Business Summary PDF

**UNIT 1** **What is a business?** - A **business** is a decision making organization involved in the process of using inputs to produce goods and provide services. - **Costumers** are people that buy a product, whereas **consumers** are the ones that actually use the product. - **...

**UNIT 1** **What is a business?** - A **business** is a decision making organization involved in the process of using inputs to produce goods and provide services. - **Costumers** are people that buy a product, whereas **consumers** are the ones that actually use the product. - **Capital goods** are physical products purchased by business to produce other goods and services. [Departments in Business:] - **Marketing:** they identify and satisfy the consumer wants and needs, they make sure the product sells. - **Finance and accounts:** in charge of managing the organization's money. - **Human resource management (HR):** they manage the personnel of the organizations - **Operations management**: responsible for the process of converting raw materials into finished goods. [Business calification depending on their stage of production.] **Primary Sector:** - Involved with extraction, harvesting and conversion of natural resources. - Employment and output mostly on low-income countries. - High-income countries operate better with more developed machines. **Secondary Sector:** - Using raw materials, and adding value to them by manufacturing the finished product. - Mostly medium-income countries. **Tertiary Sector:** - Provides services to private sectors. - In high-income countries tends to be more employment and output. **Quaternary Sector**: - Intellectual activities that generate and share information - Mainly high-income countries. [Challenges and opportunities for starting up a business]: - - Lack of finance - Unestablished costumer base - Poor location - Cash flow problems - Marketing problems - People management problems - Production problems - Legalties - High production product - Esternal influences - Growth - Earnings - Transference and inheritance - Challenge - Autonomy - Security - Hobbies **Entrepreneurship:** - Individual who plans, organizes and manages a business, taking on financial risks in doing so. **UNIT 2** **Types of business entities** - Organizations that operate in the **private sector** are owned and controlled by private individuals and business, their main aim is to earn profit. Organizations that operate in the **public sector** are under own ship and control of the government. [Profit-based organizations:] **Sole traders:** - An individual who own his personal business and is responsible for its failure or success. - The business is unincorporated, the owner is legally the same as the business. +-----------------------------------+-----------------------------------+ | **Advantages** | **Disadvantages** | +===================================+===================================+ | Easy to set up and start-up costs | Risk of losing personal | | are much lower | possessions if the business goes | | | into debt | +-----------------------------------+-----------------------------------+ | The owner receives all the | Difficult to raise finance of | | profits made by the | establish the business | | | | | business | | +-----------------------------------+-----------------------------------+ | Being your own boss | High risks of failure | +-----------------------------------+-----------------------------------+ | Get to know their customers to a | Work load and stress | | personal level, | | | | | | lea lead to a better relationship | | +-----------------------------------+-----------------------------------+ | Don't need to make their | Business is jeopardized if the | | financial records | owner is not | | | | | available to general public | present | +-----------------------------------+-----------------------------------+ | Quicker decision making | Limited economies of scale | +-----------------------------------+-----------------------------------+ **Partnership** - A for-profit sector business owned by two or more persons. - Financed mainly from their personal funds but they can join their funds together. - Silent or sleeping partners lend money to the business and in return have a portion of the profits made. **Advantages** **Disadvantages** ----------------------------------------------------------- ----------------------------------------------------------------- More financial strength than sole traders Unlimited liability Partners can benefit from shared labor and moral support If a parent decides to leave, the partnership may not continue. Partnerships don't need to public their financial records Prolonged decision making Cost-effectiveness Disagreements and conflicts between partnerships **Limited liability companies** - Limited liability shareholders don't have to carry the responsibility of a company's debt. - A **privately held company** is a limited liability company that can't sell its shares to the public by the exchange market, while a **public held company** can do that. **Advantages** **Disadvantages** ------------------------------------------------------------------ ---------------------------------------------------------------------------- Can raise large amounts of capital by selling shares Financial information must be provided to all shareholders Its easier for them to attract private and commercial investors. Bureaucracy is involved in the setting up and running of a limited company Companies benefit from continuity Dividends are only paid out if the company makes a profit Benefit from economies of scale Communication problems Hire people to increase productivity Added complexities Tax benefits Loss of control **Social enterprises** - They are revenue-generating business with the social objectives at the core of their operations. - They can be operated as a for-profit social enterprise or as an non-profit social enterprise. - Their main goal is to achieve a social objective and to earn revenue in excess of cost. - They use ethical business practices to achieve their social aims related to the needs of local communities. - They earn their revenues and financial surpluses in a socially responsible way. - [3 social enterprises aims]: 1. Earn profit and reinvest this for social benefits 2. Provide benefits to people in society 3. Protect the planet **Public sector companies:** - Public sector for-profit social enterprises are state-owned enterprises and provide essential services. **Cooperatives:** - For-profit cooperatives are owned and run by their members, with the common goal of creating value for their members. - They share any profit made between their members. 3 main cooperatives types: **Advantages** **Disadvantages** ---------------------------------------------- ------------------------------------------------------------ Motivation to work Inefficient managers and employees due to the low salaries Employees also have a say in decision making Limited sources of finance Social benefits Slower decision making Tends to be a public support Limited promotional opportunities **Non-profital social enterpises:** - They are businesses that run in a commercial manner but without profit being the main goal. [Non-governmental organsations]. They are non-profitable social enterprises that operate in the private sectors, but they are not owned by the government. **Operational NGOs** are established from a given objective or purpose. Meanwhile, **Advocacy NGOs** take a more aggressive approach to promote or defend a cause, aiming to raise awareness and gain support through direct action. **UNIT 3** **Business objectives** - A **vision statement** outlines an organization's aspirations in the future; they are focused on the long term. - While a **mission statement** states the purpose of an organization's existence, focused on the immediate time period. [Common business objectives]. **Objectives**: are the goals that an organization strives to achieve, they are specific. **-**To measure and control the performance of the business. **-**To motivate managers and employees. **-**To direct, objectives are essential in decision making. **Growth**: is measured by an increase in its sales revenue or by its market share. Growth is essential for the survival of a business. **Profit**: the main objective of private sectors s to maximize profit. Without a profit motive, owners and investors find difficult to justify the existence of the business. **Protecting shareholder value**: Protecting and maximizing shareholder values is about earning a profitable return for shareholders in a sustainable way. Most shareholders don't get involved in the day-to-day operations of the company, so the directors are responsible for protecting the shareholder's interests in the company. **Ethical objectives:** -*Ethics* are the moral principles that guide decision making and business strategy. -*Business ethics* are the actions employed by organizations that are considered to be morally correct. **Advantages** **Disadvantages** -------------------------------------- ---------------------------------- Improvement of the corporate image High costs in recycled materials Increase customer loyalty Lower profits Production costs are reduced Stakeholder conflict Improved staff morale and motivation Ethics are subjective [Strategics and tactical objectives]: -**Strategies** are the medium to long term plans of action to achieve the strategic objectives of an organization. -**Tactics** are short term methods used to achieve an organization's tactical objectives. -**Tactical objectives** are the short term goals that affect a section of the organization; they are specific goals that guide the daily functioning of certain departments. -survival [Strategic objectives are the longer term goals of a business]. -Marketing standing, the extent in which a business has presence in the industry. -Image and reputation -Market share **Corporate social responsibility**: Is the conscientious consideration of ethical environmental practice related to the business activity. **UNIT 4** **Stakeholder** - A **stakeholder** is a person that has a direct interest in and is affected by the operations and performance of the business. - There might exist a **stakeholder conflict** due to the different needs and priorities of the different stakeholders group. **UNIT 5** **Growth and evolution** - The size of a market can be measured by: their market share, total revenue, size of workforce, profit and capital employed. - Benefits an organization can get fot being large: Economies of scales, lower prices, brand recognition, brand reputation, value-added services and customer loyalty. +-----------------------------------+-----------------------------------+ | **Reasons for a business to stay | | | small** | | +===================================+===================================+ | **Cost control** | Growth can require extra | | | borrowing cost and dilution of | | | ownership nd control | +-----------------------------------+-----------------------------------+ | **Financial risk** | Small businesses can manage and | | | control better their finances | +-----------------------------------+-----------------------------------+ | **Government aid** | Economical help can be given to | | | small businesses to start up and | | | | | | develop | +-----------------------------------+-----------------------------------+ | **Local monopoly power** | Enjoy being the only firm in a | | | particular area | +-----------------------------------+-----------------------------------+ | **Personalized services** | Have time to devote to their | | | customers | +-----------------------------------+-----------------------------------+ | **Flexibility** | Tend to be more flexible and | | | adaptive to | | | | | | change | +-----------------------------------+-----------------------------------+ | **Small market size** | Large companies may not find it | | | financial | | | | | | efficient to compete with this | | | small firms, | | | | | | allowing them to survive. | +-----------------------------------+-----------------------------------+ +-----------------------------------+-----------------------------------+ | **Advantages** | **Disadvantages** | +===================================+===================================+ | Quicker than organic growth | Tends to be more expensive than | | | internal | | | | | | growth | +-----------------------------------+-----------------------------------+ | Benefit from greater skills, | Not knowing of new markets | | knowledge and | creates greater | | | | | Expertise of external parties | risks | +-----------------------------------+-----------------------------------+ | Reduces the degree of competition | Regulatory risks form the | | | government might | | | | | | Be imposed | +-----------------------------------+-----------------------------------+ | External growth can help | Potential diseconomies of scale | | businesses gain | | | | | | access to larger markets and | | | hence economies | | | | | | of scale | | +-----------------------------------+-----------------------------------+ | Businesses can benefit from | Difficult to combine different | | diversification, | cultures and | | | | | They would face fewer risks from | management styles | | failure. | | +-----------------------------------+-----------------------------------+ - An **acquisition** happens when a company buys a controlling interest in another firm with the permission and agreement of its Board of Directors to do so. - A **merger** involves the integration of businesses of similar sizes. - **Synergy** occurs when the whole is greater than the sum of the individual parts when two or more businesses are integrated. +-----------------------------------+-----------------------------------+ | **Advantages** | **Disadvantages** | +===================================+===================================+ | Benefit from having grater market | Job losses may occur due to cost | | power and | savings | | | | | Larger customer base | | +-----------------------------------+-----------------------------------+ | Economies of scale | There might be potential | | | disagreement between | | | | | | The firms | +-----------------------------------+-----------------------------------+ | Better use of resources, create | People may need to adapt to new | | synergy | cultures | +-----------------------------------+-----------------------------------+ | Allows a firm to be in a stronger | The original owners will lose | | position | some degree of | | | | | | Control | +-----------------------------------+-----------------------------------+ | Benefit from a larger customer | Increase bureaucracy may lead to | | base and reduce | less effective | | | | | Risks | Decision making | +-----------------------------------+-----------------------------------+ | Entry to new markets if the M&A | Governments may be concerned and | | operate in | regulate | | | | | different markets | | +-----------------------------------+-----------------------------------+ [4 types of integration:] - **Horizontal**: when there is a combination of firms that operate in the same industry, they represent a larger market share. - **Vertical**: businesses that are at different stages of production. *Forward vertical integration* they are headed to the end stages of production, towards the customer. *Backward vertical integration* towards an earlier stage of production. - **Lateral**: have similar operations but don't compete with each other. - **Conglomerate M&A:** refers to the combination of 2 businesses that are completely different markets. They are formed to enter new markets and spread risks. **Takeovers**: when a company purchases a controlling stake, majority of the stocks, without the permission or agreement of the company. **Joint ventures**: when 2 or more businesses decide to split and agreed to set up a new legal entity. -Synergy -Spreading of costs and risks -Entry to foreign markets -Relatively cheap -Competitive advantages -Exploitation of local knowledge -High success rate Strategic alliances: when two or more businesses corporate in a business venture for mutual benefit, the firms remain independent and don't form a new legal entity. 4 stages to form a strategic alliance: -Feasibility study -Partnership assessment -Contract negotiation \- Implementation **Franchising**: where a person or business buys a license to trade using another firm's name, logo, brands and trademark. The franchisee also pays a royalty payment. +-----------------------------------+-----------------------------------+ | **Advantages** | | +===================================+===================================+ | Rapid growth without having to | Low risk | | risk huge | | | | | | amounts of money | | +-----------------------------------+-----------------------------------+ | National or international | Lower start-up costs | | presence | | +-----------------------------------+-----------------------------------+ | Growth without having to worry | Added services to franchisees | | about running | | | | | | Costs | | +-----------------------------------+-----------------------------------+ | Franchisors receive royalty | Receiving "free" advertising and | | payments | reducing costs | +-----------------------------------+-----------------------------------+ | More incentives to do better | Greater awareness of local market | | | conditions | | | | | | and needs | +-----------------------------------+-----------------------------------+ **UNIT 6** **Multinational companies** - A **multinational company** (MNC) is an organization that operates in two or more countries, usually with their headquarters located in the home country. Many want to become a MNC: -An [increased customer base] allows the business to increase their sales by expanding internationally. And therefore benefit from economies of scale. -They can benefit from [cheaper production costs]. -Locate overseas to benefit from the host country's infrastructure, as well as quality of land. They may also be [financial incentives] from the host country's government. -By producing in a particular country they can avoid [protectionist policies] that the country might impose. -They can [spread risk] if market conditions are not favorable in a country or region. **The impact on MNCs on host countries.** - A host country is any nation that allows a multinational corporation to set up in its country. **Positive impacts** **Negative impacts** -------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------------------------------------- Creates jobs Cause unemployment to domestic businesses. Boost the host country's annual outputs value. Profits are repatriated to the home country. Introduce new skills and technology in production processes. Anti-globalisation groups are concerned about social responsibility, since host nations sometimes are unable to control the actions of large MNC. Intensify competition and innovation within domestic firms. The competitive pressures to domestic firms might force them to reduce prices or even closing the business. **UNIT 7** **Introduction to marketing** The marketing department tends to have 4 main objectives: 1. Ensure that **products** are supplied to fulfil the needs and wants of customers 2. Set the correct **price** so that customers can afford to buy the product. 3. Distribute the products to a **place** that is convenient for the customer to make the purchase. 4. Ensure that there is an effective **promotion** to convince the customers to buy from the business. - **Product-orientated marketing** is the marketing that is used to focus on getting the customers to buy the products that the business wants their clients to need or want. - **Market-orientated marketing** is when the focus on meeting the actual needs and wants of customers. **Market orientation** is when they focus on making products that they can sell, rather than selling products that they can make. **Product orientation** focuses on selling products they can make, rather than making products that they can sell. -Businesses can concentrate on producing high-quality products -The firms also has more control over its activities. \- There is a high failure rate, it's a risky strategy. Spending money without taking the customer into consideration is costly. **Market share** refers to an organization's portion of the total value of sales revenue within a specific industry. **Market growth** refers to the rate at which the size of a market is increasing. Market growth rate=[\$\\frac{\\text{Current\\ market\\ sise}\\left( \\\$ \\right) - \\text{Original\\ market\\ sise}}{\\text{Original\\ market\\ sise}}\$]{.math.inline} x100 **UNIT 8** **Marketing planning** - A [marketing plan] is a document outlining a firm's marketing objectives and the marketing strategies used in order to achieve these objectives. [Marketing planning] is the process where they analyze which strategies are of best it to achieve this goals. - A marketing plan is usually preceded by a [marketing audit], which is a review of the current position of a firm's marketing mix. A **market segment** is a group of customers with similar characteristics, **marketing segmentation** is the process of splitting a market into different groups of buyers in order to better meet their needs. Costumer profiles are characteristics of customers; demographic, geographic and psychographic. -Segmentation by demographics; age, gender, race and ethnicity, marital status, religion, language, income and socio-economic class. -Segmentation by geographic; location and climate. -Segmentation by psychographic; hobbies and interests, values, religion, status, culture. - **Targeting** is the process in which a business identifies its target market and then advertises to them through different channels. -[Niche marketing]: Strategy that targets a specific and well-defined market segment. Advantages are: -Better marketing focus -Charge higher prices and gain higher profits -Become specialists in meeting customer's needs, customer loyalty. Disadvantages are: -Limits the number of customers in the market. -Average costs tend to be higher. -Larger firms entering the market jeopardize the business survival. -[Mass marketing]: refers to undefined marketing. Advantages are: -Potential economies of scale -Save a lot of time and resources -Catering, establish larger customer base. Disadvantages are: -High entry barriers -Competition -Quite wasteful **Position maps**: Are a visual tool that shows customer perception of a product/brand in relation with others in the market. Helps businesses: \- identify any gaps in its product portfolio -refine their marketing strategies \- simple way of presenting complex research findings \- informs businesses of need for repositioning of products. **Unique selling point (USP):** [ ] it's the aspect that makes a business stand out from any other competitors. Explains why customers buy their product rather than from other brands. **Differentiation**: is the act of distinguishing a business/product from rivals in the industry. -Product -Price -Promotion -Place -People -Processes -Physical environment -Packaging [Advatages]: [Diasvantages]: -Charge higher prices - Can be expensive -Brand recognition and loyalty - economies of scales can't be fully exploited -Better distribution of products - Excessive differentiation can confuse customers **UNIT 9** **Market research** **Market research** refers to marketing activities designed to discover the opinions and preferences of potential and existing customers. The purpose of market research: -Give businesses up-to-date information -Helping businesses to improve their marketing strategies -Seeing the customers reaction to new products -Giving businesses an understanding of the strategies used by their rivals -Helping businesses predict what is going to happen in the future - **Ad hoc research**: the focus of the research is on specific marketing problems. - **Continuous research**: takes place on a regular and ongoing basis. **Primary market research**: involves getting new first-hand data for a specific study - [Surveys or questionnaires]: self-completed surveys, personal surveys, telephone surveys, online surveys, postal surveys - [Interviews] - [Focus groups] - [Observations] +-----------------------------------+-----------------------------------+ | **Advantages** | **Disadvantages** | +===================================+===================================+ | Relevant information is collected | Can be very time consuming | +-----------------------------------+-----------------------------------+ | Data tends to be more up to date | Collecting primary data usually | | and therefore | is expensive | | | | | reliable | | +-----------------------------------+-----------------------------------+ | Confidential and unique since | Faults in market research can | | | lead to misleading | | | | | | results | +-----------------------------------+-----------------------------------+ **Secondary market research:** collection of second-hand data, has been collected by others. Internal sources are those that have been already gathered by the organization itself and external sources are those that come from outside the organization. - Market analyses - Academic journals - Government publications - Media articles - The internet **Advantages** **Disadvantages** ---------------------------------------------- ------------------------------------------------ Cheaper and faster May be out of date therefore not reliable Insight to changes and trends in an industry An inappropriate format for the researcher Huge range of sources Only provide partial information Results are statistically valid Information is widely available to competitors **Qualitative market research** involves non-numerical answers and opinions. The main purpose is to understand behavior and perceptions, which are sought the researcher to get "soft" answers. Quantitative market research relies on much larger number of responses to get "hard" answers. There are two types; [closed questions] and [likert scale or sliding scales]. **Qualitative research** **Quantitative research** ------------------------------------------------------- -------------------------------------------- Collection of data about opinions, attitudes, beliefs Collection of data that can be measured Information is open to interpretation Information is open to less interpretation It's subjective It's objective The researcher is part of the process The researcher is separate Provide multiple realities Provides one reality All the potential customers of a particular market make up the **population**. Sampling is the method of selecting a small group of the population for a particular market for primary research. - Quota sampling - Random sampling - Convenience sampling **UNIT 10** **The seven P's of the marketing mix.** - A **product** is any good or service that satisfies the needs or wants of customers. They can be [tangible] or [intangible]. - Products can be classified as; [Consumer products] which are those purchased by private individuals for their own personal use. Or [Producer products] which are goods purchased by businesses. **Product life cycle.** -Show the different stages that a product is likely to go through. \(1) [Research and development] -Involves the R&D department to develop ideas for new products; through market research, market analysis, product development, testing of prototypes and test marketing. \(2) [Launch] -The product is introduced to the market. -Promotion is needed to raise awareness and encourage sales of the product. \(3) [Growth] -The product enjoys sales growth and brand recognition -Promotion techniques to make customers understand why the product it better that rival ones. \(4) [Maturity] -The rate of growth in sales slows down, although the firm has a significant market share. \- Promotion focuses on reminding customers about the product and its benefits. -Due to competition, the pricing of the product is likely to change. \(5) [Decline] -Sales revenue and profits fall. -Cost cutting becomes inevitable and promotion is likely to be cut as well. -Extension strategies may be needed to prolong the product life cycle. If these don't work the product is eventually withdrawn from the market. **Product portfolio** - Refers to the collection of all the products owned by a business at a point in time. - Product portfolio management allows a business to decide which products need more financial support and investment. - The [Boston Consulting Group Matrix] is the most popular marketing planning tool. **Extension strategies** - Are any means of extending the product's life cycle and delaying a decline in its sales revenue. For example: -[Price reductions]: tend to increase the demand for a product and get rid of excess stock. -[Advertising]: help to attract new customers, remind previous customers that the product still exists and persuade to purchase more of the product. -[Redesigning]: special features or "limited edition" to a current product tend to incite customers. -[Repacking]: helps revive the demand. [-New markets]: entering new markets or selling the existing product to new retailers. -[Brand extensions]: using an existing and successful brand name to launch a modified or new of the existing product. -[Product differentiation:] making the product stand out from other offered by rival businesses. -[Brand name change:] if the product suffered negative publicity and falling sales, it can give a fresh start. **(1) Research and development** - Is a time-consuming phase. - A [prototype] is often produced along with detailed market research to assess the potential success of the product. - [Test marketing] will usually take place, which is giving the new product to a group of customer. - Its an important phase since it will help minimize costs and give a much higher chances of success. If the product is unsuccessful the business can make changes based on feedback or discontinue the product. - However, test marketing can be expensive and competitors might find out about the product before its launch. **(2) Launch** - The launch stage requires careful marketing planning. - Sales will be relatively low as customers are not fully aware of the product's existence. And costs will be very high due to the expenses involved in the launch phase. - It is important that marketing managers get the product to the next stage as quickly as possible. - Customers who buy products during the launch stage are referred to as [innovators]. **(3) Growth** - Growth is due to the business using wider channels of distribution. - Brand awareness and the arrival of customers at this stage are known as [early adopters]. - Profits may materialize due to sales revenue rising and lower costs of units due to economies of scales. - Businesses strive to prolong this stage as far as possible. **(4) Maturity** - The business may have obtained significant market share as sales revenue are at their peak. - Cash flow and profits will be favorable due to the vast number of customers, called [early majority]. - Economies of scale will give the organization a competitive advantage, it is likely that there are many competitors. Saturation occurs when there are too many competitors in the market and sales revenues have peaked or started to fall. - Marketing mix will therefore focus on promotional activities. And marketing managers might look to exploit new market segments for the product. - Customers at this stage are called late majority. **(5) Decline** - Sales and profit of the product, as well as cash flow are less favorable. - This can be due to lower customer demand, change in fashion and tastes and new replacement models being available on the market. - Customers at this stage are called laggards. - Investment for the product is cut and the price makes a rapid fall. - New products are likely to be launched before the previous product enters decline to help maintain the business cash flow and profitability. **Branding** - A [brand] refers to a name that is identifiable with a product of a particular business. Although it can also be a sign, a symbol, color scheme, font or design. - A [trademark] gives legal protection to the owner to have exclusive use of the brand name. **Brand awareness**: -Measures the extent to which potential customers or the general public recognizes a particular brand. -It's usually expressed as a percentage and is a key part of promoting a product or business. -Brand awareness plays a major part in the buying decision of customers. \- It gives the business a competitive edge over its rivals and encourages repeat purchase if customers trust and like the brand. **Brand development**: -Is the marketing process of improving and enlarging the brand name in order to boost sales revenue and market share. -It takes a long time to develop a brand and its desire image and it can be very expensive, although it helps them to stand out from rivals. -Successful brand development helps to extend a product's life cycle. -Some brands become so famous that they are mistaken for the name of the product itself, these are known as [generic brands]. **Brand loyalty:** -Occurs when customers buy the same brand of a product time and time again, they are devoted to the brand. -It helps businesses to maintain or improve their market share. -It allows businesses with brand loyalty to charge premium prices for their product, which improves their profit margins. -It acts as a barrier to entry in highly competitive markets, this because brand loyalty reduces the possibilities of brand switching. -It plays an important role in future success of the business, helping prolong the product and brand's life cycle. -To prevent brand switching businesses often use customer loyalty schemes. These are a form of sales promotion that attracts customers to stick to the brand by rewarding devoted customers. **Brand value**: -When customers are willing to pay for a brand name over and above the value of the product itself. -This is because customers believe that a well-known brand has better value for money than products that are less well known. -Get a higher market share, since it's an indicator of the level of brand development and brand loyalty. -Allows businesses to charge higher prices for its products because customers feel they are paying for the added value that the brand carries. -Makes it more difficult for new firms to enter the market because customers are loyal to existing brands. - **Packaging** has an important impact on customer's perceptions of brand value. - A **slogan** is a memorable catchphrase used to gain and retain the attention of customers. Its designed to represent the essence of a business or its products. - **Logos** are essentially a form of branding that uses a visual symbol to represent a business or its products. [The importance of branding:] -Branding is a legal instrument: It creates a legal identity for a product and lawful ownership to the business and protects it from imitations. -Branding is a risk reducer: Brands give new products a better chance of survival, they can create a sense of value for money and encourage brand awareness. And prolongs the product's life cycle. -Branding is an image enhancer: allows businesses to charge higher prices, therefore gain higher profits. -Branding is a revenue earner: Branding can encourage brand development and brand loyalty. Customers might have a preference over other brands and see them as superior. Brand loyalty also makes brand extension strategies much easier to accomplish. Brands are: [Intangible], they represent the intangible value that costumers place on the product. [Unique], brands are unique whereas products can be easily copied. [Timeless], successful brands are timeless whereas a product can become obsolete. - **Price** refers to the amount paid by a customer to purchase a good or service. **Main pricing strategies:** [Cost-plus (mark up) pricing:] -Involves adding a percentage or predetermined amount of profit to the cost per unit of output to determine the selling price. -The percentage is known as *mark-up* or *profit margin*. [Penetration pricing:] -Involves setting a relatively low price to help establish a new product in the industry. -As the product is established the price can be changed. -The main problem is that setting prices too low customers can see the product as inferior or poor quality. [Loss leader] [pricing:] -Involves selling a good or service below its cost value. -It can attract more customers and encourage brand switching. [Predatory pricing:] -Involves temporarily reducing the price in an attempt to force competitors out of the industry. [Premium pricing:] -Is setting the price of a good or service significantly higher than similar competing products, just because the product is of higher quality or is unique enough to justify the premium price. -Customer perceive owning premium products as a symbol of success, wealth, status and prestige. -It generates a higher profit margin for the business. As well as higher barriers entries for competitors and brands can also increase the value of all their products. -But it can limit the number of customers and brands can lose their value if brands appeal to mass market. - Promotion refers to the methods of communicating marketing messages to existing and potential customers, with the intention of selling a firm's products. [5 objectives to any promotional strategy:] -**Inform** about the product or new features, functions and prices. Give sufficient information to influence the purchasing from customers. -**Persuade** customers to make a purchase or switch from rival brands and create brand loyalty. -**Remind** customers about the product and the maturity of it. -**Develop** brand awareness, recognition and loyalty. -**Attract** the attention of customers. - **Above the line promotion** refers to any form of paid-for promotional methods through independent mass media sources to promote brands and products. **Television advertising:** -Exploits the power of movement, by suing sound and images to convey a powerful message. -However, its really expensive to produce and broadcast a television commercial and marketer usually have to try to get their message across in a very short time. **Radio advertising:** -Can reach a very large audience and its more cheaper than television. Radio commercials can be broadcasted to almost anyone in the world. -However it can only communicate audio messages and sometimes audiences have lower attention levels. **Cinema:** -Audiences can be directly targeted based on the movie, the size of the movie screens can create more impact and is more difficult for viewers to ignore or switch the advertising. -However, there is a limited audience compared to those of radio and television. **Newspaper advertising:** -Reaches a wide audience and its much cheaper. And can have detailed information and can better target different markets. -However, there are high costs mainly for small businesses and the fact that newspapers tend to have a short shelf life. **Magazines:** -They have high photo-quality color images that attract the attention of the reader and tend to have a longer shelf life than newspapers. -However, magazine promotion is static and they are bombarded with advertisements and customers might accidentally miss or ignore the actually ad. There is a long time between submitting an advertisement and its actual publication. **Outdoor advertising:** -Billboards that automatically rotate increase the number of advertisements and digital bill boards that can combine moving images and sound, give a dynamic dimension. And there is a high rate of exposure to the advertisements. -However, its difficult to monitor its effectiveness because targeting is very difficult and there is also high levels of competition. Even more, traditional billboards are prone to damage due to bad weather, vandalism and graffiti. - **Below the line promotion** refers to the use of non-mass media promotional activities, this means that no commission has been paid to external media agencies. **Direct marketing:** -Refers to promotional activities that aim to sell a product straight to a customer rather than using an intermediary. -This include; telemarketing and direct mail. -Can take a larger share of any profits, since there are no intermediaries to pay. And can allow a business to contact clients that would otherwise be out of reach. -The drawback is the costs of producing and distributing promotional materials. Also most people ignore and dispose the unsolicited mail or sometimes it does not reach the right audience. **Personal selling**: -Refers to the promotion that relies on sales representatives directly helping and persuading customers to buy. -A benefit is that it can be tailored to the individual needs and can develop customer engagement, and help the business create relationships with customers. -However, sales agents can be expensive to hire and they also earn a good rates of commission on the sale of each item sold. **Sales promotion:** -The temporary methods used to boost sales and attract new buyers. -Its beneficial because it boosts sales, gets rid of excess stock and sway customers away from rival business. -However the costs are a problem since all the discounts and promotion add to the marketing costs of a business. And they are only short-term tactics. **Point of sales promotion:** -Refers to the promotion of a product at the place or location where the customer buys the product. **Publicity and public relations:** -[Publicity] is the process of promoting a business and its products by getting media coverage without paying for it. -[Public relations] refers to marketing activities aimed at establishing and protecting the desired image of an organization. **Trade shows:** -Allows exhibitors to conduct live demonstrations to showcase and promote their products. -They attract a large audience of customers. -However, there is likely to be competition as rivals also make an appearance at these events. **Sponsorship:** -Involves a business providing financial funds and resources to support an event or another organization in return for publicity. **Word of mouth promotion:** -Refers to the spreading of promotional information from one person to another through verbal communications. -Its probably the most effective form of promotion as information and recommendations about a product or business are passed onto friends and family without any direct costs to the business. -However, it can be damaging if the word spreads that a business or its products are sub-standard. **Guerrilla marketing:** -Uses untraditional and unconventional but creative and original methods of promotion, on a relatively low budget. Its designed to make the audience unaware that they are being targeted. -Its suitable for business that operate on a tight budget. **Packaging:** -Is the art of presenting products in an advantageous way in order to improve sales. Its used to encourage impulse buying. -A drawback is the costs of packaging and that environmentalist argue that marketers create excess packaging. - **Through the line promotion** refers to promotional strategies that involve both above and below the line methods. - Through the line promotion benefits from the advantages of both ATL and BTL. - Marketers consider factors such as; costs, the product, the product life cycle and legislation when using TTL. - **Place** refers to the distribution of products. - The **channels of distribution** refer to the means used to get a product to the customer. **Intermediation** is the process used to facilitate this. And **intermediaries** are agents or businesses that act as a middle person in the channel of distribution between the manufacturer and consumer of a product. [Dr. Philip Kotler distribution channels "levels":] -Zero-level distribution channel: Also known as direct distribution, skips out any intermediaries. The producer sells directly to the consumer. -One-level distribution channel: has one intermediary, such as retailers, agents or distributors. -Two-level distribution channel: uses two intermediaries, such as wholesalers and retailers. **Wholesalers:** -Are businesses that purchase large quantities of products from a manufacture and then separate it into smaller units for resale. -Wholesalers bear the costs of storage, freeing up space for retailers and manufactures. -By breaking bulk they eliminate the need for retailers to purchase in huge quantities directly from a producer. -They deal with the distribution issues, freeing up time for manufactures to focus on production. -However, the producer takes the risk on passing on the responsibility of marketing the firm's products. Also some retailers chose to order directly from manufactures. **Distributors and agents (brokers)** -[Distributors] are independent and specialist business that trade in the products of only a few manufactures. -[Agents] or ([brokers]) are negotiators who act on behalf of buyers and vendors of a product, they are used as intermediaries to help sell the vendor's products. -Insurance brokers earn a commission on the number and value of insurance policies that they succeed in selling to clients. -Agents will usually offer a range of products for the customers to choose from. Insurance brokers will try to find the "best deal". They will rely on personal selling techniques. **Retailers** -Are the sellers of products to the final consumers. They have the ability to reach large numbers of customers. **Speciality channels of distribution** -Are any indirect way to distribute products that does not involve retailers. -Some advantages are: there are no intermediaries so the business does not have to share out so much of its profits. -Businesses can have direct control over their distribution. -The growing popularity of e-commerce means that customers are more willing to use the internet as a distribution channel. -Can reach potential customers who do not have easy access to retail outlets. **E-commerce** -Is the term used to describe trading via the internet. -Is an effective way to reduce the costs and risk of international marketing. However, not all products are sustainable for online trading. **Vending machines** -Are machines hat stock products such as cigarettes, drinks and snacks. Due to their compact size, they can be placed anywhere. -Running and maintenance costs are minimal, which is an advantage. -However, they can be prone to vandalism. And if there are any mechanical failures it will halt sales, also the fact that only a small range of products can be sold. **Mail order** -Enables customers to order products via the postal system. -Businesses that have access to customer's database use this channel of distribution, but the cost of producing up to date colored catalogues is very expensive. -Detailed information aimed at different market segments can be used to boosts sales. -However, many people tend to see unwanted correspondence as junk, so there is a low response rate. Also information in a database often goes out of date resulting in mail being sent to the wrong address. **The marketing of services.** - A **service** is an intangible product such as a bus ride, a haircut, etc. - **Goods** are physical or tangible products. - **People** are the employees who interact with customers, delivering the service to customers. [Effectiveness of people in marketing can be observed in:] -Appearance and body language: since it creates an image of the organization. -Aptitudes and attitudes: managers will be interested in measuring the capabilities and conduct of their employees. -Feedback: comments made by stakeholder groups can provide useful information regarding the effectiveness of employees. -Efficiency: it will help the business to gain better reputation and improved corporate image. - **Process** refers to the way in which a service is provided or delivered. **Payment methods**: -The convenience of different methods of payment, makes the process of paying for a service more convenient for customers. **Waiting time**: -If businesses do not manage the waiting times, including customer complaints, it creates a poor corporate image. **Customer care**: -Getting meaningful feedback and retaining customers is very important, which is why businesses encourage customers to provide feedback by offering them discounts for future purchases. **After-sales service**: -A business can gain a competitive edge if it provides after-sales services. **Delivery service**: -Providing a delivery can give the business a competitive edge. - **Physical evidence** refers to the tangible aspects of a service. - **Packaging** is a vital aspect of physical evidence for many businesses. **UNIT 11** **Introduction to finance** - **Finance** is defined as the management of money in an organization. The role or purpose of finance can be categorized as: **Capital expenditure** - Is the finance spent on fixed assets (or non-current assets) - These are items of monetary value that have a long-term function for businesses, and can be used repeatedly. - They are mostly used for the purpose of production. - It has long term benefits and it also determines the scale of an organization's operations - Some of the reasons that businesses invest in capital expenditure is; to add extra production capacity, to improve efficiency, replace worn-out equipment and to comply with changing legislation and regulations. - The main disadvantages are the high costs involved and the limited sources of finance available. **Revenue expenditure** - Refers to finance spent on the daily operations of a business. - It generates value to the business today. +-----------------------------------+-----------------------------------+ | **Capital expenditure** | **Revenue expenditure** | +===================================+===================================+ | - Capital equipment | - advertising and promotion | | | | | - Furniture, fixtures and | - energy costs | | fittings | | | | - freight and delivery | | - Computer and IT systems | | | | - insurance | | - Intellectual property | | | | - office supplies and | | - Machinery | administration | | | | | - Mergers and acquisitions | - raw materials and components | | | | | - Property and premises | - rent | | | | | - vehicles | - wages and salaries | +-----------------------------------+-----------------------------------+ **UNIT 12** **Sources of finance** -Sources of finance are where and how business obtains their funds. They can be internal or external: **Internal sources of finance:** [Personal funds] -The main source of finance for a sole trader. -They are usually used to finance business start-ups. [Retained profits] -Profits that the business keeps to use within the business, usually for capital expenditure or for cases of emergency. -The benefit is that business does not have to rely much on borrowing. -However, retained profits alone may not be sufficient and may need of other sources. In addition, keeping more of the profit means less of it available for distributing to stakeholders. [Sales of assets] -Business can sell their dormant assets (unused assets). This can be old machinery or out-of-season stock. **External sources of finance**: [Share capital] -Is the money that has been raise from selling shares in the company. -Tends to be the main source of finance for a limited liability company, it often provides a huge amount of capital. -Selling securities (the name for stocks and shares) enables companies to raise capital and to provide a market in second-hand shares and stocks. -Many businesses decide to "go public" by floating their shares on a stock exchange for the first time, this is known as Initial Public Offering (IPO) [Loan capital] -Refers to sources that are obtained from commercial lenders such as banks. Interest charges are imposed and the amount borrowed is paid back in instalments over a definite and predetermined period. -Examples: [Mortgage]: a secured loan for the purchase of property. [Overdraft] -Is a financial serve that allows a business to temporarily overdraw on its account. -Commonly used when businesses have minor cash-flow problems and as a short-term finance. -Interest is charged on a daily basis if a business overdraws on its account. -The disadvantage is that they are repayable on demand without prior notice from the lender. [Trade credit] -Allows a business to "buy now and pay later". Although the credit provider does not receive any cash from the buyer until a late date. -Organizations that offer trade credit are known as creditors, and their customers are known as debtors. [Crowdfunding] -A way of raising finance from a large number of individuals for a small amount of money to finance. -Usually relies on online social media platforms, but depending on the cause it may be possible to raise money through donations. -Is not a typical source of finance. And is heavily regulated in order to protect donors and to prevent fraudulent business activities. [Leasing] -Is a form of hiring whereby a contract is drawn between a leasing company and the customer. -The main disadvantage is that in the long term, leasing is more expensive than directly buy assets. -Sales-and-leaseback involves a business selling a particular fixed asset and immediately leasing the property back. -Some firms hire purchase (HP) which allows them to pay their creditors in instalments. Its different than leasing because the buyer eventually owns the asset on payment of the last instalment. [Microfinance providers] -Is a type of financial service aimed at entrepreneurs of small businesses, especially those on low incomes. [Business angels] -Are extremely wealthy individuals who choose to invest their own money in businesses that offer high growth potential. -They have some criteria before investing: that they receive a return on their investment, need to feel confident about the business plan and that the business has a good team of people. - **Short-term sources of finance** are those available for a period of less than one year, used to pay for the daily or routine operations of a business. - **Long-term sources of finance** are those available for any period of more than 12 months from the accounting period, used for the purchase or fixed assets or to finance the expansion of a business. Managers consider a number of factors: -[Size and status of a firm]: a well-known and large business will find it easier to raise finance from a wider range of sources. And they will get cheaper finance due to economies of scale. -[Purpose of finance]: the choice of finance depends on whether it is intended for the daily running or for the longer time period. -[Amount required]: it also makes the source of finance dependent on the amount needed. -[Cost of finance]: need to consider the purchase cost of assets. Higher costs tend to require longer-term sources of finance. -[External factors]: business will be affected by the state of the economy and consumer confidence levels. -[Duration]: the duration of the finance will also affect when choosing. **UNIT 13** **Cost and revenues** **Price** is the amount of money paid the customer for a product, while **cost** is the money used for the production of a certain product. **Set-up costs** are the items of expenditure needed to start a business. Types of costs: - [Fixed costs]: the costs of production a business will need to pay no matter how much it produces or sells. - [Variable costs:] the costs of production that change in direct proportion to the level of output or sales - [Direct costs:] - [Indirect costs:] **Revenue** refers to the money coming into a business from the sales of goods. **Revenue streams** refer to the money that comes into the firm by other means. - Advertising revenue - Transactions fees - Franchise costs and royalties - Sponsorship revenue - Subscription fees - Merchandise - Dividends - Donations - Interest earnings - Subventions **UNIT 14** **Break-even analysis** Contribution is the amount of money that remains after all the variable costs have been taken away from the sales revenue of a product. Contribution per unit is the difference between the selling price of a product and its variable costs of production. **Contribution per unit= Price -- Variable Costs** **Profit= TR -- TC** **Total Revenue= Price x Quantity** **Total Contribution= (price -- variable costs) x quantity** **Margin of safety= Level of demand -- Break even quantity** **Target profit output=** [\$\\frac{\\mathbf{(Fi}\\mathbf{x}\\mathbf{ed\\ costs + Target\\ profit)}}{\\mathbf{\\text{Contribution\\ per\\ unit}}}\$]{.math.inline} **Target profit= TR -- TC** **Break even point=** [\$\\frac{\\mathbf{\\text{Fi}}\\mathbf{x}\\mathbf{\\text{ed\\ costs}}}{\\mathbf{Price - Variable\\ costs}}\$]{.math.inline} **Price x Quantity= Total Fixed Costs + Variable costs x quantity** **UNIT 15** **Final accounts** - **Profit and loss account** reports the revenues and expenses of a business at the end of a specific period. - The **balance sheet** shows the value of assets and liabilities of a business at a specific point in time. The purpose of financial accounts for different stakeholders: -S[hareholders] will be interested to see where their money was spent and how well their investments have performed. \- [Employees] will be interested in their organization's financial account to assess job security and likely to increase payments. -[Managers] can judge the operational efficiency of their organizations. -The [government] can ensure that businesses are paying the correct amount of tax. -[Competitors] can compare their financial performance. -[Financers] will look at the accounts of a firm before approving any financial backing. -[Suppliers] can decide whether trade credit should be approved. -[Potential investors] can assess whether an investment would be financially worthwhile. [Limitations:] - Only shows the past performance, can't know what is likely to happen in the future. - Legal manipulation of the account data can happen. Profit organization: non-profit organization: There are 3 parts; trading account, profit and loss account and appropriation account. **Gross profit= Sales revenue -- Cost of sales** **Cost of sales= Opening stock + Purchases -- Closing stock** Gross profit can be improved by reducing costs or raising revenue. -Using cheaper suppliers -Increasing selling price -Using marketing strategies **Net profit= Gross profit -- Expenses** **Dividends** show the amount of net profit after interest and tax that is distributed to the owners. [Balance sheet: ] - **Assets** are the items owned by or owed to a business. There are **non-current assets** which are assets that are purchased for use and last for more than 12 months. And **current assets** refer to the assets that are likely to be turned into cash within the 12 months of a balance sheet. - A **liability** is a legal obligation of a business to repay its lender. There are **non-current liabilities** which are debts that are due to be repaid after 12 months and **current liabilities** which are debts that must be repaid within one year. **Net assets= Total assets -- Total liabilities** - **Equity** refers to the value of the business that belongs to the owners. - **Creditors** are a person or company to whom money owes. - **Debtors** are a person or company who owes money. [Intangible assets] They are non-physical fixed assets that have the ability to earn revenue for a business, they are legally protected by laws that are known as *[intellectual property rights]*. - **Branding**: brand recognition and brand loyalty stay with the company for as long as it operates. - **Patents**: they provide legal protection for inventors, preventing others from copying their creation for a fixed number of years. - **Copyright**: it provides legal protection for the original artistic work of the creator, anyone wishing to reproduce or modify the artist's work must seek for permission which is usually a fee. - **Goodwill**: is an intangible asset which exists when the value of a firm exceeds its book value. - **Registered trademarks**: they are distinctive signs that uniquely identify a brand, product or business. **UNIT 16** **Ratio analysis** [Ratio analysis serves several purposes]: -to examine a firm's financial position -to asses a firm's financial performance -to aid decision making [Ratios are compared in 2 ways:] \- *Historical comparison* which compares the same ratio in two different time periods. \- *Inter-firm comparison* which compares the ratios of the businesses in the same industry. [Types of ratios:] Profitability ratio: examine profit in relation to other figures. - **Gross profit margin (GPM):** shows the value of the gross profit as a percentage of sales revenue. Gross profit margin can be improved by financial and non-financial strategies: by raising sales revenue and reducing direct costs. Raising sales revenue by: -reducing the selling price of products -raising the selling price of products -using improved marketing strategies -seeking alternative revenue streams Reducing costs by: -cutting direct material costs -cutting direct labor costs - **Profit margin:** shows the percentage of sales turnover that is turned into overall profit. **PM=** [\$\\frac{\\mathbf{\\text{profit\\ before\\ interest\\ and\\ tax}}}{\\mathbf{\\text{sales\\ revenue}}}\$]{.math.inline} **x 100** Profit Margin is a better measure of a firm's profitability than GPM since it accounts for both cost of sales (direct costs) and expenses (indirect costs). To further reduce business expenses: -discuss preferential terms with creditors and suppliers -negotiate cheaper rent -reduce indirect costs - **Return on capital employed (ROCE):** Measures the financial performance of a firm based on the amount of capital invested. **ROCE=** [\$\\frac{\\mathbf{\\text{profit\\ beofe\\ interst\\ and\\ tax}}}{\\mathbf{\\text{capital\\ employed}}}\$]{.math.inline} **x 100** [Liquidity ratios]: they look at the ability of a firm to pay its short term liabilities. Certain assets of a business can be turned into cash quickly, these are known as liquid assets. - **Current ratio**: deals with the liquid assets and current liabilities of a firm, it reveals if a firm is able to use its liquid assets to cover its short-term debts. **CR=** [\$\\frac{\\mathbf{\\text{current\\ assets}}}{\\mathbf{\\text{current\\ liabilities}}}\$]{.math.inline} High ratio may suggest: - Too much cash, which could be spent - Too many debtors - Too much stock, which increases storage and insurance costs. - **Acid test ratio (quick ratio):** similar to current ratio but ignores the value of stock, since stock cannot always be easily converted into cash. **ATR=**[\$\\frac{\\mathbf{\\text{current}}\\mathbf{\\ }\\mathbf{\\text{assets}}\\mathbf{-}\\mathbf{\\text{stock}}}{\\mathbf{\\text{current}}\\mathbf{\\ }\\mathbf{\\text{liabilities}}}\$]{.math.inline} **\ ** **UNIT 17** **Cash flow** - **Working capital** refers to the cash or liquid assets available for the daily running of a business. **Working capital = current assets -- current liabilities** - **Liquidity position** of a business refers to whether it has sufficient or insufficient liquidity to continue operating on a sustainable level. **Cash- flow forecast** is a financial tool that shows the expected movement of cash into and out of a business, per time period. It's based on: -Cash inflows -Cash outflows -Net cash flow [Reasons for cash-flow forecasts:] -Helps lenders better asses the financial health of the business seeking eternal finance -Help managers to anticipate and identify periods of potential cash deficiency. -Aids the planning process, helps businesses better achieve its aims and objectives. **[Constructing a cash-flow forecast ]** **Net cash flow= total inflows -- total outflows** **Closing balance= opening balance + Net cash flow** - The opening balance of the following month is the same value as the closing balance of the previous month. [Causes of cash-flow problems:] - **Overtrading**: business tries to expand too quickly with the insufficient resources to do so. - **Over borrowing**: capital raised from external sources of finance means spending money on interests. - **Overstocking:** Since stock cost money to buy, produce and store. - **Poor credit control:** when a firm allows too much credit to its customers. - **Unforeseen changes:** changes in demand or machinery problems for instance. - - - - - - - - - - - - - - - - - - - - - - - **Strategies for dealing with cash-flow problems**: [Reducing cash outflows]: -Negotiate extended credit terms -Seek alternative suppliers with better prices -Better stock control -Reduce expenses [Improving cash inflows:] -Tighter credit control -Cash payments only -Change price policy -Improved product portafolio [Obtaining alternative sources of finance]: -Overdrafts -Selling fixed assets -Debt factoring -Government assistance [Limitation of cash-flow forecasting: ] -**Marketing:** Poor market research or a distasteful marketing campaign may put off customers -**Human resources:** unmanaged conflict in the workforce will have an unfavorable effect. -**Operations management:** may cause production delays -**Competitors** behavior will have an effect on the firm's success. -**Changing fashions and taste** -**Economic changes** -**External stocks** **\ ** **UNIT 18** **Investment appraisal** - **Investment** refers to the purchase of an asset with the potential to yield future financial benefits. - **Investment** **appraisal** is the general term referring to the quantitative techniques used to calculate the financial costs and benefits of an investment decision. - The **payback period** refers to the period of time for an investment project to earn enough profits to repay the cost of the initial investment. PBP= [\$\\frac{\\text{initial\\ investment}}{\\text{contribution\\ per\\ month}}\$]{.math.inline} **Advantages of payback period** **Disadvantages of payback period** ------------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------- Is the simplest and quickest method of investment appraisal. The contribution per month is unlikely to be constant as demand is prone to seasonal fluctuations. Useful for firms with cash-flow problems as they can identify how long it would take for the cash to be recouped. Focuses on time rather than profits Allows firms to see whether it will break even. Encourage a short term approach to investment, ignore the longer term. Used to compare different investment projects PBP might not be suitable for some firms. Assess projects which will yield a quick return for shareholders. Calculations are prone to errors since it is difficult to accurately predict future cash flows. Assesses only on the short term, so it is less prone to errors. - The **average rate of return** (ARR) calculates the average profit on an investment project as a percentage of the amount invested. It can be compared with the base interest rate to assess the rewards for the risk involved. ARR= [\$\\frac{\\left( total\\ returns - capital\\ cost \\right) \\div years\\ of\\ use}{\\text{capital\\ cost}}\\ \\times 100\$]{.math.inline} - The main [advantage] of the ARR is that it enables comparisons of the forecast proceeds of different investment projects. - However, the [weakness] is that it ignores the timing of cash inflows and therefore is prone to forecasting errors when considering seasonal factors. Also the project's useful life span is needed. And errors are more likely to be made the longer the time period. **Qualitative investment appraisal**: (PORSCHE) -Predictions -Objectives -Risk profile -State of the economy -Corporate image -Human relations -Exogenous shocks **UNIT 19** **Introduction to human resource management** - **Human resource management** (HRM) refers to the management function of using and developing people within a business in order to meet the objectives of the organization. - A frim needs to do **workforce planning**, which is the management process of anticipating an organization's current and future staffing needs. - The workforce refers to the number of employees in an organization at any point in time. -Short-term workface planning deals with the existing and upcoming demands of an organization. -Long-term workforce planning looks at the human resource needs of the business in the foreseeable future. [Anticipating the human resource need of a firm can be done by:] -Historical data and trends -Sales and income levels -Labour turnover rates -Flexibility of the workforce -Demographic changes If manager do not make the best out of their human resources, the organization will face problems: Recruitment -- Resources -- Reservations -- Returns -- Reputation Internal factors, are those in control of the business, and external factors are those beyond the business control. **[Demographic changes]**: -The net birth date -The net migration rate -Retirement age -Women -Ageing population Increased dependent population, reduced labour mobility, changes in consumption patterns, change in employment patterns. **[Changes in labour mobility:]** Is the extent to which labour can move to different locations, known as geographical mobility, and their flexibility in changing to different jobs, known as occupational mobility. [Geographical mobility limitations]: -Family and friends -Relocation costs -Costs of living in a particular area -Language and cultural differences -Fear of the unknown [Occupational mobility limitations]: -Age -Specialization -Discrimination Hiring part-time staff is cheaper and is easier to replace if needed, they get lower remuneration. However, they tend to feel less valued and therefore less loyal to the business. Also, a huge amount of time and resources are needed to hire, induct and train new part-time workers. **[Immigration]**: There are many reasons for the migration of workers such as: -Pay and remuneration -Employment opportunities -Seasonal factors -Domestic instability -Higher standard of living **[Flextime]**: Is a system which requires employees to work for a core period but the rest of the time is flexible, employees have autonomy to determine when they will work. This can improve a firm's image as it seems as providing equal opportunities to staff who are unable to work standard hours, it also reduces the need for paying staff to work overtime. -**Teleworking** refers to working away from the office by using electronic forms of communication. -**Homeworking** is an aspect of flextime whereby people work from their own homes. +-----------------------------------+-----------------------------------+ | **Advantages** | **Disadvantages** | +===================================+===================================+ | - More job opportunities, | - There is a huge reliance on | | especially for those living | the use and reliability of | | in remote areas. | technology. | | | | | - Suitable for those who have | - Workers often exceed their | | to care for family members. | contracted hours. | | | | | - Benefits of not having to | - There is often less job | | commute, such as travel | security and less trade union | | costs, time and stress. | representation for workers. | | | | | - Autonomy in decision-making | - Employees are likely to face | | and choice of how to best | distractions at home. | | organize work. | | | | - Teleworkers and homeworkers | | - Possible income tax | tend to suffer from a lack of | | allowances for using personal | authentic training and career | | property for employment | development opportunities. | | purposes. | | | | | | - Lower costs of technology | | | mean that more people can | | | afford to work from home. | | +-----------------------------------+-----------------------------------+ **[Gig economy]** Refers to labour markets where workers are typically on short-term, flexible and temporary contracts. [Advantages:] -Greater flexibility for workers -Working for a variety of employers -Costs are lower for businesses -Allows contractors and freelance workers to make extra income -More control of their work-life balance [Disadvantages]: -Workers miss out important aspects including job security -workers do not typically receive a regular income -Do not have a clear professional career path -Expected to record and file their own tax returns -May suffer from burnout due to working multiple contracts -Businesses take the risk of relying on an outsourced freelance contractor Resistance to change in the workplace: -Self-interest -Low tolerance -Misinformation -Different assessments of the situation Six change approaches: -Education and communication -Negotiation and agreement -Participation and involvement -Manipulation and co-option -Facilitation and support -Explicit and implicit coercion **UNIT 20** **Organizational structure** **Organizational structure** refers to the formal interrelationships and hierarchical arrangements of human resources within a business. -**Accountability** shows who is held responsible for what job. It allows senior managers to have better control over the running of their organization. -**Responsibility** shows who is in charge of whom and in what role or capacity. **Delegation**: -Passing control to others and holding them accountable for their actions. -Managers save time while it motivates employees since they feel trusted. -Poor delegation can lead to confusion and a feeling of inadequacy. -SMARTER. (Specific, Measurable, Agreed, Realistic, Time-bound, Ethical, Recorded) **Span of control:** -Refers to the number of subordinates that are controlled by a manager. -A wide span of control occurs when a manager has many people under his control, there are few layers in the hierarchy. This means that costs are kept under control and communication is more effective. Advantages are: delegation becomes important, communication should be improved, cheaper to operate, smaller psychological distance. -A narrow span of control means there are fewer subordinates who are accountable to a manager, communication and control is easier. Advantages: quicker communication between smaller teams, smaller teams are easier to control and manage, greater specialization and division of labor, more opportunities for people to earn promotion. **Levels of hierarchy:** -Refers to the organizational structure based on a ranking system. -The person directly above an employee on the next hierarchical level is known as the line manager. -The main advantages are that they show clear lines of communication within the organization and can establish departments or teams. -However, departmentalization can lead to workers being isolated to their official teams and hierarchical structures tend to be inflexible. **Chain of command:** -Refers to the formal line of authority through which orders are passed down in an organization. **Bureaucracy:** -Is the execution of tasks that are governed by official administrative and formal rules of an organization. This might include: -Requirement to fill out unnecessary paperwork -Staff working in many departments and then reporting to several managers -Too many committees set up to investigate issues of concern to the organization -long, official chains of command. -Managers with duplicate or overlapping roles and responsibilities. -Bureaucratic organization is governed by several principals: -Continuity -Hierarchical structures -Accountability -The main drawback is that bureaucracy simply slows down decision making. **Centralization:** -Decision making is made by a very small number of people. +-----------------------------------+-----------------------------------+ | Advantages | Disadvantages | +===================================+===================================+ | - Rapid decision making | - Added pressure/stress for | | | senior staff | | - Better control | | | | - Inflexibility | | - Better sense of direction | | | | - Possible delays in decision | | - Efficiency | making | | | | | | - Demotivating | +-----------------------------------+-----------------------------------+ **Decentralisation:** -Decision making is shared with other people. +-----------------------------------+-----------------------------------+ | Advantages | Disadvantages | +===================================+===================================+ | - Input from the workforce | - Costly | | | | | - Speedier decision making | - Inefficiencies | | | | | - Improved morale | - Greater chances of mistakes | | | | | - Improved accountability | - Loss of control | | | | | - Teamwork | - Communication issues | +-----------------------------------+-----------------------------------+ Whether a business is more centralized or decentralized depends on: -The size of the organization -The scale of importance of the decision -The level of risk -The corporate culture -Management attitudes and competencies -The use of technologies **Delayering:** -Is the process of removing one or more levels in the hierarchy in order to flatten out the organizational structure. +-----------------------------------+-----------------------------------+ | Advantages | Disadvantages | +===================================+===================================+ | - Reduces costs | - Creates anxiety | | | | | - Improves communication | - Increases workloads | | | | | - Encourages delegation and | - Slows down decision making | | empowerment | | +-----------------------------------+-----------------------------------+ **Matrix structure:** -Is the flexible organization of employees from different departments within an organization temporarily working together on a particular project. **Organizational charts.** Is a diagrammatic representation of a firm's formal organizational structure. It shows five important features of a business. -The different functional departments within a business. -The chain of command. -The span of control. -The official channels of communication. -The levels of hierarchy. - **Flat (horizontal) organization charts.** - **Tall (vertical) organization charts** - **Organizational structure by product, function or region** - **Management** is the practice of achieving an organization's objectives by using and controlling the available human and non-human resources of the business in an effective way. - A **manager** is someone with decision making authority within an organization and has responsibility for problem solving to achieve the business goals. The functions of management: -Planning: they set tactical plans and strategic plans - **Leadership** is the process of influencing and inspiring others to achieve the organizations' goals. +-----------------------+-----------------------+-----------------------+ | | **Management** | **Leadership** | +=======================+=======================+=======================+ | **Time and devotion** | A "9am to 5pm" job. | Is responsible 24hs. | | | Have a short-term | They have longer-term | | | view and deal with | perspective and | | | tactical decisions. | handle strategic | | | | decisions. | +-----------------------+-----------------------+-----------------------+ | **Roles and | They handle the | Innovate thinkers who | | responsibility** | day-to-day | deal with broader | | | operations. | range of roles and | | | | responsibilities. | +-----------------------+-----------------------+-----------------------+ | **Influence on | Orders are listened | They inspire and | | others** | since they come from | motivate their | | | a position of | followers through | | | authority. | action. | | | | | | | | More socially | | | | engaged. | +-----------------------+-----------------------+-----------------------+ | **Risk-taking** | They follow | They take risks by | | | predetermined rules | challenging the | | | and policies. | organization norms. | +-----------------------+-----------------------+-----------------------+ | **Vision** | They follow the | They create hope | | | procedures and | within their people. | | | culture of the | | | | organisation. | | +-----------------------+-----------------------+-----------------------+ **Leadership styles**: - [Autocratic:] - [Paternalistic]: - [Democratic]: - [Laissez-faire:] - [Situational leadership:] **UNIT 22** **Motivation and demotivation** Benefits of working on a motivated workforce: - Higher morale and jobs satisfaction, leads to higher productivity and quality - Improved corporate image, helps attract customers - Better industrial relations, reduces the chances of conflict in the workplace - Lower staff turnover, reduces the cost of hiring staff - Lower absenteeism, as staff have incentives to turn up to work - Higher profits generated from all the factors above. Signs of poor motivation: - High absenteeism rates - High labour turnover rates - High wastage level, defective output or work - Low-quality output, more likely to make mistakes and care less about quality - Increasing numbers of customer complaints because of the poorer quality of output - Poor punctuality - Increasing number of disciplinary problems **[Motivation theories:]** 1. **Taylor 1911** -That employees are primarily motivated by money. -Taylor believed that higher productivity could be accomplished by setting output and efficiency targets related to pay. -Taylor promoted division labour, that the specializing in the production process to improve efficiency and output. -The introduction of differentiated piecework, where workers receive payment based on a standard level of output and receive a higher rate if the worker exceeds that level. -A critic is that on some jobs is not easy to measure the "output". -It also ignores the non-financial factors that motivate employees. -Scientific management can lead to repetitive and monotonous tasks. - Phsycological needs or basic needs: needs that must be met in order for people to survive - Security needs or safety needs: necessary to make people feel safe and stable. A daily structure and order. - Social needs or love and belonging needs: the human need to be accepted as a part of a friend group or family. - Esteem needs or ego needs: the desire for recognition and being able to have self-respect. It can be internal, feel good about themselves, or external having a status in the workplace. - Self-actualization: is the force that drive a person to become the best they can be. 3. **Herzberg 1959** -Investigated in interviews with accountants and engineers which are the factors that caused dissatisfaction at work. -Hygiene factors or maintenance factors: the aspects of work that do not motivate but must be met to prevent dissatisfaction. -Motivators: the factors that can be lead to the psychological growth of workers and then increase satisfaction and performance at work. +-----------------------------------+-----------------------------------+ | Hygiene factors (causes of | Motivators (causes of | | dissatisfaction) | satisfaction) | +===================================+===================================+ | - Company policy and rules | - Achievement | | | | | - Relationships with peers | - Advancement | | | | | - Pay- salary and wages | - Interesting tasks | | | | | - Job security | - Opportunities for promotion | | | | | - Physical security | - Personal growth | | | | | - Supervision and coordination | - Recognition | | | | | - Physical working conditions | - Responsibility | +-----------------------------------+-----------------------------------+ -Movement happens when a person needs to do something, motivations is because the person actually wants to do something. -Hygiene factors ensure employees are not demotivated, but all individuals are different and have different motivation techniques. -This does not apply to many occupations, especially those in low-skilled and low-paid jobs. -Some employees may not want enriched jobs as this involves having extra responsibility and stress. **Financial rewards** Are methods used by businesses to motivate their workers by using some form of monetary payment. i. [Salary] - Financial rewards set at a fixed annual rate but paid on a monthly basis. - Help improve a firm's cash flow. - Paid directly into the employee bank account so its safer and more convenient. - However, is difficult to reward those who are more efficient and productive. - There is little incentive to work hard since people are paid the same amount for their time. ii. [Wages] - Rewards for labour services, usually expressed as an hourly rate or measured for quantity of output. - Those who earn wages can be paid an overtime rate. - The disadvantage is that workers are not rewarded for their efforts but for their time. - Piece rate rewards workers that are more productive. - Workers have an incentive to work hard. - There needs to be a supervision and quality control. - Workers may be demotivated by the uncertain level of income, often caused by factors beyond their control. iii. [Commission] - Pays workers based on a proportion of sales or output contributed by a worker. - They do receive a basic salary - Speed in production or aggressive selling techniques do not correlate with high quality output or customer care. - There is added pressure on workers to sell more or to perform at a faster pace. - Tasks can be quite repetitive ad monotonous. - Since commission depends on fluctuating sales or output levels, there is a lack of security. - There may be a need to hire more quality controllers. iv. [Performance-related pay (PRP)] - Rewards those employees who meet certain goals. - Can be paid through; pay rise, performance bonus or gratuity. - It creates an incentive for people to perform better. - Workers can focus better if targets for each individual al clearly set out. - Is seen as a fairer system since hard work is rewarded. - Targets may be unrealistic or unachievable and this will cause resentment. - Stress caused by the pressure imposed on workers to meet their targets. - Non-financial motivators are ignored - PRP is not appropriate for some professions where quality is more important. - It may not promote teamwork since individual targets are set in a performance appraisal meeting. v. [Profit-related pay] - The higher the amount of profit made, the greater the pay received by employees. - Is used to strengthen employee loyalty and to foster team work. - Boosts labour efficiency and limit the possibility of labour conflict. - However, the share of profits given to employees is often seen as too small to provide an ince