Component 1 Revision Notes

• These notes cover the key components for Component 1 revision.

Aims and Objectives

• Business objectives can either be for the private sector or public sector.
• Private sector objectives include profitability, increasing shareholder value, survival, gaining market share, increasing brand identity, ethics and going green, and growth.
• Public sector objectives include providing a quality service, value for money, providing for customers' needs, and financial responsibility with taxpayers' money.
• Business objectives follow a hierarchical plan including the mission statements from which aims are derived, upon which corporate objectives are based, resulting in functional objectives.

Stakeholders

• Stakeholders include: owners/shareholders, banks/lenders, directors/managers, employees, suppliers, customers, community, and the government.
• Owners/shareholders focus on profit/share price with the power to appoint directors.
• Banks/lenders focus on interest and principle payments and can enforce loan agreements.
• Directors/managers focus on salary and share options enabling them to make business decisions.
• Employees focus on wages, security and motivation while influencing staff turnover and other industrial actions.
• Suppliers focus on long term contracts and prompt payments and affect pricing and availability.
• Customers focus on value, availability, and service with influence through revenue and word of mouth.
• The community focuses on local jobs and the environment with indirect influence via local planning.
• The government focuses on legal operations, jobs, and tax revenue, while regulating, taxing, and providing subsidies.

Ownership

• Public Sector organisations are owned and funded by the government and are mainly not-for-profit
• Public Sector examples: Education, NHS, and BBC.
• Private Sector organisations are owned by private individuals and shareholders, can be: incorporated like Private Ltd or Public Ltd, and unincorporated with limited and unlimited liability, like sole traders and partnerships.
• Private Sector organisations can also be not-for-profit.

Business Plan

• A business plan requires; an executive summary, business objectives, consideration of the business opportunity, product or service details, as well as market analysis.
• A Business Plan should also include the implemented strategy, breakdown of personnel, a financial plan and forecast, and a buying and production plan.
• Finally, you need a list of the premises and equipment required.
• Problems identified, resources planned, and aims and objectives that are set.
• Business Plans can become outdated but don't guarantee success, and heavily rely on knowledge and experience.

Markets

• Mass/niche
• Goods/services
• Local/global economy
• Trade/consumer
• Seasonal

Market Research

• Market research is either primary or secondary and either qualitative or quantitative.
• Used to find out; information about the market, the location of relevant participants, the existing competition, and information on the consumers.
• Price, promotion, and product strategies all use the findings of market research.

Market Segmentation

• Market segmentation can be:
  • demographic (age, gender, income)
  • geographic (location)
  • psychographic (lifestyle, values, attitudes)
  • behavioural (loyalty, usage rate)
• Choosing market segmentation allows you to target your marketing, better cater to customer needs, achieve higher profits, identify opportunities for growth, and maintain sustainable customer relationships.
• It also stimulates innovation and provides a higher market share.

Market Structure

• Market structures range from monopoly and oligopoly to monopolistic competition and perfect competition.
• Barriers to entry prevent new firms from entering a market.
• A monopoly is a single producer within a market.
• An oligopoly consists of a small number of firms, which dominate and are interdependent with each other.
• Monopolistic competition consists of relatively small businesses in competition with each other.
• Perfect competition is a large number of businesses where no one firm is large enough to influence the activities of others.
• Customer protection is needed due to overcharging, faulty goods, misleading credit terms, false descriptions of products, and cartels.

Supply and Demand

• A graph depicts supply and demand curves intersecting to determine prices and quantities in a market.

Price and Income Elasticity of Demand

• Price increases paired with inelastic demand result in increased revenue while elastic demand results in decreased revenue.
• Price decreases paired with inelastic demand result in decreased revenue while elastic demand results in increased revenue.
• During recovery, sales increases a lot for luxury goods, a little for normal goods, and decreases for inferior goods.
• During a recession, sales decreases a lot for luxury goods, a little for normal goods, and increases for inferior goods.

Location

• Key location factors include: access to markets, raw materials, services, transport links, image, availability of labour, cost of land, competition, government/EU influence, and supplier locations.
• Primary sector businesses need to be near raw materials.
• Secondary sector businesses need to be near suppliers and infrastructure.
• Tertiary sector businesses need to be near market access.

Sources of Finance

• Internal sources of finance include retained profit, owners capital, working capital and the sale of assets.
• External sources of finance include share capital, venture capital, bank loans, government assistance, hire purchase and leasing, overdrafts, trade credit, debt factoring, sale and leasebacks and mortgages.

Costs

• Different types of costs include Direct Costs, Indirect Costs, Fixed costs, Variable costs, Semi Variable costs, and Total Costs

Contribution

• Contribution is the amount a product contributes to covering costs shown as Selling Price - Variable cost.
• If a selling price per unit is £8.90 and the variable cost per unit is £3.50, the contribution per unit is £5.40.

Breakeven Analysis

• Breakeven is when total costs are the same as total revenue.
• The breakeven formula is: Fixed Costs / Contribution (selling price – variable cost/unit).
• At breakeven a business has not made a profit or a loss.

Economies of Scale

• Economies of scale exist when average unit cost decreases as output increases.
• Economies of scale: purchasing, marketing, managerial, risk bearing, labour, and co-operation.
• Diseconomies of scale: poor communication, poor coordination, poor motivation, and technical diseconomies.

R&D

• Innovation is the commercial exploitation of an invention.
• Research – the inquiry into and the discovery of new ideas.
• Development – the process which changes ideas that result from the research process into commercially viable products or processes.
• The process of product design and development includes identification of the problem, research, development of ideas and solutions, development of prototypes, final design, testing, manufacture, and launch.

Job, Batch, and Flow Productions

• Job (one-off) production is highly flexible, intensive, and suitable for niche marketing, producing tailor-made products that require a variety of machines/skills.
• Batch Production is fairly flexible and capital intensive which produces in batches using pre-planning to coordinate and cater to a variety of products needing different marketing schemes.
• Flow production is inflexible, capital intensive, involving economies of scale and suitable for mass marketing that allows for continuous process with one set of machines to produce standardised product.

Added Value

• Added value = selling price – cost of raw materials.
• To add value, increase selling price or decrease the price of raw materials.

Productivity

• Labour Productivity formula = Output (per time period) divided by the Number of employees (per period).
• Capital Productivity formula = Output (per time period) divided by the Capital employed/Number of machines.
• It needs to be specifically defined that production is more efficient over a specific period.

Technology

• Technology includes CAD/CAM, robotics, computer modelling, and I.T.
• Technology's importance relates to improved quality, faster innovation, effective marketing, less dependency on labour, reduced waste, and communications.
• Problems of using technology: initial and breakdown costs as well as employee reactions, training, and the need to upgrade.

Lean Production

• Lean production encompasses several management theories all designed to achieve the reduction and removal of waste within a business.
• Lean production methods: Kaizen, Time Based Management, Cell Production, and Just In Time.
• Kaizen focuses on continuous improvement through small incremental steps.
• Time based management seeks to reduce wasted time in the production processes.
• Cell Production utilises team members with a level of job enrichment.
• Just-in-time aims to only make it, "If it isn't wanted, don't order it; if it isn't sold, don't make it".

Quality

• Quality is when a product meets the requirements of the customers and is fit for purpose.

Quality Control v Quality Assurance

• Quality control involves the Work passing on each stage, ending with a check.
• Quality assurance involves checks at each stage of the Work passing on.
• TQM factors: focus on the consumer, involve all employees, accurate evaluation, quality improvement, and continuous improvement.

Purchasing

• Just in Case aims to always have maximum stock.
• Just in Time orders materials so that they are available only Just in time to be used.

Changing in Working Practices

• Flexible Working Practices include: zero hour contracts, part time work, multi-skilling, tempoary work, job sharing, homeworking, flexible working hours, and hot desking.
• Primary Sector technology applications: Tractors, combine harvesters, lifting equipment, automatic feeding equipment, automatic milking machines, development of pesticides and biological development (genetic engineering).
• Secondary Sector technology applications: Robots, computer aided design, computer aided manufacturing, automation.
• Tertiary Sector technology applications: Internet (e.g. online banking, shopping), communication (B2B and B2C), different methods of payment (PayPal, Contactless) and automated tills.

Workforce Planning

• Workforce planning is the process of determining what labour is required and making an improvement plan to achieve set goals.
• Key considerations: Right people, in the right place, at the right time, with the right skills and at the right cost.

Recruitment and Selection

• Methods of Selection include interviews, work trials, testing and selection exercises.
• Selection exercises include personality tests and aptitude and ability tests.
• There is also a telephone interview.
• The recruitment process includes, defining requirements, attracting potential employees and then selecting the right people.
• Internal recruitment involves candidates already employed. Advantages: better selection, increase in morale, and is cost effective. Disadvantages: limited choice, discontent could occur, and potential for internal status quo.
• External recruitment involves candidates from outside the company. Advantages: greater selection, improved HR and fairness. Disadvantages: high cost, adaptability problems and risk of wrong selection.

Training and Appraisal

• Training methods include; on the job training, off the job training, induction, and apprenticeships.
• Appraisal includes: superior assessment, peer assessment, self assessment and 360-degree assessment.
• The decision around methods is a balance of cost vs skills.

Improving Workforce Performance

• Improve workforce performance by; reducing absenteeism, increasing motivation, having a multi-skilled workforce and utilising technological improvements, by implementing flexible working practices.
• Labour Turnover formula: Number of staff leaving per period of time, divided by Average number of staff employed multiplied by 100.

Organisational Design

• Important Key Terms for design: Authority, Responsibility, Chain of command, Span of control, Delegation, Hierarchy, De/Centralisation, Empowerment, Delayering.

Motivation

• Taylor: Money, piece-rate, efficiency, and autocratic.
• Mayo: Groups, social democratic, and high skilled.
• Maslow: Hierarchy of needs, democratic, long-term, and inclusive of all workers.
• Herzberg: (Hygiene = not motivated; Motivators = motivated)
• Vroom: Valence, Expectancy, and Instrumentality.
• Porter/Lawler: Intrinsic reward (satisfaction/enjoyment/involvement/job enlargement) Extrinsic rewards (pay rise/promotion/time off/bonus).

Financial and Non-Financial Incentives

• Financial incentives include: piece-rate, profit sharing, share ownership, fringe benefits, performance-related pay, commission, and bonus schemes.
• Non-financial incentives include job enlargement, job rotation, job enrichment, team working, employee empowerment, job design, flexible working, and communication/employee consultation.

Leadership

• Good leaders are able to adapt their style to meet the situation.
• Leaders possess the characteristics: create visions/aims, establish objectives, decide on structures, create new roles/jobs, anticipate problems, and empower or delegate.
• Different styles include: Autocratic, Laissez-faire, Democratic, Paternalistic, and Bureaucratic.

Fielder and Wright and Taylor

• Fiedler states "Most people are effective in some situations but not others".
• Wright and Taylor recognised that the way leader interacts with subordinates and the leaders skills, is important for improvement.

Management

• Management needs to plan, organise, control, coordinate and inspire.
• Also needs to be; hard working, empathetic, self-aware and enthusiastic.

Management by objectives theory

• Review current objectives
• Set objectives for different department's managers
• Set objectives for individual departments
• Monitor progress – check objectives
• Evaluate performance and reward if objectives are reached

Theory X and Y

• The X model suggests the business has strict control with no development.
• The Y model suggests employees are given responsibility which has a liberating effect on control achieved by enabling.

Employee Relations

• Equal Opportunities have increased quality/motivation in well performing companies.

Trade Unions

• Reasons to join: representation, health and safety, negotiate pay, and to ensure equal opportunities as well as extra services.
• The Advisory, Conciliation and Arbitration Service or ACAS, can advise, conciliate, and arbitrate.
• Examples of collective bargaining that results in Industrial Action; overtime bans, strikes and work to rule.

Budgets

• Budget creation includes; establishing aims and objectives then setting production, marketing & financial budgets which are further broken down and monitored to set knowledge.
• Good budgets: lead to improved control, financial control, manager awareness, effective resource use, high levels of motivation and improved communication.
• Poor budgets: lead to limited commitment, inflexibility, and low quality information.

Sources of Finance

• Internal sources include owners capital, retained profit, sale of assets and working capital
• External include bank loans, leasing, hire purchase, overdraft and debts

Cash flow forecast

• Cash flow = inflow - outflow
• Increase revenue if sales are not at predicted levels
• Reduce costs if costs are higher than expected

Income Statements

• Historic view – includes income and expenditure received and incurred over the previous year

Gross Profit Margin and Net Profit Margin

• Gross profit = Sales/Revenue - Cost of Goods Sold.
• Is the direct cost attributable to the production of goods or services that a company sells.

Marketing

• It exists to identify, anticipate and satisfy consumer requirements profitably and involves; research, market reports, creating marketing goals and developing a strategy
• Market led, product led and asset led

Product Life Cycle

• Product moves through a lifecycle of development, introduction, growth, maturity and decline which determines profitability
• To extend the life cycle, the target market needs to be re-addressed, the price needs to be lowered, colour needs to be changed, and “now with” features added.

Boston Matrix

• The Boston Matrix plots the relative usage to market share which determines cash flow and profitability.

Price

• Pricing strategies include; market skimming, psychological pricing, going rate pricing, market orientation, market penetration, destroyer pricing, loss leader pricing and cost plus pricing

Promotion

• Promotion can be above the line (advertising) in the: magazines. social media and in the radio.
• The promotion can also be below the line with publicity relations, merchandising.

Distribution

• A distribution channel is the route taken by a product as it goes from manufacturer to the ultimate customer.
• Multi Channel Distribution should use a combination is possible therefore gaining the advantages of each.
• E.g. Apple have their own stores, sell to other retailers and sell using the internet.

Decision Making

• When making decisions you need the product, the price, the promotion and place of production as considerations
• As considerations you need the; mass/niche, local/global, monopoly/oligarchy, market size and size if global.

Technology

• New technology and marketing is using clicks and bricks, M-commerce. pricing and the internet. Social media. e-tailing and the comparison website.