REViSiON GUiDE

BUSiNESS STUDiES

GCSE O LEVEL

MUHAMMAD TALHA
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 Chapter 1: The purpose of Business Activity

The economics problem: needs and wants.

Basically, all humans have needs and wants. Needs are things we can't live without, while wants are simply our
desires that we can live without. We all have unlimited wants, which is true, since all of us want a new PC, a
car, new graphics card, etc. that we actually do not need to live. Businesses produce goods and services to
satisfy needs and wants.

Although we have unlimited wants, there are not enough resources for everyone. Resources can be split into 4
factors of production, which are:

- Land: All natural resources used to make a product or service.

- Labour: The effort of workers required to make a product or service.

- Capital: Finance, machinery and equipment required to make a product or service.

- Enterprise: Skill and risk-taking ability of the entrepreneur.

Entrepreneurs are people who combine these factors of production to make a product.

With these discussed, lets move on to the economic problem. The economic problem results from limited
resources and unlimited wants. This situation causes scarcity, when there are not enough goods to satisfy the
wants for everybody. Because of this, we will have to choose which wants we will satisfy (that will be of more
benefit to us) and which we will not when buying things. For any choice, you will have to would have obtained if
you didn't spend that money. For example, you would have got a book if you didn't buy the pen, or you would
have a burger if you didn't buy the chips. Basically, item that you didn't buy is the opportunity cost. Make sure
that the opportunity cost isn't higher than what you bought!

"Opportunity cost: the next best alternative given up by choosing another item."

Here is a diagram showing the whole economic problem:

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Division of labour/Specialisation

Because there are limited resources, we need to use them the most efficient way possible. Therefore, we now
use production methods that are as fast as possible and as efficient (costs less, earns more) as possible. The
main production method that we are using nowadays is known as specialization, or division of labour.

"Division of Labour/Specialisation is when the production process is split up into different tasks and each
specialized worker/ machine performs one of these tasks."

Advantages:

 Specialized workers are good at one task and increases efficiency and output.
 Less time is wasted switching jobs by the individual.
 Machinery also helps all jobs and can be operated 24/7.

Disadvantages

 Boredom from doing the same job lowers efficiency.

 No flexibility because workers can only do one job and cannot do others well if needed.
 If one worker is absent and no-one can replace him, the production process stops.

Why is business activity needed? (summary)

- Provides goods and services from limited resources to satisfy unlimited wants.

- Scarcity results from limited resources and unlimited wants.

- Choice is necessary for scarce resources. This leads to opportunity costs.

- Specialisation is required to make the most out of resources.

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Business activity:

1. Combine factors of production to create goods and services.

2. Goods and services satisfy peoples wants.
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 3. Employs people and pays them wages so they can consume other products.

Business Objectives:

All businesses have aims or objectives to achieve. Their aims can vary depending on their type of business or
these can change depending on situations. The most common objectives are:

1. Profit: Profit is what keeps a company going and is the main aim of most businesses. Normally a
business will try to obtain a satisfactory level of profits so they do not have to work long hours or pay too
much tax.
2. Increase added value: Value added is the difference between the price and material costs of a product.
E.g. If the price when selling a pen is $3 and it costs $1 in material, the value added would be $2.
However, this does not take into account overheads and taxes. Added value could be increased by
working on products so that they become more expensive finished products. One easy example of this is
a mobile phone with a camera would sell for much more than one without it. Of course, you will need to
pay for the extra camera but as long as prices rise more than costs, you get more profit.
3. Growth: Growth can only be achieved when customers are satisfied with a business. When businesses
grow they create more jobs and make them more secure when a business is larger. The status and
salary of managers are increased. Growth also means that a business is able to spread risks by moving
to other markets, or it is gaining a larger market share. Bigger businesses also gain cost advantages,
called economies of scale.
4. Survival: If a business do not survive, its owners lose everything. Therefore, businesses need to focus
on this objective the most when they are: starting up, competing with other businesses, or in an economic
recession.
5. Service to the community: This is the primary goal for most government owned businesses. They plan
to produce essential products to everybody who need them.

These business objectives can conflict because different people in a business want different things at different
times.

Stakeholders:

Stakeholders are a person or a group which has interest in a business for various reasons and will be directly
affected by its decisions. Stakeholders also have different objectives and these also conflict over time. 4

There are two 6 types of stakeholders, and these types can be classified into two groups with similar interests.

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Group 1: Profit/Money

 Owners:

1. Profit, return on capital.

2. Growth, increase in value of business.

 Workers

1. High salaries.
2. Job security.
3. Job satisfaction.

 Managers

1. High salaries.
2. Job security.
3. Growth of business so they get more power, status, and salary.

Group 2: Value

 Customers

1. Safe products.
2. High quality.
3. Value for money.
4. Reliability of service and maintenance.

 Government

1. Employment.
2. Taxes.
3. National output/GDP increase.

 Community

1. Employment.
2. Security.
3. Business does not pollute the environment.
4. Safe products that are socially responsible.

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 Chapter 2: Types of business activity
Levels of economic activity

In order for products to be made and sold to the people, it must undergo 3 different production processes. Each
process is done by a different business sector and they are:

 Primary sector: The natural resources extraction sector. E.g. farming, forestry, mining... (earns the least
money)
 Secondary sector: The manufacturing sector. E.g. construction, car manufacturing, baking... (earns a
medium amount of money)
 Tertiary sector: The service sector. E.g banks, transport, insurance... (earns the most money)

Importance of a sector in a country:

 no. of workers employed.

 value of output and sales.

Industrialisation: a country is moving from the primary sector to the secondary sector.
De-industrialisation: a country is moving from the secondary sector to the tertiary sector.

In both cases, these processes both earn the country more revenue.

Types of economiess

Free market economy:

All businesses are owned by the private sector. No government intervention.

Advantages:

 Consumers have a lot of choice

 High motivation for workers
 Competition keeps prices low
 Incentive for other businesses to set up and make profits

Disadvantages:

 Not all products will be available for everybody, especially the poor
 No government intervention means uncontrollable economic booms or recessions
 Monopolies could be set up limiting consumer choice and exploiting them
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Command/Planned economy:
All businesses are owned by the public sector. Total government intervention. Fixed wages for everyone.
Private property is not allowed.

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Advantages:

 Eliminates any waste from competition between businesses (e.g. advertising the same product)
 Employment for everybody
 All needs are met (although no luxury goods)

Disadvantages:

 Little motivation for workers

 The government might produce things people don't want to buy
 Low incentive for firms (no profit) leads to low efficiency

Mixed economy:
Businesses belong to both the private and public sector. Government controls part of the economy.

Industries under government ownership:

 health
 education
 defence
 public transport
 water & electricity

Privatisation
Privatisation involves the government selling national businesses to the private sector to increase output and
efficiency.

Advantages:

 New incentive (profit) encourages the business to be more efficient

 Competition lowers prices
 Individuals have more capital than the government
 Business decisions are for efficiency, not government popularity
 Privatisation raises money for the government

Disadvantages:

 Essential businesses making losses will be closed

 Workers could be made redundant for the sake of profit
 Businesses could become monopolies, leading to higher price

Comparing the size of businesses

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Businesses vary in size, and there are some ways to measure them. For some people, this information could be
very useful:

 Investors - how safe it is to invest in businesses

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  Government - tax
 Competitors - compare their firm with other firms
 Workers - job security, how many people they will be working with
 Banks - can they get a loan back from a business.

Ways of measuring the size of a business:

 Number of employees. Does not work on capital intensive firms that use machinery.
 Value of output. Does not take into account people employed. Does not take into account sales
revenue.
 Value of sales. Does not take into account people employed.
 Capital employed. Does not work on labour intensive firms. High capital but low output means low
effiency.

You cannot measure a businesses size by its profit, because profit depends on too many factors not just the
size of the firm.

Business Growth

All owners want their businesses to expand. They reap these benefits:

 Higher profits
 More status, power and salary for managers
 Low average costs (economies of scale)
 Higher market share

Types of expansion:

 Internal Growth: Organic growth. Growth paid for by owners capital or retained profits.
 External Growth: Growth by taking over or merging with another business.

Types of Mergers (and main benefits):

- Horizontal Merger: merging with a business in the same business sector.

 Reduces no. of competitors in industry

 Economies of scale
 Increase market share

- Vertical merger:
Forward vertical merger:

 Assured outlet for products

 Profit made by retailer is absorbed by manufacturer 8
 Prevent retailer from selling products of other businesses
 Market research on customers transfered directly to the manufacturer

Backward vertical merger:

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  Constant supply of raw materials
 Profit from primary sector business is absorbed by manufacturer
 Prevent supplier from supplying other businesses
 Controlled cost of raw materials

Conglomerate merger:

 Spreads risks
 Transfer of new ideas from one section of the business to another

Why some businesses stay small:

There are some reasons why some businesses stay small. They are:

 Type of industry the business is in: Industries offering personal service or specialized products. They
cannot grow bigger because they will lose the personal service demanded by customers. E.g.
hairdressers, cleaning, convenience store, etc.
 Market size: If the size of the market a business is selling to is too small, the
business cannot expand. E.g. luxury cars (Lamborghini), expensive fashion
clothing, etc.
 Owners objectives: Owners might want to keep a personal touch with staff and customers. They do not
want the increased stress and worry of running a bigger business.

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 Chapter 3: Forms of business organisation
Almost every country consists of two business sectors, the private sector and the public sector. Private sector
businesses are operated and run by individuals, while public sector businesses are operated by the government.
The types of businesses present in a sector can vary, so lets take a look at them.

Private Sector

Sole Traders

Sole traders are the most common form of business in the world, and take up as much as 90% of all businesses
in a country. The business is owned and run by one person only. Even though he can employ people, he is still
the sole proprietor of the business. These businesses are so common since there are so little legal requirements
to set up:

 The owner must register with and send annual accounts to the government Tax Office.
 They must register their business names with the Registrar of Business Names.
 They must obey all basic laws for trading and commerce.

There are advantages and disadvantages to everything, and here are ones for sold traders:

Advantages:

 There are so few legal formalities are required to operate the business.
 The owner is his own boss, and has total control over the business.
 The owner gets 100% of profits.
 Motivation because he gets all the profits.
 The owner has freedom to change working hours or whom to employ, etc.
 He has personal contact with customers.
 He does not have to share information with anyone but the tax office, thus he enjoys complete secrecy.

Disadvantages:

 Nobody to discuss problems with.

 Unlimited liability.
 Limited finance/capital, business will remain small.
 The owner normally spends long hours working.
 Some parts of the business can be inefficient because of lack of specialists.
 Does not benefit from economies of scale.
 No continuity, no legal identity.

Sole traders are recommended for people who:

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 Are setting up a new business.
 Do not require a lot of capital for their business.
 Require direct contact for customer service.

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Partnership

A partnership is a group consisting of 2 to 20 people who run and own a business together. They require a Deed
of Partnership or Partnership Agreement, which is a document that states that all partners agree to work with
each other, and issues such as who put the most capital into the business or who is entitled to the most profit.
Other legal regulations are similar to that of a sole trader.

Advantages:

 More capital than a sole trader.

 Responsibilities are split.
 Any losses are shared between partners.

Disadvantages:

 Unlimited liability.
 No continuity, no legal identity.
 Partners can disagree on decisions, slowing down decision making.
 If one partner is inefficient or dishonest, everybody loses.
 Limited capital, there is a limit of 20 people for any partnership.

Recommended to people who:

 Want to make a bigger business but does not want legal complications.
 Professionals, such as doctors or lawyers, cannot form a company, and can only form a partnership.
 Family, when they want a simple means of getting everybody into a business (Warning: Nepotism is
usually not recommended).

Note: In some countries including the UK there can be Limited Partnerships. This business has limited liability but
shares cannot be bought or sold. It is abbreviated as LLP.

Private Limited Companies

Private Limited Companies have separate legal identities to their owners, and thus their owners have limited
liability. The company has continuity, and can sell shares to friends or family, although with the consent of all
shareholders. This business can now make legal contracts. Abbreviated as Ltd (UK), or Proprietary Limited,
(Pty) Ltd.

Advantages:
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 The sale of shares make raising finance a lot easier.
 Shareholders have limited liability, therefore it is safer for people to invest but creditors must be
cautious because if the business fails they will not get their money back.

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  Original owners are still able to keep control of the business by restricting share distribution.

Disadvantages:

 Owners need to deal with many legal formalities before forming a private
limited company:
o The Articles of Association: This contains the rules on how the company will be managed. It states the rights
and duties of directors, the rules on the election of directors and holding an official meeting, as well as the issuing
of shares.
o The Memorandum of Association: This contains very important information about the company and
directors. The official name and addresses of the registered offices of the company must be stated. The objectives
of the company must be given and also the amount of share capital the owners intend to raise. The number of
shares to be bought b each of the directors must also be made clear.
o Certificate of Incorporation: the document issued by the Registrar of Companies that will allow the Company
to start trading.
 Shares cannot be freely sold without the consent of all shareholders.
 The accounts of the company are less secret than that of sole traders and partnerships. Public
information must be provided to the Registrar of Companies.
 Capital is still limited as the company cannot sell shares to the public.

Public Limited Companies

Public limited companies are similar to private limited companies, but they are able to sell shares to the public. A
private limited company can be converted into a public limited company by:

1. A statement in the Memorandum of Association must be made so that it says this company is a public
limited company.
2. All accounts must be made public.
3. The company has to apply for a listing in the Stock Exchange.

A prospectus must be issued to advertise to customers to buy shares, and it has to state how the capital raised
from shares will be spent.

Advantages:

 Limited liability.
 Continuity.
 Potential to raise limitless capital.
 No restrictions on transfer of shares.
 High status will attract investors and customers.
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Disadvantages:

 Many legal formalities required to form the business.

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  Many rules and regulations to protect shareholders, including the publishing of annual accounts.
 Selling shares is expensive, because of the commission paid to banks to aid in selling shares and costs
of printing the prospectus.
 Difficult to control since it is so large.
 Owners lose control, when the original owners hold less than 51% of shares.

Control and ownership in a public limited company:

The Annual General Meeting (AGM) is held every year and all shareholders are invited to attend so that they
can elect their Board of Directors. Normally, Director are majority shareholders who has the power to do
whatever they want. However, this is not the case for public limited companies since there can be millions of
shareholders. Anyway, when directors are elected, they have to power to make important decisions. However,
they must hire managers to attend to day to day decisions. Therefore:

 Shareholders own the company

 Directors and managers control the company

This is called the divorce between ownership and control.

Because shareholders invested in the company, they expect dividends. The directors could do things other than
give shareholders dividends, such as trying to expand the company. However, they might loose their status in the
next AGM if shareholders are not happy with what they are doing. All in all, both directors and shareholders have
their own objectives.

Co-operatives

Cooperatives are a group of people who agree to work together and pool their money together to buy "bulk".
Their features are:

 All members have equal rights, no matter how much capital they invested.
 All workload and decision making is equally shared, a manager maybe appointed for bigger cooperatives
 Profits are shared equally.

The most common cooperatives are:

 producer co-operatives: just like any other business, but run by workers.
 retail co-operatives: provides members with high quality goods or services for a reasonable price.

Other notable business organizations:

Close Corporations: 13

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This type of business is present in countries such as South Africa. It is like a private limited company but it is
much quicker to set up:

 Maximum limit of 10 people.

 You only need a simple founding statement which is sent to the Registrar of Companies to start the
business.
 All members are managers (no divorce of ownership and control).
 A separate legal unit, has both limited liability and continuity.

Disadvantages:

 The size limit is not suitable for a large business.

 Members may disagree just like in a partnership.

Joint ventures

Two businesses agree to start a new project together, sharing capital, risks and profits.

Advantages:

 Shared costs are good for tackling expensive projects. (e.g aircraft)
 Pooled knowledge. (e.g foreign and local business)
 Risks are shared.

Disadvantages:

 Profits have to be shared.

 Disagreements might occur.
 The two partners might run the joint venture differently.

Franchising

The franchisor is a business with a successful brand name that recruits franchisees (individual businesses) to
sell for them. (e.g. McDonald, Burger King)

Advantages for the franchisor:

 The franchisee has to pay to use the brand name.

 Expansion is much faster because the franchisor does not have to finance all new outlets.
 The franchisee manages outlets
 All products sold must be bought from the franchisor. 14

Disadvantages for the franchisor:

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  The failure of one franchise could lead to a bad reputation of the whole business.
 The franchisee keeps the profits.

Advantages for the franchisee:

 The chance of failure is much reduced due to the well know brand image.
 The franchisor pays for advertising.
 All supplies can be obtained from the franchisor.
 Many business decisions will be made by the franchisor (prices, store layout, products).
 Training for staff and management is provide by the franchisor.
 Banks are more willing to lend to franchisees because of lower risks.

Disadvantages for the franchisee:

 Less independence
 May be unable to make decisions that would suit the local area.
 Licence fee must be paid annually and a percentage of the turnover must be paid.

Public Sector

Public corporations:

A business owned by the government and run by Directors appointed by the government. These businesses
usually include the water supply, electricity supply, etc. The government give the directors a set of objectives
that they will have to follow:

 to keep prices low so everybody can afford the service.

 to keep people employed.
 to offer a service to the public everywhere.

These objectives are expensive to follow, and are paid for by government subsidies. However, at one point the
government would realise they cannot keep doing this, so they will set different objectives:

 to reduce costs, even if it means making a few people redundant.

 to increase efficiency like a private company.
 to close loss-making services, even if this mean some consumers are no longer provided with the
service.

Advantages:

 Some businesses are considered too important to be owned by an individual. (electricity, water, airline)
 Other businesses, considered natural monopolies, are controlled by the government. (electricity, water)
 Reduces waste in an industry. (e.g. two railway lines in one city) 15
 Rescue important businesses when they are failing.
 Provide essential services to the people (e.g. the BBC)

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

Municipal enterprises

These businesses are run by local government authorities which might be free to the user and financed by
local taxes. (e.g, street lighting, schools, local library, rubbish collection). If these businesses make a loss,
usually a government subsidy is provided. However, to reduce the burden on taxpayers, many municipal
enterprises are being privatised.

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Chapter 4: Government and economic influences
on business
The impact of business activity on society

All business activity has benefits and undesirable effects on society. These reasons are why governments want
to have some control over business activity:

Possible benefits:

 Production of useful goods to satisfy customer wants.

 Create employment/increases workers living standards.
 Introduction of new products or processes that reduces costs and widen product range.
 Taxes help finance public services.
 Business earn foreign currency in exports and this could be spent on imports.

Possible undesirable effects:

 Business might ruin cheap but beautiful areas.

 Low wages and unsafe working conditions for workers because businesses want to lower costs.
 Pollution
 Production of dangerous goods.
 Monopolies
 Advertising can mislead customers.

Governments tend to pass laws that restrict undesirable activities while supporting desirable activities.

Governments and the economy

Government economic objectives:

Governments all have aims for their country, and this is what they are:

 Low inflation.
 Low unemployment.
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 Economic growth.
 Balance of payments.

Low inflation:

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Inflation occurs when prices rise. When prices rise rapidly many bad thing could happen:

 Workers wages buy less than before. Therefore their real income (how much you can buy with so much
money) falls. Workers will be unhappy and demand for higher wages.
 Prices of local goods will rise more than that of other countries with lower inflation. People may start
buying foreign goods instead.
 It would cost more for businesses to start or expand and therefore it does not employ as many people.
 Some people might be made redundant so that the business can cut costs.
 Standards of living will fall.

This is obviously why governments want to keep inflation as low as possible.

Low levels of unemployment:

When people are unemployed, they want to work but cannot find a job. This causes many problems:

 Unemployed people do not work. Therefore national output will be lower than it should be.
 The government will have to pay for unemployment benefits. This is expensive and money cannot be
use for other purposes.

If the level up unemployment is low, it will increase national output and improve standards of living for workers.

Economic growth

A country is said to grow when its GDP (Gross Domestic Product) is increasing. This is the total value of goods
produced in one year. The standards of living tends to increase with economic growth. Problems arise when a
country's GDP fall:

 The country's output is falling, fewer workers are needed and unemployment occurs.
 Standards of living will fall.
 Businesses will not expand because they have less money to invest.

Economic growth is not achieved every year. There are years where the GDP falls and the trade cycle explains
the pattern of rises and falls in national GDP.

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The trade cycle has 4 main stages:

 Growth: This is when GDP is rising, unemployment is falling, and the country has higher standards of
living. Businesses tend to do well in this period.
 Boom: Caused by overspending. Prices rise rapidly and there is a shortage of skilled workers. Business
costs will be rising and they are uncertain about the future.
 Recession: Because overspending caused the boom, people now spend too little. GDP will fall and
businesses will lose demand and profits. Workers may lose their jobs.
 Slump: A long drawn out recession. Unemployment will peak and prices will fall. Many firms will go out of
business.

After all of this happens the economy recovers and begins to grow again. Governments want to avoid a boom
so that it will not lead to a recession and a slump. Currently, the government of China is spending a lot of money
so that their economy would continue to grow and avoid a boom.

Balance of payments

Exports earn foreign currency, while imports are paid for by foreign currency (or vice versa). The difference
between the value of exports and imports of a country is called balance of payments. Governments try to
achieve a balance in imports and exports to avoid a trade deficit, when exports are higher than imports. Of
course, the government will lose money and their reservoir of foreign currency will fall. This results in:

 If the country wants to import more, they will have to borrow foreign currency to buy goods.
 The country's currency will now worth less compared to others and can buy less goods. This is called
exchange rate depreciation.

Government economic policies 19

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Governments want to influence the national economy so that it would achieve their aforementioned objectives.
They have a lot of power over business activity and can pass laws to try to achieve their goals. The main ways in
which governments can influence business activity are called economic policies. They are:

 Fiscal Policy: taxes and public spending.

 Monetary policy: controlling the amount of money in the economy through interest rates.
 Supply side policies: aimed at increasing efficiency.

Fiscal policy

Government spending could benefit some firms such as:

 Construction firms (road building)

 Defense industries (Iraq war)
 Bus manufacturers (public transport)

Governments raise money from taxes. There are Direct taxes on income and Indirect taxes on spending.
There are four common taxes:

 Income tax
 Profits tax
 VAT (Value Added Tax)
 Import tariffs

Income tax

Income tax is based on a percentage of your income. Income tax is usually progressive, meaning that the
percentage of tax you have to pay rises with your income. Effects on business and individuals if there was a rise
of income tax:

 People will have less disposable income.

 Sales fall because people have less money to spend.
 Managers will cut costs for more profit. Workers might be made redundant.
 Businesses producing luxury goods will lose the most, while others producing everyday needs will get
less affected.

Profits tax or corporation tax

This is a percentage of the profit a business makes. A rise in it would mean:

 Managers will have less retained profit, making it harder for the business to expand.
 Owners will get less return on capital employed. Potential owners will be reluctant to start their own
business if the profit margin is too low. 20

Indirect taxes

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These taxes are a percentage on the price of goods, making them more expensive. Governments want to avoid
putting them on essential goods such as foods. A rise it it would mean:

 The effect would be almost the same as that of an increase in income tax. People would buy less but
they would still spend money on essential goods.
 Again, real incomes fall. Costs will rise when workers demand higher wages.

Import tariffs and quotas

Governments put tariffs on imports to make local goods look more competitive and also to reduce imports. When
governments put import tariffs on imports:

 Sales of local goods become cheaper than imports, leading to increased sales.
 Businesses who import raw materials will suffer higher costs.
 Other countries will retaliate by putting tariffs on the country's exports, making it less competitive.

Quotas maybe used to limit the amount of imports coming in.

Monetary policy and interest rates

Governments usually have to power to change interest rates through the central bank. Interest rates affect
people who borrow from the bank. When interest rates rise:

 Businesses who owe to bank will have to pay more, resulting in less retained profit.
 People are more reluctant to start new businesses or expand.
 Consumers who took out loans such as mortgages will now have less disposable income. They will
spend less on other goods.
 Demand will fall for businesses who produces luxury or expensive goods such as cars because people
are less willing to borrow.
 Higher interest rates will encourage other countries to deposit money into local banks and earn higher
profits. They will change their money into the local currency, increasing its demand and causing
exchange rate appreciation.

Supply side policies

These policies aim to make the countries economy more efficient so that they can produce more goods and
compete in the international economy. In doing so their GDP will rise. Here are some policies:

 Privatisation: Its aim is to use profit as an incentive to increase efficiency.

 Improve training and education: This obviously increases efficiency. This is crucial to countries with a
big computer software industry.
 Increase competition: Competition causes companies to be more efficient to survive. Governments
need to remove any monopolies.
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Government controls over business activity

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Government also influence major areas of business activity:

 what goods can be produced

 responsibilities to employees and working conditions
 responsibilities to consumers
 responsibilities to the natural environment
 location decisions

Undesirable effects created by business activity make governments want to control business activity:

 Business might ruin cheap but beautiful areas.

 Monopolies.
 Advertising can mislead customers.

Why government control business activity

Production of certain goods and services:

Governments can pass laws to restrict and ban certain dangerous goods such as:

 Weapons like guns and explosives.

 Drugs
 Goods that harm the environment

Consumer protection:

Consumers are easily misled by advertising. It is because consumers lack the technical knowledge and
advertising can be very persuasive. In the UK, these laws are passed to protect customers from being exploited
by businesses:

 Weights and Measures Act: to stop underweight goods being sold to customers.
 Trade Descriptions Act: all advertisements must be truthful.
 Consumer Credit Act: makes it illegal to not give customers their copy of the credit agreement to check
how much money they really have.
 Sale of Goods Act: Makes it illegal to sell:

- Goods which have serious flaws or problems.

- Products that are not fit for the purpose intended by the consumer.

- Products that do not function as described on their label or by the retailer.

 Consumer Protection Act: Make false pricing claims illegal. Consumers can now sue producers or
22
retailers if their products cause harm to them.

Competition policy: Control of monopolies

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Monopolies could cause a lot of harm to an economy because there are nobody to compete against them:

 They exploit consumers with high prices.

 They prevent new firms from starting up.
 Monopolies are not encouraged to be efficient because there are no competitors.

In some countries, monopolies are banned and must be broken up into smaller firms. In the UK, monopolies can
be investigated by the Competition Commission. This government body reports two main types of problems:

 Business decisions that are against consumer interests, such as trying to eliminate all competitors.
 Proposed mergers or takeovers that will result in a monopoly.

Protecting employees:

Employees need protection in the following areas:

 Unfair discrimination
 Health and safety at work
 Unfair dismissal
 Wage protection

Protection against unfair discrimination:

Often workers are discriminated in a job because of various reasons. There are laws that protect the employee
from such reasons to be discriminated against:

 Sex Discrimination Act: people of different genders must have equal opportunities.
 Race Relations Act: people of all races and religions mush have equal opportunities.
 Disability Discrimination Act: it must be made suitable for disabled people to work in businesses.
 Equal Opportunities Policy: That is what everything is all about.

The UK is currently working on an age discrimination act.

Health and Safety at work:

Laws protect workers from:

 protect workers from dangerous machinery.

 provide safety equipment and clothing.
 maintain reasonable workplace temperatures.
 provide hygienic conditions and washing facilities. 23
 do not insist on excessively long shifts and provide breaks in the work timetable.

Managers not only provide safety for their employees only because laws say so. Some believe that keeping
employees safe and happy improves their motivation and keeps them in the business. Others do it because it is
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present in their moral code. They are then considered making an ethical decision. However, in many countries,
workers are still exploited by employers.

Protection against unfair dismissal

Employees need protection from being dismissed unfairly. The following reasons for the employee to be
dismissed is unreasonable:

 for joining a trade union.

 for being pregnant.
 when no warnings were given beforehand.

Workers who thing they have been dismissed unfairly can take their case to the Industrial Tribunal to be judged
and he/she might receive compensation if the case is in his/her favour.

Wage Protection

Employers mus pay employees the same amount that has been stated on the contract of employment, which
states:

 Hours of work.
 Nature of the job.
 The wage rate to be paid.
 How frequently wages will be paid.
 What deduction will be made from wages, e.g. income tax.

A minimum wage rate is present in many Western countries and the USA. There are Advantages and cons of
the minimum wage:

Advantages:

 Prevents strong employees to exploit unskilled workers who could not easily find work.
 Encourages employers to train unskilled employees to increase efficiency.
 Encourages more people to seek work.
 Low-paid workers can now spend more.

Disadvantages:

 Increases costs, increases prices.

 Owners who cannot afford these wages might make employees redundant instead.
24
 Higher paid workers want higher wages to keep on the same level difference as the lower paid workers.
Costs will rise.

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Location of Industry

How governments want to locate businesses:

 They encourage businesses to move to areas with a high level of unemployment, or called
development areas.
 They discourage firms from locating in overcrowded cites or sites noted for their natural beauty.

How governments will influence the decisions of firms to locate:

 Businesses will be refused planning permission (permit to build in a place) if they wish to locate in
overcrowded cities or beautiful areas. Building in these areas might be banned altogether.
 Governments can provide regional assistance, such as grants and subsidies to encourage firms to
locate in undeveloped areas.

Governments can help businesses too

Governments can help businesses to:

 to encourage businesses to locate in poorer regions.

 to encourage enterprise by helping small businesses set up and survive.
 to encourage businesses to export.

Regional Assistance:

 Governments want development to be spread evenly over the whole country.

 Grants and subsidies can be used to attract firms to an area.

Small firms

Small firms are important for and economy because:

 They provide most of the employment because they are usually labour intensive.
 Small firms operate in rural areas where unemployment tends to be high.
 They can grow into very important businesses employing thousands of workers and producing output
worth millions of dollars.
 Provides more choice for customers. They compete against bigger companies.
 They are often managed in a very flexible way, and is quicker to adapt to changing demands.

Governments help them by:

 Lower rates of profits tax, so they can have more retained profit.
 Giving grants and cheap loans. 25
 Providing advice and information centres to small firms.

Exporting goods and services

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Why governments want businesses to export:

 Exports earn foreign currency, which can be use to buy imports.

 More exports means more people needed to produce them, increasing employment and standards of
living.
 Successful exporters earn more money and have to pay more profits tax.

Governments can support exporters by:

 Encourage banks to lend to exporting businesses at lower interest rates.

 Offering subsidies or lower taxes to firms. However, other countries would retaliate and there would be
no overall advantage.
 Trying to keep the local currency as stable as possible to make it easier for businesses to know how
much they are going to make from exports.
 Organising trade fairs abroad to encourage foreign businesses to buy the country's exports.
 Offering credit facilities. This means that if a foreign customers refuses to pay for goods, the company
could be compensated by the government.

Businesses in the economic and legal environment

Businesses could not ignore the power of the government in controlling business activity. Multinationals are an
exception although normally businesses cannot afford to move to other countries. Government decisions create
the environment in which businesses will have to operate and adapt to. The environment created by legal and
economic controls are one of the constraints to managers when making decisions.

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 Chapter 5: Other influences on business
External constraints and constraints on business activity
Businesses cannot survive by neglecting the "real world", which includes influences that forces a business to
make certain decisions or constraints that limits or controls actions. External constraints are things that
businesses cannot control, these are:

 Technological change: New products.

 Technological change: New production processes.
 Increased competition.
 Environmental issues.

Here is a table from the book giving examples and the possible impacts on business activity:
Technological changes

Technological change bring about constant changes in consumer products and production processes. By
using R&D to develop new products, companies could open up new markets and make huge amounts of
money. Such companies include Microsoft, Sony and Apple. However, new products quickly replace old ones
just like how machines are replacing workers in production processes.

There are two general things a firm could do when facing technological change:

 Ignore the changes and operate in the "traditional and old fashioned way". However, they can only sell to
a small and limited market.
 Compete by welcoming changes and have an access to huge mass markets.

Here are some Advantages and cons of technological change:

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Advantages:

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  New products encourage customers to buy more.
 If a business comes up with a new product first, they gain a huge competitive advantage.
 "High-tech" production methods make production more efficient.
 Fewer workers are required.
 New production methods can be adapted very quickly which gives businesses more flexibility in
meeting consumer wants.
 E-commerce opens up new markets and the Internet is a medium of advertising.

Disadvantages:

 R&D is expensive, without guaranteed success.

 Businesses that do not develop new products will fail, leaving workers unemployed.
 New production methods and machines are expensive.
 Workers will need retraining which is expensive. They might be reluctant to learn or fear that they will not
do well. This could lead to a fall in motivation.
 E-commerce lacks personal customer service.
 Smaller businesses cannot afford these things.

Introducing technological change successfully

Workers and managers may fear change. Workers might think:

 Will I be able to operate the new machines?

 Will I lose my job because the machines are more efficient?

Older workers are especially afraid of loosing out to younger and better trained workers. Managers also fear
change, since recruiting technology experts will make them look more inferior in some way.

To make these changes work better, workers need to be involved in the changes. Workers might be told why
the new machines are necessary and how they will be trained to use them, as well as letting them suggest ways
to make work more efficient with the machines. It leads to more opportunities for trained and skilled staff and
can lead to new ideas and products.

Competition

Most businesses have competitors. Most business decisions are based on:

 What competitors are doing?

 How they might react?

When you develop a successful product, other businesses will undoubtedly copy you. Therefore, you will need 28
to research and develop even more products, keeping ahead of them. Competition is a major influence on
business activity.

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Environmental constraints on business activity

There are two general opinions on caring about the environment:

- Opinion A: Keeping the environment clean is too expensive. We want to keep prices low and this is what
consumers want too.

 Protecting the environment is too expensive and reduce profits.

 Increased prices mean increased costs.
 Firms could become less competitive compared to others who are not environmentally friendly.
 Governments should pay to clean it up.

- Opinion B: Consumers are now starting to prefer businesses with social responsibility. Cleaner and more
efficient machinery benefit the business in the long-run.

 Environmental issues affect us all and businesses have a social responsibility to deal with them.
 Using up scarce resources leaves less for future generations and raise prices.
 Consumers are becoming more socially aware. More now prefer firms that are environmentally friendly
which could become an marketing advantage.
 If a business damages the environment, pressure groups could protest and damage its image and
reputation.

Ways to make a business more environmentally friendly

Governments make these business activities illegal:

 locating in environmentally sensitive areas.

 dumping waste products into waterways.
 making products that cannot be easily recycled.

Manufacturers often complain that these laws raise prices. Therefore, some governments usually do not make
these laws strict with the hope of increasing output and in turn employment.

Financing penalties, including pollution permits

Pollution permits are licences given to a business to pollute up to a certain level. If "dirty" businesses pollute
over the permitted level, they either have to buy permits from "cleaner firms" or pay heavy fines. This
encourages firms to be cleaner and sell their permits to dirtier companies for more money. Other penalties
include additional taxes. 29

Consumer action and pressure groups

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Consumers are becoming more socially aware, and many of them will stop buying goods from companies which
pollute the environment, harming a business' reputation and image. Bad publicity means lower sales. If they
want to keep their sales revenue up firms would have to adapt to more environmentally friendly production
processes again.

Pressure groups are becoming very powerful nowadays. They can severely damage businesses that are not
socially responsible.

These are their powers:

 Consumer boycotts
 Protests
 Blocking waste pipes.

These are times when they are likely to take action:

 They have popular public support and has a lot of media coverage.
 The group is well organised and financed.

These are times when they are less likely to take action:

 What a company is doing is unpopular but not illegal. (e.g. testing drugs on rats)
 The cost of making the company cleaner is more than losses that could be made by losing image and
sales.
 The firm supplies other firms and not customers, public support will be less effective.

Environmental issues and cost-benefit analysis

Governments are increasingly concerned about the social and environmental effects of business activity. They
have started to use a new type of analysis on businesses and government proposals which will not only take into
account financial costs but also external costs.

Cost-benefit analysis requires and awareness of external costs (costs to the rest of society) and external
benefits (gains to the rest of society). Here are some examples.

Decision: A new chemical plant will be built. 30

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Social costs are worked out from private costs and external costs.

Social benefits are worked out from private benefits and external benefits.

In other words:

 Social costs = private costs + external costs.

 Social benefits = private benefits + external benefits

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 Chapter 6: Business costs and revenue
Business costs

All business activity involves some kind of cost. Managers need to think about the because:

 Whether costs are lower than revenues or not. Whether a business will make a profit or not.
 To compare costs at different locations.
 To help set prices.

There are two main types of costs, fixed and variable costs. Here are some types of costs:

 Fixed costs = stay the same regardless of the amount of output. They are there regardless of whether a
business has made a profit or not. Also known as overheads.
 Variable costs = varies with the amount of goods produced. They can be classified as direct costs
(directly related to a product).
 Total costs = fixed + variable costs

Break-even charts, comparing costs with revenue

Drawing a break-even chart

Uses of break-even charts

There are other benefits from the break-even chart other than identifying the breakeven point and the maximum
profit. However, they are not all reliable so there are some disadvantages as well:
Advantages:

 The expected profit or loss can be calculated at any level of output. 32

 The impacts of business decisions can be seen by redrawing the graph.
 The breakeven chart show the safety margin which is the amount by which sales exceed the breakeven
point.

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Disadvantages:

 The graph assumes that all goods produced are sold.

 Fixed costs will change if the scale of production is changed.
 Only focuses on the breakeven point. Completely ignores other aspects of production.
 Does not take into account discounts or increased wages, etc. and other things that vary with time.

Break-even point: the calcultion method.

It is possible to calculate the breakeven point withought having to draw the graph. We need two formulas to
achieve this:

 Selling Price - Variable Costs = Contribution

 Break-even point = Total fixed costs/Contribution

Business costs: other definitions

There are other types of costs to be analysed that is split from fixed and variable costs:

 Direct costs: costs that are directly related to the production of a particular product.
 Marginal costs: how much costs will increase when a business decides to produce one more unit.
 Indirect costs: costs not directly related to the product. They are often termed overheads.
 Average cost per unit: total cost of production/total output

Economies and Diseconomies of scale:

Economies of scale are factors that lead to a reduction in average costs that are obtained by growth of a
business. There are five economies of scale:

 Purchasing economies: Larger capital means you get discounts when buying bulk.
 Marketing: More money for advertising and own transportation, cutting costs.
 Financial: Easier to borrow money from banks with lower interest rates.
 Managerial: Larger businesses can now afford specialist managers in all departments, increasing
efficiency.
 Technical: They can now buy specialised and latest equipment to cut overall production costs.

However, there are diseconomies of scale which increases average costs when a business grows:

 Poor communication: It is more difficult to communicate in larger firms since there are so many people
a message has to pass through. The managers might loose contact to customers and make wrong
decisions.
 Low morale: People work in large businesses with thousands of workers do not get much attention.
They feel they are not needed this decreases morale and in turn efficiency.
 Slower decision making: More people have to agree with a decision and communication difficulties also
make decision making slower as well.

Budgets and forecasts: looking ahead

Business also needs to think ahead about the problems and opportunities that may arise in the future. There are
things to try to forecast such as: 33

 sales or consumer demands.

 exchange rates appreciation or depreciation.

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  wage increases.

There are some forecasting methods:

 Past sales could be used to calculate the trend, which could then be extended into the future.
 Create a line of best fit for past sales and extend it for the future.
 Panel consensus: asking a panel of experts for their opinion on what is going to happen in the future.
 Market research.

Budgets

"Budgets are plans for the future containing numerical and financial targets". Better managers will create many
budgets for costs, planned revenue and profit and combine them into one single plan called the master budget.

Here are the advantages of budgets:

 They set objectives for managers and workers to work towards, increasing their motivation.
 They can be used to see how well a business is doing by comparing the budget with the result in the
process of variance analysis. The variance is the difference between the budget and the result.
 If workers get a say in choosing the objectives for a budget, the objectives would be more realistic since
they are the ones that are going to do it and it also gives them better motivation.
 Helps control the business and its allocation of resources/money.

All in all, budgeting in useful for:

 reviewing past activities.

 controlling current business activity - following objectives.
 planning for the future.

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 Chapter 7: Business Accounting
What are accounts an why are they necessary?

Accounts are financial records of a firm's transactions that is kept up to date by the accountants, who are
qualified professionals responsible for keeping accurate accounts and producing the final accounts.

Every end of the year, a final accounts must be produced which gives details of:

 Profits and losses made.

 Current value of the business.
 Other financial results.

Limited companies are bound by law to publish these accounts, but not other businesses.

Financial documents involved in buying and selling.

Accountants use various documents that are used for buying and selling over the year for their final accounts.
They can help the accountant to:

 keep records of what the firm bought and from which supplier.
 keep records of what the firm sold and to which customer.

These documents are:

 Purchase orders: requests for buying products. It contains the quantity, type and total cost of goods.
Here is an example.
 Delivery notes: These are sent by the firm when it has received its goods. It must be signed when the
goods are delivered.
 Invoices: These are sent by the supplier to request for payment from the firm.
 Credit notes: Only issued if a mistake has been made. It states what kind of mistake has been made.
 Statements of account: Issued by the supplier to his customers which contains the value of deliveries
made each month, value of any credit notes issued and any payments made by the customer. Here is an
example.
 Remittance advice slips: usually sent with the statement of accounts. It indicates which invoices the
firm is paying for so that the supplier will not make a mistake about payments.
 Receipts: Issued after an invoice has been paid. It is proof that the firm has paid for their goods. 35

Methods of making payment

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There are several ways goods can be paid for:

 Cash: The traditional payment method. However, many businesses do not prefer to use cash for a
number of security reasons. When cash is paid, a petty cash voucher is issued by the person in
charge of the firm's money who also signs it to authorise the payment. The person making the purchase
signs it too to show that the money has been recieved.
 Cheque: It is an instruction to the bank to transfer money from a bank account to a named person. In
order to do this the bank needs a cheque guarantee card, saying that they have enough money in their
account to support this payment.
 Credit card: Lets the consumer obtain their goods now and pay later. If the payment is delayed over a
set period then the consumer will have to pay interest.
 Debit card: Transfers money directly from user's account to that of the seller.

Recording accounting transactions

Businesses usually use computers to store their transactions so that they can be easily accessed, calculated and
printed quickly.

Who uses the financial accounts of a business?

 Shareholders: They will want to know about the profit or losses made during the year and whether the
business is worth more at the end of the year or not.
 Creditors: They want to see whether the company can afford to pay their loans back or not.
 Government: Again, they want to check to see if correct taxes are paid. They also want to see how well
the business is doing so that it can keep employing people.
 Other companies: Other companies want to compare their performance with a business or see if it is a
good idea to take it over.

What do final accounts contain?

The trading account

This account shows how the gross profit of a business is calculated. Obviously, it will contain this formula:

Gross profit = Sales revenue - Cost of goods sold

Note that:
36
 Gross profit does not take to account overheads.
 Only calculate the cost of goods sold, and forget the inventory.
 In a manufacturing business, direct labour and manufacturing costs are also deducted to obtain
gross profit.
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The profit and loss account

The profit and loss account shows how net profit is calculated. It starts off with gross profit acquired from the
trading account and by deducting all other costs it comes up with net profit.

Depreciation is the fall in value of a fixed asset over time. It is also counted as an indirect cost to businesses.

As for limited companies, there are a few differences with the normal profits and loss account:

 Profits tax will be shown.

 It needs to have an appropriation account at the end of the profits and loss account. This shows what
the company has done with its net profits, in other words, how much retained profit has been put back
into the company.
 Results form the previous year are also included.

Balance sheet

The balance sheet shows you a business's assets and liabilities at a particular time. The balance sheet records
the value of a business at the end of the financial year. This is what it contains:

 Fixed assets: land, vehicles, buildings that are likely to be with the business for more than one year.
They depreciate over time.
 Current assets: stocks, inventory, ash and debtors that are only there for a short time.
 Long-term liabilities: long-term borrowings that does not have to be paid in one year.
 Short-term liabilities: short-term borrowings that has to be paid in less than one year.

If your total assets are higher than your total liabilities, then you are said to own wealth. In a normal business,
wealth belongs to the owners, while in a limited company, it belongs to the shareholders. Hence the equation:

Total assets - total liabilities = Owners'/Shareholders' wealth

Here are some terms found in balance sheets:

 Working capital: is used to pay short-term debts and known as net current assets. If a business do not
have enough working capital then it might be forced to go out of business. The formula:

Working capital = Current assets - Current liabilities

37
 Net assets: Shows the net value of all assets owned by the company. These assets must be paid for or
finance by shareholders' funds or long term liabilities. The formula:

Net assets = Fixed assets + Working capital

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  Shareholders' funds: The total sum invested into the business by its owners. This money is invested in
two ways:

- Share capital: Money from newly issued shares.

- Profit and loss reserves: Profit that is owned by shareholders but not distributed to them but kept as part
of shareholders' funds.

 Capital employed: Long-term and permanent capital of a business that has been used to pay for all the
assets. Therefore:

Capital employed = net profits

Capital employed = Shareholders' funds + long-term liabilities

Analysis of published accounts

Without analysis, financial accounts tell us next to nothing about the performance and financial strength of a
company. In order to do this we need to compare two figures with each other. This is called ratio analysis.

Ratio analysis of accounts

The most common ratios used are for comparing the performance and liquidity of a business. Here are five of
the most commonly used ratios.

Ratios used for analysing performance:

 Return on capital employed: This result could show the efficiency of a business. If the result rises, the
managers are becoming more successful.

Return on capital employed (%) = Operating profit/Capital employed * 100

 Gross profit margin: If this rises, it could mean that either they are increasing added value or costs
have fallen.

Gross profit margin = Gross profit/Sales revenue * 100

 Net profit margin: The higher the result, the more successful the managers are. This could be compared
with other businesses too. 38

Net profit margin = Net profit before tax/Sales revenue * 100

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 Note: Net profit does not include tax.

Ratios used for analysing liquidity: This is too see how much cash a business has to pay off all of its short-
term debts.

 Current ratio: This ratio assumes that all current assets could be converted into cash quickly, but this is
not always true since stock/inventory could not be all sold in a short time. Generally, a result of 1.5 to 2
would be preferable, so that a business could pay all of its short-term debts and still have half of its
money left.

Current ratio = Current assets/Current liabilities

 Acid test or liquid ratio: This type of analysis neglects stocks, but it is similar to the current ratio
analysis.

Acid test ratio = (Current assets - Stocks)/Current liabilites

These ratios can be used to:

 Compare with other years.

 Compare with other businesses.

It must be remembered that a ratio on its own will give you nothing, but when it is compared with ratios from the
past and other businesses it will tell you a lot of things.

However, there are still some disadvantages of ratio analysis:

 Only shows past results, does not show anything about the future.
 Comparisons between years may be misleading because of inflation.
 Comparisons between businesses could be difficult since each has its own accounting methods.

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 Chapter 8: Cash flow planning
What is meant by cash flow?

Cash is a liquid asset, meaning that i can be spent on goods and services any time. Many business experience
cash flow problems, meaning that they do not have enough cash to do what they want to do. Cash flow
means "the flow of money in and out of a business". These are ways cash flow can occur:

Cash inflows:

 Sale of goods for cash.

 Payment from debtors.
 Borrowing from a source (but will inevitably lead to cash outflow in the future).
 Sale of unwanted assets.
 Investment from investors: shareholders and owners

Cash outflows:

 Purchasing goods for cash.

 Payment of wages, salaries and others in cash.
 Purchasing fixed assets.
 Repaying loans.
 Repaying creditors.

Cash flow cycle

A cash flow cycle explains the stages that are involved in the process of cash out and finally into the business.
This is what happens:

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The longer it takes for cash to get back to the business, the more they will need working capital to pay off their
short-term debts. This cycle also helps us understand the importance of cash flow planning. This is what
happens when a company is short on cash:

 Not enough to pay for materials, therefore sales will fall.

 The company will want to insist customers on paying in cash, but they might lose them to competitors
who let them pay in credit.
 There could be a liquidity crisis when it does not have enough cash to pay for overheads (bills, rent,
etc.) and the business might be forced to close down by its creditors.

Managers need to plan their cash flow so that they do not end up in these positions.

Cash flow is not profit!

First we need to examine the formula for cash flow:

Cash flow = Cash inflow - Cash outflow

However, when calculating profit, we also take into account credit that debtors owe us. Therefore, a company
might make $20,000 in profit but only $10,000 is received in cash because half of it is payed by credit card.

This creates something known as insolvency:

 Profitable business could run out of cash because of various reasons. This is called insolvency and it is
one main reason why businesses fail.
 This can be because of several reasons:
o Allowing customers too long to pay back, so that they will not have paid off the debts yet by the
time the business has run out of cash.
o Purchasing too many assets at once.
o Producing or purchasing too much stock/inventory when expanding too quickly. This is
called overtrading.

Here is an example of a cash flow statement:

41

As you can see, the closing bank balance in February is negative, which means that it has become overdrawn.
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Cash flow forecasts

Because of the aforementioned problems, it is important for the manager to get an idea of how much cash will be
available for which months. A cash flow forecast can tell the manager:

 How much cash is available for paying bills, loans and other fixed assets.
 How much the bank might need to lend to avoid insolvency.
 Whether the business has too much cash which could be more useful if used.

Uses of cash flow forecasts:

 Starting up a business: In the first months of a business, a lot of capital will be needed to set it up
properly. The problem is, not everybody realises that the amount of money they needed is much more
than they had expected. Therefore, a cash flow forecast will give them a better idea of how much money
will be needed.
 Keeping the bank manager informed: It needs to be shown to the bank to inform it of the size of the
needed loan/overdraft, when it is needed, how long it is needed and when it could be repaid. Only then
will the bank give you a chance to get a loan.
 Running an existing business: It is important to know the cash flow of a business so that loans could
be arranged in advance in order to get the least interest possible. If a firm has cash flow problems and
goes to the bank for a loan for the next day, it will charge high interests because it knows that the business
has no choice. Also, if a business exceeds the overdraft limit without informing the bank, it could be
asked to repay the overdraft immediately and could result in closure of the business.
 Managing cash flow: If a business has too much cash, it should put the cash to some good use
quickly. Some examples of this is: repaying all loans for less interest, paying creditors immediately to
get discounts.

How can cash flow problems be solved?

Here are some steps to solve cash flow problems:

 Arrange for future loans with the bank when you anticipate negative cash flow.
 Reduce or delay planned expenses until cash is available, e.g. ask to pay in credit.
 Increasing forecasted cash inflow, e.g. by getting a part-time job.

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 Chapter 9: Financing business activity
Why do businesses need finance?

Businesses need finance, or money, to pay for their overhead costs as well as their day to day and variable
expenses. Here are three situations when businesses need finance the most:

 Starting a business: Huge amounts of finance is needed to start a business which requires buying fixed
assets, paying rent and other overheads as well as producing or buying the first products to sell. The
finance required to start up a business is called start-up capital.
 Expanding a business: When expanding, a lot of capital is needed in order to buy more fixed assets or
fund a takeover. Internal growth by developing new products also requires a notable amount of finance
for R&D.
 A business in difficulties: For example, for loss making businesses money is needed to buy more
efficient machinery, or money is needed to cover negative cash flow. However, it is usually difficult for
these firms to get loans.

All all cases, businesses need finance for either capital expenditure or revenue expenditure:

 Capital expenditure: Money spent on fixed assets.

 Revenue expenditure: Money spent on day-to-day expenses.

Sources of finance

There are many ways to obtain finance, and they can be grouped in these ways.:

 Internal or external.
 Short-term, medium-term or long-term.

Internal finance:

This is finance that can be taken from within the business itself. There are advantages and disadvantages to each
of them:

 Retained profit: Profit reinvested into a business after part of the net profit has been distributed to its
owners.
o + Retained profit does not have to be repaid unlike a loan.
o - New businesses do not have much retained profit.
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o - Retained profit from small firms are not enough for expansion.
o - Reduces payment to owners/shareholders.
 Sale of existing assets: Firms can get rid of their unwanted assets for cash.
o + Makes better use of capital that is not used for anything.

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 o - Takes time to sell all of these assets.
o - New businesses do not have these assets to sell.
 Running down stocks: Sell everything in the current existing inventory.
o + Reduces opportunity cost and storage costs of having inventory.
o - Risks disappointing customers if there are not enough stock left.
 Owners' savings: Only applies to businesses that do not have limited liability. Since the legal identity of
the business and owners are the same, this method is considered to be internal.
o + Available quickly.
o + No interest paid.
o - Limited capital.
o - Increases risks for owners.

External finance:

This is money raised from individuals or organisations outside a business. It is the most common way to raise
finance.

 Issue of shares: Same as owners' savings, but only available to limited companies.
o + A permanent source of capital that does not have to be repaid.
o + No interest paid.
o - Dividends will have to be paid.
o - Ownership of the company could change hands to the majority shareholder.
 Bank loans: money borrowed from the bank.
o + Quick to arrange.
o + Variable lengths of time.
o + Lower rates offered if a large company borrows large sums.
o - Must be repaid with interest.
o - Collateral is needed to secure a loan and may be lost.
 Selling debentures: These are long-term loan certificates issued by limited companies.
o + These can be used to raise long-term finance, e.g. 25 years.
o + No collateral is required, just the trustworthiness of a big company.
o - Must be repaid with interest.
 Factoring of debts: Some businesses (debt factors) "buy" debts of a firm's debtors (e.g. customers)
and pay the firm cash in return. The firm now does not worry about worrying about whether their
customers will pay or not and 100% of all the debts goes to the factor.
o + Immediate cash is obtained.
o + Risk of collecting debt becomes the factor's.
o - The firm does not receive 100% value of the debt.
 Grants and subsidies: can be obtained from outside agencies like the government.
o + Do not have to be repaid.
o - They have conditions that you have to fulfill (e.g. locating in poor areas).

Short-term finance:

This is working capital required to pay current liabilities that is needed up to three years. There are three
main ways of acquiring short-term finance:
44
 Overdrafts: Allows you do draw more from your bank account than you have.
o + Overdrafts can vary every month, making it flexible.
o + Interest only needs to be paid only to the amount overdrawn.

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 o + They can turn out cheaper than loans.
o - Interest rates are variable, and often higher than loans.
o - The bank can ask for the overdraft back immediately anytime.
 Trade credits: Delaying payment to your creditors, which leaves the company with better cash flow for
that month.
o + It is almost a short-term interest free loan.
o - The supplier could refuse to give discounts or to supply you at all if your payments are
delayed too much.
 Factoring of debts

Medium-term finance:

Finance available for 3 to 10 years that is used to buy fixed assets such as machinery and vehicles.

 Bank loans
 Hire purchase: This allows firm to pay for assets over time in monthly payments which has interest.
o + The firm does not have to come up with a lot of cash quickly.
o - A deposit has to be paid at the start of the period of payment.
o - Interest paid can be very high.
 Leasing: Hiring something. Businesses could use the asset but will have to pay monthly. The business
my choose to buy the asset at the end of the leasing period. Some businesses sell their fixed assets to a
leasing company who lease them back so that they could obtain cash. This is called sale and leaseback.
o + The firm does not have to come up with a lot of cash quickly.
o + The leasing firm takes care of the assets.
o - The total leasing costs will be higher than if the business has purchased it.

Long-term finance:

This kind of finance is available for more than 10 years. The money is used for long-term fixed assets or the
takeover of another company.

 Issue of shares: Shares are sometimes called equities, therefore issuing shares is called equity
finance. New issues, or shares sold by public limited companies can raise near limitless finance.
However, a business will want to give the right issue of shares so that the amount bought by
shareholders will not upset the balance of ownership.
o + A permanent source of capital that does not have to be repaid.
o + No interests paid.
o - Dividends will have to be paid. And they have to be paid after tax (so taxes become higher),
while interest on loans are paid before taxes.
o - Ownership of the company could change hands to the majority shareholder.
 Long-term loans or debt finance: Loans from a bank, and this is how they are different from issuing
shares:
o Interest is paid before taxes, it is counted as an expense.
o Interest has to be paid every year but dividends only need to be paid if the firm has maid
profit.
o They are not permanent capital.
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o They need collateral.
 Debentures

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How the choice of finance is made in a business

These are the factors that managers consider when choosing the type of finance they need.

 Purpose and time period: Managers need to match the source of finance to its purpose. It is quite
simple, short-term finance is used to buy current assets and things like that, while long-term
finance for fixed assets and similar things.
 Amount needed: Different types of finance depends on how much is needed.
 Status and size: Bigger companies have more choices of finance. They pay less interest to banks.
 Control: owners lose control if they own less than 51% of shares in their company.
 Risk and gearing: loans raise the gearing of a business, meaning that their risk is increased. Gearing
is can be obtained by calculating the percentage of long-term loans compared to total capital. If
long-term loans take up more than 50% of total capital, then the business would be called highly
geared. This is very risky because the business will have to pay back a lot of its loans and has to succeed
to do so. Banks are less willing to lend to these businesses, so they will have to find other types of finance.

Will banks lend and will shareholders invest?

Loans will be available to businesses but information about the business is required:

 The firms's trading records.

 Forecasts about the future.
 Forecasts have to show that the firms are solvent, i.e. able to repay the loan and the interest back.

Banks will also consider:

 Experience of the people running a business.

 Gearing ratio of a business.

This is what shareholders will consider if they want to invest:

 The future prospects of the company.

 How much dividends are given out compared to other companies.
 Trend of share prices.
 Gearing ratio.

Business plans

Banks will want to see a business plan if they are to lend to most businesses, especially a newly created one. A
46
business plan contains:

 Objectives.
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  How the business will be operated.
 How the business will be financed.

By creating a business plan owners will have to think carefully ahead about their business to ensure the best plan
possible. These are things they will need to consider:

 Target market and consumers.

 Profits, costs and break-even point.
 Location of the business.
 Machinery and workers required.

Without a detailed plan which works, bank managers will be reluctant to lend any money to businesses
because their owners have not shown that they are serious enough about their business.

Here is an example of a business plan from the book, it shows the things you need to put in a business plan:

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 Chapter 10: Organisational Structure
What is organisational structure?

Organisational structure refers to the levels of management and division of responsibilities within a business,
which could be presented in an organisational chart.

For simpler businesses in which the owner employs only himself, there is no need for an organisational
structure. However, if the business expands and employs other people, an organisational structure is needed.
When employing people, everybody needs a job description. These are its main advantages:

 People who apply can see what they are expected to do.
 People who are already employed will know exactly what to do.

Here is an example of a Job Description taken from the book:

When there are more than one person in a small business and they all do different things, it means that they are
specialising in different jobs.

Delegation
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Delegation refers to giving a subordinate the responsibility and authority to do a given task. However, the
final responsibility still lies with the person who delegated the job to the subordinate. Here are the advantages
of delegation for managers and employees, as well as why some managers choose not to delegate.

Advantages for the manager:

 By letting subordinate do smaller tasks, managers have more time to do more important tasks.
 Managers are less likely to make mistakes if tasks are done by specialist employees.
 Managers can measure the success of their task more easily.

Advantages for the subordinates:

 Work becomes more interesting and rewarding.

 Employees feel important and trusted.
 Helps train workers, giving them better career opportunities.

Why some managers don't want to delegate:

 Managers are afraid that their employees will fail.

 Managers want total control.
 Managers are scared that the subordinate will do tasks better than them, making them feel insecure.

Delegation must mean:

 A reduction in direct control by managers or supervisors.

 An increase in trust of workers by managers or supervisors.

Organisational charts

Eventually, when a business grows larger and employs many people, they will have to create an organisational
chart to work out a clear structure for their company. Here is another example of an organisational chart
from the book:

49

Here are the most important features of the chart:

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  It is a hierarchy. There are different levels in the business which has different degrees of authority.
People on the same level have the same degree of authority.
 It is organised into departments, which has their own function.
 It shows the chain of command, which is how power and authority is passed down from the top of the
hierarchy, and span of control, meaning how many subordinates one person controls, of the business.

Advantages of an organisational chart:

 The charts shows how everybody is linked together. Makes employees aware of the communication
channel that will be used for messages to reach them.
 Employees can see their position and power, and who they take orders from.
 It shows the relationship between departments.
 Gives people a sense of belonging since they are always in one particular department.

Chain of command and span of control:

Here are two organisations, one having a long chain of command and the other a wide span of control. Therefore,
the longer the chain of command, the taller the business hierarchy and the narrower the span of control. When it
is short, the business will have a wider span of control.

In recent years, people have began to prefer to have their business have a wider span of control and shorter chain
of command. In some cases, whole levels of management were removed. This is called de-layering. This is
because short chains of commands have these advantages:

 Communication is faster and more accurate. The message has to pass through less people.
 Managers are closer to all employees so that they can understand the business better.
 Spans of control will be wider, meaning that the manager would have to take care of more
subordinates, this makes:
o The manager delegate more, and we already know the advantages of delegation.
o Workers gain more job satisfaction and feel trusted because of delegation. 50

However, if the span of control is too wide, managers could lose control. If the subordinates are poorly trained,
many mistakes would be made.

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Functional departments

Here is an example of an organisational chart from a larger business from the book:

Here are they key features of this graph:

 The business is divided into functional departments. They use specialists for each job and this
creates more efficiency. However, workers are more loyal to their department than to the organisation
as a whole. Therefore, conflict can occur between different departments. Managers working in these
departments are called line managers, who have direct authority and the power to put their decisions
into effect over their department.
 Not only are there departments, there are also other regional divisions that take care of outlets that are
situated in other countries. They use the local knowledge to their advantage.
 There are some departments which do not have a distinctive function but still employs specialists and
report directly to the CEO/Board of Directors. These departments are the IT department, and the
Economic Forecasting department. Some say the HR department fits in this category. These
departments give specialist advice and support to the board of Directors and line managers, and
the managers of these departments are called staff managers. They are often very highly
qualified personnel who specialises in only their area.

Here are the pros and cons of employing staff managers:

51

Advantages:

 Staff managers help and provide advice for line managers on things such as computer systems.
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  Helps line managers concentrate on their main tasks.

Disadvantages:

 There may be conflict between the two groups on important decisions and views.
 Line employees may be confused and do not know who to take orders form, line or staff managers.

Decentralisation

Decentralisation refers to a business delegating important decisions to lower divisions in the business. In a
centralised structure important decisions are taken at the centre, or higher levels of management.

Advantages of a decentralised structure:

 Decisions are made by managers who are "closer to the action".

 Managers feel more trusted and get more job satisfaction due to delegation.
 Decisions can be made much more quickly.
 The business can adapt to change much more quickly.

Decentralisation means that:

 Less central control.

 More delegation.
 Decisions taken "lower down" in the organisation.
 Authority given to departments/regions

Different forms of decentralisation:

 Functional decentralisation: Specialist departments are given the authority to make decisions.
The most common of these are:
o Human Resources.
o Marketing.
o Finance.
o Production.
 Federal decentralisation: Authority is divided between different product lines. e.g separate
truck/car/bus divisions.
 Regional decentralisation: In multinationals, each base in each country has authority to make its
own decisions.
 Decentralisation by project means: For a certain project, decision-making authority is given to a
team chosen from all functional departments.

Is complete decentralisation a good idea?

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It is dangerous to let the lower-level management make all the decisions. Therefore, it is wise for the central
management to decide on major issues, long-term decisions, growth and business objectives. If these
issues are not centralised then there would be a lack of purpose or direction in the business.
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 Chapter 11: Managing a business
What do managers do?

All organizations have managers. They can come by the name of director, headmaster, etc... but they all
perform similar tasks. These tasks are:

Planning:

Planning for the future involves setting goals for a business. These goals give the business a sense of
direction and purpose. Now the whole business will have something to work towards. Managers also need to
plan for resources which will be needed. These are only two strategies managers use to keep the business
running.

Organising:

A manager cannot do everything by himself. Therefore, jobs must be delegated to employees. Employees need
sufficient resources to complete their job, so managers need to organise people and resources effectively.

Co-ordinating:

Managers need to bring people together in a business for it to succeed. This is called co-ordination. If
different functional departments do not co-ordinate, they could be doing completely different things which does
not follow any common plan. Managers could co-ordinate the departments by holding regular meetings or
setting up a project team with different members from different departments.

Commanding:

Commanding refers to guiding, leading and guiding subordinates which is very important in any organisation.
Managers need to make sure that all subordinates are following targets and deadlines. It is the responsibility 53
of the manager to ensure that all tasks are completed and therefore instruction and guidance must be provided
to employees so that they can do so.

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Controlling:

Controlling means evaluating the performance of subordinates, so that corrective action can be carried out if
the subordinates are not sticking to goals.

To sum up, this is what management gives to any organisation:

 a sense of control and direction.

 co-ordination between departments, preventing wastage of efforts.
 control of employees.
 making the most out of resources (organisation)

What makes a good manager?

There are different views of why some managers are better than others. Some say that managers are born that
way, while others say good managers are trained. However, good managers do have these distinct
characteristics:

 intelligence: to understand difficult ideas and deal with different issues.

 initiative: to be able to think of solutions and take control of situations.
 self-confidence: to be willing to lead others and be a model image.
 assertiveness and determination: to be able to take command of others and take ideas and solutions
to the end.
 communication skills: to be able to inform subordinates in a clear way so that they will respond
positively.
 energy and enthusiasm: to work with high effort and involvement so that others will follow.

Styles of leadership:

Different managers use different styles of leadership, and each one makes subordinates react in a certain way. It
is important for the managers to choose the appropriate leadership style for the right situation. These styles will
be discussed in Chapter 13: Motivation at work.

Management involves taking risks:

All managers need to make decisions in what they do, whether it is planning, organising, co-ordinating, ect. All as
you know, all decisions involve some sort of risk.
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Are all decisions as important as each other?

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There are three types of decisions which has their type of importance and the length of time that is is going to
affect the business. They are:

 Strategic: These are very important decisions that will affect the overall success of an organisation. They
are long-term decisions such as company goals or growth. They are usually taken by the top
management.
 Tactical: These are decisions that are less important decisions that are taken more frequently. They can
include: new ways to train staff, new transportation routes used, advertising methods, etc... They are
usually taken by the middle management.
 Operational: They are day-to-day decisions taken by the lower management. They tend to be repetitive
and previous experience could be used to help making these decisions. They can be: inventory/stock
levels, ordering goods, dealing with customers.

All of these decisions involve risk. Since they all cost time, money and opportunity cost one should think well
before making a decision.

In business, decisions need to be made and the risks need to be accepted. People like sole traders who have
unlimited liability risk loosing all that they own by setting up a business are called entrepreneurs. As we already
know they are the managers and risk-takers of a company. Managers in a limited company are not "real"
entrepreneurs, because they are not risking their assets but the capital of the shareholders.

How can managers reduce risks when taking decisions?

Risks are the results of failure. Risks cannot be eliminated, but they can be reduced by the process of making
decisions. Here are the steps:

 Set goals: It is impossible to make decisions if the aims are not clear.
 Identify and analyse the problem: Managers all make decisions to solve a problem. This problem might
be how to use your salary in the most efficient way possible, how to spend the rest of your life, etc... It is
imperative that you must understand the problem before finding a solution for it. Otherwise, you might
make the wrong decision.
 Collect data on all possible alternative solutions: It is always important to analyse all possible
solutions to find which one is the best. The data collected should also contain constraints and
limitations on the possible decisions (e.g. the law).
 Make the final decisions and put it into effect: This is called implementing the decision. This means
that the manager must see to it that the decision is carried out and is working to plan.
 Review and evaluation of decision: This is looking back at the decision to identify pros and cons of a
decision so that the experience can be used in the future. This is often hard to do especially when the
wrong decision is made. It is nevertheless necessary.

Here is a decision-making flow chart from the book that will help you visualise the process:
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Management responsibilities in departments:

Human resources department:

 Forecasting staffing needs.

 Recruiting staff.
 Preparing the job descriptions and job specifications.
 Planning and implementing staff training programmes.
 Interviewing and selecting staff.
 Negotiating with worker representatives, such as union leaders, on wages and working conditions.
 Keeping staff records.
 Disciplining staff

The role of this department is becoming more and more important as the cost of hiring staff rises, so that it is
crucial for the HR department to manage people firmly and fairly. An unsuccessful HR department results in a
high staff turnover (people leaving the business early). The department must also make sure that the business
and staff comply with all employment laws.

Marketing department:

 Market research for:

o New products.
o New markets.
o New opportunities.
 Planning the release of new products, often working with the Production and R&D departments.
 Decide on the best marketing mix (discussed later) for a product and implementing it.
 Keeping track of products so extension strategies can be used or to take the product off the market.
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The marketing department is crucial for the business to keep in touch with its customers. No business can
survive without this kind of function.

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Accounting and finance department:

 Recording all financial transactions.

 Collecting all the data and presenting it as the regular accounts.
 Preparing all budgets.
 Analysing the profitability of new projects.
 Deciding on which source of finance to use.
 Keeping control over business cash flow.

Production department/Operations management:

 Ordering stock/inventory of materials and resources used for producing goods.

 Developing and designing new products.
 Locating in the most cost-effective place possible.
 Deciding on the methods of production and machinery. Purchase of new machinery will involve the
Finance department.
 Controlling production to maintain high levels of efficiency.
 Maintaining the efficiency of machines.
 Keeping the quality high to meet the standards of the consumers. All staff will need to co-operate
because poor quality is normally blamed on bad staff.

Administration department:

The responsibilities of the Administration department varies with the business it is in. For example, in smaller
businesses, the administration department would be the same as the Accounts and Finance department. A larger
business will have more specialized administrative department. These are what the the department does:

 Clerical and office support services: Ensure the smooth running of all other departments.
o Sorting of incoming mail and sorting and franking of outgoing mail.
o Reception will greet visitors, answer calls, and schedule rooms for meetings.
o Office tasks will include filing all records. e.g. visitors and calls.
o Information and data processing.
 Responsibility for the IT system:
o The IT department is part of the Administration department.
o Allows information to be delivered between departments accurately.
o Provides managers with data to help in decision making.
 Cleaning, maintenance and security:
o Vital for safe and healthy working conditions.
o Failure to maintain equipment and the building (e.g. air conditioner) will result in reduced
efficiency.

The widespread use of computers means that many workers in all departments can do some of these tasks by
themselves (clerical and support services), reducing the function of the Administration department and make
them less common in businesses. 57

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 Chapter 12: Communication in business
What is effective communication and why is it necessary?

Communication is when a message transferred from one person to another and is understood by the latter. We
communicate everyday (by talking, by chatting, by texting, etc.) but we need to learn how to communicate effectively.
Effective communication means that:

"The information or message being sent is received, understood and acted upon in the way intended."

In business, ineffective communication or communication failure could result in serious problems.

Why do people within business need to communicate with each other?

In business, if we do not communicate, we would be working as individuals with no co-ordination with anybody
else in the business. The management, whose tasks are guiding, instructing and commanding subordinates,
could not be done because they cannot communicate with them. Here are some common messages found in the
workplace:

 No Smoking (sign)
 You are fired because you are always late (letter)
 Do not touch (sign)
 There will be a fire drill 11:00 today (notice board)

There are many more things that are communicated. Consequences would be severe if these matters are not
communicated effectively.

The process of effective communication:

Effective communication involves four features:

 The transmitter/sender who sends the message. He has to choose the next two features carefully for
effective communication.
 The medium of communication. It is the method of communication, e.g. notice board, letter, etc...
 The receiver who receives the message. 58
 Feedback means that the receiver has received the message and responds to it. This confirms that the
message has been understood and acted upon if necessary.

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One-way and two-way communication

There are two types of communication. One-way communication is when there is no feedback required for the
message, or the receiver is not allowed to reply. This might be the sign that says "No smoking", or your boss
saying: "give me a biscuit". The other is two-way communication, when feedback is required. Therefore, both
people are now involved in the communication process. This could lead to better and clearer information.

Advantages of two-way communication:

 The sender can now know whether the receiver has understood and acted upon the message or not.
If they have not, the message might have to be sent again or made clearer. Effective communication
takes place only if the message is understood by the receiver.
 Both people are involved in the communication process. This makes the receiver feel more important
which might motivate them to make better contributions to the topic discussed.

Internal and external communication

Internal communication is messages sent between people inside a business. For example:

 The boss talking to his subordinates.

 A report sent to the CEO.

External communication refers to messages sent to people or organisations outside the business. For example:

 Orders for goods from suppliers.

 Talking to customers.
 Advertising to the public.

Both types of communication is almost the same, the only difference is who is being communicated with.

Why external communication has to work well

External communication can greatly affect the efficiency and image of a business. Imagine if the wrong
information is sent to a supplier and a customer. The supplier would send wrong materials while the customer
might buy products from another company. Here are some cases which ineffective external communication might
turn out to be very dangerous:

 The Finance Manager writes to the tax office inquiring about the amount of tax that must be paid this 59
year.
 The Sales Manager receives an order of 330 goods to be delivered on Wednesday.
 The business must contact thousands of customers because a product turned out to be dangerous. An
add must be put into the newspaper so that customers can return the product for a refund.
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Different ways of communicating: the communication media

Information can be transmitted in several ways:

 Verbal: Involves the sender speaking to the receiver.

 Written: The message is written to the receiver.
 Visual: Using charts, videos, images or diagrams to communicate a message.

There is no best method of communication, so the appropriate medium of communication must be selected
depending on the situation. First the sender also has to analyse the advantages and disadvantages of each type
of communication.

Verbal communication

Verbal/Oral communication might be:

 One-to-one talks.
 Telephone conversations.
 Video conferencing.
 Meetings.

Advantages:

 Information is transferred quickly. This is an efficient way to communicate in meeting to lots of people.
 There is opportunity for immediate feedback which results in two-way communication.
 The message might be enforced by seeing the speaker. Here the body language and facial
expression could make the message easily understood.

Disadvantages:

 In big meetings, we do not know if everybody is listening or has understood the message.
 It can take longer for verbal feedback to occur than written feedback.
 Verbal communication is inappropriate for storing accurate and permanent information if a message.
(e.g. warning to a worker)

Written communication including electronic communication

Here are some written forms of communication:

 Letters: Used for both external and internal communication. Follows a set structure.
 Memos: Used only for internal communication. 60
 Reports: Detailed documents about any problem. They are done by specialists who send them to
managers to analyse before meetings. These reports are often so detailed that they cannot be
understood by all employees.

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  Notices: Pinned to notice boards that offer information to everyone. However, there is no certainty on
whether they are read or not.
 Faxes: Written messages sent to other offices via telephone lines.
 E-mails: Messages sent between people with the same computing facilities. The message is printed if
a hard copy is needed.
o Intranet: A network inside a business which lets all employees with a computer message each
other.
o Internet: The global network for messaging anyone. (e.g. customers, suppliers)

Advantages:

 There is hard evidence of the message which can be referred to and help solve disputes in the future
over the content of the message.
 It is needed when detailed information is transferred: it could be easily misunderstood. Some countries
the law states that businesses need to put safety notices up because people could forget them.
 The written message can be copied and sent to many people.
 Electronic communication is a quick and cheap way to get to many people.

Disadvantages:

 Direct feedback is not always possible, unless electronic communication is used. However, this could
result in too many emails sent (information overload). Direct feedback via other means of written
communication is hard.
 It is not as easy to check whether the message has been understood or acted upon.
 The language used might be difficult to understand. The message might be too long and disinterest
the reader.
 There is no opportunity for body language to be used to enforce the message.

Visual communication

Here are some forms of visual communication:

 Films, videos, and PowerPoint displays: often to help train new staff or inform sales people about new
products.
 Posters: can be used to explain a simple but important message. (e.g. propaganda poster)
 Charts and diagrams: Can be used in letters or reports to simplify and classify complicated data.
Computer technology could help in the design of these charts or diagrams. A printed copy might be
needed for hard data to add to reports and documents.

Advantages:

 Present information in an appealing and attractive way that encourages people to look at it.
 They can be used to make a written message clearer by adding a picture or a chart to illustrate the point
being made.

Disadvantages: 61

 No feedback is possible. People need to check via verbal or written communication to check that they
have understood the message.

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  Charts and graphs might be difficult for some people to understand. The message might be
misunderstood if the receiver does not know how to interpret a technical diagram.

Formal and informal communication

Formal communication is the channel of communication that is recognised by the business, such as notices
on boards, emails and memos. Formal means of communication is important. It shows that the information given
is true.

Informal communication might be communication between friends and co-workers. There is no set structure
and the information transferred is not recognised by the business. This channel of communication could be used
by the manager to try out new ideas, before publicly announcing it to the rest of a company. However, informal
communication can result in gossip can rumour, and managers have no way to remove these informal links
from people.

Communication nets

There are many groups of people in any organisation, and each of them communicate in different ways. People
have connections with each other, and these links form communication nets. There are three standard types of
communication nets:

Chain network:

62
+ Can be used to transfer important messages from higher management levels to lower levels.

- This often leads to one way communication.

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- The message could become altered as it passes through different management levels.

Wheel network:

+ The central management can pass messages to all departments quickly.

- The departments cannot communicate directly between themselves.

Connected network:

+ This is used to create or discuss new ideas.

+ It specialises in two-way communication.

- Can be time-consuming.
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- There is no clear leader or sender of messages.

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Which network works best?

There is again, no best network. A company is likely to use different network at different times or for different
groups.

 The chain network is for communicating important business policies.

 The wheel network is used for sending different messages to different departments.
 The connected network is used to generate new ideas or solutions to problems where group
discussion is the most effective.

The direction of communications

Here is an organisation chart from the book explaining the direction of communications within the business. The
arrows are labeled A, B and C which shows the direction of communication:

 Arrow A (downwards communication):

o Used by managers to send important messages to subordinates.
o Does not allow feedback.
o The message might be altered after passing different levels.
 Arrow B (upwards communication):
o Used by subordinate send feedback to managers.
o Feedback from subordinates ensures that there is effective communication.
o Feedback results in higher morale and new ideas contributed to the business.
 Arrow C (horizontal/lateral communication):
o People at the same level of management communicate with each other.
o Information and ideas can be exchanged both formally and informally.
o Can cause conflict between departments. (e.g. Production department asks the Finance
department for a budget to hire new staff but is rejected)

Barriers to effective communication 64

As we already know, the four parts of effective communication includes the sender, medium, receiver
and feedback. However, communication may fail if there are problems with one of these four features. If one part
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fails, it becomes a barrier to effective communication which might cause a breakdown in communication
resulting in serious consequences to the business. Here are some common barriers to effective communication
and how to overcome them.

Problems with sender:

 Problem: Language is too difficult to understand. Technical jargon may not be understood.
Solution: The sender should ensure that the receiver can understand the message.
 Problem: There are problems with verbal means of communication. (e.g speaking too quickly)
Solution: The sender should make the message as clear as possible and ask for feedback.
 Problem: The sender sends the wrong message to the wrong receiver.
Solution: The sender must ensure that the right person is receiving the right message.
 Problem: The message is too long with too much detail which prevents the main points from being
understood.
Solution: The message should be brief so that the main points are understood.

Problems with the medium:

 Problem: The message may be lost.

Solution: Check for feedback. Send the message again!
 Problem: The wrong channel has been used.
Solution: Ensure the appropriate channel is selected.
 Problem: Message could be distorted after moving down a long chain of command.
Solution: The shortest channel should be used to avoid this problem.
 Problem: No feedback is received.
Solution: Ask for it! Use different methods of communication (e.g. meeting)
 Problem: Breakdown of the medium.
Solution: Use other forms of communication.

Problems with the receiver:

 Problem: They might not be listening or paying attention.

Solution: The importance of the message should be emphasised. Request feedback.
 Problem: The receiver might not like or trust the sender, and may be unwilling to act upon the
message.
Solution: Trust is needed for effective communication. Use another sender to communicate the
message.

Problems with the feedback:

 Problem: There is no feedback.

Solution: Ask for feedback. Use a different method of communication which allows feedback.
 Problem: The feedback is received too slowly and may be distorted.
Solution: Direct lines of communication should be available between the subordinate and the
manager.

Note: The forms of communication are: verbal, written and visual.The methods of communication can be: 65
telephone, e-mail, meeting, etc...

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 Chapter 13: Motivation at work
Motivation

People work for a number of reasons. Most people work because they need to earn money to survive, while
others work voluntarily for other reasons. Motivation is the reason why people work, and it drives them to work
better. Therefore, managers try to find out what motivate workers and use them to encourage workers to work
more efficiency. This results in higher productivity, increased output, and ultimately higher profits.

 Nowadays, machinery is more common in businesses which results in increased productivity as well.
However, the amount that a well motivated workforce can produce must still be recognised, since
employees are a firms greatest assets!

Motivation theories

People work very hard when they are working for themselves. When they work for other people, less so.
Managers have been looking into what makes employees contribute their fullest to the company and these
studies have resulted four main theories of motivation.

F.W.Taylor

Theory:

 Money is the main motivator.

 If employees are paid more, they work more.
 Work is broken down into simple processes, and more money is paid which will increase the level of
productivity an employee will achieve.
 The extra pay is less than the increased productivity.

Disadvantages:

 Workers are seen rather like machines, and this theory does not take into account non-financial
motivators.
 Even if you pay more, there is no guarantee of a productivity rise.
 It is difficult to measure an employee’s output. 66

Maslow

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Maslow created what is known as the hierarchy of needs.

In this diagram, there are 5 different types of motivation:

 Physiological needs: basic requirements for survival.

 Security needs: the need to by physically safe.
 Social needs: the need to belong and have good relationships with co-workers.
 Esteem needs: the need for self-respect and to be respected by others.
 Self-actualisation needs: the need to reach your full potential and be promoted.

Businesses realise that the more levels of motivation are available to workers, the harder they will work.
Maslow also suggest that each level of motivation must be achieved before going to the next level. Once one
level of motivation is met, more of that will no longer motivate the employee.

Disadvantages:

 Some levels are not present in some jobs.

 Some rewards belong to more than one level on others.
 Managers need to identify the levels of motivation in any job before using it to motivate employees.

Herzberg

To Herzberg, humans have hygiene factors, or basic animal needs of humans. We also have motivational
factors/motivators that are required for the human to grow psychologically.

Hygiene factors:

 Status.
 Security.
 Working conditions.
 Company policies and administration.
 Relationship with supervisor.
 Relationship with subordinates.
 Salary.

Motivational factors:

 Achievement.
 Recognition.
 Personal growth/development.
 Advancement/promotion. 67
 Job satisfaction.

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To Herzberg, if the hygiene factors are not satisfied, they will act as demotivators. They are not motivators,
since the motivating effect quickly wears off after they have been satisfied. True motivators are are Herzberg's
motivational factors.

McGregor

McGregor splits his theory into what managers believe. One type believes in theory X, while the other type
believes in theory Y. Here is the table:

Here are some differences in how an X manager will work and how a Y manager will work:

 X managers believe that people are naturally lazy, and has to be pushed with external factors to work
harder. (e.g. higher pay).
 Y managers believe that people want to do a good days work but need a good environment to do the
work. A better environment is an internal factor.
 X managers will try to provide incentives and supervision for employees to work hard.
 Y managers will try to provide a favourable environment so that employees can enjoy their work.

Theory's like Taylor's theory are X theories, while others like McGregor's theory are Y theories. People may
say that money is the main motivator, but studies have shown that many people leave jobs because other
motivational factors are not available to them.

Why do people work?

Here is a summary of why people work:

 Money: to satisfy needs and wants.

 Security: knowing that you are physically safe and have job security.
 Social needs: to belong to a group, making friends at work.
 Esteem needs (self importance): feeling important, feeling the job you do is important.
 Job satisfaction: enjoyment from the feeling of having done a good job.

Motivating factors - financial motivators

There are three ways to motivate a workforce:

 financial motivators 68
 non-financial motivators
 ways to increase job satisfaction

Financial rewards
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Pay may be the basic reason why people work, but different kinds of pay can motivate people differently. Here
are the most common methods of payment:

Wages

Wages are paid every week, in cash or straight into the bank account, so that the employee does not have to
wait long for his/her money. People tend to pay wages to manual workers. Since wages are paid weekly, they
must be calculated every week which takes time and money. Wages clerks are paid to do this task. Workers get
extra pay for the overtime that they do. There are some ways that wages could be calculated:

Time rate: Time rate is payment according to how many hours an employee has worked. It is used in
businesses where it is difficult to measure the output of a worker.

 + Easy to calculate the wage of the employee. A time-sheet must be filled out by the Accounts
department to calculate the wage.
 - Both good and bad workers get paid the same wages. Therefore, more supervisors are needed to
maintain good productivity. A clocking-in system is needed to know how many hours an employee has
done.

Here is an example of a wage slip and time-sheet:

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They show:

 Basic pay + Overtime = Gross Pay

 Gross pay - Deductions = Net Pay

Deductions include:

 Taxes
 Pension
 Union fees
 National insurance: entitles the payee to short-term unemployment benefits, sickness benefits and
state pension.

Piece rate: Piece rates are paid depending on how many units they have produced. There is usually a base
pay (minimum wage) and the piece rate is calculated as a bonus on how many units were created. Piece rates
are found in businesses where it is possible to measure a workers’ productivity.

 + Encourages workers to work faster and produce more goods.

 - Workers will often neglect quality, and businesses will need a quality control system which is
expensive.
 - Workers who focus on quality will earn less. Tension is caused when some workers earn more than
others.
 - If machinery breaks down, employees earn less. That is why there is a guaranteed minimum pay.

Salaries

Salaries are paid monthly and normally straight into the bank account. They are usually for white collar
workers. A salary is counted as an amount per year that is divided into 12 monthly accounts. You do not
usually receive overtime. Managers only need to pay their workers once a month, and since the amount is
transferred by the bank, the manager loses much less time and money calculate salary. 70

Salaries are usually a standard rate, but other rewards could be given to employees:

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  Commission: A percentage is paid, usually to sales staff, depending on the value of goods they have
sold. Workers are encouraged to sell more. However, they could persuade customers to buy products
they don’t really want, making the company look bad. Just like the piece rate, in a bad month where there
are little sales, worker's pay will fall.
 Profit sharing: Employees receive a percentage of the profits made. However, they will get nothing if
the business doesn't make a profit. This is often used in the service sector, where it is hard to find an
employee’s contribution to the company.
 Bonus: A lump sum paid to employees who have done well. It is usually paid at the end of the year or
before holidays. However, this could cause jealousy between workers. Giving bonuses to a team works
better.
 Performance related pay: Employee pay is linked to the effectiveness of their work. It is often used in
organisations where it is hard to measure productivity. It uses the system of appraisal: employees are
observed and their colleagues are interviewed to determine their effectiveness. Afterwards, the
immediate superior of the employee has a meeting with them to discuss their effectiveness.
 Share ownership: Employees receive some shares from the company. They will either benefit from
dividends or sell the shares when their price has risen. They will be more motivated because they feel
like a part of the company.

Motivating factors - non-financial motivators

There are other factors that motivate people in a business, and they are often called perks or fringe benefits.
They may be having free accommodation, free car, etc... However, when you look at it, it is just money in
different forms. Here is a list of these motivators:

 Children's education.
 Discounts on company products.
 Free Healthcare.
 Company vehicle.
 Free accommodation.
 Share options.
 Expense accounts.
 Pension.
 Free holidays.

Job satisfaction:

Employees will become more motivated by enjoying the job they do. Job satisfaction can come in different ways.
However, there are some factors that demotivate employees if they are not satisfied, and must be satisfied
before the motivators can take effect. Here are some things that make workers' jobs satisfying:

 Pay.
 Promotion.
 working conditions.
 Fringe benefits.
 Management 71
 Working hours.
 The nature of the work itself.
 Colleagues, etc...

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Herzberg and Maslow stresses that things such as responsibility recognition is also crucial to provide job
satisfaction. Letting workers contribute to the job would also help, making jobs less boring and more creative.
Here are some policies to increase job satisfaction:

Job rotation:

Workers in a production line can now change jobs with each other and making their jobs not so boring. It helps
train the employee in different aspects of their jobs so that they can cover for other employees if they do not
show up.

Job enlargement:

Adding tasks of a similar level to a worker's job. Job enlargement simply gives more variety to employees' work
which makes it more enjoyable.

Job enrichment:

Adding tasks of a higher level to a worker's job. Workers may need training, but they will be taking a step closer
to their potential. Workers become more committed to their job which gives them more satisfaction.

Autonomous work groups or team working:

This is when group of workers are given total responsibility to organise themselves and perform a task. This
makes the employees feel more important, as well as giving them a sense of belonging when they are part of a
team. If they organise themselves differently every time, the team could get job enlargement and job
enrichment too!

Leadership
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Studies have shown that leadership has a great impact on worker's motivation. Good managers have leadership
skills that inspire their workers to work better, as well as directing them with a common goal. Managers use
many styles of leadership, and they can be summarised into 3 main styles:

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Autocratic leadership:

 The manager controls all aspects of their subordinates' work.

 They keep themselves separate from employees.
 Employees are expected to obey every command and cannot contribute to decisions.
 Communication is only top-down.

Laissez-faire leadership:

 Objectives are shown to employees, but the task is completely delegated to them.
 Communication can be difficult since clear instructions are not given.
 The manager has a limited role in this type of leadership.

Democratic leadership:

 The manager discusses tasks with his employees before making decisions.
 Communication will be two-way, both top-down and bottom-up.

Here is a diagram to summarise the leadership styles:

The style of leadership used can vary depending on situations where they are the most effective.

Formal and informal groups

A formal group is an official group that is formed to do a specific task in an organisation. An informal group is
a group of people which are formed independently by themselves. They are not official, but the people in the
group have a common interest or cause. Both of these groups are needed in business, and let's see why in this
example. e.g. a school might create a football team (formal group) but the players need to bond together to play 73
effectively (informal group).

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Formal groups in business

Departments within a business are good examples of formal groups. From time to time different groups might be
set up to cope with different problems or do different tasks. Sometimes people from different departments could
come together in a group to do a team project.

Informal groups in business

There are can be many informal groups in a business that can increase the motivation of workers because they
have a true sense of belonging. e.g. There is a group of factory workers who are interested in basketball, and
they form an informal group, as a result, when they get back into their formal group they are likely to co-ordinate
better with each other.

There are other scenarios where two departments merge to become one, making them one formal group.
However, the people from these former departments still see themselves as separate from each other. These
two groups of people will refuse to co-operate until they are also merged into an informal group. Therefore,
informal groups should be handled carefully in business to yield the best results.

Regular meetings, free holidays, sporting events and such things could be organised to create informal groups
and use them in a more positive way to avoid them getting into the way of business activity.

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 Chapter 14: Recruitment, Training, and human
resources

The work of the Human Resources department

We all know that recruitment and selection is one of the tasks that the HR department fulfills. The
other tasks will be discussed below:

 Recruitment and selection: Involves selecting and attracting the best workers.

 Wages and salaries: Must be enough to motivate or attract workers.

 Industrial relations: There must be effective communication between departments.
 Training programmes: Must meet the training needs of employees and accomplish business
objectives.
 Health and safety: Must do things according to the law.
 Redundancy and dismissal: Must obey all laws when firing workers.

Recruitment and selection

Workers are needed when a business starts up, expands or an existing employee leaves.
Businesses use the recruitment process to successfully employ the right people. This process is
usually undertaken by the HR department, but in small business, HR departments do not exist since
the businesses employ too little workers for it to be of much use. Here is a diagram summarising
the recruitment process:

1. Vacancy arises.

2. A job analysis is done, which identifies the responsibilities and tasks of the job.
3. A job description lists that responsibilities and tasks to the candidates who apply for the
position.
4. A job specification outlines the required qualifications, expertise and experience a
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candidate needs so that they can be accepted.
5. The job is advertised in the appropriate media. (e.g. newspapers)

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 6. Candidates fill out application forms, which are short-listed so that only the best candidates
remain.
7. Interviews are held with remaining candidates, and the ones suitable for the job are
selected.
8. Vacancy filled.

The recruitment process

Job analysis and description:

When a new employee is needed, a job analysis needs to be taken to identify the tasks and
responsibilities of the position. This should be easy for a job that needs replacement, but not so
much for a job that has just been created.

Once all the details of the job has been gathered, a job description needs to be drawn up. This job
description has several functions:

 Given to candidates so they will know what the job will involve.

 Allows a job specification to be drawn up which will state the requirements for the job.
 Shows whether an employee carries out the job effectively or not. It helps solve disputes
between employees and employers about wages, working hours, etc.

The job description for any business will usually contain:

 The title of the job.

 The department one will work in.

 Who will be in charge of the job-holder?
 Who the job-holder will be in charge for.
 The purpose of the job (job summary).
 The main duties of the job.

Job description sometimes contain information about:

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 The conditions of employment – working hours, wages, pension schemes.

 Training that will be offered.

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  Opportunities of promotion.

Job specification

After the job description has been drawn up, the qualifications for the job can be identified. They
usually include:

 The level of educational qualifications.

 The amount and type of experience.

 Special skills, talents or knowledge.
 Personal characteristics. (e.g. type of personality)

Advertising the vacancy

The next stage is on how to get people to know that you have a job to be filled.

Internal recruitment

The vacancy can be filled by an employee already in the business. It might be suitable for
employees seeking promotion.

Advantages of internal recruitment:

 Saves time and money.

 The candidates' reliability, ability and potential are already known.

 The candidates know the expectations and rules of the company.
 Motivates other employees to work harder to get promoted too.

Disadvantages of internal recruitment

 No new ideas or experience come into the business.

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 May create jealousy and rivalry between existing employees.

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External recruitment

Most vacancies are filled with external recruitment, which always involves advertising the vacancy.
Here are some suitable media of advertising:

 Local newspaper: Usually for office and manual workers. These people are plenty since the
job does not require too much skill.

 National newspaper: Used to find workers for senior positions that requires a lot of skills. It
can be read by people anywhere in the country or overseas.
 Specialist magazines: Used for particular technical specialists such as physicists. Can be
used to hire people in the home country or abroad.
 Recruitment agencies: Keeps details of qualified people, and will send the suitable
applicants to interviews when a business asks for a worker. Many businesses prefer to use
recruitment agencies to find them workers because it is easier. However, it is expensive
since their fee is based on a percentage of the workers pay.
 Government job centres: Place where businesses can advertise their vacancies. These
vacancies are usually for unskilled or semi-skilled workers.

Possible effects of government legislation on the recruitment process

Many governments pass laws to create equal employee

opportunities. They state that all employees should be treated equally in the work place and
receive the same salary for doing the same job. People of any sex and people with disabilities are
treated equally. Therefore, businesses need to be careful when advertising and treating their
employees because they could be prosecuted and fined.

Job advertisement

This is what a business needs to decide when drawing up an advertisement:

 What should be included?

o Job description
78
oJob specification
 Where the ad will be placed.
o (depends on job)
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  Advertising budget.
o (depends on job)

Applications forms and CVs/résumés

When a person applies for a job, he will have to fill out an application form, or write an application
letter with a CV enclosed. CVs are descriptions about one's qualifications and skills in a set format.

Businesses will use application forms and CVs to see whether an applicant match the job
specifications or not. The closest matching applicants are invited to interviews in the selection
stage. A short-list is drawn up.

These are what CVs should contain:

 Name

 Address
 Telephone Number
 Date of Birth
 Nationality
 Education and qualifications
 Work experience
 Positions of responsibility
 Interests
 Names and addresses of references.

The letter of application should contain briefly:

 Why the applicant wants the job.

 Why the applicant feels he/she would be suitable.

Applicant forms ask for the same information as the application letter and CV, but may ask for
other types of information.

Interviews 79

Applicants who are invited to interviews will have provided the names and addresses of their
references. These people can give their opinions on the reliability, honesty and skills of the
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applicants and they will be likely to tell the truth because the applicants will not know what they
have said.

Interviews are the most popular form of selection. However, interviews are not always the most
reliable process of selection. They aim to find out these things:

 The applicant's ability to do the job.

 Personal qualities that are advantageous and disadvantageous.

 General characteristics – whether they can "fit in"?

These are the likely questions in an interview:

 Why have you applied for the job?

 What do you know about this company?

 What qualities do you have to offer the company?
 What ambitions do you have?
 What are your hobbies and interests?
 Do you have any questions to ask us?

Interviews can be one-to-one, two-to-one, or a panel of people to interview people which is used
to select people for important jobs. Some businesses include tests in their selection.

 Skill tests: To test the skills of the candidates.

 Aptitude tests: To test how easily candidates can be trained/learn new things.
 Personality tests: To test for people who have specific personal qualities which will fit into
jobs – e.g. that has a lot of stress; requires you to work with a team.
 Group situation tests: To test how well applicants work with other people.

Rejecting unsuccessful applicants

When applicants fail to get the job, they should be informed and thanked for applying.
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Training
Training is often needed to do achieve the needs listed below. These needs can be long-term or
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short-term.

 Introduce a new process or equipment.

 Improve efficiency.
 Decrease supervision needed.
 Improve the opportunity for internal promotion.
 Decrease the chance of accidents

Employees should know the benefits of training for them to take it seriously. Here are some
objectives of training:

 Increase skills.

 Increase knowledge.
 Change attitude, raise awareness.

There are three main types of training:

 Induction training:

o Introducing a new
employee to their business/management/co-workers/facilities.

o Lasts one to several

days.
 On-the-job training:
o Employees are trained by watching
professionals do a job.
o Only suitable for unskilled and semi-skilled jobs.
o Cuts travel
costs.
o The trainee may do
some
work.
o The trainer's productiveness is decreased because he has to show things to the 81
trainee.
o The trainer's bad
habits can be passed to the trainee.
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  Off-the-job training:
o Workers go to another place for training (e.g. school).
o Methods are varied and usually more complex.
o Usually classroom training.
o Employees still work during the day.
o Employees can learn many skills.

Workforce planning
A business will need to forecast the type and number of employees needed in the future. This
depends on the firm's growth and objectives. The forecast can be done by:

 Finding out the skills of all current employees.

 Counting out people who are leaving soon (e.g. retirement).

 Talk to staff about who would want to retrain for new jobs.
 Provide a recruitment plan. (how many new staff are needed, and how they should be
recruited, internal or external)

Dismissal and Redundancy

There are some situations when businesses need to reduce the number of employees they have.
This can be done in two ways:

 Dismissal:

o A worker is fired for unsatisfactory work or behaviour.

oFault of the employee.

 Redundancy:
o Employees are no longer needed.
o Not the fault of the employee.
o Some reasons are:
 A business is closing down a factory.
 A business wants to cut costs by reducing the number of employees.
 A business has merged/taken over another and there are too many staff in
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certain departments.
 New machinery replaces workers.

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 o Employees are given some money to compensate for their lost job.
 The money is often negotiated with trade unions.
 Some government have laws that makes businesses pay for their workers this
way.
o If only some employees are to be made redundant, trade unions will agree with the
fairest way to see who goes. These terms are negotiated with the HR department.
 Sometimes there will be voluntary redundancy by members.
 Older workers.
 There may be some who wants to leave because they have other ideas.

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 Chapter 15: Employee and employer
associations
In smaller businesses, if employees have any problems they can talk directly to their employer.
However, in larger businesses that employs many people, it becomes extremely hard to do so. It is
also hard for the Human Resources department to make decisions when they have about 500
employees (e.g. who will get a pay rise?). It becomes much easier if decisions are negotiated with a
trade union, and employee association that represents them. This saves the management a lot of
time because they do not have to see individual employees to discuss problems.

Employees might not be treated fairly at work. They may be overworked and underpaid. Trade
unions has the role of bargaining with the HR department for better working conditions, conditions
of employment and better pay.

Trade Unions

Employees with similar interests (higher pay) form a trade union. Trade unions are a form of
pressure group with has the ability to influence business activity. There are four main types of
trade unions:

 Craft union: For workers skilled at a particular job.

 General union: For unskilled and semi-skilled workers from different industries.
 Industrial union: For all types of workers in an industry.
 White-collar union: For non-manual or office workers.

Why do workers join a trade union?

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Unions have a shop steward, who is an unpaid representative of the union. When someone is new
to a job they may ask if they may want to join. If the person joins, they will have to pay an annual
subscription. This money will be use for employing union officials who will represent the views of
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the employees.

Advantages of a union

 Strength in numbers.

 Improved conditions of employment.

 Improved working conditions.
 Improved sickness benefits, pensions, and retrenchment benefits.
 Improved job satisfaction and encourage training.
 Advice/Financial
support if a worker is dismissed unfairly/made redundant or is asked to do something not
part of their job.
 Improved fringe benefits.
 Employment where there is a closed shop, which is when all employees in a business must
belong to the same union.

Trade unions need to:

 Put forward their views in the media to influence government decisions on pay,
employment, etc…

 Improve communications between workers and managers.

Closed shop

A closed
shop is when all employees must join one union in order to be employed. It is because its members
feel that the union is doing nothing when non-members receive the same pay rises as them. They
think it is unfair. Trade unions also gain greater strength if all the employees are members of the
union. However, many people think that it is unfair since they are forced to join – they should be
able to make their own decisions. 85

Single union agreement

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Some companies have a single union agreement, when a business only agrees to
deal with a single union. Any employees who want to join a union can join this union. It
is becoming more popular nowadays because many employees are becoming multi-
skilled, and do not know which union to join.

Advantages to the employee:

 Discussions are clearer if there is only one union to deal with.

 The union has greater power.

 No disagreements between different unions.
 A better working relationship should develop between the union and the management.
 Disputes are solved more quickly.

Advantages to the employer:

 Discussions are clearer.

 A better working relationship should develop, meaning that there would be less industrial
disputes, benefiting both employees and employers.
 Disputes are solved more quickly.
 It is easier to agree to changes.

The structure of a trade union

The structure of different unions vary, but most elect a President or General Secretary to work
full-time for and get paid by the union. They work at the union's headquarters. If the union is
large, there will be union officials to take cared of members in different branches. Each branch
represents its members in one work site, one factory, or one employer. Each branch has a
representative. Unions are usually democratic and their union officers are voted up by the
members. 86

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Employer associations

Employers join what are called employer associations/employer federations/trade associations.

Like trade unions, employer associations are made up of businesses and employers and who all pay
annual fees for their benefits.

Advantages of joining an employer association:

 They negotiate with trade unions on behalf of their members.

 They give advice on employment laws, health and safety, taxation laws etc…
 Strength in numbers, they want to influence government decisions.
 They can share ideas and research facilities.
 They can organise bulk buying for members and get discounts.

Employer associations and the government.

Employer associations represent similar wants of businesses, and will try to influence the
governments to give better conditions for businesses to prosper:

 They want the government to control things such as inflation, law and order, health and
safety, and education for the workforce.

 Lower taxes.
 More freedom for businesses.
 Fair competition.
 Good transport infrastructure.
 Access to overseas markets.
 Reliable source of power.

Collective bargaining 87

This is when representatives of different interest groups negotiate and a collective agreement is
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made. The bargaining can be with businesses or with the government. Collective
bargaining in businesses usually means that the representatives of one or more trade unions
negotiate with one or more employers or employer associations to come up with a mutually
acceptable agreement on conditions of employment.

Why trade unions want wage increases:

 Inflation.

 It is difficult to recruit qualified workers (so pay them more!).

 Pay differentials need to be maintained (everybody's wages should rise when the minimum
wage rises).
 Changes in the workplace, e.g. new machinery.
 If there are increased productivity, wages should increase too. There are productivity
agreements, when managers and trade unions agree to raise prices for increased
productivity.

Often agreements take place and the "middle path" is taken. However, this does not always
happen and if the workers and unsatisfied with the agreements, they will use industrial action.

Industrial action
There are various forms of industrial action that try to influence the decisions of employers. Here
are some of their most comment forms.

Strikes

Strikes are when workers stop working and leave the workplace to protest against things.

 Token strike: Stoppage for an hour, a few hours or half a day to show strong feelings.

 Selective strike: Only a few workers go on strike. They are chosen by the union to cause as 88
much disruption as possible.
 All out strike: All union members stop working and wait until a dispute has been settled.

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Unions have to pay their members out of strike
funds as long as the strike has been approved by the union. All members vote to see if the strike is
favourable or not.

Picketing
This is when workers stand outside the factory holding signs to protest and stop any people
going in and out as well as goods. This can halt the production process. The strikers gain publicity
and gives the firm a bad image. This puts pressure on the firm to settle the dispute.

Work to rule
This is when workers stick rigidly to every rule and regulation in the business so that it slows
down the production process. They still get paid since they are technically doing nothing wrong,
but this still causes a lot of disruption in the workplace.

Go slow
All workers deliberately do things very slowly.

Non-cooperative
Workers refuse to work with any new rules or follow any new practices they do not
approve of.

Overtime ban
Workers refuse to do any overtime. This might damage the business if they need to complete some
orders quickly.

Possible harmful consequences of industrial action:

 For employers:

o Loss of output.
89
o Loss of profit.
o Loss of customers.
o Poor reputation.
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 o Bad image.
 For employees:
o Loss of wages.
o They might lose their jobs if the company suffers low profits.
 For customers:
o They need to find another supplier which might cost more (production is stopped)
o Shortage of products.
o Deliveries not made.
o For other businesses:
 May lose income.
 May not have materials to produce goods.
 For the economy:
o Workers have less money to spend.
o Less tax revenue.
o Country gain bad reputation for late deliveries.
o Workers may be made redundant.
o Exports may be lost and imports increased.

Employer's powers
However, employers can do something about the situation. Usually, they will sign a no-strike
agreement with the union which also involves pay rises. The pay rises are determined by an
arbitrator, an independent person who represents both sides and decides on the best decisions
possible. Again, he will most likely choose the "middle path".

Nevertheless, if strikes do happen, here are some things employers can do:

 Dismiss all workers: This leave the company in a very terrible position since they can't
produce goods or deliver goods.

 Lock-out the workers: Stop workers from coming to work or get paid. Used to counter work
to rule and go slow strategies.
 Institute a pay freeze: Used if employees are refusing to follow new rules, practices or
operate new machinery.

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Worker participation:
The management needs to let everyone feel that they are part of the business. This means that
managers will let workers participate in business decisions. There are several ways of doing this:

 Worker directors: Some workers become directors, but they are not allowed to attend all
board meetings.

 Works councils: These are where representatives of employees get together and discuss
matters that affect employees with managers. Works councils are called European
committees in Europe, and are becoming more common there. Multinationals with more
than 1000 workers or 100 workers per branch will have to create a works council and will
have to always consult it when making decisions affecting employees.
 Quality circles: This is often used in Japanese companies, where workers regularly debate
on how to improve quality and efficiency.
 Using a democratic style of leadership: Workers are delegated tasks and are consulted in
business decisions.

Advantages of worker participation

 It increases the flow of information and improve relationships between the employer and
the employee.

 It increases motivation.
 It increases job satisfaction.
 It benefits the company since it can use knowledge from experienced workers.

Disadvantages of worker participation

 It is time consuming.

 Workers may lack necessary technical knowledge.

 If representation is done via trade unions, non union members won't be affected.
 There could be conflict of interests.
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 Chapter 16: The market and marketing
What is marketing?
A market is where buyers and sellers come together and exchange their products for money. It
can be in the streets, on the internet, in shops around the world, etc… Customers and sellers
exchange both goods and services for money.

Product-orientated and market-orientated businesses

A product orientated business focuses on the quality and price of the product before finding a
market for it to sell in. These type of businesses usually produce basic needs. New technology
could be developed this way, and customer wants are created by advertising.

Other big companies cannot afford to produce a product that will not sell, so they have to do
market research first to find consumer wants before developing a product. They are called market-
orientated businesses. They will need to set up a marketing budget for this, which is a financial
plan for marketing of a product, which contains the amount of money the Marketing department
may spend on marketing.

What is marketing
Marketing is the management process which identifies consumer wants, predict future wants,
create wants and find ways to use these wants to the fullest (most profitably). In other words,
businesses try to satisfy wants in the most profitable way possible. Marketing covers a wide range
of activities such as: advertising, packaging, promotion, etc…

The Marketing department

Most businesses will have a Marketing department, which will have a Marketing Director. He will
be in charge of things such as R&D, distribution and pricing. Here is an organisational chart showing
what departments the marketing director controls:
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  Sales department: Responsible for sale and distribution of products for each region. There
may also be an export department.

 Research and Development department: Responsible for finding out consumer wants and
developing new products. They also need to find ways to improve an existing product.
 Promotion department: In charge of advertising and promotion. It will need a marketing
budget which limits the amount of money it can spend.
 Distribution department: It transports products to their markets.

The objectives of marketing

A successful Marketing department should be able to achieve these objectives for the business:

 To increase sales revenue and profitability.

 To increase market share (percentage of sales a product has in a market).

 To maintain or improve image of a product or company.
 To target a new market or market segment.
 To develop new products or improve existing ones.

SWOT analysis
This is a method to evaluate the statistics of a product of business. It assess these things:

 Strengths (internal)

 Weaknesses (internal)
 Opportunities (external)
 Threats (external)

Strengths and weaknesses of a product are its internal factors, while opportunities and threats are
external factors.

Market segments
93
Market segments are parts of a market which contains people which have similar preferences for
their products. The Marketing department should know which segment their product fits the most,
so that they can advertise and sell their products to it.
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There are two ways to segment markets. By the type of product or the attributes of the customers
buying it. Here are two types of markets which are segmented based on the product:

 Mass market: Where there is a large number of sales of a product. (e.g. Pepsi can be bought
anywhere)

 Niche market: A small market for specialised products. (e.g. Ferrari cars)

Here is how a market can be segmented regarding people buying the product:

 Income

 Age
 Region
 Gender
 Use of product
 Lifestyle

It is very important to target the right market segment since it can increase
sales by a lot. If a business can analyse all of these market segments, they may find a market
segment whose needs are not being met. This is when the business finds a gap in the market, and
it could produce goods to take advantage of this gap and again increase
sales.

The marketing mix

The marketing mix is a term that describes how products are marketed. You must remember that
before marketing can be achieved, market research is needed. The rest is summarized into the
four P's. Let's look at them briefly first, since they will be covered in other chapters:

 Product: Design and quality, competitiveness, packaging, etc… 94

 Price: There are different pricing strategies. Businesses need to use them so that they
increase sales.
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  Promotion: Advertising and promotion. Discounts, TV adverts, sales, packaging,
etc…
 Place: The location of the point of sale (the shop). Channels of distribution. Type of shop
(wholesaler or retailer?)

A successful product require effective use of the four P's. However, businesses must be
careful to not let each of these factors counteract each other (e.g. expensive but low
quality goods), else the product will fail.

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 Chapter 17: Market research
Why is market research needed?
Any business should find out what people want to buy and how many people are going to buy that
product before producing a product since the chances of failing are very high. Usually,
market research try to answer these questions:

 What feature of the product do they like/dislike?

 Are people willing to buy the product?

 What price are people prepared to pay?
 Location of the selling point of the product.
 Type
of customer who buys the product.
 Type of promotion that will be effective.
 Competition in the same industry.

Businesses need to know these things as well as consumer wants to be more

competitive. There are two main types of information that can be gathered from
market research:

 Qualitative information: information where opinion or judgement is necessary.

 Quantitative information: information about the quantity of something.

There are two ways to gather any information for market research:

 Primary research or field research.

 Secondary research or desk research.

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Primary research
Primary research is gathering original data which may require direct contact with customers. There
are several ways to do primary research:

 Questionnaires

 Interviews
 Consumer panels
 Observation
 Experiments

Note: Questionnaires, interviews and consumer panels are all types of surveys.

The process of primary research

1. Identify the purpose of the market research.

2. Decide on the best method of research. (primary, secondary or both)

3. Decide on the size and type of sample (group of people who will be asked)
4. Carry out the research.
5. Collate data and analyse results.
6. Produce a report. (may include recommendations of action paths to take)

Methods of primary research

Questionnaires

Questionnaires involve asking people questions. Deciding what questions to ask since sometimes
questions may mislead people and make them answer what they don't really think.

Advantages:

 Detailed qualitative information can be gathered.

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 Customers' opinions can be gathered.

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Disadvantages:

 If the questions are bad it could mislead customers.

 Takes time and money to collate the results.

Interviews
Interviews are face-to-face conversations with customers where the interviewer has a set of
prepared questions.

Advantages:

 The interviewer can explain any questions the interviewee does not understand.

 Detailed information about customers' opinions.

Disadvantages:

 Interviewer bias. The interviewer might unconsciously lead the interviewee to answer in a
certain way.

 Time consuming and expensive.

Samples
A group of people who are chosen to do market research on. There could be:

 Random sample: A random number of people are selected.

 Quota sample: People are selected for some certain characteristics.

Consumer panels
98
Consumer panels are groups of people who agree to provide information and spending
patterns about a product. They may even test it and give feedback on likes and dislikes.

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Advantages:

 They provide detailed information about a product.

Disadvantages:

 They can be time consuming, expensive, and biased if opinions of some is influenced by
others.

Observation
Observation involves:

 Recording: e.g. meters can be fitted to a monitor to see what people are watching.

 Watching: e.g. see how many people go into a shop and actually buy something.
 Audits: e.g. counting inventory to see what has sold well. (inspecting)

Advantages:

 It is inexpensive.

Disadvantages:

 Only provide basic figures and not reasons why people do things.

Experiments
Experimenting involves giving products to consumers to see what they think about it. 99

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Advantages:

 Easy to set up, carry out, and gather consumer opinions.

Disadvantages:

 People might give wrong feelings to avoid offence.

 Representatives of samples may not be asked, just people who shop in an area.
 Many potential customers may not be asked.

Secondary research
Secondary research means taking information that has been already collected by others.

Internal sources of information

Data collected from past researches could easily be used again if it is needed. Examples of internal
sources of information include:

 Sales
department: sales records, pricing data, customer records, sales records.

 Distribution and PR personnel.

 Finance department.
 Customer service department.

External sources of information

Data collected from sources outside the business. The data may still be useful but there are many
limitations since it has been gathered for other purposes. Sources include:

 Internet: gives all sorts of information, but the info must be validated. 100

 Trade and employer associations: gives info about things in an industry.

 Specialist journals.

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  Research reports.
 Newspapers: about the economy and disposable income of workers.
 Government reports and statistics: contains things such as age groups and culture.
 Media reports.
 Market research agencies' reports: detailed reports on the economy. Expensive to buy.

Secondary research is often a much cheaper way of obtaining information. It also gains access to
data which cannot be gathered by primary research such as government issues or the economy.

Who carries out market research?

Normally, research is done by any business who needs it. In smaller businesses, owners use
secondary research since they cannot afford to conduct primary research. However, if a business
has enough money, it can afford to have a specialist market research agency to do the research for
it.

Accuracy of market research information

The accuracy of market research depends on how the research was conducted and how carefully
samples have been selected. Here are some ways to make information from market research more
accurate:

 A sample needs to be truly representative of the total population, hence a quota sample is
normally used.

 The larger the sample, the more accurate the results.

 Questionnaires need to be tested on a small group of people to see if there are
misinterpretations. The questionnaires will be modified to be as clear as possible.

Concerning secondary research, there are a few problems with it:

 Data collected by others may not be accurate since it was used for other purposes.

 Data can be out of date. 101

All in all, it must never be assumed that information collected from market research is completely
correct.
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How to design and use a questionnaire
Firstly, you need to ask yourself some questions:

 What do I need to find

out?

 Who do I need to ask?

 Where will I carry out my questionnaire?

Writing the questions

 Ask no more than 12 questions. (impatience)

 Make the questions simple. The answers should be simple enough to collate. (e.g. Yes/No
answers)
 Use choice of age groups.
 Avoid open-ended questions.
 Avoid misleading the interviewee with questions. (don't want to cause offence)
 The order of the questions should be logical.

Carrying out the questionnaire

First you need to figure out:

 How you will ask the questions.

 How you will collate the results.

Then:

 Where are you going to ask the questions.

 Who are you going to ask? 102

And finally:

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  How many people will be asked?

 When will you ask the questions? (time)

Analysing questionnaires
Analysing the results should be straightforward if you have easily collated the data. It simply
involves reading the answers and thinking about what they mean. It takes practice.

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 Chapter 18: Presentation of information
Presentation of data from market research
Presentation of data is important because it converts raw data into a form that is easier
to understand. Information can be displayed as:

Table/tally chart:
It is the most suitable method of presenting data when raw data is needed. However, it offers little
more than that and the information should be converted into other forms if it needs to be understood
or analysed carefully. It is sufficient for info that is brief or does not contain a lot of different things.

Bar chart:
Charts are a more meaningful and attractive way to present data. They are normally used to
compare two or more sets of stats with each other.

Pictogram:
It is similar to a bar chart but uses symbols instead of columns. It becomes extremely effective if the
data is short and simple.

Pie chart:
Pie charts are ways to show the proportion that each components take up compared to the total
figure.

Line graph:
Graphs show the relationship between two variables. It can be drawn in a straight or curved line. It
is usually to compare things with time and to identify trends.

Alternative ways of presenting information for coursework 104

Tables

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Tables could be also be used to present data in situations such as when people are interviewed on
why they like a product and they are given multiple choices.

Photographs
Photos can be used to help illustrate your points or support your work. However, avoid adding
them to your work just to make them more attractive.

Diagrams
Diagrams are used to simplify information. It can be used to show relationships of things which all
leads to the same root, which is usually at the centre of the diagram. It can also be used to show
variation, e.g. diagram for ways to save water with different ways to do so branching out from the
centre of the diagram.

Maps
Maps are usually used to present location or transport routes, etc… They aim to make the
information as clear as possible to the reader. This of course, only applies to certain types of
information where words and numbers cannot express them.

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 Chapter 19: The marketing mix: product
and packaging
The role of product in the marketing mix
The product itself is the most important element in the marketing mix. Without it, the other three
wouldn't exist. Most companies today are market oriented, and will identify a suitable product for
the market before moving on to determine the other 3 elements. Large companies have R&D
departments which spends all its time developing new product and analysing the pros and cons of
competitors' products.

Types of products:

 Consumer goods: Goods that are used up by consumers. (e.g. food, cake)

 Consumer services: Services that are produced for people. (e.g. education)
 Producer goods: Goods produced for businesses. (e.g. machinery)
 Producer services: Services for businesses. (e.g. accounting, insurance)

Each type of product determines the price, promotion and place to sell the product. Here are what
make products successful.

 Products need to satisfy consumer wants/needs to be successful.

 The product must be at the right quality so that customers are willing to pay for it.
 Costs should be low enough to make a profit.
 Design of a product is important. This means that its quality and durability should meet
expectations and match the price of the product. The design should also enhance the
products brand image.
 Products are novelties (newly introduced to the market).
 Products can stimulate new wants.

Product development
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Most businesses use a general process to develop any product:

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 1. Generate ideas: Ideas can be generated by:

1. Employees.

2. Customers.
3. Competitor's products.
4. R&D department.
5. Sales department.
2. Further research: The best ideas are selected and further research is done to see their pros
and cons.
3. Will there be enough sales?: To see whether there will be enough sales of the product to
break-even (development costs included).
4. Develop a prototype: To see how a product could be manufactured and identify its
problems.
5. Test launch: To see if the product can sell or not.
6. Full launch.

The importance of branding

Traditionally, a product's unique features and quality were explained by the sellers who made the
product. However, since products are usually sold in private retail shops nowadays, these points
need to be projected differently. Products therefore need to be branded with an unique brand
name and the products features and quality will be projected with advertisement. The price of
branded goods are usually higher, since customers are more confident to buy them. Here are
things that are involved with branding:

 Unique name.

 Unique packaging.
 Needs advertising to enforce the brand's qualities.
 Higher price than unbranded products.
 Higher quality than unbranded products.
 Creates a brand image (unique image associated with using the product)
 Creates brand loyalty.
 Consistent quality.

Packaging
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Getting the packaging right is very important. Packaging performs several tasks:

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  Protecting the product (also includes preserving foods)

 Making it easy to transport.

 Allow the product to be used easily. Container must be able to be opened easily. (e.g. juice
in a can)
 Suitable for the product to fit in.

Packaging also helps promote the product:

 Make it eye-catching.

 Carries information about the product.

 Promotes the brand image.

The product life cycle

Product life cycles show the stages that a product goes through from its introduction, to its growth,
and then to its decline. Here is a graph to show the product life cycle:

1. Development: The product is under development.

2. Introduction: The product is introduced. Sales grow slowly and informative advertising start
to attract customers. Price skimming could be used if the product is new to the market. The
main aim of sales is to breakeven.
3. Growth: Prices rise rapidly. Persuasive advertising is used to encourage brand loyalty. Prices
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may be reduced a little. Sales start to generate profits since costs have been covered.
4. Maturity: Sales rise more slowly. Competition forces prices to be lowered and the firm uses
competitive pricing. Advertising is used to maintain sales. Profits are at their highest.

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 5. Saturation: Sales reach their limit. There are no new competitors. Sales and advertising
becomes stable but profits fall because of lowered prices to be competitive.
6. Decline: Product go out of fashion and sales and profits decline. Advertising eventually
stops. It is no longer profitable to product the product.

The length of each stage varies with products. The business needs to identify which stage their
products are in so that they can use a suitable marketing strategy for it.

Extending the product life cycle

When a product has reached its maturity or saturation stage a business may adopt extension
strategies to stop sales from falling which extends the product life cycle. Sales are given a boost by
these strategies.

 Introducing new variations of the product.

 Sell into new markets.

 Make small changes to the products design and packaging.
 Sell through additional, different retail outlets.
 Update the product (make it better)
 Use a new advertising campaign.

Extension strategies aim to prolong the maturity stage of a product. Successful extension strategies
may result in something like this:

Nevertheless, it must be noted that businesses manufacture more than one product. They should
have a product in growth stage to counteract an older one which is declining.
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 Chapter 20: The marketing mix: price
The role of price in the marketing mix
When pricing a product, a business needs to choose one that fits with the rest of the elements in
the marketing mix. E.g. high price so that consumers thinks they are buying high quality goods, low
price for low quality goods, or competitive prices in a market with a lot of competition.

Price determination in a free market

People think that prices are determined by the seller of the product, but that is not quite so. Prices
are driven by market forces called demand and supply.

Demand
Demand is not only that people want to buy a product, but that they want it can are willing to pay
for it. Prices can affect how much demand there is for a product. Normally, if the price goes up,
demand goes down, and vice versa. This can be shown on the graph below:

Supply
Supply also varies with price. However, it is different. If the price goes up, then the owners would
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want to be supplied with more products to take advantage of the high price, thus the supply goes
up (and vice versa). This can be demonstrated on the graph below:

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The market price
For the market price to be determined, demand and supply must all be put onto the same graph.
The place where the two lines (called curves) cross is called the equilibrium, where the same
number of goods are demanded and in supply resulting in no leftovers. All the products are
demanded and all of them are sold.

Factors that affect demand and supply

The graphs above assume that the demand and supply of goods are fixed. But these things can
change, which moves the demand or supply curve to the left or the right in the graph. Changes in
the price affects where you are on the curves. But changes in other factors affect the position of
the curve on the graph. 111

Factors affecting demand

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  The popularity of substitute products. (products that can be used instead of the product)

 The popularity of complementary products. (products that require each other or are used
together)
 Changes in income.
 Changes in taste and fashion.
 Changes in advertising.

The result is: if demand falls, the market price and sales will fall, and the demand curve will move
to the left. If demand rises, the market price and sales will rise, and the demand curve will move to
the right. It is illustrated on the graphs below.

Elasticity of demand
Elasticity of demand is how easily demand can change when prices change. A product with an
elastic demand curve would have a higher change in demand than a change in price (uses
percentages). A product with an inelastic demand curve would have a lower change in demand
than a change in price. The elasticity of demand of a product is mainly affected by how many
substitute products that it has.

Factors affecting supply

 Costs in supplying goods to the market:

o Price of raw materials.

o Wage rates.
 Improvements in technology: 112
o Makes it cheaper to produce goods.
 Taxes and subsidies:
o Higher taxes mean higher costs.

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  Climate (for agricultural products):
o Supply of crops depend on weather.

The result is: if supply falls, the market price will rise, sales will fall and the supply curve will move
to the left. If supply rises, the market price will fall, sales will rise and the demand curve will move
to the right. It is illustrated on the graphs below.

Elasticity of supply
Elasticity of supply is how easily and quickly supply can change when prices change. How quickly
means how quickly products can be produced and supplied, which is not very quick for products
made by agriculture. A product with an elastic supply curve would have a higher % change in
supply than a change in price. A product with an inelastic supply curve would have a lower change
in supply than a change in price.

Pricing strategies
If a product is easily recognizable from other products, it would probably have a brand name. And
if it has one, it would need a suitable pricing strategy to complement the brand name that should
improve its brand image. Here are the strategies that are used:

Cost-plus pricing
Cost-plus pricing involves covering all costs and adding a percentage mark-up for profit.

 + Easy to apply.
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 - You lose sales if your price is higher than your competitors price.

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Penetration pricing
Penetration pricing is used to enter a new market. It should be lower than competitors' prices.

 + Ensures that sales are made when a product enters a market.

 - Prices will be low. Sales revenue will be low.

Pricing skimming
High prices are used when a new product is introduced into a market, partly because it has a
novelty factor, and because of the high development costs. High prices could be charged because
a product is high quality. One last use of it is to improve the brand image of a product, since
people usually associate high price with good products.

 + Skimming can help establish a product as being good quality.

 - It may lose potential customers because of high price.

Competitive pricing

Competitive pricing means setting your price to a similar or lower level than your competitors
prices.

 + Sales will be high because your price is at a realistic level (not under/over-priced).

 - You have to research on your competitors prices which costs time and money.

Promotional pricing

Promotional pricing means that you lower the prices of goods for a short time.

 + Help get rid of unwanted stock.

 + Can renew interest in a product.

 - Sales revenue will be lower.
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Psychological pricing

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Psychological pricing involves setting the price that changes consumers perception of a product.
This may be by:

 Using high price to make using the product give the user a status symbol.

 Pricing a product at just below a whole number (e.g. $99) which gives it an impression that
it is cheaper.
 Supermarkets charge low prices for products that are bought on a daily basis to give
consumers an impression that they are being given good value for money.

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 Chapter 21: The marketing mix: promotion
The role of promotion in the marketing mix
Promotion informs consumers about the rest of the marketing mix. Without it, consumers do not
know about the product, the price, or the place. Promotion is more than just advertising, and it
includes several activities. It is crucial when you are selling in a mass market or you have a brand
name. Promotion includes:

 Advertisements: They can take different forms, e.g. on TV, in newspapers.

 Promotion: e.g. Money off coupons.

 Personal selling: Sending out sales representatives to talk directly to the consumers.
 Public relations: Involves making the public aware of the company, e.g. creating publicity in
the media.

The aims of promotion

 To inform people about particular issues.

 To introduce new products to the market.

 To compete with competitors products.
 To improve the company/brand image.
 To increase sales.

Advertising
The advertising process

1. Set objectives: A business needs to determine the purpose of advertising.

116
2. Decide
the

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 advertising budget: Set a limit on how much the business can spend on advertising. It can
be decided based on:
1. A percentage of predicted sales revenue.
2. How much competitors are spending.
3. How much the business can afford.
3. Create an advertising campaign: Decide on what advertising campaign to run. Can be
determined based on:
1. Target audience.
2. Objectives.
4. Select the media: Using the suitable media for advertising that is the most cost effective.
E.g. TV, newspaper.
5. Evaluate the effectiveness of the campaign: Has the advertising met objectives?

Different types of advertising

 Informative advertising: Involves giving as much information about the product as possible.
(e.g. computer)

 Persuasive advertising: Involves persuading consumers that they need the product and
should buy it. (e.g. perfume)

Different media of advertising

Media Advantages Disadvantages Examples

Television  Millions of people will see Expensive  Food

it.  Cars
 The product can be  Household tools
presented in a very
attractive way.
 Easy to reach target
audiences.
Radio  Cheaper than TV.  Cannot use visual  Local services
 Uses song or tune which message.  Shops
makes ads memorable.  Expensive compared to
others. 117
 The advert has to be
remembered.
 Not as wide audience as

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 TV
Newspaper  Can reach many people.  Not eye-catching if they  Local products
 Cheap for local are in black and white.  Cars
newspapers.  Does not grab reader’s  Banks
 A lot of info can be put attention.
into the ad.
 Adverts are permanent*.
Magazines  Can use specialist  They are only published  Perfume
magazines to reach only once per month/week.  Golf equipment
target audience.  More expensive then  Fashion clothes
 Magazine ads are in colour newspapers.
and are more attractive.
Posters/billboards Permanent*  Can easily be missed.  Events
 Cheap  No detailed info can be  Products bought by a
 Potentially seen by anyone included. large section of the
who passes by them. population
Cinemas  Visual image shows  Only seen by people who  Toys for a children’s
product in a positive way. go to watch films. film.
 Fairly cheap.
 Effective if target audience
goes to see particular
films.
Leaflets  Cheap  May not be read.  Local events.
 Given to a wide range of  Retail stores like
people. Seven-Eleven
 Delivered to people’s
houses.
 May contain vouchers to
encourage readers to keep
the advert.
 Permanent*
Internet  Can be seen by anybody  Internet searches may not Virtual goods.
around the world. highlight the website and  Services such as
 Can store lots of info. it could be missed. banking or insurance.
 Orders can instantly be  Internet access is limited  Virtually anything
made. in some countries. that is not too small.
 Competition from other
websites.
 Security issues may 118
discourage people from
buying online.

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Others (delivery  Cheap  May not be seen by  Shops put their
everyone. names on plastic
vehicles or sides of
bags.
bags)  Coca cola use neon
signs. *Perma
nent:
adverts can be kept for future references.

Design of adverts
Businesses usually use the AIDA model:

 Attention: Informs consumers that the product exists.

 Interest: Consumers need to become interested in the product.

 Desire: Makes consumers want the product.
 Action: Prompts consumers into buying the product.

The AIDA model is most effective on products that are not used regularly. It is less effective on
products that are bought on a daily basis because people will know how good the quality really is.

Promotion
Different types of promotion
Promotion is usually used to support advertising and to encourage new or existing customers to
buy the product. Its main function is to boost sales in the short-term, but not in the long term. It is
used to attract new customers so that they can try out items with the hope that they will like it and
continue to buy it after the promotion has ended. Here are some ways in which promotion is used:

 Price reductions: Involves sales or price reduction coupons.

 Gifts: Gifts are placed in the packaging of the product to encourage consumers to buy it.
(e.g. toys in McDonald's happy meal).
 Competitions: A card may be put in the packaging allowing the consumer to enter contests
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such as the lottery.

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  Point-of sale displays and demonstrations: Can be put near the window and displayed
attractively. It could also encourage people to buy it if they can see how it works
(demonstrated by sales staff)
 After sales service: e.g. warranty services. It reassures the customers that if the product has
a problem then they can go and fix it for free. This make the product more attractive than
others without warranty.
 Free samples: Encourages people to try the product. It can be included in other products as
well. E.g. washing machine comes with free washing powder.

The advantages of promotion

 Can boost sales during the year when sales are traditionally low (encourage off-season
purchases)

 Encourages people to try a product.

 Encourages people to buy a product or the product in greater quantities.
 Encourages people to buy a product instead of competitors' products.

Which type of promotion should be used?

When deciding on what type of promotion should be used, these points should be considered:

 The stage of the product life cycle: e.g. use informative advertisement in the introduction
stage of the life cycle.

 The nature of the product itself: e.g. consumer goods use coupons but producer goods use
discounts on bulk buying.
 The advertising budget: obviously the type of promotion depends on how much you can
spend.
 The cultural issues involved in international marketing: businesses need to consider
whether their type of advertising might offend the local people. They should also take into
account things such as how many people own TV, literacy level, etc…
 The nature of the target market: Different markets require different media for advertising.

Personal selling
120

 Used when the nature of the product varies. e.g. housing

o Price varies.
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 o Quality varies.
o Customer requirements vary.
 When customers need advice on what type of product is the most appropriate for their
situation.
 When selling expensive products such as cars.
 When negotiation about price or products is needed. This is common for businesses that
sell to other businesses. (e.g. discounts on bulk buying)
 When a business has a stand at a trade fair.

Public relations
 Good for improving the brand/company's image.

 These activities raise public awareness of the company.

 Includes:
o Sponsoring events such as football matches.
o Giving products to charity.
o Employees take part in an activity for a good cause.

Customer service
It is far more expensive to attract customers than to keep old customers, so one key objective for
any business is to retain their old ones. In the international business environment, there are many
competitors, so businesses need to raise the value of their products with customer service.

Good customer service is not only producing a good product but also means:

 Giving advice about the product: It is always good to give as much information about a
product as possible so that the customers can be sure that they have purchased the product
that meets their requirements.

 Delivering goods for customers: It becomes convenient for the customer which encourages
the customer to buy products from the business since they do not have to go anywhere.
 Providing credit facilities: This means letting customers pay later or in monthly installments.
This make products look cheaper and more affordable encouraging customers to buy them. 121
Credit facilities are usually offered when people buy expensive products. You usually get
interest as a result, but you could charge no interest for promotional purposes.

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  Providing product information: This means giving information on how to use the product
and offering help on customer service helplines.
 After-sales service: The aim is to show that you care about customers' satisfaction.
Examples of after-sales service include:
o Warranties.
o Regular product checks.
o Giving refunds for faulty products.
o Exchanging unsatisfactory goods.

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 123

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 Chapter 22: The marketing mix: place
The role of place in the marketing mix
After the product, price, and promotion has been decided, the product/service has to be available
to the consumer where and when they want to buy. Consumers should be able to get to the
product easily, and the product has to be in the right place (e.g. expensive chocolate shouldn't be
in a small grocery store) to sell well.

Channels of distribution
Businesses need to know how to get the product to the consumer. They may use a variety of
channels of distribution:

 Channel 1: The manufacturer sells directly to the customer. e.g. agricultural goods are sold
straight from the farm, businesses buy raw materials from another…

 Channel 2: Involves selling to retailers. Common when the retailer is large or the product is
expensive.
 Channel 3: Involves the product going through wholesalers as well. Wholesalers break bulk
so that retailers can buy them in smaller quantities. This is common for perishable items
such as foods.
 Channel 4: Involve selling the product overseas through an agent, who sells them to
wholesalers on behalf of the company. This may be because he/she has better knowledge of
the local conditions.

Methods of distribution 124

Methods of distribution for different channels of distribution can include:

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  Department stores: Usually in the centre of town that sells a wide range of goods from
many producers.

 Chain stores: Two or more which has the same name/characteristics.

 Discount stores: Offers a wide range of products, including branded products, at discount
prices. Often all the products are similar.
 Superstores: Very large out-of-town stores.
 Supermarkets: Very large retail stores with all kinds of goods. (usually daily needs, foods)
 Direct sales: Goods are sold directly to the consumer.
 Mail order: Customers order via the post by looking at the catalogue
 Internet/e-commerce: Customers order via the internet by looking at the website.

E-commerce
The use of the internet to carry out business transactions. Businesses could communicate via email
as well. Producers as well as retailers can use the internet to sell to customers.

Advantages and disadvantages of a wholesaler

Advantages

 Breaks bulk.

 Reduces storage costs for retailers and producers.

 Fewer transactions are needed for the producers. (only a few wholesalers) they no longer
need to do as many deliveries.
 Gives credit to small retailers.
 May deliver to small retailers reducing their transport costs.
 Promotion carried out by wholesaler instead of producer.
 They give advice to retailers/producers on what is selling well.

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Disadvantages

 More expensive for small retailers.

 May not have the full range of products to sell.

 Takes longer for perishable products to reach the retailer.
 Wholesaler may be far from small shops.

Selecting the channel of distribution to use

When selecting the channel of distribution to use producers need to consider a few things:

 Type of product?: Is it sold to other producers or customers?

 Is the product very technical?: Will you need to explain how to use the product? If yes,
Channel 1 should be selected (e.g. airplanes)
 How often is the product purchased?: If it is bought every day, it should be available in
many retail outlets, otherwise people might not bother to buy it at all.
 How expensive is the product?: If it is expensive and has an image of being expensive, then
it will be sold in a limited number of retail outlets.
 How perishable is it?: If it is very perishable, it should reach the customers quickly or be
available in many outlets so it can be sold quickly.
 Location of customers?: Channel 4 might be used for customers overseas. E-commerce
would be viable anywhere apart from the countryside.
 Where do competitors sell their products?:
Usually producers will sell their product in retail stores where their competitors sell too so
that they can compete directly for consumers.

Methods for transporting goods

This is what kind of vehicles are used to transport the products. They should be fast enough for the
product to reach its destination in time. However, they must also be cost efficient and safe. These
factors a taken into account when deciding which method of transportation is used.

 Road haulage:

o Cheap and fast. 126

o Require no rail links.

o Can advertise on side of lorries.
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 o Not cost effective if lorries are not used often, may need to hire a specialist transport
business instead.
 Railways:
o Even cheaper and faster than road haulage.
o Useful for long distances.
o Goods need to be transported to retail stores by road haulage at the end of the
destination.
 Canal and river:
o Slow but cheap.
o Good for products far too big/heavy to be transported by road/train.
o Need canals and rivers.
 Sea freight:
o Used mainly for international trade.
o Can carry a lot of products.
o Products are stored in containers, which can be easily loaded onto lorries. Makes it
cheap to load and unload the ships.
 Air freight:
o Extremely fast but expensive.
o Used for small, expensive, or perishable products.
 Pipelines:
o Used to transport liquids or gases over long distances.
o Cheaper than using road haulage for liquids. Roads are not always available.

Drawing up a marketing plan

Finally, after all the four P's of the marketing mix have been decided, the Marketing department
will put them together into one marketing plan. It will also consider how the 4 P's will be modified
or adapted to fit the overall image of the product. If this is successful, sales and profits will be likely
to increase.

Note: a detailed drawing of the product must be included in the marketing plan.

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 Chapter 23: Factors affecting production
What is meant by production?
Production is the provision of a product to satisfy wants and needs. The process involves
businesses adding value to their products. E.g. The production process of matches involve cutting
wood into matchsticks, putting phosphorus ends on them and packaging them to sell.

Productivity
Productivity is the outputs measured against the inputs used to create it. This is measured by:

Output (over a given period of time)/Number of employees

If a worker makes more products in the same amount of time, his productivity increases. Firms aim
to be productively efficient to be able to make more profits and compete against their
competitors.

Methods of production
Job production

 Goods are made individually, by one person.

 Goods are usually specialized, no two goods are the same.

 Usually made to order.

Advantages

 The product meets exact requirements of the customer.

 The workers have more varied jobs.

 More job satisfaction for workers.
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Disadvantages

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  Skilled labour is needed.

 Slower and more expensive than other methods of production.

 Usually labour intensive.

Batch production

 Products are made in batches according to order.

Advantages

 It is flexible. You can easily change from making one product to another.

 Still gives some variety to workers jobs.

 Production is not too affected by machinery breakdown.

Disadvantages

 Expensive to move products around the workplace.

 Storage space will be needed to store raw materials. Expensive.

Flow production

 Large quantities of a product are produced in a continuous process.

 Uses specialization.
 Benefits from economies of scale.
 Is capital intensive.

Advantages

 Low costs. Low prices. High sales.

 Increased efficiency.
 Little training is needed.
 Goods are produced quickly and cheaply. 129
 Goods do not need to be moved around like batch production. Saves time.
 Quality is high and standardized (courtesy to Muhammad Hassaan Ayyub)

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Disadvantages

 Boring for the workers. Little job satisfaction.

 Needs a lot of capital to set up.

 If one machine breaks down then the whole production process stops.

Which type of production should be used?

The type of production that should be used varies with how the product is demanded:

 Job production: Unique and individual service is required.

 Batch production: Demand is higher but products will not be sold in large quantities.
Batches are made to orders.
 Flow production: Demand for the product is high and steady.

Stock control
Stock control is important so that a business will not
run
out of stock and be unable to satisfy demands. When stock levels get to a certain point, more
goods need to be reordered for the stock level to reach its maximum again. If more goods are not
reordered, stocks could run out because of an unexpected
surge in demand. However, keeping a lot of stock costs money, so the level of stock in a company
should always be balanced. The following graph demonstrates how stock can be controlled:

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Lead production

 Focuses on cutting down waste, increasing efficiency.

 It tries to reduce the time taken to produce a product and transport it the selling point.
 Includes the following methods:
o Kaizen.
o JIT production.
o Cell production.
o Kanban.

Kaizen

 Continuous improvement through the elimination of waste.

o Ideas of workers.

o Regular meetings of workers to discuss how to increase efficiency.

 The advantages of Kaizen:
o Increased productivity.
o Reduced amount of space needed for the production process.
o Work-in-progress is reduced.
o Improved layout of the factory floor may combine jobs of some employees, freeing
others to do other things.

Just in time production

 Eliminating the need to hold stocks.

 Goods are delivered to the selling point just when they are needed.
 JIT production needs:
o Reliable suppliers.
o Efficient system of ordering raw materials.

Cell production
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 Production line is divided into cells.

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  Each cell makes an identifiable part of the finished product.
 Boosts morale.

Kanban

 A system of ordering used with JIT production.

 Operates with two component bins.

o When one is emptied, production begins to fill it.
o The other one is then left to be emptied.
o The first one is filled up when the second one is emptied.

Improvements in technology
Here are some things that technology does in the production process:

 Automation: Equipment in the production process is controlled by a computer.

 Mechanisation: Tasks are done by machines operated by people.

 CAD (computer aided design): Used for designing 3-D objects.
 CAM (computer aided manufacture): Computers control machines in the production
process.
 CIM (computer integrated manufacture): CAD and CAM are used together. The computer
that uses CAD is directly linked with the one that controls the production process.

Here are some things that technology does in shops:

 EPOS (electronic point of sale): When products' bar codes are scanned and the information
is printed out on a receipt. Data is also sent to a computer to keep track of stocks.

 EFTPOS (electronic fund transfer at point of sale): When the cash register is connected to
the retailer's main computer and banks. The customer's credit/debit card is swiped and the
money is debited from the customer's bank account. A receipt is printed out to confirm the
transaction. 132

The advantages of new technology

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  Increased productivity.

 Boring jobs done by machines. Boosts motivation.

 Training is needed to operate new machines. Workers become more skilled.
 Better quality.
 Better stock control.
 Quicker communication and reduced paperwork.
 Info is available faster, resulting in faster decision making (for managers).

The disadvantages of new technology

 Unemployment

 Expensive
o To invest in new technology.
o To replace outdated technology.
 Employees are unhappy with changes in the workplace.

Quality control
There are three ways to control quality:

Quality control

 Involves checking and removing faulty products at the end of the production process.

 Wastes a lot of money.

Quality assurance

 Involves inspecting during and at the end of production.

 Aim to
o Stop faults from happening.
o Set a quality standard that all products have to achieve. 133
 Need teamworking and responsibility.

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Total quality management

 Encourages everyone to concentrate on quality.

 Quality is the main aim for all staff.

 Products need to satisfy all customer need.

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 Chapter 24: Factors affecting location
Location of industry
The location of a business is considered when it starts-up or when its present location is
unsatisfactory. The business's objectives as well as the conditions of the environment change, so
the business may need to look for a new location once in a while.

There are many factors that affect the location of businesses, and these factors are different for
each business sector. We'll take a look at them below.

Factors affecting the location of a manufacturing business

Production methods and location decisions

 Small
scale: transport and location of suppliers are less important.

 Large
scale: transport and location of suppliers are more important.

Market

 Need to be near to transport perishable goods.

 Need to be near to cut transportation expenses.

Raw materials/components

 Need to be near to transport perishable goods.

 Need to be near to cut transportation expenses.

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External economies of scale

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  How good nearby businesses are.

o For maintenance of equipments.

o For training workers, etc…

Availability of labour

 Wages of the labourers.

 How skilled they are.

Government influence

 Grants/subsidies.

 Restrictions on dumping, etc…

Transport and communication

 To be able to transport product easily.

Power

 Need a reliable source of power to operate effectively.

Water supply

 A lot of water is needed in the production process (e.g. cooling, cleaning)

 Cost of water.

Personal preferences of the owners

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 May locate in areas that:

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 o They come from.

o They like.
o Pleasant weather, etc…

Climate

 E.g. to reduce heating costs in a warmer climate.

 Some climates are required to produce certain items.

Factors affecting the location of a retailing business

Shoppers

 Do shoppers go there?

 What kind of shoppers go there?

Nearby shops

 Competitors.

 Mass market.
 Gap in the market.

Customer parking available/nearby

 Convenience for the customer.

Availability of suitable vacant premises]

 Goods sites (e.g. in shopping centres) are in short supply. 137

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Rent/taxes

 The more popular the site, the more expensive.

Access for delivery vehicles

 For delivering goods.

Security

 If the area is insecure

o Goods will be stolen.

o Insurance will be reluctant to insure the shop.

Legislation

 Laws restricting the trade of goods in certain areas.

Factors that influence a business to relocate either at home or abroad

 The present site is not large enough for expansion.

o If a business simply prefers to expand elsewhere, the factors affecting location will
have to be considered.

 Raw materials run out.

o One alternative is to import raw materials from elsewhere.
o Important for mining industries.
 Difficulties with the labour force 138
o Wages are too high.
o Need skilled labour.
 Rents/taxes rising.
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  New markets open up overseas.
o Cuts transport costs.
o Bypass trade barriers.
 Government grants
o To attract businesses to locate in development areas.
o To attract foreign investment.
 To bypass trade barriers
o Tariffs
o Quotas

Factors affecting the location of a service sector business

Customers

 Whether customers require:

o Direct contact.

 Is it convenient for customers to go the business?

 Will the service arrive at customers' houses in time?

o No direct contact needed.
 Mail
 Internet

Personal preference of owners

 Near their homes.

Technology

 Technology allows businesses to locate in cheaper sites.

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o Telephone.

o Internet.

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 o Transport.
 No need to be near customers.

Availability of labour

 Need to locate to sites where skilled labourers live.

o Labourers may relocate to be near the business.

Climate

 Important for tourism.

Near to other businesses

 Businesses that supply or repair machinery to others need to be near them to respond
quickly.

 Post office/banks need to be in busy areas for the convenience of customers. That is, being
near malls, shops, etc…

Rent/taxes

 If the business does not need direct contact with the customer, then it could locate in
cheaper areas

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 Chapter 25: Business in the international
community
The international dimension
In business, no manager can operate without being affected by the international community.

Exchange rates
Exchange rates is the value of one currency compared to another.

How are exchange rates determined?

There are two type so currencies:

 Floating rates: The exchange rate of the currency is allowed to change freely depending on
market forces, i.e supply and demand of the currency.

 Fixed rates: The exchange rate of the currency is set by the country's central bank.

When the exchange rate rises, it is called appreciation. When it falls, it is called depreciation.

How are businesses affected by changing exchange rates?

 Appreciation:

o Import prices fall.

o Export prices rise.

 Depreciation:
o Import prices rise.
o Export prices fall.

These exchange rate movements can cause serious damage to businesses, making business 141
endeavours that would have been profitable make losses because of changes in the currencies. The
EU, for example, wants to limit these bad effects, and hence established a common currency, the

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Euro.

International economic organisations

 Economic and political unions. (e.g. the EU)

 Free trade agreements. (e.g. NAFTA)

 Organisations working for free trade between countries. (WTO)

The European Union

 Consists of 25 European countries.

 Creates a single market in the EU.

o To tariffs, quotas or any trade boundaries.
o This results in:
 A huge market benefiting from economies of scale.
 Increased competition resulting in better products.
 Common currency.
o Issue of Euros are controlled by the European Central Bank.
o Interest rates for the Euro become the same.
 The social charter:
o The EU wants to improve working
conditions and make finding
josbs equal in the EU.
o The main conditions include:
 Workers can look for work anywhere in the EU.
 Workers must be consulted on important issues.
 Equal treatment of full/half time workers.
 Limits on maximum working hours.
 Improved health and safety rules at work.

Advantages for the UK to join the EU

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 Lower costs because:

o One price list throughout Europe can be used.

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 o No more charge through currency conversion.
 Easier to:
o Trade with EU countries.
o Compare costs of supplies with EU countries.
 No risk of losing out on exchange rate changes.

Disadvantages for the UK to join the EU

 More competition from non-UK firms.

 Consumers might buy cheaper products from other EU countries.

 The rate of interest might no longer suit UK firms.

Free trade unions

Eliminates all trade barriers. Businesses within the free trade union are affected in the following
ways:

 More competition from foreign firms.

o Consumers have more choice and prices are lower.

 No 'protection' by governments.
 More opportunities for exporting.
o Efficient firms will be more successful.

The long-term aim of the free trade union is to encourage

trade between the member countries, ultimately improving living conditions for the people.

Globalisation
Globalisation is the word used to describe the increased worldwide competition and business
activity. Goods and services that once can only be found in one country has spread all around the
world. There are several reasons for this:

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 Free trade agreements encourage international trade.

 Improved travel links and communication.

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  Countries that have been undeveloped before start to develop and export their own goods,
leading to more international competition.

Globalisation results in:

 More choices and lower prices for the consumer.

 Businesses look into more ways to become more efficient.

o Why many businesses merge to become multinationals.
 Inefficient businesses go out of business.
 Free trade results in:
o More workers losing jobs, since governments can no longer protect them from
foreign competition.

Multinational businesses
Multinationals are businesses that have factories, services, or operations in more than one
country. It is important to note that, for a business to become multinationals, they must produce
goods in more than one country.

Why do firms become multinationals

 To cut costs:

o Labour costs.

o Raw material costs.

 To extract raw materials not found elsewhere.
 To produce goods nearer to the market.
 To bypass trade barriers.
 To expand and spread risks.

Advantages of multinationals operating in a country

 Jobs are created.

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 New investment increases national output.
 Imports are reduced since there are more goods in the country. More exports.
 More taxes are paid to the government.
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Disadvantages of multinationals operating in a country

 Jobs created are usually unskilled jobs.

 Local firms are forced out of business since they can't compete with multinationals.
 Profits flow out of the country.
 Multinationals use up scarce resources.
 May influence the government.

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