Business studies

Chapter 1

The word ‘business’ is very familiar to us. We are surrounded by businesses

and we could not imagine our life without the products we buy from them. So
what is a business, or what is business studies? Here’s the very posh
definition for it: “the study of economics and management”
Not clear? Don’t worry, by the end of this chapter, you should be getting a
clear picture of what a business is.

The Economic Problem

Need: a good or service essential for living. Examples include water and food
and shelter.

Want: a good or service that people would like to have, but is not required for
living. Examples include cars and watching movies.

Scarcity is the basic economic problem. It is a situation that exists when there
are unlimited wants and limited resources to produce the goods and services
to satisfy those wants. For example, we have a limited amount of money but
there are a lot of things we would like to buy, using the money.

Opportunity cost
Opportunity cost is the next best alternative forgone by choosing another
item. Due to scarcity, people are often forced to make choices. When choices
are made it leads to an opportunity cost

SCARCITY → CHOICE → OPPORTUNITY COST

Example: the government has a limited amount of money (scarcity) and must
decide on whether to use it to build a road, or construct a hospital (choice).
The government chooses to construct the hospital instead of the road. The
opportunity cost here are the benefits from the road that they have sacrificed
(opportunity cost).

Factors of Production
Factors of Production are resources required to produce goods or services.
They are classified into four categories.

Land: the natural resources that can be obtained from nature. This includes
minerals, forests, oil and gas. The reward for land is rent.
Labour: the physical and mental efforts put in by the workers in the
production process. The reward for labor is wage/salary
Capital: the finance, machinery and equipment needed for the production of
goods and services. The reward for capital is interest received on the capital
Enterprise: the risk taking ability of the person who brings the other factors of
production together to produce a good or service. The reward for enterprise is
profit from the business.
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Specialization
Specialization occurs when a person or organization concentrates on a task at
which they are best at. Instead of everyone doing every job, the tasks are
divided among people who are skilled and efficient at them.

Advantages:
Workers are trained to do a particular task and specialize in this, thus
increasing efficiency
Saves time and energy: production is faster by specializing
Quicker to train laborers: workers only concentrate on a task, they do not
have to be trained in all aspects of the production process
Skill development: workers can develop their skills as they do the same tasks
repeatedly, mastering it.
Disadvantages:

It can get monotonous/boring for workers, doing the same tasks repeatedly
Higher labor turnover as the workers may demand for higher salaries and
company is unable to keep up with their demands
Over-dependency: if the worker(s) responsible for a particular task is absent,
the entire production process may halt since nobody else may be able to do
the task.

Purpose of Business Activity

So we’ve gone through factors of production, the problem of scarcity and
specialization, but what is business?

Business is any organization that uses all the factors of production (resources)
to create goods and services to satisfy human wants and needs.

Businesses attempt to solve the problem of scarcity, using scarce resources,

to produce and sell those goods and services that consumers need and want.

Added Value: Added value is the difference between the cost of materials
bought in and the selling price of the product.
Which is, the amount of value the business has added to the raw materials by
turning it into finished products. Every business wants to add value to their
products so they may charge a higher price for their products and gain more
profits.
For example, logs of wood may not appeal to us as consumers and so we
won’t buy it or would pay a low price for it. But when a carpenter can use
these logs to transform it into a chair we can use, we will buy it at a higher
cost because the carpenter has added value to those logs of wood.
How to increase added value?

Reducing the cost of production. Added value of a product is its price less the
cost of production. Reducing cost of production will increase the added
value.
Raising prices. By increasing prices they can raise added value, in the same
way as described above.
But there will be problems that rise from both these measures. To lower cost
of production, cheap labor, raw materials etc. may have to be employed,
which will create poor quality products and only lowers the value of the
product. People may not buy it. And when prices are raised, the high price
may result in customer loss, as they will turn to cheaper products.

Chapter 2
Classification of Businesses

Primary, Secondary and Tertiary Sector

Businesses can be classified into three sectors:

Primary sector: this involves the use/extraction of natural resources.

Examples include agricultural activities, mining, fishing, wood-cutting, oil
drilling etc.

Secondary sector: this involves the manufacture of goods using the resources
from the primary sector. Examples include auto-mobile manufacturing, steel
industries, cloth production etc.

Tertiary sector: this consists of all the services provided in an economy. This
includes hotels, travel agencies, hair salons, banks etc.
Up until the mid 18th century, the primary sector was the largest sector in the
world, as agriculture was the main profession. After the industrial revolution,
more countries began to become more industrialized and urban, leading to a
rapid increase in the manufacturing sector (industrialization).

Nowadays, as countries are becoming more developed, the importance of

tertiary sector is increasing, while the primary sector is diminishing. The
secondary sector is also slightly reducing in size (de-industrialization)
compared to the growth of the tertiary sector . This is due to the growing
incomes of consumers which raises their demand for more services like
travel, hotels etc.

Private and Public Sector

Private sector: where private individuals own and run business ventures.
Their aim is to make a profit, and all costs and risks of the business are
undertaken by the individual. Examples: Nike, McDonald’s, Virgin Airlines
etc.

Public sector: where the government owns and runs business ventures. Their
aim is to provide essential public goods and services (schools, hospitals,
police etc.) in order to increase the welfare of their citizens, they don’t work
to earn a profit. It is funded by the taxpayers' money, so they work in the
interest of these citizens to provide them with services.

Example: the Indian Railways is a public sector organization owned by the

govt. of India. In a mixed economy, both the public and private sector exist.
Chapter 3
Enterprise, Business Growth and Size

Entrepreneurship
An entrepreneur is a person who organizes, operates and takes risks for a new
business venture. The entrepreneur brings together the various factors of
production to produce goods or services. Check below to see whether you
have what it takes to be a successful entrepreneur!

Risk taker
Creative
Optimistic
Self-confident
Innovative
Independent
Effective communicator
Hard working

Business plan
A business plan is a document containing the business objectives and
important details about the operations, finance and owners of the new
business.

It provides a complete description of a business and its plans for the first few
years; explains what the business does, who will buy the product or service
and why; provides financial forecasts demonstrating overall viability;
indicates the finance available and explains the financial requirements to start
and operate the business.

Some of the content of a regular business plan are:

Executive summary: brief summary of the key features of the business and
the business plan
The owner: educational background and what any previous experience in
doing previously
The business: name and address of the business and detailed description of
the product or service being produced and sold; how and where it will be
produced, who is likely to buy it, and in what quantities
The market: describe the market research that has been carried out, what it
has revealed and details of prospective customers and competitors
Advertising and promotion: how the business will be advertised to potential
customers and details of estimated costs of marketing
Premises and equipment: details of planning regulations, costs of premises
and the need for equipment and buildings
Business organization: whether the enterprise will take the form of sole
trader, partnership, company or cooperative
Costs: indication of the cost of producing the product or service, the prices it
proposes to charge for the products
Finance: how much of the capital will come from savings and how much will
come from borrowings
Cash flow: forecast income (revenue) and outgoings (expenditures) over the
first year
Expansion: brief explanation of future plans

Making a business plan before actually starting the business can be very
helpful. By documenting the various details about the business, the owners
will find it much easier to run it. There is a lesser chance of losing sight of
the mission and vision of the business as the objectives have been written
down. Moreover, having the objectives of the business set down clearly will
help motivate the employees. A new entrepreneur will find it easier to get a
loan or overdraft from the bank if they have a business plan.

Government support for business startups

According to startup.com, “a startup is a company typically in the early
stages of its development. These entrepreneurial ventures are typically started
by 1-3 founders who focus on capitalizing upon a perceived market demand
by developing a viable product, service, or platform”.

Why do governments want to help new start-ups?

They provide employment to a lot of people

They contribute to the growth of the economy
They can also, if they grow to be successful, contribute to the exports of the
country
Start-ups often introduce fresh ideas and technologies into business and
industry

How do governments support businesses?

Organize advice: provide business advice to potential entrepreneurs, giving

them information useful in starting a venture, including legal and
bureaucratic ones
Provide low cost premises: provide land at low cost or low rent for new firms
Provide loans at low interest rates
Give grants for capital: provide financial aid to new firms for investment
Give grants for training: provide financial aid for workforce training
Give tax breaks/ holidays: high taxes are a disincentive for new firms to set
up. Governments can thus withdraw or lower taxation for new firms for a
certain period of time

Measuring business size: Businesses come in many sizes. They can be

owned by a single individual or have up to 50 shareholders. They can employ
thousands of workers or have a mere handful. But how can we classify a
business as big or small?
Business size can be measured in the following ways:

Number of employees: larger firms have larger workforce employed

Value of output: larger firms are likely to produce more than smaller ones
Value of capital employed: larger businesses are likely to employ much more
capital than smaller ones
However, these methods have their limitations and are not always accurate.

Example: Using the ‘number of employees’ method to compare business size

is not accurate as a capital intensive firm can produce large output by
employing very little labor. Similarly, the value of capital employed is not a
reliable measure when comparing a capital-intensive firm with a labor-
intensive firm. Output value is also unreliable because some different types
of products are valued differently, and the size of the firm doesn’t depend on
this.

Business growth
Businesses want to grow because growth helps reduce their average costs in
the long-run, help develop increased market share, and helps them produce
and sell to new markets.

There are two ways in which a business can grow- internally and externally.

Internal growth
This occurs when a business expands its existing operations. For example,
when a fast food chain opens a new branch in another country. This is a slow
means of growth but easier to manage than external growth.
External growth

This is when a business takes over or merges with another business. It is

sometimes called integration as one firm is ‘integrated’ into the other.

A merger: the owner of two businesses agree to join their firms together to
make one business.

A takeover: when one business buys out the owners of another business ,
which then becomes a part of the ‘predator’ business.

External growth can largely be classified into three types:

Horizontal merger/integration: This is when one firm merges with or takes

over another one in the same industry at the same stage of production. For
example, when a firm that manufactures furniture merges with another firm
that also manufacturers furniture.
Benefits:

Reduces the number of competitors in the market, since two firms become
one.
Opportunities of economies of scale.
Merging will allow the businesses to have a bigger share of the total market.

Vertical merger/integration: This is when one firm merges with or takes

over
another firm in the same industry but at a different stage of production.
Therefore, vertical integration can be of two types:
Backward vertical integration: When one firm merges with or takes over
another firm in the same industry but at a stage of production that is behind
the ‘predator’ firm. For example, when a firm that manufactures furniture
merges with a firm that supplies wood for manufacturing furniture.
Benefits:
Merger gives assured supply of essential components.
The profit margin of the supplying firm is now absorbed by the expanded
firm.
The supplying firm can be prevented from supplying to competitors.

Forward vertical integration: When one firm merges with or takes over
another firm in the same industry but at a stage of production that is ahead of
the ‘predator’ firm. For example, when a firm that manufactures furniture
merges with a furniture retail store.

Benefits:
Merger gives an assured outlet for their product.
The profit margin of the retailer is now absorbed by the expanded firm.
The retailer can be prevented from selling the goods of competitors.

Conglomerate merger/integration: This is when one firm merges with or

takes over a firm in a completely different industry. This is also known as
‘diversification’. For example, when a firm that manufactures furniture
merges with a firm that produces clothing.

Benefits:
Conglomerate integration allows businesses to have activities in more than
one country. This allows the firms to spread its risks.
There could be a transfer of ideas between the two businesses even though
they are in different industries. This transfer of ideas could help improve the
quality and demand for the two products.

Drawbacks of growth
Difficult to control staff: as a business grows, the business organization in
terms of departments and divisions will grow, along with the number of
employees, making it harder to control, coordinate and communicate with
everyone

Lack of funds: growth requires a lot of capital.

Lack of expertise: growth is a long and difficult process that will require
people with expertise in the field to manage and coordinate activities

Diseconomies of scale: this is the term used to describe how average costs of
a firm tends to increase as it grows beyond a point, reducing profitability.
This is explored more deeply in a later section.

Why businesses stay small

Not all businesses grow.Some stay small, employ a handful of workers and
have little output. Here are the reasons why.

Type of industry: some firms remain small due to the industry they operate in.
Examples of these are hairdressers, car repairs, catering, etc, which give
personal services and therefore cannot grow.

Market size: if the firm operates in areas where the total number of customers
is small, such as in rural areas, there is no need for the firm to grow and thus
stays small.

Owners’ objectives: not all owners want to increase the size of their firms and
profits. Some of them prefer keeping their businesses small and having a
personal contact with all of their employees and customers, having flexibility
in controlling and running the business, having more control over decision-
making, and to keep it less stressful.
Why businesses fail
Not all businesses are successful. The main reasons why they fail are:

Poor management: this is a common cause of business failure for new firms.
The main reason is lack of experience and planning which could lead to bad
decision making. New entrepreneurs could make mistakes when choosing the
location of the firm, the raw materials to be used for production, etc, all
resulting in failure
Over-expansion: this could lead to diseconomies of scale and greatly increase
costs, if a firms expands too quickly or over their optimum level
Failure to plan for change: the demands of customers keep changing with
change in tastes and fashion. Due to this, firms must always be ready to
change their products to meet the demand of their customers. Failure to do so
could result in losing customers and loss. They also won’t be ready to quickly
keep up with changes the competitors are making, and changes in laws and
regulations
Poor financial management: if the owner of the firm does not manage his
finances properly, it could result in cash shortages. This will mean that the
employees cannot be paid and enough goods cannot be produced. Poor cash
flow can therefore also cause businesses to fail
Why new businesses are at a greater risk of failure

Less experience: a lack of experience in the market or in business gets a lot

of firms easily pushed out of the market
New to the market: they may still not understand the nuances and trends of
the market, that existing competitors will have mastered

Don't have a lot of sales yet: only by increasing sales, can new firms grow
and find their foothold in the market. At a stage when they’re not selling
much, they are at a greater risk of failing
Don’t have a lot of money to support the business yet: financial issues can
quickly get the better of new firms if they aren’t very careful with their cash
flows. It is only after they make considerable sales and start making a profit,
can they reinvest in the business and support it.

Chapter 4
Types of Business Organizations

Sole Trader/Sole Proprietorship

A business organization owned and controlled by one person. Sole traders
can employ other workers, but only he/she invests and owns the business.

Advantages:

Easy to set up: there are very few legal formalities involved in starting and
running a sole proprietorship. A less amount of capital is enough by sole
traders to start the business. There is no need to publish annual financial
accounts.
Full control: the sole trader has full control over the business. Decision-
making is quick and easy, since there are no other owners to discuss matters
with.
Sole trader receives all profit: Since there is only one owner, he/she will
receive all of the profits the company generates.
Personal: since it is a small form of business, the owner can easily create and
maintain contact with customers, which will increase customer loyalty to the
business and also let the owner know about consumer wants and preferences.
Disadvantages:

Unlimited liability: if the business has bills/debts left unpaid, legal actions
will be taken against the investors, where even their personal property can be
seized, if their investments don’t meet the unpaid amount. This is because the
business and the investors are legally not separate (unincorporated).
Full responsibility: Since there is only one owner, the sole owner has to
undertake all running activities. He/she doesn’t have anyone to share his
responsibilities with. This workload and risks are fully concentrated on
him/her.
Lack of capital: As only one owner/investor is there, the amount of capital
invested in the business will be very low. This can restrict growth and
expansion of the business. Their only sources of finance will be personal
savings or borrowing or bank loans (though banks will be reluctant to lend to
sole traders since it is risky).
Lack of continuity: If the owner dies or retires, the business dies with
him/her.

Partnerships:
A partnership is a legal agreement between two or more (usually, up to
twenty)people to own, finance and run a business jointly and to share all
profits.

Advantages:
Easy to set up: Similar to sole traders, very few legal formalities are required
to start a partnership business. A partnership agreement/ partnership deed is a
legal document that all partners have to sign, which forms the partnership.
There is no need to publish annual financial accounts.
Partners can provide new skills and ideas: The partners may have some skills
and ideas that can be used by the business to improve business profits.
More capital investments: Partners can invest more capital than what a sole
trade only by himself could.

Disadvantages:
Conflicts: arguments may occur between partners while making decisions.
This will delay decision-making.
Unlimited liability: similar to sole traders, partners too have unlimited
liability- their personal items are at risk if business goes bankrupt
Lack of capital: smaller capital investments as compared to large companies.
No continuity: if an owner retires or dies, the business also dies with them.
Joint-stock companies
These companies can sell shares, unlike partnerships and sole traders, to raise
capital. Other people can buy these shares (stocks) and become a shareholder
(owner) of the company. Therefore they are jointly owned by the people who
have bought it’s stocks. These shareholders then receive dividends (part of
the profit; a return on investment).

The shareholders in companies have limited liabilities. That is, only their
individual investments are at risk if the business fails or leaves debts. If the
company owes money, it can be sued and taken to court, but its shareholders
cannot. The companies have a separate legal identity from their owners,
which is why the owners have a limited liability. These companies are
incorporated.
(When they’re unincorporated, shareholders have unlimited liability and
don’t have a separate legal identity from their business).

Companies also enjoy continuity, unlike partnerships and sole traders. That
is, the business will continue even if one of its owners retire or die.

Shareholders will elect a board of directors to manage and run the company
in it’s day-to-day activities. In small companies, the shareholders with the
highest percentage of shares invested are directors, but directors don’t have to
be shareholders. The more shares a shareholder has, the more their voting
power.

These are two types of companies:

Private Limited Companies: One or more owners who can sell its shares to
only the people known by the existing shareholders (family and friends).
Example: Ikea.
Public Limited Companies: Two or more owners who can sell their shares to
any individual/organization in the general public through stock exchanges
(see Economics: topic 3.1 – Money and Banking). Example: Verizon
Communications.

Advantages:

Limited Liability: this is because the company and the shareholders have
separate legal identities.
Raise huge amounts of capital: selling shares to other people (especially in
Public Ltd. Co.s), raises a huge amount of capital, which is why companies
are large.
Public Ltd. Companies can advertise their shares, in the form of a prospectus,
which tells interested individuals about the business, it’s activities, profits,
board of directors, shares on sale, share prices etc. This will attract investors.
Disadvantages:

Required to disclose financial information: Sometimes, private limited

companies are required by law to publish their financial statements annually,
while for public limited companies, it is legally compulsory to publish all
accounts and reports. All the writing, printing and publishing of such details
can prove to be very expensive, and other competing companies could use it
to learn the company secrets.
Private Limited Companies cannot sell shares to the public. Their shares can
only be sold to people they know with the agreement of other shareholders.
Transfer of shares is restricted here. This will raise lesser capital than Public
Ltd. Companies.
Public Ltd. Companies require a lot of legal documents and investigations
before it can be listed on the stock exchange.
Public and Private Limited Companies must also hold an Annual General
Meeting (AGM), where all shareholders are informed about the performance
of the company and company decisions, vote on strategic decisions and elect
board of directors. This is very expensive to set up, especially if there are
thousands of shareholders.
Public Ltd. Companies may have managerial problems: since they are very
large, they become very difficult to manage. Communication problems may
occur which will slow down decision-making.
In Public Ltd. Companies, there may be a divorce of ownership and control:
The shareholders can lose control of the company when other large
shareholders outvote them or when board of directors control company
decisions.
A summary of everything learned until now, in this section, in case you’re
getting confused:

Capture

Franchises
The owner of a business (the franchisor) grants a licence to another person or
business (the franchisee) to use their business idea – often in a specific
geographical area. Fast food companies such as McDonald’s and Subway
operate around the globe through lots of franchises in different countries.

TO FRANCHISOR
Advantages: Rapid, low cost method of business expansion
Gets and income from franchisee in the form of franchise fees and royalties

Franchisee will better understand the local tastes and so can advertise and sell
appropriately

Can access ideas and suggestions from franchisee

Franchisee will run the operations

Disadvantages: Profits from the franchise needs to be shared with the

franchisee
Loss of control over running of business

If one franchise fails, it can affect the reputation of the entire brand

Franchisee may not be as skilled

Need to supply raw material/product and provide support and training

ADVANTAGES TO FRANCHISEE: An established brand and trademark, so chance

of business failing is low
Franchisor will give technical and managerial support

Franchisor will supply the raw materials/products

DISADVANTAGES: Cost of setting up business

No full control over business- need to strictly follow franchisor’s standards

and rules

Profits have to be shared with franchisor

Need to pay franchisor franchise fees and royalties

Need to advertise and promote the business in the region themselves

Joint Ventures
Joint venture is an agreement between two or more businesses to work
together on a project. The foreign business will work with a domestic
business in the same industry. Eg: Google Earth is a joint venture/project
between Google and NASA.

Advantages

Reduces risks and cuts costs

Each business brings different expertise to the joint venture
The market potential for all the businesses in the joint venture is increased
Market and product knowledge can be shared to the benefit of the businesses

Disadvantages
Any mistakes made will reflect on all parties in the joint venture, which may
damage their reputations
The decision-making process may be ineffective due to different business
culture or different styles of leadership
Public Sector Corporations
Public sector corporations are businesses owned by the government and run
by directors appointed by the government. They usually provide essentials
services like water, electricity, health services etc. The government provides
the capital to run these corporations in the form of subsidies (grants). The
UK’s National Health Service (NHS) is an example. Public corporations aim
to:
to keep prices low so everybody can afford the service.
to keep people employed.
to offer a service to the public everywhere.

Advantages:
Some businesses are considered too important to be owned by an individual.
(electricity, water, airline)
Other businesses, considered natural monopolies, are controlled by the
government. (electricity, water)
Reduces waste in an industry. (e.g. two railway lines in one city)
Rescue important businesses when they are failing through nationalization
Provide essential services to the people

Drawbacks:
Motivation might not be as high because profit is not an objective
Subsidies lead to inefficiency. It is also considered unfair for private
businesses
There is normally no competition to public corporations, so there is no
incentive to improve
Businesses could be run for government popularity

Chapter 5
Business objectives & stakeholder objectives

Business objectives
Business objectives are the aims and targets that a business works towards to
help it run successfully. Although the setting of these objectives does not
always guarantee the business success, it has its benefits.

Setting objectives increases motivation as employees and managers now have

clear targets to work towards.
Decision making will be easier and less time consuming as there are set
targets to base decisions on. i.e., decisions will be taken in order to achieve
business objectives.
Setting objectives reduces conflicts and helps unite the business towards
reaching the same goal.
Managers can compare the business’ performance to its objectives and make
any changes in its activities if required.
Objectives vary with different businesses due to size, sector and many other
factors. However, many business in the private sector aim to achieve the
following objectives.
Survival: new or small firms usually have survival as a primary objective.
Firms in a highly competitive market will also be more concerned with
survival rather than any other objective. To achieve this, firms could decide
to lower prices, which would mean forsaking other objectives such as profit
maximization.
Profit: this is the income of a business from its activities after deducting total
costs. Private sector firms usually have profit making as a primary objective.
This is because profits are required for further investment into the business as
well as for the payment of return to the shareholders/owners of the business.
Growth: once a business has passed its survival stage it will aim for growth
and expansion. This is usually measured by value of sales or output. Aiming
for business growth can be very beneficial. A larger business can ensure
greater job security and salaries for employees. The business can also benefit
from higher market share and economies of scale.
Market share: this can be defined as the proportion of total market sales
achieved by one business. Increased market share can bring about many
benefits to the business such as increased customer loyalty, setting up of
brand image, etc.
Service to the society: some operations in the private sectors such as social
enterprises do not aim for profits and prefer to set more economical
objectives. They aim to better the society by providing social, environmental
and financial aid. They help those in need, the underprivileged, the
unemployed, the economy and the government.
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A business’ objectives do not remain the same forever. As market situations

change and as the business itself develops, its objectives will change to
reflect its current market and economic position. For example, a firm facing
serious economic recession could change its objective from profit
maximization to short term survival.
Stakeholders
A stakeholder is any person or group that is interested in or directly affected
by the performance or activities of a business. These stakeholder groups can
be external – groups that are outside the business or they can be internal –
those groups that work for or own the business.

Internal stakeholders:

Shareholder/ Owners: these are the risk takers of the business. They invest
capital into the business to set up and expand it. These shareholders are liable
to a share of the profits made by the business.
Objectives:
Shareholders are entitled to a rate of return on the capital they have invested
into the business and will therefore have profit maximization as an objective.
Business growth will also be an important objective as this will ensure that
the value of the shares will increase.
Workers: these are the people that are employed by the business and are
directly involved in its activities.
Objectives:
Contract of employment that states all the right and responsibilities to and of
the employees.
Regular payment for the work done by the employees.
Workers will want to benefit from job satisfaction as well as motivation.
The employees will want job security– the ability to be able to work without
the fear of being dismissed or made redundant.
Managers: they are also employees but managers control the work of others.
Managers are in charge of making key business decisions.
Objectives:
Like regular employees, managers too will aim towards a secure job.
Higher salaries due to their jobs requiring more skill and effort.
Managers will also wish for business growth as a bigger business means that
managers can control a bigger and well known business.
External Stakeholders:

Customers: they are a very important part of every business. They purchase
and consume the goods and services that the business produces/ provides.
Successful businesses use market research to find out customer preferences
before producing their goods.
Objectives:
Price that reflects the quality of the good.
The products must be reliable and safe. i.e., there must not be any false
advertisement of the products.
The products must be well designed and of a perceived quality.

Government: the role of the government is to protect the workers and

customers from the business’ activities and safeguard their interests.
Objectives:
The government will want the business to grow and survive as they will bring
a lot of benefits to the economy. A successful business will help increase the
total output of the country, will improve employment as well as increase
government revenue through payment of taxes.
They will expect the firms to stay within the rules and regulations set by the
government.

Banks: these banks provide financial help for the business’ operations’
Objectives:
The banks will expect the business to be able to repay the amount that has
been lent along with the interest on it. The bank will thus have business
liquidity as its objective.

Community: this consists of all the stakeholder groups, especially the third
parties that are affected by the business’ activities.
Objectives:
The business must offer jobs and employ local employees.
The production process of the business must in no way harm the
environment.
Products must be socially responsible and must not pose any harmful effects
from consumption.

Public- sector businesses

Government owned and controlled businesses do not have the same
objectives as those in the private sector.

Objectives:
Financial: although these businesses do not aim to maximize profits, they will
have to meet the profit target set by the government. This is so that it can be
reinvested into the business for meeting the needs of the society
Service: the main aim of this organization is to provide a service to the
community that must meet the quality target set by the government
Social: most of these social enterprises are set up in order to aid the
community. This can be by providing employment to citizens, providing
good quality goods and services at an affordable rate, etc.
They help the economy by contributing to GDP, decreasing unemployment
rate and raising living standards.
This is in total contrast to private sector aims like profit, growth, survival,
market share etc.

Conflicts of stakeholders’ objectives

As all stakeholders have their own aims they would like to achieve, it is
natural that conflicts of stakeholders’ interests could occur. Therefore, if a
business tries to satisfy the objectives of one stakeholder, it might mean that
another stakeholders’ objectives could go unfulfilled.

For example, workers will aim towards earning higher salaries. Shareholders
might not want this to happen as paying higher salaries could mean that less
profit will be left over for payment of return to the shareholders.

Similarly, the business might want to grow by expanding operations to build

new factories. But this might conflict with the community’s want for clean
and pollution-free localities.

Chapter 6
Motivating employees

Motivation
People work for several reasons:

Have a better standard of living: by earning incomes they can satisfy their
needs and wants
Be secure: having a job means they can always maintain or grow that
standard of living
Gain experience and status: work allows people to get better at the job they
do and earn a reputable status in society
Have job satisfaction: people also work for the satisfaction of having a job
Motivation is the reason why employees want to work hard and work
effectively for the business. Money is the main motivator, as explained
above. Other factors that may motivate a person to choose to do a particular
job may include social needs (need to communicate and work with others),
esteem needs (to feel important, worthwhile), job satisfaction (to enjoy good
work), security (knowing that your job and pay are secure- that you will not
lose your job).

Why motivate workers? Why do firms go to the pain of making sure their
workers are motivated? When workers are well-motivated, they become
highly productive and effective in their work, become absent less often, and
less likely to leave the job, thus increasing the firm’s efficiency and output,
leading to higher profits. For example, in the service sector, if the employee
is unhappy at his work, he may act lazy and rude to customers, leading to low
customer satisfaction, more complaints and ultimately a bad reputation and
low profits.

Motivation Theories
F. W. Taylor: Taylor based his ideas on the assumption that workers were
motivated by personal gains, mainly money and that increasing pay would
increase productivity (amount of output produced). Therefore he proposed
the piece-rate system, whereby workers get paid for the number of output
they produce. So in order, to gain more money, workers would produce more.
He also suggested a scientific management in production organization, to
break down labor (essentially division of labor) to maximize output
However, this theory is not entirely true. There are various other motivators
in the modern workplace, some even more important than money. The piece
rate system is not very practical in situations where output cannot be
measured (service industries) and also will lead to (high) output that doesn’t
guarantee high quality.

Maslow’s Hierarchy: Abraham Maslow’s hierarchy of needs shows that

employees are motivated by each level of the hierarchy going from bottom to
top. Managers can identify which level their workers are on and then take the
necessary action to advance them onto the next level.
Maslow's Hierarchy
One limitation of this theory is that it doesn’t apply to every worker. For
some employees, for example, social needs aren’t important but they would
be motivated by recognition and appreciation for their work from seniors.

Herzberg’s Two-Factor Theory: Frederick Herzberg’s two-factor theory,

wherein he states that people have two sets of needs:
Basic animal needs called ‘hygiene factors’:
status
security
work conditions
company policies and administration
relationship with superiors
relationship with subordinates
Salary

Needs that allow the human being to grow psychologically, called the
‘motivators’: achievement
recognition
personal growth/development
promotion
work itself
According to Herzberg, the hygiene factors need to be satisfied, if not they
will act as de-motivators to the workers. However hygiene factors don’t act
as motivators as their effect quickly wears off. Motivators will truly motivate
workers to work more effectively.

Motivating Factors
Financial Motivators

Wages: often paid weekly. They can be calculated in two ways:

Time-Rate: pay based on the number of hours worked. Although output may
increase, it doesn’t mean that workers will sincerely use the time to produce
more- they may simply waste time on very little output since their pay is
based only on how long they work. The productive and unproductive worker
will get paid the same amount, irrespective of their output.
Piece-Rate: pay based on the no. of output produced. Same as time-rate, this
doesn’t ensure that quality output is produced. Thus, efficient workers may
feel demotivated as they’re getting the same pay as inefficient workers,
despite their efficiency.

Salary: paid monthly or annually.

Commission: paid to salesperson, based on a percentage of sales they’ve
made. The higher the sales, the more the pay. Although this will encourage
salespersons to sell more products and increase profits, it can be very
stressful for them because no sales made means no pay at all.

Bonus: additional amount paid to workers for good work

Performance-related pay: paid based on performance. An appraisal (assessing
the effectiveness of an employee by senior management through interviews,
observations, comments from colleagues etc.) is used to measure this
performance and a pay is given based on this.
Profit-sharing: a scheme whereby a proportion of the company’s profits is
distributed to workers. Workers will be motivated to work better so that a
higher profit is made.

Share ownership: shares in the firm are given to employees so that they can
become part owners of the company. This will increase employees’ loyalty to
the company, as they feel a sense of belonging.
Non-Financial Motivators

Fringe benefits are non-financial rewards given to employees

Company vehicle/car
Free healthcare
Children’s education fees paid for
Free accommodation
Free holidays/trips
Discounts on the firm’s products

Job Satisfaction: the enjoyment derived from the feeling that you’ve done a
good job. Employees have different ideas about what motivates them- it
could be pay, promotional opportunities, team involvement, relationship with
superiors, level of responsibility, chances for training, the working hours,
status of the job etc. Responsibility, recognition and satisfaction are in
particular very important.
So, how can companies ensure that they’re workers are satisfied with the job,
other than the motivators mentioned above?

Job Rotation: involves workers swapping around jobs and doing each specific
task for only a limited time and then changing round again. This increases the
variety in the work itself and will also make it easier for managers to move
around workers to do other jobs if somebody is ill or absent. The tasks
themselves are not made more interesting, but the switching of tasks may
avoid boredom among workers. This is very common in factories with a huge
production line where workers will move from retrieving products from the
machine to labeling the products to packing the products to putting the
products into huge cartons.

Job Enlargement: where extra tasks of similar level of work are added to a
worker’s job description. These extra tasks will not add greater responsibility
or work for the employee, but make work more interesting. E.g.: a worker
hired to stock shelves will now, as a result of job enlargement, arrange stock
on shelves, label stock, fetch stock etc.

Job Enrichment: involves adding tasks that require more skill and
responsibility to a job. This gives employees a sense of trust from senior
management and motivates them to carry out the extra tasks effectively.
Some additional training may also be given to the employee to do so. E.g.: a
receptionist employed to welcome customers will now, as a result of job
enrichment, deal with telephone enquiries, word-process letters etc.

Team-working: a group of workers is given responsibility for a particular

process, product or development. They can decide as a team how to organize
and carry out the tasks. The workers take part in decision making and take
responsibility for the process. It gives them more control over their work and
thus a sense of commitment, increasing job satisfaction. Working as a group
will also add to morale, fulfill social needs and lead to job satisfaction.

Opportunities for training: providing training will make workers feel that
their work is being valued. Training also provides them opportunities for
personal growth and development, thereby attaining job satisfaction

Opportunities of promotion: providing opportunities for promotion will get

workers to work more efficiently and fill them with a sense of self-
actualisation and job satisfaction
 Chapter 7
Organization and Management

Organizational structure refers to the levels of management and division of

responsibilities within a business. They can be represented on organizational
charts (left).

Advantages:

All employees are aware of which communication channel is used to reach

them with messages
Everyone knows their position in the business. They know who they are
accountable to and who they are accountable for
It shows the links and relationship between the different departments
Gives everyone a sense of belonging as they appear on the organizational
chart

The span of control is the number of subordinates working directly under a

manager in the organizational structure. In the above figure, the managing
director’s span of control is four. The marketing director’s span of control is
the number of marketing managers working under him (it is not specified
how many, in the figure).

The chain of command is the structure of an organization that allows

instructions to be passed on from senior managers to lower levels of
management. In the above figure, there is a short chain of command since
there are only four levels of management shown.

Now, if you look closely,there is a link between the span of control and chain
of command. The wider the span of control the shorter the chain of command
since more people will appear horizontally aligned on the chart than
vertically. A short span of control often leads to a long chain of command. (If
you don’t understand, try visualizing it on an organizational chart).

Advantages of a short chain of command (these are also the disadvantages of

a long chain of command):

Communication is quicker and more accurate

Top managers are less remote from lower employees, so employees will be
more motivated and top managers can always stay in touch with the
employees
Spans of control will be wider, This means managers have more people to
control This is beneficial because it will encourage them to delegate
responsibility (give work to subordinates) and so the subordinates will be
more motivated and feel trusted. However there is the risk that managers may
lose control over the tasks.

Line Managers have authority over people directly below them in the
organizational structure. Traditional marketing/operations/sales managers are
good examples.

Staff Managers are specialists who provide support, information and

assistance to line managers. The IT department managers in most
organizations act as staff managers.

Management
So, what role do managers really have in an organization? Here are their five
primary roles:

Planning: setting aims and targets for the organizations/department to

achieve. It will give the department and its employees a clear sense of
purpose and direction. Managers should also plan for resources required to
achieve these targets – the number of people required, the finance needed etc.

Organizing: managers should then organize the resources. This will include
allocating responsibilities to employees, possibly delegating.

Coordinating: managers should ensure that each department is coordinating

with one another to achieve the organization’s aims. This will involve
effective communication between departments and managers and decision
making. For example, the sales department will need to tell the operations
dept. how much they should produce in order to reach the target sales level.
The operations dept. will in turn tell the finance dept. how much money they
need for production of those goods. They need to come together regularly and
make decisions that will help achieve each department’s aims as well as the
organization’s.

Commanding: managers need to guide, lead and supervise their employees in

the tasks they do and make sure they are keeping to their deadlines and
achieving targets.
Controlling: managers must try to assess and evaluate the performance of
each of their employees. If some employees fail to achieve their target, the
manager must see why it has occurred and what he can do to correct it-
maybe some training will be required or better equipment.

Delegation is giving a subordinate the authority to perform some tasks.

Advantages to managers:
managers cannot do all work by themselves
managers can measure the efficiency and effectiveness of their subordinates’
work
However, managers may be reluctant to delegate as they may lose their
control over the work.
Advantages to subordinates:
the work becomes more interesting and rewarding- increased job satisfaction
employees feel more important and feel trusted– increasing loyalty to firm
can act as a method of training and opportunities for promotions, if they do a
good job.

Leadership Styles
Leadership styles refer to the different approaches used when dealing with
people when in a position of authority. There are mainly three styles you
need to learn: the autocratic, democratic and laissez-faire styles.

Autocratic style is where the managers expects to be in charge of the business

and have their orders followed. They do all the decision-making, not
involving employees at all. Communication is thus, mainly one way- from
top to bottom. This is standard in police and armed forces organizations.

Democratic style is where managers involve employees in the decision-

making and communication is two-way from top to bottom as well as bottom
to top. Information about future plans is openly communicated and discussed
with employees and a final decision is made by the manager.

Laissez-faire (French phrase for ‘leave to do) style makes the broad
objectives of the business known to employees and leaves them to do their
own decision-making and organize tasks. Communication is rather difficult
since a clear direction is not given. The manager has a very limited role to
play.

Trade Unions
A trade union is a group of workers who have joined together to ensure their
interests are protected. They negotiate with the employer (firm) for better
conditions and treatment and can threaten to take industrial action if their
requests are denied. Industrial action can include an overtime ban (refusing to
work overtime), going slow (working at the slowest speed as is required by
the employment contract), strike (refusing to work at all and protesting
instead) etc. Trade unions can also seek to put forward their views to the
media and influence government decisions relating to employment.

Benefits to workers of joining a trade union:

strength in number- a sense of belonging and unity

improved conditions of employment, for example, better pay, holidays, hours
of work etc
improved working conditions, for example, health and safety
improved benefits for workers who are not working, because they’re sick,
retired or made redundant (dismissed not because of any fault of their own)
financial support if a member thinks he/she has been unfairly dismissed or
treated
benefits that have been negotiated for union members such as discounts on
firm’s products, provision of health services.
Disadvantages to workers of joining a trade unions:

costs money to be member- a membership fee will be required

may be asked to take industrial action even if they don’t agree with the
union- they may not get paid during a strike, for example.

Chapter 8
Recruitment, Selection and Training of Workers

The Role of the H.R. (Human Resource) Department

Recruitment and selection: attracting and selecting the best candidates for job
posts
Wages and salaries: set wages and salaries that attract and retain employees
as well as motivate them
Industrial relations: there must be effective communication between
management and workforce to solve complaints and disputes as well as
discussing ideas and suggestions
Training programmes: give employees training to increase their productivity
and efficiency
Health and safety: all laws on health and safety conditions in the workplace
should be adhered to
Redundancy and dismissal: the managers should dismiss any
unsatisfactory/misbehaving employees and make them redundant if they are
no longer needed by the business.

Recruitment
Job Analysis, Description and Specification

Recruitment is the process from identifying that the business needs to employ
someone up to the point where applications have arrived at the business.
A vacancy arises when an employee resigns from a job or is dismissed by the
management. When a vacancy arises, a job analysis has to be prepared. A job
analysis identifies and records the tasks and responsibilities relating to the
job. It will tell the managers what the job post is for.
Job-description-specification: Then a job description is prepared that outlines
the responsibilities and duties to be carried out by someone employed to do
the job. It will have information about the conditions of employment (salary,
working hours, and pension scheme), training offered, opportunities for
promotion etc. This is given to all prospective candidates so they know what
exactly they will be required and expected to do.
Once this has been done, the H.R. the department will draw up a job
specification, a document that outlines the requirements, qualifications,
expertise, skills, physical/personal characteristics etc. required by an
employee to be able to take up the job.
Advertising the vacancy
Internal recruitment is when a vacancy is filled by an existing employee of
the business.

Advantages:
Saves time and money- no need for advertising and interviewing
Person already known to business
Person knows business’ ways of working
Motivating for other employees to see their colleagues being promoted-
urging them to work hard
Disadvantages:

No new skills and experience coming into the business

Jealousy among workers

External recruitment is when a vacancy is filled by someone who is not an

existing employee and will be new to the business. External recruitment
needs to be advertised, unlike internal recruitment. This can be done in
local/national newspapers, specialist magazines and journals, job centers run
by the government (where job vacancies are posted and given to interested
people; usually for unskilled or semi-skilled jobs) or even recruitment
agencies (who will recruit and send along candidates to the company when
they request it).

When advertising a job, the business needs to decide what should be included
in the advertisement, where it should be advertised, how much it will cost and
whether it will be cost-effective.

When a person is interested in a job, they should apply for it by sending in a

curriculum vitae (CV) or resume, this will detail the person’s qualifications,
experience, qualities and skills.The business will use these to see which
candidates match the job specification. It will also include statements of why
the candidate wants the job and why he/she feels they would be suitable for
the job.

Selection
Applicants who are shortlisted will be interviewed by the H.R. manager.
They will also call up the referee provided by the applicant (a referee could
be the previous employer or colleagues who can give a confidential opinion
about the applicant’s reliability, honesty and suitability for the job).
Interviews will allow the manager to assess:

the applicant’s ability to do the job

personal qualities of the applicant
character and personality of applicant
In addition to interviews, firms can conduct certain tests to select the best
candidate. This could include skills tests (ability to do the job), aptitude tests
(candidate’s potential to gain additional skills), personality tests (what kind of
a personality the candidate has- will it be suitable for the job?), group
situation tests (how they manage and work in teams) etc.

When a successful candidate has been selected the others must be sent a letter
of rejection.

The contract of employment: a legal agreement between the employer and the
employee listing the rights and responsibilities of workers. It will include:

the name of employer and employee

job title
date when employment will begin
hours to work
rate of pay and other benefits
when payment is made
holiday entitlement
the amount of notice to be given to terminate the employment that the
employer or employee must give to end the employment etc.
Employment contracts can be part-time or full-time. Part-time employment is
often considered to be between 1 and 30-35 hours a week whereas full-time
employment will usually work 35 hours or more a week.

Advantages to employer of part-time employment (disadvantages of full-time

employment to employer):

more flexible hours of work

easier to ask employees just to work at busy times
easier to extend business opening/operating hours by working evenings or at
weekends
works lesser hours so employee is willing to accept lower pay
less expensive than employing and paying full-time workers.
Disadvantages to employer of part-time employment (advantages of full-time
employment to employers)

less likely to be trained because the workers see the job as temporary
takes longer to recruit two part-time workers than one full-time worker
can be less committed to the business/ more likely to leave and go get another
job
less likely to be promoted because they will not have gained the skills and
experience as full-time employees
more difficult to communicate with part-time workers when they are not in
work- all work at different times.
Training
Training is important to a business as it will improve the worker’s skills and
knowledge and help the business be more efficient and productive, especially
when new processes and products are introduced. It will improve the
workers’ chances at getting promoted and raise their morale.
The three types of training are:

Induction training: an introduction given to a new employee, explaining the

firm’s activities, customs and procedures and introducing them to their fellow
workers.
Advantages:

Helps new employees to settle into their job quickly

May be a legal requirement to give health and safety training before the start
of work
Less likely to make mistakes
Disadvantages:

Time-consuming
Wages still have to be paid during training, even though they aren’t working
Delays the state of the employee starting the job
On-the-job training: occurs by watching a more experienced worker doing
the job

Advantages:
It ensures there is some production from worker whilst they are training
It usually costs less than off-the-job training
It is training to the specific needs of the business
Disadvantages:

The trainer will lose some production time as they are taking some time to
teach the new employee
The trainer may have bad habits that can be passed onto the trainee
It may not necessarily be recognised training qualifications outside the
business
Off-the-job training: involves being trained away from the workplace, usually
by specialist trainers
Advantages:
A broad range of skills can be taught using these techniques
Employees may be taught a variety of skills and they may become multi-
skilled that can allow them to do various jobs in the company when the need
arises.

Disadvantages:
Costs are high
It means wages are paid but no work is being done by the worker
The additional qualifications means it is easier for the employee to leave and
find another job

Workforce Planning
Workforce Planning: the establishing of the workforce needed by the
business for the foreseeable future in terms of the number and skills of
employees required.

They may have to downsize (reduce the no. of employees) the workforce
because of:

Introduction of automation
Falling demand for their products
Factory/shop/office closure
Relocating factory abroad
A business has merged or been taken over and some jobs are no longer
needed
They can downsize the workforce in two ways:

Dismissal: where a worker is told to leave their job because their work or
behavior is unsatisfactory.
Redundancy: when an employee is no longer needed and so loses their work,
though not due to any fault of theirs. They may be given some money as
compensation for the redundancy.
Workers could also resign (they are leaving because they have found another
job) and retire (they are getting old and want to stop working).

Legal Controls over Employment Issues

There are a lot of government laws that affect equal employment
opportunities. These laws require businesses to treat their employees equally
in the workplace and when being recruited and selected- there should be no
discrimination based on age, gender, religion, race etc.

Employees are protected in many areas including

against unfair discrimination

health and safety at work (protection from dangerous machinery, safety
clothing and equipment, hygiene conditions, medical aid etc.)
against unfair dismissal

wage protection (through the contract of employment since it will have listed
the pay and conditions). Many countries have a legal minimum wage– the
minimum wage an employer has to pay its employee. This avoids employers
from exploiting its employees, and encourages more people to find work, but
since costs are rising for the business, they may make many workers
redundant- unemployment will rise.
An industrial tribunal is a legal meeting which considers workers’ complaints
of unfair dismissal or discrimination at work. This will hear both sides of the
case and may give the worker compensation if the dismissal was unfair.

Chapter 9
 Internal and External Communication

Effective Communication
Communication is the transferring of a message from the sender to the
receiver, who understands the message.

Internal communication is between two members of the same organisations.

Example: communication between departments, notices and circulars to
workers, signboards and labels inside factories and offices etc.

External communication is between the organisation and other organisations

or individuals. Example: orders of goods to suppliers, advertising of products,
sending customers messages about delivery, offers etc.

Effective communication involves:

A transmitter/sender of the message

A medium of communication eg: letter, telephone conversation, text message
A receiver of the message
A feedback/response from the receiver to confirm that the message has benn
received and acknowledged.
One-way communication involves a message which does not require
feedback. Example: signs saying ‘no smoking’ or an instruction saying
‘deliver these goods to a customer’

Two-way communication is when the receiver gives a response to the

message received. Example: a letter from one manager to another about an
important matter that needs to be discussed. A two-way communication
ensures that the person receiving the message understands it and has acted on
it. It also makes the receiver feel more a part of the process- could be a way
of motivating employees.
Downward communication: messages from managers to subordinates i.e.
from top to bottom of an organization structure.

Upward communication: messages/feedback from subordinates to managers

i.e. from bottom to top of an organization structure

Horizontal communication occurs between people on the same level of an

organization structure.

Communication Methods

Verbal methods (eg: telephone conversation, face-to-face conversation, video

conferencing, meetings)

Advantages:
Quick and efficient
There is an opportunity for immediate feedback
Speaker can reinforce the message- change his tone, body language etc. to
influence the listeners.
Disadvantages:
Can take long if there is feedback and therefore, discussions
In a meeting, it cannot be guaranteed that everybody is listening or has
understood the message
No written record of the message can be kept for later reference.

Written methods (eg: letters, memos, text-messages, reports, e-mail, social

media, faxes, notices, signboards)

Advantages:
There is evidence of the message for later reference.
Can include details
Can be copied and sent to many people, especially with e-mail
E-mail and fax is quick and cheap

Disadvantages:
Direct feedback may not always be possible
Cannot ensure that message has been received and/or acknowledged
Language could be difficult to understand.
Long messages may cause disinterest in receivers
No opportunity for body language to be used to reinforce messages

Visual Methods (eg: diagrams, charts, videos, presentations, photographs,

cartoons, posters)

Advantages:
Can present information in an appealing and attractive way
Can be used along with written material (eg: reports with diagrams and
charts)
Disadvantages:
No feedback
May not be understood/ interpreted properly.
Factors that affect the choice of an appropriate communication method:

Speed: if the receiver has to get the information quickly, then a telephone call
or text message has to be sent. If speed isn’t important, a letter or e-mail will
be more appropriate.
Cost: if the company wishes to keep costs down, it may choose to use letters
or face-to-face meetings as a medium of communication. Otherwise,
telephone, posters etc. will be used.
Message details: if the message is very detailed, then written and visual
methods will be used.
Leadership style: a democratic style would use two-way communication
methods such as verbal mediums. An autocratic one would use notices and
announcements.
The receiver: if there is only receiver, then a personal face-to-face or
telephone call will be more apt. If all the staff is to be sent a message, a
notice or e-mail will be sent.
Importance of a written record: if the message is one that needs to have a
written record like a legal document or receipts of new customer orders, then
written methods will be used.
Importance of feedback: if feedback is important, like for a quick query, then
a direct verbal or written method will have to be used.
Formal communication is when messages are sent through established
channels using professional language. Eg: reports, emails, memos, official
meetings.

Informal communication is when information is sent and received casually

with the use of everyday language. Eg: staff briefings. Managers can
sometimes use the ‘grapevine’ (informal communication among employees-
usually where rumors and gossip spread!) to test out the reactions to new
ideas (for example, a new shift system at a factory) before officially deciding
whether or not to make it official.

Chapter 10
Marketing, Competition and the Customer

A market consists of all buyers and sellers of a particular good.

What is marketing?

By definition, marketing is the management process responsible for

identifying, anticipating and satisfying consumers’ requirements profitably.

The role of marketing in a business is as follows:

Identifying customer needs through market research

Satisfying customer needs by producing and selling goods and services
Maintaining customer loyalty: building customer relationships through a
variety of methods that encourage customers to keep buying one firm’s
products instead of their rivals’. For example, loyalty card schemes, discounts
for continuous purchases, after-sales services, messages that inform past
customers of new products and offers etc.
Gain information on customers: by understanding why customers buy their
products, a firm can develop and sell better products in the future
Anticipate changes in customer needs: the business will need to keep looking
for any changes in customer spending patterns and see if they can produce
goods that customers want that are not currently available in the market.
Some objectives the marketing department in a firm may have:

Raise awareness of their product(s)

Increase sales revenue and profits
Increase or maintain market share (this is the proportion of sales a company
has in the overall market sales. For example, if in a market, $1 million worth
of toys were sold in a year and company A’s total sales was $30,000 in that
year, company A’s market share for the year is ($300,000/ $1000000) *100 =
30%)
Enter new markets at home or abroad
Develop new products or improve existing products.
Market Changes
Why customer spending patterns may change:

change in their tastes and preferences

change in technology: as new technology becomes available, the old versions
of products become outdated and people want more sophisticated features on
products
change in income: the higher the income, the more expensive goods
consumers will buy and vice versa
ageing population: in many countries, the proportion of older people is
increasing and so demand for products for seniors are increasing (such as
anti-ageing creams, medical assistance etc.)
The power and importance of changing customer needs:

Firms need to always know what their consumers want (and they will need to
undertake lots of research and development to do so) in order to stay ahead of
competitors and stay profitable. If they don’t produce and sell what
customers want, they will buy competitors’ products and the firm will fail to
survive.

Why some markets have become more competitive:

Globalization: products are being sold in markets all over the world, so there
are more competitors in the market
Improvement in transportation infrastructures: better transport systems means
that it is easier and cheaper to distribute and sell products everywhere
Internet/E-Commerce: customers can now buy products over the internet
form anywhere in the world, making the market more competitive
How business can respond to changing spending patterns and increased
competition:

A business has to ensure that it maintains its market share and remains
competitive in the market. It can ensure this by:

maintaining good customer relationships: by ensuring that customers keep

buying from their business only, they can keep up their market share. By
doing so, they can also get information about their spending patterns and
respond to their wants and needs to increase market share
keep improving its existing products, so that sales is maintained.
introduce new products to keep customers coming back, and drive them away
from competitors’ products
keep costs low to maintain profitability: low costs means the firm can afford
to charge low prices. And low prices generally means more demand and
sales, and thus market share.

Niche & Mass Marketing

Niche Marketing: identifying and exploiting a small segment of a larger
market by developing products to suit it. For example, Versace designs and
Clique perfumes have niche markets- the rich, high-status consumer group.

Advantages:
Small firms can thrive in niche markets where large forms have not yet been
established
If there are no or very few competitors, firms can sell products at a high price
and gain high profit margins because customers will be willing be willing to
pay more for exclusive products
Firms can focus on the needs of just one customer group, thereby giving them
an advantage over large firms who only sell to the mass market
Limitations:

Lack of economies of scale (can’t benefit from the lower costs that arise from
a larger operations/market)
Risk of over-dependence on a single product or market: if the demand for the
product falls, the firm won’t have a mass product they can fall back on
Likely to attract competition if successful

Mass Marketing: selling the same product to the whole market with no
attempt to target groups with in it. For example, the iPhone sold is the same
everywhere, there are no variations in design over location or income.

Advantages:
Larger amount of sales when compared to a niche market
Can benefit from economies of scale: a large volume of products are
produced and so the average costs will be low when compared to a niche
market
Risks are spread, unlike in a niche market. If the product isn’t successful in
one market, it’s fine as there are several other markets
More chances for the business to grow since there is a large market. In niche
markets, this is difficult as the product is only targeted towards a particular
group.
Limitations:
They will have to face more competition
Can’t charge a higher price than competition because they’re all selling
similar products

Market Segmentation
A market segment is an identifiable sub-group of a larger market in which
consumers have similar characteristics and preferences

Market segmentation is the process of dividing a market of potential

customers into groups, or segments, based on different characteristics. For
example, PepsiCo identified the health-conscious market segment and
targeted/marketed the Diet Coke towards them.

Markets can be segmented on the basis of socio-economic groups (income),

age, location, gender, lifestyle, use of the product (home/ work/ leisure/
business) etc.
Each segment will require different methods of promotion and distribution.
For example, products aimed towards kids would be distributed through
popular retail stores and products for businessmen would be advertised in
exclusive business magazines.

Advantages:
Makes marketing cost-effective, as it only targets a specific segment and
meets their needs.
The above leads to higher sales and profitability
Increased opportunities to increase sales