Year 10 Business Studies Short Notes PDF

YEAR 10 BUSINESS STUDIES \[0450\] SECTION 1 **Understanding business activity** 1. Business activity 2. Classification of businesses 3. Enterprise, business growth and size 4. Types of business organisation 5. Business objectives and stakeholder objectives. **Unit 1: Understanding Bu...

YEAR 10 BUSINESS STUDIES \[0450\] SECTION 1 **Understanding business activity** 1. Business activity 2. Classification of businesses 3. Enterprise, business growth and size 4. Types of business organisation 5. Business objectives and stakeholder objectives. **Unit 1: Understanding Business Activity** 1.1.1.     Concepts of needs, wants, scarcity and opportunity cost ---------------------------------------------------- ------------------------------------------------------------------------------------------------------------------------- 1.1    Business activity 1.1.2.     Importance of specialisation 1.1.3.     Purpose of business activity 1.1.4.     The concept of adding value and how added value can be increased **1.2   ** Classification of businesses 1.2.1          Business activity in terms of primary, secondary and tertiary sectors 1.2.2          Classify business enterprises between private sector and public sector in a mixed economy **1.3   ** Enterprise, business growth and size 1.3.1          Enterprise and entrepreneurship: 1.3.2          1.3.2 The methods and problems of measuring business size: 1.3.3          Why some businesses grow and others remain small: 1.3.4          Why some (new or established) businesses fail: 1.4    Types of business organisation 1.4.1          Sole traders, partnerships, private and public limited companies, franchises and joint ventures 1.4.2          Differences between unincorporated businesses and limited companies 1.4.3          Concepts of risk, ownership and limited liability 1.4.4          Recommend and justify a suitable form of business organisation to owners/management in a given situation 1.4.5          Business organisations in the public sector, e.g. public corporations 1.5 Business objectives and stakeholder objectives 1.5.1    Businesses can have several objectives and the importance of them can change: 1.5.2    The role of stakeholder groups involved in business activity 1.5.3        Differences in the objectives of private sector and public sector enterprise **Unit 2: Business in people**   2.1 Motivating workers 2.1.1 The importance of a well-motivated workforce 2.1.2 Methods of motivation: 2.2 Organisation and management 2.2.1 Organizational charts 2.2.2: The role of management 2.2.3 Leadership styles 2.2.4 Trade unions **Business activity** It is the process of producing goods and services to satisfy consumer demand. **Need**- a good or service which is essential for living **Want** -- a good or service which people would like but is not essential for living. **Economic problem:** Unlimited wants cannot be met because there are limited factors of production. This creates scarcity. **Scarcity** -- there are not enough goods and services to meet the wants of the population. So the choice has to be made. When making the choice you need to make sure that the product or service you choose is worth more to you than the one you give up. The next best alternative you give up is known as the opportunity cost of your decision. **Opportunity cost**: the benefit that could have been gained from an alternative use of the same resource. **Factors of production**: the resources needed to produce goods and services 1. Land -- all natural resources such as minerals, ores, fields, oils and forests. 2. Labour -- the number of people available to work 3. Capital -- machinery, equipment and finance needed for production of goods and services. 4. Enterprise -- is people prepared to take risk of setting up businesses -- known as entrepreneurs. **Activity:** Fatima works in a bakery and earns \$120 per week. Fatima's grandfather has given her \$5000. Fatima is going to use this money to start her own business. She is going to make **cakes** for **special occasions** such as birthdays, weddings and religious festivals. 1. Give an example for each of the four factors of production Fatima will use in her new business. 2. What is the opportunity cost to Fatima of her decision to start her own business? 3. Is Fatima's business meeting consumer's needs or consumer's wants? Justify your answer. **Specialisation:** People and businesses concentrate on what they are best at. **Division of labour:** Production process is divided into separate tasks and each employee does just one of those tasks. \[Check notes for advantages and disadvantages\] **Purpose of business activity:** Businesses produce different types of goods and services known as: 1. Consumer goods -- products which are sold to the final consumer. They can be seen and touched. Durable and non-durables. 2. Consumer services -- nontangible products such as insurance services, transport 3. Capital/producer goods -- physical goods, such as machinery and delivery vehicles, used by other businesses to help produce other goods and services. **Adding Value** Value-added is the difference between the price of a product or service and the cost of producing it. The price is determined by what customers are willing to pay based on their perceived value. The main difference between added value and the profit of a business is that profit means revenue minus all direct and indirect expenses, whereas added value is revenue minus the cost of a product. Businesses can add value by: 1. Branding Branding is the process of creating a distinct identity for a business in the mind of the target audience and consumers. At the most basic level, branding is made up of a company\'s logo, visual design, mission, and tone of voice. 2. By providing excellent service quality Quality customer service involves providing efficient, quick, and friendly service to customers as well as building strong relationships with them. It also involves responding to customers\' issues in time and handling any complaints swiftly. 3. Adding more product features Product features are a product\'s traits or attributes that deliver value to end-users and differentiate a product in the market. 4. Convenience A value-added product is a saleable commodity that has been enhanced with additional qualities that make it worth a higher price than the raw materials used to make it. It may be made more convenient, more attractive, more palatable, or easier to use than its raw ingredients. Activity: Homework Explain how these businesses add value: - Restaurant - Shoe manufacturer - House builder - Florist Conclusion: - Business activity combines the factors of production to produce goods and services that meet consumer needs and wants. - The economic problem and the problem of scarcity are due to unlimited needs and wants of consumers which cannot be met by businesses because they have limited factors of production. Choices are to be made and this creates an opportunity cost. - Specialization of both labour and capital helps businesses to produce more goods and services at a lower cost. - Businesses add value by taking raw materials and turning theses into goods and services that they sell to consumers. **Classification of businesses:** 1. Primary -- Firms whose business activity involves the extraction of natural resources. Examples: farming, fishing, forestry, mining. 2. Secondary -- firms that process and manufacture goods from natural resources. Examples: refining, manufacturing, construction 3. Tertiary -- firms that supply a service to consumers and other businesses. Examples: shops, restaurants, banks, cinemas, airlines **Chain of production** -- the production and supply of goods to the final consumer involves activities from primary, secondary and tertiary sector businesses. **Changing importance of business classification** Countries are often describes as developing and developed. A developing or less developed country \[LDC\] has a small industrial sector and low standard of living. A developed or more developed country \[MDC\] has high level of **industrialisation** people have higher average incomes and enjoy a higher standard of living. Industrialisation -- the growing importance of secondary sector activity and reduced importance of primary sector business activity. Deindustrialisation -- the growing importance of the tertiary sector and the reduced importance of secondary **Business enterprise in the private and public sectors** Most countries have mixed economies -- an economy where the resources are owned and controlled by both: the private and the public sector. **Private sector** -- the part of the economy that is owned and controlled by individuals and companies for **profit,** the businesses fall under this sector are: - Sole traders - Partnerships - Limited companies \[private limited companies and public limited companies owned by private sector\] - Franchises, joint ventures, social enterprises **Public sector** -- the part of the economy that is controlled by the state or government, the businesses fall under this sector are: - Government departments - Public corporations - Nationalised industries Mixed economy: an economy where resources are owned and controlled by both, the private sector and public sector. +-----------------------+-----------------------+-----------------------+ | | Private sector | Public sector | +=======================+=======================+=======================+ | What to produce? | Consumer choices | The government | | | | decides | | \[consumer and | | | | producer/capital | | | | goods\] | | | +-----------------------+-----------------------+-----------------------+ | How to produce it? | Firms want to make | The government | | \[labour or/and | profit | decides | | capital intensive\] | | | +-----------------------+-----------------------+-----------------------+ | For whom to produce? | Customer's buying | The government | | | power | decides | +-----------------------+-----------------------+-----------------------+ Private sector decisions: Consumer choices help businesses to decide what they produce. Businesses only produce the goods and services that consumers want if they can make profit from doing so, they decide the best way of producing their products i.e. **the lowest cost so they can make a profit when the products are sold.** These goods and services will only be bought by people who have enough money to pay the price charged. Public sector decisions: The public sector will produce goods and services \[electricity, roads, education and health care\] make decisions about how to make these goods and services. **Some of the goods and services are provided free at the point of use.** Others goods and services are sold to consumers. If some consumers do not have enough money to buy these goods and services, the government might sell them at a lower price or provide them free of charge. **Enterprise, business growth and size** Enterprise and entrepreneurship Entrepreneur -- an individual who has an idea for a new business and takes the financial risk of starting up and managing it. Characteristics of successful entrepreneur -- 1. Innovative 2. Self-motivated and determined 3. Self-confident 4. Multi skilled 5. Strong leadership qualities 6. Initiative 7. Results driven 8. Risk takers 9. Good networking Business plan -- a detailed written document outlining the purpose and aims of a business which is often used to persuade lenders or investors to finance a business proposal. A business plan describes: - Business - business opportunity - the market - objectives of the business - financial forecast Business start-ups -- a newly formed business, they start small but some might grow to become much bigger. The government support includes: Grants \[financial aid\] and interest free or low interest loans Lower taxation rates Rent free premises for a certain period of time Free or subsided training Information, advice and support from special agencies Write this at the back of your exercise book Explain the difference between the primary, secondary and tertiary sectors of industry. - Primary sector activity extracts natural products from the land while secondary sector activity uses and processes raw materials in the manufacturing of finished goods \[output\]. The tertiary sector provides services like retailing, banking, leisure and transport. **Methods to measure the business size:** - Capital employed - Value of output - Number of employees - Market share **Why some businesses grow and some remain small:** **Why some businesses expand:** - To increase profit or to maximise profit. - To increase the market share - To enjoy economies of scale - Greater power to control the market. - Protection from the risk of takeover **Different ways businesses can grow:** Internal and external growth **Internal \[organic\] growth occurs when:** - There is increase in number of good businesses can produce - When business has developed new products - When business finds new markets for its products **External growth occurs** when a business merges with or takes over another business in the same or different industry in any of the following ways: 1. Horizontal integration \-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-\-- 2. Forward vertical integration 3. Backward vertical integration 4. Conglomerate/diversification **Why businesses remain small** - Owner's choice - Market size - Access and availability of capital - Market domination **Why some businesses fail?** - Poor planning - Liquidity problem - Poor choice of location - Poor management - Failure to invest in new technology - Poor marketing - Lack of finance - Competition - Economic influences **Activity:** Explain the difference between the internal and external growth. - Internal growth \[organic growth\] is achieved when a firm increases its sales, its number of branches and its range of products by not taking over or merging with another firm. External growth is achieved by a merger with or a takeover of another business. **TYPES OF BUSINESS ORGANIZATION** **Sole traders -- sole proprietorship** A business that is owned and controlled by just one person who takes all the risks and receives all the profits This is simple form of business organisation. However, sole traders enjoy certain advantages and disadvantages. **Partnerships** A business formed by two or more people who will usually share responsibility for the day to day running of the business. Partners usually invest capital in the business and will share profit. Sole traders and partnerships are **unincorporated businesses** i.e. a business that does not have legal identity separate from its owners. The owners have unlimited liability for business debts. **Private and public limited companies:** A limited company is owned by its shareholders, these are investors who invest money in the company in exchange for shares. **Shareholder --** a person or organisation who owns shares in a limited company. **Private limited company --** Often small to medium sized company owned by shareholders who have limited liability The company **cannot** sell its shares to general public. **Public limited company** -- often a large company -- owned by shareholders who have limited liability The company can sell its shares to the general public. **Ordinary shareholders --** these are the owners of a limited company. **Dividend --** a payment, out of profits, to shareholders as a reward for their investment. **Limited liability** -- the shareholders in a limited liability company which fails only risk losing the amount they have invested in the company and not any of their personal wealth. **Unlimited liability** -- if an unincorporated business fails, then the owner/s might have to use their personal wealth to finance any business debt. **An incorporated** business like a limited company has a separate legal identity for its owners. The company and not the owners \[shareholders\] are legally responsible for the activities of the business. The owners have limited liability for the debts of the business. **Collateral** -- noncurrent assets \[fixed assets\] offered as security against borrowing. Annual general meeting -- it is a legal requirement for all companies. All shareholders may attend. They vote on who they want to be on the board of directors for the coming year. **PLC -- benefits --** - Can sell shares to public - Rapid expansion possible, specialist managers appointed - Limited liability - Continuity **Limitations** - Legal formalities - Disclosure of accounts and other information - Divorce between ownership and control - Expensive to go public **FRANCHISE** A business system where entrepreneurs buy the rights to use name, logo and product of an existing business. **JOINT VENTURES** Two or more businesses agree to work together on a project and set up a separate business for this purpose **CHOOSING THE TYPE OF BUSINESS ORGANISATION** When setting up a new business the choice to which form of business organisation to use will depend on: - The number of owners - The owners role in the management of the business - The attitude towards financial risk - How quickly the owners want to start operating their business - The potential size of the business. **PUBLIC CORPORATIONS** A business organisation that is owned and controlled by the state, financed mainly though taxation, have social objectives rather than private objectives. The services of public corporation are often provided to the population free or at a low price. **Business objectives and stakeholder objectives:** Objective -- a statement of a target to be achieved. It should be: **SMART-** S -- Specific M -- Measurable A -- Achievable and agreed R -- Realistic and Relevant T -- Time specific **Different business objectives --** **Survival** -- many businesses fail in their first or second year of trading, so survival is a very important **short-term** objectives for these businesses. Once they are established, they can focus on long term objectives such as profit and growth. **Profit --** businesses aim to produce and sell the level of output where there is greatest difference between revenue and total cost i.e., profit. **Growth --** as output increases, businesses may enjoy economies of scale, it will reduce cost of production, increase firm's competitiveness, revenue and profit. Growth is long term objective for many businesses. **Market share --** it is the revenue of a business expressed as a percentage of total market **revenue.** Increased market share helps business to develop strong **brand image** which makes it easier to sell the product to consumers, hence making market share as one of the important objectives. **Corporate social responsibility \[CSR\]-**businesses taking responsibility for the impact their activities might have on society and the environment. **Objectives of social enterprise --** Social enterprise is a business with social objectives that reinvests most of it profits back into the business or into benefiting society at large. **Public sector objectives** -- the goods and services provided by public sector should be: 1. Accessible -- regardless of income and location 2. Affordable -- cheaper than the private sector businesses 3. Open to all -- available to everyone regardless of their income, class, ethnicity, culture, religion and so on. **STAKEHOLDERS** **Stakeholders** --an individual or group which has an **interest** in a business because they are affected by its activities and decisions. **Internal stakeholders** -- have an interest in decisions and activities of a business. They are: **Owners and shareholders** -- to receive high returns/dividends as rewards on their investment, an increase in share value. **Managers** -- have job satisfaction, receive salary increase and bonus. **Employees** -- job security, to receive fair wage/salary that reflects their contribution to the business's success. **External stakeholders-** **Lenders-** to receive due interest payment, have borrowing repaid by the due date. **Suppliers --** to receive prompt payment for credit goods, to be treated fairly. **Customers --**to receive quality goods at fair prices and after sales service. **Government --** to be paid correct amount of taxes on time, businesses create employment, so government have minimum spending on unemployment benefits. **Local community** -- employment and **subsidising** of community facilities, minimum negative impact of business activities such as noise, air, and traffic pollution **However,** there could be conflict between two or more business stakeholders. This is because it is often not possible for a business decision or activity to satisfy the different groups of stakeholders. Sometimes a single business activity or decision will have both positive and negative effects for the same stakeholder. **Section 2 - People in business** **Organisation and management** To learn - Simple organisation charts - The role of management - Leadership styles - Trade unions **Organisation and management** Organisation structure -- the formal, internal framework of a business that shows how it is managed and organised. Functional departments- the main activities of business: - Finance - Marketing - Operations - Human resource - Research and development **Simple hierarchical structure** Hierarchy -- the number of levels in an organisational structure The main features of organisational structure are: - Levels of hierarchy -- each level of organisational structure is represented by the number of employees. - **Chain of command** -- the route through which authority is passed down through organisation. **Each person in the chain of command is directly responsible to the person immediately above them and directly responsible for the persons directly below them.** - **Span of control** -- the number of **subordinates \[an employee who is below another employee in the organisation's hierarchy\]** reporting to each supervisor or manager. **A span of control can be described as wide \[more employees\] or narrow depending on how many subordinates a person is responsible for.** 23/10/20 Advantages of wide span of control - Less expensive as fewer managers/supervisors are needed. - Less supervision improves employee motivation. - Faster communication and decision making Disadvantages of wide span of control - Fewer managers/supervisors reduce promotion opportunities. - Less control over subordinate's work - Effective communication may be difficult. Advantages of Narrow span of control - Effective communication is easier. - Better control over employees and their work - More managers/supervisor's increase - promotion opportunities Disadvantages of narrow span of control - Communication and decision making are often slower. - More expensive because more managers are needed. - More supervision may reduce employee motivation. **Note:** **Tall** organisations have many levels of hierarchy. Each level, except for the bottom level is a layer of management with more managers; the span of control for each manager will be narrow. The chain of command is long, communication and decision making are often slower because they must pass through several layers. **Flat** organisations have few levels of hierarchy, with short chain of command, communication and decision making is quicker as there are few levels for these to pass through. There are fewer managers with wide span of control. **Delayering** - Reducing the size of the hierarchy by removing one or more levels -- most often middle management **Delayering** - Reducing the size of the hierarchy by removing one or more levels -- most often middle management **Advantages of delayering:** 1. Reduces costs. Reduces the chain of command so communication and decision making should be quicker and more effective. 2. Wider span of control increases the opportunity for **delegation** \[passing responsibility to perform tasks to employees lower down in the organisation\]. This helps develop employees' skills and could motivate employees who are given trusts by managers. 3. Senior managers are in close touch with what is happening in the business. **Disadvantages** 1. Increased workload for managers who remain could mean that tasks are not completed on time, or the quality of decision making is not as good. 2. Businesses may have to make some **redundancy** \[termination of employment by the employer because the job is no longer needed\] payment to managers who lose their jobs. This may increase costs. 3. Employees who remain might fear redundancy and this reduces their job security. 4. Wide span of control might reduce effective management of subordinates. **Centralised organisation** One where all the important decision-making power is held at head office or the centre. **Decentralised organisation** -- one where the decision-making powers are passed down the organisation to lower levels. **Roles, responsibilities and inter relationships.** Directors and chief executive officers -- **Directors --** appointed or elected members of the board of directors of a company who have the responsibility for determining and implementing the company's policy. Some directors might also have management role like marketing director. **Chief executive officers --** the most senior manager responsible for overall performance and success of a company. Responsibilities may include: 1. Setting strategy 2. Ensure availability of resources to achieve objectives. 3. Review performance of managers 4. Protect interest of shareholders 5. Provide leadership to ensure success of the business. **Manager --** an individual who oversees a certain group of tasks, or a certain area of the department of a business. Example: a factory manager Responsibilities may include: 1. to carry out decisions of the directors 2. delegate tasks to members of their department 3. to achieve department targets 4. to motivate employees so they work hard to achieve departments and company's objectives. 5. to solve day to day problems **Supervisor --** an individual who checks and controls the work of subordinates. Responsibilities may include: 1. Complete the quality tasks efficiently. 2. Work towards achieving individual, group, or departmental target. **The role of management**: 1. Setting objectives 2. Motivating employees 3. Ensure that there are enough resources for employees to complete their tasks. **Functions of management:** 1. Planning 2. Organising 3. Commanding 4. Coordination 5. Controlling **Delegation --** It is to pass authority down through the organisational hierarchy to a subordinate. Successful delegation requires the employees to be given not only the authority to complete the task, but also the resources and cooperation of other employees. **Advantages of delegation:** 1. Managers have time to focus on more complex tasks of greater importance. 2. It's a way to motivate employees who are given the opportunity to take responsibility and develop their skills. 3. The quality of work is often improved because lower-level employees have better skills than the managers for completing certain tasks. However, **managers** are not keen to delegate tasks because: 1. They do not trust the subordinate to do a good job. 2. Some managers fear they will lose control of decision making. 3. They will also fear that subordinate may complete the task of a better standard than the manager. **Leadership styles** Leadership is an important role of a successful manager. The three main styles of leadership are: 1. Autocratic leadership -- a leadership style where the leaders make all the decisions. 2. Democratic leadership -- a leadership style where employees take part in decision making. 3. Laissez faire leadership -- a leadership style where most of the decisions are left to the employees. **Choosing a leadership style** 1. The skills and experience of the worker 2. The time available to make decisions. 3. The personality of the manager 4. The task to be completed. Note -- Managers may have to use different styles of leaderships in different circumstances. **Trade unions** An organisation of employees aimed at improving pay and working conditions and providing other services, such as legal advice, for members. **Trade unions carry out the following roles:** 1. Negotiate with employers to improve pay and working conditions. 2. Resolve conflicts -- try to negotiate with the employer a solution on behalf of its members. 3. Provide legal support and advice. 4. Provide services to members like to run pension scheme, insurance scheme and so on **Effects of employees being trade union members** 1. The trade union negotiates with employers on behalf of its members through **collective bargaining** to achieve better improvements in pay and work conditions. 2. Try to protect employees job security. 3. Employees must pay membership fees to belong to a trade union. 4. The decision of trade unions members is binding on all members even if they do not agree with the decision or action to be taken. 5. During strike action, employees lose wage which cannot be recovered. **Effects on employers of trade unions** 1. It is a single point of contact between employer and employees for negotiations making it simpler and less time consuming than having to negotiate with each individual employee. 2. Unions help to improve working conditions, health, and safety at workplace. This may result in improved motivation and reduces absenteeism among employees. 3. Powerful unions often force employers to meet high wage demand, this increases business costs and reduce the competitiveness and profitability of businesses. 4. Unions could use industrial actions such as strikes, which can disrupt production and result in loss of orders, which reduces profitability. **Activity 7.8/7.9** Pg. 101/104 Sugar industry, subway system in Brazil and SOMU in Argentina **Test yourself Page 55 Questions 1 to 10** **TERM 2** **SECTION 2 -- PEOPLE IN BUSINESS** **MOTIVATING EMPLOYEES** Motivation -- the factors that influence the behaviour of employees towards achieving set business objectives. Why people work? To gain: money, job security, promotion, training, status, responsibility, friendship, variety of tasks, fringe benefits etc. Benefits of having well motivated workforce: 1. Improved labour productivity -- labour productivity is a measure of the efficiency of employees by calculating the output per employees. 2. Low rate of absenteeism -- absenteeism is employee's non-attendance at work without good reason. Well-motivated employees are less likely to take off days or leave the business. 3. Low rate of labour turnover -- labour turnover is the rate at which employees leave a business. 4. Better quality goods and services 5. More competitive **Motivation theory by Maslow -- hierarchy of needs** 1. Physical needs -- these are the basic needs \[water, food, clothing, shelter, rest\] that must be met for human survival. 2. Safety needs -- employees need to be safe from physical danger and to have job security. This includes health and safety at work, being free from threats and have job security. 3. Social needs --employees want to be accepted by others and feel that they are loved and trusted, to have friends and belong to a group where social activities can be shared and enjoyed together. 4. Esteem needs -- employees want to be respected and to have their achievements recognised and certain status in the society. 5. Self-actualisation -- is to get the feel of reaching at one's full potential at the workplace. Not all could do so as some people will always set another challenge for themselves. Maslow's theory is important **to managers** because it is possible for an individual to satisfy some or all their needs at work. If managers want to motivate **employees,** then they must organise work so that individuals are able to satisfy their needs. If managers do this, and employees' motivation is improved, then this will increase **business efficiency** as employees will produce **better quality goods and services.** This will improve **competitiveness and help to reduce business costs and improve profitability.** However, it is often difficult to identify how much of each need has been met and which level each employee is. Also, not everyone has same needs and self-actualisation is rarely if ever achieved. Therefore, unless more challenging tasks have always been provided, it is unlikely that work will help to satisfy this need. There is the risk that if jobs are no longer challenging, employees will become demotivated. **F. W. Taylor -- scientific management theory** This theory **aims to reduce inefficiency** in the workplace by finding the quickest method of performing each task and then training all employees to use this method. Taylor believed that employees are motivated by money alone. He brought in theory of **economic man** -- the view that humans are motivated only by money. The currently used **piece rate method** of paying production employees for each unit produced is developed from Taylor's research. However, this theory cannot be applied to service industry businesses as the output is not measurable. **Fredrick Herzberg -- two --factor theory** Herzberg found out the factors that motivate people at work i.e., **hygiene factors** -- the factors that must be present in the workplace to prevent job dissatisfaction and **motivators** -- the factors that influence a person to increase their efforts. **Hygiene Factors** **Motivators** ----------------------------------- ---------------------------- Working conditions The work itself Relation with workers Responsibility Salary or wage Advancement Supervision Achievement Company policy and administration Recognition of achievement Homework -- Activity 6.3 Page 79 -- Farook Fashion **Methods of motivation** Financial rewards -- cash and non-cash rewards paid to employees which are often used to motivate employees to increase their efforts. They include: a. Hourly wage rate b. Salary c. Piece rate d. Commission e. Bonus f. Performance related pay g. Fringe benefits h. Profit sharing Non-financial rewards -- methods used to motivate employees that do not involve giving any financial reward. a. Job rotation -- increasing **variety** in the workplace by allowing employees to switch from one task to another. b. Job enlargement -- increasing or widening tasks to increase variety for employees. c. Job enrichment -- organising work so that employees are encouraged to use their full abilities. d. Quality circles -- group of employees who meet regularly to discuss work related problems or to suggest how improvements can be made. e. Team working -- organising production so that groups of employees complete the whole unit work. f. Delegation -- passing responsibility to perform tasks to employees lower down in the organisation. **Choosing methods of motivation** The businesses may consider the following factors when choosing the method of motivation: 5. What is the cost to the business of using a particular method? 6. Some methods of motivation can only be used for certain types of employees as not all methods will motivate all employees. 7. A method of motivation which works for one employees or group of employees may not work for other employees. **Exam practice questions -- CIE text book -- pg. 87 -- Company A and B** **PEOPLE IN BUSINESS** **RECRUITMENT, SELECTION AND TRAINING OF EMPLOYEES** Recruitment is the process of selecting and hiring the right employees to do the job in an organisation. Recruitment and selection methods: Internal recruitment -- filling a vacant post with someone already employed in the business. A table with text on it Description automatically generated External recruitment -- filling a vacant post with somebody not already employed in the business.  Main stages in the recruitment and selection of employees: 1. The **business identifies** the need for a new employee and carries out a job analysis. 2. A **job description** is produced -- a document that lists the key points about a job, job title, key duties, responsibilities, and accountability. 3. A **person specification** is produced -- a list of the qualification, skills, and experience and personal qualities looked for a successful applicant. 4. The **job is advertised** -- the advertisement could be placed in local or international newspapers and specialist magazines. The choice of media to advertise the job vacancy will often depend on the nature of the job. The jobs requiring special skills will be advertised nationally whereas unskilled jobs will be advertised locally. 5. Application forms and **job details are sent out** -- CV a document that contains person's name, address and other contact details, the education and qualifications obtained, experience, other skills, hobbies and interests related to the job and the name and contact details about people who will provide preferences. 6. Completed **applications are received** -- the HR department will look through all the applications received, compare the information on the application form and CVs with job description and the person specification to produce a shortlist of application for interview. 7. A **short list** is selected from all the applicants - Shortlist is a list of candidates who are chosen from all the applicants to be interviewed for the job. 8. The short listed candidates are **interviewed** -- the interview may just be question answer session with one or two people interviewing each candidate or there may be panel of interviewers. 9. The right candidate **is selected** -- following the interviews and the results of any test, the interview panel will select the best applicant for the job. The applicant will receive the formal job offer in writing. Once employee starts the job, he/she will receive the contract of employment and induction training. **The importance of training and methods** The benefits of training include: 1. Training increases productivity and quality 2. It also improves the quality of business decisions and reduces the risk of costly mistakes. 3. It helps employees to develop their abilities and reach their potentials. 4. Training can improve customer service, customer relationships and customer loyalty. 5. Health and safety training helps to reduce accidents at workplaces. 6. A well-trained work force improves business's competitiveness. **Methods of training --** 1. On the job training 2. Off the job training 3. Induction 1. **On the job training** This is the training at the workplace, watching or following an experienced employee. The employees are expected to complete the task under the guidance of the experienced employee. Advantages of on-the-job training 1. It is relatively cheap. 2. Employees learn the way that the business wants the job done. 3. Workers are producing output while training. Disadvantages include: 1. Workers might pick up any of experienced worker's bad habits. 2. Workers may not learn up to date methods. 3. They may make more mistakes when learning and this increase waste. 4. It slows down the production of the experienced worker. **Off the job training** It is the training that takes place away from the workplace- Example -- college, university, or specialist training premises. Advantages -- 1. Workers learn the latest methods and techniques. 2. It does not disrupt the production of other works. Disadvantages -- 1. It can be expensive. 2. The workers do not produce any output during training. **Induction --** a training program to help new recruits become familiar with their workplace, the people they work with and the procedures they need to follow. Advantages -- employees feel part of the business from the day they join the business. Disadvantages -- it increases business costs. **Part time or full-time employees:** At one point, business will decide either to go for full time or part time employees: **Advantages of part time employees:** 1. More qualified employees can be hired. 2. It offers greater flexibility; contract hours of part time employees may be flexible to allow for changes in demand for them as per demand for labour in an industry. 3. Part time employees may prove to be more productive than full time employees, may be because of fewer hours of work so less tired. 4. Part time employees could be more skilled and may increase the productivity. 5. Part time employees hardly take time off the work for any external appointments. **Limitations:** 1. Induction and training cost could be higher. 2. There could be communication problems. 3. The quality of service offered may not be as good with part time as with full time staff. **METHODS FOR REDUCING THE SIZE OF WORK FORCE** 1. Resignation -- termination of employment by employees 2. Retirement -- termination of employment due to employee reaching an age beyond which they do not need to work. 3. Redundancy - when an employee is no longer needed and so loses their work, though not due to any fault of theirs. They may be given some money as compensation for the redundancy. 4. Dismissal -- termination by employer because the employee has broken company rules or is not performing work to the required standard. **Reason for downsizing workforce** 1. Fall in demand for the product the employee produces. 2. Introduction of new technology 3. Relocation of the business **Deciding which workers to recruit or make redundant:** 1. How productive workers are -- keeping the more productive workers as they are better for the future of the business 2. How often workers have been late of absent from work in past year. 3. How old worker is. **Legal controls over employment issues** 1. Contracts of employment 2. Unfair dismissal 3. Discrimination 4. Health and safety 5. Legal minimum wage 29/01/2021 **COMMUNICATION** Communication is the process of passing information from one person to another person/s. The purpose of communication is to ensure that all parts of business's operations run smoothly. Two types of communication -- 1. Internal communication -- is where employees communicate with each other. 2. External communication involves communicating with people and organisations outside the business -- the business's stakeholders. The methods used to communicate a message are called as communication media. Effective communication and its importance: Communication will only be effective if: 1. The message is sent using the correct media/medium. 2. The message is sent and received by right person. 3. The receiver understands the message. 4. The receiver provides feedback \[the receiver's response to a message\] Effective communication \[information passed between two or more people or groups, with feedback to confirm that the message has been received and understood\] Benefits of effective communication- 1. Reducing risks of mistakes 2. Enabling faster decision making 3. Enabling quicker responses to market changes 4. Improving coordination between departments 5. Improving the morale and motivation of the workforce 6. Improving customer relationships **Types of communication methods-** 1. Oral communication 2. Written communication a. Letter b. Memorandum c. Agenda d. Minutes of meeting e. Job description f. Purchase order g. Invoice h. Company magazines 3. Electronic communication -- email, fax, text messaging 4. Visual communication -- graphs, charts, videos, photographs, websites. CHECK PAGE 128, 129 FOR THE DETAILS REGARDING EACH OF THESE WITH ITS ADVANTAGES AND DISADVANTAGES. Choosing the best methods of communication **When choosing the best method of communication, businesses need to think about:** 1. How urgent the message is. 2. The length and complexity of the message 3. How many people need to receive the message. 4. How far away the receiver is from the sender. 5. How important it is for all receivers to receive the message at the same time. 6. The cost of media. 7. How important it is to have a written record of the communication. 8. If the message requires discussion 9. How confidential the message **Communication barriers:** 1. Problems with the channel of communication 2. Problems between senders and receivers 3. Problems with the physical environment **Problems with ineffective communication:** 1. Tasks not completed. 2. Tasks done incorrectly. 3. Business's reputation damaged 4. Workers' morale and motivation fails. 5. Risk of accidents in the workplace. 6. Poor sales 7. Wrong type of worker recruited. **How communication barriers can be reduced or removed:** 1. To ensure that language used is appropriate to the receiver. 2. Keep the channel of communication as short as possible. 3. Sender must always insist on receiving feedback. 4. Sender to use most appropriate medium of message. 5. Physical barriers like noise should be removed. 05/02/2021 **10/02/2021** **Section 3** **MARKETING** **Marketing -- competition and customer** The role of marketing: Business activity involves more than just coming up with an idea for a product or service, making it and then selling it. The business needs to understand what customers want and to do these businesses try to: 1. Identify and satisfy customer needs. 2. Maintain customer loyalty and 3. Build customer relationships. Market changes: Market includes all customers and consumers who are interested in buying a product and have the financial resources to do so. When a business decides to produce products for a particular group of consumers, then these are known as the **"target market".** The term market can be described as the type of consumer/customer who the goods or services are sold to. These customers could be the final consumers or businesses. The market for these customers is known as: 1. Consumer market -- markets for goods and services bought by the final consumer. 2. Industrial markets -- markets for goods and services bought by other businesses to use in their production process. However, **consumer pattern does change over time**, the amount of money customers spends on buying goods and services is affected by: 1. The price of the product 2. The price of competitor's product 3. Changes in consumer income 4. Changes in population size and structure 5. Changes in taste and fashion 6. Spending on advertising and other promotional activities Some markets become **competitive** because of the following reasons: 1. Government intervention through: a. Legal controls that prevent individual firms from dominating the market b. Selling off public sector organisations to the private sector c. Deregulation -- the removal of government controls from an industry d. Providing financial and other assistance to new, small, and medium sized businesses 2. Growth of free trade between countries 3. Development of e commerce and social media networks **Businesses respond these changes by:** 1. Product development 2. Improved efficiency 3. Increased promotion 4. They may look for new markets. 08/02/2021 **Niche marketing and mass marketing.** Niche marketing -- developing products for a small segment of the market, businesses in the niche market often sell high priced and high-status goods like Rolex watches and Rolls Royce motor cars. Some businesses may target niche markets where the product is not particularly high status or high priced, example -- wedding cakes. Mass market -- selling the same product to the whole market example, flour. This type of marketing is less popular than it used to be as most businesses now see the benefits of dividing the market and providing a slightly different product to each segment. This recognises that consumers do not all want the same product. Example -- toothpaste is produced for sensitive teeth, for children's teeth and in different flavours. Check text book pages 146 and 147 for advantages and disadvantages of niche and mass marketing. **Market segmentation --** Market segment -- a part of the whole market in which consumers has specific characteristics. Market segmentation -- dividing the whole market into segments by consumer characteristics and then targeting different products to each segment. **Methods of market segmentation are**: 1. **Geographic segmentation**- regions within the country, regions of the world, different countries of the world 2. **Demographic segmentation** includes: a. Age b. Gender c. Income d. Social status e. Ethnic background f. Family size 3. **Psychological segmentation** -- lifestyles, personalities, and attitudes **Benefits of segmentation --** 1. Goods and services can be designed to meet specific needs of consumers. 2. Marketing strategies can be better targeted for each segment. 3. May be possible to charge higher prices for very similar products in one segment than in another. 02/03/2021 **Market research** It is the process of collecting, recording and analysing data about the customers, competitors and market for a product. It gives business the information about: 1. Its customers 2. Its competitors 3. Its market. This information helps a business to: 1. Find out what customers like and dislike. 2. Find out customer tastes and preferences. 3. To come up with best promotion, packaging and distribution methods 4. To identify competitors and their products -- what makes them special i.e. its **unique selling point** -- the special feature of a product that sets it apart from competitors' products. 5. Know the size of the market. 6. Predict how the demand for its products may change in the future. Businesses could be either market oriented or product oriented: Market oriented -- products are developed based on the consumer demand as identified by market research. Product oriented -- the firm decided what to produce and then find buyers for the product. The collection of data can be divided into: Primary research Secondary research **Primary research** -- It is the collection of **first-hand data** for the specific needs of the firm. It is also called as field research and collected for the first time and for its own specific needs. Secondary research -- it is the collection of data from **second hand** resources like: 1. Internet 2. Government publications 3. Newspapers and magazines 4. Libraries 5. Market research agencies 6. Business record **Methods of primary research include:** 1. Focus groups -- Here the group of consumers is invited to discuss topics such as new products, packaging, brand names and advertisements, these discussions are often recorded or filmed. This helps to find out what consumers think of colour, smell, name and packaging of a product. It can be time consuming though and take no numerical data, making its statistical analysis impossible. Example may include consumer goods like shampoo. 2. Observation -- here the behaviour of consumers is **secretly** observed and recorded by market researchers and used by large supermarkets. It is more accurate than methods like questionnaires. It is often more expensive than other methods. 3. Test market -- a limited quantity of product is produced and sold in a carefully selected area of the market which may represent the whole market. The feedback is used to make changes to the product. The advantage is that the cost of any problem is limited to a smaller output i.e. the quantity produced for the test market. However, it may delay to get the product to its main market and it is more expensive. 4. Consumer surveys- it can collect qualitative and quantitative data using questionnaires using methods like: a. Interviews -- question answer session between interviewer and interviewee, immediate feedback is possible, more expensive. b. Postal surveys -- questionnaires are posted to people's homes, and they are asked to complete and return them. Comparatively cheaper. However, are not taken seriously by the recipient taking it as junk mail. c. Online surveys -- use of internet and own web sites. It is instant and can reach many at once. However, they are often seen as junk electronic mail. **Types of primary research:** 1. Quantitative research -- it is the collection of numerical data that can be analysed using statistical techniques 2. Qualitative research -- the collection of information about consumer's buying behaviour and their opinions about their products. Methods of secondary research Methods of primary research ------------------------------- --------------------------------------------------------------- Internet Focus groups Government publications Observation Newspapers and magazines Test market Libraries Consumer surveys -- interviews, postal survey, online surveys Market research agencies Business records Questions: 1. What is the difference between primary research and secondary research? 2. Identify one advantage and one disadvantage of secondary research. 3. Explain two benefits of test marketing. 05/03/2021 Need for sampling -- Sample is a representative of the target market selected to take part in market research as carrying out primary research could be too expensive and time consuming. However, the data sometime may be **inaccurate** due to one or more of the following reasons: 1. The sample chosen may be too small or not representative of the population. 2. The method chosen by the business to collect data is not appropriate. 3. People may not answer questions truthfully. 4. The interviewer may ask questions in a way that encourages the interviewee to give an answer that does not reflect their true view. 5. The language used by the interviewer or used in a questionnaire may be unclear or difficult to understand. 6. The data may be recorded incorrectly. 7. Secondary data may be out of date or collected for a different purpose. **Presentation of market research results** Qualitative results can be presented in the form of written reports and quantitative research can be presented in a way that user will understand and be able to use it. Advantages Disadvantages ----------------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------- Tables Large data can be grouped and presented more clearly, easy to extract numerical data Lack visual impact, too much data can make it difficult to understand Bar charts -- data is shown as bars or columns Can identify important data, can read numerical values from axis Difficult to compare different parts and chart loses visual impact Pie chart -- Each part of pie chart is shown as slice of the pie and shows the relative importance of each part of the data Shows importance of each part of the data compared to other parts, easy to understand Difficult to see relative importance of different parts of data if there are too many slices Pictograms -- pictures or symbols with numerical value are used to represent data Easy for less numerate people Not very exact Line graph -- shows relationship between two variables, useful to show trends -- how data has changed over time Clearly show trends, values can be read off two axes, data can be added for future time periods Difficult to draw 09/03/2021 Marketing mix The marketing mix has been defined as the \"set of marketing tools \[price, product, place and promotion\] that the firm uses to pursue its marketing objectives in the target market\".  **PRODUCT** Product is an article or substance \[output\] that is manufactured or refined for sale. It is a good or service produced to satisfy a customer need or want. Successful products are bought repeatedly by customers and eventually it helps to develop **brand** loyalty and **customer** loyalty. The role of packaging: Most products are packed, and design and material used in packaging of products can be important in promoting the product. Role of packaging: - To protect the product - To provide information about the product - To help consumers recognize the product. - To use once the product has been used up. - To keep the products fresh once the product has been opened. The product cycle: It is the pattern of sales of a product from introduction to its withdrawal from the market. The product cycle is divided into four main stages: 1. Introduction -- the product is introduced in the market, sales are low, may be making loss because the cost of advertising could be heavy to gain product recognition. 2. Growth stage -- Product is getting better well known to the consumers, sales increase and business may see product start to earn profit during this stage. 3. Maturity stage -- product is well known in the market and is steady, sales are no longer growing but are not falling, a most **profitable stage** in a product's life cycle. 4. Decline stage -- sales start to fall, product become usually unprofitable and may be withdrawn from the market. Duration of a product at each stage of a cycle will vary from product to product. Hi- tech products may spend very little time in introduction and growth stages compared to less hi--tech products. Fashion clothing is introduced into the market and quickly grows and reaches maturity and is replaced with latest fashion. Motor cars will have a longer life cycle and will take longer to reach maturity after their introduction to the market. **Extension strategies** -- the maturity stage is the most profitable stage of a product's life cycle. A business will want to keep the product in this stage for as long as possible by using extension strategies. These are marketing activities to extend the maturity stage of a product and may include: 1. Finding new markets for the product 2. Finding new uses of the product 3. Adapting the product or the packaging to improve its appeal to consumers. 4. Increased advertising and other promotional activities. Note: at each stage of a product business may require a different marketing mix which comprises of: 1. Product 2. Price 3. Promotion 4. Place Known as 4Ps -- the right product at the right price with the right promotion in the right place. Each stage of a product life cycle may require a different market mix. Questions 1. Give advantages and disadvantages for a business when it decides to develop a new product. \[6\] 2. Compare various marketing strategies business could adopt to extend the product's stay in the market. \[6\] 12/03/2021 **PRICE** Price is very important part of marketing mix because it is often the most important influence on customer demand for a product. Price is the amount paid by the customer to the supplier when buying a good or service. Consumer decisions are influenced by price of the product and quality of the product. If there is very little difference between product quality and function, then the consumer is likely to buy the lower priced product. Sometimes consumers are not able to afford higher price for quality product. Some consumers will only buy a product if the price charged is very high as it may give them some status, example -- jewellery, clothing, and range of sports cars. Pricing methods -- 1. Market skimming -- setting a **high price** for a new product that is **unique** or very different from any other product on the market. 2. Penetration pricing -- setting a **low price** to attract customers to buy a **new** product. 3. Competitive pricing -- setting a price like that of competitor's products which are already established in the market. This pricing method is used for both new and existing products. Some industries are dominated by large companies. These companies will set the market price for their products. Smaller firms, producing similar products will find it difficult to set a price that is very different to that of the market leader. This is called market leadership. Price leadership occurs when one firm in a market (the leader) sets its price level or price change, and the other firms in the market (the followers) adopt the same or similar price level or price change. 4. Promotional pricing -- Under this business can go for: A. Loss leader pricing -- setting the price of a small number of products at below cost price to attract customers into the outlet in the hope that they will buy other products priced to earn profit. B. Buy one get one free pricing to create product awareness. C. Discounting the normal price to create product awareness. 5. Cost plus pricing -- setting price by adding a fixed amount to the cost of making or buying the product. It involves: a. Mark up pricing b. Full cost pricing Cost-plus pricing is also known as markup pricing. It\'s a pricing method where a fixed percentage is added on top of the cost it takes to produce one unit of a product (unit cost). The resulting number is the selling price of the product. Choosing a pricing method: The following are the criteria businesses may apply to choose the pricing methods: 1. Is it a new or existing product? If yes than businesses may go for lower prices if product is at decline stage. 2. Is the product unique? If yes, then a skimming strategy 3. Is there a lot of competition in the market? If yes, then competitive pricing 4. Does the business have a well-known brand image? If yes, then price skimming strategy 5. What are the costs of making and supplying the product? -- cost plus pricing. 6. What are the marketing objectives of the business? Example -- to increase market share -- low prices than the competitors. **Price elasticity of demand** -- measures by how much demand for product changes when there is change in its price. **Price inelastic demand** - the percentage change in demand \[sales\] is less than the percentage change in price **Price elastic demand** -- the percentage change in demand is greater than the percentage change in price. **Revenue** -- amount earned by a business from the sale of its product. Effect on Pricing Decisions: **Price Change Price Elasticity of Demand Effect on Revenue** Increase Price Price Inelastic Demand Increase in Revenue Decrease Price Price Inelastic Demand Decrease in Revenue Increase Price Price Elastic Demand Decrease in Revenue Decrease Price Price Elastic Demand Increase in Revenue If the business has an objective to increase revenue. 1. They may increase the price if the product has price inelastic demand. 2. And may decrease the price if the product has price elastic demand. 28/04/2021 PLACE -- DISTRIBUTION CHANNELS The businesses use channels of distribution to make sure that their product/reaches to the final consumer. Channels of distribution establish that link, how the product gets form the producer to the final consumer. It also decides the place where the consumer will be able to buy the good or service, example shop or laundry. The following are different channels of distribution: 1. Producer to consumer also known as direct selling. 2. Producer to retailer to consumer 3. Producer to wholesaler to retailer to consumer 4. Producer to agent to wholesaler to retailer to consumer Each of these channels has an advantages and disadvantage \[file notes from Teams or textbook\] to the producer as the decision to choose the channel of distribution is at his discretion. The producer may take into consideration: 1. The cost 2. Nature of the product 3. The market Activity 13.1 PROMOTION The marketing activity used to communicate with customers and potential customers to inform and persuade them to buy a business's products. It can be done through: 1. Advertising -- **paid** for communication with consumers which uses printed and visual media. The aim is **to inform** and **persuade** consumers to buy a product. It can be **informative advertising or persuasive advertising**. 2. Sales promotion -- these are incentives used to encourage short term increase in sales or repeat sales. It may be in the form of: - Money of coupons or vouchers - Point of sale displays in shops. - Loyalty reward schemes - Competitions and games with cash or other prizes 3. Personal selling -- sales staff communicate directly with the consumer to achieve a sale and form a long-term relationship between firm and consumer. 4. Direct mail -- also known as mailshots -- printed materials which are sent directly to the addresses of customers. 5. Sponsorship -- payment by a business to have its name or products associated with a particular event. Note --the business must take into consideration the **marketing budget** -- the amount of money made available by a business for its marketing activities during a particular period. Homework -- activity 13.4 **Technology and marketing mix** The development of technology especially internet and social media has affected many areas of business activity. E commerce is the use of internet and other technologies by businesses to market and sell goods and services to consumers. For opportunities and threats of e commerce for businesses and consumers -- check table on page 187 from CIE textbook. **Marketing strategy** It is a plan to achieve the marketing objectives using a given level of resources. A **marketing strategy** is a plan to combine the right combination of the four elements of the marketing mix for a product to achieve its marketing objectives using a given level of resources. Marketing objectives could include maintaining market shares, increasing sales in a niche market, increasing sale of an existing product by using extension strategies etc. However, the businesses may get affected by the laws that control the activity of businesses known as legal controls. The common legal controls that affect the marketing functions are. 1. Protect consumers from faulty and dangerous goods. 2. Prevent businesses from using advertising to mislead consumers. 3. Protect consumers from being exploited in industries where there is little or no competition. Legal controls exist in the forms of antitrust or competition laws, wrongful or misleading advertisements. The businesses must compile with the existing laws and take corrective measures to protect the consumers. However, such actions increase a business's costs. Opportunities and problems of entering **new foreign** markets: Opportunity -- Growth/expansion Problems -- 1. Differences in language and culture 2. Economic differences 3. Social differences 4. Differences in legal control to protect consumers. 5. Lack of market knowledge Methods to overcome problems of entering foreign markets. 1. International franchising 2. Licensing 3. Joint ventures **Section 4** **Operation management** **Production of goods and services** Production -- the process of converting input \[raw materials/components/factors of production\] such as land, labour and capital into saleable goods/output/finished products. The production process: Operation management involves managing business resources known as inputs throughout the production process so as to produce finishes goods services and components known as output that can be sold to other businesses or customers. It must: 4. Use resources in most cost-effective way. 5. Produce the required output to meet consumer demand. 6. Meet the quality standard. **Productivity** -- a measure of the efficiency of inputs used in the production process especially labour and capital. The labour productivity can be calculated by using equation: Labour productivity = total output/no. of production employees. Labour productivity can be improved by: 7. Increasing output by the same number of employees 8. Keeping output at same level with few employees It can be achieved by: 9. Improving the skills of employees 10. Improving the motivation of employees 11. Introducing more automation and better technology 12. Improving the quality of management decisions The main reason for improving productivity is to reduce unit costs, so the increase in output must be greater than the increase in costs. Activity 15.2 **Inventories** It is the stock of raw materials, work in progress and finished goods held by a business. Holding inventories adds to a business's costs like: 13. Warehousing costs 14. Handling costs 15. Shrinkage costs 16. Insurance costs 17. Obsolescence costs 18. Opportunity costs Business will hold the inventories to: 19. Continue with production process. 20. To meet consumers' demand 21. To take advantage of economies of scale **Lean production --** it is the method to produce goods and services with the minimum waste of resources. The main sources of waste in business could be: 22. Production defects 23. High inventories 24. Over production \[output\] 25. Idle resources 26. Transporting goods **It can be achieved through:** 27. Just in time inventory control 28. Kaizen meaning continuous improvement. 1. Job production -- the production of items one at a time 2. Batch production -- the production of goods in batches. Each batch passes through one stage of production before moving on to the next stage. 3. Flow production -- the production of very large quantities of identical goods using a continuous moving process of production. Each of these methods of production has its own advantages and disadvantages of using it for the businesses. The business has to choose the most suitable method of production by taking into consideration the following factors: 29. The quantities they are going to sell. 30. The product they are making. 31. The cost of production The appropriate method of production will depend on: 32. The size of the market 33. The type of good being made. Activity 15.4 **How technology has changed production methods:** Recently businesses are applying new methods of production combine with the advantages of the traditional methods of production. These new methods of production include the development of computer aided design \[CAD\], computer aided manufacturing \[cam\] and computer integrated manufacturing \[CIM\] Advantages and disadvantages of new technology to: +-----------------------+-----------------------+-----------------------+ | | Advantages | Disadvantages | +=======================+=======================+=======================+ | Businesses | 34. Reduced cost/time | 37. Expensive | | | of production | | | | | 38. Difficult to | | | 35. Increased | match with | | | productivity | frequent changes | | | | in technology | | | 36. Improved quality | | | | and reduced waste | 39. Requires training | | | | for employees | +-----------------------+-----------------------+-----------------------+ | Consumers | 40. Better quality | 41. Product may | | | products with | become out of | | | more features at | date more quickly | | | lower prices | | | | | 42. Expensive to | | | | maintain/ repair | | | | faulty products | +-----------------------+-----------------------+-----------------------+ | Employees | 43. Simple, boring | 46. May face | | | and repetitive | redundancy | | | tasks are done by | | | | machines | 47. Work may become | | | | less interesting | | | 44. Work becomes | | | | easier | 48. Less promotion | | | | opportunities | | | 45. Job security as | | | | business may | | | | become successful | | | | due to use of | | | | technology | | +-----------------------+-----------------------+-----------------------+ 19/05/2021 Costs, scale of production and break-even analysis. Business has to incur costs; these are the expenses business has to pay for and a decision is to be made in this regard. For these decisions managers require accurate data about the costs involved. The main costs are: 49. Fixed costs -- costs that do not change with output. 50. Variable costs -- costs that change in direct proportion to output 51. Total costs -- all the variable and fixed costs of producing the total output Total cost = fixed costs + total variable costs 52. Average costs -- the cost of producing a single unit of output. Note: fixed costs do not start from zero, whereas variable costs do. This means that total costs will not start from zero either. Example -- Activity 16.2 and 16.3 Using cost data to make simple cost-based decisions -- Cost data can be used in making decisions about whether a business should continue or stop producing a loss-making product. 18/05/2021 Economies and diseconomies of scale Economies of scale -- the reduction in average costs as a result of increasing the scale of production Business may benefit from different types of economies of scale like: 53. Financial economies of scale -- banks often prefer to lend to large businesses as they consider them less of risk than smaller businesses, large businesses find it easier to borrow money and often at a lower rate of interest than smaller businesses. 54. Managerial economies -- as a business grows, it often employs specialist managers for different functions as they improve quality of business decisions and make fewer mistakes than non-specialist managers. 55. Marketing economies -- average costs of marketing fall as output and sales increase though total marketing costs rise as a business gets larger, they do not rise at the same rate as sales output. 56. Purchasing economies -- bulk buying 57. Technical economies -- larger businesses normally use flow production to produce their output, using latest expensive technology. The technology enables businesses to produce very high level of output at lower unit costs than smaller businesses. Diseconomies of scale -- factors that cause average costs to rise as the scale of production increases and are due to problems such as: 58. Poor communication 59. Lack of commitment from employees 60. Weak coordination **Breakeven analysis**: this is the level of output where revenue equals total costs; the business is making neither profit nor loss. A business might use break even analysis to: 61. Calculate how many units it needs to sell before it starts to make profit. 62. Calculate the effect on profit of increasing or decreasing the price of a product. 63. Calculate the effect on profits of an increase or decrease in business costs. To produce a break-even analysis the business needs to know: 64. Revenue at zero output and at its maximum output \[capacity\] 65. Total costs at zero output and its capacity output 66. Fixed costs at zero output and its capacity Graph Margin of safety -- is the amount by which actual sales exceed the breakeven level of output. Margin of safety = actual sales -- break even output Note -- the higher the margin of safety, the lower the risk of a loss being made. Benefits of using break even analysis: 67. Easy to construct and interpret. 68. Provide information about output that must be sold to cover all costs and how different volumes affect the margin of safety and profitability. 69. Can show effect of a decision to change cost or revenues. 70. Can influence decisions such as location and relocation of a business. Limitations: 71. Assumes all costs and revenues can be presented. 72. Not easy to separate costs into fixed and variable. 73. Assumes that all output is sold, does not include inventories and the costs of holding it. **Achieving quality production** Quality - ensuring a good or service that meets the needs and requirements of its consumers. Quality standards -- the minimum standard of production or service acceptable to consumers The importance of quality to all businesses; 74. Develop a strong brand image. 75. Keep customers and attract new customers. 76. Reduce costs, customer complaints and returns. 77. Charge a premium price. 78. Encourage wholesalers and retailers to stock the product. 79. Lengthen the product cycle. Quality control and quality assurance: Quality control is to check the quality of goods through inspection at the end of the production process. However, products can be checked at the different stages of production whereas quality assurance is a system of setting agreed standards for every stage of production process. Quality assurance \[PROCESS\]focuses on preventing poor quality, quality issues are found when they occur and not at the end of the production process. Note: Businesses can use quality control processes and quality assurance processes to achieve desired quality standards. **Location Decisions** The decision about where to locate a new business or relocate an existing business is one of the most important decisions most service businesses make by taking into consideration following factors: Quantitative factors Qualitative factors --------------------------------- ----------------------------- Cost of site Size of site Availability and cost of labour Legal controls Transport costs Infrastructure Market potential Ethical issues and concerns Government incentives Why businesses locate their operations to another country? 80. To achieve growth 81. To reduce transport cost 82. To locate production closer to the market Benefits include: 83. Lower labour cost 84. Access to global market 85. To avoid legal barriers and import tariffs \[tax\] Challenges include: 86. Cultural differences 87. Communication problems 88. Ethical issues 89. Quality issues 90. Legal controls 14/06/2021 SECTION 5 Financial information and decision - Business finance: need and sources. - Cash flow forecasting and working capital. - Income statements - Analysis of accounts **Business finance: needs and sources** **Why businesses need finance** - To set up the business/ start-up capital \[the capital needed by an entrepreneur when first starting a business\] - To pay day to day expenses / working capital \[the capital needed to finance the day-to-day expenses and pay the short-term debts of a business\] - To purchase building and other non-current \[fixed\] assets. These are the resources owned by a business which will be used for a period longer than one year, example building and machinery. - To invest in latest technology/capital expenditure \[spending by a business on non-current assets.\] - To finance expansion of business - To finance research into new products and/or new markets. The business may go for short term \[loans or debt that a business expects to pay back within one year\] or long-term finance \[debt or equity used to finance the purchase of non-current assets or finance expansion. \[Long term debt is borrowing by a business does not expect to repay in less than five years\]. **Main sources of finance** These sources of finance are appropriate for limited companies and not for sole traders and partnerships. This is because these unincorporated businesses: - Cannot raise capital through the sale of shares. - Usually only need to finance small capital expenditure. - Are considered by lenders to be too high risk for large scale borrowing. The sources of finance could be internal or external: **Internal sources:** - Retained profit -profit remaining after all expenses, tax and dividends have been paid and which is ploughed back into the business. This arrangement may not cost to the business, however it is only available when the business is profitable. - Owner's savings - Some of the business's working capital -- this may come from 1. Cash balances 2. Reducing inventory levels 3. Reducing trade or accounts receivables - Sale of non-current assets such as equipment and machinery. Has no direct cost to the business and can raise large amount of money. It is possible if business has unwanted assets to sell and there is someone to buy it. **External sources:** **Short term** 1. Overdrafts -- an agreement with the bank which allows a business to spend more money than it has in its account up to an agreed limit. The loan has to be repaid within 12 months. 2. Trade credits -- trade credit is a source of finance as the supplier is really lending the money for the cost of the goods for the length of the agreed credit period. If a business can negotiate longer credit terms with suppliers it will increase short term finance. 3. Debt factoring -- selling trade receivables \[amount owed to a business by its customers who bought goods on credit\] to improve business liquidity. **Long term** 1. Bank loan -- provision of finance by a bank which the business will repay with interest over an agreed period of time. 2. Hire purchase -- the purchase of an asset by paying a fixed repayment amount per time over an agreed period of time. The asset is owned by the purchasing company on completion of the final repayment. 3. Leasing -- obtaining the use of a non-current asset by paying a fixed amount per time for fixed period of time. Ownership remains with the leasing company. 4. Mortgage -- a long term loan used for the purchase of land or building. 5. Debentures -- a bond issued by a company to raise long term finance usually at a fixed rate of interest. 6. Share issue -- a source of permanent capital available to limited companies. 7. Equity finance -- permanent finance provided by the owners of a limited company 8. Government grants and subsidies -- it's a financial assistance by the governments to encourage new business start-ups or to assist business growth and development. **Alternative sources of capital:** Micro-finance -- Small amounts of capital loaned to entrepreneurs in countries where business finance is often difficult to obtain. These loans are usually repaid after a relatively short period of time. Crowd funding -- financing a business idea by obtaining small amounts of capital from many people, most often using the internet and social media networks. **Factors influencing the choice of finance:** 1. Size and legal form of business 2. Amount required. 3. Length of time 4. xisting borrowing **Choosing sources of finance** when choosing which source of finance is the most appropriate to use, businesses will consider a number of factors such as cost, legal status, amount required and level of existing borrowing. **Cash-flow forecasting and working capital** Cash flow forecast -- an estimate of the future cash inflows and outflows of a business. There could be positive or negative cash flow for businesses. Net cash flow = cash inflow minus cash outflow Cash flow example **Jan.** **Feb.** **Mar** --------------------- ---------- ------------ ----------- **Cash flow** **Receipts** **10** **15** **18** **Total inflow** **10** **15** **18** **Cash outflows** **Payments** **7** **27** **12** **Total outflow** **7** **27** **12** **Net cash flow** **3** **\[12\]** **6** **Opening balance** **5** **8** **\[4\]** **Closing balance** **8** **\[4\]** **2** **The most important line in any cash flow statement is about 'closing balance'. If a businesses' cash position is forecast to become negative for a short period of time, management may decide to finance this with an overdraft.** **Working capital -- All businesses need working capital to pay for their day to day expenses. It measures the liquidity of the business \[the ability of a business to pay its short term debts\].** **The amount of working capital needed by a business depends on the time it takes from buying raw materials, making those into goods for sale, finding buyers for the finished goods and then receiving payment from customers. This is known as capital cycle.** **The working capital cycle:** - **Inventory purchased on credit** - **Production of goods and services** - **Goods sold to customers on credit** - **Cash** **What is working capital?** **It is the amount of money \[finance\] used by the business to pay for their day to day expenses.** **How is working capital calculated?** **\[Current assets - cash, bank balance, stock and debtors -- current liabilities creditors, overdraft\]** **Why is working capital important to a business?** **If the business does not have enough working capital, it will not be able to pay for its day to day expenses, at one point business will have to borrow short term loan which may prove to be expensive for the business as it will have to pay interest on the amount borrowed and this increases business costs. So it is important for a business to have enough working capital.** **Income statement:** A financial statement which records the revenue, costs and profits of a business for a given period of time **What is profit?** It is the difference between revenue \[the amount earned from the sale of products\] and total costs \[cost of sales plus expenses\] **Gross profit --** the difference between revenue earned from selling products and cost of sales i.e. the cost of making those products Retained profit -- the owners of a profitable business may decide to reinvest some of the profits in the business Importance of profit for private sector businesses: - Measure the success of a business - Measures the performances of managers - Decide whether or not to continue making or selling a product - Finance the purchase of a non-current assets, expands the business and so on - Attract investors to finance business expansion. **Difference between profit and cash:** - Money invested in a business or borrowed by a business, increases cash but does not increase profit - Capital expenditure -- buying new machines, decreases cash but does not decrease profit - Sales of goods on credit are recorded in the income statement as soon as the goods have been sold. This increases profit but not cash until the buyer pays for the goods. - Cash pays day to day expenses but not profit. Revision questions: - Owners/ shareholders - Shareholders - Employees - Lenders - Government - Suppliers - Managers - **Statement of financial position** It is an accounting statement that records the assets, liabilities and owner's equity \[capital\] of a business at a particular date. The main parts of a statement of financial position: - Assets -- these are the resources that are owned by the business and are divided into: 1. Non-current \[fixed\] assets -- these are resources the business owns and expects to use for a period of more than one year. Examples: Land Building Machinery Computers Motor vehicles 2. Current assets -- resources that the business owns and expects to convert into cash before the date of the next statement of financial position. Examples: Inventories Trade receivables \[debtors\] -- the amount of money **owed** to the business by customers who have been sold goods on credit. Cash - Liabilities -- the amounts owed by the business to stakeholders like suppliers and lenders. examples: bank loan, creditors, overdraft 1. Non-current liabilities: debts of the business which will be payable after more than a year. Examples: Long term bank loans Mortgages Debentures 2. Current liabilities -- debts of the business which it expects to pay before the date of the next statement of financial position. Examples: Trade payable \[creditors\] How to interpret a statement of financial position -- It shows; - The assets of the business - What the business is owed - What the business owes - How the business finances its activities. Revision questions: 1. What is meant by cash flow? 2. Sanjay runs a profitable and expanding computer training company. He is concerned to see that even though his business made a profit of \$6,000 last year, the bank balance fell during the year. Explain to Sanjay the possible reasons for this situation. BALANCE SHEET A balance sheet shows the financial position of a business at a certain point in time. It is a statement about the business on the date the balance sheet was prepared. It records business's assets, liabilities and owner's equity also called as capital. Owner's equity is the amount of money that has been invested in the business by the owners. For a limited company these amounts are also known as shareholder's equity or shareholders' funds. **Analysis of accounts:** A business must check its performance regularly as this can help to: - Identify its strength and weaknesses and adopt/change policies/strategies accordingly. - Show if business is meeting its objectives. - Improve future business performance. Measuring business performance - Profitability - **ability of a company to use its resources to generate revenues in excess of its expenses.** -- The following ratios are used to analyse a business's **profitability:** These ratios are used to see how profitable the business has been in the year ended. 1. Gross profit margin -- the gross profit ratio shows gross profit as a percentage of revenue. **The higher the GPM, the better.** This ratio tells how much gross profit is earned per \$1 of revenue and is calculated as: GPM = Gross profit/revenuex100 If a business wants to improve its gross profit margin it can do this by: - Increasing revenue without a similar increase in cost of sales \[through higher product price\] - Reducing cost of sales without a decrease in revenue \[by buying cheaper supplies\] 2. Net profit margin -- this ratio shows profit as percentage revenue and shows how much profit is earned per \$1 of revenue. **The higher the NPM, the better.** It is calculated as: NPM = Net profit/revenuex100 The business can improve profit margin by: - Improved gross profit margin and/or - Reducing expenses 3. Return on capital employed \[ROCE\]- This ratio shows profit before tax as a percentage of capital employed. It shows how much profit is earned for every \$1 invested in the business. This ratio is a measure of efficiency and profitability. **The higher the ROCE the better the profitability is.**  It is calculated as: Return on capital employed = Profit/capitalx100 As a rule -- if the ROCE increases from one year to the next or the business has a higher ROCE than the competitors, the business's profitability has improved or is better than similar firms in the industry. **Liquidity:** the ability of a business to pay short term debts 1. Current Ratio: Current ratio = current assets/current liabilities It provides a measure of degree to which current assets cover current liabilities. The excess of current assets over current liabilities provides a measure of safety margin available against uncertainty in realisation of current assets and flow of funds. **The ratio should be reasonable.** It should neither be very high or very low. Both the situations have their inherent disadvantages. A very high current ratio implies heavy investment in current assets which is not a good sign as it reflects under utilisation or improper utilisation of resources. A low ratio endangers the business and puts it at risk of facing a situat