Business Studies Full Tutor 2 U
Starting a Business - What is enterprise? The term “enterprise” has two common meanings. Firstly, an enterprise is simply another name for a business. You will often come across the use of the word when reading about start-ups and other businesses…“Simon Cowell‟s enterprise” or “Michelle set up her successful enterprise after leaving teaching”. Secondly, and perhaps more importantly, the word enterprise describes the actions of someone who shows some initiative by taking a risk by setting up, investing in and running a business. Look again at two key words above – initiative and risk. A person who takes the initiative is someone who “makes things happen”. He or she tends to be decisive. A business opportunity is identified and the person does something about it. Showing initiative is about taking decisions and being bold – not everyone is like that! Risk-taking is slightly different. In business there is no such thing as a “sure fire bet”. All business investments carry an element of risk – which is the chance or probability that things will go wrong. At the worst, the risk of an enterprise might mean the person making the investment loses all his/her money or becomes personally liable for the debts of the business. The trick is to take calculated risks, and to ensure that the likely returns from taking a risk are enough to make the gamble worthwhile. Someone who shows enterprise is an “entrepreneur”.
Starting a Business - Objectives of a new business What motivates someone to become an entrepreneur? Money of course! The chance to earn significant profits, buy a yacht, take numerous holidays, buy designer goods and send the kids to the best private schools. But, wait a minute! Is money and personal wealth really the main motivation? Evidence suggests that there are many more reasons why someone wants to start a business. Every business starts small. But by taking on some calculated risks, a lot of determination and some luck, a start-up business can become very large, profitable and valuable. However, not every entrepreneur wants to build a big business and earn a fortune. The objectives when starting a business can be broadly split into two categories: Financial objectives, and Non-financial objectives The media tend to focus on the financial objectives – so let‟s deal with these first.
Most business start-ups begin with one main financial objective – to survive.
Why survival? Because a large percentage of new businesses do not survive much beyond their launch. The entrepreneur discovers that the business idea is not viable – the business cannot be run profitably or it runs out of cash. Start-ups have a high failure rate. Survival is about the business living within its means. To survive, the business needs to have enough cash to pay the debts of the business as they arise – suppliers, wages, rent, raw materials and so on. To survive, a business needs to have: Sufficient sources of finance (e.g. cash, a bank overdraft, share capital) A viable business model – i.e. one which can make a profit If survival can be assured, then profit is the next most important financial objective for a new business. A profit is earned when the revenue of the business exceeds the total costs. The entrepreneur can choose to reinvest (aka “retain”) the profit in the business, or take it out as a personal payment or dividend. For many small business owners, profit is the return for all the hard work and risks taken. Profit is the reward for taking a risk and making an investment. Ideally, the profit earned is sufficient to provide the entrepreneur with enough income to live. In many cases it will be more than sufficient, once the business has been trading successfully for a few years However, it is important to appreciate that, to make a sustainable profit, a new business needs to be able to: Add value Sell into a large enough market Another financial objective is personal wealth. Some entrepreneurs have an objective that goes beyond wanting to earn an adequate income. They aim to build a valuable business that can substantially increase their personal wealth.
Contrary to popular belief, starting a business is not always about financial objectives. Very often a new business is started with other, non-financial objectives in mind. Here are some of the non-financial motives that are often quoted by entrepreneurs: More control over working life – want to choose what kind of work is done. The need for greater independence is a major motivator. Need a more flexible and convenient work schedule, including being able to work from or close to home. This motive is an important reason behind the many home-based business start-ups Feel that skills are being wasted and that potential is not being fulfilled Want to escape an uninteresting job or career A desire to pursue an interest or hobby Fed up with being told what to do – want to be the boss! Want the feeling of personal satisfaction from building a business Want a greater share of the rewards from the effort being put in – compared with simply being paid by an employer Fed up with working in a business hierarchy or bureaucratic organisation (people with entrepreneurial characteristics often feel stifled working and having to co-exist with others!
redundancy. an entrepreneur asks questions such as: Do I have a clear idea about the vision for the business? Am I really determined and committed to making the business work? Do I appreciate and accept the personal challenges and sacrifices that I will have to make? Can I handle the inevitable feeling of isolation and insecurity that a start-up brings? Can I afford to fail? What are the financial implications if the business does not succeed? Will customers really buy the product.uk will display many books by entrepreneurs and other “business experts” describing “how they made it”. Imagine how many jobs are created by the thousands of new businesses that are set up every year and by the small businesses that prosper and take on more staff. In other words he/she: Takes the initiative in trying to exploit a business opportunity Takes time to understand and calculate the risks involved Makes an investment to set up the business Goes ahead. but they tend to say the same thing. A quick search on Amazon. illness.What is an entrepreneur? There are many definitions of what is meant by an entrepreneur.As a response to a shock or other major change in personal circumstances – e. despite the risk that the business venture might fail When deciding whether or not to take the risk of starting a business. supplies. “my first million” etc. Sir Richard Branson and Sir James Dyson have earned enormous fortunes and provide inspiration for the next generation of budding business leaders. They make a major contribution to economic activity.
. which is that an entrepreneur is… Someone who takes a risk by starting a business An entrepreneur is someone who is enterprising.co. assuming that I get it right? Who already provides this product (or something similar) and can I do it better or cheaper? How will I know if the business is succeeding or failing? Is my business plan sufficiently realistic. divorce. distribution) that are needed to make the idea work? Do I need to obtain legal protection for the idea? In recent years the media have glamorised the challenge of starting and growing a business. particularly in terms of cash flows and likely start-up losses? Can I access the resources (cash. Entrepreneurs such as Lord Sugar. Risking it All and The Apprentice have proved hugely popular by showcasing the challenges faced in setting up a business. Prime-time television shows such as Dragons Den. Entrepreneurs encourage innovation through investment and risk-taking. bereavement Starting a Business . Many of the products and services you use every day have been developed through entrepreneurial activity rather than in the research laboratories or board-rooms of large multinationals. Entrepreneurs play an important role in society.g.
For the start-up. Observation Simply observing what goes on around you can be a good way of spotting an idea. similar economies. persistent queues etc). Such examples suggest that there is an opportunity to do something better. On the other hand. just because you have a passion for collecting rare tin openers. pricing. you might argue that “familiarity breeds contempt”. there is a ready market from people with similar interests! Many people have tried to turn their hobby into a business and found that generates only a small contribution to household income. detailed experience of an industry means that the budding entrepreneur doesn‟t have a fresh perspective.Sources of business ideas Where does an entrepreneur come up with the idea for his/her business? In practice there are many ways in which the business opportunity and idea is first spotted. costs etc Industry contacts. For some of us. although you have to be careful to avoid assuming that. Often an idea will be launched in another country and has not yet been tried in other. In other words. Here are some of the main sources of business ideas for start-ups: Business experience Many ideas for successful businesses come from people who have experience of working in a particular market or industry. product returns. For the entrepreneur they might suggest a business opportunity. there are several advantages of applying this experience to a new business: Better and more detailed understanding of what customers want Knowledge of competitors. who might then become the first customers of the start-up! All of the above help the business planning process and you could argue that they reduce the risks of a start-up. sometimes luck plays a big part. Hobbies and interests are also a rich source of business ideas. Starting a Business . or from their hobbies and interests. When
. quicker or cheaper than the existing products. at other times there is a role for approaches which encourage deliberate creativity. Personal experience Many ideas come to entrepreneurs from their day-to-day dealings in life. frustrating or bad experiences are a source of irritation. For every success story there are almost certainly many more business failures or businesses that don‟t meet the expectations of the people who set them up. suppliers etc Less need for start-up market research Entrepreneur is able to make more realistic assumptions in the business plan about sales. it is important to realise that starting a business is rarely glamorous. As we shall see. Someone who is new to a market may be able to exploit approaches that have worked in other industries to make an impact with the start-up. It is often said that one of the best ways to spot a business opportunity is to look for examples of poor customer service (complaints.However. In fact it is nearly always very hard work.
g. even a relatively small event can prove disastrous. Will King Will found traditional wet-shaving painful due to his sensitive skin. often starved of cash. After some brief market research. Where the Idea Came From
King of Shaves
Superjam Beautiful Vending Jo Jingles
Fraser Doherty Neil Mackay & Richard Starrett Gill Thomas
Starting a Business . Gill made a lifestyle choice to move out of the corporate world and set up her own business. Neil & Richard spotted the potential for grooming machines whilst working in entertainments industry.
. Here are some good ones: Entrepreneur Business Glasses Direct James Murray-Wells James was fed-up with being charged “rip-off prices” for prescription glasses. Stephen found out that there was no similar business in the UK. cash etc The third part of the assessment above is perhaps the most important. He added value to the potatoes by turning them into premium-priced crisps. Will needed to find an alternative use for the output from his loss-making potato farm. She combined her personal interest in teaching music to children with an idea for a franchise format. For the small business.Risks and Rewards Taking a calculated risk An entrepreneur cannot avoid risk in a start-up and everyone knows that a large proportion of new businesses eventually fail. An oil-based solution to shaving was developed and is now a world leader. so he launched one. by luck he sat next to someone who ran a household service business (treating lawns). He researched the supply chain and found he could offer consumers the same product at substantially cheaper prices by selling direct. The entrepreneur has to assess the potential impact on the business of a risk.Stephen Waring was in the USA attending a wedding. His girlfriend suggested using oil to smooth the process. Fraser turned his grandmother‟s recipe for sugar-free jams into a best-selling grocery brand. It is worth looking at some other examples of how successful start-ups got their ideas in order to appreciate the diversity of sources. unexpected costs. failure to secure distribution) The probability of the risks happening (this has to be an estimate) What would happen if the risks occur – cost. It has since become a hugely successful franchise business – Green Thumb. but also assess the upside (where things turn out to be better than expected). The trick is to assess: What the main risks are in a new business (e. lower than expected sales.
LK Bennett. ultimately. He sold it in 2005 for £43million Darren Richards started up his online dating agency (DatingDirect. Rewards from enterprise That‟s enough about the negative side of setting a business up. Starting a Business . They never lose the entrepreneurial buzz. here are some examples: Karen Darby sold her business SimplySwitch.com) with just £2. a calculated risk can be defined as follows: “A risk that has been given thoughtful consideration and for which the potential costs and potential benefits have been weighted and considered” Entrepreneurs take calculated risks everyday. A sense of satisfaction Building something Being in control Making that first sale Opening a new location Employing more people Getting an industry award or good publicity Getting great feedback from customers These are the kind of non-financial rewards that give entrepreneurs a buzz. it is the financial rewards that justify the effort and make taking the risk worthwhile. To illustrate the potential financial rewards. a service allowing consumers to compare rates for gas and electricity suppliers among other things. Here are some of the models or approaches to deliberate creativity which might be used by a start-up:
. to the Daily Mail for £22million Linda Bennett. What about the rewards? We looked earlier at the motivations for setting up a business.Creative thinking to create business ideas An entrepreneur is always on the look out for a business opportunity – the thinking process takes place constantly. However. since they take decisions everyday.So. Many of the intangible rewards that arise from being in business happen because these motives are achieved. Such people are called “serial entrepreneurs”. Each time they take a decision they are weighing up the significance of the options and (often intuitively) working out whether to go ahead. This is often referred to as “deliberate creativity”. However. it can also be argued that a formal process of creative thinking can also help someone set up a new business. one of Britain‟s most successful female entrepreneurs. to two venture capitalists for £70million Gerry Pack started up his business Holiday Extras providing airport hotel rooms and parking with just £100.500 and sold it eight years later for £30million You should also remember that there is a strong tradition of entrepreneurs who have built and sold one business for a substantial amount going onto build other successful businesses. sold her women‟s fashion chain.
This is the opposite of the black hat – what are all the positives or upsides from the idea. seeing where a thought goes. Only when the flow of ideas has stopped does the process go on to consider which ideas might have commercial potential. This is the hat which encourages lateral thinking. Lateral thinking Originally created by Edward De Bono. lateral thinking is about reasoning that is not immediately obvious and about ideas that may not be obtainable by using only traditional step-by-step logic. Blue skies thinking encourages contributors to throw in as many ideas as possible. The black hat encourages the entrepreneur to think about the things that might go wrong with an idea. What is the best that might happen? Statements of provocation and investigation. Instinctive gut reaction or statements of emotional feeling (but not any justification).
. Six thinking hats Another approach to creative thinking from De Bono . a process etc. Many entrepreneurs rely on their instinctive or gut feel with their business idea.Blue skies thinking: This is a kind of brainstorming in which the thinking process allows no limits in what is suggested and no preconceptions about what the answer might be. sales. Logic applied to identifying flaws or barriers. It could be a substance. what are the facts? Quantitative data on a market (e. seeking mismatch.g. The approach identifies six types of styles of thinking which can be used to come up with ideas and focus the group on good ideas:
Neutrality (white Hat)
Considering purely what information is available. Logic applied to identifying benefits. Lateral thinking is sometimes called “thinking outside the box” – it tries to come up with new and unexpected ideas. existing products) would be considered with this hat on.this is a thinking tool for group discussion and individual thinking. The blue hat encourages the entrepreneur to consider and evaluate the ideas coming from the other five hats!
Feeling (red hat)
Negative judgement(black hat) Positive Judgement(yellow hat) Creative thinking (green hat) Process control (Blue hat)
Starting a Business . Thinking about thinking.Invention An invention is something genuinely new – something that has not been done before. a product.
A common question asked of applicants on Dragons Den is "have you got patent protection"? However. A key benefit of a patent is the ability of the patent owner to "licence" the right to use the invention. scientific theories. or has it been protected by patents to prevent competitors from copying it? Inventions arise after a period of research – often taking many years. For an invention. in return for a royalty. or has it been protected by patents to prevent competitors from copying it? Inventions arise after a period of research – often taking many years. the protection comes from a “patent”. The research process is usually costly. is there any evidence of demand?) Can it be. artistic creations) If granted. there are some strict rules that must be applied in order for a patent to be granted. it can be made and used!) (4) Not be excluded (certain types of invention don't count . the protection comes from a “patent”. the invention must be: (1) New (2) Be an innovative step (i. a product. the invention must be:
. is there any evidence of demand?) Can it be.e. A patent can last for up to 20 years. both in terms of cash spent and time taken. For example. So it seems reasonable that a genuine invention should be capable of protection. For an invention. So it seems reasonable that a genuine invention should be capable of protection. The research process is usually costly.e.e. Many of the entrepreneurs who climb the steps leading up to the Dragon‟s Den believe that not only is their “invention” unique. a patent owner could grant a larger manufacturing business the right to use the idea in a product.Invention An invention is something genuinely new – something that has not been done before. Several questions usually follow from the Dragons: Is the invention really an original idea? Have any already been sold (i. In order for a patent to be granted. both in terms of cash spent and time taken. but that it also has great business potential. but that it also has great business potential.g.e. In order for a patent to be granted. It could be a substance. not obvious to other people with knowledge of the subject) (3) Be capable of industrial application (i. Several questions usually follow from the Dragons: Is the invention really an original idea? Have any already been sold (i. a patent gives the owner the right to take legal action against others who try to take commercial advantage of the invention without getting the permission of the patent owner.
A common question asked of applicants on Dragons Den is "have you got patent protection"? However. Starting a Business .e.Many of the entrepreneurs who climb the steps leading up to the Dragon‟s Den believe that not only is their “invention” unique. there are some strict rules that must be applied in order for a patent to be granted. a process etc.
often to meet rapidly changing customer or consumer demands or needs Adding value to existing products. innovation is a creative process. But making it commercially viable is quite another.e. Starting a Business . identifying those that the business will focus on and applying resources to exploit them.
Innovation is commonly described as 'the commercially successful exploitation of ideas'. processes or services (process innovation).e. sales staff Outside the business. processes or services of value that have not existed previously (product innovation) However. services or markets to differentiate the business from its competitors and increase the perceived value to the customers and markets Whatever form it takes. customers. not obvious to other people with knowledge of the subject) (3) Be capable of industrial application (i. it can be made and used!) (4) Not be excluded (certain types of invention don't count . scientific theories. both kinds of innovation require a business to: Challenge the status quo Have a deep understanding of customer needs Develop imaginative and novel solutions Innovation can come in many forms: Improving or replacing business processes to increase efficiency and productivity. a patent gives the owner the right to take legal action against others who try to take commercial advantage of the invention without getting the permission of the patent owner. Successful innovation is mainly about creating or adding value. artistic creations) If granted. suppliers. from employees.
.(1) New (2) Be an innovative step (i.g. in return for a royalty.e. a patent owner could grant a larger manufacturing business the right to use the idea in a product. Innovation is about putting a new idea or approach into action. A patent can last for up to 20 years. media reports. It does so either by: Improving existing goods. A key benefit of a patent is the ability of the patent owner to "licence" the right to use the invention.g. The ideas may come from:
Inside the business – e. market research insights or from contacts at local universities or other research organisations Successful innovation comes from filtering those ideas. That is where innovation comes in. in-house designers. e.g.Innovation Inventing something new is one thing. or by Developing goods. For example. or to enable the business to extend the range or quality of existing products and/or services Developing entirely new and improved products and services .
the market it is in and its financial forecasts. how much will they buy and at what price? What will it cost to produce and sell the product? Can the product be made and/or sold profitably? At what stage will the business break-even and what are the likely profits? What investment is required to launch and establish the business? Where will the money come from and what type of finance is required? What are the main risks facing the business and how to handle them?
. Benefits of business planning to a start-up The main reasons why a start-up should produce a business plan are: Provides a focus on the business idea .The benefits can be significant. and why? Producing a document helps clarify thoughts and identify gaps in information The plan provides a logical structure to thinking about the business It encourages the entrepreneur to focus on what the business is really about and how customers and finance-providers can be convinced It helps test the financial viability of the idea . its objectives. Assuming that the plan is meant to be read by potential finance providers (e. business angel or venture capitalist) then it ought to provide convincing and realistic answers to questions such as: What is the business idea or opportunity? What is the product and how is it different or unique? What is the target market segment and who are the potential competitors? How large is the target market and is it growing? Who are the customers. The business plan has many functions. from securing external funding to measuring success within the business. including: Improved productivity & reduced costs Building a brand Establishing an advantage over competitors Higher sales and profits Starting a Business . a bank.can the business achieve the required level of profitability and not run out of cash? The plan provides something which can be used to measure actual performance A business plan is essential to raising finance from outside providers .Planning a new business What is a business plan? A business plan is a written document that describes a business. its strategies.is it really a good one.g.particular investors and banks Questions a start-up business plan should answer A business plan needs to address the issues of interest to the reader and user.
The simple business plan is rarely shown to outsiders of the business. or where things might prove better than forecast). staff. Returns on investment: another key area for any investor.main segments.a simple description of the proposed business Where the idea came from and why it is a good one Key targets for the business . premises. quantity). how much to be loaned over how loan and from who Market overview .how much from the founder. Who is involved in the start-up and what will they be doing? What experience and expertise do they bring? Which management roles will need to be filled as the business grows? Marketing: the key elements of the marketing mix should be explained here. Remember that for a start-up the marketing budget is likely to limited. or if the entrepreneur needs to raise money from business angels or get a substantial loan from a bank. Here is a summary of the key content: Executive summary: a brief 1-2 page summary of the detail! Should contain nothing new. This is a description of how the entrepreneur expects investors to get a return on their investment. growth. when. but highlight the key points Market: a profile of the target market based on market research Product: what it is and how it is different from the competition (the "unique selling point") Competition: an honest description of the competition in the target market . and for how much?
. ideally for the next 3-4 years Finance required .what they do well.e. distinctive approaches to marketing or distribution that competitors will find hard to replicate Management team: a crucial area for any investor. Financial projections: a summary of the cash flow and trading forecasts. The simple plan helps summarise the key aims and targets of the business and the actions required to make the business a reality. their weaknesses and their likely response Protecting the idea: how the product and business can be protected from competition e. It is likely to be written in quite an informal way. and when.sales. This section should highlight the key assumptions that have been made and also outline the main risks and opportunities in the forecasts (i. profit. trademarks. so the plan should describe a credible approach to promoting the product and include realistic assumptions about how many customers will buy and at what price Production /operations: this explains what is involved in the production process. What would go into the simple plan? Areas such as: The idea .Starting a Business .a simple one and a detailed one. distribution methods) Cash flow forecast (important) + trading forecast A detailed business plan is needed if a more complicated or larger business is planned as a start-up. Some businesses need to produce both. what might go wrong. growth (gives a sense of direction for the business). Sources of finance: here the figures from the cash flow forecast are taken and used to highlight what funding the business needs.g. where it will be located etc. what capacity is needed.What goes into a startup business plan? For a start-up there are usually two kinds of business plan . market size (value. who will supply the business. market shares of main competitors (if known) How the business will operate (location. patents. for the entrepreneur. Who might eventually buy the business. It is written by the entrepreneur.
there are several advantages to investing in a franchise: It is still your own business – even if you are sharing the profits with the franchisor The investment should be in a tried and tested format and brand The franchisee gets advice. Franchising is particularly suitable for service businesses. suggesting that banks are happier to make loans to franchise businesses than other start-ups The typical franchisee is aged 47. Franchises are a significant part of business life in the UK: Franchises generated annual sales of £12. That might sound a bit complicated! The trick is to remember that the franchisor is in charge the franchisor is the original owner of the business idea.000 90% of franchises are reported to be profitable A franchise has average borrowings of £70. which are designed to support the operation of the business
. The basic idea for a franchise is this. 66% are men and 86% of franchisees are married! Franchises are particularly popular in the service sector Examples of well-known businesses that use franchising to expand their operations include: Subway McDonalds Starbucks Pizza Hut Thorntons Molly Maid Prontaprint You might have noticed from the list above that nearly all those businesses provide services rather than produce goods. Many new businesses are formed with the intention of offering an existing business idea.000.Starting a Business . support and training. The use of franchises is a great example of that. A franchisor grants a licence (the "franchise") to another business (the "franchisee") to allow it to trade using the brand or business format. The franchisor will also supply key equipment.4 billion in the UK in 2007 There are over 800 different franchised business formats in the UK and that number is rising by around 5% each year The average sales turnover per franchise outlet is £360.Starting a franchise A business idea for a start-up doesn't have to be original. such as IT systems. Advantages of running a franchise For a start-up entrepreneur.
investing in a franchise is a lower risk method of starting a business and there is a lower chance of business failure Disadvantages of running a franchise There are several disadvantages for the franchisee: Franchises are not cheap! The franchisee has to pay substantial initial fees and ongoing royalties and commission. It is a lower risk method of market entry and it is often easier to raise finance. not being allowed to undercut nearby franchises) and on selling the business There is always a risk that the franchisor will go out of business The franchise needs to earn enough profit to satisfy both the franchisee and franchisor there may not be enough to go round! There are many good franchise opportunities available for a start-up. a social enterprise is a proper business that makes its money in a socially responsible way. running a franchise does not offer the same kind of long-term financial rewards that owning a business outright can.It is easier to raise finance . However.the high street banks have significant experience of providing finance to franchises No industry expertise is required in most cases The franchisee benefits from the buying power of the franchisor It is easier to build a customer base – the franchise brand name will already by established and many potential customers should already be aware of it The franchisee is usually given an exclusive geographical area in which to operate the franchise – which limits the competition (since operators of the same franchise are not in direct competition with each other) Overall. He/she may also have to buy goods directly from the franchisor at a mark-up There are restrictions on marketing activities (e. Social enterprises are the most common form of “not-for-profit” enterprises. their business model is also designed to benefit others. Social enterprises are defined as: “Businesses with primarily social objectives whose surpluses are principally reinvested for that purpose in the business or community. but some poor ones too. So there is still a need for the entrepreneur to do market research into the franchise A franchise is a kind of "halfway house" for a budding entrepreneur. Social entrepreneurs can make a good profit themselves. However. However.Social enterprise One kind of business structure that has grown rapidly in the UK in recent years is the “social enterprise”.
. The clue in the phrase “not-for-profit” tells you much about the aims and objectives of social enterprises. These ventures are not necessarily formed to reinvest all profits into the communities.g. In other words.
Starting a Business . rather than being driven by the need to maximise profit for shareholders and owners‟. it is important to appreciate that a social enterprise is not a charity.
Value has been added. substantially more than the cost of buying the ingredients. Consider the examples of new cars rolling down the production line being assembled by robots. The final. Once the cooking is complete. So it is worth learning this: Adding value = the difference between the price of the finished product/service and the cost of the inputs involved in making it Added value is equivalent to the increase in value that a business creates by undertaking the production process.4billion per year to the UK economy. Alternatively. Offering convenience – customers will often pay a little more for a product that they can have straightaway. Recent government data suggests that there are more than 55. businesses can add value by: Building a brand – a reputation for quality. imagine a celebrity chef preparing a meal at his luxury restaurant. value etc that customers are prepared to pay for. or which saves them time. attentive personal service can make the difference between achieving a high price or a medium one Product features and benefits – for example. For example. the Eden Project and fairtrade coffee company Cafedirect. A few things all social enterprises have in common are: They are directly involved in producing goods or providing services They have social aims and ethical values They are self-sustaining.Adding value Adding value sounds like a bit of business jargon – and it is! However. additional functionality in different versions of software can enable a software seller to charge higher prices. Starting a Business . Nike trainers sell for much more than Hi-tec. Value has been added. they are not charities)
Well known examples of social enterprises include Divine Chocolate. the meal is being served and sold for a high price. Social enterprises account for 5% of all businesses with employees. You don‟t have to use robots or have the culinary skills of Gordon Ramsay to “add value”. even though the production costs per pair are probably pretty similar! Delivering excellent service – high quality. and do not rely on donations to survive (i.
. different models of motor vehicles are designed to achieve the same effect. but use business principles to achieve social aims. It is quite easy to think of some examples of how a production process can add value. Exactly how much is determined by the price that a customer pays.e.Social enterprises complete alongside other businesses in the same marketplace. and contribute £8.000 social enterprises in the UK with a combined turnover of £27bn. completed and shiny new car that comes off the production line has a value (price) that is more than the cost of the sum of the parts. it also has quite a precise meaning which is important.
The key benefits to a business of adding value include: Charging a higher price Creating a point of difference from the competition Protecting from competitors trying to steal customers by charging lower prices Focusing a business more closely on its target market segment Starting a Business . By focusing on a high quality product. Maybe the customer wants something that is 100% reliable. a mid-range product.A business that successfully adds value should find that it is able to operate profitably.Beating the competition With all that competition out there. Walk down the aisle of any large supermarket and look at the own-label ranges to see this in action. between profit and loss. By definition. Why? Remember the definition of adding value: where the selling price is greater than the costs of making the product. What the other competitors are charging 2. or which uses high quality materials. a product range might include a “budget” or “best value” product. and a higher-price premium product. In many consumer markets. For example. Quality is another great way to compete effectively. how does a small business compete effectively? The starting point has to be – by providing a great product! In most markets. Customers trust good brands. What the product costs to make or buy
. Buying the product is one thing – but what about the level of after-sales service? Is that an area where a small business can gain an advantage? The overall selling experience for a customer can be made to be better than the competition – are staff well-informed and friendly? Price is the other main method of competing. a successful business is often able to develop its brand reputation. Finding ways to add value is a really important activity for a start-up or small business. and which sells for the same price. It is often the case that a business needs to have more than one product in order to succeed in a market. and are often prepared to pay a higher price too. Quite simply. a business that is adding substantial value must also be operating profitably. For many businesses. brands are an important source of advantage. customers are looking for the best value for money. This means that a product which is better than the competition. A quality product is one that meets customer needs. are more loyal to them. Customer service is an important way of beating the competition. Offering a product range enables a business to provide customers with more choice and potentially attract customers who buy for different reasons. the price charged is a reflection of two factors: 1. it can make the difference between survival and failure. will most likely prove to be a winner. A successful business can compete by consistently achieving the required quality level.
000 in sales in the next half year of trading.Measurable – the business can put a value to the objective. we want to achieve sales of €10 million in European markets in 2004.Agreed by all those concerned in trying to achieve the objective. A . R . or when a new
. It is a statement of purpose. that gives it a better chance of being able to offer a lower price than competitors and still make a reasonable profit.g.If a business operates efficiently. T. An aim is where the business wants to go in the future. such as Amazon. Topic: Business aims and objectives
Introduction When a sole trader sets up they may have some unstated aims or objectives . a hotel might have an objective of filling 60% of its beds a night during October. who wants to “make history and have fun”. The main objectives that a business might have are: Survival – a short term objective. the Internet CD and bookseller. A mission statement sets out the business vision and values that enables employees. e. Business objectives are the stated. we want to grow the business into Europe. probably for small business just starting out. The most effective business objectives meet the following criteria: S – Specific – objectives are aimed at what the business does.g. by the end of the year. measurable targets of how to achieve business aims.Realistic – the objective should be challenging. e. Other businesses may wish to state exactly what they are aiming to do. customers and even suppliers to understand the underlying basis for the actions of the business. M . but it should also be able to be achieved by the resources available. managers.g. Plans can then be made to achieve these targets.for example to survive for the first year. its goals. It also enables the business to measure the progress towards to its stated aims. Business Objectives Objectives give the business a clearly defined target. an objective specific to that business. For instance. €10. e.g. e.Time specific – they have a time limit of when the objective should be achieved. This can motivate the employees.
This service will need to meet the needs of the less well off in society or help improve the ability of the economy to function: e. Sales growth – where the business tries to make as many sales as possible. Large investors in the Stock Exchange are often accused of looking too much at short-term objectives and company performance rather than investing in a business for the long-term. Health care and education establishments – their objectives are to provide a service – most private schools for instance have charitable status. Alternative Aims and Objectives Not all businesses seek profit or growth. Public sector organisations that monitor or control private sector activities have objectives that are to ensure that the business they are monitoring comply with the laws laid down. Changing Objectives A business may change its objectives over time due to the following reasons:
. Profit satisficing – try to make enough profit to keep the owners comfortable – probably the aim of smaller businesses whose owners do not want to work longer hours. by cutting prices) will reduce short-term profit. achieving higher sales in the short term (e. Large businesses can also benefit from economies of scale. Public sector corporations are run to not only generate a profit but provide a service to the public. a business may decide to accept lower cash flows in the short-term whilst it invests heavily in new products or plant and equipment. Charities and voluntary organisations – their aims and objectives are led by the beliefs they stand for.g. Profit maximisation – try to make the most profit possible – most like to be the aim of the owners and shareholders. cheap and accessible transport service. A business may find that some of their objectives conflict with one and other: Growth versus profit: for example.firm enters the market or at a time of crisis. Their aim is the enhancement of their pupils through education. Some organisations have alternative objectives. Short-term versus long-term: for example. This may be because the managers believe that the survival of the business depends on being large.g. Examples of other objectives: Ethical and socially responsible objectives – organisations like the Co-op or the Body Shop have objectives which are based on their beliefs on how one should treat the environment and people who are less fortunate.
A business may achieve an objective and will need to move onto another one (e.g. survival in the first year may lead to an objective of increasing profit in the second year). The competitive environment might change, with the launch of new products from competitors. Technology might change product designs, so sales and production targets might need to change.
Topic: Starting a business - what is required
An entrepreneur is defined as someone who has the ability to take risks and organise the factors of production. When starting a new business the entrepreneur faces a number of problems before they can start up. They need an idea and a will to succeed, but these are not enough on their own to be successful. A business needs: Finance – to fund the other elements listed below: finance is usually the hardest thing to obtain in a start-up business. Labour – to help develop a product or service and then to produce/deliver it. Customers – without them, the business will fail. Obtaining customers means the business must undertake marketing. Suppliers – provide many of the “inputs”, such as raw materials. Premises and equipment – maybe a simple office, or possibly a large, modern factory; depending on what the business activity is. Management organisation & structure – this is often very simple at the start-up stage (e.g. a sole trader!). Designed, researched and tested product or service – a successful business is about more than just having a good idea – the product needs to be brought to the marketplace in its best format. Dyson spent many years completing his first vacuum cleaner before being able to sell it. A business may also need to protect its idea or products. It can do this through: Copyright and patents make it illegal for other firms to copy directly the business idea or invention. Keep new products and services secret until they are ready for launch. Focus on retaining key staff that would be otherwise valuable for competitors to poach! Entrepreneurs An entrepreneur needs several skills to succeed: Have ideas
Ability to take risks Ability to persuade others to join the business or lend the business money Energy to keep the business going under tough circumstances – it is often said that the best entrepreneurs are the most persistent
Topic: Business departments
A business is normally organised by its functions, e.g. marketing department, accounts department and so on. This is because being grouped together allows the functions to benefit from specialisation and division of labour. This leads to lower unit costs and a greater efficiency. However it can mean that there is departmental rivalry Larger businesses might have a number of businesses within the whole company. This would be coordinated by a Head Office, where all the major decisions are made. Other ways of organising the business could be more appropriate for different types of businesses: Product – the functions are organised around the product – so at a business like ICI, who are the UK’s leading chemical manufacturer, a product manager would have a team of functions who would answer to them, like accounting, marketing and production Geographical – a hierarchy might be split according to different places that the product is sold into – for instance a business may have a Far Eastern division of its business, which would take into account the different cultural and supply differences of the region Market – the organisation is based on market segments – so an airline business like British Airways could concentrate on long haul, short haul, holiday makers, business clients and freight A business whose decision-making comes from one place only is known as a centralised organisation. Normally Head Office will decide on the major elements of strategy, no matter where the manufacturing plants and sales teams are positioned around the country or globe. This means that there are good opportunities for economies of scale. Other businesses, especially multinationals (see below) will opt for a more decentralised organisation – where the individual businesses within the whole company group, make decisions for themselves. This means that there is more opportunity to react to the changing marketplace (one of the advantages of a small firm). However there is a possibility that these businesses (who may well be in different parts of the world) might be duplicating research or not bargaining in such as strong position as a bigger overall company. When a business reaches a certain size then it might split into different departments. These departments will specialise, employing people with expertise in these areas.
The main departments in a business might be:
Role Provides a detailed record of the money coming in and going out of the business and prepares accounts as a basis for financial decisions
Human Resources Deals with all the recruitment, training, health and safety and pay or Personnel negotiations with unions/workers Production Purchasing Sales and marketing Makes sure that the production plans are met on time and products of the right quality are produced Buys all the raw materials and goods required for production Sales function deals with all aspects of selling to customers; the marketing function carries out marketing research, organises advertising and product promotion
Topic: Starting a business - getting the finance
The entrepreneur will need to finance to the business. This means they will need to find money to pay for: The purchase of plant & machinery, office equipment etc Renting or buying premises and offices (e.g. the first 3 months’ rent may need to be paid in advance) Essential business services such as insurance The purchase of stocks of raw materials and components to allow production to start The wages and salaries of the first employees to join the business (who may be needed before any goods or services are actually sold) To provide financial cover whilst the business waits for customers to pay The main ways in which an entrepreneur can find finance for a new business are: Own money Bank loans Bank overdraft Money from friends Grant assistance from government bodies These types of finance can be split into INTERNAL and EXTERNAL sources of finance. Internal sources of finance are generated from the business itself (e.g. cash from sales) and external sources of finance from outside the business (e.g. a bank loan). The business can also split the types of finance into categories relating to length of time the money is needed for Short-term: bank overdraft Medium term: bank loan; lease; hire purchase; government grants
Organic growth means the business grows by expanding its sales or their operations and is financed through its own profits. not necessary
.g. A business plan will probably contain the following elements: Statement of aims and objectives Description of market the business is selling to Main competitors (how will they respond to a new competitor?) Production and sales forecasts Equipment needed Distribution plan for how to get product to customers In the plan. debenture Business Plan A business plan sets out how a business is going to achieve its aims and objectives. share issue (for limited companies). The size of a business can be measured by the following means: Sales turnover (or sales revenue) Number of employees Share capital (the number of shares times the price of each share) Market share – the sales of the business of a particular product as a proportion of all sales of that type of product. It is extremely useful for a new business to use a plan because it can be used to show potential investors how their money is going to be spent. shops) They may mean to grow in size or sometimes it just happens without the business making a conscientious effort to do so. It is uncertain how easy it will be to find customers – and will they buy the product or service at the price that is being asked? The business will be incurring significant “start-up costs” which will eat into the available funds. mortgage. Topic: Growing a business
Introduction The growth of a business is when it expands in size. This is because in the early days of setting up a business. Businesses either grow organically or by acquisition and mergers. finance is hardest to manage. A 5% market share would mean that 1 in 20 of all products sold are sold by that business. great care should be taken to estimate and forecast how the cash will come into and leave the business in the early weeks and months. Acquisitions and mergers are when the business joins or buys other businesses. Number of outlets (e.Long term: bank loan.
at the wrong price for the wrong reasons! The advantages of mergers and acquisitions are: Economies of scale. Spreads risks if products different. which means the business can often charge higher prices. However.Customers are attracted by the ability to buy now pay later. Reduces competition if a rival is taken over. Other businesses can bring new skills and specialist departments to the business.of the same type. Sell on credit . Mergers and acquisitions are an important option for larger businesses that wish to grow rapidly. Sell in different location . Greater market share for horizontal integration.People will buy more at lower prices.
. This is known as diversification. A business can grow organically in the following ways: Lower price .Selling to a new set of customers. Businesses may wish to expand for the following reasons: Benefit from economies of scale – lower unit costs due to an increase in size A larger market share (selling more products than before) means they can charge higher prices and gain more profit As means of survival if they wish to compete with other growing businesses Some businesses start selling or acquiring businesses that are not in the same market as the markets they are presently selling in. Businesses may wish to diversify because: Helps spread the risks across a number of products. It is easier to raise money if a larger business. Mergers and Acquisitions A merger is where two or more businesses AGREE to join together to become one larger firm. more potential. If one product fails due to market conditions then other products in different markets should not be affected. This integration can either be vertical or horizontal integration. Increase advertising . When a one business buys another it is possible that the acquisition or merger integrates the new product with the existing product. which reduces unit costs. they are a high risk strategy – it is easy to buy the wrong business. An acquisition is when one firm BUYS another firm. Good way of expanding if present market seems already full.Customers are made more aware of the attraction of the products. Gives the business fresh objectives and may act to motivate managers and staff.
This often arises when one business joins with another. Keep all the profit – as the owner. businesses have struggled to expand for this very reason. especially at management levels – this may have an effect on motivation. Business affairs are private – competitors cannot see what you are earning. If the government thinks it is not in the public interest to have such a large business. Topic: Sole Traders
A sole trader is a business that is owned by one person. It is the most common form of ownership in the UK. In the South East of England. so will know less about how the business works and how it succeeds. It may have one or more employees. then the joining together may not take place. May be a conflict of objectives between different businesses. Size of the market – there is often a limit to number of people who are willing to buy the type of product that the business is producing – e. meaning decisions are more difficult to make and causing disruption in the running of the business. May need to make some workers redundant. all the profit belongs to the sole trader. other than setting up a bank account and informing the tax offices.g. where unemployment is very low for some types of jobs. Government controls means that a business cannot necessarily have more than 25% of the market share. reducing the effectiveness of the integration. a printing press manufacturer will know that there are only a small number of publishers in the UK who will be able to buy the product. Cheap and easy to start up – few forms to fill in and to start trading the sole trader does not need to employ any specialist services. Human resources are limited in terms of the skills available. which leads to higher unit costs. Clashes of culture between different types of businesses can occur. The main advantages of setting up as a sole trader are: Total control of the business by the owner. there may be reasons why it cannot do this: Financial limitations – a business may not be able to raise the necessary finance to grow any bigger – perhaps it has not made enough profits to generate the cash or the bank is not keen to lend it more money at the moment.
. Especially in more specialised areas it may be difficult to find enough qualified staff in the area to expand the business.The disadvantages of mergers and acquisitions are: Diseconomies of scale if business becomes too large. Constraints on Growth Though a business may wish to grow in size.
A sole trader is liable for any debts that the business incurs. may not be able to buy in bulk and enjoy the same discounts as larger businesses.g. This means that any money that the owner has put into the business could be lost. if the business continues to incur further costs then the owner has to pay these as well. BUT IMPORTANTLY. for instance. i. Such a risk often puts potential sole traders off setting up businesses.
. Many will prefer the satisfaction of running a business with little paper work against the risks.g. Can be difficult to enjoy economies of scale. appliance repair specialists. banks will not lend them large sums and they will not be able to use any other form of long-term finance unless they change their ownership status. Can cater for the needs of local people – a small business in a local area can build up a following in the community due to trust – if people can see the owner they feel more comfortable than if the owner is in some far off town. lower costs per unit due to higher levels of production.The reasons why sole traders are often successful are: Can offer specialist services to customers – e.e. because they are small. There is a problem of continuity if the sole trader retires or dies – what happens to the business next? The reasons for being a sole trader are often a balance between business and personal costs and benefits. A sole trader. Can be difficult to raise finance. The legal requirements of a sole trader are to: Keep proper business accounts and records for the Inland Revenue (who collect the tax on profits) and if necessary VAT accounts Comply with legal requirements that concern protection of the customer (e. Can be sensitive to the needs of customers – since they are closer to the customer and will react more quickly. because they are the decision makers too. In some cases they may have sell some of their own possessions to pay creditors. but also makes them consider the other forms of business structure. not able to hear the views of the local community. pressure and probably long working hours. Sale of Goods Act) The main disadvantages of being a sole trader are: Unlimited liability – see below.
starting cash). The next step for a partnership is to move towards becoming a private limited company. May need to spend money on an auditor to check the accounts before they are filed.Topic: Partnerships
A partnership is a business where there are two or more owners of the enterprise. Rules on how to take on new partners. A partner is normally set up using a Deed of Partnership. How many votes each partner has (usually based on proportion of capital provided). working originally as a sole trader. complementing the work already done by the original partner Increased credibility with potential customers and suppliers – who may see dealing with the business as less risky than trading with just a sole trader For example. better premises to work from) Partner may bring other skills and ideas to the business. The main disadvantages of becoming a partnership are: Have to share the profits. Either would bring added expertise. and potentially the workload. may team up with an architect or carpenter to form a partnership. The advantages of a sole trader becoming a partnership are: Spreads the risk across more people. or how a partner leaves. Less control of the business for the individual.g. However some partnerships do not want to move to this stage. so if the business gets into difficulty then there are more people to share the burden of debt Partner may bring money and resources to the business (e. The advantages of remaining a partnership rather than becoming a private limited company are: Costs money to set up limited company (may need to employ a solicitor to set up the paper work). a builder. Most partnerships are between two and twenty members though there are examples like John Lewis and some of the major world accountancy firms where there are hundreds of partners. How the partnership is brought to an end.e. Company accounts are filed so the public can view them (and competitors). but also might bring added capital and/or contacts. Of course the builder could team up with another builder as well – sharing the risk. This contains: Amount of capital each partner should provide (i. Problems if partners disagree over of direction of business. Disputes over workload. How profits or losses should be divided.
so restricting availability of finance. It also needs to have a Memorandum of Association which sets out what the company has been formed to do.
.000 in a plc. Limited companies can either be private limited companies or public limited companies. This encourages people to finance the company. depending on how the Deed of Partnership is set up. especially if the business wants to expand. and Articles of Association which are internal rules over including what the directors can do and voting rights of the shareholders. from banks [Note: becoming a “plc” does not necessarily mean that the company is quoted on the Stock Exchange. Shares in a private limited company are not available to the general public. A private limited company may have a smaller share capital A private limited company might want to become a “plc” because: Shares in a private limited company cannot be offered for sale to the general public. To do that. the company must do a “flotation” (see below)] The disadvantages of a being a public limited company (plc) are: Costly and complicated to set up as a plc – need to employee specialist bankers and lawyers to help organise the converting to the plc. They cannot claim the personal assets of the shareholders to recover amounts owed by the company.When a partnership finishes then. knowing that they can only lose what they put in.g. To set up as a limited company. each partner has an agreed slice of the business. and The issued share capital of a plc (the initial value of the shares put on sale) must be greater than £50. The difference between the two are: Shares in a public limited company (plc) can be traded on the Stock Exchange and can be bought by members of the general public. run by directors and most importantly whose liability is limited. “limited liability” means that they can only recover money from the existing assets of the business. if the company fails. Therefore. it is attractive to change status It is also easier to raise money through other sources of finance e. a company has to register with Companies House and is issued with a Certificate of Incorporation. Limited liability meansthat the investors can only lose the money they have invested and no more. For people or businesses who have a claim against the company. and/or set up such a business. Topic: Limited Companies
A limited company is a business that is owned by its shareholders.
When shares in a “plc” are first offered for sale to the general public as the company is given a “listing” on the Stock Exchange. They buy shares because: Shares normally pay dividends. competitors and customers included (would you want them to know how much profit you are making?) Shareholders in public companies expect a steady stream of income from dividends. Companies on the Stock Exchange usually pay dividends twice each year. which is a share of the profits at the end of the year.Certain financial information must be made available for everyone. where the directors present the accounts and results. the price of shares can go down as well as up. Of course. Over time the value of the share may increase and so can be sold for a profit – this is known as a “capital gain”. they can then persuade other shareholders to join with them to vote in a new management team. Therefore. so investing in shares can be very risky. Shareholders own the company. This generates additional funds for the business and can be a major form of fund raising. This is because the shareholders may have the money. such as growth and investment. which might mean that the business has to concentrate on short term objectives of creating a profit. by the shareholders. In practice directors tend to have at least a modest shareholding in the company.
. This means selling all or part of the business to outside investors. Threat of takeover. The shareholders are therefore “divorced” from the running the business for 364 days of the year. Flotation A company may float on the stock market. If they buy enough. Very recently a couple of businesses have had very strong shareholder unrest leading the company to tone down a number of their decisions. Divorce of ownership and control As a business becomes larger. because another company can buy up a large number of shares because they are traded publicly (can be sold to anyone). whereas it might be better to work on longer term objectives. They will have their say at the Annual General Meeting (AGM) of the company. but not the time or the management skills to run the company. A good example is a “venture capitalist” that will often buy up to 80% of the shares of a company and insist on choosing some of the directors. This provides the director with an incentive to achieve good dividends and capital growth for the share (an increase in the share price). the day-to-day running of the business is entrusted to the directors. If they have enough shares they can influence the management of the company. who are employed for their skills. the ownership and control of the business may become separated.
A franchise is where a business sells a sole proprietor the right to set up a business using their name.selling franchises . then there are large profits to made from . Have to pay a percentage of your revenue to the business you have bought the franchiser from. Have to follow the franchise model. The advantages of setting up as a franchisee are: The franchisee is given support by the franchiser. so less flexible. management expertise and national marketing campaigns.selling raw materials and equipment.royalty payments . Depending on the business involved. So starting a business in this way requires less expertise and is less lonely! The franchisee may benefit from national advertising and being part of a well-known organisation with an established name. You would probably be told what
. but also may want to let others run the business in other parts of the country. If the franchise model works. This includes marketing and staff training. Examples of major franchises are: McDonalds Clarks Shoes Pizza Hut Holiday Inn The franchisor is the business whose sells the right to another business to operate a franchise – they may run a number of their own businesses. format and product Less investment is required at the start-up stage since the franchise business idea has already been developed A franchise allows people to start and run their own business with less risk. The chance of failure among new franchises is lower as their product is a proven success and has a secure place in the market The disadvantages of setting up as a franchisee are: Cost to buy franchise – can be very expensive (hundreds of thousands of pounds). The advantages of being a franchisor: Large companies see it as a means of rapid expansion with the franchisee providing most of the finance. the franchiser may provide training. They may also supply the raw materials and equipment. A franchise is bought by the franchisee – once they have purchased the franchise they have to pay a proportion of their profits to the franchiser on a regular basis.
Though profits are required to enable them to reinvest in their business. they will not be a primary objective.prices to set. Topic: Cooperatives
A co-operative is where a number of individuals or businesses work together to achieve a common purpose. drawn out decision-making process Co-operatives may find it difficult to raise finance since banks are not so willing to lend them money because their main aim is not to make a profit Idealistic and ethical aims may not be agreeable with all members. The objectives of a co-op tend to set them apart from other businesses. Though co-operatives exist to overcome some of the trading difficulties faced by small businesses. what advertising to use and what type of staff to employ. they can still face of number of problems in their operation: The system of one member one vote in some societies means a long.)
. meaning they have more power to buy or bargain. a buying a franchise a good way of an individual setting up a business because: They do not have to establish themselves in the same as a sole trader might have to. so creating unrest and disharmony The aims held by many co-operatives may not lead to profits in the long run (though many co-op shops will continue to exist at a loss because the owners feel they are providing an important service to the community. They are normally formed so individuals and small businesses can benefit from being part of a larger group. the local community and the world community. There are three main types of co-operatives: Retail co-operatives Marketing or trader co-operatives Worker co-operatives A retail co-operative is probably the most familiar co-op. They will have the support of a tried and tested business model. The objectives are normally more focused on the members of the co-operative. The Co-Op shops and Leo Hypermarkets are a regular sight in the high street. often with a national marketing campaign behind them. In conclusion.
through to the shop floor worker.Topic: Span of Control and Hierarchies
In a business of more than one person. An example of a hierarchy is shown in the diagram below
A span of control is the number of people who report to one manager in a hierarchy. unless the business has equal partners. who reports to their foreman. An example of a narrow span of control is shown in the diagram below:
. The more people under the control of one manager .the wider the span of control. from the top of the company – the managing director. A hierarchy describes the structure of the management of the business. Subordinates are workers controlled by the manager. The hierarchy of a business is usually best understood by drawing an organisation chart showing which levels of management and employees report to whom. Less means a narrower span of control. in a manufacturing business. then there are managers and subordinates.
so the message reaches more employees faster It costs less money to run a wider span of control because a business does not need to
. so there is less management skill required An example of a wide span of control is shown in the diagram below:
The advantages of wide span of control are: There are less layers of management to pass a message through.The advantages of a narrow span of control are: A narrow span of control allows a manager to communicate quickly with the employees under them and control them more easily Feedback of ideas from the workers will be more effective It requires a higher level of management skill to control a greater number of employees.
In a hierarchy the chain of command means that a production manager may be higher up the hierarchy. especially when businesses need to adapt to changing markets – remember employees do not tend to react well to change. There are motivational advantages of working in teams. A tall organisation can suffer from having too many managers (a huge expense) and decisions can take a long time to reach the bottom of the hierarchy BUT. Hierarchies can be inflexible and difficult to adjust. but will not be able to tell a marketing person what to do. The advantages of hierarchies are: Helps create a clear communication line between the top and bottom of the business – this improves co-ordination and motivation since employees know what is expected of them and when. .Departments work for themselves and not the greater good of the business. The disadvantages of hierarchies are: The formation of departments can mean that: . a tall organisation can provide good opportunities for promotion and the manager does not have to spend so much time managing the staff Chain of command is the line on which orders and decisions are passed down from top to bottom of the hierarchy. Hierarchies create departments and departments form teams.
.employ as many managers The width of the span of control depends on: The type of product being made – products which are easy to make or deliver will need less supervision and so can have a wider span of control Skills of managers and workers – a more skilful workforce can operate with a wider span of control because they will need less supervision.Departments do not see the whole picture in making decisions. A more skilful manager can control a greater number of staff A tall organisation has a larger number of managers with a narrow span of control whilst a flat organisation has few managers with a wide span of control.
Government – especially the Inland Revenue and the Customs and Excise who will be collecting tax from them. the other stakeholders’ desires tend to cost money and reduce profits. and may be in contact with the business on a daily basis. Customers and suppliers. Banks and other financial organisations lending money to the business. Often the aims and objectives of the stakeholders are not the same as shareholders and they come into conflict. The main stakeholders are: Shareholders (not for a sole trader or partnership though) – they will be interested in their dividends and capital growth of their shares. Pressure Groups – who are interested in whether the business is acting appropriately towards their area of interest. prospects and pay. They sound the same – but the difference is crucial! Shareholders hold shares in the company – that is they own part of it. The conflict often arises because while shareholders want short-term profits. Management and employees – they may also be shareholders – they will be interested in their job security. or may just occasionally. Trade Unions – who will represent the interests of the workers. the workers may go on strike or the customers refuse to buy the company’s products).g. Stakeholders have an interest in the company but do not own it (unless they are shareholders). The owners often have to balance their own wishes against those of the other stakeholders or risk losing their ability to generate future profits (e. Stakeholders versus Shareholders It is important to distinguish between a STAKEHOLDER and a SHAREHOLDER.
.Topic: Stakeholders and business ethics
Introduction A stakeholder is any individual or organisation that is affected by the activities of a business. They may have a direct or indirect interest in the business.
Trading fairly with developing countries
. Ethics Ethics refers to the moral rights and wrongs of any decision a business makes.Social Responsibility Social responsibility is the duty and obligation of a business to other stakeholders. Disposal of waste safely and in an environmentally friendly manner. Businesses may adopt ethical policies because they believe in them or they believe that by showing they are ethical. they improve their sales. especially between shareholders and stakeholders. Sponsoring local charity events.
Stakeholder Shareholder Employee Supplier Customer Local community Government Environment
Example of responsibility to that stakeholder Good return on investment Fair pay and working conditions Regular business and prompt payment Fair price and safe product Jobs and minimum disruption Employment for local community Less pollution
Social responsibility for one group can conflict with other groups. Some examples of ethical policies are: Reduce pollution by using non-fossil fuels. Two good examples of businesses that have strong ethical policies are The Body Shop and CoOp. It is a value judgement that may differ in importance and meaning between different individuals.
or a greater number of pensioners in a population. The amount and type of competition depends on the market the business operates in: Many small rival businesses – e. a decision to subsidise building new houses in an area could be good for a local brick works.External Environment: introduction to the external environment Introduction A business does not operate in a vacuum. These factors that happen outside the business are known as external factors or influences. a shopping mall or city centre arcade – close rivalry. general demand.
. Political – how changes in government policy might affect the business e. however a business needs to react or lose customers. E. Government introduces new legislation e. Economic – how the economy affects a business in terms of taxation. households and communities behave and their beliefs.g. interest rates. Legal – the way in which legislation in society affects the business. It does depend on the type of product the business produces.g. changes in attitude towards health. inevitably most will face a degree of competition. New technologies mean that new products can be made. Changing External Environment Markets are changing all the time. Ethical – what is regarded as morally right or wrong for a business to do. changes in employment laws on working hours. New competitors enter a market.g. For instance. A world or countrywide event happens e. The other factors that can affect the business are: Social – how consumers. It has to act and react to what happens outside the factory and office walls. For instance should it trade with countries which have a poor record on human rights. Main Factors The main factor that affects most business is the degree of competition – how fiercely other businesses compete with the products that another business makes. increases minimum wage. exchange rates and European and global economic factors. government spending. Technological – how the rapid pace of change in production processes and product innovation affect a business.g. Gulf War or foot and mouth disease. These will affect the main internal functions of the business and possibly the objectives of the business and its strategies. Business and Competition Though a business does not want competition from other businesses. Some of the main reasons why markets change rapidly: Customers develop new needs and wants.g.
The business also needs to be aware of their social responsibilities. These are the way they act towards the different parts of society that they come into contact with. It is also important to consider the effects a business can have on the local community. These are known as the social benefits and social costs.g. e. They also discourage social costs with fines. A social benefit is where a business action leads to benefits above and beyond the direct benefits to the business and/or customer. employees and other businesses. Legislation covers a number of the areas of responsibility that a business has with its customers. the building of an attractive new factory provides employment opportunities to the local community.g. a launch of rival product) in the following ways: Cut prices (but can reduce profits) Improve quality (but increases costs) Spend more on promotion (e. Businesses will need to adjust their products to meet these changes. A business could react to an increase in competition (e. Governments encourage social benefits through the use of subsidies and grants (e. These extra cost and benefits are known as externalities – external costs and benefits. make some workers redundant Social Environment and Responsibility Social change is when the people in the community adjust their attitudes to way they live. because parents feel their children are having too much sugar in their diets. for instance pollution.g. taking sugar out of children‟s drinks.g. These extra benefits and costs are distinguished from the private benefits and costs directly attributable to the business. but costs money) Cut costs. taxes and legislation. A rapidly changing market – e. increase brand loyalty. do more advertising. use cheaper materials.A few large rival firms – e.g. washing powder or Coke and Pepsi. Pressure groups will also discourage social costs. For example. e.
. regional assistance for undeveloped areas). where the technology is being developed very quickly – the mobile phone market.g.g. A social cost is where the action has the reverse effect – there are costs imposed on the rest of society.
business confidence. The business cycle is characterised by four main phases: Boom: high levels of consumer spending.g. Others businesses choose to specialise. wood and steel. made into a table by a carpenter (secondary) and finally sold in a shop (tertiary). Prices and costs also tend to rise faster.g. or on providing a narrowly defined service.Specialisation occurs when a producer concentrates on making a small number of products. Unemployment tends to be low as growth in the economy creates new jobs
. profits and investment. The chain of production follows the construction of a good from its extraction as a raw material through to its final sale to the consumer. manufacturing steel into cars. a cosmetic surgeon) External Environment: The Business / Economic Cycle Economies go through a regular pattern of ups and downs in the value of economic activity (as measured by gross domestic product or GDP. such as coal. A shopkeeper and an accountant would be workers in the tertiary sector. This is known as the “business cycle” (sometimes you also see it referred to as the “economic cycle”). A coal miner and a fisherman would be workers in the primary sector. Goods move through a “chain of production”. Secondary sector Involves the transformation of raw materials into goods e. Tertiary sector Involves the provision of services to consumers and businesses. There are three main sectors of business activity: Primary sector Involves the extraction and production of raw materials.External Environment: Economic sectors Business activity is the process of transforming inputs into outputs by adding value. A builder and a dressmaker would be workers in the secondary sector. Examples of specialisation: Baker only baking bread Machinery that only cuts sheet metal Lawyer dealing only with criminal law Advantages of specialisation Producer becomes more efficient because they learn the best way (all the short cuts) to produce at the lowest cost A producer may be able to charge a higher price from a customer – the customer is prepared to pay more for expert/specialist knowledge (e. The business cycle is crucial for businesses of all kinds because it directly affects demand for their products. Some businesses have elements of all sectors in their chain of production. So a piece of wood is cut from a felled tree (primary sector). such as cinema and banking.
Netto) Fast-food outlets (e. Examples include: Fashion retailers Electrical goods House-builders Restaurants Advertising Overseas tour operators Construction and other infrastructure firms By contrast. Globalisation is best thought of as a process that results in some significant changes for markets and businesses to address: for example
. then consumers are likely to switch. the sharp economic downturn during 2008 and 2009 saw many businesses suffer sales falls of between 10-30%. such businesses should enjoy strong demand for their products. Businesses whose fortunes are closely linked to the rate of economic growth are referred to as “cyclical” businesses.Recession: falling levels of consumer spending and confidence mean lower profits for businesses – which start to cut back on investment. a business that relies on consumer spending for its revenues will find that demand is closely related to movements in GDP. or a cheaper alternative than more expensive products.g. chocolate sales always increase strongly during an economic downturn! External Environment: Business and Globalisation Globalisation is arguably the most important factor currently shaping the world economy. economic and social impact than ever before. Subway) Domestic holidays (e. For example. If their products are perceived by customers as representing good value for money. but some businesses are more vulnerable to changes in the business cycle than others. Dominos. Lidl. Consumers were prepared to take on significant personal debt in order to finance their purchases. Spare capacity increases + rising unemployment as businesses cut back and reduce stocks Slump / depression: a prolonged period of declining GDP . businesses feel a little more confident and start to invest again and build stocks. During the housing-market inspired boom of the early 2000‟s. You can see lots of examples of this in the UK economy currently. the business has to “ride out the storm” – suffering a sharp drop in demand. Although it is not a new phenomenon (waves of globalisation can be traced back to the 1800s) the changes it is bringing about now occur far more rapidly. assuming that the products are actually what customers want! But during a slump. Aldi.very weak consumer spending and business investment. Good examples that were featured in the UK media during the recession of 2008/09 included: Value retailers (e. B&Bs and holiday cottages) Chocolate – for some reason. spread more widely and have a much greater business. rapidly rising unemployment. However. many business failures. many retail and consumer goods businesses took advantage of the boom.g. some businesses actually benefit from an economic downturn.g. but it takes time for unemployment to stop growing Every business is affected by the stage of the business cycle. Some did not survive – their fixed costs were just too high to be able to remain viable. During a boom. prices may start falling (deflation) Recovery: things start to get better. consumers begin to increase spending.
g. which has traditionally benefitted countries with lower labour costs & skilled labour markets such as India. establishing production platforms in low cost countries where intermediate products can be made into finished products at lower cost) Avoidance of transportation costs and avoidance of tariff and non-tariff barriers Extending product life-cycles by producing and marketing products in new countries
. Nike. For example: Higher profits and a stronger position and market access in global markets Reduced technological barriers to movement of goods. at the expense of jobs in developed economies like the UK Increased levels of labour migration – which has the effect of lowering wage costs in many industries. but for others is a problem (e. Brazil.g.g.g. India and Russia A key result of globalisation is the increasing inter-dependence of economies. a loss of skilled workers leaving an economy) The emergence of countries playing a bigger role in the global trading system including China. but many emerging market countries have slowed down rather than fall into a full-blown recession There are several alternative approaches for a business looking to expand globally – many choose to follow one or more of the following: Establish production sites overseas Licence technology & other intellectual property Joint ventures Franchising Offshoring / outsourcing Selling directly to overseas markets – either with sales agents. and growing. a threat for others) An increase in transfers of financial capital across national boundaries including foreign direct investment (FDI) by multi-national companies and the investments by sovereign wealth funds (e.An expansion of trade in goods and services between countries (an opportunity for many businesses. For example: Most of the world‟s countries are dependent on each other for their macroeconomic health Many of the newly industrialising countries are winning a growing share of world trade and their economies aregrowing faster than in richer developed nations All countries have been affected by the credit crunch and decline in world trade. Middle Eastern governments buying assets in the UK) The internationalisation of products and services and the development of global brands such as Starbucks. distribution agreements or online The motivations for successful businesses to operate globally are strong. services and factors of production Cost considerations – a desire to shift production to countries with lower unit labour costs Forward vertical integration (e. the expansion of outsourcing and offshoring of production and support services. Sony and Google Shifts in production and consumption – e.
schools and prisons. You can see the main categories of government spending (in the UK) from this table: Total £bn Health Care Pensions Welfare Education Other Spending Defence Protection Interest General Government Transport Total Spending 120 117 109 86 84 44 35 31 25 21 669
How does government spending affect businesses?
The level of government spending has many direct and indirect effects on all businesses. Income Support and the Working Families Tax Credit. which is likely to reduce consumer spending
. hospitals. Current Government Spending This is spending on state-provided goods & services that are provided on a recurrent basis every week. it takes up over 45% of GDP. Spending by the public sector can be broken down into three main areas: Transfer Payments Transfer payments are welfare payments made available through the social security system including the Jobseekers‟ Allowance. For firms selling goods and services to individual consumers and to other firms: Increased government spending may mean higher taxes Higher taxes reduce the ability of customers to purchase goods and services.External Environment: Government Spending Government spending is also known as public spending and in Britain. State Pension. for example salaries paid to people working in the NHS and resources for state education and defence. Child Benefit. The NHS claims a sizeable proportion of total current spending – hardly surprising as it is the country‟s biggest employer with over one million people working within the organisation! Capital Spending Capital spending includes infrastructure spending such as new motorways and roads. The main aim of transfer payments is to provide a basic floor of income or minimum standard of living for low income households. month and year. Housing Benefit.
20%) National Insurance Contributions Excise duties on fuel and alcohol. many businesses rely on government spending for their revenues and profits.to help meet the government‟s economic objectives Changing the distribution of income and wealth Market failure and environmental targets – taxes may help correct market failures (e. wealth and Indirect taxes are levied on spending by profit consumers on goods and services Direct taxes include: Examples: Income Tax VAT (15% . The resulting cuts will directly affect many firms who rely on demand from the public sector for their revenues. Corporation Tax betting tax and the TV licence Capital Gains Tax Who pays? The burden of an indirect tax might be passed onto the consumer by the producer Depends on the price elasticity of demand and supply for the product The effects of the main types of taxation on businesses (in the UK) can be summarised as follows: Levied on Tax Income & National Insurance Income Impact Affects disposable income of households An increase in income tax would potentially lower consumer spending Higher income tax may also reduce the incentive for employees to work (impact on motivation?) Reduces profits available to retain and reinvest in a
. Good examples include: Construction firms that build and repair the road network Publishers who supply schools and colleges IT systems consultants who develop computer systems for public sector organisations In November 2010 the UK Government announced substantial cuts in government spending as part of a comprehensive review of all government spending programmes.Consequently increased government spending is often at the expense of private sector spending and is therefore potentially harmful to some firms On the other hand. External Environment: Government Taxation There are some key reasons why government needs to levy taxes. the main ones are: To raise revenue to finance government spending Managing aggregate demand . For businesses that supply services to the public sector.g. demand is directly linked to how much government is spending. car tax. pollution) An important distinction can be made between direct and indirect taxes: Indirect taxation Direct taxation Direct taxation is levied on income.
governments and businesses need other countries currencies to buy their goods and services (e. A change in exchange rates might affect a business in the following ways: Exchange rates changes can increase or lower the price of a product sold abroad The price of imported raw materials may change The price of competitors‟ products may change in the home market For example an increase in the exchange rate will mean that price abroad goes up.400 French raw materials (€4 per kilo) £2. This is because most currencies are based on flexible exchange rates.600 €14.000 in France €21. So £1:$1.000) €18.2 French car (€15. or an increase in profits.5 means the pound is getting weaker Currencies change in value against each other all the time. Currencies change in value because there is a change in demand for holding that currency.8 means the pound is getting stronger A currency that is becoming weaker or depreciating is a currency that is going down in value against another.33.8 moving to £1:$1. either leading to a fall in price and more sales.5 moving to £1:$1. A currency that is getting stronger or appreciating is a currency that is going up in value against another.500 UK car (£12. holiday makers for purchasing wine or a business buying spare parts for machinery from France will need Euros).33
business A decrease in corporation tax may act as an incentive for a business to invest (to achieve greater profits) Spending by Directly affects the selling prices of products bought by households consumers and households An increase in VAT results in higher inflation and potentially lowers the disposable income of consumers On profits from shares Reduces benefits from financial investment
External Environment: Business & Exchange Rates An exchange rate is the value of one currency expressed in terms of another. So £1:$1.000) £10. So £1 may be worth $1.5 £ appreciates £1:€1.000 in the UK £8. Exchange rate Originally £1:€1.55 and €1. competitors‟ prices fall.8 £ depreciates £1:€1.333 £12. price of imported raw materials falls.67 to UK businesses £2.22 £3.g. The notable difference is in the Euro zone (see below). Households. lowering sales. meaning lower sales.
The base interest rate in the UK economy is set by the Bank of England. Interest rates vary depending on the type and provider of borrowing. A bank will also pay interest to the owner of an account with a positive balance.introduction An interest rate is the cost of borrowing money or the return for investing money.External Environment: Interest rates . A fixed interest rate means that the interest cost is calculated at a fixed rate – which doesn‟t change over the period of the credit. So a fall in the base rate to 0. Now. For example. In theory. particularly those whose operations and activities are nationwide and international. The environment has become a key external influence on businesses. a bank charges interest on amounts loaned out or on the balance of an overdrawn bank account. During the credit crunch. the interest charged varies in relation to the base rate. The effect of a change in interest rate will be affected by whether borrowing is at a variable or fixed rate: With a variable rate. The key environmental issues which potentially constrain the ability of a business to achieve its objectives include:
Key Environmental Concerns Sustainability A “green” supply chain Minimising packaging Promoting environmental policies
Complying with environmental laws Carbon emissions Waste disposal
. the Monetary Policy Committee of the Bank of England to decide what the base rate should be. whatever happens to the base rate. External Environment: Business and the Environment
Twenty years ago. environmental issues were rarely a priority on the agenda of business management. Each month. the base interest rate has fallen sharply to as low as 0. there is an argument that operating an environmentally-friendly business is a top priority for business. a lower base rate will lead to lower interest rates on borrowings paid by businesses – but not necessarily.5% in early 2009 should mean that businesses with variable-rate overdrafts pay lower interest.5% The base interest rate set by the Bank of England affects other interest rates in the economy because it is the rate at which banks can themselves lend from the Bank of England.
since it assumes the net effect of a business activities on the environment can be measured in full.
A sustainable business is a business that has no negative overall impact on the environment. fumes & other forms of pollution Comply with rules for storage and use of hazardous substances & waste To meet their obligations. That definition makes it quite hard to quantify whether the goal of sustainability has been met. odour and light pollution Land contamination Environmental health Environmental laws and regulations are wide and varied.Business & environmental regulation
Business activities are regulated by three main agencies in the UK: Environment Agency in England and Wales Northern Ireland Environment Agency Scottish Environment Protection Agency And also by Local authorities who regulate Air quality & pollution Noise. it is possible to identify some advantages that arise for the environmentallyconscious business. smoke. These include: Lower raw material costs & waste disposal charges Longer life of assets which are recycled or repaired Trading opportunities with organisations that will only use environmentally-friendly suppliers Improved customer goodwill
You will see the word “sustainable” or “sustainability” used in many businesses these days. businesses need to focus on: Use of raw materials. water and other resources (inputs) Energy use and its impact on climate change Waste and pollution produced by the business The impact the business has on employees and the local. wider and international community Whilst complying with these regulations and laws inevitably imposes additional costs on many businesses. but essentially businesses have to make sure that they: Store and treat waste safely and securely Protect employees and environment from air pollution Don't produce excessive noise.
steel production and the rail industry. Management need to: Understand how changes will affect employees and other stakeholders Gain commitment and support from those stakeholders Anticipate changes in environmental legislation . These are activities such as: Using packaging that can be reused or recycled Minimising or eliminating the use of hazardous chemicals and processes that produce harmful by-products Working with suppliers to assess and improve their sustainability. Competitors may try harder to poach the best staff. Unemployment is where there are people you are willing and able to work but cannot find employment at the going wage rate.try to be "ahead of the game" Set short and long-term objectives for sustainability projects Review progress and objectives regularly External Environment: Labour market and unemployment The labour market is where businesses hire workers. though it can be bad for local sales.which might prevent the business from growing as fast as it wishes Existing workers may demand higher wages because they know that the business will be reluctant to release them. A business that needs more people and less machinery is known a labour-intensive business.
. On the other hand a shortage of labour might cause difficulties for a business: It may be more difficult to recruit new people . A capital-intensive industry is where a business relies heavily on machinery and technology in its transformation of inputs into outputs. teaching and the fashion industry are examples of labour intensive industries. can provide a business with a good source of cheap labour. Good examples include the car industry. house building. replacing some business travel with conference calls instead To be effective. Hairdressing. High unemployment.In practice. The amount of labour needed depends on whether the business is a labour intensive or capital intensive. or using renewable sources of energy Collaborating with other businesses that can use waste (or supply by-products that can be used as raw materials) Eliminating unnecessary activities – e.g. a business that aims to be sustainable gets involved in a range of activities designed to “minimise” their net effect on the environment. or switching to more sustainable suppliers Using more energy-efficient equipment. A business needs people to help the day to day running of the operation. a strategy of building a sustainable business requires the drive and support of people through a firm – particularly top management. For example a machine worker who cannot get a job because there are no jobs for machine workers in the area. The business may have to invest further in staff training and development rather than rely on “recruiting” new skills into the business. Recruitment of personnel can also depend on the mobility of labour in the labour market.
External Environment: Business & Legislation . There are two main types: Geographical mobility Can they physically move to that place of work? This depends on the transport links as well as people‟s desire to move house to get a job. In the North East there are pockets of high unemployment.Mobility of labour means the speed with which a person can move into a different job. Laws can be imposed by the UK or European Union courts and government. so it will be difficult to find cheap labour.Introduction Legislation The way in which a business can operate is controlled by legislation. with skilled workers without jobs. at higher wages though. They must ensure that workers health is not affected by their work. safety and rights of employees The main employment laws that a business needs to consider are: Health and Safety at Work Act 1974 Employers must provide safe premises and machinery. This is because a business may be able to attract good workers from other businesses. The state of the regional labour market will be a major influence on location decisions for businesses.
.BUT may reduce cost in the long term because of a reduction in staff absences and not having to pay compensation for injuries. because some of the more traditional industries have declined. Legislation mainly acts as a constraint on business. Occupational mobility Do they have the skills to do the new job? This depends on the education and training that people have. In the South East. there is low unemployment. though there is good pool of skilled labour. . The main areas of legislation that affect businesses are: Employment law Consumer protection Competition law Employment law This is aimed at protecting the health. especially near London. Even with GCSEs and A levels students will need more training to do many jobs. The key costs and benefits of the Health and Safety at Work Act for a business are: .Adds to costs to businesses that need to train staff and spend money maintaining the standards set out.
Competition Commission (CC) and the Office of Fair Trading (OFT) investigate any business that has more than 25% of the market share.Good health and safety record is a good way of encouraging recruitment of good workers. training or recruitment. If they do not comply they risk fines and ultimately being put out of business by the courts of law. Competition law Competition law aims to ensure that fair competition takes place in each industry. Employment law imposes additional costs to the business because they have to spend additional money on training. better quality goods and a wider variety of products. recruitment and pay. They may feel that the business has too much power and can set high prices and provide poor quality
. The main consumer protection legislation is: Sale and Supply of Goods Act (this states that goods must be of satisfactory quality) Trade Description Act (goods and services must perform in the way advertised by the business) Consumer Credit Act (this protects the consumer when borrowing money or buying on credit) Consumer protection imposes additional costs to businesses since they have to comply with the laws. It protects against unfair dismissal (without good cause) and says that redundancy pay must be paid if the worker has served more than two years and their job is to be abolished. Employment Protection Act 1978 Employees must be given a written contract of employment. Race Relations Act 1976 It is illegal to discriminate against someone on the basis of race. Sex Discrimination Act 1975 Employees cannot be sexually discriminated in employment. ethnic group or colour. Like the Health and Safety Act there are also benefits if the workers feel they are treated fairly and there is more security. Equal Pay Act 1970 Employees who do equal work or work of equal value must receive the same pay as workers of the other sex. Consumer Protection This is aimed at making sure that businesses act fairly towards their consumers – especially since consumers are sometimes in a much weaker financial position.. especially if it merges with another business. they will be more motivated. Governments believe that greater competition leads to lower prices.
products. The CC and OFT has the power between them either to fine these businesses, or prevent the merger taking place. The OFT can also fine businesses who fix prices or prevent other businesses from trading in their market. Most recently they investigated the car industry and warranties offered by leading electrical retailers.
External Environment: Business & Technology Technological change refers to the changes in production techniques and production equipment. It could be a change in the machinery used to make a product or the computers to design a product. More recently it is the use of the computers and information technology (IT) to improve the efficiency and competitiveness of businesses that has led to technological change. Since technological is so rapid, there are important implications for businesses. A business can be affected by the following technological change: In production In provision of services In the office Technological change in production Technological change leads to improved production of goods and services due to: Computer-aided manufacturing ( CAM) this reduces labour costs, is more accurate and faster and can work at any hour of the day. The computer controls the machinery. Computer-integrated manufacturing (CIM) here, computers control the whole production line. Best example is in car production where robots undertake much of the work, reducing the need for labour to perform boring, routine tasks. Computer-aided design (CAD) Computers are used to help design products using computer generated models and 3D drawings. Reduces the need to build physical models to test certain conditions, known as prototypes. This can be expensive to produce just for testing purposes (e.g. aircraft or new cars. Therefore new production technology can increase the speed of production, improve the quality of the product and reduce costs per unit of production. Technological change can be seen in the shops and the provision of other services such as banking or repairs. Electronic point of sale (EPOS) and Electronic Funds Transfer at Point of Sale (EFTPOS) speed up transactions in shops and give vital information for businesses so can sort out their stock levels. EFTPOS means that shoppers can pay for goods and services using credit and debit cards.
Banks can use “hole in the wall” machines to deliver cash or take deposits – therefore remain open all hours. Repair people can use handheld computers to work out what is wrong with the machinery they are examining. Technological change in the office helps speed up the movement of information and improves the analysis of information: Communication is improved through the use of the intranet and Internet. The intranet is an internal system of computer communication while the internet can be used to communicate with customers, suppliers amongst others in the outside world (through websites and email). Workers can work away from the office using mobile technology such as phones, laptops and modems. Computers can be used to process, analyse and store vast amounts of data to give the business more quality information. E-commerce is the ability of businesses to trade with the world via websites. This means that there is a larger market and the business is now open 24 hours a day. This has provided opportunities for businesses that could only trade locally to now expand the size of the market (e.g. Amazon as world wide book and CD sellers). Customers can also shop around for the best deals for new products. The Internet can also be useful for recruitment purposes. Job vacancies can be advertised and targeted to the right audience, often costing less than print alternatives. E.g. e-teach sends free emails every week detailing teachers posts to subscribers. Technological change can be very expensive: technology involves the following additional costs: Purchasing the equipment Installation Training staff Maintenance Replacement/upgrading There is legislation associated with the use of technology – e.g. computer screens, noise levels. In summary technological change can bring the following benefits to a business: Reduced running costs Improved productivity Improved competitiveness Lower costs per unit of product Improved quality of service (e.g. speed of service) Reduced wastage If the benefits of the above outweigh the costs, then a business should be investing in new technology. However it may need to consider the social costs of new technology:
Job losses Motivation of workers – worried about machines taking over their jobs (though extra training to work with machines may provide some increased motivation) Loss of traditional skills FExternal Environment: Business Ethics - introduction
What are business ethics?
Ethics are moral guidelines which govern good behaviour So behaving ethically is doing what is morally right Behaving ethically in business is widely regarded as good business practice. Ethical principles and standards in business: Define acceptable conduct in business Should underpin how management make decisions An important distinction to remember is that behaving ethically is not quite the same thing as behaving lawfully: Ethics are about what is right and what is wrong Law is about what is lawful and what is unlawful An ethical decision is one that is both legal and meets the shared ethical standards of the community Businesses face ethical issues and decisions almost every day – in some industries the issues are very significant. For example: Should businesses profit from problem gambling? Should supermarkets sell lager cheaper than bottled water? Is ethical shopping a luxury we can‟t afford? You will probably note the link between business ethics and corporate social responsibility (CSR). The two concepts are closely linked: A socially responsible firm should be an ethical firm An ethical firm should be socially responsible However there is also a distinction between the two: CSR is about responsibility to all stakeholders and not just shareholders Ethics is about morally correct behaviour How do businesses ensure that its directors, managers and employees act ethically? A common approach is to implement a code of practice. Ethical codes are increasingly popular – particularly with larger businesses and cover areas such as: Corporate social responsibility Dealings with customers and supply chain Environmental policy & actions
Rules for personal and corporate integrity
FExternal Environment: Business Ethics in practice
Ethics in practice
You‟ll find lots of examples of business ethical decisions and dilemmas in areas such as: Advertising Personal selling Business contracts Pricing Dealing with suppliers Let‟s take one of the above – suppliers. safety and environmental standards An ethical business has to be concerned with the behaviour of all businesses that operate in the supply chain – i.g. An interesting feature of the rise of consumer activism online has been increased scrutiny of business activities. animal furs) Business acting irresponsibly
. Pressure groups are a good example of this.g. Pressure groups are external stakeholders they Tend to focus on activities & ethical practice of multinationals or industries with ethical issues Combine direct and indirect action can damage the target business or industry Direct consumer action is another way in which business ethics can be challenged. Consumers may take action against: Businesses they consider to be unethical in some ways (e. Use of child labour and forced labour Production in sweatshops Violation of the basic rights of workers Ignoring health. A business cannot claim to be ethical firm if it ignores unethical practices by its suppliers – e.e. Suppliers Contractors Distributors Sales agents
Pressure for businesses to act ethically
Businesses and industries increasingly find themselves facing external pressure to improve their ethical track record.
common technical standards.g. road builders could be “contracted” to provide roads in Spain).
. The benefits of EU membership to businesses are: Increase in market size (a greater number of potential customers) as a result of the freedom of movement of goods and services. The costs of EU membership to UK businesses are: Greater competition from other EU businesses.
Is ethical behaviour good or bad for business?
You might think the above question is an easy one for businesses to answer? Surely acting ethically makes good business sense? As with all issues in business studies. raw materials. Increased costs due to compliance with EU regulations e. A business can employ individuals from any part of Europe.g.g. It also means there is no restriction in the employment of anyone in the EU or the ability to set a business in the EU. other than normal transport costs. A good example of this is Fairtrade.g.g.g. from ethical investors The disadvantages claimed for ethical business include: Higher costs – e. the European Union (EU). This means that it can trade one of fourteen other countries in that market without facing any barriers to trade. there are two sides to every argument: The advantages of ethical behaviour include: Higher revenues – demand from positive consumer support Improved brand and business awareness and recognition Better employee motivation and recruitment New sources of finance – e. meaning that businesses do not have to pay to extra money to send their goods abroad. Lower administration costs to trade. Football clubs have certainly benefited from this! The National Health Service has found this a good source of skilled doctors and nurses when they have had shortages of medical staff. benefiting businesses who sell goods and services to government departments (e. Greater access to cheap factors of production e. not just UK government contracts. training & communication of ethical policy A danger of building up false expectations FExternal Environment: Economics: Business & Europe The UK is part of the Single European Market. sourcing from Fairtrade suppliers rather than lowest price Higher overheads – e. Access to EU government contracts.Businesses that use business practices they find unacceptable Consumer action can also be positive – supporting businesses with a strong ethical stance & record. UK business can now sell to any of the other fourteen countries without facing extra costs or restrictions on the types of products they can sell. technology and labour.
since the most important elements of marketing are concerned with: Product . Luxembourg. Ireland. distribution and promotion to market and sell its product.the product (or service) that the customer obtains Price .Enlargement of the EU is likely to happen in the next few years with a number of Eastern European nations joining the EU. because they all share the same currency No costs of changing currency
Marketing . The advantages to businesses of being inside the Single Currency zone are: No uncertainty over pricing and costs when exporting or importing.the euro. Greece and Spain) who share one currency . France. For instance: High quality materials used in a product may mean that a higher selling price can be achieved An advertising campaign carried in one area of the country requires distribution of the product to be in place in advance of the campaign to ensure there are no disappointed customers Promotion is needed to emphasise the new features and benefits of a product What makes for an effective marketing mix? An effective marketing mix is one which: Meets customer needs Achieves marketing objectives Is balanced and consistent Creates a competitive advantage for the business
.how the customer is found and persuaded to buy the product It is known as a “mix” because each ingredient affects the other and the mix must overall be suitable to the target customer. Italy. product. Germany.how much the customer pays for the product Place – how the product is distributed to the customer Promotion . Netherlands. The marketing mix is often referred to as the “Four P’s” . Finland.The Marketing Mix The marketing mix deals with the way in which a business uses price. This will provide a further increase in the market size BUT the customers will have a lower average income and also be able to compete at lower prices with UK businesses. The Euro zone comprises 12 countries ( Belgium. European Single Currency (“Euro”) At present the UK is outside the Euro zone. Portugal. Austria.
We‟re talking about the market. the place where buyers and sellers come together. it will also vary over time.
. as illustrated below:
Marketing . what and how they buy The ways in which a market is split up into different parts to serve different customer needs – these are known asmarket segments The nature of demand in the market – how are prices set & the factors that influence the quantity of demand The size and growth rate of the overall market and its segments The proportion of market demand that is taken by competitors – an important concept known as market share Defining a market Let‟s start with a definition: A market is anywhere where buyers and sellers come together to transact with each other. a business is bound to fail unless it has a reasonable understanding of its target market. For most businesses.The marketing mix for each business and industry will vary. and how these differ The buying behaviour of customers – why. Quite simply.Types of Market Introduction Let's focus on the place where a business must compete. one or two elements of the mix will be seen as relatively more important than the others. What does the business need to understand? The needs and wants of customers.
National markets Definition: A market where customers are spread throughout the country or over a large area
. For example. The buyer and seller don‟t have to be in the same place in order to conduct transactions with each other. hairdressers) is another good example. Businesses operating in local markets enjoy several advantages. so are better placed to understand local cultural issues and traditions. National markets are very common in the UK. Take a drive along any main road on a Sunday and you will come across car boot sales – the classic example of aphysical market in action. of course. Tescos.uk. A market exists whenever buyers and sellers come together. However.g. there are many different kinds of market. Here is a summary of the main market categories: Geographical markets The two main categories of geographical markets are:
Local markets Definition: Where customers are a short distance from suppliers
Common for the sale of fresh and locally-sourced products and the delivery of locally-supplied services. McDonalds and Subway branches in just about every town and city in the UK. the term market has a much wider relevance when it comes to business studies. Here.The traditional image of a market is a physical place where buyers and sellers come together in one place. It is also easier to develop relationships with local customers. bought tracks from iTunes or iPhone apps from the App Store? Have you bought something from a catalogue by making a phone call? In all these examples.co. This still happens. These businesses are operating in national markets – e. For example. television. groceries and fast food. The main downside to operating in local markets is that the market size may be relatively small. you‟ll see BT phone vans. The car boot sale is a great example of a local product market. franchise operations. you will notice from the examples given that businesses which are national in terms of the scope of their operations are definitely not small businesses! Another way to think of a national market is in terms of the total sales of a product or service across the country. A start-up or small business can be focused on a national market. the total demand for greetings cards. although it is likely that it will have a very small share of the market. A business may have several (or many) locations in the country in order to reach those customers. The UK has many towns that are referred to as “market towns”. the markets for telephones. to engage in market research and to respond quickly to changes in the market. Your local high street or retail park is another example. the same product or service is offered to customers who are spread around the country. They are physically closer to their customers. However. you have participated in a market. where consumer goods are sold to people who tend to live pretty close. The use of local services (e. although you were not physically with the other party to the transaction! So. One way to illustrate this is to think of businesses that seem to be everywhere as you travel round the UK.g. so-called because they host a towncentre market on regular dates throughout the year. BSkyB satellite dishes. jams or loft conversions. Do you sell or buy items on EBay? Have you bought products from Amazon.
mobile telephony. especially products with a very high technological content. rather than what a customer wants. On the other hand some products are argued to create a need or want in the customer. particularly if the business has identified a small niche segment of that market Electronic markets tend to be highly price-competitive since it is quite easy for customers to search for products from a variety of suppliers and to compare the best prices available (just about every consumer goods market has one or more price comparison website). digital television and via email. A product orientated approach means the business develops products based on what it is good at making or doing. Fraser Doherty started hisSuperjam business by selling his homemade jams at farmers markets and then promoting them in the aisles of supermarkets. Marketing . Most markets are moving towards a more market-orientated approach because customers have become more knowledgeable and require more variety and better quality. To compete. video and Internet access. including the Internet. Nick Jenkins‟ specialist greetings card business Moonpig has always relied on using electronic markets. Innovations create the need rather than the customer being able to second-guess how new technology is going to develop. with many additional gadgets.
. Farmers‟ markets are another good example. Mobile phones have moved from being a business accessory to being a big consumer brand item. building sales by running a specialist website. Businesses find their customers using a variety of electronic media. such as pictures. A physical market brings buyers and sellers together in the same location. By contrast.particularly in well-established markets. This approach is usually criticised because it often leads to unsuccessful products .Marketing orientation Businesses can develop new products based on either a marketing orientated approach or a product orientated approach. rather than what the business thinks is right for the customer. We‟ve already mentioned car boot sales and markets in town centres. A marketing orientated approach means a business reacts to what customers want. A much larger number of markets are now electronic. The key points to remember about electronic markets are that: They provide an easier way for start-ups to enter a national market. The decisions taken are based around information about customers‟ needs and wants. Setting up a new business in an electronic market tends to have lower start-up costs than entering a physical market. Both physical and electronic markets are important to start-ups and small businesses. Transactions are completed electronically with the delivery method depending on the nature of the product sold. businesses need to be more sensitive to their customers needs otherwise they will lose sales to their rivals. Most successful businesses take a market-orientated approach.Physical and electronic markets We have touched on these two categories already. For example.
Segmenting the market There are several important reasons why businesses should attempt to segment their markets carefully. A very popular method of “demographic” segmentation looks at factors such as age.g. population within ranges or above a certain level Population density: e. For example.g. lower-priced product By segmenting markets.g. clothes. Other businesses focus on products that appeal directly to consumers on low incomes (e. gender. Wales Northern Ireland or (at a more detailed level) counties or major metropolitan areas Countries: perhaps categorised by size. 5-9. These are:
Better matching of customer needs Better opportunities for growth
Customer needs differ. teen. Lexus. businesses can often become the market leader. in the UK these might be England. hairdressing. semi-rural
. Bang & Olufsen). This tries to divide markets using: Regions: e. income and so on. urban. Creating separate products for each segment makes sense and provides customers with a better solution Market segmentation can build sales. family) We all know that males and females demand different types of the same product.Marketing . leisure activities and other products & services
Another approach is known as “geographic segmentation”. target customers can be reached more often and at lower cost Through careful segmentation and targeting. pre-school. rural. toiletries and cosmetics markets Many companies target rich consumers with luxury goods (e. Aldi and Lidl (discounted groceries) and fast-fashion retailers such as TK Maxx) Many businesses believe that a consumers "perceived" social class influences their preferences for cars. suburban. Good examples are toothpaste – look at the variety of toothpaste products for children and adults) and toys (e. Great examples include the clothing. even if the market is small
More effective promotion Gain a higher share of the market
There are many ways in which a market can be broken down into segments. customers can be encouraged to "trade-up" after being introduced to a particular product with an introductory. These are described briefly below:
Businesses often target certain age groups.g.g.g. home furnishings. development or membership of geographic region City / town size: e. 10-12. magazine. Scotland.
The attitudes and lifestyles of the grey generation have changed dramatically in recent years. Marketing . people aged over 50).It would be nice to think that market segmentation is the answer to an entrepreneur‟s problems. even if the market is small
More effective promotion Gain a higher share of the market
. the start-up business can focus all its efforts on reaching the target customer base. Sales forecasts will also be an important part of the budgets produced by the finance department. A research and development department will need to work very closely with the marketing department to understand the needs of the customers and to test outputs of the R&D section. These are:
Better matching of customer needs Better opportunities for growth
Customer needs differ. Larger businesses will dedicate specific staff and departments for the purpose of marketing. Limitations of segmentation If only business life was that simple. For example: The marketing section of a business needs to work closely with operations. finance and human resources to check their plans are possible.e.Segmenting the market There are several important reasons why businesses should attempt to segment their markets carefully. Creating separate products for each segment makes sense and provides customers with a better solution Market segmentation can build sales. target customers can be reached more often and at lower cost Through careful segmentation and targeting. customers can be encouraged to "trade-up" after being introduced to a particular product with an introductory. Hard to reach customer segments once identified: it is one thing spotting a segment. it is another finding the right way to reach target customers with the right kind of marketing message Marketing . For example. It isn‟t. By spotting a clear niche market using segmentation. research and development. Here are some key limitations with market segmentation: Lack of information and data: some markets are poorly researched with little information about different customer needs and wants Difficulty in measuring and predicting consumer behaviour: humans don‟t all behave in the same way all of the time. Operations will need to use sales forecasts produced by the marketing department to plan their production schedules.Marketing role in business Marketing is perhaps the most important activity in a business because it has a direct effect on profitability and sales. as well as the deployment of labour for the human resources department. It is important to realise that marketing cannot be carried out in isolation from the rest of the business. The way that they behave also changes over time! A good example is the “grey generation” (i. lower-priced product By segmenting markets. businesses can often become the market leader.
This tries to divide markets using: Regions: e. semi-rural It would be nice to think that market segmentation is the answer to an entrepreneur‟s problems. suburban. Wales Northern Ireland or (at a more detailed level) counties or major metropolitan areas Countries: perhaps categorised by size. 5-9.g.g. The way that they behave also changes over time! A good example is the “grey generation” (i. Scotland. Other businesses focus on products that appeal directly to consumers on low incomes (e. leisure activities and other products & services
Another approach is known as “geographic segmentation”. clothes. Good examples are toothpaste – look at the variety of toothpaste products for children and adults) and toys (e.There are many ways in which a market can be broken down into segments. Bang & Olufsen). Limitations of segmentation If only business life was that simple. Lexus.e.g. pre-school. Aldi and Lidl (discounted groceries) and fast-fashion retailers such as TK Maxx) Many businesses believe that a consumers "perceived" social class influences their preferences for cars. the start-up business can focus all its efforts on reaching the target customer base. Hard to reach customer segments once identified: it is one thing spotting a segment.g. population within ranges or above a certain level Population density: e. Great examples include the clothing. it is another finding the right way to reach target customers with the right kind of marketing message
.g. income and so on. 10-12. gender. people aged over 50). A very popular method of “demographic” segmentation looks at factors such as age. urban. hairdressing.g. It isn‟t. family) We all know that males and females demand different types of the same product. development or membership of geographic region City / town size: e. toiletries and cosmetics markets Many companies target rich consumers with luxury goods (e. The attitudes and lifestyles of the grey generation have changed dramatically in recent years. rural. These are described briefly below:
Businesses often target certain age groups. magazine. home furnishings. By spotting a clear niche market using segmentation. teen. in the UK these might be England. Here are some key limitations with market segmentation: Lack of information and data: some markets are poorly researched with little information about different customer needs and wants Difficulty in measuring and predicting consumer behaviour: humans don‟t all behave in the same way all of the time.
Marketing - Market mapping Once an entrepreneur has identified an appropriate segment of the market to target, the challenge is to position the product so that it meets the needs and wants of the target customers. One way to do this is to use a “market map” (you might also see this called by its proper name – the “perceptual map”). The market map illustrates the range of “positions” that a product can take in a market based on two dimensions that are important to customers. Examples of those dimensions might be: High price v low price Basic quality v High quality Low volume v high volume Necessity v luxury Light v heavy Simple v complex Lo-tech v high-tech Young v Old Let‟s look at an illustrated example of a market map. The map below shows one possible way in which the chocolate bar market could be mapped against two dimensions – quality and price:
How might a market map be used? One way is to identify where there are “gaps in the market” – where there are customer needs that are not being met. For example, in the chocolate bar market, Divine Chocolate (a social enterprise) successfully spotted that some consumers were prepared to pay a premium price for very high quality chocolate made from Fairtrade cocoa. Green & Black‟s exploited the opportunity to sell premium chocolate made from organic ingredients. Both these brands successfully moved into the high quality / high price quadrant (see above) before too many competitors beat them to it. The trick with a market map is to ensure that market research confirms whether or not there is actually any demand for a possible “gap in the market”. There may be very good reasons why consumers do not want to buy a product that might, potentially, fill a gap. Marketing - Understanding the customer Segmentation is all about splitting a market up into relevant sections to make marketing more effective. In order for a business to segment its market, it needs to understand and analyse its target customers.
A problem that faces any start-up or small business is that customers are not all the same! Think about how you behave as a customer. The things that you want from your mobile phone or night out are likely to be different from those wanted by someone of a different age, with other interests and so on. So how does a business address these differences? In short, the challenge for a business is to: Identify groups of customers who have similar needs and wants Find a way of offering (positioning) a product which is attractive to those customer groups Markets consist of customers with similar needs. For example, consider the wide variety of markets that exist to meet the need to: Eat (e.g. restaurants, fast food) Drink (e.g. coffee bars, pubs & clubs) Travel (for business and leisure, near or far) Socialise (as couples, with family, with friends) Be educated (as a child, adult, for work or other reasons) As you can imagine, such markets (if they were not further divided into smaller parts) would be very broad and difficult for a new business to target. The great news for any new business is that customers in any broad market are not the same. For example, within the market to provide meals, customers differ in the: Benefits they want (food quality, ambience, dietary health) Amount they are able to or willing to pay (budget, expensive) Quantities they buy (bulk buy or one-off purchase) Time and place that they buy (fast-food, up-market restaurant) It therefore makes sense for businesses to divide (or “segment”) the overall market and to target specific segments of a market so that they can design and deliver more relevant products. Marketing - Marketing's role in business strategy Marketing strategies explain how the marketing function fits in with the overall strategy for a business. Examples of marketing strategies could be: Business Strategy Grow sales Example Marketing Strategies Launch new products Expand distribution (e.g. open more shops) Start selling products into overseas markets Increase profits Increase selling prices Reduce the amount spent on television advertising Build customer awareness Implement a public relations programme
The objective of distribution is clear.g. They can then measure more effectively the success or failure of their marketing strategies to achieve these objectives. then the business must develop an action to turn the strategy into reality. But what if: Customers are not near a retailer that is selling the product? A competing product is stocked by a much wider range of outlets? A competitor is winning because it has a team of trained distributors or sales agents who are out there meeting customers and closing the sale? Distribution matters for a business of any size – it is a crucial part of the marketing mix. It is one thing having a great product. sold at an attractive price. Marketing objectives are the specific targets for marketing set by the business to achieve their corporate objectives. The starting point for this plan is the setting of marketing objectives. including: Retailers Wholesalers Distributors / Sales Agents Direct (e.Distribution (place) Place (or its more common name “distribution”) is about how a business gets its products to the customers. It is: To make products available in the right place at the right time in the right quantities Distribution is achieved by using one or more distribution channels.Invest more in advertising
Once a strategy has been identified. Marketing . via e-commerce)
The role of a distribution channel
A distribution channel can be defined as:
"all the organisations through which a product must pass between its point of production and consumption"
. Examples of marketing objectives might be: Increase sales by 10% Launch a new product by the end of the year Achieve a 95% customer satisfaction rating Increase the number of retail outlets selling our products by 250 within 12 months It is important for a business to set marketing objectives because managers can then have targets for their work.
The organisations involved in each stage of distribution are commonly referred to as “intermediaries”. They have the contacts.Looking at that definition. An intermediary will also want to make a profit by getting involved.Distribution channels A distribution channel can have several stages depending on how many organisations are involved in it:
. including grading.g. The main function of a distribution channel is to provide a link between production and consumption. holding stock)
Marketing . Organisations that form any particular distribution channel perform many key functions: Information Promotion Contact Matching Negotiation Physical distribution Financing Risk taking Gathering and distributing market research and intelligence . Why does a business give the job of selling its products to intermediaries? After all. experience and scale of operation which means that greater sales can be achieved than if the producing business tried to run a sales operation itself.important for marketing planning Developing and spreading communications about offers Finding and communicating with prospective buyers Adjusting the offer to fit a buyer's needs. assembling and packaging Reaching agreement on price and other terms of the offer Transporting and storing goods Acquiring and using funds to cover the costs of the distribution channel Assuming some commercial risks by operating the channel (e. Intermediaries are specialists in selling. The answer lies in efficiency of distribution costs. you can see that a product might pass through several stages before it finally reaches the consumer. using an intermediary means giving up some control over how products are sold and who they are sold to.
a wholesaler and a retailer. convenience. Canon etc. sell their goods directly to large retailers such as Comet. Many holiday companies also market direct to consumers. The consumer electrical goods market in the UK is typical of this arrangement whereby producers such as Sony. shopping. The market Is it geographically spread? Does it involve selling overseas (see further below) The extent and nature of the competition – which distribution channels and intermediaries do competitors use? The business Its size and scope – e. can it afford an in-house sales force? Its marketing objectives – revenue or profit maximisation? Does it have established distribution network or does it need to extend its distribution option How much control does it want over distribution? The longer the channel.Looking at the diagram above: Channel 1 contains two stages between producer and consumer . speciality Desired image for the product – if intermediaries are to be used. A wholesaler typically buys and stores large quantities of several producers‟ goods and then breaks into bulk deliveries to supply retailers with smaller quantities.g.the travel agent. Tesco and Amazon which then sell onto the final consumers. Channel 2 contains one intermediary. this is typically a retailer. since it has no intermediary levels. Panasonic.
What is the best distribution channel for a product?
What factors should be taken into account in choosing the best distribution channel? Here is a summary: Nature of the product Technical/complex? Complex products are often sold by specialist distributors or agents Customised? A direct distribution approach often works best for a product that the end consumer wants providing to a distinct specification Type of product – e. For small retailers with limited order quantities. then it is essential that those chosen are suitable and relevant for the product. bypassing a traditional retail intermediary . the less control is available Legal issues Are there limitations on sale? What are the risks if an intermediary sells the product to an inappropriate customer?
. In consumer markets. In this case the manufacturer sells directly to customers. An example of a direct marketing channel would be a factory outlet store. Channel 3 is called a "direct-marketing" channel. the use of wholesalers makes economic sense.g.
Tupperware and Pampered Chef). wholesalers etc)
The most popular distribution channel for consumer goods. particularly if broad coverage by the major retail chains can be obtained. Distributors and dealers are often involved in providing after-sales service.g.
Wholesalers stock a range of products from several producers. nationwide retail brands.g. insurance agents and the organisers of party-based selling events (e. they often sell onto the end customer rather than a retailer.Selling using intermediaries (retailers.
Distributors and dealers
Distributors or dealers have a similar role to wholesalers – that of taking products from producers and selling them on. public-quoted retail group) Location (e.g. grocery. Franchises are commonly used by businesses (franchisors) that wish to expand a service-based product into a much wider geographical area. clothes. out-of-town) Brand (e.
.Marketing . retailers operate outlets that trade directly with household customers.g. corner shop. Wholesalers usually specialise in particular products – for example food products. They also usually have a much narrower product range. privately-owned independent. You will often find agents working in the service sector. counter-service) Size (e. However. The big downside to using a retailer is the loss of profit margin. Good examples include travel agents. self-service.g.g. rural. city-centre. superstore) Ownership (e.g. local one-shop name) Retailers enable producers to reach a wider audience. Retailers can be classified in several ways: Type of goods being sold (e. furniture) Type of service (e. The role of the wholesaler is to sell onto retailers. A high street retailer will typically look to take at least 40-50% of the final consumer price.
Franchises are independent businesses that operate a branded product (usually a service) in exchange for a licence fee and a share of sales.
Agents sell the products and services of producers in return for a commission (a percentage of the sales revenues).
Marketing . A customer can get advice on how to apply the product and can try different products. DVD players. dental treatment. Great examples include cars. The sellers promote the product through their attitude. accountancy. appearance and specialist product knowledge.g. trainers. photocopiers) and many products that are sold by businesses to other industrial customers. music downloads A product can be said to have three elements:
What the product does . What is a product? A product is: “anything that is capable of satisfying customer needs” This definition therefore includes both: Physical products – e. take-away pizzas Services – e. The main advantages and disadvantages of personal selling can be summarised as follows:
Disadvantages Advantages High customer attention Message is customised Interactivity Persuasive impact Potential for development of relationship Adaptable Opportunity to close the sale High cost Labour intensive Expensive Can only reach a limited number of customers
Point-of-sale merchandising is a specialist form of personal selling.Personal selling & merchandising Personal selling is where businesses use people (the “sales force”) to sell the product after meeting face-to-face with the customer.g. office equipment (e.What is a product? Products are at the heart of marketing. are often sold using personal selling. Products with relatively high prices. The visit also provides the opportunity for the merchandiser to check on stock levels and to check whether the product is being displayed optimally.Marketing . or at least trial the product. The product needs to exist for the other elements of the mix to happen. They aim to inform and encourage the customer to buy. holidays. Merchandising involves face-to-face contact between sales representatives of producers and the retail trade. A good example of personal selling is found in department stores on the perfume and cosmetic counters. A merchandiser will visit a range of suitable retail premises in his/her area and encourage the retailer to stock products from a range. or with complex features.the main functions of the product
.g. games consoles. insurance.
plasma television which is HDTV compatible The extra elements which add to the perceived value of the product in the eyes of the consumer Augmented benefits can be tangible (e. weight.g. The advantages of having a strong brand are that it: Inspires customer loyalty leading to repeat sales and word-of mouth recommendation The brand owner can usually charge higher prices.g. what it looks like.
. especially if the brand is the market leader Retailers or service sellers want to stock top selling brands. Disney.g. she understood what her customers where really buying from her. for instance in design or image.g. food and clothing Services – products that are non-physical – watching a film..Brands A brand is a product with unique character. It is consistent and well recognised.g. Coca Cola. e. having a hair-cut It is important to appreciate that a service is still a product – even though there is nothing you can touch. A great example was cosmetics leader Elizabeth Arden. it was much more than that. Marketing . after-sales service. reputation for reliability) E. It wasn‟t pots of cream and cosmetics. free installation.. 500g of ice-cream A flat-screen. but will give the retailer more profit than selling a normal brand.Core benefits
E. With limited shelf space it is more likely the top brands will be on the shelf than less well-known brands.g. washing machine – it cleans clothes Cinema – it shows a film you want to see What the product is made of. She certainly knew what she was selling. dimensions or duration E. Many successful businesses really understand this. Examples of global brands include: Microsoft. Mercedes and Hewlett Packard. Some brands are so strong that they have become global brands. she said “I don’t sell cosmetics…I sell hope” Products can be split into two broad categories: Goods – physical products that you can touch and feel. extra features) or intangible (e. materials. brand name. These tend to be cheaper than the normal brands. This means that the product is sold in many countries and the contents are very similar. where they use their name of the product rather than the manufacturers like Tesco‟s “Finest” range of meals and foodstuffs. full money-back guarantee
Tangible or physical element Augmented benefits
Often the augmented benefits of a product are the key determinant of whether a customer decides to buy. Some retailers use “own-label” brands.
A logo is a symbol or picture that represents the business.
. when sales begin to fall This can be illustrated by looking at the sales during the time period of the product. developing and then launching the product Growth – when sales are increasing at their fastest rate Maturity – sales are near their highest. Virgin Airlines and Virgin Cola. e.The strength of a brand can be exploited by a business to develop new products. A branded good can enjoy continuous growth. not necessarily connected. E. The logo on a product is an important part of the product. It describes the stages a product goes through from when it was first thought of until it finally is removed from the market. new competitors in market or saturation Decline – final stage of the cycle. such as Microsoft. Examples include Dove soap and Dove Shampoo (both contain moisturiser). Some continue to grow and others rise and fall. and maintains a strong brand loyalty. establishes brand loyalty and can create a favourable image. Marks and Spencer clothes and food. It is important because it is easy to recognise. Not all products reach this final stage.g. Mars Bar and Mars Ice Cream Brand stretching is where the brand is used for a diverse range of products. This is known as brand extension – a product with some of the brand‟s s characteristics.Product life cycles The product life cycle is an important concept in marketing.
The main stages of the product life cycle are: Introduction – researching. because the product is being constantly improved and advertised. but the rate of growth is slowing down.g. Marketing .
Product portfolios and the Boston Matrix Why businesses have more than one product Most businesses sell more than one product. or subtle changes such as putting crisps in foil packets or Seventies music compilations Marketing .g. owning a product portfolio often poses a problem for a business. the market segment may be too small to earn a living) A range can be sold to different segments of the market e. Which products should it focus on? A portfolio of products can be analysed using the Boston Group Consulting Matrix. A collection of such products is known as a “product group” or “product range”. This categorises the products into one of four different areas. However. Often they will produce several similar products that appeal to different customers. family holidays and activity holidays However a greater range of products can mean that the marketing resources (e.g. Again businesses use marketing techniques to improve sales.g.g. promotion) across the portfolio.Extension strategies extend the life of the product before it goes into decline. video messaging on mobile phones Explore new markets – try selling abroad New packaging – brightening up old packaging. Managing the product portfolio A business with a range of products has a portfolio of products.g. It must decide how to allocate investment (e. Examples of the techniques are: Advertising – try to gain a new audience or remind the current audience Price reduction – more attractive to customers Adding value – add new features to the current product. based on: Market share – does the product being sold have a low or high market share? Market growth – are the numbers of potential customers in the market growing or not How does the Boston Matrix work? The four categories can be described as follows:
. personnel and cash) are spread more thinly. e. in product development. Good examples of product groups include: Dell‟s range of desktop and laptop computers Sony‟s range of DVD players and televisions There are several advantages to having a product range rather than just one product: Spread the risk – a decline in one product may be offset by sales of other products Selling a single product may not generate enough returns for the business (e.
which is the acronym for Unique Selling Point. if ever. They need to be managed for continued profit so that they continue to generate the strong cash flows that the company needs for its Stars Question marks are products with low market share operating in high growth markets. low-growth markets. This means making the product different from its competitors. Dogs are usually sold or closed. Nike. Ideally a business would prefer products in all categories (apart from Dogs!) to give it a balanced portfolio of products. BMW A key term to remember is USP.
. Reebok Performance . but they are rarely. but may need substantial investment to grow market share at the expense of larger competitors. Mercedes. Often Stars need heavy investment to sustain growth.g. worth investing in.Stars are high growth products competing in markets where they are strong compared with the competition.e.g. Product differentiation can be achieved through: Distinctive design– e. assuming they keep their market share. This suggests that they have potential. Management have to think hard about “Question Marks” which ones should they invest in? Which ones should they allow to fail or shrink? Unsurprisingly.differentiation and USPs An important part of the marketing of the product is through product differentiation. Apple iPod Branding . Marketing .Making a product stand out . Dogs may generate enough cash to break-even.e. Dyson.g. Stars will become Cash Cows Cash cows are low-growth products with a high market share. Eventually growth will slow and. These are mature. the term “dogs” refers to products that have a low market share in unattractive. successful products with relatively little need for investment.
If a business finds that its customers are switching to competitors or buying purely on price.g. then the question is whether it is communicating USPs clearly to customers? Marketing .g. new technology making it easier to manufacturer certain goods or new markets abroad Reviews the business‟ future threats. e. or wish to develop new products (Virgin have used their strong brand name to launch several products) Can implement strategies to eradicate these weaknesses e. offering extra functions. more resources put into a better warehousing system for the despatch of goods. A business needs to look at its unique selling points compared to competitors. A business can perform a SWOT analysis as a way of deciding which marketing strategy to use. A USP could be a lower price. If it has.
Reviews the business‟ current weaknesses such poor response times to requests for information or late deliveries
External Opportunities Reviews the business‟ future opportunities e. perhaps in the way they promote the product.SWOT analysis and marketing An important part of the planning process is looking at the existing position of the business and trying to decide how factors external to the business may affect the business. it should be asked whether the business has identified the USPs for its products and services. Can use strategies to take advantage of the potential opportunities e. or even simply producing a standard product in a range of colours or designs. mostly from increased competition from other firms or from changes in the economic situation.g.A Unique Selling Point is a feature or benefit that separates a product from its competitors. If it doesn‟t have any.g. developing new products to meet the potential increased demand
Can employ strategies to ward off these problems. a smaller version of the product. An audit is a review of all the business‟ activities. setting lower prices or increasing promotion
Explanation Internal Strengths Reviews the business‟ current strengths such as a good brand or strong sales performance
Can develop the strengths. The business performs an audit on the internal and external nature of the business looking at the current and future situation. the business will probably struggle to make the product seem attractive to customers (the remaining option is usually to compete solely on price).
g. Promotion is also used to persuade customers that the product is better than competing products and to remind customers about why they may want to buy.Promotion (introduction / overview) It is no longer enough for a business to have great products. That is the role of promotion. China & India) The use of social media like Facebook and Twitter to reach new customers A list of possible marketing threats could include: Competitors introducing better products at lower prices Changes in the economic environment which encourage customers to be less loyal to established brands Changes in customer tastes and fashions Marketing . There are a variety of approaches that a business can take to get their message across to customers. Which promotional methods are used depends on several factors:
. Why because promotion is the way in a business makes its products known to the customers. It is important to understand that a business will use more than one method of promotion. both current and potential. Promotion is all about communication. Lots of businesses have those too. Possible strengths in marketing might be: Specialist marketing expertise An innovative product or service The location of the business – convenient for customers The reputation of the brand – perhaps it is trusted or recognised as the highest quality Possible weaknesses in marketing might include: Lack of a clear product differentiation compared with competing products Weak distribution compared with competitors Inadequate online presence Potential marketing opportunities could include: The use of technology to develop new products Growing demand from overseas markets (e. It isn‟t. although advertising is certainly an important one. The variety of promotional methods used is referred to as the promotional mix.Thinking about the use of a SWOT analysis in assessing the contribution of marketing to a business‟ strategy. The main aim of promotion is to ensure that customers are aware of the existence and positioning of products. It is a common mistake to believe that promotion by business is all about advertising. Customers need to know about a great product and be persuaded to buy.
Advertising presents or promotes the product to the target audience through a variety of media such as TV. It is aimed directly at the target audience. How can a business cut through the advertising noise and get a message across
. advertising is important at the launch stage How much information is required by customers before they buy What are rivals doing? How much can the firm afford? Other elements of the mix (price. The problem with advertising is that consumers are bombarded with advertising messages every day. cinema.g. Below the line promotion – promotional activities where the business has direct control e. radio. Marketing . advertising on TV or in the newspapers. place etc) Appropriate ways to reach the target market
The main methods of promotion are: Advertising Public relations & sponsorship Personal selling Direct marketing Sales promotion
Main aims of promotion
Promotional activities have a variety of aims: To inform current and potential customers about the existence of products To explain the potential benefits of using the product To persuade customers to buy the product To help differentiate a product from the competition To develop and sustain a brand To reassure customers that they have made the right choice
Promotional methods – “above and below the line”
The way in which promotion is targeted is traditionally split into two types: Above the line promotion – paid for communication in the independent media e. online and magazines to encourage them to buy.Stage in the life cycle Nature of the product Competition Marketing budget Marketing strategy Target market
E.g.Advertising Advertising is defined as any “paid-for method of promotion” and is the main form of “above the line promotion”. Advertising is the main methods of above-the-line promotion. direct mailing and money off coupons. product.g. Though it can be targeted. it could be seen by anyone outside the target audience.
telephone selling. direct radio selling.this tries to entice the customer to buy the product by informing them of the product benefit Informative advertising .g. e.Selling direct A key decision a business has to make about distribution is whether to sell “direct”.effectively? And how can a business measure the effectiveness of an advertising campaign. direct-mail selling. An agency plans. and on-line computer shopping have been developed.g. It is often said that businesses waste half their advertising spend – the problem is that they don‟t know which half! When deciding which type of advertising to use a business needs to consider factors like: Reach of the media – national or local. copywriters. cold calling. But the business will also want to consider cost per head if reaching a larger audience Online or offline – there has been substantial growth in businesses that advertise online as they swap some (sometimes all) of their advertising budgets to reach Internet users. Direct marketing means selling products by dealing directly with consumers rather than through intermediaries. organises and producesadvertising campaigns for other businesses. More recently telemarketing.
. magazine and TV advertising. Mostly done by the government (e. Advertising can also be split into two main types: Persuasive advertising . health campaigns. a recruitment ad would be placed in a trade magazine or newspaper but a lipstick ad would be shown on TV or women‟s magazines Position in product life cycle – launch stage will need different advertising from products undergoing extension strategies Cost of medium & size of advertising budget – e. Traditional methods include mail order. number of potential customers it could reach. The main advantages and disadvantages of advertising as method of promotion are:
Advantages Wide coverage Control of message being promoted Repetition means that the message can be communicated effectively Can be used to build brand loyalty
Disadvantages Often expensive Impersonal One way communication Lacks flexibility Limited ability to close a sale
Marketing . The advantage of an agency managing the campaign is that it has the expertise a business may not have. designers and media buyers. local newspaper advertising is cheaper than radio. and door-to-door calling. new welfare benefits) Sometimes a business will employ an advertising agency to deal with its needs.this gives the customer information. which in turn is cheaper than TV. how long before the message is seen Nature of the product – the media needs to reflect the image of the product.g.
Sales promotion is designed to be used as a short-term tactic to boost sales – it is not really designed to build long-term customer loyalty. Others are targeted at intermediaries (such as agents and wholesalers) or at the firm‟s sales force. there are several factors that a business must take into account: What does the promotion cost – will the resulting sales boost justify the investment? Is the sales promotion consistent with the brand image? A promotion that heavily discounts a product with a premium price might do some long-term damage to a brand Will the sales promotion attract customers who will continue to buy the product once the promotion ends. or linked to. Some sales promotions are aimed at consumers. There are several potential advantages of using an intermediary: More efficient distribution logistics Overall costs (even taking into account the intermediaries‟ margin or commission) may be lower Consumers may expect choice (i. Products are not sold alongside those of competitors either. There may also be specific market factors that encourage direct selling: There may be a need for an expert sales force. dealers and other intermediaries may be unwilling to sell the product Existing distribution channels may be owned by.The main advantages of selling direct are that there is no need to share profit margins and the producer has complete control over the sales process.Sales promotion Sales promotion is the process of persuading a potential customer to buy the product. or cut coupons out of newspapers or a products packaging that enables them to buy the product next time at a reduced price Competitions – buying the product will allow the customer to take part in a chance to win a prize Discount vouchers – a voucher (like a money off coupon) Free gifts – a free product when buy another product
. competing producers (making it hard to obtain distribution by any other means than direct) However. to demonstrate products. When undertaking a sales promotion. there are significant costs associated with selling direct which may be higher than the costs associated with using an intermediary to generate the same level of sales.e. the products and brands of many producers) at the point of sale Producers may not have sufficient resources or expertise to sell direct Marketing . distributors. provide detailed pre-sale information and after-sales service Retailers. including: Money off coupons – customers receive coupons. or will it simply attract those customers who are always on the look-out for a bargain? There are many methods of sales promotion.
display stands – ways of presenting the product in its best way or show the customer that the product is there. suppliers. though a business will need to pay for its own PR department or external PR consultant PR is arguably more powerful because the message the business communicates through PR is often more believable than paid for advertising However there is no guarantee that PR will reach its target audience (the media may fail to feature the story) whereas advertising must be displayed since the space in the newspaper is paid for. local communities. Loyalty cards can offset the discounts they offer by making more sales and persuading the customer to come back. They encourage the customer to return to the retailer by giving them discounts based on the spending from a previous visit.g. A secondary objective might be to emphasise social or ethical credentials. but most sponsorship really does have a commercial objective at heart.Public relations & sponsorship Public relations covers a broad series of activities where a business manages its relationships with different parts of the public. The main advantages and disadvantages of sales promotion are: Disadvantages Advantages Effective at achieving a quick boost to sales Encourages customers to trial a product or switch brands Sales effect may only be short-term Customers may come to expect or anticipate further promotions May damage brand image
Marketing . employees and investors. when and what do they buy? This is very valuable marketing research and can be used in the planning process for new and existing products. posters. particularly with larger businesses. which is often shortened just to “PR”. goods or other offers Loyalty cards have recently become an important form of sales promotion.g. Nectar and Air Miles. Loyalty cards – e. Sponsorship is a specialised kind of public relations and increasingly popular.
. particularly amongst customers To communicate effectively with customers and other stakeholders Public relations. They also provide information about the shopping habits of customers – where do they shop. team or individual in order to build brand awareness. the media. e. customers. where customers earn points for buying certain goods or shopping at certain retailers – that can later be exchanged for money.g. The main objectives of public relations are: To achieve favourable publicity about the business To build the image and reputation of the business and its products. has several advantages over advertising in terms of promotion: No direct charge is made for PR. A business will sponsor an event.Point of sale materials – e.
g. In other words. Here are some examples of how niche and mass markets compare: Niche Market Industry Holidays Motor cars Eating out Chocolate Magazines Trekking in Nepal Porsche 911 Turbo Exclusive restaurant Hotel Chocolat Snowboard UK magazine Beach holiday in Ibitha Fiat Uno Burger King Cadbury‟s Dairy Milk Hello! Magazine Mass Market
Why should start-ups and small businesses aim for a market niche? Because surviving in high volume or mass-marketsegments is almost impossible. Marketing .
. together with all major sporting events.
A niche market is a smaller part of a large market where customers have quite specific needs and wants. volume etc. By comparison. Market research for a start-up or small business needs to focus on the fundamental issues. and the prices they pay The main purpose of the market research is to help a business find a position in a part of the market where it charge a reasonable price and to earn reasonable profits. it is common for small businesses to sponsor local teams. It is important to known what their preferences are in terms of when and where they buy. Often this happens when a business targets a niche market. many of the goods and services you buy are offered in a mass market – where customer needs and wants are not too specific. But. Mass markets are dominated by wellestablished businesses that enjoy lower costs and can charge lower prices than a smaller business. low price or high quality) What kind of customers there are in the market.) How fast the market is growing ) & the market growth potential Who the existing competitors are and their share of the market How the market is divided up into segments (“segments” are the different parts of a larger market – e. sports celebrities and sporting teams all benefit from substantial corporate sponsorship. At a local level.introduction The entrepreneur has come up with what he/she believes is a good business idea. a start-up or small business will face stiff competition if it tries to compete in a mass market. how does the entrepreneur check that the business idea actually meets customer needs and has the potential to become a viable business? The answer is to do some market research. such as: How big the market is (measured by sales.Market research .The 2012 Olympics in London.
funds are often in short-supply which restricts how much market research can be carried out. It is about getting the right information to make good decisions. have you seen the new advert for cornflakes Multiple choice – a number of options are available to the answer Sliding scale – a value is placed on an answer e.g. Questionnaires need to be designed carefully. don‟t worry.
. An interviewer will be filling in a face-to-face questionnaire and the person may be able to ask for the question to be rephrased if they do not understand it the first time. talking to customers and suppliers on a day-to-day basis and reading the trade newspapers and magazines. Remember that a small business can learn much about the market by simply trading.g. from customers who complete the questions? The type of person who is going to be asked – questions need be easy to understand and also easy to answer depending on the person who is answering.Market research . Once the questionnaires are complete. at a minimum. The design of the questionnaire depends on the following: Objectives of the questionnaire – what information is needed. Marketing . How the questionnaire is going to be taken? – A face-to-face questionnaire might include different questions to an emailed questionnaire. The types of questions that can be asked can be split into three groups: Simple yes/no answers – e. A questionnaire contains a series of questions which gather primary marketing research data for the business.A business needs to be satisfied that there is likely to be a demand for the product. satisfactory. the data is collated and analysed. However. how do rate the performance of this product – less than satisfactory. Effective market research is not about getting hold of lots of statistics or detailed reports.questionnaires Questionnaires are one the main tools in the use of field research. excellent (or could use a scale of 1-10 with 10 being excellent and 1 being dreadful!). However.
A costly. A different way of thinking about market research is to consider the two main approaches – qualitative and quantitative. a postal survey can cover a wide geographical area and avoids the potential for interviewer bias. but can leave questions unanswered. but good way to get detailed insights from an individual Groups of potential customers are brought together to discuss their feelings about a product or market. potential customers are often wary of being called and may be reluctant to give anything other than short answers Increasingly popular and relatively low cost. a start-up could start by selling to a limited local area in order to iron-out product issues.Market research . sit outside a shop and watch how many people walk by. For example. However.quantitative and qualitative The distinction between primary and secondary research is really about the different sources of market information. look at the window display etc. Observation works well in retail markets. However. the telephone interview allow quicker feedback than a postal survey. Focus groups are a good way of getting detailed information about customer tastes and preferences This involves selling a new product in a small section of the market in order to assess customer reaction.Market research .primary There are various methods of primary research:
Comments Watching how consumers behave provides many insights. Software firms often test-market their products by offering “beta” versions for testing by a small group of potential customers. online surveys are widely used by small businesses as a way of capturing the views of existing and potential customers Personal interviews conducted face-to-face. Test marketing can be a good predictor of how a new product or service will be received by the larger market (provided that it can be kept secret from competitors!)
Face-to-face surveys Focus groups
Marketing .Marketing . Sent to the address of potential customers who complete the form and send back in a pre-paid envelope. Relatively cheap.
. response rates (the proportion of people sending back a completed survey) are often very low and it can take be a long time before enough surveys are returned Not to be confused with “telesales” (which is a method of selling).
such data can highlight potential issues which can be explored in quantitative research. on the move or surfing online. or “How?” Qualitative research aims to understand why customers behave in a certain way or how they may respond to a new product. “when?” and “where?” The results of quantitative research will generally be numerical form – for example: 35% of customers rate the new product as “attractive” 70% of potential customers use the Internet to buy their hotel accommodation in Dorset 3 out of 5 customers will buy a new food product after being offered a free in-store sample The main methods of obtaining quantitative data are the various forms of surveys – i. face-to-face and online. Quantitative research This is research based on larger samples and is. as we see later.
Marketing . more statistically valid. “how often”.
. attitudes. but it is costly and time-consuming to collect. Given that these opinions are often obtained from small numbers of people. telephone. The cost is the amount spent by a business making the product. However.What is price & pricing? You come across the concept of price every time you buy something – whether it is in a shop. However. This kind of research deals with questions such as “Why”? “Would?”. postal. particularly for a start-up or small business. therefore. The price a business charges for its product or service is one of the most important business decisions management take. the findings are not necessarily statistically valid.Qualitative research Qualitative research is based on opinions. This kind of data is often revealing and useful. beliefs and intentions. Quantitative research is concerned with data and addresses question such as “how many?”. Price is: The money charged for a product or service Everything that a customer has to give up in order to acquire a product or service Usually expressed in terms of £ per unit You can see from the above that price is not the same thing as cost. a firm needs to take account of the cost of production when setting price to ensure that it is making a profit on the products it offers. The price is the amount customers pay for a product. “who?”.e. Focus groups and interviews are common methods used to collect qualitative data.
Unit cost Mark-up Selling price
£100 50% £150
How high should the mark-up percentage be? That largely depends on the normal competitive practice in a market and also whether the resulting price is acceptable to customers.Pricing approaches and strategies There are three main approaches a business takes to setting price: Cost-based pricing: price is determined by adding a profit element on top of the cost of making the product. customers are not too bothered what it cost to make the product – they are interested in what value the product provides them. Marketing . An advantage of this approach is that the business will know that its costs are being covered. So pricing is important. Cost-plus (or “mark-up”) pricing is widely used in retailing. where a business wishes to ensure that it makes an additional £50 of profit on top of the unit cost of production. although it is still widely used. After all. it could cause serious problems for sales and cash flow. The main disadvantage is that cost-plus pricing may lead to products that are priced un-competitively. At worst. but it is really tough to get right.
. Customer-based pricing: where prices are determined by what a firm believes customers will be prepared to pay Competitor-based pricing: where competitor prices are the main influence on the price set Let‟s take a brief look at each of these approaches. There are so many factors to consider. Setting a price that is too high or too low will . since it contributes to the perception of a product or service by customers.at best . and much uncertainty about whether a price change will have the desired effect. unlike the other elements of the marketing mix (product. where the retailer wants to know with some certainty what the gross profit margin of each sale will be.For example. place & promotion).
Cost based pricing
This involves setting a price by adding a fixed amount or percentage to the cost of making or buying the product. In some ways this is quite an old-fashioned and somewhat discredited pricing strategy. Here is an example of cost-plus pricing. pricing decisions directly affect revenues rather than costs.limit the business growth. Pricing also has to be consistent with the other elements of the marketing mix.
In the UK a standard retail mark-up is 2. Penetration pricing is often used to support the launch of a new product. Price skimming Skimming involves setting a high price before other competitors come into the market.
Penetration pricing You often see the tagline “special introductory offer” – the classic sign of penetration pricing. In the short term. The purpose of making a
. Such products are often bought by “early adopters” who are prepared to pay a higher price to have the latest or best product in the market. A loss leader is a product priced below cost-price in order to attract consumers into a shop or online store. This is equal to a total mark-up of £14 (i. Penetration pricing is most commonly associated with a marketing objective of increasing market share or sales volume. a firm may slow down the volume growth of demand for the product. there are some significant benefits to long-term profitability of having a higher market share. Good examples of price skimming include innovative electronic products. such as the Apple iPad and Sony PlayStation 3. The aim of penetration pricing is usually to increase market share of a product. So. It may be necessary to give retailers higher margins to convince them to stock the product. The main advantage of cost-based pricing is that selling prices are relatively easy to calculate. so the pricing strategy can often be justified. then the business can also predict more reliably what the overall profit margin will be. and works best when a product enters a market with relatively little product differentiation and where demand is price elastic – so a lower price than rival products is a competitive weapon. This is often used for the launch of a new product which faces little or no competition – usually due to some technological features. There are some other problems and challenges with this approach: Price skimming as a strategy cannot last for long. However. the retailer will look to sell it for 2. penetration pricing is likely to result in lower profits than would be the case if price were set higher. to attract new customers. A final problem is that by price skimming. as competitors soon launch rival products which put pressure on the price (e. Loss leaders The use of loss leaders is a method of sales promotion. The strategy aims to encourage customers to switch to the new productbecause of the lower price. the launch of rival products to the iPhone or iPod). providing the opportunity to increase price once this objective has been achieved. Penetration pricing is the pricing technique of setting a relatively low initial entry price.g. usually lower than the intended established price. reducing the improved margins that can be delivered by price skimming. Distribution (place) can also be a challenge for an innovative new product. the selling price of £24 less the bought cost of £10). If the mark-up percentage is applied consistently across product ranges.4 times the cost the retailer pays to its supplier (normally a wholesaler).4x £10 = £24. This can give competitors more time to develop alternative products ready for the time when market demand (measured in volume) is strongest.e. if the wholesale cost of a product is £10 per unit.
So. so it makes sense to change the loss leader or its merchandising every so often. Pricing in this way is intended to attract customers who are looking for “value”. It has to use non-price methods to compete – e. setting a price that is in line with the prices charged by direct competitors. Psychological pricing Sometimes prices are set at what seem to be unusual price points. The main problem is that the business needs some other way to attract customers.product a loss leader is to encourage customers to make further purchases of profitable goods while they are in the shop. Customers will soon get used to the tactic.99 or £14. Most firms in a competitive market do not have sufficient power to be able to set prices above their competitors.
If there is strong competition in a market.g. For example. They will buy something for £9. One risk of using a loss leader is that customers may take the opportunity to “bulk-buy”.99? The answer is the perceived price barriers that customers may have. If the price discount is sufficiently deep. or lead to losses by the predator. prices are deliberately set very low by a dominant competitor in the market in order to restrict or prevent competition.
. customers are faced with a wide choice of who to buy from. providing distinct customer service or better availability. They tend to use “going-rate” pricing – i. If a business undercuts its competitors on price. The price set might even be free. So a price that is one pence lower can make the difference between closing the sale. Predatory pricing (note: this is illegal) With predatory pricing.99. but think that £10 is a little too much. then it makes sense for customers to buy as much as they can (assuming the product is not perishable). But does this strategy work? Pricing is a key competitive weapon and a very flexible part of the marketing mix. new customers may be attracted and existing customers may become more loyal. An advantage of using competitive pricing is that selling prices should be line with rivals. why are DVD‟s priced at £12. In effect such businesses are “price-takers” – they must accept the going market price as determined by the forces of demand and supply. Using a loss leader is essentially a short-term pricing tactic for any one product. Whatever the approach. so price should not be a competitive disadvantage. or not! The aim of psychological pricing is to make the customer believe the product is cheaper than it really is. They may buy from the cheapest provider or perhaps from the one which offers the best customer service. But customers will certainly be mindful of what is a reasonable or normal price in the market. using a loss leader can help drive customer loyalty. predatory pricing is illegal under competition law.e.
it may be that the objective is to position the business as the highest quality provider – in this case. then the business can put prices up. or whether it simply has to follow the normal market price Costs – a business cannot ignore the cost of production or buying a product when it comes to setting a selling price. The state of the economy – some products are more sensitive to changes in unemployment and workers wages than others. The price of a product in the decline stage of its product life-cycle will need to be lower than when it was first launched. However.Marketing . Makers of luxury products will need to drop prices especially when the economy is in a downturn The bargaining power of customers in the target market – who are the buyers of the product? Do they have any bargaining power over the price set? An individual consumer has little bargaining power over a supermarket (though they can take their custom elsewhere). and be consistent with. the objectives of the business. Competitor strength influences whether a business can set prices independently. Exclusive designer fashion labels and luxury holiday businesses apply this strategy (using “premium” or luxury prices).g. or if its gross profit margin is too low to cover the fixed costs of the business The state of the market for the product – if there is a high demand for the product. the rail industry Other elements of the marketing mix – it is important to understand that prices cannot be set without reference to other parts of the marketing mix. a business will fail if it sells for less than cost. a higher price should be used to signal high quality to the consumer. For example. Factors to consider when setting price There are several factors a business needs to consider in setting the price: Objectives – what are the marketing objectives of the firm? Competitors – this is really important. The distribution channels used will affect price – different prices might be charged for the same product sold direct to consumers or via intermediaries. Legislation in the market – some businesses operate in markets where prices are regulated by government legislation – e. At the other end of the pricing scale. a business that positions itself as a lowcost or discount provider will look to set prices that are lower or as low as any rival. but a shortage of supply.
.Factors to consider when setting a price The price a business charges needs to take account of. The battles in the discount supermarket and low-cost airline markets are great examples of this strategy in action. an industrial customer that buys substantial quantities of a product from a business may be able to negotiate lower or special prices. The strategy is to gain advantage by offering the lowest prices (not just in the short-term). In the long-term.
g. e. receipts from customers. Cash book and bank statements: shows all transactions involving cash (e. Shareholders – how their investment is doing. These records are used to maintain the information that is used to make up the main financial statements. forecasting cash flows. Banks and lenders – can the business meet repayments of loans and risks of loaning the business money. Balance sheet – a statement of the assets and liabilities of a business at a particular time. Nominal (or “General”) ledger: used to categorise the transactions of a business under headings e. Suppliers – can they give the business trade credit. Provide other stakeholders with legal/vital information (financial accounts: trading account. and balance sheet).g. their every day transactions. and postage. payments to suppliers. salaries and wages. Purchase ledger: shows how much is owed by the business to suppliers who have provided goods and services on credit. Financial Statements Financial accounting produces the following key documents: Profit and loss account – showing how the business has traded for a specific period. Help the managers to manage the business more efficiently by preparing regular financial information e. costs and profits against budgets. raw materials.g. The main role of financial accounting is to: Record financial transactions. Inland revenue – tax returns. cost investigations. and how those assets and liabilities have been financed.g. collecting money from sales. monthly management accounts showing sales. paying suppliers. sales of widgets.Introduction to Financial Accounting Introduction Financial accounts are the records of the financial dealings of the business.
. employee wages). The main accounting records kept by the business are records for keeping the details of transactions: Sales ledger: shows how much is owed by customers who have bought on credit. profit and loss.Finance . electricity.
but also new machinery and tools to perform processes quicker.g. materials and employing people. it will need to finance the purchase of assets. Right from the moment someone thinks of a business idea. The day to day running of the business also needs money.Why Businesses Need Finance Finance is the money available to spend on business needs. so money needs to be raised to pay for the research. Finance expansions to production capacity As a business grows. New technology can be relatively expensive to the business and is seen as a long term investment. Link to cash flow forecasting. more efficiently and with greater quality. As the business grows there are inevitably greater calls for more money to finance expansion. advertising campaigns and setting up retail outlets. where competitors are constantly updating their products. Take-over or acquisition When a business buys another business.Cash flow statement – a statement showing how cash has come into the business and what it has been spent on Finance . because the costs will outweigh the money saved or generated for a considerable period of time.g. These can be new geographical areas to sell to (e.g. This costs money in terms of research and marketing e. The main reasons a business needs finance are to: Start a business Depending on the type of business. These costs are not normally covered by sales of the products for some time (if at all). it needs higher capacity and new technology to cut unit costs and keep up with competitors. Moving to new premises
. And remember new technology is not just dealing with computer systems. This money will be used to pay owners of the business which is being bought. a business needs to spend money on developing and marketing new products e. To enter new markets When a business seeks to expand it may look to sell their products into new markets. There will also need to be money to cover the running costs. export markets) or new types of customers. it will need to find money to pay for the acquisition (acquisitions involve significant investment). It may be some time before the business generates enough cash from sales to pay for these costs. there needs to be cash. to do marketing research and test new products in “pilot” markets. To develop and market new products In fast moving markets.
The cheapest option available – the cost of finance is normally measured in terms of the extra money that needs to be paid to secure the initial amount – the typical cost is the interest that has to be paid on the borrowed amount. Finance . How quickly the money is needed – the longer a business can spend trying to raise the money. from paying a supplier for raw materials. However it may need the money very quickly (say if had to pay a big wage bill which if not paid would mean the factory would close down).Things for a start-up to consider when raising finance Often the hardest part of starting a business is raising the money to get going. Potential sources of finance (especially external sources) take this into account and may not lend money to higher risk business projects. Raising finance for a start-up requires careful planning. An entrepreneur might have a great business idea and clear plan for how to exploit a market opportunity. medium-term and short-term finance What security (if any) can be provided? This will affect the ability of the business to raise a bank or other loan where the lender requires some security (or “collateral”) Whether the entrepreneur is prepared to give up some control (ownership) of the start-up in return for investment?
.Finance is needed to pay for simple expenses such as the cost of renting of removal vans. unless sufficient finance can be raised. the entrepreneur will struggle to make the most of the opportunity. paying the wages through to buying a new printer cartridge. through to relocation packages for employees and the installation of machinery. normally the cheaper it is.
Choosing the Right Source of Finance A business needs to assess the different types of finance based on the following criteria: Amount of money required – a large amount of money is not available through some sources and the other sources of finance may not offer enough flexibility for a smaller amount. unless there is some sort of guarantee that their money will be returned. The cheapest form of money to a business comes from its trading profits. The entrepreneur needs to decide: How much finance is required? Raising finance is hard work and expensive – the startup should avoid having to go through the process too often! When and for how long the finance is needed? A useful distinction can be made between long-term. The amount of risk involved in the reason for the cash – a project which has less chance of leading to a profit is deemed more risky than one that does. The business would then have to accept a higher cost. The length of time of the requirement for finance .a good entrepreneur will judge whether the finance needed is for a long-term project or short term and therefore decide what type of finance they wish to use. To pay for the day to day running of business A business has many calls on its cash on a day to day basis. However.
However.g. although the risk is that. It is also a strong signal of commitment to other potential investors and banks. Friends and family who are supportive of the business idea provide money
.Whether the cost of the finance (e. extra investment in capacity) An important consideration when obtaining finance for a business is when and for how long the finance is needed. Investing personal savings maximises the control the entrepreneur keeps over the business. The way this works is simple. Re-mortgaging is the most popular way of raising loan-related capital for a start-up.g. then the property will be lost too. Savings and other “nest-eggs” An entrepreneur will often invest personal cash balances into a start-up. a bank balance. The table below summarises the main examples and uses of each category:
Long-term Finances the whole business over many years Examples: Retained profits Share capital Venture capital Mortgages Long-term bank loans
Medium-term Finances major projects or assets with a long-life Examples: Bank loans Leasing Hire purchase Government grants
Short-term Finances day-to-day trading of the business Examples: Bank overdraft Trade creditors Short-term bank loans Factoring
Finance . The use of mortgaging like this provides access to relatively low-cost finance.the fixed assets that the business needs before it can begin to trade Working capital (the stocks needed by the business –e. The entrepreneur takes out a second or larger mortgage on a private property and then invests some or all of this money into the business. A useful distinction can be made between long-term. This is a cheap form of finance and it is readily available. medium-term and shortterm finance.g. most start-ups make use of the personal financial sources of the entrepreneur. interest charged) is justified The finance needs of a start-up should also take account of these key areas: Set-up costs -the costs that are incurred before the business starts to trade Getting ready to produce . It can be providing assets for the business (e. Often the decision to start a business is prompted by a change in the personal circumstances of the entrepreneur – e. the credit crunch falling house prices has made remortgaging harder.personal sources In practice. raw materials + allowance for amounts that will be owed by customers once sales begin) Growth and development (e. Borrowing from friends and family This is also common.Entrepreneurs finance . It can also simply be working for nothing! The following notes explain these in a little more detail. redundancy or an inheritance.g. a car).g. if the business fails. This can be personal savings in the building society.
e. a business can accelerate cash inflows. the entrepreneur pays for various business-related expenses on a credit card. borrowing in this way can add to the stress faced by an entrepreneur. Each month. By taking longer to pay bills owed. Cut back or delay expansion plans – many of the biggest cash outflows occur when a business is expanding (e. Cut stocks: reduce the amount of cash tied up by buying and holding raw materials or goods for resale. This provides the information which highlights the main cash flow issues. a business can reduce cash outflows (at the risk of damaging relationships with suppliers though). an entrepreneur saves the business cash. such as a prompt-payment discount. the entrepreneur reduces the need to employ others . here are the main options: Cut costs – by far the most important method of improving cash flow. 15 days later the credit card statement is sent in the post and the balance is paid by the business within the credit-free period. It works like this. This can be quicker and cheaper to arrange (certainly compared with a bank loan) and the interest and repayment terms may be more flexible than a bank loan. particularly if the business gets into difficulties.and therefore saves cash that would otherwise have to be paid out in wages in salaries. the use of credit cards is the most common source of finance amongst small businesses. This can be done by (a) ordering less stock from suppliers and/or (b) offering discounts on stocks held to encourage customers to buy (ideally for cash). Credit cards This is a surprisingly popular way of financing a start-up. The effect is that the business gets access to a free credit period of around 30-45 days! Working for nothing! How can this be a source of finance? Simple . In just about every start-up.by working for nothing.
.g. which immediately reduces cash outflows. cash can be conserved in the short-term. but widely used in business. They may need to be given a financial incentive. The recent credit crunch and recession has proved that businesses can take drastic actions to cut overheads and other costs. Delay payments to suppliers – a dangerous game. there is no guarantee that customers will agree. reduce the finance needed) by putting in the "hard yards" Finance .either directly to the entrepreneur or into the business. opening new offices or shops. By delaying this expansion. In terms of actions which management can take. the founders look to save cash (i. However. By working long hours and multi-tasking. Every business can identify savings in non-essential costs if it looks hard enough. Reduce the credit period offered to customers – this is easier said than done. adding a production line or factory). In fact. By asking customers to pay for their purchases quicker. However.Tackling a cash flow problem The best way to improve cash flow is to have a reliable and up-to-date cash flow forecast.
Understanding Demand Demand is defined as: The amount (quantity) that customers are prepared to buy at a given price As customers. we are restricted by a simple problem – we don‟t have unlimited money! So. an increase in price will normally lead to a fall in quantity demanded. the quantity demanded for a product will increase if the price falls. Conversely. economists often prefer to talk about “effective demand” – which means the quantity that customers are able to buy. in an ideal world we would be able to buy whatever we wanted. Normally. However. as illustrated below:
. Effective demand is all about the ability and willingness of customers to pay – or how much they can afford.Finance . The relationship between quantity demanded and price can be shown graphically by drawing a demand curve.
and this causes demand to increase. eggs and butter does not tend to change significantly when prices move up or down When an individual‟s income goes up. The rapid decline in sales of Crocs is a great example
Consumer tastes and preferences
Fashions and technology
Finance . Those products are sold to customers. You will come across some different ways of describing sales. perhaps by cutting their prices or by introducing a new or better version of a product When a product becomes unfashionable or out-dated. that transaction becomes a sale for the business. demand can quickly fall away. Products have different sensitivity to changes in price. How are sales measured? The value of revenue in a given period is a function of the quantity of product sold multiplied by the price that customers paid. demand for necessities such as bread. When incomes fall there will be a decrease in the demand for most goods Can have a significant effect on demand for different products. For example. Alternative terms for “sales” include: Revenue (the official accounting term) Income Sales turnover Takings (often used by retailers) So we know that sales arise through the trading activities of a business. A good example of this is the surge in sales of smoothies! Competitors are always looking to take a bigger share of the market. Persuasive advertising is designed to cause a change in tastes and preferences and thereby create an increase in demand. The value of sales made is the revenue of the business. When a customer buys a product.Factors that affect demand The demand for a product will be influenced by several factors:
The most important factor that affects demand. Total revenue can be calculated by this formula:
. their ability to purchase goods and services increases. That‟s what businesses do – they make sales.Understanding Business Revenues A business exists to provide goods and services.
For example.500.500 £2.750 £2.Total revenue = volume sold x average selling price A business that wants to increase revenue needs to either: Increase the amount or volume sold (higher quantity). if Sheila did just 20 jobs next year (6 fewer than budget) at an average price of £4. By focusing on smaller number of higher-value jobs. the solution to higher sales can probably be found in the average selling price achieved.500 £3. let‟s look at an example. In Sheila‟s case.000). How might Sheila do better than her estimated revenue for next year? Winning more jobs might help.500 £15. unless she is able to raise capacity by employing extra designing or outsourcing elements of the work.500
In the example above. These sales come from a total of 26 jobs. Sheila may find it hard to handle higher sales volumes.673 Total revenue £15.
. Her budgeted revenue for next year is as follows: Number of jobs Quarter Jan-Mar Apr-Jun Jul-Sep Oct-Dec Total 6 7 5 8 26 Average value per Job £2. then her total revenues would be £80.Introduction to cash flow Cash flow describes the movements of cash into and out of a business When you look at the bank statement of any business.000 £17. although 26 jobs already looks a lot of work. Sheila runs a web design business. Sheila is budgeting to achieve total revenues of £69.000 £2. Achieve a higher selling price. an increase over the existing sales budget of £10.500.000 (20 x £4.673. with an average selling price per job of £2. Sheila may be able to increase revenues and deliver a better service.000 £69. you soon realise that cash flow is a dynamic and often unpredictable part of business life.000 per job. Finance . Or (ideally) both of the above!
Calculating revenue To see how the revenue formula works.000 £22.
The result of the cash flow forecast is an estimate of the bank balance at the end of each period covered (normally this is for each month).In business. when a loan is received from the bank.The Cash Flow Forecast The cash flow forecast predicts the net cash flows of the business over a future period. The forecast estimates what the cash inflows into the bank account and outflows out of the bank account will be. interest is received or when assets are sold Cash flows out of the bank account when suppliers are paid. a week. employee wages and salaries are paid.g. interest is paid to the bank and so on You need to be able to distinguish between: Cash inflows: movements of cash into a business Cash outflows: movements of cash out of the business The difference between the cash inflows and cash outflows during a specific period (e. month) is known as the “net cash flow”. The challenge for any business (particularly a start-up) is to ensure that it manages its net cash flow to ensure that it does not run out of money. An example of a simple cash flow forecast is shown below:
. Main types of cash inflow and outflow The main types of cash flow can be summarised as follows:
Finance . cash is always on the move… Cash flows into the bank account when customers pay for their sales.
the bank will want to look at cash flow forecasts at regular intervals
. Cash flow is the life-blood of all businesses – particularly start-ups and small enterprises. “cash is king”. Analyse whether the business is achieving the financial objectives set out in the business plan (which will almost certainly include some kind of cash flow budget) Why the cash flow forecast is so important If a business runs out of cash and is not able to obtain new finance. if the forecast shows a negative cash balance then the business needs to ensure it has a sufficient bank overdraft facility See whether the trading performance of the business (revenues. Note – this is not really a problem for businesses (like retailers) that take most of their sales in cash/credit cards at the point of sale As an important discipline of financial planning – the cash flow forecast is an important management process. Here are the key reasons why a cash flow forecast is so important: Identifies potential shortfalls in cash balances in advance – think of the cash flow forecast as an “early warning system”. Suppliers who don‟t get paid will soon stop supplying the business. So in business. it is even worse if employees are not paid on time Spot problems with customer payments – preparing the forecast encourages the business to look at how quickly customers are paying their debts. Certainly if the business has a bank loan. As a result. similar to preparing business budgets External stakeholders such as banks may require a regular forecast. it is essential that management forecast (predict) what is going to happen to cash flow to make sure the business has enough to survive. It is no excuse for management to claim that they didn‟t see a cash flow crisis coming. it will become insolvent. costs and profits) turns into cash.Jan £'000 Cash at start of month Cash inflows Cash outflows Net cash flow Cash at end of month 25 20 25 -5 20
Feb 20 25 30 -5 15
Mar 15 20 30 -10 5
Apr 5 15 10 5 10
May 10 20 10 10 20
Jun 20 25 20 5 25
A business uses a cash flow forecast to: Identify potential shortfalls in cash balances – for example. This is the most important reason for a cash flow forecast Makes sure that the business can afford to pay suppliers and employees.
Profits earned which are kept in the business (i. Profit is also an important signal to other providers of finance to a business. Profit is also an important source of finance for a business.Finance . Profit can be measured and calculated. particularly those which do not involve retailing or which are not covered by official statistics. suppliers and other lenders are more likely to provide finance to a business that can demonstrate that it makes a profit (or is very likely to do so in the near future) and that it can pay debts as they fall due. Launch marketing activities often do not generate the excitement and customer buzz that is intended! The response of competitors – how will they respond to a new challenger entering the market? A start-up business cannot expect to enter a market without a challenge from the existing operators. not distributed to the owners via dividends or other payments) are known as retained profits. The main problems concern the uncertainties about: The size of the available market – how much do customers already spend in the market? Not every market is well researched. In general. The moment a product is sold for more than it cost to produce. So here is the formula:
. The price that customers will be prepared to pay for a new product. but especially start-up or small businesses. marketing leaflet or online store?) The effectiveness of marketing activities – by definition.What is Profit? Profit is a very important concept for any business – particularly a start-up Profit is the financial return or reward that entrepreneurs aim to achieve to reflect the risk that they take. then a profit is earned which can be reinvested. new businesses start without an established customer base. A new business will often assume that customers will pay a higher price than they actually will.g. Banks. the profit earned by a business can be used to measure the success of that investment. experience shows that start-ups tend to overestimate their expected revenues in the first year or two.Estimating revenues One of the hardest tasks an entrepreneur faces with a start-up business is coming up with a realistic estimate of revenues.e. from a physical store. A new product into a market often has to be offered at a discount (lower price) in order to encourage customers to buy for the first time The timing and source of sales: where will customers buy and which methods will they use (e. Given that most entrepreneurs invest in order to make a return. Finance . Retained profits are an important source of finance for any business.
this method is known as a dividend. However. Why? Profit is the most important source of finance for a business. Once a profit has been made. Additional production capacity Investment in information technology To buy more stocks of raw materials and components
The alternative use for profit is to pay it as a reward or return to the business owners. Why is profit important as a source of finance? Because it is entirely within the control of the business – it is not provided by outsiders. It is defined as being an “internal source” in the sense that it is generated from within the business. the true cost of retained profit is much less than paying interest on a bank loan or overdraft.g. pay a dividend to shareholders) Retain the profit in the business – either in cash or by investing the profit into new assets
Most entrepreneurs reinvested or “retain” profits in a business. For shareholders in a company.
. Another reason is that retained profits are relatively cheap.How profit is used by a business Profit arises when total sales exceed total cost for a period.g. the owners of the business have a choice: Take the profit out of the business (e. They do have a cost – which is the return that the business owners could obtain by taking the money out of the business. What can profit be reinvested in? Essentially to help the business grow: e.PROFIT = TOTAL SALES less TOTAL COSTS Here is an example which illustrates the formula in action:
Fixed costs remain the same.g. raw materials. Direct costs are costs which can be identified directly with the production of a good or service.Introduction to Business Costs Introduction A business has many different costs. By careful classification of these costs a business can analyse its performance and make better-informed decisions. A business can measure the outcome of a decision by comparing it with the benefits (probably measured in profits or revenue) it could have had if it had taken the next best option. An opportunity cost is the financial benefit forgone of the next best alternative use of money.
. e. For example.A dividend provides a shareholder with one part of his/her return on investment. from paying for raw materials through to paying the rent or the heating bill. costs associated with buying a new machine to cope with increased production. The second part of the return comes when the value of the shares in the company increases. Break even analysis which tells a business what it needs to sell to cover its costs. The opportunity cost of buying a new piece of machinery might be compared with the benefits of spending the money on a new advertising campaign. The main kinds of costs are: Variable costs Raw materials Workers wages Energy/fuel for machines Fixed costs Rent Salaries of head office workers Heating and lighting Insurance Interest on loans Semi-fixed costs are costs which only change when there is a large change in output. direct and indirect. Variance analysis to see if the business is keeping control of its costs. no matter how much the business produces. Also telephones and electricity for instance have a fixed and variable element: a standard line rental and then a charge for each call/unit of electricity after that. The main ways in which a business needs to manage its costs are as follows: Classification of costs into fixed and variable. Finance . Fixed and Variable Costs Variable costs change in proportion to the amount of output produced.
000. planned sales were thought to be 6.
Drawing break-even charts To draw a chart the following steps need to be followed: 1.000 units (£4 x 5. If the business had fixed costs of £20.000 units – break even 5.Introduction Breakeven A business can work out how what volume of sales it needs to achieve to cover its costs. The business would be able to sell 1.g.Indirect costs are costs which cannot be matched against each product because they need to be paid whether or not the production of good or services takes place.000 units. This is known as the break even point. The amount of money each unit sold contributes to pay for the fixed and indirect costs of the business. If. A break-even chart plots the sales revenue. Plot any two points from the sales revenue data for the sales revenue line and then draw a straight line for sales revenue (assumes that the price per unit does not change) – if the
. Finance .000 units = 1. then use this plan on the chart. Each unit sale therefore makes a contribution of £4 towards the fixed costs of the business. using the example above.Breakeven . The margin of safety is the difference between the number of units of planned or actual sales and the number of units of sales at break even point. different costs and helps identify the break even point and margin of safety.000 = £20. then the margin of safety would be 6. On another piece of paper sketch the scales that you want to use given the data. 3. Classification of costs help allocate costs to right parts of the profit and loss account and also helps analysis of the break even point of the business. then it would need to sell 5. Contribution = selling price less variable cost per unit E. Label the horizontal axis “sales/production (units)”. 4. e.g.000 units.000 less than planned before they were in danger of making a loss. The key to break even is to work out the contribution made from the sale of each unit. a product sells for £15 and has variable costs per unit of £11. Label the vertical axis “sales and costs in pounds”. rent on the premises.000 contribution) in order to break even. 2.
g. Then draw the straight line starting at the same point as the fixed costs started and then through the two plotted points. 6.
It is important for a business to understand its break-even point because the contribution from every unit sold above the break-even point adds to profit. The main limitations of break-even charts are: Do not take into account possible changes in costs over the time period. but also helps it work out whether the forecast sales will be enough to produce a profit and whether further investment in the product is worthwhile. Read off the units of sales to give the break even level of sales.
.g. Total costs are fixed costs plus variable costs. then work out two points. Do not allow for changes in the selling price. 8. entry of new competitor. At the same starting point it is possible to draw the total costs line. The gap between the total costs line and sales revenue line after the break even point represents the level of profit. 5. Draw a horizontal line for total fixed costs starting at the point on the vertical axis at the level of costs. The break-even point provides a focus for the business. Do not allow for changes in market conditions in the time period – e. 7. Work out what the total costs are for say 1000 units and 1500 units. e. Analysis only as good as the quality of information.information is not given for sales revenue. Where the sales revenue crosses the total costs line is the break even point. The start of the line should be through the origin (where the axes meet). for 1000 units sold and 1500 units sold.
less than £18 Note that the total contribution of £180. Let's do that now. If we take these away from the contribution (£180.000 is not the total profit made by the business.000 The total fixed costs of the business are £116. then we can calculate the overall profit or loss of the business:
.e.Finance . Why? This is because we have not yet taken account of the fixed costs of the business.e. It is used in calculating how many items need to be sold to cover all the business' costs (variable and fixed).000 Other overheads: £23. in the example above. £12 x 15.000 Payroll: £50. more than £30 Lowering the variable cost per unit .Contribution Contribution looks at the profit made on individual products. Here is some information about a business that just sells one product: Selling price per unit £30 Variable cost per unit £18 Contribution per unit £12 (i. you should be able to see that it can be increased by: Increasing the selling price per unit ..000 (i.000 units) Looking at the contribution per unit above (£12).000 Marketing: £25.e. £30 less £18) Units sold 15.000. Imagine that.i.000).Breakeven . Let's start with a really important definition & formula (you really do need to know these!) Definition: Contribution is the difference between sales and variable costs of production Formulae: Contribution = total sales less total variable costs Contribution per unit = selling price per unit less variable costs per unit Total contribution can also be calculated as: Contribution per unit x number of units sold Let's look at a simple worked example of contribution. we can perform the following calculation: Contribution = £180..i.e.000 Using the formulae.000 Total: £116. the business has the following fixed costs: Admin: £18.
e. electricity. The main accounting records kept by the business are records for keeping the details of transactions: Sales ledger: shows how much is owed by customers who have bought on credit. £180.Introduction to Financial Accounting Introduction Financial accounts are the records of the financial dealings of the business. and postage. payments to suppliers. Inland revenue – tax returns. receipts from customers. profit and loss. costs and profits against budgets. forecasting cash flows. raw materials. Shareholders – how their investment is doing. Finance . Nominal (or “General”) ledger: used to categorise the transactions of a business under headings e. Purchase ledger: shows how much is owed by the business to suppliers who have provided goods and services on credit. The main role of financial accounting is to: Record financial transactions.Total profit = contribution less fixed costs Total profit = £180. These records are used to maintain the information that is used to make up the main financial statements. collecting money from sales.000) In the above example we calculated contribution per unit by subtracting variable cost per unit from selling price per unit. Provide other stakeholders with legal/vital information (financial accounts: trading account. Cash book and bank statements: shows all transactions involving cash (e.g. salaries and wages. Suppliers – can they give the business trade credit.g.000 = a profit of £64. Contribution per unit is a really useful number to have when answering questions on break-even. paying suppliers.000 less £116. sales of widgets. e.g.
. Banks and lenders – can the business meet repayments of loans and risks of loaning the business money.g. and balance sheet). Help the managers to manage the business more efficiently by preparing regular financial information e. cost investigations.000 (i.000 .£116. employee wages). monthly management accounts showing sales. their every day transactions.
100 Notes Likely to find sub-totals for buildings. Balance sheet – a statement of the assets and liabilities of a business at a particular time.800 300 250 150 700 (400) 300 2. Owes – money to creditors and the bank. stock and cash.g.000 400 2. also known as working capital Fixed assets + net current assets
700 1. The Balance Sheet Balance sheets provide a snap shot of the assets and liabilities of a business at a point of time. It shows what the business owns.100
e. loans from banks Amounts invested by shareholders The profit accumulated that has been retained by the business Long term liabilities + share capital + profit and loss reserves
. Is owed – money from debtors. Cash flow statement – a statement showing how cash has come into the business and what it has been spent on. is owed and owes: Owns – assets such as buildings. equipment and vehicles
Fixed assets Current assets Stock Debtors Cash Total current assets Current liabilities Net Current Assets Net assets employed Financed by: Long term liabilities Share capital Profit and loss reserves Capital employed
Stock + debtors + cash Current assets – current liabilities. and how those assets and liabilities have been financed. A typical balance sheet would look like this: Balance sheet for XYZ plc as at 31 st March 2003 £’000 1. Owes to the investors and owners of the business (they own the profit).Financial Statements Financial accounting produces the following key documents: Profit and loss account – showing how the business has traded for a specific period.
Cash –in the bank and in the cash box. The total of current assets minus current liabilities is known as working capital. Profit and loss reserves are the profits due to the owners that have not already been paid out in dividends. Current liabilities Current liabilities are what the business owes in the short run. but may have been used to buy more stock or fixed assets. Capital is the amount of long-term money put into the business to buy assets. A negative figure can be a problem for some businesses that may need to pay for outstanding debts. Debtors – people who owe the business money (customers who owe money are known as “trade debtors”). Fixed assets Fixed assets are: Assets that provide a benefit for the business in the long-term (normally for at least a year).Note that net assets employed = capital employed. Share capital is the money invested in the business by the owners. Long-term liabilities are the monies the business has borrowed for a period of more than a year – mainly bank loans. This is always the case.g. This money is not necessarily held in cash (see the current assets).
. buildings and machinery Assets that the business intends to keep Note that fixed assets are depreciated over their useful life Current assets Current assets are assets that will be used up or sold in the next year + the cash balances kept in the business. Main forms of capital: owner‟s money (share capital) and long term bank loans. but do not have enough spare cash to do so. because the capital employed is the amount of long-term money put into the business and the net assets employed how it is used. work in progress and raw materials (note: you may also see stocks called “inventories”). The main categories are: Stocks – finished goods. e. The main categories are: Creditors – money owed by the business in the short term (suppliers who are owed money by the business are known as “trade creditors”). Shareholder funds are the share capital and reserves added together. This is amount of money available for the day to day running of the business. Bank overdraft – amounts due within the next 12 months.
categorising costs between “cost of sales” and operating costs.000) 800.000) 330.000 (220. A profit and loss account starts with the TRADING ACCOUNT and then takes into account all the other expenses associated with the business.000 £ 1. It includes the balance of stocks at the start and end of the year. Trading account The trading account shows the income from sales and the direct costs of making those sales.000
Note that the closing stock figure would appear in the balance sheet under Stock.000) (70.g.Profit and Loss Account Profit and Loss Account The purpose of the profit and loss account is to: Show whether a business has made a PROFIT or LOSS over a financial year.000 400.
.200. Describe how the profit or loss arose – e.Finance .000
(330. An example of the trading account of a business would look this: Trading account for XYZ plc for the year ended 31 st March 2003 Category Sales Opening Stock Purchases less Closing Stock Cost of Sales Other Costs Gross Profit £ 150.
g.Profit and loss account The trading account now has all the other expenses now deducted. postage. bank charges. 400 cars at £3.
Turnover (sales) revenue Cost of sales
The amount of money generated by sales The cost of making the goods or buying them
Raw materials Cost of labour working directly on each product Cost of running the machines/equipment
Gross profit Overheads or expenses
Turnover minus cost of sales Costs not directly involved in the production process (indirect costs)
Cost of premises e.g. insurance. staff salaries and wages Sales and marketing costs e. profit and loss account for XYZ plc for the year ended 31 st March 2003 £’000 1.200 Examples e.g.g. computer maintenance. It would look like the table below: Trading. salaries of salesmen. repairs Office costs e. stationery. advertising Finance costs e. interest on bank loans
Operating profit Interest and taxation payable Net profit after tax and interest Dividends Retained profit
Gross profit minus overheads Also known as NET PROFIT The money that is due to be paid in interest on loans and to the Inland Revenue as tax The money available to be distributed to shareholders
Money paid to shareholders as a reward for holding shares The money left for the business to reinvest
The business has to pay tax at the rate determined by the government and interest at the rates determined by the lenders.g. rent.
Finance .a good entrepreneur will judge whether the finance needed is for a long-term project or short term and therefore decide what type of finance they wish to use. It will be paid back in a short period of time. so less risky for lenders. unless there is some sort of guarantee that their money will be returned. A mortgage is an example of secured long-term finance. However it may need the money very quickly (say if had to pay a big wage bill which if not paid would mean the factory would close down). The cheapest form of money to a business comes from its trading profits.Choosing the Right Source of Finance Choosing the Right Source of Finance A business needs to assess the different types of finance based on the following criteria: Amount of money required – a large amount of money is not available through some sources and the other sources of finance may not offer enough flexibility for a smaller amount. Long-term finance tends to be spent on large projects that will pay back over a longer period of time. More risky so lenders tend to ask for some form of insurance or security if the company is unable to repay the loan. The main types of short-term finance are: Overdraft Suppliers credit Working capital The main types of long-term finance that are available for to a business are: Mortgages Bank loans Share issue Debentures Retained profits Hire purchase
. The cheapest option available – the cost of finance is normally measured in terms of the extra money that needs to be paid to secure the initial amount – the typical cost is the interest that has to be paid on the borrowed amount. The amount of risk involved in the reason for the cash – a project which has less chance of leading to a profit is deemed more risky than one that does. Short Term and Long Term Finance Short-term finance is needed to cover the day to day running of the business. normally the cheaper it is. The business would then have to accept a higher cost. How quickly the money is needed – the longer a business can spend trying to raise the money. The length of time of the requirement for finance . Potential sources of finance (especially external sources) take this into account and may not lend money to higher risk business projects.
Finance . The sale of new shares through a share issue. Examples of external finance are: An overdraft from the bank. A fixed term means how many months or years before the loan has to be repaid in full. A bank loan is a fixed amount for a fixed term with regular fixed repayments. Disposal (sale) of any surplus assets no longer needed (e. External finance comes from individuals or organisations that do not trade directly with the business e.Bank Loans and Overdrafts Bank Loans and Overdrafts A bank overdraft is a limit on borrowing on a bank current account. The approximate repayments on this loan would be £392 a month for 36 months (£14.g. selling a company car).Internal and External Finance Internal finance comes from the trading of the business.112). The interest on a loan tends to be lower than an overdraft.000 from a bank over 3 years at an interest rate of 5%. However it may not be able to generate the sums of money the business is looking for. banks. With an overdraft the amount of borrowing may vary on a daily basis. Examples of internal finance are: Day to day cash from sales to customers. Normally a fixed term loan will be for a greater amount than an overdraft. Example of a loan: A business borrows £12. Overdrafts Flexibility – can change the amount borrowed within limits Interest is only paid on amounts borrowed Cannot be used for large borrowing Rates of interest higher than loans Bank can change limit at any time or ask for money to be paid back sooner than expected Loans Larger amounts can be borrowed Lower interest rates than overdrafts Regular repayments help plan cash flow Less flexible than an overdraft Have to pay back in stated time or risk further financial problems
.g. Money loaned from trade suppliers through extended credit. Internal finance tends to be the cheapest form of finance since a business does not need to pay interest on the money. A loan from a bank or building society. especially for larger uses of finance. Reductions in the amount of stock held by the business.
Debentures A debenture is a long term loan which is usually secured against a specific asset (e.g. shareholders gain a share of the ownership of the company. Ideally the founder will try to provide all the share capital of the company. it is the company that owns the money provided. Debentures are different from ordinary shares because: The lender has no voting rights in the company. Once the investment has been made. An illustration of an example company share ownership structure is shown below: Number of Shares Shareholder Angela Nicolas Gordon Barack Total 300 400 600 700 2. A debenture is repayable at a fixed date and has a fixed rate of interest.000 15% 20% 30% 35% 100% Shareholding
Shareholders benefit from the protection offered by limited liability – they are only liable for the amount they invest in share capital rather than the overall debts of the company.
Finance . The loan attracts interests – whereas holders of ordinary shares get dividends. A start-up company can also raise finance by selling shares to external investors – this is typically to a business angel or venture capitalist. This is a common method of financing a start-up. Share capital is a long-term source of finance. In return for their investment.g.
. The founding entrepreneur is very likely to invest in the share capital of the start-up. retaining 100% control over the business. The providers of loans are paid out before ordinary shareholders in the event that the business fails (assuming there is some cash left). A key point to note is that the entrepreneur may use a variety of personal sources (e. The shareholder obtains a return on this investment through dividends (payments out of profits) and/or increases in the value of the company when it is eventually sold. cash. personal investments) to finance the purchase of shares.Share capital Share capital is the money invested in a company by the shareholders. the factory) or the overall assets of a business.
Help businesses relocate to areas of high unemployment. The advantages of leasing are: Cheaper in the short run than buying a piece of equipment outright. Most company cars are leased to businesses. because the leasing company charges fees which make the total cost greater than the original cost. The business pays a regular amount for a period of time.Finance . With an equipment lease. Some of the main sources of funds are:
. the business swaps the car for a newer model. BUT it is not so good for profits since it reduces the total revenue received from those sales. The disadvantages of leasing are: More expensive in the long run. Hire purchase is different to leasing in that the business owns the equipment when it has finished making payments.and then collects the full amount of the debts. Once payments have finished it then owns the piece of equipment.say 80-90% of face value of the debts . Debt Factoring A business sells its outstanding customer accounts (those who have not paid their debts to the business) to a debt factoring company. Hire Purchase Business hires the equipment for a period of time making fixed regular payments. The factoring company pays the business .Other Sources of External Finance Leasing Leasing is like renting a piece of equipment or machinery. The business pays a monthly fee for the car and at the end of the period (normally about two years). Cash flow management easier because of regular payments. Help start up new businesses. It is a good way of raising cash quickly. Once it has done this it will pay the remaining amount to the business less a charge. Government Finance The government and the European Union provide help to businesses for the following reasons: Protect jobs in failing/declining industries. Help create jobs in areas of high unemployment. but the item belongs to the leasing company. If technology is changing quickly or equipment wears out quickly it can be regularly updated or replaced. without the hassle of chasing payments. the equipment is handed back to the leasing provider.
Most public sector organisations. normally around 30-60 days. Sources of Finance for Public Sector Organisations Public sector organisations receive from both the normal sources that most businesses receive money. Trade credit is an important source of finance for nearly all businesses – since it is effectively a free source of finance. See below for more details of how working capital can be used. They are given period of credit. it does not cost money to use. and licences for the BBC. By trying to extend this period they can improve their short-term finance position.who have previously collected the money from tax payers. In the UK over 80% of retained profits are reinvested back into the business. Small businesses now have some protection under law that prevents larger firms exploiting their credit terms.g. stamps for the Post Office. especially for start up is money from the individuals who are forming the business. e.European Structural Fund Assisted Areas Regional Selective Assistance Small Loans Guarantee Scheme Trade Credit A business does not always have to pay their bills as soon as they receive them. Own capital is a costless form of finance. Retained Profits The cheapest form of finance is the business‟ own profits. Other organisations gain money from sales.
. but carries the risk of the money being lost. but also from tax revenues. Own Capital For sole traders and partnerships a common source of finance. Working Capital Working capital is the amount of money available for the day to day running of the business. Since it is not being borrowed from anyone. It is the difference between current assets and current liabilities. They may also borrow money from family and friends. such as schools and hospitals obtain more straight from the government .
Depreciation is the tool used by accountants to record the reduction in the original value of an asset. There are two main methods of depreciation: Straight line depreciation – this is where the same amount is charged every year using the following formula to calculate it: Original Cost of the Fixed Asset / Useful Life of the Asset For example. the bank account goes £50. credit arises when: A business makes use of a bank overdraft facility – e. It appears in the balance sheet by reducing the value of the fixed assets.g. suppliers and others in order to trade. Management decide to charge depreciation on a straight line basis. Depreciation appears in the profit and loss account under expenses – it reduces the profit for that year because some of the asset was used up in that time period. 20%. For example.000 loaned over five years A business buys goods or services from a supplier and agrees to pay for them in 30 days – this is known as trade credit The amount of credit that a business can raise will depend on several factors such as: Whether the business is profitable and is likely to remain so in the future The ability of the business to generate a positive cash flow to allow it to repay credit
.000 has a useful life of ten years. This means that the balance sheet reflects a true and fair value of the assets. Customers pay in cash and the expenses and costs of the business are settled in cash.Finance .000 Reducing balance depreciation – the same percentage of an asset‟s value is taken off every year.000 “into the red” or overdrawn A business takes out a bank loan – e. So the annual depreciation cost is £20. £100. However. Depreciation is charged every year of a fixed asset‟s useful life to the profit and loss account.g. They need to borrow or lend from banks. credit is about borrowing – owing money to others for a period of time. Finance . e.g.000 / 10 = £2. but it is possible to argue that reducing method is better because it reflects the fact that most assets lose most of their value in the first years of use. So in business. In the balance sheet the original cost of the fixed asset is reduced by the amount of depreciation.Depreciation of Fixed Assets Depreciation A fixed asset reduces in value over its useful life due to wear and tear and (when it is no longer useful) obsolescence. a machine bought for £20.Why businesses need credit Some small businesses trade in cash – and nothing else. Most businesses use straight line depreciation. There is no need for credit. most businesses cannot survive simply with the cash they have in the bank.
Examples of internal communication include: Formal meetings and briefings E-mail Intranets Wikis. The credit crunch was about a reduction in the availability of credit for businesses. It also aims to ensure that all employees are working towards the same goal and know exactly what they should be doing and by when.g. This is closely linked with the idea of “stakeholders” – i.The strength of the relationship between the business and its creditors The industry or market in which the business operates You may have heard about the “credit crunch” during 2008 and 2009. blogs.e. internal social media tools Informal meetings where employees can meet with senior management Conference calls & webinars Internal newsletters. It links together all the different activities involved in a business. those who have an interest in the activities and results of the business
. People management . As lenders struggled to stay in business. or making the repayments and interest charges worse Suppliers insisting on earlier payment of invoices Customers taking longer to pay their bills The effects of the credit crunch – notably an increase in failed businesses – show just how important credit is to the business community. brochures. So many businesses found themselves in financial trouble due to: Banks withdrawing or lowering overdraft facilities Banks refusing to provide bank loans.Communication (introduction) Communication can be defined as: The process by which a message or information is exchanged from a sender to a receiver Communication can be: Internal: between people in the same business External: with people outside the business Internal communication is particularly important. induction materials) External communication is where the business communicates with people & organisations outside of the business. they lost confidence in the ability of businesses to repay credit. and other printed materials Team briefing sessions Message boards Training packs (e. podcasts.
g.e. without misunderstanding or misinterpretation Communication is made using an appropriate communication channel and/or method The receiver of the communication is able to pass on any relevant and appropriate feedback (i. direct mailings) Published financial information (e.Examples of external communication include: Press releases Marketing materials (e. two-way communication) There are many reasons why it is important for a business to achieve effective communication: Motivates employees – helps them feel part of business Easier to control and coordinate business activity – prevents different parts of business going in opposite directions Makes successful decision making easier – decisions are based on more complete and accurate information Better communication with customers will increase sales Improve relationships with suppliers Improves chances of obtaining finance – e.g. emails and telephone conversations with customers and suppliers Reports to government and other agencies People management . adverts. accounts) Letters. Good communication is an important part of motivating employees and the main motivational theorists recognised this: Mayo emphasised importance of communication in meeting employees‟ social needs Maslow and Herzberg stressed importance of recognising employee‟s achievements and self-esteem needs Amongst the other reasons for using communication to boost motivation are: Ensures that everyone is working towards same company goals Enables employees to be involved in decision-making Employees can offer feedback and give suggestions People are motivated by having clear targets set for them Recognise employee achievements
. keeping bank up-to-date about how business is doing The link between communication and motivation is particularly important.e.g.Effective communication What would be considered good or effective communication? It would be communication in which: The sender and receiver of information are properly matched The message is communicated clearly – i. brochures.
g. too many layers in hierarchy through which message has to be passed) might prevent or distort the message If people receive conflicting or inconsistent messages.g.People management . Be able to think creatively to provide a vision for the company and solve problems Be calm under pressure and make clear decisions Possess excellent two-way communication skills Have the desire to achieve great things Be well informed and knowledgeable about matters relating to the business Possess an air of authority Do you have to be born with the correct qualities or can you be taught to be a good leader? It is most likely that well-known leaders or managers (Winston Churchill. too much use of technical or financial jargon Various things stop a message from getting through or being heard – e.
. There are several barriers to communication. There are many qualities that are needed to be a good leader or manager. including:
Explanation Barrier Language The communication message might not use vocabulary that is understood by the receiver – e.Barriers to good communication Aiming to achieve effective communication is one thing – actually doing it is another. Managers deal with their employees in different ways. background noise.g. Some are strict with their staff and like to be in complete control.g. slow down decision making The relationship between the sender and receiver of communication might adversely affect the message – which could be ignored or misinterpreted Too many intermediaries (e. whilst others are more relaxed and allow workers the freedom to run their own working lives (just like the different approaches you may see in teachers!). too many people speaking Too much information can cause problems e. Richard Branson or Alex Ferguson?) are successful due to a combination of personal characteristics and good training. poor connection. Whatever approach is predominately used it will be vital to the success of the business. “An organisation is only as good as the person running it”. distractions. then they may ignore or block them
People .Management styles What makes a good leader or manager? For many it is someone who can inspire and get the most from their staff.
They will delegate to them the authority to do this (empowerment) and listen to their advice. This requires good two-way communication and often involves democratic discussion groups. A democratic style of management will put trust in employees and encourage them to make decisions. paternalistic and democratic. However. The style is closely linked with Mayo‟s Human Relation view of motivation and also the social needs of Maslow. in a time of crises) When controlling large numbers of low skilled workers.There are three main categories of leadership styles: autocratic. Managers must be willing to encourage leadership skills in subordinates. Managers are interested in how happy workers feel and in many ways they act as a father figure (pater means father in Latin). Autocratic (or authoritarian) managers like to make all the important decisions and closely supervise and control workers. The ultimate democratic system occurs when decisions are made based on the majority view of all workers. which can offer useful suggestions and ideas.indeed one of the criticisms of this style is that it can take longer to reach a decision. this is not feasible for the majority of decisions taken by a business. The manager will however make the actual decisions (in the best interests of the workers) as they believe the staff still need direction and in this way it is still somewhat of an autocratic approach. They consult employees over issues and listen to their feedback or opinions.
. For example: When quick decisions are needed in a company (e. Paternalistic managers give more attention to the social needs and views of their workers. This style has close links with Herzberg‟s motivators and Maslow‟s higher order skills and also applies to McGregor‟s theory Y view of workers. Managers do not trust workers and simply give orders (one-way communication) that they expect to be obeyed. This approach derives from the views of Taylor as to how to motivate workers and relates to McGregor‟s theory X view of workers.g. This approach has limitations (as highlighted by other motivational theorists such as Mayo and Herzberg) but it can be effective in certain situations.
Employee representation Employee representation or participation arises when employees are part of a formal structure for involving them in the decision-making process of an organisation. Of course all businesses communicate with their employees in some way everyday. there are several strong reasons why a business should have a formal system of employee representation.Summary of management styles
Description Autocratic Senior managers take all the important decisions with no involvement from workers
Advantages Quick decision making Effective when employing many low skilled workers
Disadvantages No two-way communication so can be de-motivating Creates “them and us” attitude between managers and workers
Managers make decisions in best interests of workers after consultation
More two-way communication so motivating Workers feel their social needs are being met
Slows down decision making Still quite a dictatorial or autocratic style of management Mistakes or errors can be made if workers are not skilled or experienced enough
Workers allowed to make own decisions. However. The law requires a business to consult with employees on things such as: Redundancy programmes When employees are transferred from one employer to another (e. to: Make employees' views known to management Help strengthen both management's and employees' understanding of workplace issues and other matters affecting the business
. Some businesses run on the basis of majority decisions
Authority is delegated to workers which is motivating Useful when complex decisions are required that need specialist skills
People management . there are some situations when the law requires this communication to take place.g. the sale of the business) On changes to pension arrangements Proposed changes to working time arrangements In additional to the mandatory requirements for employee representation. For example.
these are called 'functions'. materials. each of which has a specific job or task to do . The main functional areas of a business are outlined briefly below:
Human Resources / People What it does: Responsible for all aspects of managing the people who work in a business.Help create an atmosphere of mutual trust between employees and management and therefore improve workplace relations The main benefits and drawbacks of employee representation to a business include the follows:
Advantages Increased empowerment and motivation of the workforce Employees become more committed to the objectives and strategy of the business Better decision-making because employee experience and insights taken into account Lower risk of industrial disputes
Disadvantages Time-consuming – potentially slows decisionmaking Conflicts between employer and employee interests may be a block to essential change Managers may feel their authority is being undermined
People management .Functions in a business Once a business has been properly established and has taken on a reasonable number of employees. people) in finished goods and services Main activities: Organising suitable method of production
Marketing What it does: Responsible for understanding the needs and wants of customers Main activities: Research into the market New product development Development and delivery of promotional campaigns Setting and monitoring prices Ensuring suitable distribution Obtaining and auctioning customer feedback Accounts / Finance What it does: Manages the financial resources of the business and reports on the financial position & performance Main activities: Allocating and monitoring the use of financial
. the organisational structure will involve the business being splits into number of different departments.g. Main activities: Organise hiring employees (recruitment) Set up and manage employment rules Organise employee training & appraisal Monitor the working conditions for employees Manage communication with staff Ensure business complies with employmentrelated legislation Production / Operations What it does: Organises the transformation process that turns inputs (e.
Main activities: Organise hiring employees (recruitment) Set up and manage employment rules Organise employee training & appraisal Monitor the working conditions for employees Manage communication with staff Ensure business complies with employmentrelated legislation Production / Operations What it does: Organises the transformation process that turns inputs (e.Functions in a business Once a business has been properly established and has taken on a reasonable number of employees.Controlling the use of inputs to produce efficiently Managing the quality of finished output
resources through budget Ensuring business has sufficient cash to enable it to pay its liabilities as they fall due Reporting on financial performance Ensuring business meets legal requirements re financial reporting
People management . people) in finished goods and services Main activities: Organising suitable method of production Controlling the use of inputs to produce efficiently Managing the quality of finished output
Marketing What it does: Responsible for understanding the needs and wants of customers Main activities: Research into the market New product development Development and delivery of promotional campaigns Setting and monitoring prices Ensuring suitable distribution Obtaining and auctioning customer feedback Accounts / Finance What it does: Manages the financial resources of the business and reports on the financial position & performance Main activities: Allocating and monitoring the use of financial resources through budget Ensuring business has sufficient cash to enable it to pay its liabilities as they fall due Reporting on financial performance Ensuring business meets legal requirements re financial reporting
.g. each of which has a specific job or task to do . materials. the organisational structure will involve the business being splits into number of different departments.these are called 'functions'. The main functional areas of a business are outlined briefly below:
Human Resources / People What it does: Responsible for all aspects of managing the people who work in a business.
This shows the managementhierarchy in a business and works from top to bottom. Here is an example organisational chart:
.People management .Organisation charts & hierarchy The simplest way to show how a business is organised is to look at an organisation chart.
Span of control The span of control is the number of subordinates for whom a manager is directly responsible. The two diagrams below illustrate two different spans of control:
People management . The organisation chart above shows a business with four levels of hierarchy – from the Managing Director at the top. which shows a taller hierarchy. Below is another organisation chart. Traditional organisations were tall with many layers of hierarchy and were often authoritarian in nature.Hierarchy
The levels of hierarchy refer to the number of layers within an organisation. to assistants and team members at the bottom.
A business with a tradition of democratic management and empowered workers may operate wider spans of control
.A span of control of 7 would be considered to be quite wide. If being a line manager requires a great deal of close supervision. Highly skilled. which would be considered “narrow”
Is there an ideal span of control? The answer is generally no – a suitable span of control will depend upon a number of factors: The experience and personality of the manager The nature of the business. then a narrower span might be appropriate The skills and attitudes of the employees. Contrast this with a span of 3 below. professional employees might flourish in a business adopting wide spans of control The tradition and culture of the organisation.
mass production industries with low-skilled employees may not adapt easily De-layering can have a negative impact on motivation due to job losses. For example. De-layering can offer a number of advantages to business: It offers opportunities for delegation.Delayering As we have seen earlier. Some schools adopt this policy too – with a director of studies looking after several schools in a local area. there are some strong arguments in favour of a business have fewer rather than many layers in the hierarchy. making a decision to delayer less clear cut: Not all organisations are suited to flatter organisational structures . this is known as “delayering”. particularly as a response to the economic downturn. preferring to appoint a manager to oversee a number of branches. Delayering usually means increasing the average span of control of senior managers within the business and is seen as a way of reducing operating costs. many highstreet banks no longer have a manager in each of their branches. empowerment and motivation as the number of managers is reduced and moreauthority is given to shop-floor workers It can improve communication within the business as messages have to pass through fewer levels of hierarchy It can remove departmental rivalry if department heads are removed as the workforce is organised in teams It can reduce costs as fewer employees are required and employing middle managers can be expensive It can encourage innovation It brings managers into close contact with the business‟ customers But disadvantages exist too. especially if it is really just an excuse for redundancies
. A business may develop a tall hierarchy over time which becomes costly and inefficient. If management attempt to remove one or more layers from the hierarchy. the layers removed are those containing middle managers. Frequently.Should spans of control be wide or narrow? Here is a summary of the relative advantages and disadvantages of each:
Narrow Span of Control Allows for closer supervision of employees
Wide Span of Control Gives subordinates the chance for more independence More appropriate if labour costs are significant – reduce number of managers
More layers in the hierarchy may be required
Helps more effective communication
People management .
Decision-making is about authority. Most large businesses necessarily involve a degree of decentralisation when it starts to operate from several locations or it adds new business units and markets. or whether it should be delegated further down the hierarchy.
. The main advantages and disadvantages of centralisation are:
Advantages Easier to implement common policies and practices for the business as a whole Prevents other parts of the business from becoming too independent Easier to co-ordinate and control from the centre – e. with budgets Economies of scale and overhead savings easier to achieve Greater use of specialisation Quicker decision-making (usually) – easier to show strong leadership
Disadvantages More bureaucratic – often extra layers in the hierarchy Local or junior managers are likely to much closer to customer needs Lack of authority down the hierarchy may reduce manager motivation Customer service does not benefit from flexibility and speed in local decision-making
People management . A key question is whether authority should rest with senior management at the centre of a business (centralised). if it is too wide. Fast-food businesses like Burger King.g. away from the centre (decentralised) The choice between centralised or decentralised is not an either/or choice.Decentralised organisational structures In a decentralised structure.Centralised organisational structures One of the issues that a business needs to address is where decision-making power resides in the organisational structure. decision-making is spread out to include more junior managers in the hierarchy. as well as individual business units or trading locations.A period of disruption may occur as people take on new responsibilities and fulfil new roles Those managers remaining will have a wider span of control which. The issue is really how much independence do business units or groups within a business have when it comes to the key decisions? Centralised structures Businesses that have a centralised structure keep decision-making firmly at the top of the hierarchy (amongst the most senior management). The need to ensure consistency of customer experience and quality at every location is the main reason. Pizza Hut and McDonalds use a predominantly centralised structure to ensure that control is maintained over their many thousands of outlets. can damage communication within the business People management .
Motivation can come from the enjoyment of the work itself and/or from the desire to achieve certain goals e. Each supermarket has a store manager who can make certain decisions concerning areas like staffing. duplication of roles Who provides strong leadership when needed (e. motivation can be said to be about “The will to work” However.g. A talented employee who feels de-motivated is unlikely to perform
. sales promotions.Motivation at work (introduction)
What is motivation?
Motivation is essentially about commitment to doing something. skills & experience) and motivation. motivation is about more than simply working hard or completing tasks.Good examples of businesses which use a decentralised structure include the major supermarket chains like WM Morrison and Tesco. The performance of employees is a product of both their abilities (e. The store manager is responsible to a regional or area manager. Hotel chains are particularly keen on using decentralised structures so that local hotel managers are empowered to make on-the-spot decisions to handle customer problems or complaints. Why does motivation matter in business? In short. or achieving a successful outcome after a difficult project or problem solved. in a crisis)? Harder to achieve tight financial control – risk of cost-overruns
Improved level of customer service
Consistent with aiming for a flatter hierarchy
Good way of training and developing junior management Should improve staff motivation
People management . Entrepreneurs and staff can find motivation from a variety of sources. people‟s behaviour is determined by what motivates them. In the context of a business.g.g. earn more money or achieve promotion. It can also come from the sense of satisfaction gained from completing something.g. The main advantages and disadvantages of this approach are:
Advantages Decisions are made closer to the customer Better able to respond to local circumstances
Disadvantages Decision-making is not necessarily “strategic” More difficult to ensure consistent practices and policies (customers might prefer consistency from location to location) May be some diseconomies of scale – e.
these include staff discounts. contributions to travel costs.Financial methods of motivation Though there are many reasons why people work for a living. an employee might expect to have a mixture of the above in a pay package. For most people. very common in small businesses where employees are paid per hour. these are common for most managerial positions (e.
.g. but it is unlikely to encourage us to work harder or to a higher standard. play a key role in motivating people in the workplace. whereas a motivated employee can often deliver far more than is expected from them!
Benefits of a well-motivated workforce
A well-motivated workforce can provide several advantages: Better productivity (amount produced per employee).well at work. it is undeniable that money. Other performance-related pay: e. staff uniforms etc Time-rate pay: pay based on time worked. bonuses for achieving targets Shares and options: less common in small businesses. Accountant. Small businesses tend not to offer pension benefits. motivation (the will to work) comes from “within”. There is a wide variety of ways in which a business can offer money (or “financial rewards”) as part of the “pay package”. In most cases. More money can help us feel better about out work. Piece-rate pay: pay per item produced – becoming less common Commission: payment based on the value of sales achieved. This can lead to lower unit costs of production and so enable a firm to sell its product at a lower price Lower levels of absenteeism as the employees are content with their working lives Lower levels of staff turnover (the number of employees leaving the business). it is less clear that paying people more results in better motivation. However. Someone who feels undervalued or under-paid may soon leave to find better-paid employment.g. or other financial rewards. but popular in businesses whose shares are traded on stock markets Pensions – becoming less common and generous. Payroll Manager) Benefits in kind (“fringe benefits”) – very common in businesses of all kinds. including: Salaries: fixed amounts per month or year for performing a role. How important is money as a motivator? It is widely accepted that poor or low pay acts as a demotivator. This can lead to lower training and recruitment costs Improved industrial relations with trade unions Contented workers give the firm a good reputation as an employer so making it easier to recruit the best workers Motivated employees are likely to improve product quality or the customer service associated with a product People management .
there are several ways in which businesses determine how much to pay: Job evaluation / content.
Structuring the financial package
With so many methods of pay available. this is usually the most important factor.People management . payroll costs are over 50% of total costs) People feel strongly about it Pay is the subject of important business legislation (e.Ways to pay employees and management There is no doubt that most people are motivated (at least in part) by the financial rewards they gain from their work. getting employee pay right (often referred to as the “remuneration package”) is a crucial task for a business. Market rates – another important influence – particularly where there is a standard pattern of supply and demand in the relevant labour market. and what rate of pay should it use? The starting point is usually to find out what the “market rate” is. businesses include an element of “performancerelated” reward in their pay structures. how should a business decide to structure the pay package it offers to employees. If a business tries to pay below the “market rate” then it will probably have difficulty in recruiting and retaining suitable staff Individual performance – increasingly. national minimum wage. Why is pay important? It is an important cost for a business (in some “labour-intensive” businesses. equal opportunities) It helps attract reliable employees with the skills the business needs for success Pay also helps retain employees – rather than them leave and perhaps join a competitor Because pay is a complex issue. Factors that help determine the market rate for a job include: Whether the skills that are required are widely available The overall level of unemployment in the employment “catchment area” Whether the job requires specialised (or even highly specialised) skills There are several ways in which a business can obtain data on market rates: Local employment agencies & job centres Job adverts Industry associations (who often perform annual surveys of pay in an industry) The next question is – should the business pay MORE or LESS than the market rate? Factors to consider here include:
. What is involved in the job being paid? How does it compare with similar jobs? Fairness – pay needs to be perceived and be seen to match the level of work Negotiated pay rates – the rate of pay may have been determined elsewhere and the business needs to ensure that it complies with these rates. So.g.
Time worked over this standard is known as overtime. Overtime is generally paid at a higher rate than the standard time-rate – reflecting the element of sacrifice by an employee.g.g.g. a business should try to construct a pay structure that is simple (to help employees understand it). 35 hours per week). logical and fair
Time rates are used when employees are paid for the amount of time they spend at work. This is usually the case for managerial positions where it is generally accepted that the hours worked need to be sufficient to fulfil the role required.g. The main advantages of time-rate pay are: Time rates are simple for a business to calculate and administer They are suitable for businesses that wish to employ staff to provide general roles (e.g.g.g.g.g. financial management. 5 weeks paid holiday). This is the most common method of payment in the UK. due to inflation-related pay rises and employee promotion
. many employees who are paid a monthly salary do not get paid overtime. piece rates) or some other measure of performance? Should the remuneration package be a combination of approaches (e. some basic pay per month + a commission-related incentive)? In deciding the answers to these questions.g. salesmen with an industry reputation for being strong performers) Does the business need trained employees or is it prepared to invest in training beginners? Are the skills wanted by the business needed urgently (in which case – the business would probably want to pay more) Do factors affecting the mobility of labour need to be addressed – e. pay for a rail season ticket) or relocation allowances to be offered to encourage new employees to move home? The third important question is how to structure the remuneration package. time-rates) or the amount they produce (e. The employment contract for a time-rate employee will also stipulate the amount of paid leave that the employee can take each year (e. payroll costs will be a function of overall headcount rather than estimated output) The main disadvantages of time-rate pay are: Does little to encourage greater productivity – there is no incentive to achieve greater output Time-rate payroll costs have a tendency to creep upwards (e. are there transport problems that need to be solved (e. Usually the time rate is fixed in relation to a standard working week (e. However. The usual form of time rate is the weekly wage or monthly salary.g. administration. Should employees be paid on the basis of time spent working (e.Does the business need above-average employees (e. maintenance) where employee productivity is not easy to measure It is easy to understand from an employee‟s perspective The employee can budget personal finance with some certainty Makes it easier for the employer to plan and budget for employee costs (e.
The rate of commission depends on the selling price and the amount of effort required in making the sale. the sales force may lose some motivation until they begin to focus on the next payment (which might be up to 12 months away)
. therefore. a form of “incentive pay”. What happens if production machinery breaks down? What happens if there is a problem with the delivery of raw materials that slows production? These factors are outside of the employee‟s control – but could potentially affect their pay. customers are misled & missold High commission earnings enjoyed by some of the sales team may be resented elsewhere in the business – particularly if the sales actually depend on a team effort It is difficult to change what proves to be an over-generous commission structure without upsetting and demoralising the sales team Once commission payments have been made. is a reward for value of work achieved. businesses exist to sell goods and services for profit – not just to make things. but.e. Commission is. not explain the product or service in enough detail to potential customers) – i. often at the expense of quality. to have two elements: A basic pay element – this is fixed (time-based) An output-related element (piece-rate). Commission. Piece-rate pay encourages effort. Often the piece-rate element is only triggered by the business exceeding a target output in a defined period of time
Commission is a payment made to employees based on the value of sales achieved.g. there are some problems. there are several drawbacks with using commission payments: Sales people may cut corners to make sales (e. it is argued. The main advantage to the employer is that the payroll cost is related to the value of business achieved rather than just the amount produced. The main advantage of commission from an employee‟s point-of-view is that it enables high performing sales people to earn huge amounts. commission rates could range from 5% where the product sells easily (e. However. household goods sold door-to-door) to 30% where the effort is substantial. For example. the employee is paid a flat percentage of the value of the good or service that is sold.Piece-rate pay
Piece-rate pay gives a payment for each item produced – it is therefore the easiest way for a business to ensure that employees are paid for the amount of work they do. like piece-rates. The answer to these problems is that piece-rate pay systems tend. In most cases.g. in reality. After all. It can form all or (more often) part of a pay package. From the employee‟s perspective. Piece-rate pay is also sometimes referred to as a “payment by results system”.
Whilst the detail of real performance-related schemes varies from business to business.
. This may be because the performance element is usually only a small percentage of total pay
Fringe benefits are financial benefits that are not paid out directly in cash (or cash equivalents such as shares). This is the performance appraisal At the end of the appraisal. if sales and profits justify the change. and/or above average Performance related pay is generally used where employee performance cannot be appropriately measured in terms of output produced or sales achieved. employees are categorised into performance groups – which determine what the reward will be The method of reward will vary. but also because they cause a business less hassle and can help to differentiate the remuneration package. there are several common features: Individual performance is reviewed regularly (usually once per year) against agreed objectives or performance standards. the commission rate can always be increased slightly. There are several problems with performance-related pay: There may be disputes about how performance is measured and whether an employee has done enough to be rewarded Rewarding employees individually does very little to encourage teamwork There is doubt about whether performance-related pay actually does anything to motivate employees. This is part of a movement towards rewarding individual performance which reflects individual circumstances. Examples of these include: Company cars Discounted season tickets Health insurance Pensions Holiday and other entitlements to take time off work Childcare provision Staff uniforms Staff discounts Benefits in kind have become a much more popular and widespread form of remuneration.
Performance related pay
Performance-related pay is a financial reward to employees whose work is considered to have reached a required standard. This is partly because businesses pay less tax on providing them. but traditionally it involves a cash bonus and/or increase in wage rate or salary Performance-related pay has grown widely in recent years – particularly in the public sector. most businesses that use commission as an incentive payment method offer a basic pay plus a moderate commission level. In this way.As a result of the above disadvantages.
Staff turnover levels also vary from region to region. Keeping them is another. providing that all employees are able to participate. a factory is closed) The above reasons can be called voluntary staff turnover – employees who leave of their own accord. Key advantages include: Creates a direct link between pay and performance Creates a sense of team spirit.Keeping hold of employees (staff retention) Recruiting suitable employees is one crucial business task.g. A high proportion of staff leave each year in the leisure sector (e. There are many reasons why a high staff turnover figure (poor employee retention) may cause problems for a business: Increases recruitment costs (e.helps remove „them and us‟ barrier between managers and workers if all employees involved May improve employee‟s loyalty to company Employees more likely to accept changes in working practices if can see that profits will increase overall People management . employing temporary staff whilst the job vacancies are filled) Reflects poor morale in workforce and so low productivity levels Increases training costs of new workers Loss of productivity while new worker settles in However. there are some advantages of a firm experiencing staff turnover: It gives the chance for new people to be brought into the business who may have fresh ideas and up to date market knowledge. The highest rates are found where unemployment is lowest and where people find it quite easy to move onto another job. hotels. restaurants).Profit sharing
Profit sharing refers to any system whereby employees receive a proportion of business profits. This isn‟t always easy! It is important to remember that all businesses lose staff – for a variety of reasons: Retirement / maternity / long-term illness Unsuitability Changes in strategy (e.g. Profit sharing is generally accepted as having many advantages. In some industries this can be as much as 30-50% each year. Workers with specialist knowledge or expertise can be employed rather than having to train up existing lower skilled employees. advertising for replacement staff.
. The proportion of employees who leave each year is known as “staff turnover”.g. Employee retention is the ability of a business to convince its employees to remain with the business. It is important to remember that staff turnover varies between industries.
more decision making power) Improving the effectiveness of its recruitment and selection processes so that fewer unsuitable employees are recruited in the first place Conducting research to understand why employees are leaving (through exit interviews or surveys) A business may also have to adopt more flexible working practices in order to retain staff and fit in with the changing trend in UK employment and working patterns. In job enlargement. salary rise) Non-financial incentives (e. The main ones are described briefly below:
Job enlargement involves adding extra. It motivates by giving employees the opportunity to use their abilities to the fullest.
. A possible negative effect is that job enlargement can be viewed by employees as a requirement to carry out more work for the same pay!
Job rotation involves the movement of employees through a range of jobs in order to increase interest and motivation. the job itself remains essentially unchanged. For instance. there is a greater emphasis currently being placed on “flexible hours contracts” and part-time working. However. the employee rarely needs to acquire new skills to carry out the additional task. Some time might then be spent manning the company telephone switchboard and then inputting data onto a database.
Job enrichment attempts to give employees greater responsibility by increasing the range and complexity of tasks they are asked to do and giving them the necessary authority. an administrative employee might spend part of the week looking after the reception area of a business. similar. Job rotation may offer the advantage of making it easier to cover for absent colleagues. tasks to a job. Job rotation also often involves the need for extra training. but it may also reduce' productivity as workers are initially unfamiliar with a new task. This is mainly to allow for the growing number of women joining the workforce who have to juggle childcare and their working lives. Successful job enrichment almost always requires further investment in employee training.A business can improve its employee retention by offering: Financial incentives (e.
People management .g. For example. bonus. With job enlargement. hopefully the employee will experience less repetition and monotony.Non-financial methods of motivation Most businesses recognise the need for non-financial methods of motivation. by widening the range of tasks that need to be performed. dealing with customers and enquiries. promotion.g.
This led to an increase in strikes and other forms of industrial action by dis-satisfied workers. This was the start of the era of mass production. which focused on managers taking more of an interest in the workers. Taylor‟s approach has close links with the concept of an autocratic management style (managers take all the decisions and simply give orders to those below them) and Macgregor‟s Theory X approach to workers (workers are viewed as lazy and wish to avoid responsibility).
People . The most notably advocate was Henry Ford who used them to design the first ever production line. His Theory of Scientific Management argued the following: Workers do not naturally enjoy work and so need close supervision and control Therefore managers should break down production into a series of small tasks Workers should then be given appropriate training and tools so they can work as efficiently as possible on one set task. Firms could also afford to lay off workers as productivity levels increased. Empowered teams are an increasingly popular method of organising employees at work. repetitive tasks to carry out and were being treated little better than human machines.Theories of Motivation There are a number of different views as to what motivates workers. Organising the labour force into teams with a high degree of autonomy can achieve this.
. Mayo Elton Mayo (1880 – 1949) believed that workers are not just concerned with money but could be better motivated by having their social needs met whilst at work (something that Taylor ignored). This means that employees plan their own work. Workers are then paid according to the number of items they produce in a set period of timepiece-rate pay. As a result workers are encouraged to work hard and maximise their productivity. take their own decisions and solve their own problems. Unfortunately these theories do not all reach the same conclusions! Taylor Frederick Winslow Taylor (1856 – 1917) put forward the idea that workers are motivated mainly by pay. However workers soon came to dislike Taylor‟s approach as they were only given boring. making Ford cars. Teams are set targets to achieve and may receive rewards for doing so. He introduced the Human Relation School of thought. treating them as people who have worthwhile opinions and realising that workers enjoy interacting together.Teamworking and empowerment
Empowerment involves giving people greater control over their working lives. The most commonly held views or theories are discussed below and have been developed over the last 100 years or so. Taylor‟s methods were widely adopted as businesses saw the benefits of increased productivity levels and lower unit costs.
Mayo conducted a series of experiments at the Hawthorne factory of the Western Electric Company in Chicago He isolated two groups of women workers and studied the effect on their productivity levels of changing factors such as lighting and working conditions. From this Mayo concluded that workers are best motivated by: Better communication between managers and workers ( Hawthorne workers were consulted over the experiments and also had the opportunity to give feedback) Greater manager involvement in employees working lives ( Hawthorne workers responded to the increased level of attention they were receiving) Working in groups or teams. For example a person who is dying of hunger will be motivated to achieve a basic wage in order to buy food before worrying about having a secure job contract or the respect of others. All of the needs are structured into a hierarchy (see below) and only once a lower level of need has been fully met. Maslow Abraham Maslow (1908 – 1970) along with Frederick Herzberg (1923-) introduced the NeoHuman Relations School in the 1950‟s. His theory most closely fits in with a paternalistic style of management. Maslow put forward a theory that there are five levels of human needs which employees need to have fulfilled at work. They may therefore have to offer a slightly different set of incentives from worker to worker. would a worker be motivated by the opportunity of having the next need up in the hierarchy satisfied. Managers should also recognise that workers are not all motivated in the same way and do not all move up the hierarchy at the same pace. ( Hawthorne workers did not previously regularly work in teams) In practice therefore businesses should re-organise production to encourage greater use of team working and introduce personnel departments to encourage greater manager involvement in looking after employees‟ interests. which focused on the psychological needs of employees.
. He expected to see productivity levels decline as lighting or other conditions became progressively worse What he actually discovered surprised him: whatever the change in lighting or working conditions. the productivity levels of the workers improved or remained the same. A business should therefore offer different incentives to workers in order to help them fulfill each need in turn and progress up the hierarchy (see below).
interesting and challenging tasks surrounding a complete unit of work. Job enrichment .Herzberg Frederick Herzberg (1923-) had close links with Maslow and believed in a two-factor theory of motivation. For instance how interesting the work is and how much opportunity it gives for extra responsibility. Importantly Herzberg viewed pay as a hygiene factor which is in direct contrast to Taylor who viewed pay. Hygiene factors are factors which „surround the job‟ rather than the job itself. He argued that there were certain factors that a business could introduce that would directly motivate employees to work harder (Motivators).
. However there were also factors that would de-motivate an employee if not present but would not in themselves actually motivate employees to work harder (Hygienefactors) Motivators are more concerned with the actual job itself. and piece-rate in particular Herzberg believed that businesses should motivate employees by adopting a democratic approach to management and by improving the nature and content of the actual job through certain methods.involves workers being given a wider range of more complex. Empowerment means delegating more power to employees to make their own decisions over areas of their working life. This should give a greater sense of achievement. recognition and promotion. Some of the methods managers could use to achieve this are: Job enlargement – workers being given a greater variety of tasks to perform (not necessarily more challenging) which should make the work more interesting. For example a worker will only turn up to work if a business has provided a reasonable level of pay and safe working conditions but these factors will not make him work harder at his job once he is there.
just like any other resource
. Indeed. advertising the position and choosing the most appropriate person for the job. Retention means ensuring that once the best person has been recruited. managed and retained. the success of any business depends to a large extent on the quality of its staff.Recruitment (introduction) Recruitment and selection is the process of identifying the need for a job. Undertaking this process is one of the main objectives of management. will reduce costs. Recruiting employees with the correct skills can add value to a business and recruiting workers at a wage or salary that the business can afford. Employees should therefore be carefully selected. they stay with the business and are not “poached” by rival companies.-------------------Review performances and progress with tools like SuccessFactors performance appraisal software to predict and improve your business -------------------People management . defining the requirements of the position and the job holder.
Recruitment methods The methods of recruitment open to a business are often categorised into: Internal recruitment is when the business looks to fill the vacancy from within its existing workforce. They can be found in many places (local and national newspapers.
Cheaper and quicker to recruit
Limits the number of potential applicants No new ideas can be introduced from outside the business May cause resentment amongst candidates not appointed
People already familiar with the business and how it operates Provides opportunities for promotion with in the business – can be motivating
Business already knows the strengths and weaknesses of candidates External Recruitment Outside people bring in new ideas
Creates another vacancy which needs to be filled Longer process
Larger pool of workers from which to find the best candidate
More expensive process due to advertisements and interviews required
People have a wider range of experience
Selection process may not be effective enough to reveal the best candidate
The four most popular ways of recruiting externally are: Job centres .Advertisements are the most common form of external recruitment. notice boards. location. Job advertisements . Where a business chooses to
. job description.People management . pay package. External recruitment is when the business looks to fill the vacancy from any suitable applicant outside the business. recruitment fairs) and should include some important information relating to the job (job title. how to apply-either by CV or application form). They also provide a service for businesses needing to advertise a vacancy and are generally free to use.These are paid for by the government and are responsible for helping the unemployed find jobs or get training.
Often referred to as „word of mouth‟ and can be a recommendation from a colleague at work.e. This is an important legal document that describes the obligations of the employee and employer to each other (terms and conditions) as well as the initial remuneration package and a number of other important details. intelligence tests and psychometric tests (to reveal the personality of a candidate). Other selection tests can increase the chances of choosing the best applicant and so minimise the high costs of recruiting the wrong people.advertise will depend on the cost of advertising and the coverage needed (i. A full assessment of the candidate is still needed however but potentially it saves on advertising cost. the new employee must be given an employment contract. teacher recruitment Personal recommendation .Provides employers with details of suitable candidates for a vacancy and can sometimes be referred to as „head-hunters‟. how far away people will consider applying for the job Recruitment agency . People management . The basic interview can be unreliable as applicants can perform well at interview but not have the qualities or skills needed for the job.Recruitment interviews An interview is the most common form of selection and it serves a very useful purpose for both employer and job candidate.g. They work for a fee and often specialise in particular employment areas e. Examples of these tests are aptitude tests. Once the best candidate has been selected and agreed to take up the post. financial services.often known as people skills Natural enthusiasm or manner of applicant See how applicant reacts under pressure Queries or extra details missing from CV or application form For the Candidate Whether job or business is right for them What the culture of company is like Exact details of job There are though other forms of selection tests that can be used in addition to an interview to help select the best applicant.
. nursing. The main benefits of an interview include: For the Employer: Information that cannot be obtained on paper from a CV or application form Conversational ability .
such as interviews. main achievements. Once a business has received all the applications.Job applications For many jobs. nationality
Including examination results. remuneration package. they need to be analysed and the most appropriate form of selection decided upon. but it will still ask for much of the same information. This is different from a CV in that the employer designs it and sends it to applicants. When analysing applications. unless they have to
. It has the benefit over a CV in that a business is able to tailor it to their exact needs and ask specific questions. professional qualifications Names of employers. a business will ask applicants to provide a Curriculum Vitae (CV). reasons for leaving A chance for applicants to „sell themselves‟
Previous employment history Suitability and reasons for applying for the job Names of referees
Often recent employer or people who know applicant well and are ideally independent
Sometimes job applicants are asked to fill in a firm‟s own application form.People management . date of birth. a business will normally split the applications into three categories. The business would not want to incur costs putting them through the selection process.
Those to reject
Candidates may be rejected because they may not meet the standards set out in the job specification such as wrong qualifications or insufficient experience or they may not have completed the application form to a satisfactory standard Often comprises 3-10 of the best candidates who are asked to interview
Those to place on a short list Those to place on a long list
A business will not normally reject all other candidates immediately but keep some on a long list in case those on the short list drop out or do not appear suitable during interview. address. schools/universities attended. position held. This is a document that the applicant designs providing the details such as:
The word appraisal implies making a judgement about how well an employee is doing. It can also provide the opportunity to discuss any weaknesses or problems they may have.Developing new products . The workforce plan will establish what vacancies exist and managers then need to draw up ajob description and job specification for each post.Increasing sales of existing products . Set objectives . A job description is a detailed explanation of the roles and responsibilities of the post advertised. Large and more complex businesses tend to operate formal and structured appraisal systems. maternity leave Business needs employees with new skills Business is relocating – and not all the existing workforce wants to move to the new location In each of these circumstances a business will normally carry out Workforce Planning to find out how many workers and what types of workers are required.
. There are four key elements to effective employee appraisal. Most applicants will ask for this before applying for the job.Recruitment planning There are a number of possible reasons as to why a business may have to recruit more employees: Business is expanding due to: . skills. A job specification is drawn up by the business and sets out the kind of qualifications.Entering new markets Existing employees leaving to work with competitors or other local employers Existing employees leaving due to factors such as retirement. It is a vital tool in assessing the suitability of job applicants and refers to the person rather than the post. This might be relatively informal (particularly in smaller businesses). If appropriate. People management . 1. set timescales for achieving them.Appraisal A key task of management is to identify how employees in the firm are performing and what is required to ensure that employee performance supports the objectives of the business. It refers to the post available rather than the person. and to come up with solutions. Most businesses operate some kind of performance review or appraisal system. These documents are an important part of the recruitment and selection process and provide the basis as to where the job may be advertised and whether an applicant is suitable for the post.People management . experience and personal attributes a successful candidate should possess. sick leave.decide what is needed from employees and agree these objectives with them. They also help provide a framework for questions to be asked at an interview. However. the appraisal process needs to be more than simply scoring or judging past performance. A suitable appraisal system appraisal can help employees feel that their good work is recognised and that they are valued. It needs to look forward too.
Indeed. trade unions often refer to a traditional rallying call – “unity is strength”. Food and Allied Workers Union (BFAWU) National Union of Journalists (NUJ) Transport and General Workers' Union (T&G)
The two main functions of a trade union are to represent their members and to negotiate with employers. Manage performance . in most cases employers and union representatives have a constructive relationship.2. 3.monitor and assess employees' performance. set timescales for achieving objectives. After that. Carry out the appraisal . The basic concept behind a trade union is that of increased bargaining and negotiation power which comes from acting together. If appropriate. Examples of trade unions which are still active include: Association of Flight Attendants (AFA) Communication Workers Union (CWU) Prison Officers Association (POA) Association of Teachers and Lecturers (ATL) Fire Brigades Union (FBU) Professional Footballers Association (PFA) Bakers. Not surprisingly. trades and professions. appraisals once or twice a year may be enough. it is possible to identify several advantages of unionisation from the employers‟ point of view: Negotiating with trade unions (ideally a single union) saves time and cost rather than dealing with all employees individually Unions are part of the communication process between the business and employees Employee morale and motivation may be improved if they know that their interests are being protected by a union
People management . Many businesses carry out an appraisal after a set period for new employees or those who have changed jobs within the company.consider pay awards and/or promotion based on the appraisal and decide how to tackle poor performance. discuss those assessments with them and agree on future objectives. The traditional view of the employer/trade union relationship has been one of confrontation. resources and training they need to perform well. Provide rewards/remedies . 4.give employees the tools.Trade unions Trade unions are organisations of workers that seek through collective bargaining with employers to: Protect and improve the real incomes of their members Provide or improve job security Protect workers against unfair dismissal and other issues relating to employment legislation Lobby for better working conditions Offer a range of other work-related services including support for people claiming compensation for injuries sustained in a job Individual trade unions have historically been associated with specific industries.
retail) where unions are less well established Growth in the number of small firms which tend not to recognise (or need) trade unions Significant growth in flexible working (part-time. only 28% of people in a job in the UK were members of a trade union. seasonal) – where employees see less need for union protection Improved employee involvement in the workplace – so less perceived need for collective bargaining
. The overall level of trade union membership in the UK is shown in this chart produced by the Office of National Statistics:
From the chart. Unionisation is much higher in the public sector – at over 50%.g. temporary. The extent of trade union representation also varies enormously by sector. In 2008.The trade union can be a supportive partner in helping a business undergo significant change In the UK there has been a long term decline in union membership. For example. you can see that total trade union membership in the UK has almost halved from its peak of over 13 million in the late 1970‟s. That percentage is much lower in the private sector where less than one in six employees is in a union. retail and motor trades The main reasons for the decline in union membership are: Decline in employment in manufacturing (where union membership is traditionally strong) and an increase in employment in the service sector (e. nearly 60% of people working in education are members of a trade union but only 6% of people in hotels and restaurants and only 11% of people working in wholesale.
People management .Industrial disputes and industrial action Back in the 1970s and 1980s the news was often dominated by industrial disputes and action taken by trade unions. However.
. in the last two decades the incidence of industrial disputes has reduced dramatically. But there is little evidence that union members secure any significant wage “mark-up” or greater job protection than people in non-union jobs. fire fighters and prison officers) unions are still prepared to exert their “industrial muscle”. as evidenced by the chart further below. Under UK law employers must recognise a trade union in pay and employment discussions when a majority of the workforce want to be represented and has voted for it. unions now have significantly less power and influence to determine pay and conditions than twenty years ago although in some industries (including postal workers.Partly as a result of their declining membership. railway worker.
This involves informing and consulting workers and their representatives on employment matters and business developments more widely Depending on the size of the business. Employees refuse to work overtime. no participation in supporting activities. productivity etc
Risk that illegal action will result in legal proceedings
Given the costs involved. what can a business do to prevent industrial action in the first place? The priority for management should be to encourage a workplace culture that prevents conflicts from arising. However. management could set up: Regular consultations with a recognised trade union . The damage from industrial action includes:
Damage for the Business Lost sales and profits from the lost output Damage to customer satisfaction
Damage for the Employee Lost pay Potential loss of jobs if the action results in action to cut costs Possible loss of customer and public support (depending on the reasons for the action)
An internal distraction for management and the business (worse if competitors are not affected) Damaged relationship with staff may adversely affect motivation. Can have a significant effect on production capacity during period of peak demand. you can see many problems and costs.an effective working relationship with union officials can pick up problems before they escalate
. fraught with danger for both employer and employee and strictly policed by legislation on industrial action. It is just about possible to argue that industrial action can lead to a better long-term relationship between employer and unions and that a dispute that is settled might improve the deal earned by employees. industrial disputes and action do arise. Staff still get their basic pay. The main forms of industrial action are:
Description Employees follow the strict conditions of their employment contract – no voluntary overtime.
There are rarely any winners from industrial action. wherever you look in a prolonged industrial dispute. but ineffective as a bargaining tool during quieter periods! Employees work at the slowest or least-productive pace that is allowable under their employment contracts The action of last-resort.However.
recruitment. many employers are prepared to incur these costs because they expect their business to benefit from employees' development and progress.What is training? Training can be defined as: The process of increasing the knowledge and skills of the workforce to enable them to perform their jobs effectively Training is. Training costs can be significant in any business. therefore. However.g. especially those which recognise trade unions. a process whereby an individual acquires job-related skills and knowledge. Those procedures are important and can be used to address emerging problems at an early stage. The typical agenda on a Works Council meeting would include: Business objectives and performance Workforce planning issues (e. discrimination) People management .g. Works Councils are now an increasingly popular method for a larger business to communicate with employees. training is required to: Support new employees (“induction training”) Improve productivity Increase marketing effectiveness Support higher standards of customer service and production quality Introduction of new technology. staffing levels) Employee welfare issues (working conditions. Training takes place at various points and places in a business. Commonly. health & safety) Training and development programmes Compliance with legislation (e. These businesses are required to set up Works Councils. European Union legislation formalised many of the above actions in relation to firms that operate in two or more EU countries and have more than 1. systems or other change Address changes in legislation Support employee progression and promotion Effective training has the potential to provide a range of benefits for a business: Higher quality Better productivity
. have written procedures in place to discuss with representatives collective grievances or other significant issues affecting all or part of the workforce.A staff forum or joint working group to pass on information and collect ideas from workers and consult with workers An employee consultative body to discuss major issues as they arise Team and group meetings and feedback sessions Many employers.000 employees.
monitoring progress and training effectiveness Given the costs involved.showing the trainee how to do the job
. employees receive training whilst remaining in the workplace.Types & methods of training at work
Induction training is important as it enables a new recruit to become productive as quickly as possible.Improved motivation .through greater empowerment More flexibility through better skills Less supervision required (cost saving in supervision) Better recruitment and employee retention Easier to implement change in the business Effective training starts with a “training strategy”. It can avoid costly mistakes by recruits not knowing the procedures or techniques of their new jobs.g. morale) than tangible – so they are harder to measure People management . The length of induction training will vary from job to job and will depend on the complexity of the job. Some firms don‟t invest anything in training! Here are the most common reasons for underinvestment in training: They fear employees will be poached by competitors (who will then benefit from the training) A desire to minimise short-term costs They cannot make a justifiable investment case Training takes time to have the desired effect – management are impatient! Sometimes the benefits of training are more intangible (e. you might not be surprised to learn that many businesses do not invest enough in training. The three stages of a training strategy are: Identify the skills and abilities needed by employees Draw up an action plan to show how investment in training and development will help meet business goals and objectives Implement the plan. the size of the business and the level or position of the job within the business. The main methods of one-the-job training include: Demonstration / instruction . The following areas may be included in induction training: Learning about the duties of the job Meeting new colleagues Seeing the layout of the premises Learning the values and aims of the business Learning about the internal workings and policies of the business
With on the job training.
g. Various methods of performance appraisal can be used and an important output from this process should be an assessment of an employee‟s training needs.where the employee spends a longer period of time at college (e. Common methods of off-the-job training include: Day release (employee takes time off work to attend a local college or training centre) Distance learning / evening classes Block release courses . Training programmes should be focused on meeting those needs. computer-based training The main advantages and disadvantages of this form of training can be summarised as follows:
Advantages A wider range of skills or qualifications can be obtained Can learn from outside specialists or experts Employees can be more confident when starting job
Disadvantages More expensive – e.which may involve several weeks at a local college Sandwich courses . to gain experience of a wide range of activities (e.which gives them exposure to other parts of the business and allow them to take part in new activities.a more intensive method of training that involves a close working relationship between an experienced employee and the trainee Job rotation .where the trainee is given several jobs in succession. Most successful project teams are "multi-disciplinary" The advantages and disadvantages of this form of training can be summarised as follows: Advantages Generally most cost-effective Employees are actually productive Opportunity to learn whilst doing Training alongside real colleagues Disadvantages Quality depends on ability of trainer and time available Bad habits might be passed on Learning environment may not be conducive Potential disruption to production
This occurs when employees are taken away from their place of work to be trained. a graduate management trainee might spend periods in several different departments) Projects .Coaching . transport and accommodation Lost working time and potential output from employee New employees may still need some induction training Employees now have new skills/qualifications and may leave for better jobs
Training’s link to motivation
An important part of managing people is to let them know how they are performing.
. six months) before returning to work Sponsored courses in higher education Self-study.g.employees join a project team .g.
i.e. they can take the employer to an Employment Tribunal The right of employees to be paid at least the National Minimum Wage (NMW) is also protected by legislation.Assuming training is effective: then: Employees feel more loyal to the business Shows that business is taking an interest in its workers Employees should benefit from better promotion opportunities Employees to achieve more at work – and perhaps gaining financially from this (depending on the remuneration structure) People .bonuses and pension contributions. daily. as well as basic wages or salary Workers have the right to ask their employer for information to check equality – using the equal pay questionnaire If employees believe their pay is unequal.Legislation affecting employment
Equal pay and minimum wage laws
The basic rule that a start-up business has to remember is that: Men and women are entitled to equal pay for work of equal value Looking at that rule in a little more detail: “Pay” includes everything in the employment contract .the NMW still applies. The current rates are shown here:
Discrimination is the treatment in an unacceptable way of anyone who is termed to be different. It makes no difference when a worker is paid (monthly. hourly) . including pregnancy and maternity Marital / civil partnership status A person's disability Race Age Sexual orientation Religion/belief Trade union membership or non-membership Status as a fixed-term or part-time worker Discrimination laws apply in many areas of employing staff . weekly.terms and conditions Promotions and transfers Providing training
. it is illegal for an employer to discrimination against an employee on the basis of: Sex. In the UK. Recruitment Employee contract . The NMW is reviewed and usually changed every year.
Business location for a new business Where to start a new business? It is a tough question that often leaves an entrepreneur agonising over the decision. produces or supplies For most start-up or small businesses. Where can I find some premises? What kind of premises do I need and what will they cost? These days the decision about locating a start-up business is a very different one. made possible by easy communications and the enthusiasm of many people to work from home. The important thing for management to remember is that it is not just about protecting staff – health & safety applies to any people who come into contact with the business. is not without its problems. Laws provide a variety of “rights” for employees. this is a very popular approach to locating a new business. as freelancers or consultants. without ever having separate business premises. Setting up a virtual business. even with several people. or at another site Visitors to the premises such as customers or subcontractors People at other premises where the business is working. often from home.
. including: Reasonable notice before dismissal Right to redundancy Right to a written employment contract Right to request flexible working Right to be paid national minimum wage Right to take time off for parenting
Health and safety
Health and safety is about preventing people from being harmed at work or becoming ill. hygiene) Chemical production (dangerous processes. However.even if they're outside the business premises Anyone affected by products and services the business designs. by taking the right precautionsand providing a satisfactory working environment. complying with health and safety isn‟t too much trouble. waste disposal) Air travel (passenger safety) Tour operators (holidaymaker safety) Production & operations . such as a construction site Members of the public . However. The so-called “virtual business” is now a reality. That means that proper health and safety needs to be provided to: Employees working at the business premises. in some industries health & safety is really important – for example: Food processing (hygiene) Hotels (guest safety.Deciding what fringe benefits employees receive Employee dismissal
An employment right is something to which an employee is entitled which is protected by law. A small business starting up 10-15 years ago would soon be agonising over a key decision. from home. It is possible to run a new business.
Locating a new business in one of these areas potentially makes government grants and loans available. the textbooks often use the example of a new retail business. For example. if the product is a service targeted at affluent older-aged people. If the start-up is “location-independent” (i. Businesses that are labour-intensive often look to locate in areas of traditionally low wages. then access to a reliable pool of staff with relevant skills is important. Transport links are particularly important if the business delivers products. the most important consideration for a start-up is the cost of the business location. sells direct using a sales force or is dependent on import and export. This factor tends to be more important for manufacturing businesses rather than service businesses. Setting up in a new business location can add significantly to overheads – a business will incur rent.
. Wales. the search for a good location is vitally important. Making a choice of location involves drawing up a list of criteria of what the start-up is looking for from business premises and then using qualitative judgement about what will work best. These include many parts of north-east England. When a start-up needs to hire employees. Franchise businesses often analyse the population characteristics of a potential new territory before setting up in a new location.
Factors affecting the choice of location
Whatever the business. then it may be that deals and incentives offered by Government can influence the choice.
Market . In general. air) as well as information infrastructure. insurance and many other on-going costs simply from the decision to take some premises.customers A start-up may need to be located near particular centres of & population population. rates. there are several general factors that influence the choice of location. Suppliers The business may be dependent on supplies of a particular raw material. For retailing. then it is important to be located where there is a sufficient population of such people. so costs will be lower if the business is located near the source of supply (e. rail. it might be that the availability of government grants or other incentives is the deciding factor.
There is no magic formula which can be applied to decide the most important factors in choosing a location. Information technology is less of an issue these days – most start-ups can quickly establish reliable broadband Internet connections. In your exam. Government policy has often been designed to influence the locations of new businesses. it is best to assume (unless you are told otherwise) that a start-up has limited financial resources and that it will seek to minimise the start-up costs. the other factors above don‟t really make a difference to the choice of location).e. Some poorer areas of the UK are designated as “assisted areas”. When addressing the question of business location. Cornwall etc.g.Not every kind of start-up can be based at home. where the raw material is grown or where a distributor is based). These are: Factor Communications Comments This includes transport facilities (road. East Yorkshire. Where two possible locations have been identified.
g. coal. As with the secondary sector. fabrics. agricultural commodities). For example: Construction Electronic instruments Pharmaceuticals (drugs) House-building Tertiary production Tertiary production is associated with the provision of services (an intangible product).g. there are many tertiary production markets. Secondary production Secondary production involves transforming raw materials into goods. Industrial and capital goods are used by businesses themselves during the production process. gas and stone Harvested / collected – e. and plastics are transformed into motor vehicles. There are many different industry sectors in secondary production. iron ore. In the secondary production sector. iron. secondary and tertiary. The aim is usually to produce the highest quantity at lowest cost to a satisfactory standard. For example. Raw materials can be: Extracted – e. complex information systems.g. value is “added” to the raw material inputs. There are two main kinds of goods: Consumer goods – e. plant and machinery.Topic: Stages of production
Production within an economy can be divided into three main stages: primary. timber.g. foodstuffs are transformed into ready meals for sale in supermarkets. fish Grown – e.g. Good examples include: Hotels Private healthcare and education
. DVD players. washing machines.g. cereal crops There is little value added in primary production. metals. Primary production Primary production involves the extraction of raw materials (e. coal. As the name implies. oil. these are used by consumers Industrial / capital goods – e.
Specialisation of the workforce Larger businesses split complex production processes into separate tasks to boost productivity.Accountants Tourism
Production & operations . Scale economies have brought down the unit costs of production and have fed through to lower prices for consumers. By specialising in certain tasks or processes. as their production output increases.
Economies of scale are the cost advantages that a business can exploit by expanding their scale of production. Marketing economies of scale A large firm can spread its advertising and marketing budget over a large output and it can purchase its inputs in bulk at negotiated discounted prices if it has sufficient negotiation power in the market.
. Here are some examples of how economies of scale work: Technical economies of scale: Large-scale businesses can afford to invest in expensive and specialist capital machinery. Most firms find that. however.Economies of scale Consider the following questions: Why can you now buy a high-performance laptop for just a few hundred pounds when a similar computer might have cost you over £2. It might not. A good example would be the ability of the electricity generators to negotiate lower prices when negotiating coal and gas supply contracts. For example. a supermarket chain such as Tesco or Sainsbury‟s can invest in technology that improves stock control. The major food retailers also have buying power when purchasing supplies from farmers and other suppliers. Economies of scale are a key advantage for a business that is able to grow.000 just a few years ago? Why is the average price of digital cameras falling all the time whilst the functions and performance level are always on the rise? How can IKEA profitably sell flat-pack furniture at what seem impossibly low prices? The answer is – economies of scale. be viable or cost-efficient for a small corner shop to buy this technology. the workforce is able to produce more output in the same time. they can achieve lower costs per unit. The effect of economies of scale is to reduce the average (unit) costs of production.
Lack of motivation Workers can often feel more isolated and less appreciated in a larger business and so their loyalty and motivation may diminish. Poor communication As the business expands communicating between different departments and along the chain of command becomes more difficult. They are also likely to pay a lower rate of interest on new company bonds issued through the capital markets. newsletters. e-mails) and less face-to-face meetings. with favourable rates of borrowing. notice boards.e. which can result in less feedback and therefore less effective communication. In addition.
.Financial economies of scale Larger firms are usually rated by the financial markets to be more „credit worthy‟ and have access to credit facilities.Dis-economies of scale Increasing the size of a business does not always result in lower costs per unit. smaller firms often face higher rates of interest on overdrafts and loans. This is particularly true as managers are less able to take a personal interest in the workers. motivation will decline. It is harder for managers to stay in day-to-day contact with workers and build up a good team environment and sense of belonging. Sometimes a business can get too big! Diseconomies of scale occur when a business grows so large that the costs per unit increase.g. The main result of poor employee motivation is falling productivity levels and an increase in average labour costs per unit. Businesses quoted on the stock market can normally raise fresh money (i. What can a business do about this? Possible solutions include: Delegation of decision-making (empowerment) Making jobs more interesting (job enrichment) Splitting employees into teams (teamworking) There is also a close link between communication and motivation (which the motivational theorist Elton Mayo recognized) and so as communication becomes harder. there may be more written forms of communication (e. extra financial capital) more cheaply through the issue of shares. Production & operations . but all as a result of the difficulties of managing a larger workforce. There are more layers in the hierarchy that can distort a message and wider spans of control for managers. This can lead to lower employee motivation with damaging consequences for output and quality. Diseconomies of scale occur for several reasons. In contrast. This may result in workers having less clear instructions from management about what they are supposed to do when.
g.g. Production & operations . factory buildings) is expensive – a business needs to maximise the return it makes on these assets There are various ways in which a business can try to improve its productivity: Training – e. Productivity can be measured in several ways: e. A falling ratio would indicate that efficiency was improving.Loss of direction and co-ordination It is harder to ensure that all workers are working for the same overall goal as the business grows. That means the business can either make a higher profit per unit sold (assuming that the product is sold for the same price as a competitor) or the business can offer customers a lower price than competitors (and still make a good profit/ Investing in production assets (e. or to set up and operate a call centre. Productivity measures the relationship between inputs into the production process and the resultant outputs. Why is achieving high productivity important? Most importantly. a more efficient business will produce lower cost goods than competitors.g. leaves the manager less in control. Output per worker or hour of labour Output per hour / day / week Output per machine Unit costs (total costs divided by total output) The unit cost measure is particularly important. Another good way to look at how efficiently a business operates is to look at “productivity”.Productivity and efficiency It is important that every business makes effective use of its assets. equipment. on-the-job training that allows an employee to improve skills required to work more productively Improved motivation – more motivated employees tend to produce greater output for the same effort than de-motivated ones More or better capital equipment (this links with the topic of automation) Better quality raw materials (reduces amount of time wasted on rejected products) Improved organisation of production – e. The investment in production capacity is often significant. It is more difficult for managers to supervise their subordinates and check that everyone is working together effectively. the production line with all its machinery and technology. as the spans of control have widened. less wastage
.g. Think about how much it costs to set up a factory. A manager may be forced to delegate more tasks. which while often motivating for his subordinates.
this is not always easy to assess. assume a sofa manufacturer makes 100 sofas a month and employs 25 workers. However. A more efficient business will produce lower cost goods than competitors and may generate more profit possibly at lower prices Increasing efficiency will also boost the capacity of a business. The labour productivity is 4 sofas per person per month. this is particularly important for a growing business.
. The most commonly used measure is labour productivity. assuming there is no change in the number of inputs employed. The capacity of a firm refers to how much a business can produce during a specific period of time. For example. If the stock level falls below this level then the productive efficiency has reduced since the output per worker has not met the planned requirements. However. therefore. Output per hour / day / week Output per machine Unit costs Unit cost (also referred to as cost per unit) divides total costs by the number of units produced. A falling ratio would indicate that efficiency was improving. which is measured by output per worker. Stock levels A business will have set itself a target stock level of finished goods that it should achieve. In many markets. a business needs to be at least as efficient as its main competitors in order to be able to compete and survive in the long-term. This is calculated to satisfy the demand expected by the marketing department plans and based on what the production department thinks they can produce. a measure of how well the production or transformation process is performing. What do we mean by efficiency? Where a business has efficient production. Efficiency is.Production & operations: Production efficiency All businesses should try to operate efficiently. There are several ways to measure efficiency Productivity This measures the relationship between inputs into the production process and the resultant outputs. it is operating at maximum output at minimum cost per unit of output. There are several other measures of productivity.
suppliers etc Land – think of this as the natural resources that are used by the business – e. a business needs resources – i. the transformation process is about adding value. what kind of labour etc and how & when they are needed in the business. The activities of a new business should be designed to turn those resources into products and services that customers are willing to pay for. energy. inputs. The entrepreneur takes the decisions about how much capital.
Inputs to the transformation process
In order to make products and deliver services. computers. They need to be the right kind of inputs. This process is known as the “transformation process”. The black box is the business – what is does how it does it and so on.Non-productive (“idle”) resources Which resources are not in constant use in the business? Are employees often left with nothing to do? Are machines only used for part of available time? Too many idle resources are a common sign of inefficiency in production
Production & operations: The transformation process
A good way to think of a business is to imagine inputs entering an imaginary black box. transport which are used during production. for example. which is a slightly boring way of describing real resources such as: Labour – the time and effort of people involved in the business: employees. Inputs by themselves are rarely enough for a start-up to succeed. Capital can also include finance – the investment that is required in order for the business activities to take place. in the right mix. Enterprise – enterprise is the entrepreneurial “fairy-dust” that brings together or organises the other inputs. What come out of the box areoutputs. in summary. So. So. You will probably agree that enterprise is the most important input for a successful business. a successful entrepreneur will be keen to ensure: High quality people are employed (the best the business can afford at each stage of development) and that these people are retained and invested in (training)
. actual land.e. If the value of what customers pay for the outputs is more than the cost of the inputs. A business needs resources in order to trade. The textbooks often refer to these as “factors of production”. and other natural resources Capital – capital includes physical assets such as machinery.g. then the business can be said to have “added value”. So. let‟s take a look at some practical examples of what is involved in the transformation process. That sounds pretty theoretical.
In most textbooks you will see the outputs of the Quaternary sector included in the tertiary sector. E. the distinction isn‟t important. The quaternary sector consists of those industries providing information services. industrial equipment. security. travel. it often needs to change its method of production to allow greater production capacity.g. Think of this as any business activity that involves people doing things for you! Retail businesses are in the tertiary sector. What is important is that you remember that the Tertiary sector in the UK has grown strongly over recent decades and now accounts for about 75% (three quarters) of all business activity.g. health.one of the four largest supermarkets in the UK) also own and operate its own factories that make many of the food products sold in store (secondary sector).g. particular in scientific fields). finance. Don‟t worry. For example. flat-screen TVs. games consoles. It is quite useful to think of ways in which similar business activities can be grouped based on those outputs. The secondary sector is also often referred to as the “manufacturing sector”. Here is another example. many farms in Britain (farming = primary sector) also offer holiday accommodation (tertiary sector) and produce processed foods such as cheese and ice-cream from farm supplies (secondary sector). motor vehicles. legal.
Production & operations: Flow production As a business grows the scale of its operations. A final word about the categorisation of business activities (outputs) into sectors. Remember that is perfectly possible for a single business to be operating in more than one sector. Providing a service of some kind. tertiary sector .
. such as computing and ICT (information and communication technologies). Morrison‟s supermarkets (i. Economists and business examiners alike have traditionally categorised the outputs from the transformation process into these three groups: Sector Primary Secondary Businesses involved in… Extraction of natural resources (e. The list of potential services is endless. some textbooks have also suggested that there is a fourth sector – the Quaternary sector. gas) and farming activities Production of finished goods and components (e.e. oil.
In recent years. building.Capital investment is focused on efficiency and quality – use of modern machinery or IT systems of the right kind can have a significant effect whether a small business is able to compete
Outputs from the transformation process
The outputs of business activities are reflected in the products and services sold to customers. consultancy (offering advice to businesses) and R&D (research. computer memory chips.
Flow production involves a continuous movement of items through the production process. A key production method in these circumstances is flow production. which should lower the cost per unit of production. This makes productioninflexible and means that all products have to be very similar or standardised and cannot be tailored to individual tastes. engines. This is because production can continue at night and over weekends and also firms can benefit from economies of scale. It is appropriate when firms are looking to produce a high volume of similar items.A small business might use job or batch production to provide a personalised or distinctive product.
. the time taken on each task must be the same. Another disadvantage of using flow production is that the work can be pretty boring for employees involved. Flow production (often known as mass production) involves the use of production lines such as in a car manufacturer where doors. bonnets and wheels are added to a chassis as it moves along the assembly line.
Flow production is capital intensive. mass markets. Some of the big brand names that have consistently high demand are most suitable for this type of production. This means that when one task is finished the next task must start immediately. as is the case on an assembly line. However. Keeping staff motivated is therefore an important issue for management.
The main disadvantage is that with so much machinery it is very difficult to alter the production process. Therefore. then alternative methods of production may be required in order for the product to be produced efficiently. if the product is intended for much larger. The advantage of this is that a high number of products can roll off assembly lines at very low cost. This means it uses a high proportion of machinery in relation to workers.
where the raw material is grown or where a distributor is based). In your exam. Not every kind of start-up can be based at home. made possible by easy communications and the enthusiasm of many people to work from home. as freelancers or consultants. This factor tends to be more important for manufacturing businesses rather than
. so costs will be lower if the business is located near the source of supply (e. then access to a reliable pool of staff with relevant skills is important. It is possible to run a new business. without ever having separate business premises. The so-called “virtual business” is now a reality. rates. When addressing the question of business location. However. When a start-up needs to hire employees. Setting up a virtual business. if the product is a service targeted at affluent older-aged people. Transport links are particularly important if the business delivers products. Setting up in a new business location can add significantly to overheads – a business will incur rent. even with several people. Information technology is less of an issue these days – most start-ups can quickly establish reliable broadband Internet connections. then it is important to be located where there is a sufficient population of such people. Franchise businesses often analyse the population characteristics of a potential new territory before setting up in a new location. the textbooks often use the example of a new retail business.
Factors affecting the choice of location
Whatever the business. sells direct using a sales force or is dependent on import and export. A small business starting up 10-15 years ago would soon be agonising over a key decision. For retailing. In general. For example. air) as well as information infrastructure. Suppliers The business may be dependent on supplies of a particular raw material. the most important consideration for a start-up is the cost of the business location. there are several general factors that influence the choice of location. rail. is not without its problems. often from home. it is best to assume (unless you are told otherwise) that a start-up has limited financial resources and that it will seek to minimise the start-up costs. insurance and many other on-going costs simply from the decision to take some premises. Businesses that are labour-intensive often look to locate in areas of traditionally low wages.
Market . the search for a good location is vitally important. These are: Factor Communications Comments This includes transport facilities (road. Where can I find some premises? What kind of premises do I need and what will they cost? These days the decision about locating a start-up business is a very different one.g.customers A start-up may need to be located near particular centres of & population population.Production & operations . this is a very popular approach to locating a new business.Business location for a new business Where to start a new business? It is a tough question that often leaves an entrepreneur agonising over the decision.
service businesses. Government assistance Government policy has often been designed to influence the locations of new businesses. If the start-up is “location-independent” (i.e. the other factors above don‟t really make a difference to the choice of location), then it may be that deals and incentives offered by Government can influence the choice. Some poorer areas of the UK are designated as “assisted areas”. These include many parts of north-east England, Wales, East Yorkshire, Cornwall etc. Locating a new business in one of these areas potentially makes government grants and loans available.
There is no magic formula which can be applied to decide the most important factors in choosing a location. Where two possible locations have been identified, it might be that the availability of government grants or other incentives is the deciding factor. Making a choice of location involves drawing up a list of criteria of what the start-up is looking for from business premises and then using qualitative judgement about what will work best. Production & operations - Batch production Batch production occurs when many similar items are produced together. Each batch goes through one stage of the production process before moving onto next stage. Good examples include: Cricket bat manufacture Baking / meal preparation Clothing production
The benefits and drawbacks of batch production include: Advantages Making in batches reduces unit costs Can still address specific customer needs (e.g. size, weight, style) Use of specialist machinery & skills can increase output and productivity Disadvantages Time lost switching between batches – machinery may need to be reset Need to keep stocks of raw materials. Cash also investment in work-in-progress Potentially de-motivating for staff
Production & operations - Lean production (overview) Lean production is an approach to management that focuses on cutting out waste, whilst ensuring quality. Lean production aims to cut costs by making the business more efficient and responsive to market needs. The lean approach to managing operations is really about: Doing the simple things well Doing things better Involving employees in the continuous process of improvement …and as a result, avoiding waste The concept of lean production is an incredibly powerful one for any business that wants to become and/or remain competitive. Why? Because waste = cost Less waste therefore means lower costs, which is an essential part of any business being competitive.
The pioneering work of Toyota (a leader in lean production) identified different kinds of waste which can be applied to any business operation. These are: Type of waste Over-production Waiting time Transport Stocks Motion Defects Description Making more than is needed – leads to excess stocks Equipment and people standing idle waiting for a production process to be completed or resources to arrive Moving resources (people, materials) around unnecessarily Often held as an acceptable buffer, but should not be excessive A worker who appears busy but is not actually adding any value Output that does not reach the required quality standard – often a significant cost to an uncompetitive business
Production & operations - Lean production methods
In traditional production, products were manufactured in separate areas (each with a responsibility for a different part of the manufacturing process) and many workers would work on their own, as on a production line. In cell production, workers are organised into multi-skilled teams. Each team is responsible for a particular part of the production process including quality control and health and safety. Each cell is made up of several teams who deliver finished items on to the next cell in the production process. Cell production can lead to efficiency improvements due to increased motivation (team spirit and added responsibility given to cells) and workers sharing their skills and expertise.
Kaizen is a Japanese word for an approach to work where workers are told they have two jobs to do: Firstly to carry out their existing task; and Secondly to come up with ways of improving the task The concept known as “continuous improvement” therefore implies a process where the overall progress and gains in productivity within a firm, come from small improvements by workers being made all the time. For example, an employee may simply re-organise the lay out of his work area, which saves 2 minutes looking for and filing paperwork each day. When added up the course of a week, 10 minutes extra productive time is gained, which over a year equates to an extra days work. If other workers also adopt this, then a firm can benefit from a significant increase in output per worker (productivity) over a year.
This minimises the amount of stock that has to be stored (reducing storage costs). JIT has many benefits and may appear an obvious way to organizes production but it is a complicated process which requires efficient handling. Key aspects of quality for the customer include: Good design – looks and style Good functionality – it does the job well Reliable – acceptable level of breakdowns or failure Consistency Durable – lasts as long as it should Good after sales service Value for money „Value for money‟ is especially important.Just in time
JIT means that stock arrives on the production line just as it is needed. and the customer must be satisfied that the price fairly reflects the quality.g. This process needs to be carried out very accurately or production could come to a standstill. Advantages of JIT Reduces costs of holding stock e.What is quality? Quality is important to businesses but can be quite hard to define. make repeat purchases and recommend the product or service to others. A good definition of quality is: “Quality is about meeting the needs and expectations of customers” Customers want quality that is appropriate to the price that they are prepared to pay and the level of competition in the market. For example. can be use better elsewhere Disadvantages of JIT Needs suppliers and employees to be reliable
May find it difficult to meet sudden increase in demand
Production & operations . JIT relies on sophisticated computer systems to ensure that the quantities of stock ordered and delivered are correct. Strong brand reputation for quality Retailers want to stock the product
. Why quality is important to a growing business Good quality helps determine a firm‟s success in a number of ways: Customer loyalty – they return. warehousing rent No money tied up in stock. because in most markets there is room for products of different overall levels of quality.
The main objective of quality control is to ensure that the business is achieving the standards it sets for itself. samples from each batch. There are two alternative approaches to managing quality
A definition of quality control is: The process of inspecting products to ensure that they meet the required quality standards This method checks the quality of completed products for faults. Production & operations . In almost every business operation.As the product is perceived to be better value for money. Quality inspectors measure or test every product.Managing quality Achieving high quality does not happen by accident. Quality control involves setting standards about how much variation is acceptable. quality control is achieved through inspection. For example. or a service is provided. Quality management is concerned with controlling activities with the aim of ensuring that products and services are fit for their purpose and meet the specifications. it is not possible to achieve perfection.
. Furthermore. At its simplest. production skills applied. which can easily be damaged by a news story about a quality failure. The aim is to ensure that a product is manufactured. firms have to work hard to maintain and improve their reputation for quality. it is thought that inspectors may be better placed to find widespread problems across an organisation. This approach means having specially trained inspectors. For example there will always be some variation in terms of materials used. inspection is intended to prevent faulty products reaching the customer. it may command a premium price and will become more price inelastic Fewer returns and replacements lead to reduced costs Attracting and retaining good staff These points can each help support the marketing function in a business. Advantages of quality control With quality control. reliability of the finished product etc. The production process must be properly managed to achieve quality standards. or random samples – as appropriate to the kind of product produced. However. trained inspectors examine samples of work-in-progress and finished goods to ensure standards are being met. rather than every individual being responsible for his or her own work. in a manufacturing business. to meet the specifications which ensure customer needs are met.
A quality control approach can be highly effective at preventing defective products from reaching the customer. This is also known as a „zero defect’ approach. rather than checking by inspectors. organisations consist of „quality chains‟ in which each person or team treats the receiver of their work as if they were an external customer and adopts a target of „right first time‟ or zero defects. this can help the firm gain marketing advantages arising from its consistent level of quality Total quality management (“TQM”) is a specific approach to quality assurance that aims to develop a quality culture throughout the firm. In quality assurance. Advantages of quality assurance include: Costs are reduced because there is less wastage and re-working of faulty products as the product is checked at every stage It can help improve worker motivation as workers have more ownership and recognition for their work (see Herzberg) It can help break down „us and them‟ barriers between workers and managers as it eliminates the feeling of being checked up on With all staff responsible for quality.Disadvantages of quality control A major problem is that individuals are not necessarily encouraged to take responsibility for the quality of their own work. if defect levels are very high.
. In TQM. but in many industries it has to be scrapped – either way rejects incur more costs. However. Rejected product is expensive for a firm as it has incurred the full costs of production but cannot be sold as the manufacturer does not want its name associated with substandard product. the company‟s profitability will suffer unless steps are taken to tackle the root causes of the failures. Some rejected product can be re-worked. there is more emphasis on „self-checking’.
A definition of quality assurance is: The processes that ensure production quality meets the requirements of customers This is an approach that aims to achieve quality by organising every process to get the product „right first time’ and prevent mistakes ever happening.
quantity and timing of stocks needed. Stock management Good stock management by a firm will lower costs. Obtaining the correct balance is not easy and the stock control department will work closely with the purchasing and marketing departments. the majority of firms will hold buffer stock. This is the “safe” amount of stock that needs to be held to cover unforeseen rises in demand or problems of reordering supplies.Stock control There are three types of stock that a business can hold: Stocks of raw materials (inputs brought from suppliers waiting to be used in the production process) Work in progress (incomplete products still in the process of being made) Stocks of finished products (finished goods of acceptable quality waiting to be sold to customers) The aim of stock control is to minimise the cost of holding these stocks whilst ensuring that there are enough materials for production to continue and be able to meet customer demand. The marketing department should be able to provide sales forecasts for the coming weeks or months (this can be difficult if demand is seasonal or prone to unexpected fluctuation) and so allow stock control managers to judge the type. cannot be implemented quickly Focus on processes – how things are made or delivered Achieved by improving production processes Targeted at the whole organisation Emphasises the customer Quality is built into the product Quality Control Can be implemented at short-notice Focus on outputs – work-in-progress and finished goods Achieved by sampling & checking (inspection) Targeted at production activities Emphasises required standards Defect products are inspected out
Production & operations . It will give the firm a competitive advantage as more efficient production can feed through to lower prices and also customers should always be satisfied as products will be available on demand. at a competitive price and from a reliable supplier who will deliver on time. It is the purchasing department‟s responsibility to order the correct quantity and quality of these inputs. As it is difficult to ensure that a business has exactly the correct amount of stock at any one time. improve efficiency and ensure production can meet fluctuations in customer demand.Quality Control or Quality Assurance – which is best? Which approach to managing quality is best? Here is a summary of the main considerations: Quality Assurance A medium to long-term process.
Advantages Can meet sudden changes in demand Disadvantages Costs of storage – rent and insurance
Less chance of loss of production time because Money tied up in stocks not being used of stock outs elsewhere in the business Can take advantage of bulk buying economies of scale Large stocks subject to deterioration and theft
. then it will overstock. poor stock control can lead to problems associated with overstocking or stock-outs. There are advantages and disadvantages of increasing the stock level. In these circumstances a business may choose to increase the amount of stock they hold in reserve (buffer stock). If a business holds too much buffer stock (stock held in reserve) or overestimates the level of demand for its products. Increases warehouse space needed Higher insurance costs needed Higher security costs needed to prevent theft Stocks may be damaged. This can have severe consequences for the business: Loss of production (with workers still having to be paid but no products being produced) Potential loss of sales or missed orders. This occurs when a businesses runs out of stocks. become obsolete or perish (go out of date) Money spent buying the stocks could have been better spent elsewhere The opposite of an overstock is a stock-out. Overstocking increase costs for businesses as holding stocks are an expense for firms for several reasons. This can harm the reputation of the business.However.