Business Building a Business. Topic 3.1 Marketing

Transcription

1 Business Building a Business This unit gives the opportunity to examine how a business develops beyond its start-up phase. Its covers the following modules: Marketing Meeting customer needs Effective financial management Effective people management The wider world effecting business Topic 3.1 Marketing This topic covers: Marketing Market research Product trial and repeat purchase Product life cycle Branding and differentiation Building a successful marketing mix Marketing First a business must develop a product that consumers want to buy, a product that meets the needs of consumers. Then it has to sell the product at price consumers are willing to pay whilst still allowing the business to make a profit. This process is called marketing and is responsible for anticipating, identifying and satisfying consumers wants and needs. To find out what customers want business carry out market research this reduces the risk of failure. Market research allows a business to understand current consumer needs and identify trends in future needs.

2 Surveys This involves asking questions of respondents who are normally spoil into different market segments or part of a market that contains groups of buyers with similar buying habits. Examples of market segmentation include: gender, age, income, socio economic or ethnic groups. Differing ways of conducting surveys include: postal, newspapers, telephone, personal interviews and consumer panels. Surveys can contain a mixture of open and closed questions. Sampling A survey can t ask every customer for their opinion so a fraction or sample is surveyed. To be useful the sample must be representative of all consumers. Samples can be random (out of a hat), systematic (every 100 th person in a telephone directory for example are chosen) or based on a quota or stratified sample (specific segments are chosen). Product trial Product trials are the way businesses persuade customers to try out a new product or service to raise awareness of its existence and gain feedback on its possible success. Advertising Advertising informs customers about a product via the media such as TV, radio, cinema, newspapers and magazines. Free publicity Free publicity also known as PR (public relations) can be used to advertise a product through a free launch party or viral advertising on sites such as MySpace or Facebook may be used. Free samples Another way of launching a product is to give out free samples either for example in a magazine or a free stand in supermarket. Low trial prices Businesses may choose to offer new products at a low price known as penetration pricing this may be a very low price for the first month, or offer special offers such as two for one or money off coupons. Targeting trade buyers Cadburys sell to trade buyers such as wholesalers or retailer so producers may send out advertising literature or sales its sales force to visit. In some case manufacturers may pay supermarkets to stock their products.

3 Repeat purchases Businesses have to retain customers as this is cheaper than attracting new ones. When customers keep on coming back and making another purchase is known as brand loyalty. Only if there is repeat purchases will most products be a success. Customer loyalty can be created through the Marketing Mx: Promotion e.g. advertising, sales displays, PR and free samples Price e.g. special offers or pricing strategies including prestige, penetration, premium pricing, competition pricing, predatory pricing, skimming and loss leaders. Product e.g. modifying the products to incorporate the latest technology or a new variant on an old product if for example Cadbury s chocolate. Place e.g. producers must make sure that their products are in the right place at the right time, this may include supermarkets, local shops and on the internet. Product Life Cycle The product life cycle shows that stages a product passes through over time. These stages include: development phase (this will include market research and development), product launch (advertising and promotion will be intensive), growth phase (sales and profits will rise but costs will still be high as advertising and promotion will still be high), product maturity (product reaches its peak sales and research and development costs will have been paid off). At the maturity stage of a product there is repeat custom and customer loyalty. At the maturity phase the products life cycle can normally be extended through extension strategies such as modifying the product, reducing its price or changing the place it is sold from for example. Finally products move into what is known as saturation and decline. Competitors bring out alternative products that take sales away and the product becomes difficult to sell and eventually the product goes into decline and sales fall until the product becomes obsolete. During the development phase e the product has a negative cash flow as more cash is spent on production whilst no revenue is being generated. In the launch phased the net cash flow is also likely to be negative as launch costs and subsequent promotion is more than likely higher than any revenue generated. During the growth phase net cash flow will be small but then will increases as sales revenue increases to cover high production costs. During the maturity phase, saturation and decline cash flow is likely to be positive as start-up and development costs have been paid and the value of sales exceeds the costs of production. Extension strategies however cost money.

4 Product portfolio analysis Most businesses sell a range of products this range represents a product mix or product portfolio. Businesses manage their product portfolios so to keep up overall sales new products ate launched as others decline. A product portfolio analysis is therefore an analysis of the range of products within a business s portfolio e.g. which are doing well, which are likely to do better, which should be withdrawn etc. Boston Matrix This is a technique to analyse a product portfolio designed by the Boston Consultancy Group. In the Boston Matrix a product is described in two ways: How fast is the whole market for the product growing? How strong is the product within its market?

5 A star is a product whose market is growing fast and it has a high share of the market. Stars are successful and sales and profits of these products will be growing. The business will be spending heavily on promotion and the star may be in the growth phase but will be big profit earners in the future. Cash cows ate products with a relatively strong market share and are often in the maturity phase however the market may be slow and the product may be in decline. Cash cows give good levels of profit and are popular with high levels of customer loyalty and repeat purchases. Cash cows have strong positive net cash flows which can be used to reinvest in developing new products to build up the portfolio. Extension strategies can also be used to keep the sales and profits high. Problem children are a product that has a relatively low market share in a fast growing market. It is a problem as it is unclear what should be done with the product. It may be a product that has a low share of the market and many show promise but may not have taken off yet. Its net cash flow is small and the debate is whether to get rid of the product or invest more in it in the hope of it becoming a star. Dogs are products with a low market share in a low growth market; the product is unsuccessful in its market and in a slow growth market. There is little point in investing in the product and if it is unprofitable the product should be withdrawn.

6 MARKET SHARE HIGH MARKET GOWTH STAR HIGH High growth rate and market share. May need heavy investment to grow rapidly. Will slow and become cash cows if properly managed. PROBLEM CHILD LOW High growth and low market share. Need cash injection to maintain or increase share to become stars. If not, should be phased out LOW CASH COW Low growth but high market share. Very profitable and should be milked to supply cash for other products. DOG Low growth rate and small market share. No longer profitable and should be dropped. Branding A branded product is a product that is seen to be different from other often similar products in the same market. A brand has a certain image that means the product is more likely to be purchased over other products e.g. Apple iphone The opposite of a brand is a generic product such as potatoes that are not seen as any different from one farm to another. Own brands also pose competition for retailers with own brand products from companies such as Tesco and Sainsbury s for example. Own brands are often much cheaper than branded products. The advantages of branding include: Premium pricing which is achieved as the consumer perceives the product to be of a higher quality and higher advertising which increases both the sales of the product and consumers willingness to buy it. Greater consumer awareness means consumer are more aware of the claimed advantages of the product

7 Increased sales and market share due to repeat purchases Product differentiation is a means to ensure similar products appeal to different segments of the market. Products can be differentiated in the following ways: design, formula and function, name, packaging, differentiating across the value chain. Market maps Market Mapping Market maps is a diagram showing the possible positions for two features of a product e.g. low to high price and consumer perceptions of low to high quality. Market maps can be sued to illustrate the differences between a strongly branded product and a weakly branded product. Most strongly branded products are in the higher price/higher quality part of a market map. Can you create a market map and identify where competition is the most competitive and where there may be a potential gap in the market? Revision questions 1. What is meant by quantitative data? 2. Give an example of market research. 3. Identify the aim of market research. 4. Explain the difference between open and closed questions.

8 5. Identify one disadvantage of carrying out market research. 6. Explain how this disadvantage may affect a company. 7. Explain what is meant by product trial. 8. Explain two ways a magazine aimed at teenagers could try to get potential readers to buy the first edition. 9. Give two examples of ways in which Ford have used extension strategies for the Ford Focus. 10. Explain one possible reason why Ford may have introduced these extension strategies. 11. List the names of the four categories used in the Boston Matrix to classify products. 12. What is meant by repeat custom? 13. Why is repeat custom important for a business? 14. Give one way a chocolate manufacturer can differentiate its products. 15. Name one advantage of a business owning a recognised brand. 16. Explain how branding can help Apple i) get consumers to trial its iphone ii) make repeat purchases 17. Identify 3 ways Apple has differentiated the iphone from other similar products 18. Explain one advantages of Apple selling a branded product such as the iphone Topic 3.2 Meeting Customers Needs This topic considers the effects of design and research and development on product differentiation and meeting customer satisfaction, how stock control can be managed effectively, the methods used to keep productivity up and costs and prices down to allow businesses to be more competitive, how effective customer service can be achieved and the effects of legislation on business. This topic covers: Design and research development Managing stock and quality Cost effective operations and competitiveness Effective customer service Meeting consumer protection laws

9 Scientific research Scientific research is at the base of the majority of the products made today. Some businesses have their own research and development teams and departments. Managing stock Most businesses hold stock. This stock is normally one of three types: stock brought from other businesses, half- finished stock or finished stock. Stock control In order to know when to buy in new stock businesses set a maximum, minimum and reorder level. This is sometimes called Just in case method of stock control or bar gate stock graph. Maximum stock levels are the largest amount of stock a businesses has decided to keep at any one time. Reorder levels is the level of stock at which the businesses orders new stock. Minimum or buffer stock levels are the lowest level of stock that a business wants to hold it is also known as the buffer level. If stock falls below this level business might have problems meeting orders. The buffer level stock is important because if stock levels fall to zero businesses would have to stop production. Why is stock control important? All types of business must control stock levels to make sure that there is the right amount of stock to meet the needs of their customers. Manufacturers need to hold enough stocks of raw materials and components to keep the production line working, so that they can meet customers' orders. The service sector too requires a range of stocks, for example garages need petrol and spare parts. If a business runs out of stock, its customers may turn to its competitors. Can a business have too much stock? A business must to make sure that it does not have too much stock. Holding too much stock (over stocking), means that money is tied up in goods and the company s warehouse costs will be high this is inefficient and could cause cash-flow problems. Not enough stock means the business risks missing orders. Key points To prevent too little stock being held, the production manager will fix a minimum stock level and a re-order stock level, for each item of stock.

10 It is not sensible to allow stock to fall to the minimum level before ordering, because deliveries take time to arrive from suppliers. This is known as the lead time. How can stock levels be managed? Stock levels can be managed electronically using electronic point of sale (EPOS). This is used by supermarkets such as Tesco, at the checkout a bar code is scanned this is linked to a computer and stock levels are updated automatically. Other ways of managing stock Stock levels can be managed by using a simple graph. The graph bellow shows how the stock levels can be managed. The maximum amount of stock that can be held in the warehouse is 700 boxes. Production would stop if stocks fell below 200 boxes. The suppliers of the components take 6 days to deliver after having received the order, so the re-order level is set at 400 boxes. Stock control graphs Buffer stock is the stock kept in case of emergencies e.g. the suppliers delivery may be delayed. Just in time stock control or JIT is when businesses hold no stock. When raw materials are needed for production they are delivered just when they are needed to be used. Stock costs money to store so reducing stock levels cuts costs as there are less storage costs and cash is not tied up in the stock itself. However production could be halted by holding too little stock or if a supplier fails to deliver stock on time. JIT cuts costs but does mean that businesses are vulnerable if the stock is not delivered on time and often can t benefit from economies of scale.

11 Revision questions 1. Name the three elements of the design mix. 2. Define the terms scientific research. 3. Explain why scientific research is important in the design of a product. 4. Explain what is meant by buffer stock. 5. Explain using an example what is meant by i) maximum stock levels ii) reorder level. 6. What impact would a sudden and unexpected order have on stock levels? 7. What are warehouse costs? 8. What is meant by JIT? 9. What are the advantages of JIT compared to traditional methods of stock control, but what is the risk? 10. What is the difference between quality inspection and quality assurance? Types of Production Job Production is making one thing at a time. Job production is used when a firm manufacturers labour intensive products. Each product has a unique design based upon the customer s specification. These products often require highly skilled labour and have a high cost. Mass Production is making lots of things continuously. This is also known as flow production. All products are identical and the aim is to produce at lowest cost. To be efficient, production has to be continuous with no stoppages. Many mass production factories operate 24 hours a day with workers rotating in shifts. Mass production is highly competitive. Batch Production A batch of products are produced that are identical, then machines are retooled and a new similar, but slightly different batch of the product is produced e.g. different paints. Designing New Products The three important considerations that are taken into account when designing new products are the same for most designers of new products: Design Mix Function how well does the product do what it is intended to do? Aesthetics how good does the product look?

12 Economy of manufacture how expensive will the product be to produce? The trade-offs involved in designing new products is known as the design mix. Function Economy of manufacture Aesthetics Quality Assurance (Quality Culture) and Total Quality Management Total Quality Management (TQM) is the commitment by the management and workforce to total quality. If successful the firm should achieve zero defects, i.e. no faulty products, no wastage. TQM is concentrates on the systems and staff. Staff are encouraged to put forward ideas on how to improve the process, this is known as continuous improvement. There will be a commitment to quality assurance rather than quality control. The difference between quality control and quality assurance QUALITY INSPECTION. - relies on product testing that happens after the event, it is costly and wasteful and investigates failures QUALITY ASSURANCE also known as Quality Culture. - focuses on how products are produced - defines systems and processes to capture best practice and ensure Right First Time production - prevents failure i.e. Builds-in Quality Problems of poor quality goods Direct costs High levels of waste products. This will increase costs considerably as workers will have been paid to produce the product and raw materials will have been wasted that have gone into its production.

13 Faulty goods returned by customers will have to be replaced. There is a direct cost to replacing the products. Indirect costs The company may develop a poor reputation for its products and sales will decrease. A culture of poor quality may develop in the firm. Customers who experience a poor quality product are service are unlikely to give any repeat business to the firm. Labour Productivity Labour productivity is often seen as the single most important measure of how well a firm is doing. In order to keep costs low and the firm competitive, a manager must attempt to increase labour productivity. Labour productivity = output per period. Number of employees per period The higher the productivity of the workforce the better it is performing. The more productive a firm is, the more competitive it will be. Customer Service It costs a business far more money to gain a new customer than it does to retain an existing one, but by offering great customer service it can do both. Excellent customer service can prompt customers to recommend a business by word of mouth. It is a powerful form of promotion which can boost a business s sales for free. However, customers are more likely to warn others about a business when they have a bad experience, which would damage its reputation. Reasons why good customer service is important to a business; attract and retain customers gain customer satisfaction and loyalty create a positive image and reputation spread information to customers gain information from customers increase and keep market share

14 improve sales revenue and profits Consumer Protection The legal system enables transactions to take place and provide a mechanism for resolving disputes. There is a need for laws to overcome the inequality between large organisations and the individual. They relate to poor quality goods, misleading information, manufacturers negligence, breach of contract, consumer safety and restrictive practises. Consumer Protection Laws *Sale of goods act states that goods for sale must be; 1. of merchantable quality 2. fit for their purpose 3. as described *Trade Descriptions act 1968 protects consumers from false or misleading statements about goods or services. 3.3 Finance The areas which you will be expected to know are External and internal sources of finance Budgets and cashflow forecasts Costs and Breakeven analysis Profit and loss accounts The Purpose of Accounts Internally, managers want to know how much they are selling, the level of their costs and the amount of profit they are making. From this information they can set budgets and performance targets to plan for the next trading year. Externally, all businesses are legally required to keep records of their finances. A firm has to make its accounts available to the Inland Revenue so they can determine how much tax must be paid. Limited companies also have to publish an annual report and final accounts because they have a separate legal identity. They legally produce this for tax purposes (HM Customs).

15 These accounts have to be checked by an independent person - an auditor - to ensure that they true. Potential investors or shareholders, for example, will want to know if a business is worth investing in. Potential creditors will also want to know whether the company will be able to repay any loans or credit they give them. These assessments are based on two key accounting concepts: liquidity and profitability. Liquidity - A firm's ability to meet short term debts as they occur. Profitability - The relationship between a firm's income and expenditure Remember - Make sure you understand why accounting is important, what records are kept and what the law requires. This is a favourite topic with examiners. Sources of Finance You need to know why firms need to raise finance, how they can do it and what each method is best used for. Firms need finance for five reasons: New firms need start-up capital to buy assets needed to run the business. New firms also need to finance their poor initial cash flow they need to pay suppliers before they receive money from customers All firms need enough cash to meet the day to day running costs of the business this is called working capital e.g. to pay, bills, wages etc. Sometimes customers delay payment finance is needed to cover this liquidity shortfall Firms may need finance to fund expansion and finance growth Sources of finance can be categorised as internal (from inside the firm) or external (from outside the business). They can also be classed as Short-term, medium-term or long-term depending on how long the finance is needed for. The table below summarises the sources of finance available to firms and what they are used for. Type Features Used For External Sources Short Term Bank Overdraft One Day-Three Years Money allowed to be withdrawn, despite business bank account having a negative balance. Short term Covering gaps in cash flow

16 Short-term Loan Hire Purchase Trade Credit Factoring Medium Term Venture Capital Leasing Term Loans agreements with high interest rates charged. A specific amount of money borrowed over a fixed time period. Payments will be made every month. A method of buying equipment by paying for it in instalments. The full price is paid plus a charge for interest. The business owns the equipment when the final payment is made. Arrangements with a supplier to postpone payments for goods or services. Usually a period of 30 to 60 days but will depend on the firm s reputation. This has no cost to the business. A way of receiving money from debtors immediately. A factoring company will offer 80% of the amount owed immediately. The remainder will be paid once the debt is settled minus a charge for commission. Three Years-Ten Years These are Business people who are prepared to invest in a business that is considered risky by banks who may have refused to authorise a loan. Venture capitalists will be given a share of the business in return for their investment. E.g. a 30% share. Usually Venture capitalists will give their expertise and contacts to the business. They usually sell their stake when the business has grown and therefore make a healthy return on their investment, however if the business fails they could lose all their original investment. The leasing company will buy the asset and then lease it to the business for a fixed period of time. The business will not own the asset after this period. It is a form of renting. Similar to short-term loans but larger amounts may be available, and interest rates may differ Usually for a specific purpose such as buying a vehicle or piece of equipment Buying equipment Buying Stock To cover gaps in cash flow Used to acquire new equipment and other expenses; often there expertise is more valued than the investment or to set up a new business To acquire equipment Start up costs, buying equipment or expansion Long Term Ten Years + Debentures Very large plc s can borrow through the City of London by issuing debentures (sometimes called stocks and bonds). expansion

17 Mortgage Loans Internal Sources Retained Profit Investment Selling/leasing assets May involve large sums of money and so may be for between 20 and 35 years. Money saved out of net profit. No interest to pay, easily available. Most common source of finance. Money put in by owners (owners capital) or, if a limited company, obtained by selling shares (share capital). Usually a long term commitment. A one-off for raising money, generally when a business is struggling Purchasing land and buildings Running costs, also potentially renewal and expansion Start-up costs, buying equipment, renewal, expansion Buying equipment, running costs (emergency) Exam questions often ask you to advise on the most suitable form of finance for a particular business and its specific need. Think carefully about what the finance is needed for, how much is needed, how long the money is needed for and the type and size of the business. There may not be a clear best type but show the examiners that you have considered the options and give a logical, reasoned conclusion. There are three main factors which affect the choice of finance: Match the type of finance to the length of time it is needed for. For example the purchase of short term assets such as stock should be financed by a short term source of finance such as trade credit or overdraft. The cost of the finance: Bank loans are a cheaper way of financing the purchase of assets than hire purchase or leasing. The size and type of the company some sources of finance such as debentures are only available to limited companies. Budgets A budget is a plan for the firm s income and spending. It is based on predictions for the future and can help the firm know whether it is likely to make a profit or a loss. A firm's managers need to be aware of the inflow and outflow of cash to plan future finances. The firm has various costs and different sources of income. To keep the business profitable and avoid running into financial difficulties the firm must ensure it has enough money to pay its bills. Cash Flow A firm needs to know how much cash is coming in and going out.

18 Drawing up a cash flow forecast shows whether there is enough cash available to pay salaries and settle debts on time. It calculates the firm's reserves, which could be invested in expansion projects or new equipment. Accountants identify when shortfalls are likely to happen, and surplus funds are likely to become available. This helps them plan for when the firm might need an overdraft, or be able to reinvest its reserves into the business. You can see that the total flow of cash into the business (income) for January was 15,500, and that the total outflow from the business (expenditure) was 15,000. You can find the cash balance by subtracting the expenditure from the income, shown as a net surplus (profit) or a net deficit (loss). Income - Expenditure = Balance 15,500-15,000 = 500 (a surplus) Important Note: Cash flow forecasts do not show predictions about how much profit or loss the firm will make, only the cash surplus or deficit. A firm could make a profit in a particular month but if the cash has not been collected from the customer they can still have a cash deficit. Costs and Break Even Analysis Fixed or Variable Costs Fixed costs are those costs that do not change when the level of output is changed. They still have to be paid even if there are no customers. Examples include rent, interest on loans, rates and insurance Variable costs are costs that do not vary with the level of output and the number of customers. Examples include raw materials, packaging and parts. Total costs = Fixed Costs + total variable costs What is Revenue? Revenue is the income gained by firms from selling its goods or services, before any costs are taken away. It is sometimes called turnover or sales turnover.

19 Total Revenue = price per unit x the number of units sold. What is Profit? A profit is made when the revenue gained from selling a certain number of goods or services is greater than the cost of producing them Profit/ loss = Total Revenue Total costs If costs are higher than revenue than the company will have made a loss. What is the break-even point? The breakeven point is the level of sales at which the total costs of making the items equals the total revenue received from selling them. There is no profit or loss at this level of sales. Why do firms want to know the break-even point? To show how many units have to be sold over a period of time for costs to equal revenue To show when a profit might be achieved or a loss suffered To use as a target or objective Calculating the break-even point The break-even point can be calculated in two ways 1. Using tables and graphs 2. Calculation

20 Costs/Revenues TR TC FC Output (units) Breakeven point (units) Example Novelty Mugs is a company that makes unusual painted mugs that are sold in gift shops. The company s fixed costs are 1200 per month. The variable cost for each mug is 2.50 and the company sells them to retailers for 6 each. Contribution Method A popular question in the exam!! The breakeven point can also be calculated using a simple formula. The BEP is worked out in two stages 1. Calculating the contribution - Contribution is the amount that each unit makes towards fixed costs after variable costs have been paid and is worked out using this simple sum 2. Contribution = Selling price Variable cost (per unit) In the case of Novelty Mugs = Calculating the BEP using the simple formula Break-even point (units) = Fixed costs/contribution. For Novelty mugs 1200/ 3.50 = 343 Novelty Mugs would have to sell 343 mugs each month in order to break even

21 Profit and Loss Account At the end of every trading year a business prepares final accounts. These provide a financial summary of all their trading activity during the year. The trading account forms the first part of the profit and loss account and shows the gross profit (or loss) that the company has made. Profit is the money made by the business and equals income minus expenses. The profit and loss account shows the net profit (or loss) made. They are often combined as one trading and profit and loss account so that both the gross and net profit can be displayed in the same set of accounts. Turnover shows the amount of revenue earned by the firm through the sale of goods at marked up prices. Cost of sales shows how much they have spent on buying the goods at cost price before the firm has added its own profit margin. It is divided into three sections: 1. Opening stock is the value of stock remaining unsold from the previous year. 2. Purchases are the amount spent on new stock during the current year. 3. Closing stock is the value of stock left unsold this year to be carried forward. Why do firms produce final accounts? There are several reasons why firms produce accounts: To meet the legal requirements As a tool for potential lenders, investors and shareholders to analyse the company s performance and make informed decisions as to whether to lend to or invest in the company As a decision making tool for managers As a basis for tax inspectors who are assessing the amount of tax to be paid

22 As a tool for comparing the company s performance with previous years or with other companies 3.4 Human Resources Managing People Managing people is vitally important and staff wages are one of the largest expenditures in most businesses. As a result of this, recruitment, training and the creation of good working relationships needs to be carefully managed. In small businesses the managers have direct responsibility for the people working for them, whilst in larger companies it is the job of the Human Resources or Personnel Department to manage people. Internal Organisation Businesses are built up in layers with those with most power at the top and those with least at the bottom, this is known as a hierarchy. The bottom layer has the most people with the least responsibilities and as you go higher, responsibility increases and the number of people decreases. Businesses with lots of layers are called tall hierarchies, those with few layers are known as flat hierarchies. The span of control is the number of people who a manager has direct control over and whom a person reports to is known as their line manager. Managers have differing amounts of people to control depending on the nature of the work and the structure of the firm. People communicate in a company through what is known as a chain of command, this shows the route that individuals communicate both upwards to their managers and downwards to those they are managing. Delayering takes out layers (or in effect people) from within a business and makes businesses more competitive. It speeds up communication and decisions, as less people are involved and also cuts costs as fewer people are employed. Delegation happens when one person cannot complete all the work, so it is delegated or passed on. Delegation gives individuals a sense of authority and responsibility but those taking on the extra responsibility must be clear of what is expected of them and must carry out their increased workload in a responsible manner else problems may occur and the reputation of the business may suffer. Personnel or Human Resources Department This department deals with the people that work in, or want to work for the firm. HR (Human Resources) departments have to recruit and train staff, terminate employment through retirement, redundancy or dismissal, organise staff appraisals, prepare employment contracts, deal with negotiations with staff and employers over grievances and disciplinary procedures and supervise health and safety concerns. In addition the HR department keep records of all staff, negotiate wages and working conditions with Trade Unions and speak on behalf of the firm at tribunals. It is also the

23 responsibility of the HR department to organise welfare facilities such as childcare and first aid rooms and organise staff training. Marketing Department The Marketing Department promotes and markets the product. It sets up market research, works with the design and production department to ensure products are what customers want and organises the advertising, promotion and distribution of products and services. Sales Department This department plans, organises and administers sales. It sells a firm s products through sales representatives, receives orders and passes them on to the production department, deals with customer complaints, makes sure all sales documents are sent at the right time, receives payments and passes them onto accounts. Production Departments This department plans, organises and carries out the manufacturing of a firm s products. Finance Departments Finance departments keep a detailed record of all the money coming in and going out of a business, this allows them to assess whether they have made a profit or a loss. Recruitment Organisations must plan ahead to identify and fill job vacancies. Vacancies arise due to retirement, promotion or expansion. Selecting the right person will add value to a company, whilst the wrong person can increase costs, reduce quality and affect a firm s reputation. Recruitment is usually done in stages. First the Manager and HR Manager write a job and person specification, the job advert is then placed in a suitable publication. CV s are then short listed through comparing them to both the job and the person specification. Next candidates are interviewed and often given a series of tests, the job in then offered to the most suitable candidate or is re-advertised. References are checked and a contract and induction training is arranged. Job descriptions are drawn up by employers and describe the job the worker will be doing e.g. their day to day duties. Job specifications are also drawn up by the employer and state the qualities you are looking for in an applicant. They include things such as: essential and desirable qualities, qualifications and experience. External recruitment whilst more costly, time consuming and risky may bring new skills into the workforce and avoids internal jealousy. Internal recruitment is fast, cheap and the employer knows the applicant however, they have less people to choose from and no new ideas coming in.

24 Training Staff Training costs a company money but helps produce good quality staff and a good reputation for a business. Workers need to be able to acquire new skills and work flexibly and properly trained staff are more productive and satisfied, take less time off and stay with a business longer (meaning they become experienced and highly skilled) and have the confidence necessary to obtain promotion. Induction training is given to new employees and teaches them the basic skills needed for that job, introduces them to the business and its expectations and may include a presentation and tour. Training can take place on the job (while employees are working) and off the job (specialist training away from the normal working environment.) Off the job training may be expensive. Motivation Theories - Maslow s Hierarchy of Needs Maslow studied the reasons why people worked and ranked their needs in order of importance with the most basic needs at the bottom of a pyramid and the most critical at the top. Maslow said that workers must have their basic needs met and once these are met, people will strive for the higherorder needs. He ranked peoples needs as follows: self-fulfilment being most important for people to reach their potential (challenges and the chance to develop new skills), followed by self-esteem and a sense of status within a company (recognition and trust), social needs were next as most people needed positive relationships with their colleagues, safety in the form of job security and pensions followed and finally basic needs were last (these included food and shelter or money to obtain these.) Motivation and Pay Motivation means providing encouragement and incentives for workers. This can be achieved through a variety of measures that are either financial or non-financial. Motivational theorists suggest people have different reasons for working which include: earning enough money to survive and pay for interesting activities outside of work hours, gaining social contact with people and to give a vocation and a purpose to life. The purpose of incentives therefore is to improve people s

25 commitment to work but theorists say incentives will differ according to the person s reason for working. Financial incentives include: higher wages, bonus payments, fringe benefits (free meals for instance), extra payments (overtime), commission based on the number of goods sold and a long term contract. Different pay systems can influence the commitment of workers. Different pay systems include: Wages and Salaries - Most manual workers are paid wages based on an hourly rate and are paid weekly, most non manual workers are paid salaries and these are based on yearly figures and are paid monthly. Time Rate Payment taken for the time to finish a job. This can encourage people to take longer to finish a job to boost their pay. Overtime This is paid when a job cannot be completed in normal time and is normally a higher rate. Piece Rate Payment according to the number of products finished. This may increase work rate but decrease quality. Bonus Payments Extra payments if a job is finished early or by a specific deadline. Commission Payment of a low, basic wage plus a percentage of the total value of products sold. Performance Related Pay - Pay is linked to results and achieving specific targets. Profit Sharing Extra profits based on a company s profits over a given time. Fringe Benefits These include company cars, pensions, private health care and cheap loans. Non-financial incentives include: varied and interesting work, responsibility to make decisions, praise, promotion opportunities, feeling valued, a positive working environment and a challenging role. Communication Businesses need to communicate internally with staff and with customers and suppliers externally. Good communication means workers do their job effectively and motivation remains high, individuals and departments within a business work towards the same objectives. Poor communication leads to low motivation, a breakdown of relationships internally and/or externally (between workers and management for example or a firm and its suppliers), delays in production, increased costs, loss of customers and profits and industrial disputes between employers and employees.

26 Industrial Relations, Employment and the Law Employment laws ensure that workers are fairly treated. They ensure that the employer must provide a written statement on pay, holidays and period of employment, give equal pay to men and women for the same job, give benefits to workers who have completed two years with a firm and follow Health and Safety Laws. Such laws also ensure that employers don t discriminate on age, gender, race or disability, prevent a worker from belonging to a trade union, employ children under thirteen and dismiss workers unfairly. Under Health and Safety Regulations employers must provide fire escapes, guards on machinery, toilets, identify harmful tasks and minimise risks. Equal Opportunities Laws means employers can t discriminate on the grounds of age, race, gender or disability in any aspect of the recruitment and selection process. Employment Legislation The Equal Pay Acts Men & Women must receive the same rate of pay. Sex Discrimination Acts applies to both males and females and makes sex discrimination unlawful in: employment, training and opportunities. Equal Opportunities Act and The Race Relations Act makes racial discrimination unlawful in employment. The Act defines racial discrimination as discrimination on the grounds of colour, race, nationality or ethnic or national origins. The EU Part-time Workers Directive gave part-time workers the same pro rata terms and conditions of employment as full-time workers. This removed legal discrimination against part-time workers so that they now enjoy the same employment protection rights as full-timers. The National Minimum Wage came into force in This applies to all workers over to 21 receive a lower rate. The Working Time Directive (WTD) 1998 Designed to protect employees from a requirement to work excessive hours, the WTD provides workers with the following statutory rights: four weeks' paid annual leave. A llimit on average weekly working time to 48 hours, a rest break after 6 consecutive hours of work and at least a day's rest per week. Disability Discrimination Act - provides that it is unlawful for employers to discriminate against a disabled person. Interest Rates 3.5 The Wider World Affecting Business The price at which a business or individual is charged for borrowing money OR the interest received by a business or individual for investing money.

27 The Bank of England sets interest rates for the government. If the government want to create jobs then it will reduce interest rates. Reducing interest rates will have the following affect; Consumers will save less and spend more on new products. People will be needed to make the new products and jobs will be created. Firms profits will rise as they sell more goods. They will take on workers. Consumers will have more disposable income to spend on goods as their mortgage repayments fall. Many goods or bought on credit. Loans will become cheaper and more goods will be bought on credit, creating new jobs. This will particularly benefit firms making or retailing luxury goods. Exchange Rate The rate at which one currency trades for another currency on the foreign exchange market. Businesses that import and export goods and services will be interested in exchange rate fluctuations. A falling exchange rate (weaker ) will help exporters as it will make their goods cheaper overseas. A rising exchange rate (stronger ) will help importers as it will lower the price of imported goods. A fluctuating makes it very difficult for firms to forecast sales and sign long term contracts. The Trade Cycle and its Stages It has been observed in economies that income and employment tends to fluctuate over time. These regular fluctuations are known as trade or business cycles. The average growth rate in the UK has been around 1.5% in the past 100 years. During the 1980s the figure was nearer 2.5%. However in certain years the growth rate has been negative. There are three main stages to the trade cycle; BOOM Business expectations high, sales high, stocks low, output near capacity, profits and investment high, unemployment low with labour shortages, prices rising. RECESSION Optimism fades, fall in sales, stocks accumulate, profits are lower, investment cut, unemployment rises, price rises slow down. RECOVERY- Expectations rising, sales increase, re-stocking begins, output increases and spare capacity is brought back into production, profits and investment rise, unemployment starts to fall and prices start to accelerate. Impact of the trade cycle The trade cycle is beyond the control of a firm. However, firms will be effected in different ways and to different degrees. Those producing or retailing necessity goods such as supermarkets are known as, and are almost recession proof. Supermarkets retailing primarily inferior goods may

28 even see a slight rise in sales during a recession. Other firms particularly manufacturers of capital goods and to a slightly lesser extent luxury goods, will be affected more than any other during the trade cycle. Opportunities created during a boom, will often be undermined a few years later during times of recession. Business Forecasting Larger firms attempt to forecast economic trends. Various statistical indicators are used by firms. Government, Bank of England, CBI surveys and forecasts and official statistics: unemployment, inflation, business optimism, retail sales figures, National income statistics (GDP) and investment. SOCIAL RESPONSIBILITIES What is Social Responsibility? Social responsibility is the firms responsibility to its employees, customers, local community and the environment. Why do businesses meet social responsibilities? Some firms meet their social responsibilities because of their social conscience of their owners i.e. their personal or moral beliefs. Many companies regard their social image as very important in the development of their reputation and market share. Good publicity is often generated by acts of social responsibility and the recruitment of quality staff can depend on the firm s national and local reputation. In addition new market segments can be reached by responding to trends in public opinion. Increasingly firms use their caring social policies as a basis for their publicity. The Body Shop has based its entire business strategy on social responsibility. Business Ethics An ethical firm will do the morally correct thing even if it conflicts with profit e.g. Innocent pay third world farmers high prices and give 10% of their profits to charity. Unethical could be Nike paying workers a dollar a day in Asia. Business and the Environment Business are having a greater impact on the environment. Business activity often causes a lot of negative impacts on the environment. E.g. road congestion, pollution, air, noise & water pollution and long term detrimental effects of firms such as Global warming. Ryanair was voted the most unenvironmentally friendly firm operating in the UK. Pressure groups Many pressure groups put pressure on businesses to be environmentally friendly e.g. Greenpeace who campaign for renewable energy and give bad publicity to any firm that pollutes the environment e.g. BP

29 International Trade Exports British goods that are sold abroad Import Goods made overseas that are sold in Britain Tariff a tax on imported goods Quota a physical limit that is put on imported goods Protectionism tariffs and quotas used by a country to protect its own firms Subsidy where a government gives money to a firm to help it lower its costs Wage rates are very low in countries such as China and India, sometimes just $1 a day. Many goods are being manufactured there as it is cheaper, as a result many UK firms have closed down because they can t compete on cost. All countries use tariffs to increase the price of imported goods from abroad in order to protect their own industries e.g. If a UK firm wants to sell watches in India it has to pay the Indian government 58% import tax (tariff). The Indian government makes money from this and protects watch manufacturers in India. India has 1.2 billion consumers and China 1.4 billion, making them massive potential markets for UK firms, although consumers are often quite poor. The Chinese and Indian economies are growing at around 8% per year (GDP increasing), whilst the UK economy is in recovery growing at around 2% per year. UK firms will have to take many things into consideration when deciding where to sell their goods or locate. E.g. wage rates, competition, different consumer tastes, tariffs etc. The EU and UK Government rules and regulation Bureaucracy and Red Tape means a lot of rules and regulations made by government that business have to follow. There is complete free trade within the EU. UK firms can sell to any EU country without tariffs. Many countries in the UK have rich consumers e.g. France & Germany. However, all the firms from these countries can also sell their goods in the UK. Many UK firms, such as Rover have closed down due to competition from abroad. There is also free movement of people, hence UK firms can recruit workers from any EU country. The EU and UK government imposes many laws on business e.g. Health and Safety legislation, taxation, Paternity (fathers given time off work when they have a baby) & Maternity legislation and minimum wage. All these increases the costs of business significantly making UK businesses less competitive when compared to firms from countries such as China

30 What is the law on health and safety at work? Health and safety at work covers a wide range of issues, from noise, machinery, the working environment, handling chemicals to the use of new technology. Every year there are many injuries caused by accidents at work or cases of ill health caused by dangerous conditions in the workplace. The law imposes a range of duties on employers for health and safety at work. The law is designed to ensure that people can work in a safe and healthy working environment and that anyone coming into contact with the workplace (e.g. customers) can do so without risk to their health. Health and Safety increases a firm s costs but should avoid bad publicity and prevent it getting sued. The UK also has a minimum wage of around 6 per hour. This is good for low paid workers, but again puts the costs of UK business up as it has to compete with other countries such as China where there is no minimum wage. Minimum Wage Write down the arguments in favour of a high minimum and the arguments against it: In Favour Against