AQA GCSE Business. (8132) Knowledge Booklet. Name

Transcription

1 AQA GCSE Business (8132) Knowledge Booklet Name 1

2 Business Studies Data Capture Assessment Record Target Grade Year 10 Year 11 Data Capture Current Prediction P Cestrian Way Learning Focus Behaviour Focus Data Capture Current Prediction P Cestrian Way Learning Focus Behaviour focus Blue = Above Green = On Yellow = Near Red = Below 2

3 1) Business in the Real World (papers one & two) 1 Business A business is an organisation that produces a good or supplies a service. 2 Purpose of business Produce goods or supply services that are demanded by others to fulfil the needs and wants of its customers, distribute products, fulfil a business opportunity and provide a good or service to benefit others. 3 Needs A need is a basic human requirement we need to eat and drink. 4 Wants A want is a desire for a particular product we need to drink, but we want Coca-Cola. 5 Good Is a physical tangible product such as a car. 6 Service Is an intangible product, such as financial advice, or a hair dresser. 7 Customer Is someone who buys a product from a business. 8 Consumer Is someone who uses goods and/or services produced by a business 9 Reasons for starting a business They want to be their own boss and make their own decisions. They want to keep all the profits of a business for themselves (earn more money). They need a job (starting a business is one way of getting a job). They have an interest or hobby and this grows into a business. They want to prove something to themselves and get a sense of satisfaction. They are unhappy with their current job and want to do something different. They want more flexible working hours and work when they want. They have spotted a business opportunity to provide a good or service identified a gap in the market. They want to provide a service to help others (social enterprise). 10 Entrepreneur Is someone who is willing to take the risks involved in starting a new business in return for the rewards (profit, status, satisfaction etc.) 11 Entrepreneurship Refers to the ability to be an entrepreneur to take risks to develop a business idea. 12 Characteristics of an Entrepreneur Innovative good at spotting an opportunity can identify problems and develop solutions. They have a vision of how things could be. Risk Takers in reality many new ideas fail you may have lost your savings. Hard working and determined you need to be prepared to struggle, you will not be well known and will have to work hard to develop good relationships with customers and suppliers. Organised running your own business involves many skills and many decisions. You will have to be good at meeting deadlines. 13 Social Enterprise Is a business that is set up to help society rather than to make a profit. 14 Factors of production Land the physical land and the site on which the business is located and other natural resources a business might use. Labour the skills and numbers of employees employed by a business. Capital the equipment used to provide the goods or services, such as machinery or equipment. Enterprise the skills of the people involved in the business to identify business opportunities and bring together resources to meet these opportunities. 15 Enterprise Is another word for a business. It also refers to the skills. 16 Resources Are the inputs that businesses use to provide their goods or services. 17 Opportunity Cost Is the sacrifice we make whenever we decide to do anything e.g. if you decide to invest in a business, then you are not using these savings to earn money, which is known as interest, in the bank. 18 Primary Sector Is made up of organisations that are at the first stage of production and use raw materials. (Farms, oil exploration companies and fishing fleets). 19 Secondary Sector Is made up of organisations that are at the second stage of the production process. They are involved in using primary resources and converting these into products. (manufacturers and printers). 20 Tertiary Sector Is the final stage of the production process and is made up of organisations that provide services. (fast food stores, estate agents, and delivery companies). 21 Functions of a Business 22 The Business Environment Marketing Human resources Operations Finance Regardless of the size of the organisation they will have these functions. A sole trader may carry out all of these functions, whereas in a bigger business they may have a small team for each function. A business will be affected by changes in the business environment these are all factors outside a business that can affect it. Technological change Economic change Legal change Environmental expectations 23 Interest Is the money paid by banks as a reward to attract people to save with them. 24 Interest Rates Refer to the cost of borrowing money or the reward for saving money, expressed as a percentage. 25 Gross Domestic Product (GDP) Measures all the income earned in a country s economy in a year. 3

4 26 Sole Trader Is someone who sets up in business on his or her own Advantages of a sole trader Disadvantages of a sole trader You are your own boss. Can decide things quickly. Quick and easy to set up. Keep all the profits. Make your own decisions. Unlimited liability. May lack finance. Heavy workload. May not have all the skills required. Difficult to take a holiday. 27 Partnership Occurs when two or more people join together in a business enterprise to pursue profit. Advantages of a partnership Disadvantages of a partnership Share workload and discuss ideas. Share liability. More sources of finance than a sole trader. Share skills as partners can specialise. Partners can cover for each other when ill or want a holiday. May disagree with other partners as they have different ideas. Decisions may be slower due to consultation. Unlimited liability. Liable for the actions of the other partners and share profits. 28 Deed of Partnership Is an agreement between partners that sets out the rules of the partnership. How to divide up profits (how much money they put in or how much work they do). How decisions are made (voting rights). How to value the business if someone wants to leave. How to decide on whether someone else can join. 29 Company A company is a business that has its own legal identity. It can own items, owe money, sue and be sued. Examples are private limited companies and public limited companies. 30 Private Limited Company (Ltd) Advantages of a private limited company Limited liability can help gain access to funding from investors. For many customers, a company seems to have more status than a sole trader. If the founders die, the company still exists and whoever owns the shares continues with the business. Managers can be employed to run the day- Is owned by its shareholders who when the business is starting out tends to be its founders although they may eventually bring outside investors in if more funding is required. Has ltd after its name. Cannot advertise its shares to the general public, if sold will be done privately. Can include certain restrictions in its Articles of Association to limit who the shares can be sold to (family members only). Disadvantages of a private limited company Various legal procedures need to be completed, such as registering, which take time and money. A summary of the business s financial accounts must be produced and be available to the general public (including competitors) Accounts must be checked by an independent accountant (auditor) which creates an additional cost. to-day business whilst the owners retain control. 31 Public Limited Company (Plc) The business must pay corporation tax, which may be more than if they just had to pay income tax. Any individual that invests and owns shares will have a vote on how the business is ran slowing decision making down, have different objectives. Is owned by its shareholders. Sells it shares to the general public on the Stock Exchange. The share price changes when there is more or less demand for them. Disadvantages of a public limited company Advantages of a public limited company Can advertise its shares to the general public Increase media coverage could also be bad for access to greater number of potential the business if it makes a mistake. investors and raise large sums of money. Cannot control who buys its shares, so managers Attracts more media coverage, which may find that a competitor buys control of the provides a good form of cheap publicity. company and takes it over. Plc are usually thought of as having more More regulated than a Ltd, it has more things it status than Ltd s and are usually bigger. This must do according to law. can impress customers. Must produce more detailed financial Investors may be more willing to invest as it information and send it to shareholders can be is easier to sell shares on later. expensive and gives away information to competitors. When a Ltd becomes a Plc it brings in external investors, original owners may not agree with views and objectives of new owners 32 Shareholder Is a person or an organisation that owns part of a company. Each 33 Not-for-profit organisations 34 Which is the right form of business? shareholder owns a share of the business. Are set up to achieve other objectives other than profit, for example a charity may set up to help homeless people or someone might set up a youth club. They still have to raise funds and invest just like other companies. The type of ownership will vary depending on the type of business such as a new start-up business or a large established business. This will depend on: The business experience they have. Whether they want to share profits. The amount of risk they are willing to take. What they want to do to protect them from that risk. What investment they want and from who. 4

5 35 Liability Unlimited Limited Sole Trader Partnership Private Limited Company Public Limited Company Investors in a limited company can only lose what they invest in a Means the owners are responsible business, they cannot be forced to for all of the businesses debts. sell personal assets to pay off the business s debts 36 Aim Is a general goal of a business. The owners may aim to grow the business or make it more profitable. 37 Objective Is a specific target that is set for the business to achieve. The aim may be to grow, whereas the objective set from this might be to grow sales by 25% within 3 years 38 Purpose of Objectives Managers will be clear about what they are trying to achieve Helps with decision making and with establishing priorities. It helps investors to understand the direction in which the business is heading could help with investment when setting up or expanding. It provides a target so that everyone can compare actual results with the planned results to decide how successful the business has been. It can motivate everyone connected with the business because they know what they are trying to do and how they can measure success. 39 Main Objectives Survival in the short-run surviving is an achievement, ensuring that the business s name is known. You may charge lower prices and make lower profits, but this could change in the long-run. Important for when the economy is doing badly. Earning a profit (profit maximisation) normally a long-term objective as it takes time to build a brand. If none or low profits are made the owners will take resources out of the business and use elsewhere. The business must make enough profit to exceed the opportunity cost of using these resources. How much is enough will vary with each business. Shareholder value businesses aim to reward shareholders by generating profits to pay dividends, which are financial rewards paid on each share the shareholder owns. In addition the managers will want to run the business well to encourage people to invest which increases the price of the shares meaning current shareholders own something more valuable. Customer satisfaction done by providing a better quality service or a wider range of products than competitors. This should lead to more profits in the long-run as if customers are happy they are more likely to return or tell friends about the business. Could increase costs and result in lower profits in the short-run. Market share measures the sales of one product or business as a percentage of the total market sales. (Sales of products total market sales) x 100. If a business has a larger market share it increases its influence on the market. Growth managers and owners may want the business to open more stores, sell more products or increase its revenue. This could be locally or on a larger scale (nationally or internationally) Being ethical business will want to be seen to be doing the right thing, for example paying employees reasonable wages, treating their suppliers and customers with respect and being honest with them about the state of the business. They will benefit from favourable media coverage, using the ethical message in its marketing and in attracting customers, investors and employees. It can however increase costs by paying more money to employees or sources more ethical resources. Environmental and sustainability targets want to be seen by customers to be taking care of the environment in order to attract more customers. They may set limits on the amount of energy they use, or limit their carbon footprint, or set recycling targets, or reduce wastage. 40 Effective Objectives To be effective a target should clearly state: What the target is e.g. to increase profits by 20% When it has to be achieved e.g. to achieve the target within two years. Who is to achieve it who is in charge of marking sure the target is it. How to achieve it what is and what is not acceptable behaviour. 41 Resources to achieve objectives To be successful and business must set objectives that are achievable and involve only the resources that are available. Time managers often have many different tasks to complete so they must feel they have a sufficient amount of time available to focus on a given target. People does the business have the staff it needs? Money does it have the necessary finance to buy the resources and materials required? Equipment does it have the machinery and facilities needed to achieve the target? 42 Changing Objectives Business objectives can change between different businesses for a number of reasons. The size of the business a small sole trader will initially want to set an objective of survival, whereas a large business will set targets of increasing profits or growth. Larger businesses are also open to more scrutiny so may also set environmental or ethical targets to avoid media attention. 5

6 43 Not-for-profit Organisations 44 Private Sector Organisations 45 Public Sector Organisations 46 Using objectives to measure success The level of competition if the market is saturated with lots of competition then it may difficult to set targets of growth. It may be more prudent to set a target of customer satisfaction to achieve growth, or an increase in profits. The type of business some business are not set up to achieve the Main Objectives such as Not-for-profit organisations. Are organisations that are set up not to make a profit, Their objectives are to benefit the particular cause they were set up to help. They can operate in the private or public sector. Are owned by individuals. E.g. social clubs and charities. Are owned by the government. E.g. schools and hospitals. Only when you know the overall desired result can you judge whether a business has met its objectives fully, partially or not at all. It is important to analyse each objective in conjunction with other objectives. By measuring the success of objectives you can identify likely reasons for any shortfalls or gains and then take steps to improve or sustain this next year. Survival are they still in business? Earning a profit (profit maximisation) have they met the target set, passed it or fallen short? Shareholder value is the business paying dividends and at what value? Has the share price increased? Customer satisfaction has there been a reduction in complaints or an increase compliments? Are customers returning or getting new customers? Market share Has market share increased? Is this due to another company leaving the market or your business growing and taking share off of competitors? Has the share increase based on value of sales or volume of sales? Growth has the opening of new stores affected other objectives such as profit as the growth is financed? Have you grown, but not to the size you wanted or not internationally? Being ethical Are you paying employees the living wage are you similar to competition? Do you treat suppliers as well as other companies? Do other suppliers want to do business with you? Environmental and sustainability targets are you meeting your target? Are you falling short, but doing better than competitors, or exceeding and doing worse than competitors? 47 Stakeholders Are individuals or organisations that affect or are affected by the activities of a business. The objectives that a business set will be influenced by its stakeholders. The main stakeholders are: 48 The objectives of stakeholders 49 How does a business have an impact on stakeholders? 50 How stakeholders can influence a business Employees Owners/Shareholders Local Community Government Suppliers Customers Sometimes the objectives of stakeholders will overlap with each other, but sometimes they will conflict. It is down to the business to ensure they get a balance of doing what is right for their stakeholders. Employees secure jobs, higher earnings. Owners/Shareholders higher profits/dividends and share price. Local Community local jobs, minimise environmental impact on the community (e.g. little pollution or congestion, investment in the community). Government legal behaviour, taxes paid, growth. Suppliers paid on time, informed of any changes to the business (e.g. any proposed reduction in output). Customers useful, accurate information on the product, good service, value for money. The success of the business will affect the number of people employed. The values of the owners will affect how well treated the employees are. A business will impact the local community through employing local people, investing in local facilities or through congestion. The way in which a business treats is suppliers will affect their success. Does it pay them on time and at a fair price? Does it build a positive relationship or force them to compete with each other? The success of the business will affect the share price and the dividends that can be paid to shareholders. A business may try to reduce the amount of tax it pays, this will affect government revenue. Stakeholders can influence a business in many ways. Negotiation Employees may negotiate for better pay; suppliers may demand better terms and conditions. Direct Action Customers can stop buying the products of a business if they are unhappy with the way it behaves. Employees can go on strike and refuse to work if they do not get what they want. Refusal to Co-operate Local councils can refuse to co-operate with a business if they do not like its behaviour. E.g. they could refuse planning permission. Employees could resist any changes that owners suggest and could show they are unhappy by not working hard. 6

7 51 Dealing with Stakeholders 52 Why is location important? 53 Factors Influencing Location Voting the owners/shareholders of a business can make their views clear and can votes on what the business should do next. E.g. 2 out of 3 owners could outvote the other when deciding what should be done. A business may want to think about: How it communicates with stakeholders Does it need to keep them informed? How does it keep them informed? Whether it should involve different stakeholders it may want to hold meeting with different stakeholders to gather opinions Costs the amount to be paid in rent or to buy a premises varies according to location. The costs of facilities can affect the level of profit a business makes. Sales location may affect whether or not the business gets customers. Image for some products where they are produced can have an important impact on their image. E.g. A wine shop from Bradford may not sell as well a gift shop in a tourist village. There will be many factors that influence the location of a business and these will vary depending on the type and size of the business, and of which factors the business would consider the most important to them. The type of business a web design business could set up from home, whereas a shop needs to be close to potential customers. Generally speaking, factories are more concerned about supplies and transport systems, whereas shops are more interested in being close to their customers. The proximity to the market a business will want to know where its customers are located and ensure that it can reach them easily. This is more important for some business. E.g. a comparison website would not need to be near its customers. However, a service business (hairdressers) will need to be close to its customers. Competitors in some cases a business will not want to be close to it customers, e.g. petrol stations. However, some businesses will want to be located close to competition, such as a new business wanting to take competition away from others, or a restaurant wanting to be located in an area known for its good eating places. Availability of raw materials some businesses rely on raw materials. Being close to them could reduce the cost of transporting them or ensure that the products are fresh e.g. a dairy business or a fish business. Availability and cost of labour some businesses what highly skilled and able individuals. These can often be recruited from the best universities, so businesses locate close to these and make good links with them. Some business located where the labour is cheaper in order to keep costs down. Transport links businesses aiming to export will try to locate close to an airport or port so they can transport goods easily and reduce costs. If a business wants to operate in an expensive area, but cannot afford the costs, they may locate close by, but where there are good rail or road links. Technology businesses can now operate from many locations due to the internet and mobile communications. This means a business can choose a cheaper location to keeps its costs down. Costs all location decisions tend to be affected by the overall costs and the finance available to the business. Businesses may start their business in a cheaper location, less effective location, but then move once the business becomes more establishes. A business will often compare the costs of the location with the potential revenue that it can earn. E.g. higher-cost location could actually bring in more profit. 54 Overseas Location Some businesses will have an objective to expand overseas. There are many advantages and disadvantages that a business could experience. Advantages of overseas location Disadvantages of overseas location Cheaper Labour wages in other countries (China, India) are much lower than the UK. Access to resource that are not easily available in the UK e.g. growing bananas is a lot easier in South America that in England. Financial incentives from foreign governments some governments are keen to attract foreign businesses to their country so offer money or lower taxes. Avoids protectionist measures by foreign governments some governments want to help their own firms to protect them from overseas competition. This can be done through tariffs or quotas. By locating in that country you avoid these. The market overseas may be growing fast home markets could have slow growth, locating overseas could help with expansion. There may be different rules and regulations in other countries these could affect how you treat the labour force, or how you are allowed to advertise your products and what safety tests must be passed. It could be expensive to change what you currently do. Customers may have different tastes products may need to be differentiated for the local market. This could be expensive. Language barriers Transport costs Bad publicty from locating Broad uk job losses If they move to low-wage Countries could be seen as unethical Customers may prefer made in the uk 55 Protectionist Measures Are policies that governments use to protect their own businesses against foreign competition. 56 Tariff Is a tax on foreign goods imported into a country 57 Quota Is a limit on the number of foreign goods imported into a country. 7

8 58 Business Plan Is a document setting out what a business does and what it hopes to achieve in the future. 59 Business Planning Is the process of producing a business plan 60 The purpose of business planning 61 The main sections of a business plan 62 Problems of Business Planning Help set up the business successfully establishing a new business involves lots of decisions and often the person making them is inexperienced. By planning, entrepreneurs have to think ahead and gather data. This helps them assess the risk of various decisions and hopefully make better decisions. Raise finance a business plan is useful to show to investors as they would want to see what the managers intended to do with the money that is to be invested. They would want to understand why the managers think the business would succeed. Set objectives a plan will set out what the business wants to achieve. This will help provide a clear target for everyone in the business and increase motivate and help with decisions as everyone knows what they are trying to achieve. Co-ordinate actions a plan will set out how an objective is going to be achieved, what resources will be required, what the time frame is, what the targets for different parts of the business are. The plan will therefore co-ordinate the various activities within the different parts of the business. Background information on the founders and investors and their previous experience. An analysis of the market and the firms expected position within it; this should include a detailed analysis of the customers that will be targeted. The firms objectives Details of the price it will set and expected sales. An explanation of how the business will compete against its rivals how it will be competitive, and what makes it better that the competition. An analysis of the financial position of the business, including forecasts of profits and cash flow. Uncertainty it is not always easy to look ahead and predict what is going to happen in a market or to estimate future sales figures with any degree of accuracy. Lots of predictions that are made in the plan could change which makes the plans out of date. Lack of experience people starting their own business may not have the experience to compile a sufficient business plan or plan ahead effectively. Bigger businesses can use experts to produce business plans and consult with new businesses may not be able to afford this. Change business plans need to regularly reviewed and updated which can take time and money. This can prevent the business from 63 Reduce the Risk of Business Planning focusing on running the business if they lack the sufficient resources to regularly review and update the business plan. To reduce the risk of business plans going wrong, businesses can Research the market thoroughly Talk to experts and consultants (if they can afford it) Plan for a variety of possible outcomes Regularly review and update the plan so that it remains relevant and any problems are spotted quickly. Not all the risks can be removed but they can be reduced or at least prepared for and better planning helps do this. 64 Variable Costs Are costs that change with output. E.g. if a café produces more sandwiches, it will need more bread. Bread is therefore the variable cost. 65 Fixed Costs Are costs that do not change with output. E.g. the rent of a building will be fixed for a given period. The rent will not change regardless of how much is being produced. This does not mean that fixed costs never increase, but they do not change with output. 66 Total Costs Fixed costs + variable costs 67 Revenue Is the income that a firm receives from selling its good or services. It is also referred to as turnover it is measured by Number of units sold X Price E.g. if 200 units of a product are sold at 5 the revenue would be 200 x 5 = 1,000 (it is important to include the to get full marks) 68 Profit and Loss Revenue total costs if the costs are greater than the revenue this will result in a loss for the business. It is often measured over a given period, normally a year. However, it could be separated for each individual project. 69 Business expansion Is a common objective of most established businesses and occurs when the firms gets bigger. 70 Measuring the Size of a Business Value of sales is also called revenue or turnover. The bigger the turnover, the bigger the business. It could also increase the firms market share. Value of the business can be measured by calculating the value of the businesses assets (what it owns) minus its liabilities (what it owes). Another way is to calculate the value of its shares. This is called market capitalisation. Number of employees some businesses do not sell their products (e.g. NHS) these will be measured using the number of employees. 71 Market Capitalisation Measures the value of all company s shares. Market price of a share x the number of shares. 8

9 72 Methods of Expansion 73 Internal Growth (Organic) A business may expand through internal (organic growth) by selling mores of its own products or through external growth (inorganic growth, integration) by joining with another business. Can be done in several ways. Franchising, opening new stores, e- commerce or outsourcing. Internal growth tends to be slower that external growth, but may be more manageable. Joining with a new business, changes the size of the business suddenly with new staff and different ways of doing things. 74 Franchise Occurs when a franchisor sells the rights to its products to a franchisee; this is usually in return for a fee and percentage of turnover. Advantages of selling a franchise Disadvantages of selling a franchise Can grow quickly. Franchisee provides some of the finance. Franchisees motivated as they are running their own business. Lost some control. Danger of problems with one franchisee affecting the whole brand. Have to share profits. Advantages of buying a franchise Disadvantages of buying a franchise Established brand. Access to training and supplies. Share marketing costs. Learn from other franchises. Tried and tested business established customer base. Have to share profits. May have to work within franchisors guidelines. Have to contribute to group marketing. Sales may suffer if another franchisee gets a bad reputation. 75 Franchisee Buys a franchise usually in return for a fee and percentage of turnover 76 Franchisor Sells a franchise usually in return for a fee and percentage of turnover 77 New Stores This is where the business would use the same formatting and open up the same business in another location. This is slow method of expansion, but allows the business to retain full control. 78 E-Commerce Is the act of buying or selling a product using an electronic system such as the internet. Advantages of e-commerce Disadvantages of e-commerce Cheaper locations can be sort, as no shop front is needed could use own home. Opens up to a larger target market (global) Employment costs could be cheaper as less staff may be required. Increase in Click and Collect makes it easier to distribute products. Can add another channel to access the market if you already have a physical store. Cost of setting up a sufficient website to deal with e-commerce. Competition is now global, so can push prices down. If you have a physical product, you have to consider the distribution of the product and the cost of it. Online sales could affect the sales in your physical store if you have one. 79 Outsourcing Occurs when a business uses another business to produce for it. Used when: A business does not have the time to produce the products Does not what to take the risk of expanding its own production 80 External Growth (Integration) (Inorganic) facilities. Does not have the finances to expand and does not want to miss a market opportunity. They must be careful to control the quality and it may cost more than producing the items themselves in the long run. Occurs when two or more firms join together to become one. This is fast paced growth and rapidly increases the businesses market share. 81 Merger Occurs when two or more businesses join together to form a new business. 82 Takeover Occurs when one business buys control of another business. 83 Types of Integration Horizontal Integration occurs when one firm joins with another firm at the same stage of production this allows the business to increase its market share and influence on the market. Vertical Backward Integration occurs when a firm joins with one of its suppliers. This can ensure good and reliable supply of raw materials for production. Vertical Forward Integration occurs when firm joins with of its distributors. This can ensure that it can control the selling of its products. Conglomerate Integration occurs when one firms joins together with another firm in a different type of industry, e.g. Rentokil doing pest control, parcel delivery and security. This spreads the risk of the business over different industries if one market was to fail. 84 Advantages of Business Expansion It can lead to economies of scale, which are benefits that come with a larger size. It can lead to more power in the market. E.g. retailers are more likely to be more willing to stock the products of a well-known brand. Big firms have more status. This can make it easier to launch new products Big firms are more expensive so it makes it more difficult to takeover, so those in charge feel more secure. Rewards for staff are often linked to the size of the business, so everyone may support the success of the business. 85 Economies of Scale Occur when a business s unit costs of production fall as its output rises and the business expands. There are different forms of economies of scale. Purchasing as you get bigger you produce more and therefore need more raw materials. Suppliers administration costs are reduced per unit on larger orders as they only have to process an order once instead of a lot of times for smaller orders. 9

10 86 Disadvantages of Business Expansion Technical Bigger firms may be able to purchase specialist equipment that makes production, cheaper and more efficient such as a production line. They may not be able to justify this as a smaller business. Specialist Managers as a small business the entrepreneur would normally fulfil all roles in the business. A larger business could employ specialist for each role, such as a marketing manager or a finance director. Financial larger firms can get more favourable terms when trying to borrow money. Decision making becomes slower as there can be more people to consult due to more levels in the hierarchy. This could result in the messaged becoming distorted as they pass through the chains of communication. Employees may feel isolated and no longer feel special or important to the organisation. This may mean they become demotivated. Controlling and co-ordinating the business that has many customers and products in many locations can be difficult and may be less efficient. Occur when the cost per unit increases as a business expands. 87 Diseconomies of Scale 88 Unit cost Measures the cost of a unit. These are also called average costs Unit cost = total costs output 89 Economies and The costs of a business cannot continue to fall forever. At some stage in Diseconomies of the process the reductions in unit costs will decrease and eventually Scale lead to an increase in unit cost. Output (units) Total Costs ( ) Unit Cost = Total costs Output ( ) 100 1,000 1, = 10 Economies of Scale 200 1,600 1, = ,100 2, = ,400 2, = ,000 4, = 8 Diseconomies of Scale 90 Expanding Abroad This enables the business to target more customers and potentially sell more. However new markets brings new challenges. The law and regulations facing businesses may differ. The existing businesses may resist new entrants into the market. Customers buying habits and expectations may be different. 10

11 2) Influences on Business (papers one & two) 1 Information and Communications Technology (ICT) 2 Types of information exchanged Is the computing and communications systems that a business might use to exchange information with stakeholders. E.g. Tablets, smartphones, PC s cloud computing networks allowing more information to be exchanged quickly. There will be various types of information that need to be exchanged with different stakeholders and the type and importance will influence the way in which this is done. Prices and product details (customers) Resources required (suppliers) Customer needs and complaints Ideas and suggestions (employees) 3 Websites Uses to promote and sell a business s products and to collect information from customers and other stakeholders. 4 Intranets Are communication networks which can only be accessed by an organisation s employees. These are often operated by many large companies. 5 Extranets Are similar to intranets but can also be accessed by other organisations such as suppliers. Used to communicate with each other, to monitor production and the quality of goods and services, and to place orders with suppliers. Can provide access to many other types of information and can help cut down on the amount of paperwork. 6 The Impact of ICT on Business Activities Rapid developments in technology have led to changes in the ways in which ICT is used, with implications for the way businesses operate. The location of employees can now work more flexibly from home or from a range of different offices, or factories. In addition many businesses can now locate elements of their business overseas such as call centres to reduce costs. Some of these jobs are now being done by computers to reduce the amount of employees. Collecting, storing and analysing information businesses no longer have to own and manage physical servers on their own property. Many businesses now operate using Cloud Computing. These services can enable a business to analyse the information they store quickly and accurately e.g. identify changes in consumer behaviour 7 Cloud Computing Is a general term for the delivery of specialist computing services, such as storage of very large amounts of data provided by businesses using the internet. 8 Changes in ICT Has led to important and large changes in two aspects of business activity. E-Commerce and Digital Communication. 9 E-Commerce Is the act of buying or selling a product using an electronic system such as the internet. Businesses selling to customers or to other businesses using their websites. Individuals selling to other people directly through websites such as ebay or Amazon. E-Commerce can provide much of a business s growth as it offers access to wider markets. A business must operate a good quality website with a payment system (e.g. PayPal) and make it products accessible to customers throughout the world. 10 M-Commerce Is the buying and selling of products through wireless handheld devices such as smartphones. 11 Digital Communication 12 Digital Communication with Stakeholders Is the transmission of information electronically between computing devices. /Texts Webchat - Is a simple means of communications in real time using only web browsers (Firefox, Chrome Internet Explorer) Teleconferencing and video-conferencing special software can be downloaded to allow businesses to connect with people in lots of different locations all at once for meetings. Apps (applications) - Are pieces of software designed for a specific purpose and for use on smartphones and tablets (Skype, Whatsapp) Social Media - Are methods of online communication such as websites and applications. They share information and help to develop social and professional contacts. Digital communication has changed the way businesses communicate with their stakeholders. Customers and potential customers businesses now have far more contact with customers and potential customers than in the past. Lots of communication can now be done through social media, such as asking questions or making complaints to promoting the products of the business particularly for small businesses with limited resources. Companies now employee people with specific responsibility for their online presence. Amazon has gone as far as reducing labour by using the Dash instant order buttons. Suppliers and employees many business operate systems to automatically re-order supplies, this can reduce storage costs, but also ensure there are sufficient supplies. Technology can also send communications to employees or managers such as sensors to detect the number of customers, this can then be used to predict future trends and ensure sufficient staff are available. 11

12 Other stakeholders PayPal and Intel now hold online shareholder meetings, meaning the attendance is now greatly improved resulting in the opinions of more shareholders. 13 Ethics Refers to whether a business s decisions are thought to be morally right or wrong. An ethical decision is made on the basis of what is judged to be morally right. 14 Ethical Behaviour Requires businesses to act in ways that stakeholders consider to be both fair and honest. 15 Profit Measures the difference between the values of a business s revenue and its total costs. 16 Questions asked by stakeholders 17 How can a business behave ethically? Are suppliers (especially small businesses) paid on time, or is payment delayed? Are employees treated fairly? Are they paid well? Is child labour used in overseas factories? Are consumers aware of the materials used to make products? Is the business s advertising truthful and fair? Are its products harmful? Even though the business is acting legally, some stakeholders will still feel the business is being unethical. E.g. paying managers, high salaries whilst other employees are only on the living wage. Businesses can behave ethically by considering the whole community and not just profits when making decisions. Businesses can behave ethically in each of the four functional areas. Ethical Marketing behave honestly, fairly and responsibly in all marketing activities. E.g. avoid targeting children with advertisements for products with potentially harmful side-effects, such as junk food. Ethical Business Operations managers may choose not to buy resources from suppliers that are involved in unethical practices such as child labour or choose to manufacture products that can be recycled. Ethical Human Resources not using zero hour contracts, offering employees the opportunity of high-quality training, despite the cost, paying the living wage. Ethical Finance investing in the local community or pay employees to undertake charitable work during normal work hours. Paying the correct amount of tax 18 Zero Hour Contracts Using zero hour contracts means employees do not know how many hours, if any, they will be asked to work each week. 19 Trade-off between Ethics and Profits. Behaving ethically, may mean that profits will decline, at least in the short run. Ethical decisions often make it more expensive to produce and sell goods and services. For instance: Using environmentally friendly resources or fair trade products, which are more costly. Providing employees with high-quality training (after which they make take a job elsewhere). Offering lower-priced products to certain groups such as pensioners. Acting in a socially responsible way by taking into account the needs of all stakeholders and not just shareholders. Having a reputation as an ethical business can help a business to attract large numbers of customers, despite relatively high prices. By paying good wages you can attract better quality employees leading to improved quality. Businesses that are seen to be unethical can suffer from bad publicity, leading to a damaged reputation, reducing its sales and profits. 20 Fair trade Products Are those for which customers pay higher prices and offer better trading terms, such as payments with orders. The aim is to improve the living standards of people in poorer countries where the products are produced. 21 Social Responsibility Is an approach to managing businesses in which the interests of all groups in society are taken into account when making decisions. 22 The effects of business activity on the environment. 23 How businesses and consumers can show environmental responsibility. Traffic congestion with increased numbers of vehicles on the road, this results in externals costs through the increased CO 2. It also results in additional costs for business as they have increased fuel costs or costs due to delays in production or deliveries. Air and noise pollution production in factories generates noise and air pollution resulting in problems for local animals. Traffic congestion businesses are seeking to produce cars that produce fewer emissions or choose transport methods that do not cause any pollution. Air and noise pollution business have targets they have to meet and are fined if they failed to do so. Recycling business are increasingly designing products that can be recused or recycled. E.g. plastic bottles, paper or metal. Building are now dismantled instead of demolished so bricks can be reused. Disposing of waste businesses aim to reduce the amounts of waste that result from production and consumption of their products. This could involve reduced packaging, or products that last longer, so fewer are produced. Sustainability businesses can produce using sustainable methods and consumers can support this by choosing to buy from producers to produce this way. 12

13 24 Sustainability The use of scarce resources many resources are scarce or nonrenewable, such as coal, oil or gas. This means that is limited. Firms are now looking at using renewable materials such as wind or solar power. Global warming is the gradual heating of Earth s surface, oceans and atmosphere. Governments have emission targets that must be met and they pass these onto businesses and fine them if they are unable to. 25 External costs of Production 26 Consumers decisions and the environment Advantages of environmentally friendly and ethical policies Can result in some positive publicity and can be used in advertising. Can charge higher prices for products and services as customers are more willing to do business with you. Can win more customers if you are more ethical and environmentally friendly than competitors. There is also a trade-off between a business acting sustainably and ensuring that they make a profit. They can experience the same benefits and drawbacks as in the trade-off with being ethical and profits. Are costs which arise when a business s activities result in harmful effects on other people not directly involved in production e.g. local residents. It is easy to think that businesses are solely responsible for environmentally responsible methods of production. Consumers can also help protect the environment by: Recycling products at home to reduce the amount of waste they produce. Buying environmentally friendly products whenever possible. This encourages businesses to produce more of them and less of others. Complaining to businesses (maybe on social media) whenever they are seen to cause damage to the environment. Disadvantages of environmentally friendly and ethical policies Can increase costs, such as employment costs or cost of raw materials. (it is cheaper to get new than recycled) Must ensure that all aspects of the business are ethical and environmentally friendly to avoid damaging publicity. 27 The economy Is made up of millions of individual consumers, many thousands of businesses and governments. All take decisions on what to buy and produce. 28 Economic climate Is a term that refers to the state of the economy. This term considers whether an economy is: Producing a greater or smaller quantity of goods and services. Providing consumers with falling or rising incomes. Experiencing a rise or fall in the amount that consumers can spend on goods and services. Offering more or fewer jobs for people. 29 An improving economic climate Rising levels of employment, production, consumer incomes and spending. 30 A weakening economic climate Falling levels of employment, production, consumer incomes and spending. 31 Interest rates and the economic climate Changes in interest rates can affect the economic climate of a country. They have this impact because they affect decisions taken by both consumers and businesses. 32 Interest rates Refer to the cost of borrowing money or the reward for saving money, expressed as a percentage. 33 Consumers and changes in interest rates 34 Businesses and changes in interest rates A change in interest rates will have two broad effects on consumers decisions. The amount they want to save and spend. Saving by consumers a fall in interest rates will lead to some consumers deciding not to save as the interest they will receive will have been reduced. Spending by consumers as well as spending their savings, consumers may also be more willing to borrow money to buy expensive items such as a house or car. This is because the cost of borrowing is cheaper due to lower interest repayments. A rise in interest rates will have the opposite effects. Some businesses rely heavily on borrowed money to finance their activities. Sometimes this is for a short period to pay for raw materials or for longer periods to pay for new factories. Borrowing large amounts of money over long periods means businesses can be affected significantly buy interest rate changes. Rising interest rates businesses may face large increases in the amount of interest they repay on existing loans. This could increase it costs and reduce profits. It could result in a business being unable to repay its loans and probably stop trading. Falling interest rates this would reduce the cost of borrowing and help a business to improve its profits. This is not favourable however, for businesses with large amounts of savings. Businesses are likely to increase spending and expansion when interest rates are low. Businesses can protect themselves by negotiating loans with fixed rates of interest. However, these are likely to be higher rates of interest that the current market rate. 35 Overdraft Is a flexible loan which businesses can use, whenever necessary, up to an agreed limit. 13

14 36 Levels of employment If the economic climate is strong and improving, there is likely to be a rising level of employment as more workers are needed. Wages may also rise. On the other hand, during a period in which the economic climate is weakening, employment levels and wages may fall. The level of employment can be measured by calculating the percentage of people aged in employment. Increases in the level of employment have effects on businesses. The possibility of higher sales if more people have jobs, it is likely consumer spending will go up. Also this could represent an increase in wages meaning that the spending power of consumers is greater so can buy more. Increased employment costs labour can become scarce, resulting in higher wages especially for skilled labour as businesses compete to employ the remaining available labour. 37 Consumer spending Refers to the value of goods and services bought by consumers over a time period usually a month or a year. 38 The effects on business of changes in consumer spending Business that produce or sell essential products such as basic foods, do not experience larges falls in sales when consumers incomes fall. Equally they do not benefit from large increases when consumers incomes rise. Business that produce or sell non-essential products such as luxury holidays or organic foods do experience large falls in sales when consumers incomes fall. Generally when incomes increase they benefit from increases in sales. 39 Income elasticity Determines how sensitive products are to changes in consumers incomes. E.g. a fall in income could lead to a fall in demand for luxury holidays or a rise in demand for supermarket own brand products. Sensitive Luxury travel, fine wines, new kitchens and bathrooms, gym memberships and sports cars. Non-sensitive Basic foods (bread milk eggs), tobaccos products (addiction) buss travel, petrol and tap water. 40 Globalisation Is the trend for markets to become worldwide in scope. This has changed the ways in which many businesses operate: The volume of trade between countries has increased. People have moved overseas to live and work and money have flowed between different countries. Multinational companies (MNCs) have grown in importance and have supplied products to markets across the world. 41 Why has the pace of globalisation increased 42 Benefits of globalisation 43 Drawbacks of globalisation 44 How UK businesses compete internationally Incomes have risen, allowing consumers in many countries to buy goods and services produced by MNCs. The cost of transporting products has fallen sharply, making it impossible to move raw materials and finished goods around the world. Electronic communications have allowed even small businesses to sell products to global markets. Rapid growth growing quickly has allowed businesses to benefit from economies of scale making unit costs cheaper. Inward investment countries benefit from investment from other governments, businesses and individuals such as buy new factories or helping finance transport systems or energy supplies. Cheaper resources due to cheaper transportation, resources can be obtained from the location they are cheaper, such as coal is now imported into the UK as it is cheaper than mining for it. This means that it can help increase businesses profits and make them more price competitive. Fierce competition this can place increased pressure on UK businesses to sell at lower prices. This makes it difficult for UK businesses to compete with businesses who benefit from lower labour costs. This can affect the level of employment. New competitors due to globalisation business find it more difficult to increased or even maintain, their market shares, which results in the influence they can have diminishing. Threat of takeover buying a UK business is a quick way for a MNC to acquire a well-known brand and gain a foothold in the UK market. This can result in UK factories closing as production is moved to areas with lower labour costs. Former suppliers are also affected. UK business can use two major approaches to allow them to compete internationally. Improving the design of their products this can give the image that their products are superior to those produced by competitors. A business can charge a higher price if consumers prefer the design of their products. Alternatively, a business may seek to maximise sales by offering a product with a better design at a similar price to rival competitors. Quality and price a high quality product does not need to be expensive or highly sophisticated, it merely has to meet the consumer s needs. By ensuring that quality matches price a business is more likely to succeed in competitive international markets. 45 Quality Is the extent to which a consumer is satisfied with a product. 46 Price Is the amount a business asks a customer to pay for a single product. 14

15 47 Exchange rate An exchange rate is the price of one currency expressed in terms of another. 48 Effects of a rise in the exchange rate 49 Effects of a fall in the exchange rate The exchange rate (in pounds) Example Rises 1 originally worth $1.20: increases in value to be worth $1.50 Falls 1 originally worth $1.20 decreases in value to be worth $ = $1.31 or 1 = 1.12 If the exchange rate of the pound rises against other currencies, it means that fewer pounds are needed to purchase goods and services from other countries. This makes imports cheaper. At the same time it makes UK exports more expensive and therefore sales are likely to decline. If the exchange rate of the pound falls against other currencies, it means that more pounds are needed to purchase goods and services from other countries. This makes imports more expensive. At the same time it makes UK exports cheaper, and therefore sales are likely to increase. It also means that business that import raw materials from other countries could have reduce profits. Prices of UK exports overseas (in foreign currencies) Increases in prices Fall in prices Prices of imported products in the UK (in pounds) Fall in prices Increase in prices 50 Legislation Is a set of rules that governs the way society operates, it is another term for laws you do not need to quote the names of these laws or the dates they were introduced., but you should aim to understand how they affect businesses. 51 Employment law Minimum (living) wage workers over 25 must receive the living wage. Workers under 25 must receive the national minimum wage for their age group. The same rule apply for both part-time and full-time workers or temporary workers. Equality Act 2010 states that employees cannot be discriminated against in the work place based on: age, disability, race, gender (or reassignment), marriage or civil partnership, religion, pregnancy, sexual orientation. 52 How business are affected employment laws Other employment laws pregnant employees entitled to 52 weeks leave, with the job kept open to return to. Legal right to paid holiday up to 5.6 weeks. Limited to work 48 hours per week unless agreed to work more. Employee s right to choose whether to belong to a trade union. Have to be given a contract of employment. Can have time off work such as for when a child is ill. Benefits Workers could be motivated by higher rates of pay or having their employee rights met and could lead to more efficient workforce profit could therefore increase. Can ensure that they employ the best candidate regardless of age, gender, disability. Allowing staff to meet with trade unions could create good relationships, meaning disputes could be reduced. Drawbacks Minimum (living) wage increases can impact on profit levels as employment costs increase. Employers could decide to employ less people leading to reductions in output. When recruiting staff, firm may have to pay HR specialists to ensure that they do not break any rules. Meeting employees rights can lead to additional costs, such as maternity pay (although it can be reclaimed) 53 Health and safety law The health and Safety at Work Act 1974, states that employers must ensure that they safeguard all their employees health, safety and welfare at work it covers main business activities. The installation and maintenance of safety equipment The maintenance of workplace temperatures Giving employees sufficient breaks during the working day Providing protection against dangerous substances Fitting guard on dangerous machinery Writing and displaying a safety policy The act also requires employees to follow all health and safety procedures and to take care of their own and others safety. 15

16 54 How business are affected by health and safety laws Benefits Avoid having to pay large fines for conforming. Can help motivate employees. Drawbacks Increase costs as business are likely to have to invest in training in health and safety matters, or in installing health and safety equipment. It can be time consuming to abide by these laws, taking a business away from core business activities. 55 Consumer law Business can treat their customers unfairly in a number of ways: By selling goods and services that are not as described e.g. incorrect quantities stated on the packet. By selling products that are unsafe e.g. toys containing unsafe chemicals such as lead. By selling products that do not work properly or at unfair prices. By selling information about consumers to other business without their permission. 56 Examples of consumer law Consumer Rights Act, 2015 provides consumers with clear rights and protection when buying goods and services. The Consumer Rights Act covers: Product quality must be of a satisfactory quality (not broken), fit for purpose and as described. Consumers have the right to reject products that do not meet these standards within a reasonable time. Returning goods Repairs and replacements Delivery rights with many product now been delivered, consumers are protected against products going missing and late delivery. Finally the Consumer Rights Act protects consumers against unfair terms in contracts. Labelling of products labels must state what ingredients the packaged food contains. Weights and measures must be on the package and be correct. It is illegal to give consumers incorrect information on packaging and labels. Buying products using loans laws stops businesses charging very high rates of interest to consumers if they take out a loan to purchase expensive products. It also allows them a week to change their minds. Using information correctly prevents people looking at information on computers they have no right to read. Information must be stored securely and avoid any theft or loss. It prevents personal details being sold without the consumer s permission. 57 How business are affected by consumer laws Safety of products states what can be in certain products e.g. such as food. Prevent the selling of unsafe products and makes the business liable for injury caused by their products. Benefits Protection offered to consumers can make them more willing to purchase expensive and complex products such as cars. Encourage business to produce goods that are safe, fit for purpose and as described. Means that businesses compete on a level playing field. Drawbacks Increase business costs of production, such as for imposing standards or requiring businesses to deliver products promptly. 58 What is a market? A market exists where there are buyers and sellers that come together to exchange goods and services and to set prices for goods and services. Markets can be geographical such as the Trafford Centre or online such as music. 59 What is competition? Competition exists when more than on business is attempting to attract the same customers. 60 Different levels of competition Number of firms Examples Products Prices Other means of competing Businesses face different numbers of competitors, some businesses trade in markets with many competitors other face few rivals and then very few face no competition. A large number of small (or possibly mediumsized businesses) Indian restaurants Painters and decorators Estate agents Products can be similar or different from each other Generally low, especially if the products are similar Advertising High-quality service Convenient locations A few larger firms Mobile phone manufacturers, Supermarkets Products will be different or advertised to appear as if they are different Can be high, especially if firms compete in other ways Advertising Launching new products A single business (known as a monopoly) Water supply Railways between some destinations Only one main product is available Prices can be high as little or no competition These business face little or no direct competition 16

17 61 The risks faced by businesses 62 How businesses can minimise risks Internal risks A business s employees may refuse to work known as going on strike. A business may suffer fire or theft (physical or through IT) Suffer low profits due to bad publicity Lose most talented employees to competitors External risks New competitors could enter the market Natural disasters such as floods and earthquakes these could cause a business to cease trading Governments can pass laws that impact directly on businesses national living wage Prepare business plans identifies what might happen so that the business can plan against it Invest in training this can mean that employees are ready to deal with whatever happens, such as dealing with dissatisfied customers, or an IT security alert. Using experts and consultants experts can help identify the risks and have specialist knowledge to plan for them or employ a specialist HR consultant to improve the reputation to avoid falling sales. Selling in different marks operating a policy of diversification means a business can reduce the risk of consumer s fashions choices changing or new competitors entering. 63 Diversification Occurs when a business starts selling new products in new markets. 65 Entrepreneurs and risks Entrepreneurs start businesses for many reasons, including desire to be their own boss, the need to have work, or to earn more money. Entrepreneurs have to be able to manage risks so planning ahead and producing a business plan. They take the risk in return for a reward (profit) 64 Why all businesses face uncertainty Economic uncertainty with businesses unable to forecast when issues such as a recession occur, the impact when one happens can have huge implications for a business. With the Brexit vote, businesses are unsure of what agreement will be made, such as on import and export taxes or on who they can employ. Competitors and uncertainty a competitor might cut their prices significantly, introduce new products or attempt to buy their rivals. It is difficult to be prepared to respond to so many challenges. Social changes and uncertainty changes in society are not always easy to predict. Changes in tastes and fashions can have major implications for a wide range of businesses. They make it difficult to estimate future sales accurately. E.g. Coca-Cola has reduced sales as consumers become more aware of the dangers of sugary products. 17

18 3) Business Operations (paper one) 1 Production Refers to all the activities in managing the transformation process. management 2 Production Is the process of changing inputs such as labour services into goods and services that can be sold. Production does not just relate to manufacturing, but also to supplying services. 3 Job production Is a method of production in which a product is supplied to meet the exact requirements of a customer. E.g. Garden design garden will be unique to that customer and their needs. Tailors suits or wedding dresses will be made to each individual customer s size and choice of material. Personal trainers the trainer will provide a diet and exercise programme to suit the individual customer. Restaurants meals are prepared and cooked to meet the customer s specific needs such as how they want their steak cooked. Advantages of Job Production Disadvantages of Job Production Helps smaller firms to gain an advantage over larger firms. Can be the best approach when it is not possible to use technology One-off products or services allow customers Labour costs can be high as skilled workers are usually needed and training will be required Production costs can be high. It is often a slow process as the business must plan and design each project individually special requirements to be met. High prices can often be charged as customers may be prepared to pay extra for specially designed products It is a flexible production process no two products or services need to be the same 4 Flow production Occurs when an item moves continuously from one stage of the production process to another. E.g. Car manufacturing cars pass along the conveyor belt as each element of the car is fitted. Bottle plant filling each bottle is cleaned, cap fitted, a label is added and it moves on to be packed without stopping. Advantages of Flow Production Disadvantages of Flow Production Low cost of each unit produced due to high level of output and efficiency. High amount of automation with computercontrolled machinery produced very consistent, high standard of quality products. Less need to hold stocks storage costs are lower and less likely that raw materials will be damaged Division of labour the complete job is split up into a large number of small tasks enables each job to be done quickly. Specialisation workers are often specialists in one area of production Set-up costs of buying the equipment are high, especially if computer-controlled robots are to be used. Production problems can be costly as the whole production line may have to be stopped. Worker motivation can be low because they are not involved in make a complete product and doing one repetitive task can become boring as a result of specialisation and division of labour. This can lead to absenteeism and people leaving which can be expensive and disruptive for a business. The basic standardised product cannot be changed without costly and time-consuming changes in machinery. (although advances in technology make it slightly possible to change products) 5 Specialisation Occurs when individuals focus on a limited number of tasks. 6 What to consider when choosing a method of production Businesses should consider The cost The likely level of demand The need for flexible production 7 Efficiency Refers to how well a business uses its resources. If a business has high levels of inputs to produce its output, it is inefficient compared to a business that uses fewer inputs to produce the same output. Efficiency is measured by looking at the cost per unit. An inefficient business will have higher unit costs. The efficiency of a business will depend on factors such as: How well employees are managed if they are well managed and motivated, they should produce more and therefore, the cost per unit should be lower. How good suppliers are if suppliers are reliable and provide goodquality supplies, then this helps keep costs lower. Investment in machinery and technology if a business has goodquality equipment and up-to-date technology, this should help keep cost of production low. The type of production used job or flow production they can also use lean production. 18

19 8 Lean production Lean production techniques aim to reduce the amount of waste in a business. Waste is inefficient; if a business can reduce waste it can reduce its costs. There are many forms of waste in a business. If production exceeds demand, then items may have to be thrown away. Wasted time is inefficient and costs money. In flow production, if workers have to wait to start work because the stage before have not finished, they are wasting time. Any faulty products will have to be re-made, costing money. Holding stocks can be wasteful because they can get damaged or stolen. In addition, holding stocks costs money (warehouse costs), which could be in a back earning interest. Opportunity cost. 9 Just in time production Means producing to order the business only makes an item when there is a customer for it. 10 Kaizen Means continuous improvement. It is an approach in which all employees are involved in improving how things are done. The changes are often very small, but over time can add up to significant improvements. By involving employees the business learns from the people who actually do the work. 11 Managing stock Stocks are important because a business needs them to operate and produce. Having stocks can also be attractive because it may mean you have a wide range of products to show customers. 12 Just-in-time stock control You only store the materials you are about to use in production, based on having a customer with an order. Advantages of JIT Disadvantages of JIT Cuts stock-holding costs and increases efficient use of factory space. Capital expenditure that was used to pay for stocks can now be used more efficiently in other parts of the business. Close contact with suppliers at all times leads to better, more efficient supplier relationships (e.g. wiliness to supply goods at very short notice). Improves efficiency of cash flow by reducing the time between paying for supplies and receiving payment from customers. Less time is spent on checking and re-working the product of others as the emphasis is on getting the work right first time. There is little room for mistakes as minimal stock is kept for the reworking of a faulty product. Production is very reliant on suppliers and if stock is not delivered on time, the whole production schedule can be delayed. There is no spare finished product available to meet unexpected orders, because all products are made to meet actual orders however JIT is a very responsive method of production. Cost of ordering supplies could increase as so many small orders are made rather than one order and one large delivery of supplies. 13 Just-in-case stock control Holds stocks just in case there is a delay from supplies or a sudden unexpected increase in demand. Advantages of JIC Disadvantages of JIC Can meet sudden increases in demand as has spare stock. Lower risk if there are problems with suppliers. Buy bigger quantities and may get price Holds stock that might go out of date or need to have price reduced to sell. Higher stockholding costs as it holds stocks just in case of an increase in demand or problems with suppliers. reductions (bulk discount); less transport costs as less frequent deliveries. Less external costs, from congestion and pollution caused by deliveries leading to good reputation. 14 JIT vs JIC Businesses need to balance the advantages of JIT (the leaner) with JIC. Neither of these approaches is necessarily better, but they offer different advantages to different types of businesses. 15 Working with suppliers All business will use supplies. These supplies may be: General items used to keep the business going, such as energy, telephone and cleaning products. Materials used in the production process for example, a car will include thousands of different supplies, such as engine parts, tyres, paint and seats. Major purchases used to create the production process for example, the production line equipment in the car factory. The procurement, of supplies is an important part of operations management. Managers will want to make sure that their money is used wisely and not wasted and that the right supplier is chosen. 16 Procurement Involves selecting suppliers, establishing the terms of payment and negotiating the contract. 17 The supply chain The supplier of a business will also tend to have its own suppliers and this creates a supply chain. Supply chain refers to all the businesses, people and activities that take part in the production processes from the start until it gets to the customer, With globalisation, these can be more complex across different countries, or more localised in the UK. 18 Why suppliers matter If suppliers can deliver products on time, this means the business has the stocks that it needs and can meet its own customer requirements. If suppliers can produce and deliver quickly and reliably, a business can hold relatively little stock because it can be replaced; this reduces its stockholding costs. 19

20 19 Factors affecting choice of suppliers It a suppliers provides good-quality products, this will help the reputation and quality of the business. It will not have problems with defects and returned items so wastage is reduced. If the supplier can produce efficiently, this will help reduce the costs of the business and enable it to provide its products, at a better price or increase its own profit margins. The costs The quality The range of products that can be supplied The speed of delivery The flexibility of the supplier (for example, in terms of the quantities that can be produced and the time of deliveries) The reliability (that is, the ability to deliver within a given time slot) The reputation (that is, what have other said about working with thins business) The payment terms (for example, how long would the business have to pay) The contract terms ( for example, what financial compensation would be paid if deliveries were late) 20 Logistics Refers to the movement of goods, services, information and money throughout the production process. 21 Trade-offs in the supply chain It may cost more to get better quality (although this may save money later on as it may lead to fewer problems with customers) It may cost more to get supplies quicker To benefit from reduced costs, this must be balanced against the quality of the service. 22 The meaning of quality A quality product is one that meets the customer s requirements. 23 Meeting customer expectations 24 Measuring quality and identifying problems Achieving quality involves hitting targets that have been set by the business in order to meet customer expectations. The target set will depend on the nature of the business. A hospital might set targets for the length of time patients are kept waiting. An airline might set targets relating to the percentage of planes taking off on time, or landing on time. Once a business has set standards for quality, it can measure whether or not these have been achieved. To measure performance it may ask different groups: Customers ask them to complete surveys or speak to the manager. Mystery visitors some business employ mystery shoppers to use the product in secret to test the quality of service. Staff could feel like they are being spied on. 25 The consequences of quality problems 26 Maintaining consistent quality 27 Total Quality Management (TQM) Staff can be asked to check the quality of work done at each stage of production. Quality assurance focuses on preventing mistakes occurring. This involves training the employees to inspect their own work, choosing the right suppliers and checking work at each stage to make sure faulty work is not passed on. If products do not meet the standards set, this will lead to: Customer dissatisfaction customers may not buy the product again or recommend it to others; if customers are unhappy, they tend to tell other and this damages the brand The cost of recalling faulty products customers need to be told about any mistakes, and the business must pay to get the products handed back in. The cost of replacing goods new items may have to be produced to replace the old ones. The cost of waste if there is poor quality, the items may have to be thrown away. The cost of goods that are produced but no one wants The cost of legal action if the business is sued for poor quality To maintain quality, a business should: Make sure its suppliers are reliable and that the products they use are of good quality and meet their needs. Train staff so they know how to do their jobs properly and what the desired standards are. Invest in equipment so that staff have the equipment they need to do the job well. Inspect the products at each stage of the process to make sure there are no defects it s easier and cheaper to catch any problems along the way than to rely on finding them at the end. Involve staff in improving the process e.g. Kaizen Is an approach to quality in which everyone is focused on preventing errors occurring and ensuring quality at each stage of the production process. Required everyone in the business to be working towards ensuring the quality targets are met. It stresses that everyone has a customer and that may be the next employee who you pass work onto. Each employee must ensure that they pass on work that meets the quality targets. Not all employees will want the extra responsibility and they may not be skilled enough to identify mistakes in their own work 20

21 28 The costs of improving quality 29 The benefits of maintaining quality 30 Problems achieving consistent quality The costs of achieving better quality include: The costs of inspection and checking known as quality control The costs of training staff to check their own quality The costs of selecting better suppliers Image /reputation having good quality products or services will help maintain or improve the reputation of a business. Particularly if the quality is deemed superior than that of competitors. Additional sales customers are more likely to come back and recommend a business if they know they can trust the quality. You always know what you are going to get at McDonalds or Starbucks, but at a new café it is not easy to already know the quality. Higher price customers will be more willing to pay for reliability and for the reassurance that what they buy will work and do what it is supposed to. Saves costs avoiding mistakes saves money. It does not have to rework/replace faulty products if the product is dangerous, they could even be sued by customers. Easier to launch new products as a business has built up a good reputation it makes it easier for customers to trust new products that it launches. It can be difficult to maintain and monitor quality in your own business. It can become more difficult if you franchise your business or outsource some of the production process you lose an element of the control over quality, this can mean that quality may suffer. 31 Customer service Is the part of a business s activities that is concerned with meeting customers needs as fully as possible. 32 Methods of good service The product providing products or services that meet the needs of customers is a form of providing high-quality customer service. Reliability good should be reliable and do exactly what is expected of them. E.g. paint should last for years without fading. Safety ensuring that the product is safe is important as customers worry about safety when buying some products/services e.g. like air travel. Customer engagement positive customer engagement occur when customer have a good experience from their contact with the business. The customer is more likely to buy from it and recommend it to others. Good product information customers expect clear information about goods or services. This helps them make the right decision. It is therefore important for staff to be well-trained. Post-sales (after-sales) service businesses should deal quickly and 33 Benefits of good customer service 34 Why does poor customer service occur? fairly with complaints, deliver products without delay, exchange goods that are faulty for do not meet the customers needs and repair goods (free of charge under guarantee). Premises they should be clean (e.g. food places), customers should be able to find their way around (e.g. hospitals), disabled customers should be able to access the business and there should be sufficient services like toilets. Different methods of payment small business can increase sales by accepting other methods of payments such as cheques, credit cards and also providing small quantities of products at proportionally low prices. Managing customer expectations if the shop should open at 9am then it should do and not at 9:15am. In a restaurant you expect to be served in a certain time and receive your food shortly after. Businesses need to think carefully about what they promise. It helps a business to be competitive - especially if they can t compete on price - Increases customer satisfaction customers feel good if they have a good experience, so less complaints are made, staff feel happier. Attracts new customers if the product is similar to competitors, then good customer service will attract customers. Increases customers spend customer may be more willing to spend with a business that provides good customer services. Increases market share as you get more customers, market share could increase. This increases your influence in the market. Increases customer loyalty you are less likely to lose customers when new products or competitors come into the market. Increases profitability all of the above leads to an increase in profits. Businesses promise too much customers expectations are raised above what the business can deliver. Customers are dissatisfied when this happens. Poor communication information about the level of service if not clear and customers expect more than what is actually provided. E.g waiting times at a GP surgery. If delays are not communicated in advance, customers do not expect them and are unhappy. Poor management the business may have the resources to provide good customer service, but if the management of them is poor, the level of service drops. E.g not enough staff allocated to the right jobs. External factors this could be out of your control, such as delays from suppliers, or weather conditions that affect the level of customer service. 21

22 35 Dangers of poor customer service 36 How ICT can help businesses to offer good customer service Dissatisfied customers they will not return to buy from the business. Problems attracting new customers. There will be little word of mouth from current customers. A loss of revenue and profits Costs, if a business has to reimburse customers because they have been sold the wrong items or given the wrong information. Websites can give the customer information about the business and the products sold. It can help advertise the business to a much larger group, leading to increased sales. It can include FAQ, this can allow customer to find out answers to questions they may have. It can offer advice to customer about problems they may have E-commerce and M-commerce customers can view products from 24/7 from all over the world. They can see other people s reviews of products. They can ask questions of online support teams. They may receive suggestions based on their purchases. Could benefit from lower prices online. Social media helps build awareness of the product/brand. Allows customer another interface to interact with the business. Can get feedback from customers. Data analysis it can help a business rebrand a product, or alter the price based on the data provided. It can help improve decision making in the business as they can understand the customers and their buying behaviour. They can track the effectiveness of their marketing. Not all employees will be skilled enough to use the technology. It may mean training is required or outside specialists may need to be paid for. 22

23 4) Human Resources (paper one) 1 Organisational structure 2 Why businesses have organisational structures Is the way a business arranges itself to carry out its activities. Business have to organise themselves to be able to carry out their activities effectively. It is important that everyone in the business knows: What their duties are. The person or people that they have to report to. The other employees in the organisation for whom they are responsible. 3 Organisational chart Is a plan showing the roles of, and relationships between, all the employees in a business. 4 Line manager Is an employee s immediate superior or boss. 5 Authority Is the power to control others and to make decisions 6 Job roles Job role Directors Managers Team leaders (supervisors) Shop-floor workers Responsibilities Establish the business s overall goals Set long-term plans and targets for the business Work to achieve the short-term and long-term targets set by the directors May be responsible for a function within the business, for example, marketing or finance Use employees and other resources in the best way possible. Help managers to achieve their targets by reporting any problems and passing on instructions Take simple decisions, such as allocating jobs among different employees Carry out the business s basic duties or activities. These could be working on a production line, serving customers in a shop or basic office duties. 7 Span of control Is the number of employees managed directly by another employee Wide Span of Control Narrow Span of Control Quicker communication as there are fewer layers in the business. More responsibility is given to each manager and worker as cannot control everyone all the time. Workers may need training to take on responsibility, which could increase motivation levels. Appropriate for senior managers who believe workers should be involved in decision-making. It is easier to control fewer staff, so managers can closely supervise quality. Training costs will be lower as workers will not have to be trained how to take responsibility and decisions. Responsibility is kept in the hands of senior managers so there is less risk of low-level workers making wrong decisions. Appropriate for senior managers who believe that workers need to be controlled. 8 Levels of hierarchy Are the layers of authority within a business. The business with the narrow span of control has 4 levels of hierarchy. This means that the employees at the bottom of the organisational structure have three layers of authority above them. 9 Chains of command Is the line of authority within a business along which communication passes. E.g. Directors decide on a target and communicate this to managers, this is then passed on as an instruction to team leaders and they shop-floor workers. Similarly each level of the hierarchy will report to the level above on the progress made in achieving the target. This shows how communication can flow up and down the chain of command. 10 Delayering Is the removal of one or more levels from a business s organisational structure. Advantages of Delayering Disadvantages of Delayering Managers are closer to the customer which can make the customer feel more valued Can remove highly paid employees that are not needed reducing business costs Workers are given more responsibility which can potentially motivate them Can improve communication within the organisation as messages have to pass through Potentially removes highly skilled and experienced employees to competitors Junior employees may not be experienced enough to make suitable decisions. Training of junior employees adds additional costs. Could increase the span of control when a level of the hierarchy is removed. fewer levels of hierarchy. 11 Delegation Is the passing of authority to more junior employees. In very small businesses the entrepreneur might take all the decisions. In a larger business there are too many decisions to make. E.g. a store manager in a supermarket might delegate authority to more junior employees to order supplies of vegetables. Each assistant manager has a span of control of 5 people Each assistant manager has a span of control of 2 people 23

24 Advantages of Delegation Reduces management stress and workload Allows senior management to focus on key tasks Subordinates are empowered and motivated Better decisions or use of resources (potentially) Good method of on-the-job training 12 Using organisation structures 13 Flat organisational structure 14 Tall organisational structure 15 Influences on choice of organisational structure 16 Organisation structure and communication 17 Methods of communication Disadvantages of Delegation Cannot/ should not delegate accountability Depends on quality / experience of subordinates Harder to do in a smaller firm May increase workload and stress of subordinates. Not all businesses use the same organisational structure. Some business may opt to use tall organisation structures, while others use flat structures. This has wide spans of control and few levels of hierarchy. There is likely to a greater level of delegation. This has narrow spans of control and a larger number of levels of hierarchy. This means that the authority it likely to stay with the line managers instead of people lower down the hierarchy. The skills of the workforce skilled workers are more able to take decisions on their own and need less supervision from managers, thus managers may choose wider spans of control and a flat organisation structure. E.g. in a hospital with doctors. The management style used in the business managers that like to retain control over employees will be more likely to use a tall organisational structure. Those who do not wish to control employees closely will delegate and use a flatter organisational structure. The business s competitive environment a business in a competitive environment may wish to keeps its costs to a minimum and have the best possible performance from its workforce. This may lead to a flat organisational structure. This structure requires fewer managers, helping to reduce wage costs. There are three types of communication that take place within a business. Downward communication from senior employees to more junior ones. Upward communication from junior employees to their line managers and other more senior employees. Horizontal communication, which takes place between employees at the same level in the organisation, for example, a discussion between managers Meetings Video conferencing Telephone conversations s Business intranets 18 Effects of flat organisational structures on communication 19 Effects of tall organisational structures on communication Downward and upward communication may become easier as there are fewer level of hierarchy for messages to pass through. Giving greater authority to junior employees can encourage upward communication, which means managers have more knowledge about what s going on. Wider spans of control may mean that line managers are responsible for large numbers of people, this may result in more s and fewer meetings, the quality of communication may suffer. Horizontal communication may become more difficult as there are more people on each level of the hierarchy. Normally operate with smaller spans of control. This can lead to good communication between managers and subordinates. Often experience problems in passing information through the levels of hierarchy. Messages can become garbled or may not be passed on. 20 Centralisation Tends to keep all decision making with managers and head-quarters. Advantages of Centralisation Disadvantages of Centralisation Easier to implement common policies. Prevents other parts of the business from becoming too independent. Easier to co-ordinate and control from the center e.g. with budgets. Economies of scale and overhead savings easier to achieve. Greater use of specialization. More bureaucratic often extra layers in the hierarchy. Managers are further from the end customer, so more difficult to know their needs. Lack of authority down the hierarchy may reduce manager motivation. Customer service does not benefit from flexibility and speed in local decision making. Quicker decision-making (usually) easier to show strong leadership 21 Decentralisation Normally a decision taken when a business grows in size because it becomes difficult for a small number of senior managers to make all the decisions. Allows employees working in all areas (branches, departments or factories) of the business to take decisions. Advantages of Decentralisation Disadvantages of Decentralisation Decisions are made closer to the customer. Can allow for faster decision-making. Better able to respond to local circumstances. Improved level of customer service. Consistent with aiming for a flatter hierarchy. Good way of training and developing junior management. Should improve staff motivation. 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.g. duplication of roles. Who provides strong leadership when needed? Harder to achieve tight financial control risk of cost-overruns. 22 Recruitment Is the process of finding and appointing new employees 24

25 23 Why businesses need to recruit employees 24 The importance of recruiting the right person and keeping them Starting a new business a new business will need to recruit employees if its owners cannot carry out all the necessary tasks and duties themselves. E.g. too many duties to do, or lacking in the skills to do all the duties. Expanding a business a business may be increasing its production and will need similar employees, or diversifying into new products and may need employees with different skills. When employees leave happens when people have been offered another job, this could be a promotion. Or when people retire or stop working for reasons such as caring for dependents (children) Recruiting the right person will ensure the business have the suitable set of skills it needs to be successful. If the wrong people are recruited it can impact on quality, efficiency and profits as customers may leave if they are unhappy. The business may also then have to spend time and money recruiting other people. Once a business has recruited the right employee, it tries its best to retain them. High rates mean that large amounts of the workforce leave over a year. Low rates mean that few members of the workforce leave the business, this can help reduce recruitment and training costs. 25 Retention Is the proportion of a business s workforce who remains with the business over a period of time, usually a year. If a business has 1500 employees and 1350 have worked for the business for more than a year. Its employee retention will be x 100 = 90% 26 Internal recruitment Is filling a job vacancy from any suitable person already employed by the business. Advantages of Internal Recruitment Disadvantages of Internal Recruitment Candidates will have experience of the business and will be familiar with its methods of working. Candidates will know many of the people with whom they will be working. Internal recruitment provides employees with the chance of promotion, which may help to motivate them. Internal recruitment is cheaper as it avoids the need for expensive external advertising. Prevents breaking up existing teams and avoids jealousy of people being promoted over other workers Firms may have to pay for training when promoting or transferring employees, as they might not have all the right skills for the job. Can only choose from a limited number of employees, the choice of skills is limited. Creates another vacancy when the employee is promoted 27 External recruitment Is filling a job vacancy from any suitable person not already employed by the business. Advantages of External Recruitment Disadvantages of External Recruitment Manager will have a wider choice of candidates; this can result in applications from higher-quality candidates, especially if advertised nationally. They could bring in fresh ideas and enthusiasm. Provides employees who have the right skills Can be more costly to advertise Can be more time consuming Can cause demotivation in current workforce, if they feel there is no chance of promotion. The business knows less about the person, which could mean there is a greater chance of making a mistake. immediately, training existing employees can take time. 28 Methods of advertising vacancies Internal The owner or manager tells employees about the job vacancy. Certain employees are invited to apply Advertisements are placed in the business s employee newsletter. Advertisements are placed on notice board, the internal website or sent by The recruitment and selection process External Advertising (newspaper, radio, internet) this could also be in specialist trade magazines. Jobcentre Plus they help bring together businesses looking for workers and suitably skilled people. Employment agencies are privately owned businesses that help business recruit employees. They give businesses a list of suitable applicants and might help a business choose the most suitable applicant. They are paid fees for these services. The way in which the job is advertises will depend on the business and the type of job available. For lower skilled jobs they might use local papers. But for more senior positions, the advertisement might be national and in specialist magazines. 1. Business needs new employees because of growth, entering new markets or employees leaving. 2. Job descriptions and person specifications drawn up using data from job analysis. 3. Job positions are advertised internally or externally (or both) 4. Applications are received and kept until the closing date. 25

26 30 Documents used in the recruitment process before any recruitment documents can be prepared, it is necessary for a business to conduct job analysis. This is the collection and interpretation of information about a job. To identify the best person for the job, managers must understand what the job involves. 31 Job description Is a document stating information about the duties and tasks that make up a particular job. It usually includes: The title of the job The hours and place of work The main tasks that make up the job The employees for who the person will be responsible to and for 32 Person specification Is a document setting out the qualifications and skills required by an employee to fill a post that is advertised. It might include: Educational qualifications Vocational or professional qualifications Ability to work as part of a team Experience of similar jobs A person specification may list some qualities and qualifications as essential and others as desirable. This can help in the short listing. 33 Job advertisement A job advertisement would normally include: The title of the job Some information about the business The location of the job Working hours expected and holidays offered Pay rates How to apply and the closing date for applications Businesses often use employment agencies to draw up job descriptions and person specifications, and to place their job adverts. 34 Application form and curriculum vitae (CV) To apply for a job, it is necessary for applicants to give some information about themselves. Such as name, age, address, employment history and qualifications. This can help the business match the application against the person specification. An application form is a standardised form and makes it easy for the business to find the information they want. Sometimes applicants will provide a CV, these will be similar to the application form but will differ from candidate to candidate. 35 Selection process 1. Match application form or CVs against the job specification. 2. Draw up a shortlist of candidates (perhaps 8-10). 3. Invite applicants to attend the selection process. 4. Selection process interviews, psychometric tests and an assessment centre. 5. Choose the best applicant(s) on the basis of performance in the selection process. 6. Inform all candidates of the decision taken. 36 Interviews Is the most common form of selection. It is quite cheap for the business, but is not always the most reliable way of selecting the best people for a job. Some people are very good at interviews, but that does not mean that they will be good at the job. 37 Psychometric tests These are multiple-choice tests designed to show the personality of the candidates. This can help choose the applicant with the most suitable personality for the job. 38 Assessment centre This form of selection is increasing particularly for senior appointments. They include: Role plays simulating the job itself Psychometric tests A number of interviews Practical tasks for candidates to complete 39 The benefits of an effective recruitment and selection process These tasks can be demanding and stressful and help the business to identify who can respond well under pressure. Having an effective recruitment and selection process can ensure that the business has the most skilled and experienced employees and reduces the chances of them leaving within a short period of time. Other benefits become more apparent in the long-term and should result in increased profits for the business. High levels of productivity appointing the best employees can help a business to achieve high levels of productivity. This means employees product relatively large quantities of goods or services over a period of time. This means the labour cost per unit is lower. This can help a business to be more competitive as it helps to sell products at a lower price, this can increase sales. Alternatively the business could sell at higher prices and enjoy increased profits as its costs of production are low. High-quality products or customer service appointing the very best people will help a business supply good quality products as the employees will have the skills and ability to produce good quality products. Having high quality or good customer service can lead to an increase in sales and profits. Employee retention having poor retention of employees can lead to higher costs, as you have to replace the employees that leave and then train them once employed. It can also lead to reductions in quality and customer service as it takes time for new staff to settle in. customers may be unhappy if they had expected to deal with a certain employee and now have to deal with a new one. Finally, the productivity of the business will be reduced until new employees become familiar with how the job is done and have had training. 26

27 40 Contracts of employment Employees have to be given a contract of employment within two months of starting work. It is a legal agreement between an employer and employee. It includes Normal working hours Rates of pay Holidays Duties at work Place of work 41 Full time Occurs when someone works a number of houses equal to the normal working week, normally between 35 and 40 hours. Benefits to Employers Benefits to Employees May benefit from having employees at work throughout a normal working week, this can result in better communication as employees are more likely to be able to speak directly to one another. Full-time employees may be more skilled and experienced as a result of being at work for more hours each week. This can improve their Full-time employment means workers are paid for more hours each week. This can improve living standards and reduce the need to find a second job. Employees are more likely to be able to gain promotion as a full-time employee. Full-time working can allow them to attend more training courses ad to gain more experience. performance at work. 42 Part-time Occurs when an employee works fewer that the normal number of working hours per week. Benefits to Employers Benefits to Employees Part-time employees can help businesses to cope with busy periods during the week, for example, some shops may attract large numbers of customers at the weekend. Having part-time employees at work can help provide good customer service. Some businesses need employees with specialist skills, but do not need them throughout the working week. For example, a small business might need an accountant to organise the payment of employees and to update financial records. This might only require one or two days work a week. Employees can fit in work with other commitments, such as caring for older relatives or children. May employees only work during school hours or for half days. This allows them sufficient and suitable hours to care for their relatives. Some older employees may not want a full-time job, but do not want to retire. Part-time work can be a half-way solution on the road to full retirement 43 Job sharing Occurs when two or more people combine to fill a single job role. Such as someone does the morning duty and another person does the afternoon duty. Employers can benefit from having a broader range of skills. However communication may suffer between the employees. 44 Zero hours contracts Allows employers to hire staff without any guaranteed hours of work. The employees may get no hours or may get a large number. Employees do not have to accept any of the hours they are offered. However turning down hours may lead to them not being offered them in the future. 45 Motivation is the range of factors that influence people to behave in certain ways. It can be described as the will to do something. It is the force that drives an employees to work very hard and to carry out their job as effectively as possible 46 Why do people work? 47 Benefits of a motivated workforce Financial Motivation offering employees higher pay or bonuses through reaching targets, could lead to increased levels of motivation. Non-Financial Motivation factors such as praise or the opportunity to carry out a more interesting job could motivate employees. Everyone who works is motivated to do so by one or more factors. Maslow believed that people worked their way up from the bottom of the hierarchy meeting each of the levels of needs. E.g. as soon as someone is able to provide food and water, they then look to develop security in their job. They then want belonging and want to accepted at work. Increased productivity levels this allows a business to reduce its cost per unit meaning they can be more competitive in their pricing and lower the sales price to increase sales. To keep prices the same and benefit from higher profits due to lower costs. Improved employee retention rates employees who are motivated are more likely to be loyal to a business. This removes the need to recruit new employees and the costs of that and removes the need to train new employees. It also allows the business to benefit from the skills and experience of its workforce. 27

28 48 Methods of motivation (nonfinancial) 49 Methods of motivation (financial) Higher levels of sales motivated workers will work hard to meet the needs of customers. Customers treated like this will be more willing to buy goods and services. Improved recruitment and selection motivated staff gives the business a reputation as a good employer. This makes it easier for a business to recruit the best and most skilled employees. Increasing authority through job enrichment some employees may lack motivation because they are bored. Job Enrichment can help correct this by making jobs more demanding and challenging. It can give employees more diverse duties as well as more authority to take decisions at work. Training an employee may not be able to take on more demanding duties without being trained. Training in itself is likely to motivate employees because it shows that the business owner values the employees. It can also motivate by making the workplace safer following health and safety training. Management styles authoritarian managers tend not to motivate employees as they make all the decisions. Democratic managers to allow employees to help make decisions help motivate workers as they feel their opinion is valued as allow them meet their needs to self-esteem and self-actualisation. Fringe benefits these types of benefits supplement the pay that employees receive. They could include: health insurance, a company car, discounts when buying the company s products. If offered to a larger number of employees can become expensive. Salaries is an income received by an employee, stated as an annual figure. Thee employees are not normally required to work a set number of hours per week. Employees paid in this way may be motivated by an increase in salary, perhaps alongside some fringe benefits. Wages usually paid each week and employees normally work an agreed number of hours. A higher hourly rate (overtime) is paid for any additional hours worked, an increase in the hourly rate may be used to motivate employees. Piecework employees are paid according to the amount they produce. They are paid an agreed figure for each unit of output they product, this is subject to them receiving the National Living Wage as a minimum. Commission this is a payment to an employee based on the level of sales he or she has made of a period of time. It is normally paid in addition to a wage or salary. Profit sharing employees receive a share of the business s profits alongside their normal wages or salaries. This can motivate as employees benefit directly from an increase in the business s profits. 50 Training Is a range of activities giving employees job-related skills and knowledge. 51 Benefits of training Improvements in productivity this can make them better at their jobs as they learn new, improved and efficient ways of doing their job. This could be: how to use new technology, how to reduce time wasted on unnecessary tasks or correcting mistakes. Improvement in quality training enables employees to improve the quality of the work they do. This can lead to customers being more satisfied and therefore more willing to purchase from the business which would increase profits. This can relate to products or to the level of customer service provided as employees know how to meet the customer s needs. More motivated employees can make employees feel valued, this will make them more committed to the business. Training allows employees to take on more challenging tasks (job enrichment). They also feel that there will be a chance of promotion. Improved rates of employee retention makes them more loyal to the business, so that they are less likely to leave the business. The business benefits from the skills and experience and do not have to pay to recruit new employees. All these factors enable the business to be more competitive. 52 Types of training Induction On-the-job training Off-the-job training 53 Induction training Is training given to an employee when he or she first starts a job. It is intended to help new employees to become more familiar with the business and the job they are to do. It might involve: Meeting other employees at the business with whom they will work with closely. Learn key information about the business, such as how its IT systems work or health and safety information. More about their role in the business. Induction training helps new employees integrate with existing workers and helps them conduct their jobs effectively. It can help them become more productive earlier. It can help retain employees as if they do not receive training within a certain period of joining they may leave. Induction training can help avoid low rates of staff retention and therefore avoid the additional costs of recruitment and retraining. 28

29 54 On-the-job training Is training that is done within the workplace. This type of training means that employees may learn from more experienced workers. It can take the form of: Work shadowing here experienced and skilled employees are observed during the working day. They may offer advice and guidance as well. Formal training sessions these can be led by experienced employees or by specialist trainers from outside the business. These sessions can update employees on changes such as health and safety. They can be used to prepare employees to take on new roles within the business. Computer-based training employees can conduct a number of questions or work through some scenarios. This is an efficient form of training as it can be done without a trainer. Advantages of On-the-job training Disadvantages of On-the-job training It can be a relatively cheap way of providing training. Employees do not have to travel to a training centre. This is particularly good for businesses that cannot afford to spend lots of money on training. It means that more employees can benefit from the training resulting in an increased level of productivity. It targets the exact needs of the business. This means that employees will receive precise knowledge and skills they need to carry out It is unlikely to bring new ideas into the business unless an outside trainer is used. As a result it may not lead to dramatic improvements in the performance of a business s employees. Using this type of training can result in more employees being unavailable to work within the business for a period of time. E.g. the business might lose the services of the person who is providing the training as well as those receiving it. their job effectively. Computer-based training can be delivered at any time and is very effective for large numbers. 55 Off-the-job training Is provided outside the employee s place of work. It might involve: Advantages of Off-the-job training Can help bring new ideas and approaches into a business. This can help a business remain competitive. Off-the-job training is expensive and can be used to motivate employees. This is because they feel valued by their employer because the business is spending significant amounts of money on improving their skills. This can result in substantial improvements in the employee s performance at work. It can give more credibility to the training, which can be good for getting cheaper insurance if the training is about something like fire safety. 56 Factors influencing the decisions on types of training Disadvantages of Off-the-job training It can be expensive, so for business making only small amounts of profit, it may not be affordable. They may only choose to send selected members of staff on training, which could mean those who do not attend may not feel as valued. There is a risk that employees may leave the business for a new job once the training is completed. Off-the-job training can prepare employees to work in a range of different businesses. Thus a business may spend heavily on training an employee, but receive little or no benefit in return. The business s financial position as off-the-job training is expensive, businesses in weak financial positions will be more likely to choose on-the-job training. The type of training required very specific training requirements will be best served by on-the-job training as off-the-job training can be generic training. Training that is more long-term such as accountancy qualifications would be done through off-the-job training; this may allow the business to reduce the costs if it takes place outside working hours. The skills and experience of the business s workforce if the employees that provide the training are unable to communicate this effectively you may choose to bring specialist in or send employees out on off-the-job training. Business that grow rapidly or have low retention rates will have large numbers of new staff. This will make it difficult to provide in-house training. The employee attending a course at a college or university. Studying at home. Going on a training course run by a training company. Sometimes off-the job training can last for a considerable amount of time. E.g. an accountancy training course that lasts 2 years) 29

30 5) Marketing (paper two) 1 Exchange Occurs when someone gives up something in return for something else. E.g. a business exchanges a product for money. 2 Identifying a business opportunity A business must identify and offer something that customer s value and are willing to pay for. Is there something the business can do better than others? Is there something that customers are unhappy with at the moment? Is there something that customers are missing and want. 3 Needs A need is a basic human requirement we need to eat and drink. 4 Wants A want is a desire for a particular product we need to drink, but we want Coca-Cola 5 Customer Is someone who buys a product from a business 6 Consumer Is someone who uses goods and services produced by a business 7 Importance of identifying and satisfying customer needs 8 The size of the market Increasing sales by offering something that customers want or that is better than competitors, the sales of a business should increase. Selecting the correct marketing mix by choosing the correct combination of Product, Price, Place and Promotion, the more likely a business will appeal to its customers. Avoid costly mistakes if a business misunderstands its customers and makes mistakes with the type of product, or the price it sells it for, then this will cost the business a lot of money, as they may have to withdraw products or lower the price, which means they may not be able to cover production costs. Be competitive if a business can offer better perceived value, it makes them more competitive in the market. If a business understands what exactly customers want to buy, when they want to buy it, how much they are prepared to pay for it and where that are likely to look for it, they will be able to develop their marketing more effectively and be more competitive. How big the market is. Sales Volume measures the number of items sold. Sales value measures the revenue generated. It is possible for the volume of sales to increase but the value to decrease. Equally the volume may fall, but the value could increase if prices are rising. Some business will want to be the market leader on sales volume others on sales value and will use this within their marketing. 9 The growth of the market The growth of the market based on last year s market size E.g. the sales in the market last year were 200,000 units and this year is 220,000 units. The market has grown by 10%. Market growth = (change in market size original market size) x 100 This could also be done using the value figures. 10 Segmentation Occurs when a market is divided into different groups of needs and wants. 11 Market segment Is a group of buyers with similar needs within the overall market. 12 Benefits of segmentation 13 Ways of segmenting a market Develop its products to fit customer needs more closely Target its customers more precisely it can promote its products in the right places at the right time to boost sales. Set the price appropriately. E.g. if the is high demand, but relatively few providers, it may be able to charge more for its products. There may be limits to how far a business wants to segment as ultimately everyone has slightly different tastes and in most cases a business cannot completely tailor-make a product for each customer. By gender a clothes retailer might have some products specifically targeting women and other targeting men. By age may target some toys at children (Duplo) and others at older customers (video games) By location McDonalds changes its menus in different countries around the world. By income a business might target high income earners with its high range products and lower income earners with other products. By the stage someone has reached in their life cycle customers in the age range to start families may be targeted with baby products whereas older customers may be targeted with retirement products. 14 Targeting Once a business has identified relevant segments in its market, it will need to decide which ones to focus on. A business will target segments where it thinks: It can make a high enough return; some segments may be too small or not profitable enough. It can compete effectively, that is, it has the skills and resources to win market share. It covers the opportunity cost, that is, there are no better alternatives. 15 Market research Is the process of gathering, analysing and processing data relevant to marketing decisions. 30

31 16 The purpose of market research 17 Types of data used in market research 18 Marketing research maths 19 Uses of market research 20 Methods of market research - Primary Observing Experimenting Telephone surveys Questionnaires Market research will help gather information about: Demand the size and growth of the market and the different segments that exist within the overall market. Market share the sales of each producer as a percentage of total sales in the market. Competition the number and size of competitors and their share of the total market sales. Research might identify which businesses are growing and help managers understand why. Target market a business is unlikely to want to target everyone in a market, it will want to focus on particular groups. Quantitative data this involves the use of numbers such as the size of the market, the growth of the market or the number of customers a business has. Qualitative data this involves views and opinions, but does not provide statistically reliable information. This data focuses on why people do things. Market size = number of units sold x price per unit) Market growth = (change in market size original market size) x 100 Market share = (sales of the product total market sales) x 100 Identify opportunities in markets E.g. is there demand for a new flavour of the company s drink. Weigh up different possible actions E.g. is it best to promote the product launch online or in print? Assess the effectiveness of actions that have been taken E.g. how successful was the price promotion that the business ran last week? Uses data that has been gathered for the first time Carried out without customer knowledge Potential for bias reduced Test how things work out before a large scale roll-out Cheap Allows interviewers to clarify any questions that are unclear. Results are easy to analyse as most use closed questions. A relatively fast method compared to others Time consuming Does not answer the Why? question. Easy to misinterpret May not represent whole market. May be viewed as a nuisance by those telephoned People may not answer their phones. Cannot see how people react (body language) Interviewer may be bias (through an over friendly approach) Customer/Supplier feedback Focus groups Internet Research (can be used as primary to collect information or as secondary to research information already gathered) Printed Press, such as newspapers and magazines May give insight into future trends, not yet visible on the high street. Helps build relationships with suppliers Real insight as to how to improve the customer experience In-depth information about consumer attitudes and motives behind purchasing decisions Cheap and quick Can get an insight into what your target market are interested in. Can get information on the markets, economy and competitors. Advantages of Primary Research More up-to-date Specific to the business Can gather as much data as you require You have more control over the collection so can trust the findings more. Suppliers may present a biased view. Does not represent what noncustomers think Very expensive Only carried out using a small sample, so results may not be representative. May not find the views of your targets customers if they are not online Can be biased based on the newspapers political view point. Disadvantages of Primary Research Can cost of a lot of money and take a lot of time to conduct. Failure to ask enough people meaning the information collected does not represent the typical customer. Asking too many people from one segment (age, gender etc.) may mean the results do not represent the market as a whole Poorly designed questionnaires may use suggestive of leading questions, which encourage participants to answers as they think you want them to. 31

32 21 Methods of market research - Secondary Uses data that has already been gathered. Advantages of Secondary Research Disadvantages of Secondary Research It can be gathered quickly and cheaply. It can provide information on large sections of the population. Normally small businesses cannot afford this but the government can. It can help find the focus for more extensive primary research It is not specific to the needs to the business. E.g. data is about year olds when you want year olds. It may be out of date it may have been collected 5 years ago. You are not sure how it was collected is it reliable? E.g. were any reward given for doing the market research. 22 Factors that affect choice of market research 23 Use of market research: information that may help decision making The budget available The usefulness of the research How reliable the research is What current contacts they have to conduct research You will be expected to interpret and use qualitative and quantitative market research findings to help make appropriate decisions for different types of businesses. You will be expected to manipulate and interpret data from tables and charts. You will be expected to identify market size and market share. 24 The marketing mix Refers to all the activities influencing whether or not a customer buys a product. The elements of the mix can be analysed using the four Ps: product, price, place and promotion. 25 Choosing the best marketing mix The choice of marketing mix will depend on factors such as: The product is it distinctive/ is it a product that needs a unique design? How long does a customer expect it to last? Something unique and long lasting might justify a higher price. Competitions products what do they offer and how does it compare with what you have? The target customers who are you trying to sell to? How much do they earn? Why are they likely to buy your product? How much do they need it? What do they do with their time? (so you know how to reach them) Business approach are you trying to match what your competitors do? Are you trying to be different from your competitors? 26 The product The product is what customers actually buy. If the product is wrong then it is difficult to imagine that the marketing overall will be successful. This includes its design, its performance, its features and its reliability. Other factors are also considered: The service is it easy to order in store or online? As the sales staff well informed? Is there any post-sales services? Is there a delivery service? Does the product come with a guarantee? The performance of the product does the performance of the product match what was promised in the advert? The price does the product represent better value for money than the competition? 27 Product development When developing a new product a business will consider: The design what does it offer in terms of features, design, look, ease of use or reliability compared to competitors? What needs and wants does it fulfil? The price what will customers be willing to pay for the product? How much are the benefits worth? The expected sales what is the likely demand for this product? The cost of development and of production given the expected sales and the price, will this product make a return that justifies the risk in producing and launching it? 28 Product differentiation 29 The stages of new product development Differentiation is where a business wants to make their products stand out from its competitors. E.g. Pepsi and Coca-Cola are the same drink but people regard them as very different products. A business may differentiate its products by: Building the brand image through its logo, its design and its communications. This could also be through the design of its stores and the way it advertises and promotes itself. The unique selling point (USP) a business will develop some aspect of the product or the service it offers that makes it unique. It could feature a (Made in the X), a (2-hour delivery) or even a guarantee. By differentiating its products a business can hope to attract more sales and may even be able to charge more. 1. Generate an idea this may be a genuinely new idea or simply improving a product that exits. 2. Check the idea this involves testing the idea to see what it would cost to develop and what possible returns it might earn; this is to check it is financially worthwhile. 3. Develop the product this will involve testing and putting together different versions of the product to see what works. This can take many years of research and testing to make sure the product works and is safe. 4. Trial the product a trial launch may be used to see if the sales are as expected. 5. Launch it! 32

33 A business may decide not to go ahead with a product at any of these stages, because it is proving to be too expensive or too difficult that imagined to develop. Even when launched the product might not be a success, they could even be withdrawn. Product development can be risky, but standing still and not innovating could also be risky. 30 Product portfolio Is a collection of products that a firm produces. This enables a manager of a company to check how the products are doing and decide whether anything needs to be changed. 31 Boston matrix A famous way of analysing a business s product portfolio is called the Boston matrix. This model looks at products in terms of their share of the market and the growth in the market. It consists of four categories. Question marks are products that have a small market share of a fast-growing market. These products could turn out to be very successful and the market is attractive because it is fast growing. However, the business cannot be sure whether or not the product will succeed. Businesses need to spend money promoting and developing question marks to make sure they are successful. The money for this could come from the revenue from cash cows. Stars are products that have a big share of a fast-growing market. Start products are doing well in an attractive market. Businesses need to keep improving and promoting stars with the aim of turning them into the cash cows of the future. 32 Balanced portfolio All businesses want a balanced portfolio of products. They need the cash cows to provide the finance to develop new products (question marks or stars) for the future. However, if a business has too many cash cows, the firm should worry about the future as they have too many products in a market that is not growing. Equally if a firm has a high number of question mark products, then it is taking a risk as it is likely that some of these may not succeed. Businesses pursuing only new products may run out of money if they do not have cash cows to provide valuable finance. 33 Product life cycle Shows how the sales of a product may change over time. Dogs are products that have a low share of a low-growth market. These products are not much use to a business and the business should either get rid of them because they are not selling enough or try to improve them to make them much more attractive. Cash cows are products that are doing very well in that they have a high share of the market. However, the market is not growing very fast, this could be because it has already grown and is not as big as it is likely to get. Cash cow products are well known and shops want to stock them on their shelves. Customers know these products and buy them in large quantities. This type of product was previously heavily marketed; the business can now generate revenue from it with comparatively little promotional expense. Profits from these products are very good. The business should use the money earned from cash cows to develop products for the future. 1. Development in this stage the idea for the product is develops and tested to see if it will work. This may involve building a prototype. During this stage, businesses spend money but have no money coming in because there are no sales. 2. Introduction is when the product is launched and sales begin. It can involve a lot of expenditure on promotion and publicity. At this stage a business needs to convince distributors they should stock the new product rather than existing brands. This can be difficult as they will not want to take a risk. 33

34 34 Variation with the product life cycle 3. Growth is experienced when the product starts to sell faster. People are beginning to buy more of it and it is becoming successful. A business may need to find more outlets for the product at this stage. 4. Maturity the sales rate begins to slow down. Perhaps a competitor has launched something similar that is affecting sales, or perhaps customers simply want something new. During maturity, a business should consider introducing some different versions of the product to keep sales up or use some extension strategies. 5. Decline occurs when sales start to fall. Decisions need to be made one whether to boost sales by spending more on marketing, of should the product be taken off the market. The length of time it takes for the life cycle to move from development to decline can vary from product to product. Products like cars can spend years in the development stage. A few film can be launched and enter the decline phase within weeks. Some brands are around for years such as Cornflakes or Coca-Cola. The marketing mix changes at different stages of the product life cycle. E.g. at the introduction stage, promotion may focus on making people aware that the product exists. Over time promotion may start to concentrate on why the product is better than competition. The price may have been set high when the product was launched and now needs to be reduced in order to keep sales growing. 35 Extension Strategies Are attempts to maintain the sales of a product and prevent it from entering the decline stage of the product life cycle. These include: Cutting the price to make the product better value for money. Spending more on advertising to make the product more popular. Updating the packaging of the product. Adding more or different features. Trying to get people to buy more of the product; for example shampoos say on the label that you should always wash your hair twice. Trying to get people to buy the product on more occasions; for example, we tend to buy turkey mainly at Christmas in the UK could you get people to eat it at other times during the year? Trying to find new customers; for example, a business might try to target a new market by selling its products abroad. 36 Price and demand In general an increase in price is going to lead to a fall in the quantity demanded assuming nothing else has changed. However the extent to which sales fall can vary significantly. If the product has a strong brand image or a USP the fall may be small compared to the price increase. This is why businesses try to differentiate their products to make demand less sensitive to price increases. If the fall in sales is small, a business can make more revenue with a higher price. If demand is sensitive a business might lower its prices to gain significant numbers of customers from rivals. 37 Price skimming Is setting a high price for a product when it first enters the market. This strategy is used when there is high demand. It helps the business to obtain money needed to repay development costs. Once the first group of customers has paid the high price, the price is then reduced in order to attract new customers who need a lower price to get them interested. This strategy works best if the product is unique in some way and, therefore people are willing to pay more. 38 Price penetration Is launching a new product at a low price to achieve fast sales. Is a way to get market share very quickly and trying to establish a product as the market leader. This strategy works best is customers are very sensitive to price. Buy producing on a larger scale, a business may get its name known quickly and may also benefit from lower costs by buying in bulk and from other economies of scale. 39 Competitive pricing Is matching the prices that competitors charge. This approach is used a lot by supermarket and insurance companies, which openly compare their prices to show customers that they offer good value. Competitive pricing is common in markets where there are a few big firms competing directly against each other and where customers can compare their products easily. If the products are similar then the price becomes an important factor that will influence the customer s decision to buy the product. 34

35 40 Loss leader Is a product sold at a loss in the hope that the customer will buy other items from the business where they can make a profit. Supermarkets use this approach by selling some products at a loss and advertising these in the shop windows. This gets customers into the shop, and the supermarkets hopes they will buy some of the higher-priced items. Printers are sold at a loss allowing the business to repeatedly sell the ink cartridges over time making a profit. 41 Cost plus pricing Is where products are priced by covering the cost of it to the retailer and adding a percentage on top. 42 Factors influencing price Is an approach that aims to ensure the business covers its costs and makes a profit. It works by calculating the costs of providing the product and adding a percentage on to this to decide on the price. This is known as mark-up Cost plus pricing is quite common for retailers This approach is simple to apply but does not take account of the demand in the market it does not directly consider what people are willing to pay. You buy an item at 20 and add on 25%. (25 100) x 20 = 5 The new price will be = 25 Costs to make a profit, the price must cover the costs. There are fixed costs and variable costs to cover. Demand this determines what people are willing to pay for a product. If demand is high that a business can increase its prices. If demand is low, the business will probably have to lower priced of the product. The nature of the market (degree of competition) if a market contains many firms selling similar products then prices have to be competitive. Offering a product that is very different from the competition gives the ability to charge more. A business s objective and approach to pricing if a business aims to gain a large share of the market and make its product well know, then it may use penetration pricing and have a relatively low price. If it aims to promote its product as very high quality and top of the range, it will probably charge a high price. Position in the product life cycle when demand is rising fast in the growth phase it is probably feasible to keep the price high. If the product is in the decline stage, then the price will probably be reduced. Rest of the marketing mix price must fit with the rest of the marketing mix. If the product is a well-known high-end brand and promoted in an expensive format, then a high price should be used. Others Does the customer have to pay the full amount now or can they pay in instalments? Can they pay with a credit card or do they have to pay cash? Can they get a discount if they buy in large quantities? 43 Promotional activity Are the different ways in which a firm tries to communicate with its customers. 44 Types of promotional activity Advertising Sales promotions Public relations activities Personal selling 45 Advertising Newspapers Local papers such as Sale & Altrincham Messenger are delivered free to most homes, so advert has potential to be noticed by local people. Magazines (specialist) Television Radio On the side of buses Internet (social media) Billboards/posters Sponsorship Leaflets People interested in the products/services you sell subscribe to these, so your advert is targeting your target market. Expensive form of advertising. However, it can allow the business to portray a high quality image of their brand/product. Cheaper than TV adverts and can be used to target small regions. Might not be heard. Can be seen by lots of people Can be beneficial for people on-the-go and is a cheap method of keeping your product/service in peoples view. Have a high visual impact and stay in one place for a long period of time, so people seem them daily. Can allow the business to be seen to be supporting local sporting teams, or charity events. This is good for the businesses image. Cheap to produce, can be handed out to the target market in the street or put through letter boxes of local people. Might just be thrown away. 35

36 46 Sales promotions These are short-term incentives to encourage customers to buy the product. Point of sales displays 2 for 1 offers Samples Free gifts Coupons Competitions 47 Public relations activities These are beneficial to the business as it allows the business to let customers have a taste of their products or entice them into buying the product as they have coupons. However, this can be expensive for smaller businesses and could reduce it profits in the short-term, although it can increase sales in the long-term. These are activities used by a business to arrange free media coverage of its activities and/or products. Shops could hold open days, as this is normally cheaper than advertising. Similarly a business could release a press statement to get coverage for the brand. The problem with public relations is that you cannot control what will be said by the media. 48 Personal selling Many businesses will have a sales force to help promote their products. Members of the sales teams might visit different stores to get them to stock their products. They will let the businesses know about new offers, new products and the benefits of their products compared to those of competitors. 49 What promotion is used for 50 Factors influencing the choice of promotional activity (growing businesses) Inform customers or remind them about some aspect of the product. Create of increase sales. Create or change the image of the product; to extend sales businesses may want to change customers perceptions of a product. Show the benefits of a product; a business may want to explain why its product is so good. Costs and finance some forms of promotion are much more expensive than others such as TV compared to a local newspaper. Target market if the target market is wide spread then the internet might be more effective than leaflets. For a business trying to reach a local audience, national TV is too expensive. A business also needs to consider the customer and what they do, what they read, what they watch or listen to. Only then can you decide the best way to reach your target market. Competitors actions if competitors are visible in terms of advertising, there may be pressure on a business to respond to this. Businesses may want to adopt similar approaches to their competitors if they run successful campaigns. 51 Reasons for promotion 52 The distribution channel (place) Nature of the market the size of the market, the total amount spent in the market and where customers are based will all affect the best way to promote the product. Posters can target a specific area, TV can target a mass area, and if price sensitive then discounts could work. If price is not an issue then a gift might be better. Nature of the product the brand image and type of product may influence what promotion is suitable. If the brand is a premium brand, then discounts and competitions may not be suitable for the brand. A two for one may work better in fast food restaurants than in a jewellery store. To inform, To persuade, To remind Overall when choosing which promotional activities to undertake businesses need to think about: The coverage of a promotion how many people will see it? The quality of the promotion how effective is it likely to be? The cost. The different media options for example, print, film or sound. Describes how the ownership of a product passes from the producer to the final customer. Producer > Wholesaler > Retailer > Customer (two level) Producer > Retailer > Customer (one level) Producer > Customer (zero level) 53 Producers A producer supplies goods or services. Cadbury produces chocolate, Direct Line provides insurance 54 Wholesalers Buy products from producers in bulk and supply smaller quantities to retailers (known as breaking bulk) some wholesalers sell through cash and carry stores. Selling to a few big wholesalers reduces the transport costs for manufactures, because it is a lot cheaper that transporting to lots of retailers, it also means the manufacturer has fewer deals to negotiate. 55 Retailers Are the shops that sell goods and services to the final customers. 56 Connecting the distribution channel Mail-order businesses produce catalogues and customers order from these. The businesses do not have physical retail outlets. Telesales this is where businesses sell their products over the telephone. Online selling this gives customers the opportunity to use click and collect services. These are all examples of direct marketing as the business sells directly to the customer. Providing physical and online operations is known as a multi-channel option. 36

37 57 E-commerce Is the act of buying or selling a product using an electronic system such as the internet. It allows a business to extend its reach to international markets. 58 M-commerce Is the buying and selling of products through wireless handheld devices such as smartphones. Advantages of Direct Selling Disadvantages of Direct Selling Customers can order any time Customers can order from home Customers can order from anywhere in the world potentially Need to be able to distribute to a much wider range of destinations; logistical and cost issues. Need to be able to handle returned good; because customers cannot try on or touch items, they are more likely to return them. Need to ensure the security of the site and protect customers data; logistical and cost issues when distributing overseas raises the price of products and can impact on competiveness. 59 Levels of distribution Wholesalers and retailers are intermediaries in the distribution channel. Zero level this means there is no intermediary between the producer and the customer. The maker of the product sells direct to the final buyer. One level this occurs when there is one intermediary between the producer and the customer. E.g. a business sells to a retailers and then to the customer. Two level when there are two intermediaries between the producer and the customer. A wholesaler buys in bulk from the producer and then sells a range of products to the retailer who sells onto the final customer. It is easier for the retailer to go to one wholesaler than to many producers. Advantages of using intermediaries Disadvantages of using intermediaries A producer can access many thousands of customers by selling to retailers that then distribute to their own stores, or by selling to wholesalers than then sell them on. The intermediaries help distribute products widely and can save the producers the costs of trying to distribute direct to many different customers in many different places. By selling in other businesses stores, the producer enables the customers to compare what is on offer. Intermediaries want to make a profit so the price is increased at each stage. This makes the final product more expensive that if the producer sells directly to customers. By selling a product on to someone else, the producer loses control. An intermediary can promote the product as they choose, the producer may not approve of their displays, descriptions or even their store layout. 60 Selecting the right channel of distribution 61 Importance of getting distribution right 62 Integrated nature of the marketing mix In order to select the right channel of distribution, businesses need to think about the following: Costs what are the costs of distributing via other intermediaries compared to selling directly? Lack of control to what extent does this matter? Does the producer want control over how the product is sold and displayed, particularly for fashion brands, whereas for newspapers or mints the type of shop does not matter. The product convenience products like milk and bread will mean that customers will not want to travel far for them and will go to the nearest store. Selling through retailers can ensure a producers products are widely available. Speciality items that customer do not have to purchase often could be sold directly to the customer. Many businesses will use a range of distribution channels. Using more than one distribution channel may increase sales and reduce the risks if there was ever a problem with one of the channels. Sales if a product is not available when and where customers want it, they may buy something else instead. Image if a product is sold in the wrong place then it may damage the brand and affect sales over time. Costs how a product is distributed will affect costs and the final price. The more intermediaries there are, the higher the final price because all the firms involved want to make a profit. It is important to consider all four elements of the marketing mix together when choose how to promote your product, or what price to sell at, or how to get it to your customers. All four elements must give of the same image of the product/brand. 37

38 6) Finance (paper two) 1 Why do businesses need to raise finance (new businesses) 2 Why do businesses need to raise finance (established businesses) 3 Influences on sources of finance (new businesses) 1 Renting or buying a building this might be a shop, an office or a factory and is likely to be relatively expensive. 2 Vehicles many businesses will require cars to visit customers and suppliers, as well as vans or lorries to deliver products. 3 Advertising the business potential customers will not know about a new business unless it promotes itself. Many new businesses spend quite large amounts of money on advertising, even before they start trading. 4 Equipment and machinery for the business most businesses require some equipment or machinery, especially if they are planning to manufacture products. 5 Inventories of raw materials a shop will be inventories (stock) if it is to have anything to sell. To expand it is common for businesses to decide to increase the scale of their enterprise, possibly by entering new markets or selling more in existing markets. Businesses may need the finance to pay for additional shops, factories or offices, as well as to recruit new employees. To improve efficiency businesses can raise money to spend on training employees or to purchase technology to use in production, these can help a business to product better quality products quicker and with fewer resources. To develop new products this is an important way for many firms to compete, but it can be costly. To develop new products business may have to pay for scientific research or for new production facilities, as well as for advertising to inform customers. The amount of personal fiancé available to the entrepreneur the more personal finance an entrepreneur has, the less they have to borrow. Some use redundancy pay they receive when they become unemployed. In other circumstances they sell their homes to raise the funds. Legal structure of the business only companies can sell shares; a new business may be a private limited company. However, all shareholders have to agree for this source to be used. How risky the new business is judged to be if the business is deemed to be risky, banks may be unwilling to offer mortgage, loans or overdrafts for fear of not being repaid. This means the entrepreneur may need to use personal finance or sell shares. 4 Influences on sources of finance (Established businesses) Profitability of the business a profitable business will be able to use retained profits. a profitable business will also be more likely to persuade a bank to agree to a loan as it should be able to make the repayments. Assets owned by the business a business with a lot of assets may choose to raise finance by selling the assets and leasing them back. The business could also use them as collateral against a loan. Past history and future prospects a business that is expected to make a profit in the future may be in a strong position to take out a bank loan, as it is more likely to be able to pay back the loan on time. Equally a business with a good record for paying loans on time may be in a better position to agree a bank loan or mortgage. Legal structure of the business only companies can sell shares; a public limited company can sell shares on the Stock Exchange. Amount of finance that has to be raised if a business needs a large sum of money, it will use more than a single source of finance. A bank may not be willing to offer all of the finance required. Selling enough shares to raise the finance may mean that the owners lose control of the business. Using several sources of finance helps a business to avoid the worst disadvantages of any one source of finance. 5 Internal sources of finance Is money that is available from within the business. Finance Explanation Benefits Drawbacks method Owner s Funds Money put into the business by the owner No need to pay interest on the money Could have been invested elsewhere, earning a higher profit Owner may not have enough funds to meet the needs of the business Retained Profits Money kept in the business by the owners Known as retained profit on the balance sheet No need to pay interest on the money Can be available immediately, so don t miss business opportunities Could have been invested elsewhere, earning a higher profit The business may not have enough retained profit to meet its needs Shareholders may become unhappy if this means lower dividend payments 38

39 Selling Assets Trade Credit Items owned by the business are sold and the money made used to finance the business Items are bought from suppliers on a buy now pay later basis The business is using money it already has so no need to take on loans or pay any interest or charges Gives the business more cash to use in the immediate future The business has to have something worth selling for this to be an option The business may sell something they later need Can only be used to buy certain goods Bills usually have to be settled within 30,60 or 90 days 6 External sources of finance Refers to money that comes from outside the business. Finance Explanation Benefits Drawbacks method Bank Loan An amount of money is borrowed from the bank, then repaid (with interest) over a set period of time Easy and quick to set up Large amounts of money can be borrowed Structured Interest payable If repayments cannot be kept up, the business risks getting a poor credit rating or being made bankrupt Mortgage Overdraft Issuing Shares Long term loan provided by a bank in order to buy property The bank allows the business to draw more money from their bank account than they actually have in it A share in the business is sold to an individual or another business. This money then used to purchase new assets repayment term Only method available to buy property Structured repayments over a long term (25 years) Very quick to arrange A good short term solution to a cash flow problem No need to repay the money invested Cheaper than a loan. Some businesses can raise large sums of money this way Large sums of interest charged Can take a long time to repay debt Only suitable for smaller amounts and has to be repaid within a short amount of time Interest or charges are paid Need to pay the shareholders a share of future profits Ownership also means some influence over how the business is run the original owners may lose control of the business Risky for the shareholder - the investment may be lost if the business fails Family and friends Hire Purchase Governmen t Grants Friends and family is a popular source of finance for new small businesses. An item is bought on finance, repayments are made each month until the final payment when the item becomes the property of the firm Money given to the business by the government. Easy to arrange Often lent interest free Flexible method can hand back the item if no longer required and payment will stop No need to repay the grant May take a long time to acquire all the finance miss opportunities. May not be able lend enough money May require it back suddenly High interest often charged Item doesn t belong to the business until the end of the term Limited funds are available May be restrictions on the usage of the money 7 Cash flow Is the money that flows into and out of a business on a day-to-day basis. 8 Cash inflows Cash inflows mean that money flows into a business and becomes available to it. This could include: Income from sales the money business earn from selling goods and services. Loans from banks this is when the loan is given to the business. Money invested by the business s owners when a new business is started, the owner may invest personal finance, an established business may sell new shares. 9 Cash outflows Is when a business makes a payment out of the business. This could include: Buying raw materials most businesses need to buy raw materials, such as for a production line or for food in a restaurant. Wages these are higher particularly for businesses that provide a service. Rent or mortgage this could be for shops, factories or offices. Interest on loans the bank gives a loan as cash inflow and then the repayments become the outflow. Taxes businesses may have to pay sales taxes and taxes on profits. Advertising this could be used to increase cash inflows. 39

40 10 Why is cash flow important? 11 The benefits of having a positive cash flow 12 Interpreting cash flow forecasts and statements Cash flow is important, because if a business does not have enough cash to pay its bills, it could fail. A business that is unable to pay its suppliers will probably not receive any further supplies. If it is unable to pay its workers, the business will probably stop trading. The business does not need to borrow and can avoid paying interest charges many business use overdrafts to cover periods of cash flow difficulties, this can be expensive. A business will be more able to arrange long-term finance a positive cash flow position means banks will have greater confidence that the business has the ability to may repayments on time. Cash flow problems are a major cause of business failure a positive cash flow helps reduce the risk of a business failing. You will be expected to interpret a cash flow forecast and possibly advise on what actions could be taken to improve the cash flow position. 13 Cash flow forecast Is a plan of the expected inflows and outflows to and from a business over a period of time. Cash inflows money that comes into the business. Cash outflows money that goes out of the business Net cash flow net cash flow = inflows outflows Opening balance is the money in held by the business at the start of the month. Closing balance is the money held by the business at the end of the month and becomes the new opening balance. All negative figures are shown in brackets. 14 Cash flow statement Is a record of the cash inflows and outflows that took place over and earlier period of time. 15 Example of a cash flow December January February Cash Inflows Personal savings 5,000 Bank loan 7,500 Sales revenue 3,800 6,000 8,800 Total Cash Inflow (A) 16,300 6,000 8,800 Cash Outflows Inventories (Stock) 8,000 4,250 3,900 Wages 4,000 3,500 3,700 Interest on bank loan Rent (for three months) 4, Electricity & Gas Total Cash Outflow (B) 16,750 8,220 8,060 Net Cash flow (C = A B) (450) (2,220) 740 Opening Balance (D) 1, (1,670) Closing Balance (E = D + C) 550 (1,670) (930) 16 The importance of cash flow forecasts 17 The causes of cash flow problems Managers can identify times when the business might be short of cash Managers can take suitable actions to avoid cash shortages becoming a major problem. Poor management managers may not be aware of the importance of managing cash flow and may not plan carefully. This is more likely in small businesses, which may not employ specialist finance managers. Even experienced finance managers may make decisions that weaken the cash flow position. The business is making a loss a business makes a loss when over a period of time its costs of production re greater than the revenue it receives from sales. A business making a loss will be at risk of running out of cash at some point. This will occur because more cash is flowing out of the business than in. Offering customers too long to pay this is known as trade credit. Managers may be too generous in offering customers trade credit, especially if they are keen to increase the business s sales. A business may offer 60 days trade credit, but in the meantime it may be unable to pay its own bills on time. 40

41 18 Solutions to cash flow problems 19 Selecting the best solution Reschedule payments it may be possible for a business to agree with it suppliers, or others to whom it owes money, to delay its payments. If this gives the business sufficient time for the business to receive inflows of cash, the problem may be solved. Alternatively a business could persuade its customers to pay more quickly, thereby speeding up cash inflows. This can be done by offering discounts for early payments. Similarly customers that owe money could be chased up and persuaded to pay promptly. Cut costs this should result in reduced cash outflows. This could mean employing fewer staff or holding smaller stocks of raw materials. The business could also seek cheaper sources of fuel or raw materials. However, this could result in lower quality and lead to the business losing customers. Use overdrafts is a short-term flexible loan that can provide the business with the cash it needs. It can be arranged immediately. However, it can be expensive and it used extensively could damage their profits. Banks can also ask for an overdraft to be repaid immediately. Find new source of cash inflows a business may be able to generate extra cash flows by diversifying the products/services they offer. E.g. a pub could also offer accommodation. This could take time to implement. A business could also advertise its products to generate more sales. However, it costs the business money to advertise. Debt factoring a business could sell the money owed by customers to another company. This would ensure the business receives some money. However, the business would not receive the full amount as the debt factoring company would take a percentage. The above solutions have disadvantages. Managers have to take these into account when deciding how to tackle a cash flow problem. Two key factors may influence the managers decisions on how to overcome cash flow problems: The cause of the cash flow problem if the problem is giving customers too long to pay then reducing the amount of trade credit would fix the problem. An overdraft would also fix the problem, but the business would incur extra interest payments. The business s circumstances the above example could be a new business in a new market. They need to persuade customers to shop with them, so the trade credit is a good selling point. Reducing it could cause customers to go to competitors. An overdraft in this case would be better for the business. 20 The different between cash and profit Cash is entirely different from profit Profit is the extent to which a business s revenue exceeds its total costs over some period of time. Profits can be paid to the owners of a business as a reward for taking the risk of investing into the business. Alternatively profits might be reinvested into the business. Cash flow is the way in which money moves through the business. Cash flow shows the balance between cash moving into and out of the business. Cash is essential for all businesses to ensure that they can pay debts on time. Businesses can survive for some time without making a profits. However if a business does not have enough cash to pay its bills, it is likely to be forces to stop trading. 21 Revenue Is the income that a firm receives from selling its goods or services. It is also referred to as turnover it is measured by Number of units sold X Price E.g. if 200 units of a product are sold at 5 the revenue would be 200 x 5 = 1,000 (it is important to include the to get full marks) 22 Price Is the amount a business asks a customer to pay for a single product. (see Marketing KM for more information on price) 23 Sales Refers to the number of products sold by a business over a period of time. Sales is expressed in volume and revenue in monetary terms. 24 Costs Are the spending that is necessary to set up and run a business a business normally has to main types of costs fixed and variable 25 Variable Costs Are costs that change with output. E.g. if a café produces more sandwiches, it will need more bread. Bread is therefore the variable cost. Total variable costs = variable costs of a single unit x number of units. Total variable costs = 15 x 30,000 = 450,000 Raw materials used in production Employee wages when paid based on what they produce Energy used in the production process Commission paid to sales people based on how much they sell 26 Fixed Costs Are costs that do not change with output. E.g. the rent of a building will be fixed for a given period. The rent will not change regardless of how much is being produced. This does not mean that fixed costs never increase, but they do not change with output. Rent & business rates on factory and office premises Salaries of employees and management Insurance Advertising and other promotional campaigns 41

42 27 Total Costs Fixed costs + variable costs 32 The average rate of return (ARR) Compares the average yearly profit from an investment with the cost of the investment and is stated as a percentage. It helps a business decide whether an investment is likely to be worthwhile. ARR = average yearly profit x 100 cost of investment For example, if a new delivery van costs 40,000, but increases a business s profits by 6,000 a year, the ARR would be calculated as follows: ARR = 6,000 x ,000 = 15% To calculate the ARR of an overall project you would have to work out the average yearly profit. 28 Profit and Loss = Revenue total costs if the costs are greater than the revenue this will result in a loss for the business. It is often measured over a given period, normally a year. However it could be separated for each individual project. 29 Profit Measures the difference between the values of a business s revenue and its total costs. 30 Loss Is the amount by which a business s costs are larger than its revenue from all sales. 31 Why do businesses invest? Businesses need assets such as buildings, machinery and vehicles to produce goods and services. They buy these assets to use in producing goods and services in the hope of making a profit. Land and buildings most businesses require land and buildings to be able to supply goods and services. Businesses invest in additional land and buildings when they wish to expand production of existing goods and services or to produce new ones. Machinery and vehicles machinery is used by businesses that supply services as well as on manufacturers production lines. Advances in technology mean that more productive machinery becomes available for most industries over time. Investing in such machinery can help businesses to become more competitive and profitable. Similarly more efficient vehicles can help reduce a business s costs. New products to remain competitive, businesses invest in developing new products. In some industries such as computing, software development and pharmaceuticals, continuous investment is essential for a business to compete with its rivals. Step 1 total profits number of years = average yearly profit. Step 2 ARR = (average yearly profit cost of investment) x Interpreting the results of an ARR A higher figure is preferred as it shows the return on the investment is greater. calculation Managers will simply choose the investment which offers the highest percentage return. It assumes that profits are the sole factor influencing the decision. Answer stated as a percentage makes it easy to compare with the returns from an alternate investment, such as holding the funds in a savings account. ARR are not always accurate, if the forecast for yearly profits is wrong. The profits could be made towards the end of the project, so businesses could be making a loss in the early years. 34 Break-even Is the level of production at which a business s total costs and revenue from sales are equal. If total revenues are greater that total costs then the business will make a profit. If total revenues are less than total costs the business will make a loss. If total revenues equal total costs the business will break-even. 42

43 35 Break even chart Shows a business s costs and revenues and the level of production needed to break even. Made up of four lines Fixed costs Variable costs Total costs Total revenue 36 The level of breakeven output Break-even output occurs when the total costs of production equal the revenue from sales. In a break-even chart, this occurs at the level of production at which the total costs line intersects the total revenue line. Levels of output below break-even at these levels of production, total costs will be greater than total revenue. Business makes a loss. Levels of output above break-even at these higher levels of production, total revenue will be higher than total costs. Business makes a profit. Business makes a profit if it produces and sells more than 500 units. 37 Margin of safety Measures the amount by which a business s current level of production exceeds its break-even level of output. Having a margin of safety can be reassuring for the managers of a business. It means that sales and production can fall significantly before the business is at risk of making a loss. The advantages of using break-even analysis Help managers to see the effects of any changes in costs a rise in costs will increase the level of output and sales a business will need to break-even. It will also reduce or eliminate the margin of safety. A fall in costs will have the opposite effect. Show the effects of changes in price Banks are more likely to provide finance if the business and provide evidence of planning future finances. 38 Why businesses prepare financial statements The disadvantages of using break-even analysis It assumes that a business sells all of the output it produces. This is unlikely, even for a wellknown business. Break-even charts are much greater value to managers if supported by market research showing that future sales will match production levels. Many businesses operate in markets where costs and prices change rapidly and frequently. This makes break-even charts of less value as they are inaccurate almost as soon as they are prepared. Two of the most important financial statements prepared by businesses are the income statement and the balance sheet. Businesses need to prepare these financial statements for a number of reasons. The law publishing financial statements in the UK is a legal requirement under the Companies Acts. If a business fails to prepare these statements in the agreed format, it may be fined, or in extreme cases, forced to cease trading. Sole traders and partnerships do not have to follow the same rules. To help the business s managers make decisions they assist the managers in mangers in making decisions on how to improve the business s performance. E.g. if the business s profits were lower than 43

44 expected, the mangers might take action to improve profitability, possibly by raising prices. To guide investors people and others businesses that are planning to invest money into a business will gain a lot of information from its income statement and its balance sheet. This will help them judge how safe the investment is and whether the investment will earn a profit. 39 Income statement An income statement shows three key pieces of information for a business over a period of trading, normally one year: 40 Components of an Income statement Revenue Minus Cost of sales Gives Gross profit Minus Overheads Gives Operating profit Minus Tax and interest Gives Net profit The revenue earned by the business The costs of production that have been paid by the business The amount of profit earned by the business or the loss it has made. Revenue this is income received by a business from the sale of its goods and services over the period of time covered by the income statement. Cost of sales these are the costs involved in directly supplying the good or service. They include: the wages of employees directly involved in the production, transport and selling of the products, the buying of the products that are sold in the shops, buying the raw materials which are used in production. Energy costs directly used in production. Gross profit = revenue cost of sales Overheads These are costs that do not alter when the level of production changes. They are sometimes called expenses. Overheads include: Salaries of managers, Insurance costs, Interest on loans and Cost of maintaining buildings Operating profit = gross profit overheads Net profit = operating profit taxes and interest payments. Net profit is a good measure of the performance of a business. This Year Last Year Sales revenue 940, ,125 Cost of sales 438, ,050 Gross profit 502, ,075 Overheads 225, ,925 Operating profit 276, ,150 Tax and interest payments 98, ,100 Net profit 178, , Balance sheet Sets out the assets and liabilities that a business has on a particular day (snapshot in time). It shows where a business s finance has come from and how the business has spent the money that it has raised. 42 Assets An asset is anything that is owned by a business. Assets can be divided into different types: Non-current assets a business will normally keep this type of asset for more than 12 months. Non-current assets include: shops, vehicles, machinery and land. Non-current assets create revenue for the business and enable it to earn profits. Current assets these are assets that the business only expects to have for less than 12 months. Current assets include: cash, inventories (stock) 43 Liabilities Liabilities are the amounts owed by a business to other businesses and individuals. Non-current liabilities are debts that will be paid back over many years. These include mortgages. Current liabilities are debts that a business will pay back within a year. These include money owed to suppliers and the tax the business has to pay. 44 Total equity Is the part of the company s money that belongs to shareholders. If a company stops trading and sells all its non-current and current assets, it would normally leave a large sum of money remaining. This would be used to pay all the companies liabilities (debts) 45 Balancing assets and equity A balance sheet gets its name because the two parts of the document will equal each other. The value of the assets owned by the business (once it has paid its liabilities) is called net assets employed this will exactly equal the amount of money put into the business by the company s shareholders which is called total equity. Net assets = total equity If the shareholders of a business raised extra finance to buy new vehicles, then the value of the business s non-current assets and the shareholders total equity will increase by the same amount. Net assets 3,975,000 = Total equity 3,975, New vehicles 125,000 New funds raised by shareholders 125,000 = = New net assets 4,100,000 = New total equity 4,100,000 44

45 46 Example of balance sheet Non-current assets + Current assets - Current liabilities - Non-current liabilities = Net assets = Total equity Balance Sheet at 31 st December '000 '000 Plus: Non-Current Assets Goodwill and other intangible assets Property, plant & equipment 2,450 2,100 Plus: Current Assets 2,600 2,250 Inventories 1,325 1,475 Trade & other receivables 4,030 3,800 Short-term investments Cash & cash equivalents Less: Current Liabilities 6,945 6,245 Trade & other payables 2,310 2,225 Short-term borrowings Current tax liabilities Provisions Less: Non-Current Liabilities Equity 3,750 3,680 Borrowings 1,200 1,450 Provisions ,340 1,590 Net Assets 4,455 3,225 Share capital Retained earnings 3,955 2,725 Total Equity 4,455 3, How to interpret financial statements A business s stakeholders such as managers, suppliers and owners will be very interested in the information that is set out in its balance sheets and income statements. They may look for trends in profits to see if the business is making higher levels of profit than in previous years. They may consider the figure for net assets employed to see if the value of the business has increased over time. To make better judgements about business performances, it is important to compare a profit figure to something else to understand how successful the business has been. There are a number of comparisons that can be made: A comparison with previous years key indicators for a business s performance over time from its income statement are: the revenue from sales of goods and services and gross and net profits. a business may have sales that are less than a previous year, but could have reduced its overheads so profits could still increase. A comparison with the performance of competitors if a business can increase its revenues and profits more quickly that others in the same industry, it is a good sign that the business is performing strongly in financial terms. Using profit ratios there is internal data that can be used to compare a business s financial performance. These can be used to calculate financial ratios, gross profit margin and net profit margin. 48 Gross profit margin This profit ratio compares a business s gross profit with the revenue figure for the same year. A gross profit margin of 25% means that 25p in each 1 of revenue is gross profit. Is 25% a good figure for a gross profit margin? This can only be answered by comparing the figure to one of the following: The business s target for tis gross profit margin. The business s gross profit margin from earlier years. The gross profit of other similar businesses. 45

46 49 Net profit margin This profit ratio compares a business s net profit with the revenue figure for the same year. 50 Judging financial performance from the view of different stakeholders The net profit margin can be a better indicator of a business s financial performance as its calculation included all the costs paid by a business. Is 10% a good figure for a net profit? As with gross profit it needs to be compared with: The business s target for its gross profit margin. The business s gross profit margin from earlier years. The gross profit of other similar businesses. Shareholders and owners they will be concerned because profit is the reward to the business owners and dividends for shareholders. The income statement provide vital information on: the levels of sales achieved, the costs the business has had to pay and the amount of profit or loss that has been made. In addition, a balance sheet can show whether the value of the business has increased. If the value has increased greater than that of a competitor, shareholders will be happy and may be willing to invest more money into the business. Managers use the financial statements to judge whether their decisions are effective. The balance sheet can show how much the business is borrowing; this can help decide on future sources of finance or judge whether borrowing is too high. Suppliers these will guide a supplier on whether it is likely to be paid in the future. A business that is recording a large loss may not be able to pay for supplies. Employees for businesses that operate profit sharing schemes, employees will want to see what level of profits a business is making. It can also guide employees regarding job security. A business that records a substantial loss on its income statement may seek to cut costs to improve its performance. This might mean that is employs fewer people and that some employees lose their jobs. make a better judgement of a business s performance. A rise in profits is a good sign for a business, if the business also has a rise in its net profit margin, this shows that the business is being run more efficiently. If a business revenue and profits are rising over time, it provide evidence that the business s performance is improving, this is especially true if the performance of competitors over the same time period has not improved. Helping managers to make effective decisions financial documents help managers make better decisions. They may be able to uncover the reasons for falling profits and take appropriate action to improve the situation. The income statement will show whether costs have increased, whether it be costs of sales, or overheads or both. Managers can take decisions to cut costs. Alternatively it may be a fall in sales that has caused the decline in profits. Managers can take decisions to increase advertising to provide a boost in sales. 52 Formulae You will not be given any formulae in the exam so you must learn them 51 The importance of financial statements Assessing business performance financial documents allow managers and other stakeholders to conduct ratio analysis. By comparing two pieces of financial information, it is possible to 46

47 Exam Skills 1 Exams Paper 1 Paper 2 1 hour 45 minutes long Worth 90 marks 50% of total GCSE Topics 1,2,3 and 4 are covered 1 hour 45 minutes long Worth 90 marks 50% of total GCSE Topics 1,2,5 and 6 are covered In both papers there will be three sections Section A is a mixture of MCQ and short answer questions and is worth 20 marks. Section B and C are both based around a case study. Which could include some data? You will have to answer a mixture of short and long questions related to the information in the case study. 2 Assessment Objectives AO1 Knowledge This skill is about recalling, selecting and communicating. You need to show that you have got a really good understanding of the facts and that you can use appropriate business terms, e.g. sole trader, supply chain, limited liability AO2 Application This skill is all about applying what you know to different situations. Make sure your answer is relevant to the situation being described. For example an exam question might tell you about a sole trader who wants to buy a new piece of equipment and ask you to suggest how they could raise finance. Here, you would not want to suggest that the company issue more shares (since only a limited company can have shares and sole traders are unlimited). This would mean although the knowledge is correct, it have not been applied correctly and so no marks would be given. AO3 Analysis and Evaluation This skill is all about using evidence to make judgements and reach conclusions. For example if you recommend that a business raise money using a mortgage rather than an overdraft, you need to explain why using what you know about finance. Your ideas need to be structured in a logical way so that your arguments make sense. Often these questions will not have a right answer. The important thing is using evidence from the question and case study to support your conclusion. 3 Command words Assessment Objective AO1 AO1 Command Word Identify, List, State, Give Describe, What is meant by, Define What to do These words ask for a statement. You do not need to back it up with evidence. These words want you to demonstrate your knowledge, a suitable example, maybe form the case study would be needed to acquire the second mark. AO1 & AO2 Explain This means you need to give reasons for things. You need to show that you understand the connection between things that happen in the world and the effects they have on businesses. AO2 & 3 Analyse Separate the information into its components and explain their characteristics and their relationship to the context. Draw on the knowledge and understanding from the specification that underpins the question. AO2 & 3 Advise or Recommend Present the key points about different ideas or strengths and weaknesses of an idea. Make a choice from those given and use evidence from the information provided in the item to support that choice. AO2 & 3 Evaluate You should discuss both sides of an issue. You should finish you answer with a conclusion giving your overall judgement. AO 1, 2 & 3 Calculate Use the given material to carry out a calculation. Remember to show your working. AO2 & 3 AO2 & 3 Give reasons for your answer Use evidence to support your answer This means you need to include lots of points and explain why they are relevant to your answer. Link you ideas together to build a balanced argument. This means you need to pick out specific information from a case study or piece of data that you have been given, in order to back up your answer 47

48 4 Example of Knowledge Area Delayering command words Any Section What is meant by (or define) delayering Knowledge only AO1 (1-3 marks) Sections B and C Explain one benefit to the business of delayering Knowledge applied to the context AO2 (2-4 marks) Sections B and C Analyse the possible benefit to the business of delayering Analysis of the knowledge applied to the context AO3 (6 marks) Sections B and C Recommend whether the business should use delayering to reorganise the workforce Judgement based on analysis of the knowledge applied to the context AO3 (9 or 12 marks) 5 Case study For questions that are based on case study information or on data, make sure, you use evidence from the case study or data set as well as your knowledge of Business in your exams. For questions using analyse or recommend command word, there will usually be advantages and disadvantages of a situation to think about to get all the marks. Before you get started on your answer, read the case study and any data all the way through. Then read the whole question carefully and make sure you have understood what you are being asked to do. It is important the you remember the context of the question and the case study if your business is a sole trader, you answer must be relevant to a sole trader and not to a well-established private limited company. 6 Calculation questions (10% of paper) In your exams, you will have to do some maths e.g. do some calculations using financial data, or interpret a graph. For calculation questions always make sure you show your working even if you final answer is wrong you could still get some marks if your method was correct. Make sure you give your answer in the correct units,% etc or to the correct decimal places asked for. Make sure you have a calculator with you in lessons and the exam. 7 Connectives It is important to use the correct terminology to link your arguments Because This will mean that This is likely to lead to As a result Although this will depend on The impact would be This will mean that A consequence of this might be that This is important because This is significant because Examples of mark schemes for a range of different marks 48

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