Business Studies Unit 3

Marketing

Market - A place where buyers and sellers come together to exchange goods and services.

Marketing - Anticipating, understanding and satisfying customer needs profitably.

Marketing mix - A set of tools used by a business which influences consumers buying decisions - (Product,
Place, Price, Promotion).

Product The goods or services produced by a business that

is made available to customers.
Price The amount of money a customer must pay for
the product or service.
Place The location the product is sold and the way the
product is distributed.
Promotion The communication between the business and
the customer.

Market Research - Collecting information about customers' needs and wants before the development of a
new product or service.

+ves -ves
Prevents waste of resources such as money and Data can be inaccurate, bias and out-dated.
time.

Primary (Field Research) - The collection of first-hand information specific to your needs. i.e.
Questionnaires, Observations.

+ves -ves
- Accurate - Expensive
- Up-to-date - Time consuming
- Reliable - Bias information

Secondary (Desk Research) - The collection of second hand information that someone else collected for a
different purpose. i.e. Internet, Magazines.

+ves -ves
- Cheap - Could be old
- Quick - Could be biased
- Data based on actual sales - Reports are expensive
Quantitative - The collection of information about the market based on numbers and fact which can be
measured. OBJECTIVE (Closed Qs).

+ves -ves
Can be used to identify trends and predict new Results can be bias due to the type of research
ones used

Qualitative - The collection of information about the market based on subjective factors such as opinions
and reasons. SUBJECTIVE (Open Qs).

+ves -ves
Can be used to attract new potential customers Expensive and Time-consuming

Product trial - The way in which a business persuades customers to try out a new products or services.

Product trial helps

raise awareness of its existence as well as gain feedback on its possible success.
build loyalty to the product thus establish repeat purchase.

Effective Product Trial Examples

Advertising Television, radio, newspaper, magazine, etc.
Public relations (free publicity) Launch event which encourages journalist to write
about the product in newspapers and magazines.
Viral Marketing Spreading the word on social media.
Free samples Supermarkets or malls have stands where they
give out free samples. Perfumes often have a free
sample in magazines.
User testing Potential car buyers or gaming enthusiast can
have the opportunity to test the product before it
is launched in the market.
Low trial price Businesses often use penetration pricing to
encourage customers to trial their product or
sales promotion such as money off coupons.
Targeting trade buyers Encouraging retailers to stock their product by
giving them a trade discount or paying them to
stock their products.

Repeat purchase - When a customer buys a product on more than one occasion.

Repeat purchase shows...

loyalty from the customer.

that the product is successful.
Product life cycle - The stages in which a product goes through in its life.

Extension Strategies

Find new uses for the

product
Develop a wider product
range
Change the appearance
(packaging)
Encourage more use
Adapt the product
Reduce the price

Reasons for extending a products life:

Its expensive to research and develop a new product.

Most people are reluctant to try new things.
New advertising is very costly.

The Boston Matrix - A method of studying products based on market share and market growth.

Market share - The

percentage of the
market held by a
company or product.

Market growth - The

increase in value of the
whole market.

Calculating Percentage
Growth - New sales old
sales / old sales * 100
Brand - A named product which consumers perceives as being different from competing products and
which they can associate and identify with.

+ves of a Strong Brand -ves of a Strong Brand

Greater brand recognition High promotional costs
Repeat purchase through loyalty One bad product can lead to the whole
Product trial brand name suffering.
Unique selling point Imitation
Ability to charge higher prices

Product differentiation - The degree to which consumers perceive that your brand is different from
competitors.

Product Differentiation Examples

Brand name Giving the product an identity.
Logo Symbol that is associated with brand to give
recognition.
Design Looks different from the competition.
Content The distinct use of the product.
Packaging The presentation of the product before its sold.
Unique selling point (USP) The feature that makes it stand out from the rest.

Range - Similar products produced by a single firm that compete with one another, usually targeted at
different segments of the market.

Mix - The entire group of different products a firm produces. Targeted at a wide range of target group.

Pricing Strategies Examples

Price skimming/ Price creaming
Penetration pricing
Price leadership/ Price taking
Predator/ Destroyer pricing
Used to establishing a prestigious brand name.
Used to appeal to more exclusive and up-market
type customers.
Low prices are set to break into a market or to
achieve a rapid growth in market share. Used to
gain new customers and increase brand
awareness.
A large company (the price leader) sets a market
price that smaller firms (price takers) tend to
follow. Small firms will usually follow because a
lower price could trigger a price war, while a
higher price will mean loss of customers.
A firm sets very low prices to drive other firms out
of the market. Objective of this strategy is to
reduce the number of competitors in the market.
 Pricing Tactics Examples
Psychological pricing This is intended to give an impression of value.
Eg. 2.99 instead of 3
Loss leader Firms such as supermarkets set low prices for
certain products to encourage consumers to buy
other fully priced items.

Two main influences on pricing decisions:

the cost of production

the price elasticity of demand

The amount a business will mark-up its price is dependent on a few factors, which are:

The level of competition

The price that the customers are willing to pay
The firms objectives- for example, whether it is aiming to break-even or maximize profit,
or aim for a high market share.

Price elasticity of demand - Shows how responsive the demand will be from the consumer when the
price changes.

- PEoD Calculation - % change in quantity demanded / % change in price

Meeting customer needs

Product differentiation - The process of distinguishing a product/ service from others, to make it more
attractive to a target market.

Design Mix - The range of variables which contribute to successful design. (Function, cost, and
appearance).

Stock - Materials that a business holds. Some could be materials waiting to be used in the production
process and some could be finished stock waiting to be delivered to customers.

Types of stock a business can hold

Raw Materials Brought from suppliers to be used in the
production process
Work in Progress Incomplete products which are still in the process
of being made
Finished Goods Goods of acceptable quality that can be sold to
customers

Businesses hold stock because

they can meet orders quickly

stock represents money
stock can be retained until payment is received
buying stock in bulks gains economies of scale.

Implications of running out of stock

lost production
lost profit from lost sales
loss of customer loyalty and future sales

Businesses must understand two key areas when managing stock:

Maximum Level of Stock

- amount of stock they can hold in their storage space

Minimum Level of Stock

- amount to which stock should be allowed to fall without running out

Stock must be re-ordered before a minimum level is reached to allow time for delivery!
 Each vertical line is a new delivery of
stock.
Each sloping line shows the
depletion of stocks.
The reorder level is the point at
which a new order is made.
The lead time is the gap between
reordering and receiving new stock.
The buffer stock level is the reserve
of stocks needed to prevent a stock
out occurring.

Holding Stock
+ves -ves
Meet expected orders without delay Money tied up in stock could be used elsewhere
(opportunity cost)
Achieving economies of scale through bulk buying Stock may become obsolete if buyer tastes
change
No loss or delay of production Storage costs incl. additional rent, utilities,
security and insurance

JIT: Just in Time

For JIT to work, the following must be obtained:

- Excellent relationships with suppliers - Trust that goods will arrive on time with the right quality
- Reliable employees - Efficient workers with zero defects cannot afford to waste as they have
calculated amount of stock - cannot cope with stoppages
- Flexible workforce - Widely skilled workforce can move around to different departments if
needed due demand or absenteeism.

+ves
Reduction in costs as no need for warehouses
which saves on rent, utilities, security and
insurance costs.
As stock is only obtained when it is needed, less
money is tied up in stock.
Motivation of staff as workers have the
responsibility of getting it right first time.
-ves
There is little room for mistakes as minimal stock
is kept for re-working faulty products.
Become dependent on suppliers and if stock is not
delivered on time, the whole production schedule
can be delayed.
May lose bulk-buy discounts - economies of scale.
Quality - Consistently achieving what customers want.

- Businesses could improve the quality of its product by:

investing in quality material and technology

continuously training workers and employing more skilled workers
rigorously checking quality at different stages of production
offering warranty services to satisfy customers
register with quality standards agency which will certify quality

- 3 quality control systems to help manage the quality produced in a business:

Quality Control
Quality Assurance
Total Quality Management

Quality control - Product orientated and focuses on defect identification. It is the traditional
method which consists of checking the product at the end stages of production and ensuring
products left the factory with no defects.

Quality assurance is process orientated and focus on defect prevention. It consists of checking the
product at the various stages of production and guarantees quality.

TQM encourages all employees involved not just the production staff but sales staff too to think
about the quality of their work. Employees are encouraged to make suggestions for improving
the standard of work. Focuses on eliminating mistakes which cuts waste and cost (lean
production) - Getting it right first time - Zero defects

Cost-effective - Producing large quantity of goods in the cheapest way possible without compromising on
quality.

Competitiveness - Being cost-effective by producing a product cheaper and of better quality than rivals.

Productivity Calculation: Productivity = total output / number of workers

- Productivity is often a priority for a business because:

the average cost of each unit is reduced,

prices could decrease and profits could increase.

- To improve productivity businesses could invest in:

training
better equipment
better working conditions
 Businesses can do the following to
reduce its cost:

- Improved purchasing - Change suppliers,

negotiating better deals, etc.
- Relocation - Move business locally,
nationally or internationally
- Better design - May lead to cheaper
production costs or better quality
products that last longer
- Cutting overheads - Costs not directly
related to production such as R&D or
marketing.

Manufacturing businesses can use the following methods of technology:

CAD: Computer Aided Design - Used to design new products

CAM: Computer Aided Manufacture - Controlling production machines using computers
CIM: Computer Integrated Manufacture - Controlling the whole factory using computers
and robots

Service industries can use the following methods technology to improve efficiency:

Electronic Point of Sale (EPOS) - Database of stock which is kept up to date using bar
codes
Electronic Data Interchange (EDI) - Sales and stock information is automatically sent to
head offices
Electronic Fund Transfer at Point of Sale (EFTPOS) - System that allows customers to pay
electronically using credit or debit card
Email and Video Conferencing - Improved speed of communication between business and
consumers

Consumer Legislation

Sale of Goods Act - Goods must be fit for purpose, of satisfactory quality and as described.
Supply of Services Act - Service must be reasonable quality and completed within a reasonable
time.
Food Safety Act - Must be safe to eat and labelled correctly.
Trade Description Act - Goods must be delivered as advertised and packaged
Weight and Measure Act - If the packaging say 100g then the product must contain 100g
Consumer Credit Act - Lenders cant take advantage borrows
Effective financial management

Cash Flow

Opening balance - How much cash business has at start of time (*previous months closing)
balance
Closing balance - How much money is left at end of month (net cash flow + opening balance)
Cash inflows or receipts - How much cash is coming into a business
Cash outflows or payments - How much cash is going out of a business (Fixed and variable costs)
Net Cash Flow (NCF) = Total cash inflow total cash outflow

Inflows - Sales, grants from the government, capital from the sale of machinery, loans

Outflows - Wages and salaries, raw materials, utilities, rent, interest on loans, tax, equipment

Cash flow forecast - A prediction of how cash will flow in and out of a business over a period of time.f

Cash Flow Forecasting

+ves -ves
Identify potential cash-flow problem in advance Changes in the economy
and avoid the possibility of business becoming
insolvent.
Ensure that the business has sufficient cash Changes in consumer taste
available make payments.
Provide evidence in support for financial assistant Inaccurate market research
such as loans and overdrafts.

How to increase inflow and decrease outflow:

Reduce prices to increase sales or increase prices to increase revenue

Reduce staff to lower cost
Change to a cheaper supplier of raw materials
Extend length of time taken to pay suppliers

- Other words for revenue Sales, Income, Turnover.

Other sources of revenue

Interest on savings
Investment from selling shares
Leasing or Rental Income from properties, equipment, machinery and vehicles

Calculating Total Revenue: Total revenue (TR) = price per unit (PPU) X number of unit sold (NOUS)

Loss - The expenditure is greater than the revenue

Profit - The revenue is greater than the expenditure

Profit/loss = Revenue Expenditure

Break-even (Point) - The level of output where total revenues are equal to total costs; this is where
neither a profit nor a loss is being made. (Total Revenue = Total Cost)

Break-even = Fixed Costs / Contribution (Price Per Unit Variable Cost Per Unit)

Variable costs - The operating cost that CHANGE depending on the number of output the
business produces. I.E. wages, material

Fixed costs - The operating costs that REMAIN THE SAME no matter how much the business
produces. I.E. rent, salary
Total Costs = Fixed Costs + Variable Costs.
Profit = Total Revenue - Total Costs

Margin of safety - The difference between the break-even point and the current level of output.

Break even Analysis A calculation of the point at which revenues equal expenses.

+ves -ves
Predict the effect of changes in sales prices. Assumes production and sales are the same.
Analyze the relationship between fixed and Break even charts may be time consuming to
variable costs. prepare.
Predict the effect of cost and efficiency changes It can only apply to a single product or single mix
on profitability. of products.

Businesses need finance for:

Start-Ups - Assets such as buildings, machinery, vehicle and materials

Everyday Expense - Utilities, pay wages and supplies
Growth & Expansion - Bigger premises, marketing and better equipment
Unexpected Circumstances - Large orders, creditors/customers not paying, no sales due
to economy and maintenance repairs

Internal Sources of Finance Finance which is obtained within the business. I.E Retained profit, sale of
assets, Owners funds.

External sources of finance - Finance which is obtained from outside the business. I.E. Bank loans, share
capital, Bank overdrafts.
Effective people management

Organisational structure - The relationship between people and functions

Organisational hierarchy - Vertical division of authority and accountability
Organisation chart - Diagram showing the lines of authority and layers of hierarchy

The organisation chart shows:

the span of control in each division

the official channel of communication

span of control - The number of subordinates whom a manager is required to supervise directly.

Two types of span of control:

Wide - Manager has many subordinates that answer to them

Narrow - Manager has few subordinates that answer to them

Chain of command - The route through which information travels throughout the organisation.

Two types of chain of command:

Short - Information is transmitted swiftly and decisions are made quickly.

Easy access to senior management.
Long - Decisions can take a long time to be made.
Senior managers are remote.
levels of hierarchy is the number of different supervisory and management levels between shop
floor and the chief executive in an organisation.

Two types of hierarchy:

Tall structure - Many layers of management

Each manager has a narrow span of control
Flat structure - Few layers of management
Each manager has a wide span of control

Features of tall structure with narrow span of
control
More promotional opportunities as the career
ladder has more rungs on it.
More layers have more staff which means more
company overheads.
Allows managers to have a tight control resulting
in improved quality and less mistakes.
Features of flat structure with wide span of control
Managers may have less time for subordinates
and therefore must delegate effectively.
More delegation means staff are given greater
responsibility which improves morale.
Staff may become overstretched which may in
turn cause stress.
 - Centralised organisation

A structure where decision making power remains in the hands of the top management
levels.
Decision are made by seniors who are experts
Decision making is often slow which causes delay

- Decentralised organisation

A structure where decision making power is delegated to workers lower down the
organisation.
Decisions are made quickly and progress is made
Decisions involved staff on the front line which boost morale

Delegation - The process of passing authority down the hierarchy from a manager to a subordinate.

+ves -ves
Time management - Delegation gives Customer expectation - Customers often
managers more time to focus on other want to see managers in charge.
important task and reduces the stress.

Motivation - Empowers and gives greater Attitudes and approach to management -

job satisfaction. Some managers exercise their power
ineffectively and often dictate.

Flexibility - Ability to use initiative to make Quality of staff - Not all staff have the skill
quick decisions and experience to complete delegated
task.

Staff development - Providing knowledge Confidentiality - Difficult to delegate task

and experience for higher positions. if there is a need for confidentiality.

Leader - Someone who gains support, respect and loyalty through hard work, intelligence and rational
thinking from others.

Leadership - The ability to take charge of people, so that they perform to the best of their ability.

Autocratic Leader - Makes all the decisions and gives orders to the workers - the workers are told
what to do.
Democratic Leader - Involves workers in the decision making - workers are consulted and asked
for their opinions.
Laissez faire Leader - Allows workers to do their own thing - they are encouraged to make most
of the decisions themselves.
 Paternalistic Leader - Treats workers like family giving them advice, guidance and protection -
decisions are made with the best interest of business as well as workers.

Motivating factors:

Reward Money Recognition Satisfaction Ambition

Status Opportunity Friendship Security

Methods of Motivating Employees

Financial Non-Financial
Time Rates Job Enrichment
Piecework Job Enlargement
Performance Related Pay Job Rotation
Profit Sharing Empowering Employees
Fringe Benefit Working in Teams

Benefits of Motivating Staff:

Happy staff leads to satisfied customer

Reduces absenteeism
Reduces labor turnover
Reduces costs

Communication - The process of exchanging information or ideas between two or more people.

Internal communication

Communication within the organisation to improve the efficiency of the operation with
the intention of achieving corporate objectives.
i.e. Manager delegating task to subordinate

External communication
 Communication between external groups to improve the overall effectiveness of
business in order to make it more successful.
i.e. Customers expressing their opinion on certain products.

One-way Communication - Communication without any feedback (autocratic). i.e. Notice on

notice board
Two-way Communication - Communication with feedback (democratic). i.e. Department meeting

Communication channels - The route through which communication occurs.

Open channels of communication - Allows any staff member to see, read or hear the discussion
and conclusion.
Closed channels of communication - Restricts access to the information to only a named few.

Formal channels of communication - Information communicated through official methods like

briefings and meetings.
Informal channels of communication - Information passed through the grapevine and gossip.

Vertical communication - When information is passed up and down the chain of command
through the hierarchy.
Lateral communication - When people at the same level within the organisation pass information
to each other.

Two types of vertical communication:

Downwards communication (aka top-down communication) - Information transmitted

from the top of the organisation to the bottom (superior to subordinate) generally to give
instructions.
Upwards communication (aka bottom-up communication) - Information transmitted from
the bottom of the organisation to the top (subordinate to superior).

Benefits of Upward Communication:

Helps managers to understand employees views and concerns.

Helps managers keep in touch with employees attitudes and values.
Alerts managers to potential problems.
The wider world affecting business

Business ethics - The ideas about what is morally correct or not, applied in a business situation.

Businesses that operate ethically will impact the following issues:

Production
Suppliers
Workers
Customers
Competitors
The environment
Local communities

- Production
Environmentally friendly - Minimize wastes going to landfill sites and recycling more.

- Suppliers
Fair treatment and responsibly sourced - Paying farmers a fair trade and ensuring
products are free from pesticides free range.

- Workers
Minimum wage and health and safety at work - Paying workers above minimum wage
with the opportunity for career development and ensuring that they have safe working
environment

- Customers
The customer is always right - Listening to customers and giving them what they want.
Banning certain products that go against customer values and principles.

- Competitors
Fair competition - Some large organizations have taken bribes to secure deal.

- The environment
Pollution causing climate change - Major power plants and factories are contributing to
the negative effects on the planet.

- Local communities
Giving back to community - Businesses should support local businesses through charities
and sponsorships and develop the infrastructure including schools, road, etc.

Pressure group - An organization created by people with a common interest or aim who put pressure on
businesses and governments to change policies so that an objective is reached.
 Based Activity on Society
+ves
Production of goods and services - More consumer
choice
Taxes - helps finance essential public services
Exports - Brings money into the area
Jobs and incomes - Higher standard of living
-ves
Profit motive - Influence wrong decisions
Monopolies - Less choice for consumers
Misleading advertising - Persuade consumers to
buy
Pollution problems - Increase in transportation

Social Responsibility - Acting in ways that show care and concern for all members of society. E.g. recycling
waste materials.

Fairtrade Movement - A group that supports the standards for importing goods from developing countries
and they aim to ensure a fair deal for farmers and workers.

Ethical Decisions - When a business decision benefits stakeholders, other than shareholders.

Environment - Our natural world including pure air, clean water and undeveloped countryside

Legislation - Laws passed by Parliament.

Consumer Boycott - When consumers decide not to buy products from businesses that do not act in a
socially responsible way.

Supply chain - The process that are involved in route taken by a product from the raw materials needed to
create it right through to the final customer.

Effects on the Environment

Short-term Effects
Traffic congestion - Every stage of the distribution
channel will of some sort create traffic
congestion.
Air, noise, smell and water pollution - Production
to delivery
Long-term Effects
Climate change - Emissions caused by greenhouse
gases (carbon dioxide and methane gas).
Resource depletion - Renewable and Non-
renewable

What can be done to prevent these effects:

Changes in business operations - Greener way of operating and recycling.

Law and regulations - Permissions to build factories as well as tighter control of production.
 Taxes and fines - Higher taxes on petrol and landfill sites.

Subsidies and grants - Governments will financially support the infrastructure of an organization
that have a greener approach in its operations.
High income countries (HICs) - Developed countries
Low (LICs) and Middle income countries (MICs) - Developing countries.

Types of import protection:

Tariff or custom duties - Taxes put on import goods to make them more expensive
Quotas - Limits on the physical number of goods that can be imported over a period of time.
Export subsidy - Money given to domestic firms by governments that help reduce the cost of
production which therefore makes goods cheaper to sell abroad.

The European Union (EU) - The UK is part of the Single European Market, meaning it can trade one of fourteen
other countries in that market without facing any barriers to trade. Also, there is no restriction in the
employment of anyone in the EU or the ability to set a business in the EU.

+ves of EU membership to businesses are:

Increase in market size - (a greater number of potential customers) because of the freedom of movement of
goods and services. UK business can now sell to any of the other fourteen countries without facing extra costs
or restrictions on the types of products they can sell.

Greater access to cheap factors of production - e.g. raw materials, technology and labor. A business can
employ individuals from any part of Europe. The National Health Service has found this a good source of skilled
doctors and nurses when they have had shortages of medical staff.

Access to EU government contracts - Not just UK government contracts, benefiting businesses who sell goods
and services to government departments (e.g. road builders could be "contracted" to provide roads in Spain).

Lower administration costs to trade - Meaning that businesses do not have to pay to extra money to send their
goods abroad, other than normal transport costs.

The costs of EU membership to UK businesses are:

Greater competition from other EU businesses.

Increased costs due to compliance with EU regulations e.g. common technical standards.

Enlargement of the EU is likely to happen in the next few years with several Eastern European nations joining
the EU, providing a further increase in the market size BUT the customers will have a lower average income
and be able to compete at lower prices with UK businesses.

At present the UK is outside the Euro zone. The Euro zone comprises 12 countries (Belgium, Austria, France,
Finland, Luxembourg, Italy, Netherlands, Germany, Portugal, Ireland, Greece and Spain) who share one
currency - the euro.

+ves to businesses of being inside the Single Currency zone are:

 No uncertainty over pricing and costs when exporting or importing, because they all share the same
currency
No costs of changing currency