groups use jargons. However, when they use jargons while speaking
with a person from outside the group this results in misunderstandings.
 Distractions: messages may not be clear at factories or construction sites due to the loud noise
and therefore, messages may be ignored or people may be misled.
 Business culture: some business have developed a culture for poor communication. If this
continues the messages sent by the top management may be passed in different ways to other
employees therefore, employees may fail to understand and hence, costs rises.
 Long chain of command: when the chain of command is too long the messages passed may be
misinterpreted and therefore, people may misunderstand.

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  Using the wrong medium: if businesses use the wrong medium to communicate this can result in
important messages being missed out. For example: complex and detailed information should be
communicated through reports.
 Different countries, Languages and Cultures: in a Multinational company there are workers and
managers of different nationalities and therefore, each of them may understand and speak with
their own languages which may result in information being missed out or misunderstood.

Problems of ineffective communications

Ineffective communications for businesses can result in problems such as: more staff absenteeism.
Lower motivation and high staff turnover. Ineffective external communication can result in
misunderstanding between businesses and the consumers or suppliers.

How can barriers to communication be removed?

 Recruitment: when businesses recruit new employees they can assess the written communication
using forms that applicants submit. While verbal communication and body language could be
assessed through interviews.
 Training: business can ensure that the staffs are well-trained in their jobs. This can increase the
productivity and reduce the mistakes which could save money and time. And also can give more
priority to communication verbally and written trainings.
 Written communications: businesses can ensure that they provide standard company letters with
a company logo and a letter head. They can also use forms to make details clearer. This would
prevent employees including information that are irrelevant.
 Technology: if communication is being interrupted by faulty technology businesses can ensure
that they use good broadband connections and keep up with the most up-to-date technology.
 Chain of command: using a shorter chain of command with less layers of management can ensure
that business messages can be easily understood and are clear with lower frustrations.
 Social events: businesses can organize events such as yearly parties to make the communication
between different departments easier. As employees get to know each other well this results in
more cooperation at work.
 Culture change: if the business has a culture of poor communication then they can ensure that
the communication methods changes in the upcoming future. For example, introducing some
formal groups and inserting new public address systems to make communication easier.

CHAPTER 18: RECRUITMENT AND SELECTIONS

Basic definitions

Recruitment: this is the process of employing people due to reasons such as expansion.

43
Job description: document that shows the responsibilities and tasks of the employee after being
employed.

Person specification: personal profile of the type of person required to do the job.

Internal recruitment: recruiting people from inside the business.

External recruitment: recruiting people from outside the business.

There are various forms of employment such as:

Full time employment: this is where a business recruits and expects an employee to work all days in a
week except for the holidays.

Part time employments: this is when a business allows an employee to work only at times when the
business in need of them. This gives them more flexibility.

Job share: this is where 2 part time employees share the job and the salary of a single full time
employee. The employees must make sure that they interact effectively and work as a team.

Casual employment: this is when a business employs people who have to work on a call. Which means that
the employees must be ready at any time. This is mostly used in the hospitality industries when the
demand for hotel rooms increases at summer.

Seasonal employment: this is where employees are being recruited at certain times of the year for
example, at summer times the demand for ice-cream increases therefore, people employed in the
production of ice cream will get their jobs.

Temporary employment: this is when employees are employed in order to cover the absence of full time
employees who have taken leave due to specific reasons: paternity or maternity leave.

Recruitment stages
Identify the type and the
number of people
required

Prepare the job description

and person specification

Advertise using
appropriate media

Evaluate applicants and select

a shortlist for interview

44
 Carry out interviews

Evaluate interviews and

appoint the best candidate

Provide feedbacks for

unsuccessful candidates

Documents that are used for recruitment process

Job descriptions: it states the job titles, tasks, duties and responsibilities for the job. It clearly shows
what is expected from an employee. It could also be used in appraisal that is when judging the quality of
the new employee who is employed.

Person specifications: details of qualifications, referees and experience may be included which is
expected from an employer. They can be used to screen applicants while finding the best candidate for
interviews. The things that are essential and desirable can also be shown.

Application forms: while employees apply for the job they are required to fill an application form which
will help businesses gather enough data and the same data from every applicant which will make
comparisons to be much easier.

Curriculum Vitae: it is a personal document that is submitted by the job seeker which includes the
years of experience, referees and other personal information. This allows the job seeker to express his
personality.

Internal and external recruitment

Internal recruitment is recruiting employees or replacing positions to fill vacant positions using the
employees who are already existing in the business.

Advantages Drawbacks
Cheaper as it saves advertising costs No fresh ideas generated
No need induction training as the employees Motivation may suffer if the person who
are familiar with the policies. worked to get the promotion but failed to
get it.
Staffs are motivated if they know that
there is a promotion.

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External recruitment is recruiting people from outside the business.

Advantages Drawbacks
Fresh ideas generated Advertising costs
Larger pool of potential employees Induction training is to be given which
increases the time
More talented

Methods to attract employees from outside the business

 Advertising
 Job centers
 Direct applicants
 Head hunting
 Word of mouth
 Employment agencies

Job advertisements: businesses have to produce a good job advert to attract potential employees. They
should consider area that the business plans to target and the job. For example, a blue collar worker
could be targeted through word of mouth while an accountant can be targeted by head hunting. They can
also use the social media to attract employees from all parts of the world. This is cheaper.

Shortlisting: after receiving the application forms the personal manager must ensure to choose the right
people for the final interview. This is easier with the use of application forms as comparisons can be
made and the experience and skills will be considered when going through the CV. In this way, process
speeds up.

Interviewing: After the final shortlist the applicants are called for interview in which the business can
analyze and assess the candidates’ performance in terms of verbal communication and body language.
They can also clarify the information that is given in the CV. They can also asses the confidence of the
candidate. This will also help businesses to ask challenging questions to the candidates and see their
answer and how they may deal with the problems. Candidates can be encouraged to speak and ask
questions.

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 CHAPTER 19: LEGAL CONTROLS OVER EMPLOYMENT

Basic definitions

Discrimination: choosing one person instead of another based on their characteristics.

Minimum wage: minimum amount per hour that all employers are supposed to pay to the workers or
employees.

Businesses must ensure that they do not discriminate one another employee based on their race, religion
or gender. However, if the person is much more skilled and experienced than the other the business
choosing this person is ethical.

Legislations that governments have imposed in order to protect the rights of all employees.

1. Gender

One of the most common form of discrimination is gender discrimination. Females are being
discriminated at work. Businesses must ensure that the advertisements, references in work titles,
promotions and wages for staff must not be based on gender. For example, the business who is
advertising for a police officer must ensure that they don’t specify the gender such as: Police men.
(There are 2 acts for this which is written at the end of chapter)

2. Race and religion

Businesses have to make sure that they don’t discriminate employees based on their color, race or
religion. Some examples are: businesses have no rights to prevent women and men from wearing religious
such Burka or turbans. And workers must receive good training to encourage equality at work. (There is
one act for this which is written at the end of chapter)

3. Disability act

Unemployment rate for the disabled people are comparatively higher than the unemployment rate for
abled bodies. Business should ensure that they do not discriminate employees based on their disability
but should classify people according to their skills. They should make facilities for employees to use the
wheel chairs such as ramps for wheels and give them holidays for weekly check-ups. (There is one act
for this which is written at the end of chapter)

4. Sexual preference
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Businesses should make sure that they do not discriminate any employee based on their sexual
preference and this is also illegal. However, many countries have different laws. This will also result in
dissatisfaction of workers due to harassment and bullying in work place.

5. Age

An employee of the same skills with more experience and qualifications but older to another employee
must get the same pay as the younger employees. However, most businesses discriminate employees in
terms of age. For example, business cannot refuse to offer promotion to an elderly person.

Minimum wage laws

Minimum wage legislation is set by the government. And this is the minimum amount of money an
employee is entitled to receive. An employer will face a huge penalty if they didn’t pay. Younger
employees will be exempted from minimum wage laws.

Reasons or benefits of minimum wage laws

 To benefit the disadvantaged workers such as: woman: when minimum wage laws are being
imposed this may increase the salaries or wages of all disadvantaged workers hence, they have
increased incomes. This will result in their living standards to be improved hence, economic
growth will increase.
 To reduce poverty: minimum wage laws increases the income of the low income earners. Hence,
poverty will reduce and many people will move out of poverty.
 To help business: the profits of business may increase as productivity increase as a result of
increased motivation due to increased wages.

Effects of minimum wage laws on businesses

When minimum wage laws are being imposed this will increase the costs of production and therefore,
they may eventually have to increase the prices. Also in reducing the costs they may lay off workers
which may increase the unemployment rates. Also if the price of wages increases labor will be replaced
by machineries and also they may move to countries where labor is much cheaper.

Advantages to business of minimum wage laws

 People will be motivated hence, lower absenteeism and therefore, increased productivity.

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  Low wage earners will have increased income hence, their disposable income may increase and
therefore, disposable income may increase and therefore, more purchases and hence, profits
rises.
 As the wages of employees increases they may do one job instead of 2 or more jobs. Therefore,
they may be more committed to their work.

CHAPTER 20: TRAINING

Basic definitions

Training: it means to increase the skills and knowledge of the workers to enable them to do their work
effectively.

Induction training: training that’s given to a fresh employee.

On the job training: training that’s given in the workplace by another employee.

Off the job training: training that’s given by a specialist in another premise.

Importance of training

It is unlikely that an employee will go through his/her life without a proper training. Training increase
the knowledge of the employees while also increases the productivity and competitiveness. Hence,
businesses gain more revenues. Also it ensures that employees know how to do their jobs and be safe.
However, training is an expensive process so business usually try to avoid it but some business offset
other expenses to fund training as they know the importance of this.

There are 3 types of trainings:

1) Induction training: this is given to new employees who have recently joined the business this
helps employees be familiar with the working practices.
2) On the job training: these types of trainings takes place at the workplace and they may be given
for different purposes such as: introduction of technology, new working practices etc. It can take
place in three ways:

49
  Watching another worker: new employees will be instructed to learn from another worker by
looking at how he or she does the work.
 Mentoring: this is where the worker will be given the tasks to work but can ask questions and
learn more from the mentor.
 Job rotation: this is where employees are given opportunities to work in different departments
or different jobs in order to improve the flexibility and make the workers work more interesting.

Advantages Drawbacks
Cheaper method Mistakes may affect the output
Can be easy to organize Could be dangerous for a surgeon
Output is being produced at the same time May be stressful for workers for working
with others

3) Off the job training: this is where training takes place away from the work place.

Advantages Drawbacks
Outputs are not affected if mistakes are Expensive method.
made
Customers and others are not put at risk It takes time to organize
Training could take place outside the work No output produced as no contribution to
place if required work

Training in healthy and safety

As many of the jobs that people do have some dangerous problems. The government has imposed many
health and safety regulations to protect the employees. For example, business should prepare a written
statement of their general policy of health and safety and must give it to the employees. Employees also
should learn of how to use health and safety equipment such as: fire extinguishers.

Advantages of training

 Keeps the workers up-to-date: training will help businesses ensure that their workforce is well
aware of the latest technology that has arrived and how to use this and be more competitive. It
could also be new regulations or procedures.
 Improving the labor flexibility: this will help businesses cover the absenteeism of one employee
by replacing with another.
 Improving the job satisfaction and motivation: as employees become more familiar after the
training they are more satisfied and motivated with their job. Hence, the productivity rises.
 New jobs in the business: as the business expands there will be more new jobs and therefore,
more training is required.
 Training for promotion: as staffs are promoted due to vacancies they may require more training
to do their new jobs and can learn more skills and knowledge.

50
Drawbacks or training

 Costs of training other resources: training is expensive as the specialists who come to train will
be paid and other equipment that are required is also expensive.
 Loss of output: some new workers who join the business learn by doing the work so if mistakes
occur this will damage the business reputation and increase the wasteful resources.
 Learn by doing: as employees learn the job by doing them there may be distractions in the work
place due to the sound this may affect the quality of the training.
 Employees leaving: when employees are well trained and if they decide to leave the business and
move to the rivals this may be waste of money in training hence, the rivals have an advantage.

CHAPTER 21: THE IMPORTANCE OF MOTIVATION AT THE WORKPLACE

Basic definitions

Hygiene factors: things at work that result in dissatisfaction.

Motivators: things at work that result in satisfaction.

Job enrichment: making a job more interesting and challenging

Maslow’s hierarchy of needs: order of people’s needs starting with basic human needs.

Why is employee motivation important in business?

 Easier to attract employees: if the employees are highly motivated and the working environment
is pleasant there are high chances that a business might attract the best possible employee from
the rivals. Hence, new ideas and secrets can be shared therefore, business is likely to get a
competitive edge.
 Easier to retain employees: when the motivation increases this may result in lower absenteeism
and employees may begin to love the job they do. This will help to increase the employee
satisfaction and therefore, help to reduce the staff turnover.
51
  Higher labor productivity: when there is a well-motivated workforce, businesses will be more
productive as the labor productivity is likely to increase significantly. This is because employees
may be willing to show gratitude to the business for keeping them motivated and therefore, may
work harder to increase the profits for the business. The business will have increased reputation.

3 main theories have developed on how to keep the work force motivated

1) Herzberg-two-factor theory: Fredrick Herzberg has introduced 2 factors known to be as

motivators and hygiene factors. ( see the basic definitions above) Examples of motivators:
achieving aims, recognition etc. While for hygiene factors examples include: pay, working
conditions etc. He gave more emphasis on job satisfaction and job enrichment. He said that
workers are only motivated if they get more targets to achieve and win more promotions.
2) Maslow’s hierarchy of needs: Abraham Maslow recognized the importance of business to satisfy
some of the needs and he put them into a pyramid which starts from the bottom.
 Physiological needs: they are the basic needs of survival and humans cannot live without them.
Examples: food and water. Businesses must ensure that they provide these else they should give
enough money for the employees to satisfy these needs.
 Safety and security: businesses should make sure that their employees are well protected and
are familiar with the business procedures.
 Social needs: the working environment must be open enough for the employees to interact with
each other make new friendships and relationships which would increase the motivation to work.
 Esteem needs: employees want appreciation and awards for their hard work.
 Self-actualization: employees may want taking their carrier to another level and therefore, they
may need more challenges in their work and want to be creative.

He also said that:

 Business must keep on trying to motivate their workers and achieve the next set of needs and not
stop after achieving one set of need.
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  Businesses should ensure that they satisfy the lower needs before movng to the top level needs.
 They should try their best to satisfy every single need in the pyramid and if not motivation may
suffer.

3) Taylor’s theory of scientific management: Fredrick Taylor suggested that workers are highly
motivated with money as they can only do things if they had enough cash in their pockets. He also
said that workers should use specialist tools, receive proper training and so on. As soon as they
have established the best way to carry out tasks then Taylor said that the employees must be
given a fair day’s pay for a fair day’s work. (This is linking to the piece rate system which
will be given later.)

CHAPTER 22: METHODS OF MOTIVATION AT WORK

Basic definitions

Remuneration: money that is paid to the employees for their work.

Time rate: payment system based on the amount of time employees spend on work.

Salary: pay to non-manual workers expressed as yearly figure but paid monthly.

Piece rate systems: payment system in which employees receive an amount of money for the number of
units produced.

Performance related pay: a payment system or non-manual workers where increase in pay is given if
targets are met.

Businesses can use different types of methods of motivation. They are usually classified into 2
categories:

1) Financial
2) Non-Financial

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Financial methods (Remuneration)

1) Time rates: this method of pay is related to the time that the employees spend at work. Workers
may be paid for the extra hours that they work and this is called overtime pay. However, the non-
manual workers who are paid with salaries will not get overtime payment even if they spend extra-
hours at work.
2) Piece rate system: this is a payment system which is completely related to the number of pieces
produced. This could increase the productivity of workers as if they produce more pieces they
may be able to get a higher pay. However, workers may use shortcuts and therefore, quality of
work will be poor. Workers may do the work faster hence, mistakes can occur.
3) Performance related pay: this is a payment system that is used to reward non-manual workers
whose output is immeasurable. Their pay is related to their performance. They may be given a
target and if they achieve it they may be awarded with bonuses or commissions. This system also
helps in appraisal system to evaluate the staff performance. However, some workers may feel
that the target set is too high and they are incapable of reaching it. Some workers may feel that
during the appraisal system the managers may favor one over another.
4) Bonus payments: bonus is paid in addition to the basic salary because the targets are met. The
main advantage of this system is that they are paid only if targets are met. That means they are
paid when money is earned. They motivate workers to work harder and meet targets faster.
5) Commissions: it is awarded to reaching certain targets but only for sales staffs. A sales person
may have a very low salary but increased with huge commissions for reaching targets. This can be
a method which Fredrick Taylor may approve to motivate workers.
6) Promotions: as most of the employees want to build up an illustrious career at work they may want
to get promoted. Businesses must ensure that there are clear chances for promotion. If there is
a promotion employees may be motivated to work harder and therefore, productivity increases.
Also after getting promoted the increase in pay may also be a motivation. As per Herzberg’s
theory, this is a motivator.
7) Fringe benefits: they are the perks that are given above the normal wage or salary.
8) Examples: company cars, medical insurance and subsidized meals. It is cheaper to give fringe
benefits than to give employees increase in salaries. Productivity may improve as employees may
use the fringe benefits such as: gym facilities to be fit and therefore, less absenteeism.

Non-financial methods

Reasons for using non-financial methods of motivations

 Some people are not motivated by money

 Some workers give more importance to non-financial methods
 As more workers work in teams individual financial rewards are inappropriate.

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Job rotation

This is a method of motivating employees. This involves the business allowing employees to take up
different responsibilities and tasks and work in different departments. There will be frequent changes
in the jobs. Employees may feel it to be interesting rather than doing the same job repeatedly. Also,
business will benefit from the flexibility because if one employee is absent the other can take over the
job of the absentee. Hence, there is no delay in production. However, the training costs may rise.

Job enrichment

This involves businesses giving challenging work to their employees which may include problem solving,
decision making and more interesting tasks. This will help employees build up their career and showcase
their talents. They are allowed to use their minds creatively and may also be awarded with promotions.
However, employees may be forced to take on extra-responsibility hence, may be disappointed.

Autonomy (empowerment)

This is when a business gives the employees to take decisions by themselves on their work issues. This
will help the employees to take control over their own work and have set goals for the future. They may
feel valued and motivated. Hence, businesses may be having higher labor productivity. Costs will lower as
businesses now have the opportunity to reduce the number of supervisors and managers as workers are
now having control of their own work. However, some workers may think that this is a way that business
is trying to get maximum out of the workers with the same pay and reduce the number of staffs.

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 CHAPTER 23: ORGANISATION STRUCTURE AND EMPLOYEES

Basic definitions

Organizational charts: diagram that shows the different job roles in a business and how they relate to
each other.

Span of control: number of people a person is directly responsible in a business.

Centralized: type of organization where the decisions made come from the top level management to the
workers in the lower level along a chain of command.

Decentralized: type of organization system where decision making comes from the bottom level workers
to the top along a chain of command.

The internal structure of a business is known to be as a formal organization.

Organizational chart shows:

 How the business is split into functions or departments.

 Who has the responsibility and to whom are people accountable to
 The roles of employees and their job titles

Employees’ roles and responsibilities

 Directors: they are appointed by the owners or shareholders and they are led by a chairperson
who is accountable to the owner. They have authority over the managers.
 Managers: some of the functions carried out by the managers are problem solving, decision
making and so on. They are expected to use the limited resources that the business owns
effectively. They are entirely responsible for the running of the business. They are accountable
to the directors and have authority over the supervisors.
 Supervisors: they monitor and ensure that all work is done on time with the best quality. They
have authority over the operatives and general workers while they are accountable to the
managers.
 Operatives: they are the skilled workers and work in the production department. They carry out
functions such as operating machineries etc. they are accountable to the supervisors and are
having authority over general workers.
 General staffs: general staffs are unskilled workers with lower wages and can perform variety of
tasks and can also be promoted. Examples: accounting clerks.
 Professional staffs: they are skilled and highly trained. Examples: Doctors and Accountants.

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Features of organizational structures

Chain of command: route through which orders are passed down in the hierarchy. Information can pass
from the top to bottom and from bottom to top. If the chain of command is too long messages are lost
or changes might not be accepted.

Span of control: number of people a person is directly responsible for. If the san of control is wider the
communication will be less friendly and more formal. If the span of control is narrower communication
will be more friendly and informal.

Flat and tall structures

Flat structures

Advantages: communication is better, management costs are lower and control is friendlier and less
formal.

Disadvantages: less chances for promotion

Tall structures

Advantages: there is a clear route for promotion

Disadvantages: communication through the whole structure can be poor because there is a long chain of
command, management costs are higher and control is more formal and less friendly.

Delegation

This is where a manager transfers his or her work to a subordinate due to travelling or overload of work.
This may motivate the employees and make them feel valued. Although the manager has responsibilities
for the work the time may be saved. However, some of the employees may think this to be as an extra
load of work and therefore, may be displeased.

Centralized and decentralized

Advantages and drawbacks of Centralized

Advantages
Coordination and control becomes easier.
Senior manager has complete control over
resources
Senior managers are experienced and
trained in decision making.
Drawbacks
Employees are demotivated as they have no
authority
Less creativity and fewer ideas
Procedures may be needed to make the
decision making much easier.

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Advantages and drawbacks of Decentralized

Advantages Drawbacks
Workers have autonomy and be better Senior managers may lose control of
motivated resources
Speeds up decision making Some employees may not have ability to make
decisions
Workers have opportunity to share their Some employees may not welcome extra
ideas responsibility

CHAPTER 24: DEPARTMENTAL FUNCTIONS

Basic definitions

Market orientated: where a business focusses on the needs of consumers when developing products.

Human resource: deals with issues related to employees.

Finance department: deals with the issues related to money and suppliers.

Production department: deals with the issues related to producing the product.

Marketing department: deals with issues related to the sales of the product.

Contracts of employment: a written agreement between an employer or employee in which each has
certain obligations.

Human resource department

This department deals with all decision based on employees. Some of the functions carried out by this
department:

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  Work force planning: this involves calculating the number and type of employees required.
 Recruitment and selection: providing application forms, interviewing and selection is done for new
candidates.
 Training: organizing induction and other training.
 Health and safety: business must ensure that all their staff is well protected with required
equipment and must impose legislations.
 Staff welfare: this department is responsible for maintaining the environment and ensuring that
it fits all employees with a pleasant working environment.
 Employment issues: The human resource department is responsible for drawing up contracts of
employment which may show the number of hours to be worked and many more.
 Industrial relations: The HR department is responsible for maintaining healthy relation with
trade unions and employees.
 Disciplinary and grievance procedures: The HR department is responsible to make the working
environment pleasant by imposing rules for disciplinary conduct.
 Dismissal: sometimes the HR department will have to dismiss employees for their poor conduct or
make employees redundant due to increased labor cost. Some employees may claim that the
dismissal was unfair and they may go to the employee tribunal court which is a court that deals
with the dispute between the employer and employee. In this the HR department will be involved.
 Redundancy: when employees are made redundant there is a strict procedure the HR department
must make sure all goes as the regulations.

Finance department

This department is mostly involved in transactions relating to money. Some of the activities carried out
by this department are:

 Recording transactions: transactions that goes in and out of the business will be recorded and
these information may be used to produce reports and son on.
 Wages and salaries: this department is responsible to ensure that all salaries and wages goes on
time to all employees.
 Credit control: This involves ensuring that all debts are paid on time and all customers pay on
time.
 Cash flow forecasting and budgets: as the finance department is responsible for controlling and
dealing with the money of the business these reports may assist them.
 Accounts: the finance department is responsible for ensuring that all accounts are being
prepared. This information will be taken into account while preparing financial statements.

Marketing department

As most of the businesses are being market orientated today, marketing department is becoming
increasingly important.

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  Market research: business must collect and analyze the information that is gathered and use this
to make decisions based on the product and improve the product as per the customers’ needs and
wants.
 Product planning: this involves deciding which product to be marketed.
 Pricing: the business should ensure that they charge the right price after gathering details about
the costs, competitor and the nature of the product.
 Sales promotions: people employed in these areas have to ensure that they have an effective
marketing technique.
 Advertising: This involves purchasing advertising space from the media and using the best adverts
to attract the customers. They must ensure that the company website is more attractive.
 Customer service: Most of the businesses focus on the quality of the customer service that they
provide. This is because they may want to get the most loyal consumers who may even purchase
the products when the prices increases.
 Public relations: this is the communication between the company and general public and also links
to the advertising and is more about building up the image of the business.
 Packaging: this involves wrapping the product with the best design to attract the consumers and
differentiate from the rivals products.
 Distribution: they must ensure that products are available at the right place at the right time.
They must also ensure that delivery services are on time if they have.

Production department

This department involves in making goods and services. Some of the activities carried out are:

 Design: the production department is responsible for designing the product and changing the look
and so on.
 Purchasing: they are also involved in purchasing raw materials and other things that are required
for the production of the product.
 Stock control: this involves controlling and calculating the inventory and resources while providing
enough information about the inventory. It would send signals to the purchasing department
about the stock level.
 Maintenance: there is a team of workers who will be cleaning and maintaining the machineries.
 Research and development: the production department is fully responsible for innovating new
products by investing more on R&D.

If the marketing department accepts the order of 15000 units and forget to inform the production
department then this will result in them losing a huge order and losing money.

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 UNIT 3: CHAPTER 25: SOURCES OF FINANCE

Basic definitions

Short term finance: money borrowed for one year or less.

Long term finance: money borrowed for more than one year.

Capital: finance provided by the owners to a business.

Internal finance: finance generated by the business from its own means.

Retained profits: profit held by the business without returning to the owners and which may be used in
the future.

External finance: finance obtained from outside the business.

The need for finance

Short term needs: when the business begins to trade they may have revenues which could be used to
cover the expenditures, however, it may not be enough at times and this is when the business has to
borrow money.

Long term needs: in order for the business to begin trading or continue trading they may need funds.
These may be funded by the owner’s capital that is invested or by some financial institutions. This money
will be kept in the business for a long time or permanently.

Startup capital: in order for a business to start they may have a lot of expenditures such as:
Registration costs, purchase of non-current assets that are one off and so on. So in order to fund this
the business will have to borrow money or the owner may have to invest.

Expansion: when a business wants to expand then they may need money. One of the reason why most of
the businesses want to expand is that to meet the large orders.

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Internal source of finance

There are 3 types of internal source of finance:

 Personal saving: as a business is to begin there is a need for finance. Some of the finance may be
funded by the owners and some by other financial institutions. The owners may fund using their
redundancy money, loans, gifts or some other sources and these are called their personal savings.
 Retained profits: once businesses have established they may generate a huge amount of profit
and a small amount of profit could be kept by the business without returning it to the owners.
This amount can be used for future expansions or emergency funding. This is the cheapest source
of finance as it has no any extra charge such as interests.
 Selling off assets: when a business develops they may have a lot of unwanted non-current assets
that may worth a lot. They can sell these assets to fund expansions. This is also cheaper form of
finance.

In the end, all internal sources of finance are cheaper and always available so business can minimize their
costs.

External sources of finance

External sources of finance is generally divided into 2:

Long term, which will remain in the business for more than a year or short term which will last in the
business for less than a year.

They are needed by businesses for various reasons such as:

 Some businesses have seasonal trade and they may need finance at off season to fund all
expenditures.
 A firm may be short of money because a customer has delayed the payments.

And many more…

There are 3 main sources of short-term external sources of finance:

 Bank overdrafts: this means the business is allowed to spend more money than it has in its
account. However, there is a limit set by the bank. There may be interest charges. The bank has
all the rights to call the business and ask for the money immediately at any time and they may do
this when they feel the business is facing a loss.
 Trade payables: business can purchase raw materials from their suppliers on credit. That is the
payment can be paid at a later date usually within 30 to 90 days. The business can delay the
payments to their suppliers in order to fund some important things. However, this may damage
the healthy relationship between the business and the supplier and make the supplier to refuse to
supply.

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  Credit cards: they are very flexible and easy source of finance. The accounts should be settled
within 56 days to avoid any interest charges. And if the payment is delayed even after 56 days
interest charges will be very high.

There are 8 main sources of external long-term sources of finance:

 Loan capital: bank loans can be used to fund short or long-term needs. They loan must be paid in
regular installments with the interest. The main advantage is that businesses will know how much
to pay every month.
 Unsecured bank loans: this is when banks lend loans to business with no any form of security or
guarantee. Banks often avoid this and prefer secured bank loans. The interest rates are very high
for these loans comparative to secured loans.
 Mortgages: this is a long term loan in which the business or the borrower must use a land or a
property as a security. Interests are lower for these types of loans. Also, they may go up to 25
years.
 Debentures: this is a long term security yielding a fixed rate of interest issued by a company and
secured against assets. They must be repaid at a set date usually when the debenture matures.
Public limited companies usually use this form of loans.
 Hire purchase: this is when the business borrow the tools that may be required instead of
purchasing them. The business may have to make a down payment. However, this is more
expensive than a bank loan.
 Share capital: this is a common method of raising finance for limited companies by selling their
shares to people. The business can also use a right issue which may give the existing shareholders
the right to purchase more shares. However, the shareholders may expect dividend payments and
the costs of administration is much higher.
 Venture capital: they are specialist investors who provide money for business purposes, often to
new businesses. They may be entitled to a share of profit. They invest in companies that have a
higher growth potential. They may exit after about 5 years. The main problem of this source is
finding a suitable venture capitalist be the owner and the venture capitalist must have the same
interest for the future.
 Crowd funding: this is where a large number of people invest in a business venture using an online
platform. The main advantage of this is that there is no interest payments. The lenders may be a
large number of people who together may represent the crowd therefore, a large amount of
money may be raised. However, if the business fails the crowd will be disappointed.

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 CHAPTER 26: CASH FLOW FORECASTING

BASIC DEFINITIONS

Cash flow: flow of money into and out of a business.

Insolvent: inability to meet debts.

Cash flow forecast: it is a prediction of all receipts and payments over a period of time for the future.

Closing cash balance: amount of cash that a business expects to have at the end of each month.

The importance of cash

Cash is the most easiest to be changed into money. It determines the success and failures of business
activities. When a business has a very high amount of cash then it is considered to be successful, else
it’s considered to be struggling to survive.

To pay suppliers and other costs: as the raw materials are purchased from the supplier, he/she may be
expecting cash in return. If the business fails to pay them adequate amount of cash then this will result
in a damage to the healthy relationship with the suppliers and they may refuse to supply. Other costs
such as overheads and labor costs such as wages also requires cash. If cash wasn’t given employees may
not work.

To prevent business failures: businesses must ensure that they have enough cash to pay their
outstanding debts. And if they are unable to pay (insolvent) then this will result in the business shutting
down. They should continually monitor their cash flow and keep up-to-date records of financial
transactions.

The between cash and profit difference

Sometimes the value of cash and profit may be different at the end of the trading period. Some of the
reasons are:

 As some goods are sold on credit, there may be some consumers who have not paid the money at
the end of the trade period and therefore, cash is less than the profit.
 Sometimes owners put more cash into the business therefore, cash is greater than profit.
 Purchase of non-current assets may reduce the cash.

Cash inflows: Money that is coming into the business. Examples: car sales, petrol sales

Cash outflows: money that is going out of business. Examples: tax, other expenses

Net cash flow: difference between cash inflow and outflow. (Cash inflows – Cash outflows)

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Cash flow forecasts

All figures that are shown in a cash flow forecast are estimated. They may be actually more or less. But
this gives a business an idea of how the future is going to be.

Why are cash flow forecast important?

 Identifying the cash shortages: business can in advance identify the cash shortages and make
arrangements to raise funds.
 Supporting applications for funding: If the cash flow balances are positive then financial
institutions are more willing to lend money.
 Help when planning the business: It helps to clarify the aims and to make improvements to the
business.
 Monitoring the cash flow: Business can compare the predictions and the actual ones and find the
weakness and try out different steps to increase the cash inflow.

CHAPTER 27: COSTS

Basic definitions

Costs: expenses that must while running the business

Fixed cost: the costs that remain constant

Variable costs: the costs that vary with the level of output

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Total costs: the total of the fixed cost with the variable costs

Total revenue: money generated from the sale of outputs

Fixed costs

Fixed costs do not vary with the level of output. They don’t increase when output increases neither do
they decrease when the output decreases. However, they are to be met even if no output is produced.
They form a straight horizontal line in a graph. Examples: rent, development costs etc.

Variable costs

Variable costs are the costs that vary with the level of output. When output increases they increase and
the vice versa. Examples: raw materials, packaging.

To find total variable costs = Variable cost per unit x number of units

Total costs

This is the addition of the Variable and fixed costs.

Total cost = Fixed cost + Total Variable costs

Average costs

This is the average cost of producing one single unit:

Average costs = Total cost / total quantity produced

Total revenues

The amount of money the firm receives after selling its outputs.

Total revenues = Price x Quantity

Profit

The amount of money that is given to the owner or distributed among the owners or shareholders after
the deduction of all costs is called profit.

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Profit = Total revenues – Total costs

CHAPTER 28: BREAK-EVEN ANALYSIS

Basic definitions

Break-even point: it is the level of output where the total revenues is equal to the total costs. Neither a
profit nor a loss is made.

Break even chart: the graph that shows the total costs and total revenues.

Margin of safety: amount of output available to be sold above the break-even point where the business
makes a profit.

Break-even point = Fixed costs / contributions

Contributions = Selling price – Variable cost per unit

What does the Break-even chart shows?

 Break-even point is where the total costs and total revenues intersects.
 At any level of output below the break-even point the business makes a loss.
 At any level of output above the break-even point the business makes a profit.
 Margin of Safety = Current output – Break even output
 Fixed costs are always horizontal in the graph

Construction of Break-even charts are usually not asked and not mentioned in the specification.

Effects of changes in price and costs on the Break even chart

 If the price is higher, the TR line will be steeper and the Break-even point will shift to the left.
 If the price is lower, the TR will be flatter and the break-even point will shift to the right.
 If the FC is higher, then the TC will move upwards with the steepness unchanged and the break-
even point will shift to the right.
 If FC is lower, TC will move downward with the steepness unchanged and break-even point will
shift to the left.
 If VC is higher, TC will be steeper and the break-even point will shift to the right.
 If VC is lower, TC will be flatter and the break-even point will shift to the left.

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Limitations of Break-even chart

 The TC and TR are shown as straight lines. This is because the costs may lower when the
suppliers offer discounts on large orders. And therefore, the TC may fall.
 It is assumed that all goods are sold. However, there are unsold stocks at the end of the trading
period.
 The accuracy of the break-even chart depends on the accuracy of the details that is given and
the quality of the data that is used to construct the chart.

CHAPTER 29: STATEMENT OF COMPREHENSIVE INCOME

Basic definitions

Income statement: financial document that shows a firm’s expenses and income for a particular trading
period.

Profit: money that is left over after the costs are deducted.

Retained profit: profit that is held in the business and not returned to the owner.

Normal profit: minimum profit a business needs to make to retain the interest of owners.

Finance costs: interests paid on loans

Purpose of the income statements

Income statements are used by businesses to calculate profits for a particular trading year. There are 2
types of profits:

 Gross profit which is calculated before deducting the overheads.

 Operating profit which calculated after the deductions of overheads and other
Costs.

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Features of income statement

 Revenues: money the business receives from selling goods and services.
 Costs of sales: costs of producing the products such as: purchase of raw materials.
 Gross profit: Revenues – costs of sales
 Administrative expenses: general overheads or expenses of the business.
 Other Operating expenses: any expense that is not included in the administrative expenses are
included here
 Selling expenses: the expenses that are directly related to the selling of its products.
 Operating profit: the administrative costs and other overheads are subtracted from the gross
profit to get the operating profit.
 Finance costs: interests paid on loans.
 Profit for the year: costs of finance is subtracted from the operating profit to get the profit
for the year.
 Profit for the year after tax: the amount of money that is left over after all expenses have
been deducted as well as the taxes.

How might income statement be used in decision making?

Investment decisions: a business can analyze the income statement and see if they are having enough
profits to invest in new projects. They can also see into the previous year’s income statement and
compare the performance.

Cost Analysis: businesses can also evaluate the increase or decrease in costs. For example, if the costs
of raw materials has increased then they can find new suppliers with lower prices.

Basis for future forecasts: After a deep look at the income statements of the previous years the
business can find a trend in the profits. If they are decreasing they can necessary steps to increase the
profits and expect more for the future.

Making comparisons: the operating profit in the income statement can be compared with the profits of
the rivals and measures can be taken to increase the profits if rivals were outcompeting.

The nature and importance of profit

Profit is the key element that encourages many people to start businesses. If there was no profits
earned business owners may fail to continue. All business owners need a normal profit to retain their
interest in the running of the business. Many people will invest their money in more profitable industries
to increase their profits. They are also important as measure of success as they can be compared with
the profits of rivals.

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 Here is an example
of an income
statement

CHAPTER 30: STATEMENT OF FINANCIAL POSITION

Basic definitions

Statement of financial positions: it is a summary of the business assets and liabilities at a point of time.

Assets: resources used or owned by the business. Examples: delivery vehicles.

Liabilities: debts of business that provides funds. Examples: Trade payables.

Capital: Finance provided by the owners of the business.

Non-current assets: the assets that last in the business for more than a year.

Current assets: assets that last in the business for less than a year and will be turned into cash easily.

Liquidity: how easily an asset is converted into cash.

Current liabilities: the liabilities that are to be paid within a year.

Non-current liabilities: the liabilities that are to be paid even after 1 year.

Net assets: the value of all assets deducted by all liabilities.

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Good will: the value that a company has because it has good relationship with its customers and suppliers.

Working capital: the value of the liquid resources that can be used to meet the running costs

Purposes of Statement of financial position

The main purpose of a statement of financial position is that it helps a business find the value of their
net assets and analyze are they able to continue in the future. And if not they will have to find ways to
increase their net assets.

Features of a Statement of Financial position

Non-current assets: they are the assets that last for more than a year in the business.

Current assets: they are the assets that may be changed into cash easily and they include: inventory of
raw materials, Trade receivables and cash in hand.

Current liabilities: they are the debts to be paid within a year. Examples include: Trade payables, Bank
overdrafts and taxes.

Net current assets: They are the current asset minus the current liabilities. This shows the working
capital. If a business is short of working capital it could have cash flow problems.

Non-current liabilities: money owed where repayments is not due for more than a year. Examples:
Borrowing loans for more than one year, mortgage payments.

Net assets: this is the value of assets deducted by the value of liabilities.

Shareholder’s equity: the money that the owners have contributed to the business.

Retained profit is the amount of money that is held back without returning to the owner.

Other reserves is any other amount that is owing to the owner.

Capital employed: the money that owners have invested in the business.

Interpreting the statement of financial position

The information provided by the statement of financial position can be used to evaluate the position of
the business. It provides a guide to the value of a business.

However, the value will be estimate as Assets are generally hard to provide a value. Also, some
businesses may have assets that are non-physical such as good will.

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 CHAPTER 31: RATIO ANALYSIS

Basic definitions

Ratio analysis: mathematical approach to investigating accounts by comparing 2 related figures.

Gross profit Margin: it is the gross profit that is expressed as a percentage of turnover.

Operating profit margin: operating profit expressed as a percentage of turnover.

Current ratio: it assesses the firm’s liquidity by dividing the current assets by the current liabilities.

Acid test ratio: similar to current ratio but excludes inventory from current assets.

Return on capital employed: profit of a business as a percentage of capital employed.

Ratio analysis can be done in 2 ways:

 Liquidity ratios: this measures how easily a business is able to pay its short term debts.
 Profitability ratios: it measures the performance of a business.

Profitability ratios

Gross profit ratio

= Gross profit / Revenues x 100

When a question arises on this, you should include:

 To improve this ratio, a business should reduce their costs of sales by demanding for discounts
from suppliers.
 Also, they should increase their selling price.\

Operating profit margin

= Operating profit / Revenues x100

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When a question arises on this, you should include:

 Businesses should control their expenses.

 They should also increase their gross profit.

Mark-up

= Profit per item / costs per item x 100

It is calculated by businesses to set a price. This is because it guarantees that all costs of production
are covered and a profit is generated.

Liquidity ratios

This measures how easily the business can convert its assets into cash.

Current ratios

= current assets / current liabilities

 The norm for current ratio is from 1.5 to 2.0

 If a business has less than 1.5 then it is unable to pay its short term debts.
 If a business has more than 2.0 then it has lots of money tied up unproductively.

Acid test ratio

This is the most severe test of liquidity which involves the deduction of inventory which may take some
time to convert into cash.

= Current Assets – Inventory / Current liabilities

 If the business has a lower acid test ratio, the business may be unable to pay the suppliers
hence, the suppliers may refuse to supply.
 Current ratios and Acid test ratios changes from industry to industry.

Return on capital employed

= operating profit / capital employed x 100

 The advantage of this ratio is that it links profit to the size of the business.

Capital employed = Non-current Liabilities + Capital and reserves

These are good returns on capital if compared with the rate of interest at this time.

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Using ratios to make comparisons

Ratios can be used to analyze the performance of the business. They can also help business to improve
their performance by working on their weaknesses. They can be used to make comparisons between 2 or
more businesses in the same industry. This will also help them to find their market share in comparison
to other businesses.

CHAPTER 32: THE USE OF FINANCIAL DOCUMENTS

Basic definitions

Quantitative information: the information that are expressed in numbers.

Auditing: this is a financial procedure that checks the accuracy of the company’s financial statements.

The use of financial documents to assess the performance of the business

Reasons for different stakeholders having a look and analyzing the financial statements:

 Managers and employees: Managers may need for making comparisons and also to demand for
higher salaries if business is becoming profitable. Employees may need while negotiating for
wages and ensuring that they have job security.
 Owners and Shareholders: owners may need to see if their business is profitable or is it worth
investing more? Shareholders may need because to see whether they can get higher dividend
payments. Also, they can invest in growing companies after taking a deep look at financial
statements.
 External Stakeholders: Banks may need to look at the financial statement s of the business
before granting a loan to see if there are any unpaid debts or will the business be able to repay
them back. Suppliers may want to see if businesses are able to pay for the goods or to see the
credit worthiness of the business before allowing to trade on credit. Public limited companies
often publish their accounts to give a guide to the shareholders of how their business is
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 performing and this also can be used by financial analysts to examine and give the shareholders a
proper guide while investing in businesses.

Use of financial documents to inform business decisions

Financial documents consists quantitative information which is very helpful in decision making.

 Funding decisions: Businesses can look into th financial statements to see if they have enough of
cash to fund the expenses of the following year. Also, this document can be used to support while
borrowing money from the banks if the business was profitable in the previous years.
 Reducing costs: businesses can use the income statement to see if the costs are rising. They can
take measure to reduce the costs. Also, they can use the ratio analysis to see the profitability of
the business.
 Increasing the profitability: businesses can try ways using the financial documents to increase
their profitability. For example, if the gross profit margin is lower they can increase the selling
price or so on.
 Investment decisions: Businesses can look into these documents to see if they have enough cash
to invest in expansion of the business. However, these information alone cannot help managers
take risky decisions.

Other uses of financial documents

 Government: governments may use these information to monitor the progress of the economy and
the success of economic policies.
 Competitors: they may use the information when comparing their figures with the rivals to
evaluate their level of success.
 The media: they may use to produce reports on business and commerce.
 Tax authorities: they may require the financial documents of business when deciding how much
tax to charge.
 Auditors: They may need the financial documents while checking the accuracy of the accounts and
ensuring a true and a fair view of the business is given to the shareholders.
 Registrar of companies: it is a must that when companies register they have to submit a copy of
their financial statements every year.

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 UNIT 4: MARKETING CHAPTER: MARKET RESEARCH

Basic definitions

Market research: this is the gathering of data related to the consumption of goods and services related
to the market and analyzing them and using for Marketing purposes.

Untapped: it is market that is available but yet to be exploited.

Focus groups: number of people are invited to a discussion attended by groups of Market researchers.

Consumer panels: groups of consumers who are asked for feedbacks about products over a period of
time.

Purpose of Market research

 To identify and understand consumer needs: it is important that businesses always meet the
expectations of their consumers. Market research will help businesses to do this by gathering
information and predicting consumers’ needs and wants from the products.
 To identify the gaps in the market: finding the untapped places in the market the business can
innovate new products that their rivals have not yet touched. This will help them gain a
competitive edge in the market which can be done by Market research.
 To reduce risk: before any business begin to trade it is important that they carry out market
research. This is because they may get to know the market, consumers and rivals. Hence, this can
prevent the likelihood of business failures.
 To inform business decisions: information that are collected by carrying out market research can
be used to influence the decision making in a business. For example, how should the price be
charged? Whether the product is a fast moving consumer good? And so on.

Methods of primary research

 Questionnaires: they are the most common form of primary research. They may include opened
and closed questions, clear and easy questions, be short and may not include leading questions.
They can be used in different ways such as: postal surveys, telephone interviews, personal
interviews, online surveys.

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  Focus groups or consumer panels: detailed information can be collected using this cost-effective
method. The people must represent the whole population. They may not be reliable as consumers’
fashion and trends changes all the time.
 Observations: this is where market researchers observe the behaviors of consumers using CCTV
cameras and see how much time they spend on watching the products and so on. However, many
questions go unanswered.
 Test Marketing: this is a market research technique that is used before a national launch. The
product is sold in small restricted area and then the feedbacks are used to modify the product.
They may be free at times.

Advantages of primary research

 Original information
 Accurate information
 Not used by competitors.

Drawbacks of primary research

 Expensive
 Time consuming

Methods of Secondary research

Advantages of secondary research

 Cheaper
 Less time consuming
 Easier method

Drawbacks of secondary research

 Inaccurate information
 Out of date

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Qualitative and quantitative data

Qualitative data is the intentions, attitudes and beliefs of consumers. It is written down in words and
recorded in video clips. Quantitative information are those expressed in numbers. They need less
interpretation and examples include: statistics or market shares.

Role of social media in collection of Market research data

Role Advantages
Broad reach Can reach millions of people
Ability to It allows specific groups to target
target
Free or low It may be free for businesses and paid options may be cheaper
costs
Personal It allows communication on personal basis with individual customers and groups
Fast Information can be collected very quickly
Easy Easier to set-up accounts.

Importance of the reliability of Market research data

The information collected should be reliable for businesses to use and get the positive effect. If the
information was unreliable then this will result in failures in business. The reliability of information
collected depends on the number of people and whether they represent everyone.

Businesses should appreciate that human behaviors are unpredictable as fashions and tastes changes
every time. If the quality or reliability of the information is poor then the decision taken based on this
information will not be effective.

CHAPTER 34: THE IMPORTANCE OF MARKETING

Basic definitions

Market: set of arrangements that allows buyers and sellers to communicate and trade in goods and
services.
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Marketing: identifying customers’ needs and satisfying them profitably.

Product orientated: where a business focusses on the design of the product rather than the consumers.

Market orientated: this is where a business focusses on the consumers rather than the product.

Market share: it is the proportion of sales in a market that a business enjoys.

Mass markets: large market in which branded products are marketed.

Niche market: small market within a large market or industry.

Importance of Marketing

Marketing is not just about selling products however, it is about identifying the needs and wants of
consumers, charging the right price and so on. Some of the importance of Marketing for businesses are:

 Satisfying the customer needs: businesses must ensure that they satisfy the needs and wants of
their consumers after carrying out market research and identifying the needs of their
consumers. Or they must be able to predict the future changes in needs. If they do so they may
be successful.
 Building customer relationships: businesses needs to build proper consumer relationship. They
can do this with good communication and ask for feedbacks in social media platforms. For
example, they can say “thank you” to their consumers and do everything possible to meet the
needs.
 Keeping customer loyalty: in order to retain and make their consumers come again for purchases
businesses must use some effective techniques to gain this loyalty. Such as:
1. Reward cards: these cards get points when consumers make purchases and at the end of
specific period the business give them money-off vouchers which could be used at the same
store.
2. Free gifts: businesses can give gifts to their loyal consumers and this may encourage them to
do more purchases.
3. Charitable donations: this is when a business can transfer a small amount of the money they
receive from a purchase of a product to a charity organizations. In this way consumers are
likely to do more purchases as they know that some of their money are going for a good cause.
4. Partnership deals: this is when businesses share the costs and the benefits of rewarding loyal
consumers with some other businesses.

Product and Market orientation

Product orientation is when some businesses focusses on the manufacture and the design of the
products rather than the consumers who are the main purchasers of it. Market orientation is when some
businesses focusses on the needs and wants of consumers and satisfaction of consumers rather than the
products.
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Market share and Market analysis

Market share is the share of the total market that a business enjoys.

Market share = Total product of business sales / Total sales in the whole market x 100

Market analysis is a quantitative and qualitative assessment of a market. This is when a business analyses
the whole market about the consumers, rivals and other things relating to the product. This is a
continuous process as markets changes all the time as technology is evolving.

Niche marketing and mass Marketing

When a business sell its products to a mass market then they will have to spend a lot of money in making
their products more attractive than the rival’s products to their consumers as competition is high.
However, they will be able to exploit the economies of scale as they produce in large quantities to serve
the whole market. Examples: Fast moving consumer goods.

Niche market is a small segment of market that is not served by large markets. It is serving a small
group of customers with specific needs. Examples: Wedding planning.

Responding to the changes in the market

Changing customer needs: customer needs changes for various reasons such as: changes in incomes so
consumers prefer better quality products, changes in fashions, advancement in technologies and so on.

Changes in consumer spending patterns: Businesses can collect data or information form market
research or purchase it from specialist market researchers and identify which products are frequently
consumed by consumers and produce similar products.

Increased competitions: businesses should monitor rivals carefully and innovate new features or
characteristics to their products in order to differentiate and increase their market share while
attracting consumers.

Competition puts businesses under some pressure: consumers are forced to purchase the products of
the business instead of the rivals by some methods of attraction such as: lowering prices or producing
better quality products. These may reduce the profits and increase the costs however, if the business
wants to survive in the market they will have to do this.

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 CHAPTER 35: MARKET SEGMENTATION

Basic definitions

Market segments: this is a part of a whole market where a particular customer group has the same
characteristics.

How does businesses use market segmentation to target consumers?

 Some businesses concentrate on producing one product for a particular segment.

 Some businesses produce a large number of products and target several segments.
 Some businesses aim their products at all consumers.

Methods of Market segmentation

Location segmentation: people living in different countries have different needs depending on their
climates. For example: hot countries may prefer cotton clothes. Also in different regions have
different needs and so on.

Demographic segmentation: this is where businesses divide their consumers in terms of gender, age,
status, religion and race.

Age: teenagers may want the trending clothes with the latest fashions while adults may want decent
clothes.

Gender: women may want stylish and girlish cars while men may want sport cars.

Income: High income earners may want luxurious cars while low income earners may want way any
type of transport vehicle to travel.

Social class: this is when businesses target consumers based on their employment status. Such as:
young professionals may want sport cars.

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 Ethnic origin: Different ethnic groups are having different needs based on their cultures.

Religion: Examples: Muslims do not eat pork or drink alcohol.

Lifestyle or Psychographic segmentations

This is when businesses classify their consumers according to their lifestyles.

For example,

Television broadcasters may target sports channels at sports lovers.

Adventure holidays may be targeted at outdoor types who like to take risks and try new things.

Benefits of Market segmentation

 Can increase the revenues when the products are targeted at the right group.
 More loyal consumers as their needs are met.
 Can avoid wasteful promotional resources by targeting the right group.
 Businesses can target a wider range of goods to different customer groups.

CHAPTER 36: PRODUCT

Marketing Mix

These are the elements of a firm’s marketing that are designed to meet the needs of consumers. They
are:

1. Product
2. Price
3. Place
4. Promotion

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This chapter focusses on the Product.

Product development

Products are needed to be produced in order for a business to trade. However, sometimes businesses
may produce products while trading. These may be because the existing product is getting out of date or
to build up a competitive edge in the market. In order to produce a product there are few stages:

 Generating ideas: these may come from various sources such as: owners or research and
development centers. Also, businesses may try to copy the product of the rivals while improving
some of the features.
 Analysis: after the ideas are being generated businesses are required to analyze the ideas and
filter them, choosing the best, marketable, profitable and legal idea.
 Development: this is where experiments and simulations may be carried out and the product is
produced as expected.
 Test marketing: this is when the product is being tested in a market and sample is taken to be as
a representative of the whole market. Modifications may be made according to the consumers’
feedback.
 Commercialization and national launch: this is where the business modifies the product finally
and launches it nationally. Some businesses gives huge promotions or have a press conference.

Goods and Services

Goods are the physical products which can be touched. Examples: cars, toys etc.

Services are the non-physical products that can’t be touched. Examples: banking services, holidays etc.

Packaging

 Consumers link the quality of the product through the neatness and beauty of the packaging.
 Small children get attracted towards colorful packages.
 It helps businesses to display their brand name and increase their image and reputation.
 It helps consumers differentiate it from the rivals.

Product life cycles

 Development: there is no sales. This is where the product is being made, tested and analyzed.
Lump amount of money is spent on research and development and the costs are high.
 Introduction: product is being introduced with huge parties or promotions. Pricing strategies are
implemented and costs still remain high while there is a slight increase in the revenues.

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  Growth: if the product is successful the revenues starts to increase significantly. Line is steeper
in the graph and costs are beginning to be recovered. At the end of this phase revenues starts to
fall as competitors are emerging with their own products of the same type.
 Maturity and Saturation: revenues begin to fall and the costs are fully recovered. Cash flow is
improved and business is making a profit. More rivals and therefore, some businesses are forced
out or their promotion techniques changes. Some businesses use extension strategies to lengthen
the lifecycle.
 Decline: this is where the product is out of date or not trending due to changes in tastes and
fashions or advancement of new technologies. Some businesses bring out new products to replace
the declining products.

Extension strategies

These are the methods that are used to lengthen the life of a product. Some methods are:

 Changing the appearance of the product.

 Encouraging more frequent use of the product.
 Finding new markets for the products.

Advantages of using Extension strategies

 Brand image is improved.

 Costs of developing new brands are saved.
 Competitors may find it difficult to enter the market.

Disadvantages of using extension strategies

 They are expensive.

 They may damage the brand image if extended product is a failure.

Managing and reviewing the product portfolio

Product portfolio is a range of product a business is currently marketing. A business have to manage the
product by constantly reviewing each product and making changes whenever necessary. A Boston matrix

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may be used to analyze a product marketed by a business while categorizing it according to the market
share and market growth.

The Boston matrix puts the products into 4 categories:

 Stars: valuable products for a business while having a high market share and growth.
 Cash cows: mature products with high market share but low market growth while generating a
steady income.
 Question marks: potential products with lower market share but higher market growth.
 Dogs: declining products with low market share and growth.

CHAPTER 37: PRICE

Basic definitions

Cost plus pricing: adding a percentage to the cost of the product to get the price.

Mark-up: percentage that is added to the cost that makes a profit for the business while setting the
price.
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Penetration pricing: starting with a lower price and eventually increasing the price when the product is
established in the market.

Competition based pricing: strategies based on the prices charged by rivals.

Destroyer or predatory pricing: setting a lower price until the rivals drive off the market.

Skimming: setting a higher price initially and then lowering the price when rivals begin to enter the
market.

Loss leaders: products sold below the costs to bring more consumers.

Importance of Price

Price is one of the key elements of the marketing mix. Consumers want better quality products for
reasonable price. Some of the factors affecting the price are: Marketing mix, objectives, taxes and
competitions. There are different types of pricing strategies:

Cost plus pricing

This strategy involves adding a percentage of the costs known to be as a mark-up to the price. One of
the key advantage of this pricing strategy is that it ensures that a profit is made for every product that
is sold. However, the price may be higher than the market price.

Penetration pricing

This is when the business initially starts with a lower price to draw in consumers and then increase the
price when there are more loyal consumers and product is established in the market. Advantage of this
pricing strategy is that easier to attract more consumers. However, the product may be considered to
be of lower quality and the costs are higher.

Competition based pricing

This is a pricing strategy that is based on the prices charged by the rivals. The main advantage of this
strategy is that a price war is likely to be avoided. Sometimes businesses may use destroyer pricing to
drive out the rivals from the market and to reduce the competition in the market. However, the costs
for business using this method of pricing is high.

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Skimming or Creaming

This is when a business initially starts with a higher price and then eventually lower the prices when the
competition increases. One of the key advantage of this strategy is that the profit margins are higher
and the costs are recovered as soon as possible. However, there will be less revenues as consumers may
not want to purchase high price products.

Promotional pricing

This involves lowering the price of the product for a short period of time in order to draw in consumers.
There may be other reasons also:

 To get rid of old stocks

 To generate some cash quickly to solve a cash flow problem

They can take place in various forms:

 Discounts and sales: this involves the business cutting down the price for a short period of time
and revenues increases as goods are sold below the standard price.
 Psychological pricing: this involves setting the price slightly below a round number. Examples:
$99.99. This attracts the consumer easily and they may think this is much cheaper than $100 and
may eventually end up purchasing the product.
 Loss leaders: this is when the product is sold lower than the costs. It is hoped that when
consumers enter the market they may end up purchasing some other products which could
increase the revenues of the business.

CHAPTER 38: PLACE

Basic definitions

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Distribution channels: route taken by a product from the producer to the customer.

Wholesalers: person or business that buy goods from manufacture and sell them in smaller quantities to
retailers.

Retailers: business that buy goods from manufacturers and wholesalers and sell them in smaller
quantities to consumers.

E-commerce: use of electronic systems to sell goods and services.

Direct selling: where business sell their products directly to consumers.

Agent: intermediary that brings together the buyers and sellers.

Place is one of the 4p’s of the marketing mix. Consumers may not be willing to purchase the
product if it wasn’t available at the right place and at the right time.

Distribution channels

This is a route through which the product travels from the producer to the consumer. Some businesses
sell their own products directly to their consumers or use intermediaries such as retailers and
wholesalers in order to reach their consumers.

Retailing

Why do manufacturers sell their products to the retailers instead of directly selling it to the
consumers?

 Most consumers may want the products in smaller quantities. Therefore, retailers buy in bulks
and break them into smaller products and sell it to the consumers.
 Locations where retailers are available is more conviniet to the consumers rather than the
location in which the manufacturers are available in.
 Also, retailers may add value to the products by providing extra services such as: delivery
services which will not be provided by the manufacturer.

There are different types of retailers such as:

 Independents: they are sole traders such as: greengroceries, jeweler etc. and are found in malls
and high streets.
 Super markets: Large stores, cheaper products, includes ranges of products and provides free
parking facilities.
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  Department stores: large stores split into departments and provides good quality products with
better customer services.
 Multiples or chain stores: They may be many stores in different locations with the same
products and may be controlled by a central office. However, limited products with same prices in
all stores.
 Superstores or Hypermarkets: Large giants, with cheaper products than in supermarkets, less
customer services and goods are not displayed attractively.
 Kiosks and street vendors: small outlets with limited products and operates in airports or bus
stations. May be expensive or cheaper depending on the location. Lower quality products.
 Market traders: they are of small stalls which may be relocated. Limited products with lower
prices than retailers. However, quality is lower.

E-commerce or E-tailing

The most common form of retailing in today’s world is E-tailing. It uses electronic systems to sell and
purchase goods and services all around the world. This is of 2 types:

Business to consumers

This is when the goods are purchased online and delivered at home. However, the new trend is that goods
are ordered and collected from a central hub. Some examples for business to consumers are:

 Tickets for travel purposes

 Access to online movies, songs etc.
 Financial services such as banking and insurance.

Business to business

This involves businesses selling to other businesses online. Sophisticated software can be used to
purchase the components that are required with the help of these software which may help to find the
best cheapest supplier while carrying out all the paper works.

Benefits to businesses of online distributions

 Lower overheads as no need to rent premises

 Businesses can serve their consumers 24/7/365
 Businesses have more choices when locating operations

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Drawbacks to businesses of online distributions

 Businesses may have to face increased competition as this is a cheaper method of forming
business.
 There is a security risk as hackers may gain access to sensitive information.
 Site may be affected by malware and poor internet connections.

Benefits to consumers of online distribution

 It is cheaper because saves travel costs.

 It saves time which is valuable
 There is more choices for consumers

Drawbacks of online distribution to consumers

 Consumers cannot touch or look at the goods before purchase.

 Customers may experience poor after sales services.
 Customers without credit cards or internet may not get the service.

Other methods of Distributions

 Direct selling: this is where the business sells their products directly to the consumers.
 Wholesaling: they buy from manufacturers and sell to retailers. Consumers can purchase goods
for cash from the wholesalers. Retailers have a wide range of products.
 Agents or Brokers: they link buyers and sellers.

Choosing the appropriate distribution channels

The nature of the product

Different product require different distribution channels. For example,

 Services are sold directly to consumers without any intermediaries.

 Some products needs explanation and demonstrations.

Cost

Businesses may choose the cheapest distribution channel and also may prefer less intermediaries
because if there were more intermediaries then the product may become more expensive and therefore,
lower revenues and market share. Websites may be used by businesses to sell their products directly to
the consumers so that costs are lower.
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The market

Producers selling to larger markets are likely to use intermediaries. While producers selling to small
markets are likely to sell directly to consumers. Producers selling overseas are likely to use agents to
guide them to the new market.

Control

Some producers may prefer to sell their products directly to consumers as they do not want to see their
products sold in down markets as it may damage their brand image.

CHAPTER 39: PROMOTION

Basic definitions

Advertising: communication between a business and customers where messages are placed in the media
to encourage the purchase of a products.

Public relations: attempt by a business to communicate with interested parties.

Sponsorship: making a financial contribution to an event in return for publicity.

Promotion is another element of the marketing mix. This involves making the consumers aware of the
product while also describing the features and the location of the product.

Above and below the line promotion techniques

Above the line promotion involves placing the adverts using the media while below the line promotion
involves placing the advert without the use of media.

Examples of above the line promotion: advertising in newspapers and magazines

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Examples of below the line promotion: press release and coupons.

Above the line promotion

 Televisions: advantage is that huge audience can be reached and creative adverts can have great
impacts. However, very expensive.
 Newspapers and magazines: advantage is that they are relatively cheap and readers can refer
back. However, no movement or sounds.
 Cinema: advantage is that big impact with big screens and sound and movement can be used.
However, limited audience.
 Radio: advantage is that sound can be used and cheaper production. However, not visual.
 Posters and bill boards: advantage is that they are seen repeatedly and good for sharp
messages. However, difficult to evaluate the effectiveness.
 Internet: advantage is that can be targeted and updated. However, possible technical problems.

Below the line promotion

Doesn’t use any media to advertise. Some of the forms of the below the line promotions are:

Sales promotions

They are the incentives to purchase the product. For example, free gifts, coupons and loyalty cards are
offered by businesses to encourage people to make purchases.

Merchandising and Packaging

Most businesses arrange point of sales so that this attract consumers easily. This is called
merchandising. Some examples include, layout of the product is made more attractive and visible,
posters and leaflets are used to advertise, and shelves are often kept well stocked to give a good
impression in the minds of the consumers.

Direct mailing

This is where businesses sends letters and leaflets about the product to consumers. They may be
personalized. This may encourage consumers to purchase the product.

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Direct selling and personal selling

Direct selling involves a sales person calling to numbers and encouraging the consumers to purchase a
product. One advantage is that features of a product can be discussed more clearly. However, people
often get irritated by this.

Exhibitions and trade fairs

Some businesses promote their products through attending exhibitions and advertising their products.
Advantage of this method is that products can be tested out on consumers before a full launch.

Public relations

This is an attempt by the business to communicate with the interested parties. The main purpose is to
increase the revenues by improving the image and establishing the brand. The main advantage of public
relations is that it is a cheaper method of promotion. Some approaches that are used are:

 Press release: some information about the business or the product may be given to the media and
this may be used to write an article for the newspaper and this may improve the image of the
business.
 Press conference: some of representatives of the business may speak in the media and this allows
the press to ask for frequently asked questions and give their feedbacks.
 Sponsorships: this is where the business assist some worldwide programs such as the Olympics
financially and get their names or brand images displayed in the event which may be visible to
millions of people all around the world through media and televisions. The main advantage is that
there is no need to pay broadcasters to display as they may be attracted easily for these huge
events.
 Donations: this can be used by businesses to improve their image.

Using technology in promotion

As the technology has been evolving in the last 5 decades, business have taken advantage of this and
used it in advertising.

 Online targeted advertising: this is when businesses could make use of their advertising
resources more effectively. This is made possible by the use of browsing habits and other data
that are collected using cookies. This is because they can target consumers who are willing to
purchase the product. Instead of wasting money by advertising to a large number who are not
interested in the product.
 Viral advertising: businesses can use this type of advertising technology to increase their
revenues. This contains messages, video clips and images which may promote a product. These
messages may encourage people to pass on to their friends and family and thereby, make it viral.
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  Social media: social media is a very common approach used by many businesses for advertising.
This helps businesses to target their adverts more effectively. One of the main advantage is
that, it is relatively cheaper method and the advert may reach millions of people.
 E-newsletter: some businesses may send electronic messages to interested parties which may
include interesting statistics and industry news. They may send messages to consumers who have
already purchased goods from them. This also will be a personalized message which will less likely
to be treated as a spam.

Branding

Branding involves giving a product a name, sign or symbol for the product in order to differentiate it
from that of the rivals. It is used to create customer loyalty and to develop an image.

The use of promotion strategies in different market segments

 Advertising: this may not differ much in any market segments. However, in large markets
businesses may us social media or television advertising to advertise their product.
 Sponsorship: this is used in markets where images are important. Many businesses may sponsor in
Olympics to get their names displayed and increase their revenues. This is a cheaper method of
advertising.
 Product trials: this is when some businesses offer consumers to take a trial for a lower rate
before purchasing the product fully. This allows consumers to see if the product is satisfying
their needs before purchasing it.
 Special offers: some business may give discounts on some products in order to draw in the
consumers into the stores while hoping that some other products may be purchased. This method
may be used to clear out stocks or generate quick cash.
 Branding: businesses may try to establish a strong brand name in a particular market segment and
may try to stretch it to other segments and this will help to increase their revenues.

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 UNIT: 5 CHAPTER: 40 ECONOMIES AND DISECONOMIES OF SCALE

Basic definitions

Scale: size of a business

Economies of scale

It is the financial advantages of producing something in huge quantities OR the fall in average costs for
a business when they produce in bulk. Basically, economies of scale is divided into 2 portions:

1. Internal economies of scale

2. External economies of scale

What are the internal economies of scale?

They are the financial or cost benefits an individual firm could enjoy as they expand. Some of them are:

 Purchasing economies of scale: this is when businesses get discount for purchasing components in
bulk. Therefore, average costs fall.
 Marketing economies of scale: for example, it would be senseless for a small business to
purchase a machinery that may be used once a month. Instead, it could be rented or leased.
 Technical economies of scale: larger operations are more efficient as they may include
specialized equipment and machineries which may save time and money.
 Financial economies of scale: as businesses grow they can easily convince financial institutions to
lend money as they may be able to support their repayments using their previous successful year’s
financial statements.
 Managerial economies of scale: larger companies can employ specialized managers for each
department so they can get fresh ideas which may help to increase the revenues of the business.
 Risk-bearing economies of scale: larger businesses may have wider product ranges selling into
varieties of market and therefore, if one product fails they can depend on the other.

External economies of scale

The cost benefits that all firms in an industry enjoys as the industry as a whole expands. Some of them
are:

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  Skilled labor: when an industry develops there may be well-trained labors with required
qualifications and experience, hence, training costs may be lower for businesses.
 Infrastructure: when an industry expands the road and other infrastructures may suit the needs
the industry.
 Ancillary and commercial services: when an industry is established then suppliers may be
encouraged to set up close to the industry hence, in this way the costs may fall.
 Cooperation: when more firms are located in the same industry cooperation is likely to increase
hence, there may be some cost benefits for example, sharing the costs of Research and
development.

Diseconomies of scale

This is when a firm expands beyond a certain limit it experiences a rise the total average cost and this is
called diseconomies of scale. Some of them are:

 Bureaucracy: when businesses grow too fast and too much the decision making process slows
down. This is because there are number of departments and lots of paper work.
 Labor relations: the relationship between the workers and the top management reduces. Hence,
motivations suffers and therefor, productivity falls.
 Control and coordination: controlling a firm with thousands of employees, millions of units and
many departments is difficult. There is a need for more supervision.

Minimum efficient
scale

Other limitations to growth

 Lack of finance: some businesses may want to grow but may not have the required amount of
money that is needed to grow. Purchasing machineries, equipment and other things are expensive.
 Nature of market: some businesses by nature cannot grow. For example, the luxurious watch
company Rolex is unable to grow because the consumption of their product is very low.
 Lack of managerial skills: some businesses may not have proper owners who know hpw to run a
business effectively and grow. So they may be prevented from growth.
 Lack of motivation: some business owners may not want to grow because they may not want to
take the extra responsibility of running a huge organization and also they may be satisfied with
running a small business and making a living.

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 CHAPTER 41: PRODUCTION AND PRODUCTIVITY

Basic definitions

Production: transformation of resources into a final product.

Productivity: rate at which goods are produced, and the amount produced, especially in relation to the
work, time and money needed to produce them.

Labor productivity: output per worker in a given time period.

Lead time: time it takes to prepare or deliver something.

There are different types of production:

Job production

This is when a business produce one product from start to finish before moving onto the next. All
factors must be employed for producing a single unit of output at a time. This is used when orders are
small and each item is different. The advantage of this method is that the products may meet the
customer expectations. However, the lead times may be longer.

Batch production

The method that involves completing one operation at a time on all units before performing the next.
This is suitable when the demand is higher and all units are to be standardized. The advantage is that
the unit costs are also likely to be lower and the production is flexible with large orders. However, work
may be boring for workers because of specialization therefore, motivation suffers.

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Flow production

It is a large scale of production for standard products where the products move from one operation to
the next in a conveyor belt. Some of the features of this method of production are: large quantities are
produced and standard products are produced. The main advantage of this type of production, unit costs
are lower and productivity is increased. However, the set-up costs are higher.

Process production

This is the form of flow production where materials pass through a plant where a series of processes
are carried out in order to change the product. This is used in oil productions.

Labor and Capital – intensive production

Labor intensive production is when a business use more of labor than machineries. While capital intensive
production is when a business use more machineries than labor in their production process. They may use
this when machinery is relatively cheaper than labor.

Productivity

This is the rate at which goods are produced especially in relation to the work, time and money spent.
Labor productivity is the amount of output produced by the workforce at a given period of time. While
capital productivity is the amount of units or output produced by the machineries in the production
process over a period of time.

Labor productivity = Total output / number of workers

Capital productivity = Total output / capital employed

Methods to improve the labor productivity

 Businesses can use motivation schemes that a financial or non-financial to motivate their workers
hence, employees are more willing to work and therefore, productivity increases.
 The government can invest more on education by providing more equipment for schools and
improving the quality of teaching.
 When the labor is more organized and managed by dividing into departments wit leaders for each
department then productivity can be increased as workers know their work properly.

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Methods to improve the capital productivity

 Downsizing: process of laying of staff for reducing the capacity. The advantage of downsizing is
that there is less costs and profits are increased as profitable parts don’t subsidize the
unprofitable ones.
 Relocation: businesses often relocate their workplace in order to improve the efficiency and
productivity. They can take advantage of the cheaper resources such as labor.
 Outsourcing: contraction out of work that may be otherwise done by the organization to other
business. This means that work that can be currently done by the business can be done by other
business who can do it at lower costs.
 Lean production: the productivity of business can be improved by reducing the usage of
resources. This is discussed in the next chapter.

The impacts of business on productivity improvements

 Financial impacts: the costs may be lower and the profits may increase. However, some of the
measures that are used to improve the productivity may cost money, such as: investing in new
technology.
 Competitiveness: as productivity increases businesses may have a competitive edge in the market.
Hence, they can enjoy huge profits, higher market share and more loyal consumers.
 Workforce: there are positive and negative impacts for this. When motivational schemes are
introduced workers are more willing to work as their bonuses may have increased and work may be
more interesting. However, when new technology is introduced workers may be laid off and then
this may create a negative impact in the minds of the existing workers.
 Customers: the benefits of improvements in productivity for customers are better quality
products, lower prices as unit costs are reduced and better products with increased facilities and
tastes.

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 CHAPTER 42: LEAN PRODUCTION

Basic definitions

Lean production: approach to production aimed at reducing the quantity of resources used.

Just in time: Production technique that is highly responsive to customer orders and uses very little stock
holding.

Tailor-made: where a product has been designed so that it is exactly right for someone’s needs.

The main aim of lean production is to use fewer resources in production as it uses less of everything. It
raises the productivity and reduces costs and cuts the lead time. It also reduces the waste and improves
the productivity.

Some of the principles of lean production are:

Just-in-time production

This is a production technique that is highly responsive to customer orders and uses a very little stock
holding. Suppliers may have to deliver the goods several times a day.

Advantages Drawbacks
Cash flow is improved High ordering and administration costs
Space is released Vulnerable to a break in supply
Fewer suppliers Hard to cope up with changes in demand

Kaizen

Kaizen is a Japanese word that refers to continuous improvements as everything in this world can be
improved. Workers are always encouraged to come up with fresh ideas to improve the quality of the
product and the efficiency at the workplace. When kaizen is adopted in western countries they are
needed to be trained as this may be unfamiliar for the people in the west.

Advantages Drawbacks
Continuous improvements Expensive
Makes people aware of their mistakes More cooperation is required
More loyal consumers Proper quality procedure is required

The 5s of good house keeping

 Sort: Getting rid of the clutter in the workplace.

 Set in order: Organizing the workplace.
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  Shine: ensuring that the workplace and equipment are well cleaned.
 Standardize: The practices must be identified by everyone and adopted in their daily work hours.
 Sustain: everyone should adopt the system to lock the other 4s on a permanent basis.

Some of the practices and principles that Kaizen is surrounded with are:

 Standardization: this means that all activities of a business should be carried out according to
the established formulae. Quality can be assured while ensuring that customer needs are met. It
is the task of the top management to ensure that the standards are maintained.
 Team working: this involves dividing the workforce into smaller groups expecting that workers
may develop a team spirit, flexibility may improve, labor relations and communications may also
improve.
 Empowerment: this is when businesses give their employees more authority over their own work.
This may help workers develop skills such as: decision making and problem solving. This may
increase the motivation for workers hence, the labor productivity increases.
 Suggestion schemes: this is when the employees are given the rights to suggest ideas in order to
improve the productivity or reduce the costs.
 Quality circles: these are small groups of workers who get together to discuss the work-related
problems and try solving them. Hence, the employees get the opportunity to improve their job.
 Multi-skilling: this is when workers are trained in different departments and different jobs to
help improve the flexibility of the business in case of an emergency.

The benefits of Lean production

 Financial benefits: costs are lower as less resources are used. Therefore, more profits for
owners and cheaper funds are available for the future.
 Improved competitiveness: when the costs are lower the prices of the products can be lowered
hence, higher market share and revenues.
 Positive environmental effects: when businesses use the resources efficiently this will reduce
the negative impacts in the environment. Hence, their image will increase as they become more
environmentally friendly.
 Improved customer service: lean production results in shorter lead times. And when kaizen is
adopted it focusses on the needs of the consumer therefore, customers get a better service.

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 CHAPTER 43: TECHNOLOGY IN PRODUCTION

Basic definitions

Computer aided design (CAD): use of the computers to design products

Computer numerically controlled machines (CNC’s): machines that carry out the instructions fed by the
computers

Computer aided manufacturing (CAM): where computers link and control the design and production of
goods in manufacturing

Computer integrated manufacturing (CIM): use of computers to control the entire production process

Technology has played a vital role in today’s production processes. The advancement of technology has
resulted in lower costs for businesses.

The impact of new technology in the primary sector

Advantages

 Increase in productivity
 Lower costs
 Improved health and safety procedures
 Increased nutritional values for products

Drawbacks

 Increase in installation costs

 More pollutions from new machineries

The impact of new technology in the secondary sector

Robots

They are divided into 3 categories:

 Material handling robots: used in transport of inventory or components from one place to other
inside a factory.
 Processing operations robots: performs specific task and specialized to do the task with the
fitted tools.

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  Assembly line robots: they do a single task or are used in inspection of the products in an
assembly line.

However, the drawbacks of using robots in production are that staffs may lose their job after
introduction of robots and they may be expensive to introduce.

Computer Aided Design (CAD)

The design of a product before it is being manufactured can be made easily and accurately with the use
of CAD. It is also cheaper method and faults can be detected easily. Also, by the use of CAD the need
for models are less. Hence, the advancement of technology has mad businesses feel more in the
production of their product.

Computer numerically controlled machines (CNC’s)

These are machineries that can be programmed by the computer to do several tasks such as: cutting and
sewing. They do their jobs more accurately. There are no human errors and the amount of waste is
reduced. They can measure several variables, such as dimensions, weight and temperature.

Computer Aided Manufacturing (CAM)

This approach is used when the design and production are linked together and then the whole process of
production may become automated. It assists several activities such as planning, management and
transportation. CAM speeds up the production and minimizes the waste.

Computer Integrated Manufacturing

This involves using computer for the whole production process. People may only be used for maintenance,
monitoring and supervising.

Impact of new technology in the tertiary sector

Benefits

 Lower labor costs in the financial services as ATM machines are readily available and many
transactions can be carried out online.
 In marketing researches can be carried out very easily as IT has made it easier.
 In advertising the costs have been lowered as now advertisements can be placed online on social
media platforms where it could reach millions of people without any cost.

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  In retailing EFTPOS is a good example. This refers to the technology that records the details of
the sale of a good or service to the customer at the point where they are purchased.
 In the leisure industry, there are less paper work and saves travel expenses as there is no need
to travel to purchase tickets.
 The use of IT has reduced the cost of administration and communication costs in businesses.
Information could be passed from one corner of the world to another within a fraction of second
using Electronic mails.
 E-commerce is the use of electronic systems to sell and purchase goods. This had reduced the
cost of travelling for consumers and the cost of rent of premises for businesses.

Overall the advancement in technology has great impacts on the tertiary sector business such as lower
costs and faster, accurate and easier work.

Advantages Drawbacks
Tasks are easier for workers Loss of flexibility
Improved health and safety procedures High installation costs
Less waste of resources Technology breakdown can be expensive
Improved communications Reduced motivation for machine workers

Balancing the cost, productivity, quality and flexibility of technology

 The financial costs of introducing technology is very high. Which includes the installation cost,
human costs of making them redundant and so on. Productivity will only improve if there are huge
amount of outputs produced.
 The quality of the product produced may be lower is huge amount of products are produced. Also,
all products are standardized and therefore, consumers have less choices. If products were
handmade consumers may pay higher prices for the products. Therefore, there is a loss in the
flexibility.
 Investing in new technology is risky and businesses have to evaluate the costs, productivity gains,
the impact on the quality and the loss of flexibility (if any) before going ahead.

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 CHAPTER 44: FACTORS OF PRODUCTION

Basic definitions

Fixed capital: stock of human made resources that are used to help make goods and services

Entrepreneur: individual who organizes the other factors of production and risks his own money in the
business venture

Factors of production

These are the resources that are used to produce goods and services. They are generally of 4 types:

1. Land

It is the plot of land that is required for businesses to locate their premises. It also may include natural
resources such as iron, coal and rain water etc.

2. Labor

This is the amount of human workforce that is required to produce the goods and services. They may be
skilled, semi-skilled or unskilled workers. Each worker is unique and have different skills and intelligence.

3. Capital

It is an artificial resource as it is made by labor itself. There are 2 types of capital:

 Working capital: it is the stock of raw materials and components that will be used in the
production process.
 Fixed capital: it refers to the offices, shops and machineries that may be used in the production
and fixed capital is also used in converting the working capital into goods and services.

4. Enterprise

They are responsible for setting up and running the business. Some of their qualities are:

 They come up with great business ideas and use them in the production process.
 They are business owners and risk their money in business venture while expecting returns in the
future.
 Entrepreneurs are risk takers because they may lose all of their money if the business is a
failure. However, if it was successful they make a huge amount of profit.

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  They are also responsible for organizing the resources and make key decisions such as: price
fixing.

Specialization and division of labor

Specialization is a production of limited range of goods or services usually in which the business is an
expert in. Departments specializes in different activities such marketing and finance.

Workers will also specialize in certain tasks and skills, this is called division of labor.

Some of the advantages of division of labor are:

 Workers concentrate on the task that they do the best.

 Workers skills are improved as they regularly do the same work.
 The organization of production is easier.
 Time is saved as workers don’t switch from m=one job to another.

Labor and capital intensive production

Labor intensive production is when a business uses more labor relative to machineries in their
production process. Capital intensive production is where a business uses more machineries in
comparison to labor in their production process.

The best resource mix between the labor and capital depends on the following factors:

 The type of the product: fast moving consumer goods are likely to produce in large operations
using large amounts of machinery.
 The relative prices of the 2 factors: Most eastern countries use labor intensive production as
labor is much cheaper than machineries. However, most of the western countries use capital
intensive production as machineries are cheaper than labor in their production process.

Labor intensive production

Advantages
Cheaper for small scale production
More flexible than machineries as they can be
retrained
People are more creative than machineries
Disadvantages
People are difficult to manage
People needs breaks and holidays
People can be unreliable as they may take sudden
holidays from work

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Capital intensive production

Advantages Disadvantages
Machineries can operate 24/7 Huge set-up costs
Machineries are easier to manage than labor May be inflexible
Machineries are more precise and accurate May leave the workforce facing the redundancy
and effect their morale

The changing relationships between enterprise, capital and labor

Large scale production are becoming more efficient due to the advancement in technology and more use
of machineries in the production process. Previously computers were not used while nowadays every
employee has a computer to make their tasks easier.

CHAPTER 45: QUALITY

Basic definitions

Quality: it is the feature of a product that allows it to satisfy the needs of the consumer

Quality control: this is ensuring that the quality of a product meets the specified quality standards

Some of the main features that consumers look into while checking the quality of the product are:

 Durability
 Reliability
 Customer service
 Physical appearance

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Why is quality of a product important for a business?

 Increased competition: As competition is increasing in a market better quality products are

having higher demand as they serve as a competitive edge for businesses because consumers
prefer better quality products for reasonable prices.
 Government legislations: businesses have to follow the legislations that are imposed by the
government else they may be fined.
 Faulty products are costly for businesses. Cost of components are higher when faulty products
are produced.
 Revenues can be boosted up if quality is maintained.

Quality control

This is ensuring that the products meets specified quality control.

Quality assurance

They are the working methods that take into account customers’ needs and wants when standardizing
quality. It also ensures that the quality standards are met. This is method of checking quality during the
production process. Some of the advantages are less costs and reduces waste and saves time. However,
implementation costs are higher.

Total quality management (TQM)

Some of the main features of TQM are:

 Quality chains: every worker in a production line will receive and pass on the semi-finished work
after ensuring that the specified quality standards are met. This avoids faulty products being
made.
 Everyone is involved: everyone is involved and TQM starts from the top management down to the
bottom.
 Quality audits: statistical data is used by businesses to reduce the variations which is the cause
of many quality problems and to make all products standardized.
 Team work: this is the most effective way of solving problems as there more knowledge, skills
and talent.
 Customer focused: businesses must ensure that they respond to changes in people’s needs and
expectations.
 Zero defects: every product that is manufactured are free from defects.

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 Advantages Disadvantages
Focus is on customer needs High training and implantation costs
Quality improved in all aspects of business Focus is on processes and not on the product
Improves the communications and problems Will only work if everyone is committed
solving

The internationally recognized quality standard is ISO 9000 certification. Some of the benefits of
this certification are:

 Helps to identify staff training needs

 Shorter lead times
 Motivates staffs and makes them to get things right at the first attempt

Quality and Competitive advantage

Businesses that produce good quality products have a competitive advantage in the market which could
be used by them to earn a higher market share which potentially could increase their revenues and
profits. Also consumers are prepared to purchase products for higher prices if the product was of high
quality. Although there is a lot of costs that are involved in this process the effort is worth.

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