=InftOrMec) Scanned with CamScannerTheme 1 Marketing and people ‘Theme 2 131 132 133 134 135 14 ial 142 143 14a 145 15 15.1 152 153 154 185 156 Meeting customer needs The market Market research Market positioning Market Demand Supply Markets... aes Price elasticity of demand... Income elasticity of demand... Marketing mix and strategy Product or service design Branding and promotion... Pricing strategies . Distribution Marketing strategy - ‘Managing people Approaches to staffing Recruitment, selection and training Organisational design fae Motivation in theory and practice... Leadership 4 Entrepreneurs and leaders Role of an entrepreneur ......2.2. 206+ Entrepreneurial motives and characteristics... Business objectives .. Forms of business Business choices .. .. Moving from entrepreneur to leader Managing business activities 24 24a 212 213 214 22 221 222 223 2.2.4 23 231 232 233 24 24) 242 243 244 25 251 252 253 Raising finance Internal finance External finance Liability Planning Financial planning Sales forecasts Sales, revenve and costs - Break-even Budgets Managing finance FiO ect Liquidity... Business failure Resource management Proc, prody aed effec woo sononso-sevsssse esse ssses 21 Capacity utilisation . : ms Stock control Quality management External influences Economic influences... Legislation... > Competition and market size . Sere ah «Inside back cover Scanned with CamScannerCompetitive products Standardised — Theme 1: Marketing and people Meeting customer needs [1.1.1 The market ‘Amarket is any medium in which buyers and sellers interact and agree to trade at a price. Markets are not necessarily found in specific locations. Many markets are virtual; buyers and sellers interact, but do not meet face to face. A few businesses still use catalogues and mail-order, like Cotton Traders. A-competitive market: @ creates a space where businesses can sell their products to customers and customers can see what is on offer. © provides valuable signals to businesses, showing what price they can get and how much they can sell © determines what actually gets produced in an economy. © provides signals for businesses that show them the opportunities available. Mass markets and niche markets Markets are immensely varied in nature. Old fashioned outdoor markets have existed for thousands of years, selling fresh food of all kinds ~ the one in Cambridge hasn't changed much since the town was established. At the other extreme are global markets, relying on on-line or telephone communication. Niche markets can develop where a business identifies a small market with specific needs for specialised products or services. For example, there is a niche market for soap products that do no ecological damage. ‘Amass market is a very large market where most people will tend to buy the same or similar products. Mass marketing involves each business in providing a standardised product, aimed at a large group of consumers with the same needs and preferences. Think of laundry detergents. A mass market ‘Aniche market j |e Involves a large proportion of the population. _—_« Is much smaller than a mass market. i |e Isthe largest group of consumers for a ‘= Has a specialised or specific type of "product or service within the market. product or service. | stusterse preferences tend to be similar for ‘Is identified with a particular market | large groups of people. segment. «The product or service is usually standardised Prices tend to be high and there is often and heavily promoted. __aclose link between buyer and seller. i + The product willbe widely available and _-—_* Promotion sikely to be specifically targeted at the niche customer. ' ¥ gant aon ge pared to mass market products, sales | hee Many markets have both mass market producers and niche producers. For example, Primark and H&M aim at the mass market for inexpensive clothes, while the various fashion designers cater for niche markets, ‘consisting of small numbers of wealthy buyers who want to wear distinctive clothes that few others can afford, Scanned with CamScannerMass market Niche market Advantages Mass producers have many customers, _« Less competition in some markets, a standardised product and Noh eS sgt customer needs may be precy ‘easier; they get exactly what they «They can use their profits to expand want. out further, increasing market. increased loyalty and repeat a purchases. ‘+ Mass production usually means lower i ‘+ May be more flexible; may respond production costs so lower prices. quickly to changes in the market. i Disadvantages» Competition may be stiff. ‘There i litle room for expansion, } ‘Being price competitive reduces +» Vulnerable to economic downturns | profit margins. and changes in consumer tastes. ‘+ High advertising and promotional _» Successful niche producers can be ‘costs may reduce profitability. taken over by bigger businesses. eCommerce or etailing has opened up many new niche markets. Some businesses might have been unaware of potential niche customers and even if aware, unsure how to reach them. Now, on-line selling strategies ‘aimed at global niches can make business in small markets very profitable, Market size and market share ‘Market size can be measured either by value (sales revenue) or volume — the actual number of items sold. Businesses that want to make a profit enter promising markets and sell to as many customers as they can. If they are meeting a need and their products are either better or cheaper than competing products, they will become increasingly successful and will grow in size (probably both in volume and value terms). Of course businesses can succeed without increasing volume, just by improving the product and charging ‘more. Profits can be used to increase market share, by: © attracting more customers with keen prices. ‘© developing their products so that they are perceived as superior to competing products. © offering services that are attractive ~ including good customer service that enhances their reputations. ‘Market share means, literally, the amount sold by a single business as a percentage of the total market for the product concerned. ‘When a market is growing, all businesses within it can grow and maintain their market share, Ifthe market is more or less fixed in size (e.g. the market for bread) then individual businesses that want to grow will have to work out how to expand their market share. Business growth often involves developing a distinctive product that acquires a reputation for quality 0° {good value. One way of doing this isto give the product a brand name that will encourage customers to choose it over the competing products in the market. Brands are covered in more detail on pages 24-28. Scanned with CamScannerMarket change Adaptation The digital economy Dyna ‘Some markets are quite stable and change little over time. The market for Kelloggs cornflakes has changed very little, although there are far more competing products than there were when they were invented in 1894. Market size and market share do not change much and there is little innovation. Other markets are far more dynamic, subject to rapid and continuous changes. markets Dynamic markets are constantly changing. Buyers may choose to buy less of one product and more of another. This may be due to rising incomes, fashions, fads or the arrival of a superior competing product offered by another business and giving better value for money. Sellers find sales rising or falling, depending on what else is available in the market or what technological changes ‘are occurring. There may be shocks ~ weather events or new discoveries that alter the market dramatically. All businesses must adapt to the changing nature of their markets. If they do not, they are likely to get left behind and lose competitiveness. Ultimately falling sales will cause businesses to exit the market. © New businesses emerge when new technologies or design techniques make it possible to invent new products or cheaper substitutes. €@ Sellers respond to buyers’ changing needs by improving existing products and services or introducing new ‘ones. For example, demographic Factors can cause needs to change. @ Sellers also respond to other sellers’ changes in order to stay competitive. @ Some businesses expand by diversifying - adding to their product ranges to meet needs in new or different markets. Some markets are more dynamic than others. Most high-tech products have rapidly changing markets. New ways of distributing products can also have a significant impact. Think! | There used to be a mass market for CDs. This market has shrunk very far and very fast. Explain how music streaming has affected a range of markets in recent years. Alternatively, use a flow chart to | _ help explain your answer. Online retailing Online retailing is growing fast. During 2015 it increased by 18% in the UK, and by 13% in the USA. It affects most European economies as well © Many businesses, both new and established, offer consumers access to a huge range of goods and services, This growth would have been impossible without new technologies and the digital economy. © Some products have become cheaper because they are distributed more efficiently on-line than via traditional retail outlets. © Many on-line retailers look for profits by cutting costs and operating efficiently rather than raising prices (Amazon is a good example.) © Information is easier to obtain through price comparison sites and consumer publications, or just by doing a thorough web search. Sometimes these expose potentially bad deals. © By giving access to markets and providing numerous channels that connect buyers and producers all over the globe, online retailing has transformed the retall and the business world ‘The digital economy includes all those areas of the economy that are affected by the development ‘of computer hardware and software, ICT networks (including social media) and online marketing. In short, it means everything that is affected by digital technologies, Scanned with CamScannerMarket forces ‘Competition New technologies and innovations of all kinds lead to new and improved products. How markets change ‘© Changes in supply and demand generate market forces that affect both buyers and sellers. Businesses are constantly trying new ways to attract customers (© Buyers ae constantly looking fr the best bargain ~ the product or service that gives them the most bang for their bucks. @ These pressures affect business to business trading (B28) as well as consumers and retailers. Many factors drive change in the market. © Consumers’ needs and preferences change over time and in response to social trends. @ New technologies and innovations of all kinds lead to new and improved products. ‘© Governments intervene, creating rules and regulations that affect markets. © Competition drives businesses forward as they try to atleast maintain sales levels and market share. Forces for change Innovation and market growth Innovation means bringing a new idea into being and using it, either to: © create a new product or improve an older one (© or find new and cheaper or better ways of making a product and bringing it to the market. Businesses do this to gain sales or to reduce costs and rapidly. Scanned with CamScannerMarketing Efficiency ue Product innovation occurs when new technologies make it possible to create completely new products orto improve the quality of existing ones. Process innovation means using new technologies to improve production methods, so that costs are reduced. The change is often invisible to consumers, who may only notice a resulting price cut. Price cuts can create a larger market. Some businesses will innovate to cut costs and make more profit, keeping prices the same. Process innovations change the way things are produced; they also affect many other areas such as distribution channels, stock control systems and supply chains. (A supply chain is the sequence of processes, that eventually leads toa finished product.) Many businesses have to innovate to survive in a competitive market. Adapting to change Businesses must keep in close touch with their markets if they wish to survive. Successful businesses need ‘a range of tactics and strategies to deal with the changes in the market. A new, successful competitor in the market might cause established businesses to: © cut prices or improve quality, or © civersfy into different markets, or both. Developing market research efforts, spending more on research and development (R&D), investing in innovative design and vigorous marketing may all have a part to play in adapting to change. Marketing is the action or process of promoting and selling products or services, including market research and advertising. It is how the business connects to its customers. How competition affects markets Competition affects many businesses and it intensifies, they must act. Rival businesses compete for market share but all businesses compete for consumers’ spending as they make choices about what to buy. Market orientation is an essential element for many businesses: they must use their market research efforts to gain 2 very clear understanding of both customer preferences and competing products. (More on market orientation on page 6.) © ina competitive market businesses compete with each other to make sales to customers. The need to ‘cut costs makes them more efficient; they can cut prices and consumers benefit. © Competition also benefits customers by giving them more choice, innovative products and improvements in quality and reliability. @ As efficiency increases, the economy grows. Productivity increases and businesses become more competitive internationally. Exports rise and growth is assured, (If you need to revise productivity, go to page 92.) ee] Businesses that can adapt quickly will develop a | [EER nei aoeroge ane aus in on markets. Those that cannot keep up will see een) \— —_ i sales falling and begin to make losses. In time they will reduce production and eventually exit, | [EEE] these vere on compettve avartage on pages 10-11.) Scanned with CamScanner{ { Customer preferences Fieldand | Risk and uncertainty — what's the difference? At first lance both terms imply doubt over what might happen but there isan important difference, © isk involves situations whore the outcomes are known and can be quantified by ‘calculating probabilities. © Risk can be greatly reduced when a business makes sure that itis as well informed 128 possible about the kinds of things that might go wrong. © Uncorany ares where ers we unprodiaabe tle caeedy acon ove] tho cong he banos ane elhood of poste oores cana be Pirie fee © Uncerany ets Yom eves abou which we hav ner oma tintrpovetie to sorte pebabane alae way. \ Market research refers to the process of gathering data in order to understand current and future ‘customer needs and the nature of the market. This reduces the risk involved in developing new business ideas, (© Market research is intended to provide information about the market by examining patterns of demand and possible changes. Tis information can be used to make better-informed decisions, firmly based on knowledge of customer preferences. (© Market researchers investigate consumer motivation and behaviour. Potential products can be evaluated in relation to customer preferences. Expected sales can be estimated, @ Research can be highly sophisticated using specialist researchers using statistical techniques to get the most accurate information possible. Orit can be very basic, perhaps just asking for feedback from customers. (© Market research can provide information about potential gaps in the market and possible growth areas, as well as suggesting ideas for successful marketing © The objective isto achieve a competitive advantage that will lead to growth and profitability Product and market orientation Product and market orientation refer to different business priorities. \Product orientation means that a business wll focus its efforts upon creating the product rather than responding to the needs of the market. The priority isto develop the product and then try to sel it. With market orientation, a business will concentrate on customer preferences and decisions will be based on a good understanding of the market, underpinned by extensive market research. Primary and secondary research \Primary research involves collecting new data directly from original sources. t may include survey questionnaires, focus groups, in-depth interviews and on-line communities. It often involves asking people for specific information. I is sometimes refered to as field research. + Secondary research, also called desk research, involves yathering information from existing « on-line and paper-based sources. Some information can be found in government statistics or trade journals. Internal information, available within the business, might include customer records, evidence of complaints and accounting data Scanned with CamScannerPrimary research ‘Advantages = Can be designed to meet exact needs, someone else. * Information is relevant and up to + Easy and cheap to collect. date. Disadvantages» Can be expensive and time ‘© May not fit the exact needs of the ‘consuming. business. '* Care must be taken to avoid errors.» May be out of date or inaccurate. Uses of market research include @ understanding the market and customer preferences. @ finding out about competing products. © quantifying potential demand and likely sales levels © working out a price level that will attract purchasers and cover costs of production. @ judging the success or otherwise of individual products and services, @ increasing profit and reducing the risk of losses. © developing and maintaining a competitive advantage. Quantitative and Qualitative research * Quantitative research involves the analysis of numerical data, and generates estimates of future sales levels. For example, a cruise operator might want data on the growth of passenger numbers over the past five years. Quantitative research may use sampling and questionnaires to get the required data. clased question (¥s/tia) \ Qualitative research is directed towards discovering customers’ genuine opinions of the various products available. The focus is on attitudes and reactions to specific products. Online communities may be good sources of information but focus groups can be important too. The objective is to understand customer behaviour. Sampling and bias Gathering data from individuals is expensive so surveys often involve sampling, This means consulting a ‘group of people that will be representative of the target market, The sample size must be large enough to reflect variations in individual responses reasonably accurately. It must include a range of people from specific groups, balanced according to gender, age, pethaps also income, location and so on. Ifthe sample is too small, bias may occur and information wil be inaccurate, Bias can occur if the sample includes a disproportionate number of people from a particular market segment. Limitations of market research (© Market research can only give accurate results if the questions that are asked are well designed and do not lead the interviewee in a particular direction, © Samples must be big enough to be representative of the target market but not so big that they become very costly, Scanned with CamScannerOnline ‘surveys © The sample must not be biased in terms of representation and should be relevant to the mara, concerned, {© Market research is particulary tricky in foreign markets; businesses need wel-trained local people tp help them and this can be costly. © Some markets are so dynamic that market research data is out of date before it can be put to use © It may be necessary for all departments to have an understanding of market research so that its implications are fully understood. Use of ICT to support market research (© Primary research can be obtained from digital communities created on Facebook or Twitter. Sometimes product-specific on-line communities are created in order to provide information and promote the product. © Online surveys and questionnaires can be useful although care must be taken to avoid bias. © Businesses can create databases using on-line information gathered during the purchase process. This Generates valuable information on customer behaviour and preferences. @ It also allows the business to keep in touch with existing customers, those likely to have brand loyalties. Feedback from customers is often valuable. © Supermarkets’ loyalty cards provide substantial information about customer habits. Market segmentation {tis unlikely that one product will satisfy all consumers in the market © Markets are split up into groups of consumers that have similar wants and needs. @ Each group of consumers forms a target market and is identified by the process of market segmentation. ‘Market segmentation refers to the way markets can be divided up into segments, each of which has different customer preferences. Product specifications and marketing strategies can be designed to fit the preferences of each market segment. Markets can be segmented by socio-economic grouping, income, age and gender, size and composition of customer households, ethnicity and/or religion, educational background of customers, or hobbies and interests, Think! Think of three different market segments that you yourself might be said to belong to. For each | ‘segment, identify a product that you possess. Grif you prefer, do this for someone you know well. | Lastly, think about whether you might move out of one market segment and into another, and think ‘about the likely cause for this. IF you can, identify market segments that to some extent reflect your personal values, your lifestyle and your career plans. i © Segmentation means that a business can design products to meet the needs of groups with distinctive preferences. © Some market segments will be associated with niche markets where the may be possible to charge a premium price. usually less competition; it © Within market segments, individuals ae likely to get exactly what they want. This may’enhance brand loyalty and lead to repeat purchases. Scanned with CamScannerTarget markets Product. differentiation Repositioning n catered for, © Ideally, the bu has nol previons hich then g Q k a mass market and cutting y focusing on a single standardised product may be more profitable. 1.1.3 Market positioning ews on individual products or brands, in relation Market positioning examines customers’ vie each other, This may involve variations in price or quality, style or te jons of a range of competing product ical features. Market rese can reveal customer per a product that fits the preferences of a target market. pliers @ Ma preferably one that is not particularly well catered for by other su et positioning helps businesses to desig n find and target market segments will prioritise different features. If 2 busines © Consumers in differer a gap in the market and design its product for the neglected market segment, it will face relatively litle competition. he competition with a similar (me-too) product or to create 2 @ Businesses can choose whether to follow ‘a gap in the market differentiates its different image for their product. A business that has found product so as to fill that gap. © Alternatively, it may pay to follow the market leader and stay in the mass market. Samsung cr ny ways, similar to Apple iPhones but rather cheaper. Miele did well by smartphones that were, in mai ind reliability, charging more but achieving a strong reputation trading on the strength ofits performance a for its white goods. ion occurs when each business creates a distinctive product. This may involve istomers, or it may involve changing perceptions as to Product differet Giving it unique features in order to attract cu the function of the product. Branding may be an important part of this. ‘A distinctive product may secure brand loyalty and there may be few reasons to change. Alternatively, some businesses reposition their products in order to give them a new lease of life. (Think of extension strategies, page 34.) Example For a long time, elderly men in Ireland were the main drinkers of Guinness. Inevitably sales were falling. The company decided to reposition the drink; quality was improved and the serving temperature reduced. Marketing was aimed at younger people ‘and women. The new approach was started in the Irish market, and worked. So the ‘company decided to promote Guinness in Britain, That worked too. Now there is an Irish pub somewhere to be found in most cities, all over the world. A product which ‘was once flagging looks safe forthe future. Scanned with CamScannerMarket mapping ‘A market map is a tool that plots brands in the market according to how they meet customers] needs. It illustrates the way 2 business may position its individual products effectively within the wider market " | Waitrose sMeS Low Quality On a market map, the grid shows two market features, such as price and quality (as in the diagram) or price and customer age. Individual brands or businesses are placed on the grid to show potential niches or gaps in the market. It helps to position products in relation to each other. Market mapping can help in the design of a product or product range. The objective is to create a product that will either appeal to many customers in a mass market or meet very specific preferences in a niche market. Price and product features will both be important. The end result will be a differentiated product. Advantages of market mapping Disadvantages of market mapping Enables a business to spot gaps in the market. Can be hard to categorise some products ‘and services. an help a business to differentiate its product Identifying a gap does not mean there is a from the competition. — need for a product to fil t. More research must be done, to establish profit potential. Competitive advantage, adding value and differentiating products ‘Competitive advantage means having an edge over rival products. It may be based on low costs and keen prices, or an innovative design feature, or a reputation for reliability or good customer service. Product differentiation often plays a part in this In the business world, everyone is working to achieve a competitive advantage. Without this, sales will fall and losses will rise. An obvious solution is to cut costs, improve efficiency and compete on price to attract ‘customers. For example, the business can: @ invest in new technologies, with appropriate training schemes. ‘@ ‘improve relationships with employees and suppliers, “@ improve the product itself and its mage by changing the marketing strategy. Scanned with CamScanner| Adding value Value for money may be based on a low price or a reputation for quality. Adding value may achieve quality by making the product more useful, reliable or desirable. Businesses can: @ introduce completely new products or re-design existing ones. © target product reliability or customer service with staff training, © produce a consistently reliable branded product that will sell for more than an anonymous, basic one would ‘Adding value is when a business increases the worth customers place on a product by improving itor creating a fresh image. This allows them to charge more. Iti the difference between the selling price and the costs involved in production or delivery of a service. Businesses that enhance their competitive advantage by cutting prices or adding value to the product, are likely to be able to sell more. Sometimes adding more value allows them to raise prices too. Making a product or service distinctive can help: © A brand image may become associated with technical excellence or appealing design features. © Competitive advantage applies to services as well as manufactures. It is easy to see how better staff {taining might improve the services offered in a hotel ot a fitness centr. Product differentiation means that each product is carefully designed to be in some way a litle different from competing products. Some products will suit a mass market but many will be designed precisely to match the needs of a particular market segment. Branding may help to generate customer loyalty. Individual businesses may differentiate within their own product range but they will be especially careful to distinguish their products from those of other businesses. Each business hopes to cater for as many different market segments as possible. U points (USPs) can be important ~ these are features that no competing product can match, ne . . si Example nctive context for coffee drinkers. In fact, they brought coffee shops back into fashion, actually changing the culture by encouraging customers to | meet friends in their shops. They helped to grow the market for coffee shops generally and may well have played a part in the closure of many pubs. | Although Starbucks has imitators, their USP still helps to keep customers loyal. i Competitive advantage, adding value, market segmentation and product differentiation are all very closely linked, To achieve a competitive advantage: © businesses can add value, using their resources to improve or market a product. © find the market segments where their products will sell best. @ create further added value by differentiating their products to suit as many potential customers as possible © strive to use their resources efficiently, so as to keep costs and prices down, adding a further competitive advantage. Product differentiation can be achieved in very many ways. Design, quality, reliability and customer service can all be important. Businesses may find that changing fashions, or the activities of competing companies, have taken demand away from them. Having distinctive product ranges, with a reputation for giving value for money, can ensure survival if they can also adapt swiftly to change Try this ‘What happens if a competing company comes up with a much better product? What will the rest of the businesses in the industry have to do to survive? You may find it helps to considera particular market, e.g. sources of recorded music or a product you think of for yourself. Scanned with CamScannerInverse relationship Market Markets can be res their own inte al or virtual, small or global. Their key characteristic is that buyers and sellers following reate market forces that determine both the price and quantity sold of a good or service © Buyers ~ are all those people or organisations that want to purchase something; they create the demand for goods and services. © Sellers - are all those people or organisations that want to sell something; they create the supply of goods and services, 1.2.1 Demand Demand refers to the amount of a product that customers will want and be able to buy at a range | __ of different prices. Ifthe is price is high, quantity demanded will be lower and vice versa, Market demand is the total ofall individual demands for a product. (NB demand must be effective; ‘customer may want something but unless she or he can pay for it at the asking price, there will be no sale) Price and demand Price and quantity demanded are inversely related. This means that if the price goes up, the quantity ‘demanded will go down and vice versa. As price (P) rises 1, quantity demanded (Q) falls 1. As price (P) falls 4, quantity demanded (Q) rises 7. The demand curve ‘A demand curve is a graphical representation of the relationship between quantity demanded and price fora product or service. Note that the curve is often shown as a straight line. Bes rs i J Figure 1: The demand curve Price The diagram shows a demand curve; as the price rises from P1 to P2, quantity demanded falls from Q1 to Qz ‘A change in price causes a movement along the demand curve. Lower prices mean that consumers want to buy more of the product; higher prices mean the opposite, consumers buy less of the product. Factors leading to a change in demand ‘Arrange of other factors may cause a change in quantity demanded, besides price. Something can happen to make consumers want more or less of a good even though the price remains the some. This means Scanned with CamScannerthat there is a shift in the demand curve. If, at a certain price, consumers want less of the product, the curve will shift to the left. If they want more, the curve will shift to the right. You can see how this works in Figure 2. The reasons for a shift are set out below. Figure 2: Increases and decreases in demand Price Wren ter ic ‘bewase n ana Sopanded, ~s ‘Semana cure ‘a Sh tote ok est abies testis ish ieee Se ry Substitutes are products that are similar, so if the price of a substitute increases, | RSME the demand for the original product increases. Ifthe price of a substitute Prt decreases, the demand for the original product decreases. | PRI Complements are products that are normally consumed together. I the pice of PaRMEARNAE a complement decreases, demand forthe orginal product will increase. the RABANNE price of a complement increases, the demand for the original product wil | Cem ocrcase. a lH consumer incomes rise, demand for most goods and services will ise too. | Itincomes decrease, s0 too will he quantity demanded. ea Fashions and fads come and go. If the preference for a particular product Peery increases, then more will be demanded, if the preference decreases less will be Pei demanded. oy Peretarg eed CMERC LTE Advertising can make us all buy more of something i..lead to an increase in BSE ent ity demand. Branding does the same, a strong brand will Increase demand. ‘As population increases or decreases 50 too does the demand for most goods ‘and services. In addition, ifthe structure of the population changes so does ‘demand for certain goods and services, e.g. a growing number of older people «will increase the demand for care homes. Deroy External shocks can be extreme, such as terrorist attacks that decrease the ‘demand for air ravel or they may take the form of a report claiming that dark ‘chocolate is good for you which increases demand. ; “The time of year has an impact on the amount demanded, think of warm clothes: “in winter, er de Succ saae a el Same peo aE “sunscreen and tourist attractions in mid-summer. Scanned with CamScanner1.2.2 Supply provide, at a range | ‘Supply ~ the amount of a good or service that producers are willing and able to of different price levels. ofall individual suppliers of a particular good or service. Producers at any given price. This will be based on together with any other objectives they Market supply refers to the total output make decisions as to how much they are willing and able to supply the cost of inputs and the amount of profit they are likely to make, may have. Price and supply There is a relationship between price and quantity supplied. This isa positive relationship: as one changes ‘so does the other but in the same direction. As price (P) rises 1, quantity supplied (Q) rises 1. As price (P) falls |, quantity supplied (Q) falls |. The supply curve A supply curve shows the relationship between the price and the quantity of a product that producers want to create and sel. t shows the total amount supplied to the market by all producers, at a range of different prices. As with demand, the curve is often shown as a straight line. Figure 3: The supply curve Peco Figure 3 shows a supply curve; as the price rises from P1 to P2, quantity supplied rises from Qi to Q2. A change in price causes a movement along the supply curve. Lower prices mean that producers are less inclined to produce for this market; higher prices mean bigger profits and an incentive to produce and sell more. Factors leading to a change in supply Figure 4: Increases and decreases in supply A range of other factors, besides price, will ‘cause a change in quantity supplied. Some- thing happens to make producers supply more cor less of @ good even though the price remains the same. This is a shift in the supply curve. The most common cause for this, set out below, is a change in costs of production, which can happen for many reasons. Scanned with CamScannerAn increase in input costs means itis less profitable to produce at that price and S0 less is supplied. But if costs decrease, producers respond by increasing utput, The supply curve shifts to the right ay ‘Technological pr nological progress allows businesses to produce a given item at a lower ‘Technology Wiieeediaibamy ®t. This wil increase the amount supplied at that price: the supply curve shits eg tothe right ‘An increase in the tax on a product means that the price to the customer rises. ‘The supply curve shifts to the let because at any level of output, the price will be higher CEE EE Subsidies are payments to producers that encourage them to produce more. ‘The product can then be sold at a lower price; the amount supplied will increase, peri The supply of some goods is dependent on events beyond the producer's aos Control, for example, the supply of wheat depends on the amount of wheat harvested. 7 trek ioe How to get the demand and supply curves the right way round! Every year some exam candidates get their curves mixed up. Remember them this way... Demand starts with a D - the demand curve slopes Down from L to R. SUP ply has the word UP in it - the Supply curve slopes UP from L to R. The interaction of supply and demand ‘@ When the demand and supply curves are brought together on the same diagram there is a point at which the curves cross each other. © This is the equilibrium point, at which the quantity demanded is the same as the quantity supplied © The price at this point is the equilibrium price where there will be no unsold products and customers will be able to buy all they demand at that price. We say, the market clears. @ Price and quantity are determined by the interaction of supply and demand ~ ie. by ‘market forces. In market economies with strong competition, prices are the signals that tell suppliers when consumers want more of Price and quantity ae determined by the interaction less of their product. cof supply and demand. Scanned with CamScanner=e —_——_"—" i 9 Figure 5: Equilibrium price and quantity 10 supply ie - Figure 5 shows that the equilibrium price is "i 50 and quantity is 400. Sales revenue wil be ° £20,000. If demand increases for some reason rs ' ‘and the demand curve shifts to the right, Ps ' suppliers (businesses) will do their best to = ' expand output to meet the demand. rc) ' Demand y (600 800 0 a 406 Market a clearing Quant i Equilibrium price ~ the price at which the amount supplied is exactly equal to ee. ae demanded, The market clears, There are no surpluses or shortages, ie. no unsold products left o the shelves (excess supply) and no customers who fail to get what they want at that price (excess demand). | ‘Some markets rarely remain in equilibrium for long, Something usually happens that alters the factors leading to a change in demand or supply. This means that one of the curves will shift, leading to a new equilibrium price and quantity. If demand increases, suppliers will increase output as fast as they can to meet the demand. How demand and supply diagrams show market change Figure 6: Changes in demand ory Fall in Demand 4 ‘Supply Shifts in the Pe demand curve a Now Demand omand a ‘Quanty © The increase in demand in Figure 6 shows the demand curve shifting to the right as more will be demanded at every price. Equilibrium price and quantity both increase. This might be caused by a change in tastes or a fall in the price of a substitute (a competing product) @ A fall in demand, perhaps caused by a fall in incomes, shifts the demand curve to the Equilibrium left as less will be wanted at every price Equilibrium price and quantity both decrease, @ in both of the diagrams there has been a shift of the demand curve that causes a. movement. ie ‘along the supply curve, AAfallin demand, wil be wanted at evey a ‘demand cur at every pice ive to the left as less Scanned with CamScannerShifts in the supply curve A movement along the Changes in supply Figure 7: Changes in supply {Increase in Supply GF ‘Quantity GO ‘Quantity @ The increase in supply shows the supply curve shifting to the right as more will be produced at every price. Equilibrium price falls and equilibrium quantity increases. This may have been caused by technology developments that reduce production costs © A fall in supply shifts the supply curve to the left as less will be produced at every price. Equilibrium price rises and quantity sold decreases. This could be caused by higher input prices, leading to increased production costs © In both of the diagrams there has been a shift of the supply curve that causes a movement along the demand curve. ‘Sample scenario ‘Students will be required to draw demand and supply (market) diagrams to demonstrate the interaction between supply and demand and to show what happens if there is a shift of either curve. Scanned with CamScannerPanis ns clit 1.2.4 Price elasticity of demand (PED) it sures the © Elasticity measures responsiveness to change. Price elasticity of demand me: ae scone to which a change in price leads to a change in quantity demanded (a change ins “4 ‘We know that a change in price will ead to a change in quantity demanded. PED is ied a tell us by how ‘much the quantity demanded will change, showing the consequences of the price chang Calculating price elasticity of demand ia To compare changes we need to look at the percentage changes in both price and quantity. We can then use a formula to work out PED, which will give us @ numerical answer. PED = % change in quantity demanded '% change in price Example: A holiday company reduced the price of a package holiday from £500 to £450 and found that sales increased from 10 holidays a week to 12. 96 change in quantity demanded '% change in price 20% “10% PED. = 2 This tells us the degree of elasticity. We then refer to a good ora service as being price elastic or price inelastic. Interpretation of numerical values of price elasticity of demand What happens What it means Numerical value A price change causes a % change in Q is Beyond -1 se Proportionately bigger greater than the % change in quantity change in P demanded Unit price elasticity A price change causes 9 change in Q is = the same proportional the same as the 9% change in quantity change in P demanded Price inelastic Aprice change causes 9 change in Q is Between 0 and-1__ proportionately smaller smaller than the % change in quantity change in P demanded |mour example above, the answer of -2 means that the demand for those package holidays is price elastic. 7 eka ‘negative. Remember to include the minus sign. The factors influencing price elasticity of demand Scanned with CamScannerTime lags Total revenue | © Luxury or necessity ~ luxuries tend to be more price elastic and necessities tend to be more price inelastic. (Unless the luxury in question is a status symbol, in which case cutting the price may make it say less about your status). © Proportion of income spent on a good - if toothpaste increases in price by 20% most people will still buy it; sales will hardly change because toothpaste is price inelastic. But if the cost of foreign holidays rises by 20%, sales are likely to drop significantly. Holidays are much more price elastic. © Time scale In the short term some products will be more price inelastic than in the long term. The main reason for this is that people take time to adjust to new prices, especially in relation to consumer durables like central heating boilers and washing machines. They won't switch to a cheaper product until they need to replace the existing product. ive market, many rival suppliers offer similar or standardised products and demand for any one of them will be price elastic. Most businesses in this situation will not consider a price increase, because sales and revenue would fall. Non-essential products may, similarly, be price elastic just because customers can choose to do without them. Businesses selling products that are price elastic will do all they can to control costs in order to stay profitable. They may also try to differentiate their products, creating strong brand images if they can, developing USPs, all of which will make demand less price elastic. © When there are few close substitutes, demand tends to be less price-sensitive. In niche markets where there are few suppliers, successful differentiation can distance one brand from its substitutes. Businesses that are confident that demand for their products is price inelastié can expecta price increase to lead to a relatively small fallin demand. A higher price can increase both sales revenue and profit. This is attractive; so many businesses will try to make their products distinctly different from rival substitutes. Businesses are in a stronger position when demand for their product is price inelastic. They can use market research to target specific groups of customers with product features that appeal. They will try to select a market position for their products where demand is as price-inelastic as possible. When they succeed in this, the way is open for price and profit increases. So businesses need to know the value of PED for each of their products, so they can tell what will happen to demand if they change the prices of their products. They may use market research findings to help them. Of course people with experience in the markets where they sell can be very good at deciding (ona price without actually knowing the formula for PED. But they have to quess and mistakes can be very expensive. Calculating and interpreting the link between price elasticity of demand and total revenue Total revenue or TR is the amount of income generated by the sales of a business. It is calculated by multiplying the price of a product (P) by the quantity sold (Q). Total Revenue = Price x Quantity or TR = PxQ Price changes affect total revenue, The outcome differs according to whether demand is price elastic or price inelastic. @ Figure 8 (overleaf) shows an inelastic demand curve (with a very steep gradient). The price cut reduces total revenue. You can see that the loss of revenue due to the fal in price is much bigger than the increase in revenue due to the increased quantity sold. @ Figure 9 shows an elastic demand curve, ie. one with a very gentle slope. A cut in price will have a dramatic effect on the quantity sold, just what you would expect if demand is elastic. Scanned with CamScanner: ith elastic demand Figure 8: Price cut with inelostc demand Figure 9: Price cut with elastic dema ay Pre | Price changes poe ct a, andsales | Pe revenue i , | t D | } en Ong Overy g oF Ocantsy With an inelastic demand curve, any given change in price will cause a relatively small change in quantity demanded. With an elastic demand curve, nearer to the horizontal, there is a much bigger change in ‘demand, Sales revenue is price x quantity, or P x Q on the diagrams. Revenue received has shrunk where |__ demand is price inelastic and price i cut. By contrast, a price cut would increase sales revenue if demand is price elastic ‘When a supplier puts a price up there are two effects on revenue. The higher price increases the revenue per Unit but also reduces the number of units sold If demand is price inelastic, quantity changes less than price Example | In 2011, Netflix in the USA decided to change its prices for DVDs and streaming services. The ‘ost of subscribing to both went up from $10 to $16. Subscriber numbers fell from 25 milion to 24 million, Subscribers made a big fuss on Twitter. They were not pleased. Calculating 1. Calculate the price elasticity of demand for Netflix products in the USA. 2. Which of the above diagrams (Figures 8 or 9) best describes what happened? | 3, Explain the likely causes ofthis outcome, and its consequences for Netflix. 4. Explain when it might be a good idea for a business to cut it prices. Use an example. You could explain, with reference to price elasticity of demand, wht might be the best course of action for ‘a market greengrocer with alot of perishable fruit on his stall towards the end of the day, (Answers on page 114) Businesses that have differentiated their products and have strong brands that foster brand loyalty can keep in close touch with their markets, This wll give them the information they need to decide whether to | competing raise prices. The key factor is whether the available substitutes will attract large numbers of substitutes customers after a price rise. Careful market research will provide useful information on this. Businesses | | operating in niche markets often face less competition from substitute products so demand is less price | elastic than its in mass markets. | fdemand is price elastic: If demand is price inelastic: | Increasing price would decrease TR (Pt TR 4) | Reducing price would increase TR (PTR 1) a Increasing price would increase TR (PT TR1) Reducing price would decrease TR (PTR) “The government understands PED very wel: thats why it pus indirect as alcohol, cigarettes and petrol and not on price elastic goods! taxes on price inelastic goods, such High price elasticity goes together with being in a highly competitive market. Where there are many competing businesses, there wll be plenty of good substitutes around. A pice increase wil probably dive Scanned with CamScannerIncome clastic Income inelastic customers away. An obvious answer would be to cut costs and increase efficiency. This would be one way to maintain competitive advantage. From the customers’ point of view, competitive markets and price elastic demand force businesses to keep costs and prices down to the minimum possible and this is good for their standard of living. [1.25 Income elasticity of demand (YED) Very often, @ change in income will bring about a change in quantity demanded. But by how much will ‘quantity demanded change? This is what YED is all about. Businesses need to be aware of how changes in income will affect their markets. Notice, Y always stands for income. Income elasticity of demand measures the responsiveness of quantity demanded to.a change in income. Calculation of income elasticity of demand The formula used is similar to PED: E ‘guantity demanded This wil give a numerical answer, a precise figure that tells us whether the good or service is income elastic. or income inelastic. Calculating ‘Adjusted for inflation, national income in the UK grew by 2.6% in 2014, According to the Society cof Motor Manufacturers and Traders, new carsales in the UK grew by 9.4%. Calculate the income elasticity of demand for cars in that year, (Answer on page 114) Interpreting numerical values for price elasticity of demand Numerical value _YED What happens | What it means Income elastic ‘Anincome change causes %changeinQis Greaterthan) f proportionately bigger greater than the % ! j change in quantity change in Y | t demanded © agg | Tiaryineame oestaiy An tone Ganges Sechangem is | } the some proportional thesome asthe % 1 | change in quantity change inY | t demanded A ; Income inelastic ‘Anincome change causes %changeinQis _BelweenOand1 ‘proportionately smaller smaller than the % i { ‘change in quantity change in Y_ : demanded 2 } 2 Scanned with CamScanner‘Type of good Incomes rise t Incomes fall 4 Normal Quantity demanded t Quantity demanded 4 Intestor, (Quantity demanded J Quantity demanded + ‘An inferior good isa substitute for something more expensive. It may be of poorer quality or it may just be different and less appealing. © Days out in Brighton are an inferior good because if Londoner's incomes fall (as they did in the recession following the financial crisis in 2008-8), they are less likely to take holidays abroad and more likely to take day trips to Brighton. (Brighton tourist attractions did well during the recession.) © |F their incomes then rise again, they are likely to return to buying the normal goods they bought before The factors influencing income elasticity of demand @ The main factor that affects the degree of income elasticity is whether the product or service is a luxury ora necessity © Luxuries are income elastic and have high positive YED values e.g. cruises or designer goods. © Necessities are income inelastic and have a low positive YED value e.g. baked beans and soap. The significance of income elasticity of demand to businesses ‘© Incomes tend to change relatively slowly. Changes in individual incomes will have little effect on YED. It {is when incomes change en masse that it begins to affect a business. © Businesses may need to react to changes in incomes and plan accordingly. The usual cause of this is a change in the economy e.g. recession. @ Recession creates problems because many people will face falling incomes; sellers of luxury goods will hrave to find ways of coping with falling sales. By contrast sellers of inferior goods will se rising sales, and adjust their production accordingly. © Businesses selling inferior products and services tend to do well during a recession when incomes fall and consumer confidence is low. Halfords saw an increase in sales during the recession 2008-12, as more ‘motorists did thelr own maintenance or bought a bike to commute and save money. © Businesses selling luxury income elastic goods tend to do well when the economy is growing and many people have rising incomes. Scanned with CamScanner| Function Marketing mix and strategy 1.3.1 Product or service design The design mix When a product or service is created the designer will have in mind several influences that will determine how the finished item will lok, how it will function and how easy iti to produce. These influences are often described as the design mix, which combines three elements: © Function © Aesthetics © Cost “The design mix refers to the way in which all aspects of product design are considered, including function, aesthetics and cost, so that the product will match every customer requirement. «© How the product performs ‘© How the product looks ~ ‘¢ How viable itis to produce. = does it work well? does itappeal tothe user? «¢ The product must make & «© Products need to be ‘© The product should have ‘profti.e. be capable of stollable and ft for * high quality design being made at a cost Purpose. Teatures, beauty or syle. bbolow the market price. Rather like a cake mix, using the ingredients in different ways and combinations will produce different ‘outcomes, depending upon the intentions of the designer. {© For designer fashions, aesthetics are likely to be the most important element of the mix. © For high street fashions, cost becomes much more important. © For protective clothing, function may be the most important consideration, Creating the design mix isnot just for tangible products. It applies to services, creating a wide range of differentiated choices for the consumer. Food outlets vary from the functional and cheap fast food chains {to Michelin stared restaurants where the aesthetics of the experience are a high priority. the design mix that reflect social trends Changes it Social trends refer to the way society as a whole behaves and the values that determine that ‘behaviour. Consumer demand is not fixed and is influenced by a range of factors, some short term and others more long lasting. As a result the design mix wil change to reflect market trends, | Resource significant worry for both businesses and consumers. AS resource inputs | depletion become scarcer, costs increase. Some manufacturers are switching from scarce 8 metals to plastics which may cost less. i § . ee ae Scarce, | Recycling, instead of being dumped, most old cars are stripped of all the parts that can ; resources | re-using be re-used | Wiaste Sone procs beng designed so that they canbe epaed more ely || minimisation when they go wrong. Cars are designed to lat longer than they did in the past. Bhi involves nat wasting scarce resouroes or damaging the lives of employees. i | ‘Many people want to avoid buying products associated with child labour or | dangerous working conditions : B ee Scanned with CamScanner| Sustainability | Ethical sourcing © For many customers, sustainability is important. So there is pressure to use inputs from sustainayy sources and make packaging bio-degradable or re-cyclable. Praduction processes can be designed, ‘minimise waste. Energy use and pollution levels can be carefully monitored and reduced. © All ofthis affects the eost element in design. Ethically sourced inputs often cost more than the minimum, Competition and fluctuating incomes make costa key factor for competing businesses. The dificult trade off between socal expectations and price cutting cll for continuous adaptation of the design mix Example Palm cil is @ component part of margarine and many household products. Demand is growing, Indonesian Farmers and companies lke Unilever try to grow more by cutting down tropical forest and Planting oll palms. This is contributing to climate change and doing damage in other ways. Unilever Promised to get all ts palm oil from certified sustainable sources by 2015. This may be difficult because to date, only 1% of palm oil comes from sustainable sources. Sourcing palm oil ethically is not easy. Think! ‘The trade-off between keeping costs down and ethical sourcing cals for more innovative types of | design mix. Think about how businesses might tackle this problem and give examples if you can. Braiding and promotion = " Branding is about creating a postive and recognisable image of the product or service in the mind of the customer, Many businesses use it asa way to create a competitive advantage Brands can come in different forms, such as a symbol like the Nike Swoosh or just the name of the company like Apple. The important thing is that consumers recognise it, have positive feelings about it, want to buy it and stay loyal to it. Promotion is designed to inform customers and potential customers about the product or service and persuade ther to buy it. Itis a key element in the marketing mix. ‘The way promotion is used depends on a range of factors, including © ‘The type of market, its size and whether its a niche or mass market © ‘The type and size ofthe business and its promotion budget, {© The profile of the target customer and the most effective way of reaching them. ‘Types of promotion ‘© Types of advertising include print, television, film, radio and billboards « Itinforms and persuades and is designed to increase sales. ‘© Can be talored to suit the needs and size ofthe target market. ‘© Usually short-term techniques, © Include money-off coupons, buy one get one tree offers (BOGOF), discounts, {rae samples and special offers. © They all, in effect, lower the price to encourage customers to buy. * Digital promotion is simed at users ofthe internet, mobile phones or other digital devices. ‘¢ Methods include Facebook pages, online advertising, advergaming, social media and viral marketing, Scanned with CamScannerPromotion ‘* Businesses gain publicity by financially supporting an event, activity or person. * The business name gets inked with the event and generates a postive brand. image. ‘© Commonly used for sporting events and withthe arts and television. Reese) * Involves direct contact between a sales person and the potential customer. ® Can invoWve door to door or in the street but is normally done over the phone. 1 To be successful a good list of leads is needed to avoid wasting time, ir relations Cy '* PR involves providing the press and media with information about the ‘company. ‘© Many businesses have PR departments or use an outside agency. Advantages Disadvantages | “Advertising Advertising is likely to be seen by _* Itcan be difficult to know just “large numbers of people. how effective your advertising is # Can bé a quick way of reaching out tt Bean be expensive, to potential customers in a given area. * Now that itis no longer necessary } to watch television ‘live’ many | people will fast-forward through the adverts, Sales offers « Reduced prices can bea powerful + Consumers may simply take ‘incentive to buy. advantage of the cheaper prices and wait for the next special offer. |_| ee + Digital «itis cheap and has the potentialto__ There isa lot of competition and reach large numbers of people. ‘some analysts think that it may not be very effective. ‘© Once started a digital campaign can take ona life of its own. + Some people still distrust content i from the internet. } | Sponsorship + Can reach a wide range of people» Can be very expensive compared . could be millions for big events. to other forms of promotion. i j | { ‘= Can also bring positive connotations + No guarantee that consumers that will enhance image and will buy the product. t reputation. } f | Direct sales Message can be adapted to suit ‘* Many people distike direct sales t the consumer. ‘and the ‘high-pressure’ sales pitch. / « The salesperson can answer «= It.can be relatively expensive j involving large sales teams. individual queries. «= Cannot be as precisely targeted Public ‘= itis a cheap method of promotion, Sr relations (PR) even though a PR department as other forms of promotion. el cost one, «Itis also not always possibleto ‘control what is said. «= By comparison with some Scanned with CamScanner| Types of branding eg | There are a number of different types of branding that can be identified although some brands could fy ‘umber of categories. Type of branding Description Examples Product branding Asingle product is recognised by that name, Jacuzzi : ‘Multiple branding A business uses a range of different brand WW owns Audi, SEAT names for its products. Bentley and Skoda Umbrella branding A business that uses the same brand name Hoover, Miele for a range of different but related products. Pee fra vange of different bucrelated products, | Corporate branding The name of the business is the brand, Microsoft, Facebook a ala eal caer Own label branding Common amongst supermarkets to compete Waitrose essentials, | with ‘name’ brands. John Lewis clothing | Personal branding Individuals who have become their own brand. Stella McCartney The benefits of strong branding Businesses want to develop strong and recognisable brands. They ae areal asset and can bring a consider able competitive advantage. Added value Added value is the difference between the selling price of a product or service and the costs ofits «material inputs, Branding, together with promotion, can ensure that the producti widely recognised. © Brands add value because consumers feel an affinity with it and may be willing to pay a higher price fr | it increasing profitability. © The brand makes the product stand out amongst the competition, giving it a competitive advantage, sometimes based on reputation, reliability or style {© Brand names strengthen the bond with customers. They know exactly what they are geting. | Ability to charge premium prices © @ Aquick glance around supermarket shelves shows that many branded products cost more than cheaper substitutes. © Despite this the brands have created brand loyalty; some consumers are happy to pay the higher price. © For other goods such as designer clothes or luxury goods, the higher price is part of the attraction and is a reflection of the brand's desirability and status. Reduced price elasticity of demand PED © PED is very dependent on the availability and closeness of substitutes. {© The whole point of branding is to reduce the attractiveness of substitutes in the eyes of the consumer, so reducing the PED for that product or service. {© This not only helps sales but also the ability to charge premium prices. @ Figure 1 shows how the demand curves might change. For goods such os designer clothes the higher rice por clothes the higher pie the ottraction end election ofthe bran’ stats. [2] a Scanned with CamScannerFigure 1: Successful branding changes the slope of the demand curve. | | | Branding “influences: | demand | Think! Identify three strong brands, each relating to a different type of product. In each case work out why ‘and how the brend has benefited the producer. Unique selling points (USPs) and differentiation Ways to build a brani Unique selling points (USPs) are distinctive features that no competing product can match precisely. © The whole point of a USP s that other businesses cannot share it {© The USP may be real or usta perception built up by clever branding and promotion. © I has to be strong enough to keep existing customers satisfied and be able to attract new ones. @ The USP is closely connected with the positioning of the brand (how it is perceived by consumers in relation to rival brands). Careful market positioning can be extremely helpful in differentiating one product from another. | Advertising {© Advertising can be either informative or persuasive, or both © it takes many different forms from humble informative adverts in the local paper to very expensive nationwide TV campaigns. © Good advertising helps to reinforce USPs and reinforce the positive aspects of the brand, increasing its desirability and value. {© Advertising strategies vary hugely according to the type of p the business rroduct, the type of market and the size oF (in 1 t ‘Why are laundry detergents and air fresheners frequently advertised ‘expensively on TV? | | Why are cars frequently advertised in magerines? i | hy do painters and decorators tend to advertise by putting leaflets through leterbores? | Consider three businesses that advertise and explain hhow and why their strategy works forthem. 2 Scanned with CamScanner| | | Social media Sponsorship ‘© Sponsorship of cultural and sporting events is an effective way of keeping @ eye. © The repetition of the name helps to familiarise it to potential and existing consumers and is more likey to be remembered when a purchasing decision is made. brand name in the pubig Changes in branding and promotion to reflect social trends ‘Social media is based on digital communication devices through which users create on-line ‘communities; these provide an inexpensive way of advertising that can be both informative and Persuasive. Ths is a particularly good way to sell new or improved products to existing customers, © Social media advertising can make use of videoclips, interactive flash games, branded software, text and email messages and web pages. © When looking for the things they want, consumers often start with a web search; they will come tothe supplier rather than wait forthe supplier to inform them. © There are often special offers open only to social media followers and not the general public. © Social media also provides instant feedback forthe business and much cheaper ways of advertising than the conventional ones © The Internet Advertising Bureau UK says that nearly 80% of consumers would be more incined to buy specific brands in the future because of the brand's presence on social media, Viral marketing Viral marketing describes any strategy that encoureges individuals to pass on a marketing message to someone else > {© Just like a real virus the marketing message is designed to spread rapidly by digital contact amongst many people. : © Viral marketing consists of any technique that induces web sites or users to pass on a marketing message to other sites or users; YouTube has proved particularly useful. © Viral marketing can appear within any social network. Emotional branding Emotional branding is the term given to the creation of brands that appeal to a consumers emotional nature rather than their logical side. {© Many people feel a strong attachment to a brand without necessarily being able to say why. © There may be no rational reason for brand loyalty yet there is something about the brand and is promotion that instinctively appeals, ‘© Advertising is often impressionistic and more concemed with reinforcing an image than being particu informative. {© Music and images may have a powerful emotional effect on potential customers. [WBB) Pricing strategies include a range of ways in which a business might decida on the price of ts product or service. —————— Scanned with CamScanneradvantage © The price is.an important aspect of marketing — along with product design and promotion. @ The strategy chosen will depend on the market the business isin © It may be that being the cheapest is important © Alternatively, a high price may denote exclusivity and desirability @ Having a competitive advantage usually requires careful consideration before deciding on the best price. Pricing strategy Advantages Disadvantages ‘Cost plus pricing involves This method ig easy and, It does not consider whether adding a certain percentage to simple to calculate and the customer s willing to ‘the average total cost of the ensures that when sold, “buy at that price, or the product. Many businesses set the product yields a profit. _prices charged by competing their prices by adding 10% May work well for very supplierssIf sales are falling, to the cost. Ths is a 10% small businesses, €.9. * losses may follow. mark-up. painters and decorators. {Premium pricing isthe ability increases profitability. Only successful if product or to charge a higher price than brand is perceived as better the competition, without ‘quality than rival products. losing sales. } ‘Price skimming means ‘Profit is maximised while Usually only short lived, rival ‘charging a very high initial initial demand is at its products soon appear and ‘price for the produc. highest. ‘the demand for and price of a the original product falls. Competitive pricing means Mostuseful in competitive ky to ralse prices to charging about the same as, or ‘markets where there are increase profits as sales may alittle less than, the prices of /_-many substitutes. fall wher-customers switch ‘competing products. *to cheaper rival products. | sPenetration pricing is used If price isimportant, sales ‘Reduces profitability in the | toenteranew market. Alower _and,customers will be «short run ice than the competition is gained and they may wt try and persuade remain loyal when price is NO Quarantee that customers | customers of existing products restored to competitive will sta loyal when a | to.ive the new product atry, levels, increasing competitive price is restated | ian attempt to penetrate the * profitability. | market and gain market share. sPsychological pricing is used This strategy is best used Some high-end products ‘to make the price seem more when the customer is ‘avoid this strategy to i ‘attractive than it actually is by ooking for value for money. reinforce their customer's rounding it down slightly, e.g. ‘expectations of high quality. | charging £9.99 instead of £10. | ‘Predatory pricing is atactic Can be effective... .-but it’s illegal. used by a dominant business sto reduce competition. | Prices are set at a very low "level, even below the costs | ‘of production, for as long as it takes to ‘destroy’ the | ‘competition. 1 Scanned with CamScannerChoosing the best pricing strategy Number HERI © To more USPs a business has the mor wilng Consumers ae to pay Coca , cnisher price. ETAT REA © Standing out tom the compettion is important for premium pricing. GCSE II) * A business facing price elastic demand will be wary of raising prices, CRTUSUEIG © Businesses with price inelastic demand have more scope for raising prices. ear ESEPeITERT Ry) © The amount of competition the business faces will be important. Gisisteneeeg ° Less competion and fewer substitutes mean that the business will have ei ‘more control over price. BRERPIyI] © A stong brand means that a premium pricing strategy is possible. ETSEECIN| ° Anew or weak brand will need to be much more competitive in its Pricing strategy. EPEEREE © The pricing strategy ofthe products likely to vary throughout the cycle Reg aeeHyEN 22 he business trios to maximise its profits. FAERIE © Itwill also depend on the amount of competition the business faces at each stage. eerie) oni) prea ‘There may be a period of low pricing to gain sales (penetration pricing). © In the long run the business will have to cover its costs in order to survive, Changes in pricing to reflect social trends Online sales have grown dramatically since intemet use became popular: © Competition intensified as bricks and mortar retailers had to compete with online retailers. Some have adapted successfully while others have struggled. ‘@ Consumers now have access to a much wider choice than before and, for some products, on-line selind has reduced prices. i Scanned with CamScannerPrice comparison sites ‘© Price comparison sites are a driving force behind the rise of online retailing, providing muct information that is easily accessed. @ Ata glance consumers can see the range, availabilty and price of most goods and services. © itis not ahvays straightforward though; some businesses such as mobile phone and energy companies have created complex pricing structures that make it hard for accurate comparisons to be made. h more [13a Distribution ‘The marketing mix refers to the combination of processes that are used to encourage customers to buy. ‘These are often described as the 4 Ps: product (design features), price, promotion (which includes advertising, packaging and much else) and place (the way the product is distributed) © in today’s global economy the process of getting the products to the consumer can be complex and may rely on a variety of technologies. {© Without effective distribution a business is unlikely to be successful. (© fective distribution can be a useful source of competitive advantage e.g. for Amazon. Distribution channels \ A distribution channel is the route taken by the product as it moves from the producer to the customer. ‘The Four-Stage distribution channel © This is the traditional method of distribution. © Wholesalers buy large quantities of goods from a producer and store them, usually in a warehouse. ‘@ Retailers then place smaller orders for stock to sell to customers. swell for the producer as they/do not have to wory about dealing with numerous individual This works 5 that can'get most of the stock they need from one retailers. It also works for convenience stores wholesaler making a regular single delivery (@ ‘The disadvantage for producers is that thet profit margins will be reduced ‘wholesaler may ignore potential promotion opportunites @ In this mode! there is no wholesaler. ‘@ The producer sells direct to the retailer who then sells to the customer. {© There are two main variations dependent on where the retailer buys from... by the wholesaler. Also the ‘The Three-Stage distribution channel a Scanned with CamScannerOne producer ~ many retailers (One retailer ~ many producers ‘One producer, for example Ford, which Ori retailer wil buy from manysdifferent producers, supplies Ford dealerships throughout _—_ All the big supermarket chains operate this way. the UK. Market ‘Supply is tightly controlled by the produeer Big retailers have much more market power than the power ‘and outlets and trading conditions are producers and they canidrive down the price they regulated. pay in order to pass the savings onto the customer. This has real advantages forthe producer Whilst this means lower prices for the customed bbutis not so good for the consumer who ts nt so good forthe producers wio may struggle. faces restricted choice and possibly higher Dominant retailers can make it dificult for smaller prices because competition is limited, ‘etailers to compéte. If they go out of business, customer choice will be restricted. ‘The Two-Stage distribution channel | @ This is also a traditional distribution method. Some'small businesses sell directly to the customer, 9, old-fashioned bakeries, farm shops and photographers selling their own calendars on-line. | @ The producer has no ‘middle-man’ to pay and may find this approach more profitable, (©The customer benefits from personal service. Niche © More recently.the internet has made it much easier for a business to sell dectly to the customer even markets if they are on the other side ofthe world, This works particularly well in niche markets. Changes in distribution to reflect social trends ‘Online distribution © The internet has removed much of the need for some traditional distribution channels. @ It is now much easier for a customer toreach a supplier than the other way round. €@ Search engines lead the potential customer to the website to make the purchase and often within hours the goods are delivered. © Many traditional ‘bricks and mortar’ retailers also offer internet shopping and online distribution to ‘complement their high street premises. They retain their advantage in customer service while allowing the customer to pay on-line and have the product delivered. {© For many products and services, on-ine retaling cuts costs and prices. Delivering from a warehouse cheaper than having a store in a prime retail site Changing from product to service ‘@ The distribution systems described above are all about getting physical goods to the customer. Service ———=—@ Many services ae now purchased online aiine and train tickets, hotel and holiday bookings, insurance and accountancy services. Ths cuts costs. sector {© stost people rarely vit a bank, performing many banking tsk via secure connections. The same appli to many government services. © cinemas face competition frm the kes of Netflix and Amazon Prime. 2 — Scanned with CamScannerpoo 1.3.5 Marketing stratesy Businesses will considera wide range of marketing strategies. The marketing mix ~ product, price, promotion and place ~ isa collection of umbrella terms that cover all kinds of possibilities. Effective marketing means coming up with a plan that includes a number of strategies that wil in combination, achieve the highest possible level of sales and profits. The focus here is on the product. The product life cycle The product life cycle shows the different stages a product passes through. It begins as an idea, is developed, sells wel fora time and then becomes obsolete Figure 2: The stages of the product life cycle ‘sales & i Pratt, © Dectine Development | Introduction Time ‘Stage in life cycle __ Impact on cash flow Impact on marketing mix Development Research and development and Maybe some limited promotion to high levels of investment with _ alert retalers and consumers prior zero sales mean that cash flow to launch Vis all negative. Introduction Still negative aslow initial sales) Heavy promotion to create awareness; do not outweigh high costs of | competition-based prices may increase initial launch and promotion. _market share or premium prices can be charged for a new product in high demand, pcg 5 CUE eer Growth ‘Sales pick up, promotional costs Promotion may change emphasis to still high but cash flow should building brand loyalty; prices may rise become positive. to premium level or fall to match the competition and secure a mass market. ee EE Maturity ‘Cash flow should be maximised Promotion may ease as brand becomes as'sales begin to peak; average established, with occasional bursts to costs begin to fall as rising maintain sales or differentiate from production evels reduce average rival products. costs. ‘Sales will fall but cash flow may Little promotion, price i likely to fall Temain positive as average costs _ to maintain some sales until the are also low. product reaches the end of its life. ‘Some products have a very long life cycle ~like Mars bars, seling wel in the UK since 1932. Others, perhaps responding to a temporary need, may disappear after a few months. Think of London Olympics T-shirts Scanned with CamScannersaturation For some products, the maturity phase of the p this means that everyone who wants the produ ‘may be the moment for the business to think about extension stra The maturity stage is anyway the most profitable part of the prod business sense. oduct life cycle can end in mat ct already has one and sales may then drop right down, Th, ket satur ee n. Essential teaies ct life cycle, so extending it makes goog Extension strategies can be used when sales are slowing, to increase sales by re-launching the product with a new image or aiming a a different market segment or promoting it in new ways, Figure 3: The effect on soles of an extension strategy ‘sales Time Extension strategies may involve changing the product or the promotion plan, or both: Changing the product “*\Re-launching can keep sales high, add value and keep the product in the maturity stage. «It might involve new model with improvements and updates that will attract both old and new ‘customers, e.g. the iPhone, The brand name stays but the updates and improvements enhance attractiveness, «= The product can also be ¥e-positioned to suit ‘a new market segment. Many confectionery brands have become ice creams and drinks, i.e. furthehdifferentiating the product. Using fresh promotion strategies « Promotion is likely to be used to accompany the re-launch of an existing product. It can also be used to breathe fresh life into the product with or'Fe-branding. Promotion ‘an be used to emphasise the USP or reinforce an image. ‘It can be used to change a customer's perception of the product and even re-position it entirely slincentives can be offered to persuade customers away from a rivals product. The Boston Matrix ‘Most businesses have more than one product to sell. Their range is known as the product portfolio. erent eee sometimes called the Product porto ana businesses fo make plans forthe future ensuing ng Scanned with CamScanner Ai iCash cows: Dogs ‘The Boston Matrix, shown in Figure 4, places products in four categories according to their market share and market growth: © Stars have a significant market share of a fast growing market. @ Problem Children or Question Marks have a small share of a fast growing market, but have potential for faster growth in the future. They need to be promoted and perhaps adapted to fit customer requirements more closely. © Cash cows have a large share of a slow growing or static market and selling well. They are usually relied upon to provide a steady stream of profits that can be used to help develop potential Stars or support Problem Children ~ they may be the Cash Cows of the futur. © Dogs have a low share of a low growth market. Usually the best strategy is to discontinue production, unless they can be repositioned. Figure 4: The Boston Matrix Market Growth High Low ‘Star High Market Share Low a Within the product portfolio, businesses will im to have viable products in each category. Production of dogs should cease as soon as they no longer make any profit. The Boston Matrix helps businesses to keep product portfolios developing continuously, providing for long-term market success, Each product will require a different marketing mix. The position of each product on the matrix can give clues as to the marketing strategies that are most likely to bring result. Scanned with CamScannerMarketing strategies —~ al “Marketing objectives are the longer term marketing goals and targets that a business is trying to reach. (Marketing strategies are used in order to meet the marketing objectives set by the business, Marketing objectives might include increasing sales or market share, or raising profit levels. Marketing strategies appropriate for different types of market Marketing strategy Target markets Methods used ‘Mass markets ‘Amass marketing strategy Mass marketing aims to “Price is important and aims to¥each large numbers of | Vattract all kinds oF buyers, promotion tends to focus, ‘Vpeople. A business may decide __the requirements of on radio, television, and ‘diignore market Segments and potential customers tend newspapers to reach the appeal to the whole market to be general and non- largest possible audience; with a single product, priced attractively, and one strategy. With 2niche marketing — “strategy, the product is carefully differentiated and Specifically aimed at the niche '\ market segment, A’business to business ‘\(62B) marketing strategy refers to the process of selling products or services to other businesses, Advertising may be through trade journals or web specific. ‘The product or service is ‘Niche marketingocuses‘on ‘Va particular Segment of the market that is likely to respond positively to a niche product or service. Many small businesses exposure to the product is maximised. Distribution strategies need to reach ‘everyone. ' Price is less important but » the medium used must target ‘the niche precisely, perhaps using specialist publications, ‘websites or social media ‘groups. rice is importantin BB. It may vary from customer to customer depending on the size of the order. The product itself can be important, not {ust in terms of quality but sites, Product design may have _exist to provide services also in the ability to deliver to be negotiated in detail. for other businesses, e.g. on time or guarantee supplies accountants, cleaners etc, _in the future. A ‘The customer deals with Advertising would probably the supplier directly; there not use TV, but involve a rage ‘would involve selling directly iso wholesaler or retailer of media including the press, to customers who are buying _involved. The target market magazines, web sites, widely products or services for might be the general public distributed catalogues or cold personal use. It applies to (mass market) but is most calling. Distribution must be ‘on-line buying (etailing) and _likely to be a specific efficient for B2C to work mail order. tis particularly ‘market segment where well. ‘useful where the market is buyers are located in many | widely scattered with no local different places. concentration of customers. o Scanned with CamScanner —For mar ny products, image and style carry a message that customers make into o part of their own imag ‘and identity. Consumer behaviour — how businesses develop customer loyalty Customer loyalty matters because: Repeat @iitis easier to market and sell products to customers who are already familiar with them purchases @ it is harder and more expensive to attract new customers © Loyal customers make repeat purchases and may recommend the business to friends. Effective promotion and a strong brand image help to develop customer loyalty. Product design can be very important too - the iPhone isthe obvious example. For many products, image and style carry a message that customers make into a part of their own image and identity. Businesses try to design their promotional activities in ways that encourage this, © New software has created possibilities for customer relationship management. Many businesses aim to keep in touch with their customers through on-line communities and other forms of social media advertising, Through this approach they alert their loyal customers to new products or upgrades or fashion styles. ‘Example As Microsoft puts it in its own promotional material, “Microsoft ‘Dynamics business solutions energize ‘and empower customer engagement with real-time information and collaboration.” The idea is that. ‘businesses should use IT systems to store information about their customers so that they can target Individual customers with promotional material specifically designed to engage their interest. Keep an eye on your emails. You may already be being targeted. © Customer service that is really helpful engenders trust and encourages repeat purchases. Giving good service advice and acting swiftly if anything goes wrong can both create loyal and happy customers. @ Loyalty cards and saver schemes are often favoured by supermarket chains, aitines, hotels and coffee chains, Waterstones are trying to hold onto their customers with loyalty cards. Typically, loyalty cards either entitle customers to a discount there and then, or let them accrue points or tokens for use against future purchases. Tis may encourage people who buy a great deal from one retailer to avoid competing products, Scanned with CamScannerValued staff ‘Outsourcing Managing people 1.4.1 Approaches to staffing l Staff as an asset; staff as a cost |n business an asset is defined as something of value, such as cash, equipment, inventory, ‘outstanding debts due to be paid (accounts receivable), or buildings. In business a liability is defined as something that has a negative effect on the value ofthe busines, such as @ loan that must be repaid or outstanding invoices for supplies. Just lke any other Facet of a business, staff can be seen as an asset ora liability. ‘Some managers believe that staff are cuca tothe success of a business and that looking after and airg ‘them s a priority. Other managers see staff a amajor item of expenditure and asa large proportion of as, Staff as an asset ‘Staff as a cost or liability '* Staff are seen as a valuable and skilled » Labour is seen as a resource to be used as resource capable of developing either by. cheaply as possible. Pay may be at the themselves or with help from management. minimum wage level, sometimes involving + In doing s0 their vole tothe business Zeo-hows contracts, providing vey Blt 2 curity. Or pay may be atthe lowes evel increases and they become more efficient and 1 | _ productive. They ate more likely to care about that will attract people with the necessary the business and work well with customers, ae ‘© While there may be short term cost, * Some businesses prefer to get part or all ‘investment in staff is more likely to be Droduction carried out abroad where wage productive and cost effective in the long run, ‘3 te lower. Tiss called outsourcing and has become common in the past few decades, Flexible workforce eS A exible workfore can adapt quickly: there may bea sudden change in customer demand and enalo®* hhave to adjust to this. They may be able to move easily fom one task to another or may be asked tow more ot fewer hours. Some businesses use part-timers. In todays highly competitive markets, ha? flexible and responsive workforce may be essential. In oder to compete effectively, a bsines needs ot an its fet; restrictive working practices and a lack of fexbility can increase production cae and ei competitiveness, leading eventually tothe decline ofthe business, Multi-skilling ee ee ee ‘Multi-skilling i the practice of training employees so that the y have the ability to doa ange of tasks, or of recruiting employees wo have several sls, steel dete | } €@ staff absences can be covered easy without any las of production (©The business can respond to unexpected changes in demand and special orders, © The business becomes much more fesible Scanned with CamScanner__ iQ Zero hours contracts, ‘© Employees may find that theic jobs are less tedious or repetitive and respond to increased responsibility. © All this provides a competitive advantage in today’s fast moving and dynamic economy. Part. ‘Many businesses are not suited to having a full-time and permanent staff; demand varies according to the time of day or the season, Pubs, farmers and many other employers want help just when they need it. e and temporary work Employers Employees ‘Advantages « Pay forstaffonly when needed, May sut some workers e., parents reducing labour costs. with school-age children or students. + Less costly in terms of employment» Flexible working hours suit some rights. employees. Disadvantages _« Employees may not be 3s Lack of job security and full i committed or motivated. ‘employment rights. Increasing numbers of people are offered zero-hours contracts; the employer does not have to provide the employee with any particular number of working hours, and the employee is not obliged to accept the hours offered. This ensures great flexibility for both but leaves employees without the security ofa reliable income. Fle je hours Flexible hours require the employee to work a certain number of hours in a given time period but ‘mostly there are no fied hours when they have to be on ste. | 50 an employee could start early and finish late and vice versa; by working an hour or two extra each day they can take a day off when it suits them. This system is sometimes called flex-time. Home working ‘This means working from home in affice-type jobs, or roles involving travel where home is used asa base. Employees I Employers | ‘Advantages « Less office space and other “ Reduces the time and cost of : | overheads means lower cos. commuting. | 4 Productivity canincrease when _« Working hours may be more flexible t away from workplace distractions, __and suit other ifestye requirements. ft i | Disadvantages + Employers must trust that the ‘= Can be lonely without the company | ‘employee will work efficiently of fellow workers. ! pahlebipe re The home needs tobe equipped ( asa works, Fry Scanned with CamScannerCutting [labour costs Trade unions Outsourcing ss or processes are undertaken by an exter) local or overseas. re business t her business that may be | Tanging from simple services such 25 off ‘some oral of the production of isha ‘Outsourcing refers to the situation wher provider. Inputs are bought in from anoth (© Outsourcing can cover a wide variety of business needs, cleaning to highly skilled consultancy inputs. Or it may involve good. © By outsourcing, the business can take adv they may be more experienced and/or mare cost-effective. © Ienables the business to concentrate on what it does best and leave some aspects to somebody eke ve business can reduce its labour costs and only buy in extra help antage ofthe specialised knowledge ofthe other company, © Outsourcing usually means that th and when itis needed. (© The main disadvantage i thatthe business me work and it requires very good communication. ay not have full control over the quality ofthe outsourced The distinction between dismissal and redundancy Dismissal means a worker is tld to leave the job because thelr behaviour is unsatisfactory or they have repeatedly failed to work tothe required standard In everyday language, they are sacked © A dismissal has tobe fair and correct procedures must be followed. © A summary dismissal occurs when an employee is dismissed instantly, without notice or pay in leu of notice, usvally because of gross misconduct (e.g. theft, fraud or violence). Redundancy occurs when a worker is told to leave the job because their skills are no longer of use ‘to the organisation, ‘© Redundancy isnot the fault ofthe employee. tt may happen for many reasons e.g, mergers and takeoves say mean fewer people are required, the business may be failing or automation may mean less bout is needed, ‘@ Redundancy can be voluntary or compulsory. The right procedures must always be followed. Employer/employee relationships Employer/employee relationships Emplayers and employees need to communicate. The individual approach refers to direct discussions between an employer and an individual, Collective bargaining refers to discussions between employes and representatives of employees. Usually in eollectve bargaining the workforce fs beng represented By? ‘trade union. “The individual approach suits many employees nowadays, because many people chromed with scarce skis ae Collective bargaining suits employees in large organisations where the emy om ris likel treat all employees doing the same kind of work in the same way. ployer is likely tot Trade unions es to represent employees in situations where group action mo uP action is more effective than any individual canbe. Typically rade unions represent specific occupations e.g, RMT, which includes saaple wating onthe ana and London Undergound er cen ope oft Unit represents mostly public sector employees €© Discussions usualy focus on pay, the working environment and condition a procedures and healt & safety. ns, ours, production lve working © Employers and employees have diferent aims in ther relatonsips and may dsagree Scanned with CamScannerki Employers. want a secure future for the business and enough profit to keep the I ‘owners shareholders happy - but ~ need the co-operation and motivation of | the workforce to ensure @ long term future or enough profit. Employees ...want a good level of pay and good working conditions - but ~ they know that if the business is not successful there will be fewer or no jots. @ The outcome may be a collective agreement but disputes may be very hard or impossible to resolve. k Both sides may have little trust in one another. @ The union may undertake industrial action, involving restrictions on what work will be done and when, | ora strike, CAS ‘© Disputes can be referred to ACAS (The Advisory, Conciliation and Arbitration Service) a public body that exists to mediate and may be trusted by both sides. Sees A From ime tne bsiness may need to take on ent replacement tf. Tls proces af eutment | | can be done internally or externally Internal Internal recruitment means that potential applicants are found within the organisation. and external (Seer External recruitment means that potential candidates are found from outside the organisation, a either by advertising or using recruitment agencies. Internal recruitment External recruitment | Aavantages = Quicker and cheaper * External candidates may be more j peee ane Woe ie ‘experienced or have different sis. | ' business and the candidate + May have fresh ideas thatthe | knows the business. company needs. | g + Reduces training costs + Likely to bea larger number of ' t | ‘+ Motivates the workforce with splints) ; chances of career progression. 3 Disadvantages + Number of applicants limited by» Can be time-consuming and the size ofthe business. ‘expensive. ‘= Promoting an intemal applicant * May need a longer training and | leaves anather vacancy tobe filed. induction period. “+ May cause resentment amongst Impressions at interview might be any internal candidates nt chosen, _mstesding and mistakes may be mae, (© There is an old business saying ~ “Recruit for attitude, train for sills”, Think! {sit better fora business to recruit someone who has a positive attitude but will need training or to {ook for someone who already has the sills and experience? | a Scanned with CamScanner| Labour turnover Induction Training Fics © When younger applicants lack skills or ‘experience but may be raceptive to training. © When attitudes are important because recruits will be part ofa team, ‘© When customer relationships are crucial. Cost of recruitment and training «© When the job necessitates a certain existing 4 | level of professional competence. | | © iftraining may be lengthy or expensive, ¢ If experience is an important aspect of the | job. —| Recruitment and training are expensive and it takes some time for new recruits to become fully competen, ‘The more senior the position, the more it will cost. Hard costs + Advertising and recruitment agency costs + Interview costs and expenses and managerial time diverted. + Costs of training and induction, Soft costs « Loss of production when staff are involved in recruitment and training. ‘Time taken to build up knowledge, experience and working relationships with co-workers and customers. ‘The costs of recruitment and training mean that a high rete of labour turnover can be a real problem. t entails the loss of valued skills and knowledge and therefore lowers productivity. It may affect employee ‘motivation. (For more on motivation, see page 46.) Even so, a certain amount of labour turnover can bing in capable and innovative people who will have a positive effect. Labour turnover measures the rate at which staff leave the business, They may or may not need replacing. It can be measured by the percentage of staff leaving within a time period. ‘Types of training Indu and help motivate them, On-the-job training occurs in the workplace, sometimes as part of an apprenticeship scheme. @ The new employee learns by watching and then doing whilst under supervision, @ It may involve @ mentoring process with a trained and experienced person responsible for a planned training programme. Off-the-job training takes place away from the workplace, in colleges or specialist training centres. Training is an important aspect of any business or organisation, ‘on-going programme to maintain and improve sks, Ther ar several afferent types of training, © Induction training isthe frst stage of an ongoing training pro © It will usually involve introductions to key personnel, a tour of thy coverage of relevant health and safety requirements. Not just for new recruits but as part ofa. n is the training given to new employees to familiarise ‘them with the work environment, the requirements of the job and their colleagues. ‘gramme, designed to welcome new startes 'e premises and facilities and including occurs in the eS 65 pot oF an aprons Mea, sone On-the-job training ____ Scanned with CamScanner| = On-the-job training Off-the-job training Advantages + Usually easy to organise. «Training can be both relevant and + Cost tends to be lower as itis imewne done internally + Trainers will be professional * Training is specific to that business Training will be up to date. and therefore fully elevant. Disadvantages + The business many not have * May be more expensive. competent tae; + Trainee is offsite and not productive. * Trainers may not have up-to-date am ‘Training may be general, not specific to the job or the business. i + Trainer and recruit may be less productive initially. In practice many training schemes involve elements of both on and off-the-job training. Apprenticeships split time between the workplace and a local college. Many businesses expect training to be a lifelong process, ‘An organisational structure is the framework, usually hierarchical, which shows how a business arranges its lines of authority and communications, and allocates responsibilities and duties. © All businesses have a structure, meaning the fremework within which it operates. © The structure used will depend upon the size of the business, what it produces, its history and its comporate culture. © Each structure will have pros and cons and some may suit one sort of business better than the others. Hierarchies Ina hierarchy, employees are ranked in layers, one above the other. Each has fewer employees than the one below, in a typical pyramid shape. Hierarchies may be tall or flat. Figure 1 shows how a tall hierarchy may have several layers in between the ‘managing director and the lowest ranking employees, or no extra layers at all. Figure 1: Tall and flat hierarchies 4 tt ttt ale: titt « thtttt Tall organisation Flat organisation Scanned with CamScannerCET i Delayering {© Inthe past tall hierarchies suited businesses that wanted to supervise employees very closely fig, neatly with an autocratic leadership style (See pages S0-52)- ‘© Responsibilities are clatly defined and there are opportunities for promotion {© More ayers mean more managers can specialise... butinterdepartmentalrvaly may reduce ecg {© Flat organisations suit businesses that want to encourage flexibility in the workforce ‘© Some employees who are given more responsiblity become more motivated. ‘© Communication may be easier, faster and more effective (© Reducing the number of middle managers ~ delayering ~ can cut costs. © Ina fatter organisation, decision making may be quicker and clearer and reaction to market change ry, be faster Delayering flattens an organisational hierarchy by removing levels of management. 9 Chain of command A chain of command sets out the levels of authority forgiving and taking instructions within an ‘organisation @ The chain of command enables information and decisions to be passed through the organisation, fan those making the decisions to those affected by them. © Each individual will have links and responsibilities to others both above and below in the hierarchy. © Tall hierarchies wil have a long chain of command. Those with flat hierarchies have a short chain of command, This diagram shows a hierarchy, chain o ‘command and a span of control © The person at the top of the hierarchy st Overall charge of everyone. The next two eh the middle row are the next in line ‘authority and in tuin they are each in chase of three people on the bottom row. @ This also shows the chain of command instructions are passed down through tht @ & g 2 & &£ hierarchy from top to bottom, ay © The person atthe top has a span of cont of two and each of those has a span Control of three people. ‘Span of control The span of control i the numberof people directly answerable to each person inthe chan command. The most appropriate span of contol depends on the circumstances © Managers in tall organisations have a narrow span of control and thow wide span of contro. Delayering will usually mean that the span of cont @ Tall organisations with narrow spans of control run the risk of slo ‘communication (think of the game of ‘Chinese whispers’) — but the Ina flat organisation have? rol gets wider, w decision making and distorted }y Can monitor staff more effet 'gers may find it hard to manage so m=" ve responsibilty and become more ceati® {© in flat organisations with a wide span of control some mana people effectively ~ but this can allow staff to take on mo and productive. Scanned with CamScannerCommunication S and A Level B Figure 2: Wide and narrow spans of control O20 00 ©®@ OOO00000O | Think E oa oe | | How might a wide span of control enhance communication? i Centralised and decentralised structures ‘A centralised structure involves keeping all decision-making at the top of the hierarchy, usually in the head office (ie, amongst the most senior management) A decentralised structure means that businesses have moved the decision making process away from a central head office and spread it throughout the organisation, often to branch level. Decentralisation is closely linked with delegation (see page 50). Being centralised: advantages | Helps to maintain an overall strategic direction. + Decision making is easier and swifter. ‘Decisions can be quickly passed down the structure. | # Standardising everything may increase | efficiency. |e Favours strong leadership; this can be an | advantage in uncertain economic times. | Being decentralised: advantages | «Senior managérs concentrate on the most ___ important strategic decisions. | © Everyday decisions can be made close to. © the market. | « Local managers know their market and | eastomers and may react faster to local changes, making more effective decisions than senior managers can. | « Giving responsibility to local managers may | empower them and increase motivation, Being centralised: disadvantages _ « It can be rather bureaucratic and lack flexibility. ‘+ Can be slow to respond to local problems inthe branches, j + Decision-taking may be slower * Local managers may not be consulted, local needs may not be catered for and local opportunities may be missed. ‘© Asa result local managers may feel powerless and demotivated, Being decentralised: disadvantages * Itcan be more difficult to co-ordinate overall strategy, '* Communications may be more difficult without a clear chain of command. | ‘¢ There can be a lack of accountability if things go wrong, ‘* It may be that employees at branch level do not want the extra responsibility, Scanned with CamScannerTeamwork Creativity Efficiency © inva matrix structure individuals are assigned to teams according to their specialism, and work ona patticular project. © This can greatly encourage teamwork, empowerment and creativity and give real flexibility tose organisation, © itis particulary sited to creative organisations in fast moving markets, such as advertising agencies tech start-ups. © Once the project is complete, employees may be moved onto a different team, © it can mean that an individual reports to different managers depending on which project they are working on; careful management is required. (© This approach may be hard to manage in more stable or traditional organisations but may work f ned to a delayering process. Organisational structures, business efficiency and motivation all structures are most commonly associated with rational industries, with a centralised decseh making process, rigid chain of command and small spans of contro. (© Employees are closely supervised; the workis often simple with litle scope for initiative. (© This may be more suited to mass production where standardisation leads to greater efficiency. (© There isa trend towards flatter structures, which may be connected to the importance of goed communications in present day businesses @ Flatter organisations are more efficient when the emphasis is on encouraging individual initiative. such cases motivation I likely to be stronger. © Matrix structures work well for businesses that undertake a series of projects [14.4 Motivation in theory and practice Motivated employees are generally thought to be more productive and b and better able to com municate and collaborate, Business managers try to meet employees’ needs in a way that vil enhance their performance and productivity, so maximising efficiency. Comm more likely to be careful and conscientious of wanted emp leyuts 2 There is no ane way to improve mativation. There are many theories : ; time, many different approaches have been tried ‘out how ths canbe done and Scanned with CamScannerProductivity F W Taylor ~ scientific management Taylor on his ideas in 1917. At that time, great emphasis was placed on ‘the scientific approach’. This assumed that people are rational and respond to Incentives. pay could be inked to output, then output ld rise, Htmore is Htiess is produced then a duce Bonus seamed ebrninge ae oat Taylor used technical investigations to ify the best production methods, observing ways in which a job could be broken down into its component parts. He recommended that managers should control the workforce very carefully so that each employee was working in the most efficient way possible. Taylor's methods did make a difference, but in time they went out of fashion because: © They did not take into account individual differences in the way employees work. {© Employees became worried about their jobs as productivity increased and fewer people were needed to do the work © In order to meet productivity targets, quality could suffer. © Supervisors were needed to maintain quality and efficiency. © The repetitive nature of the work was demotivating @ People work for other reasons besides money. Mayo - human relations theory ‘e Taylor had focused only on what a worker could do if rewarded. No interest was shown in the person doing the work «© Research began to show that workers could be more productive if their human needs were addressed, ons approach emphasises the importance of the ways in which people interact The human relati treated. Motivation can Improve when the employee feels more involved, and how they are (© Aca psychologist and Harvard researcher Elton Mayo was involved in early motivation experiments in the 1930s at Western Electric's Hawthorne plant. t when workers were involved in experiments with working conditions suchas lighting heir productivity increased being involved. This became known as ‘The Hawthorne effect’. @ He discovered tha and temperature t ‘@ They were reacting positively to schological and socal factors were more important in increasing productivity, ‘@ Mayo concluded that psy é May ssng the importance of communication asa two way proces not jst from boss to worker. “o:This was the start ofthe human relations approach Scanned with CamScannerHierarchy of needs Good working conditions Motivating and Hygiene Factors, Maslow ~ hierarchy of needs © Abraham Mastow (1908-70) was a psychologist who set out to discover why people work, He identig 3 range of needs that contribute to motivation and showed how they should be met. (© Maslow pyramid starts at the base with the need for money to pay for essentials such as food anda home, (© Once the most basic needs are met, good working conditions become important, The hierarchy they ‘moves upwards to the higher order needs. Maslow’s Hierarchy of Needs Salt. ‘actualisation Self-esteem Social needs Safety needs Basie physical needs for survival Needs What they mean ae ee Self-actualisation Fulfilling potential, being able to develop. and be creative, Self-esteem Gaining respect and recognition for achievement s feeling competent. Social needs Communicating with colleagues, friendship, team-working, wast, Safety needs Assafe working environment and job securit ae Basic physical needs Having enough money for essential, Businesses satisfy these necds by Paying wages that enable employees to pay the bills, : % Problems with Maslow’s ideas... (© Some jobs ae very satisfying but do not actually pay enough for the employee tos urvve in the long run, This sometimes applies to jobs with charities, : © Not all employees needs are the same ~ some employees are so ambitious that they do not care very ‘much about communication and friendship, © The higher order needs do not have much impact f there i a treat of redundancy. ‘© However, Maslow can provide some clues as to how individuals may be motivated. Herzberg’s Two Factor Theory Frederick Herzberg (1923-2000) was also a psychologist. Both he and Maslow argued that certain neeg must be satisfied in oder to motivate people, but Herzberg based his views on research in different workplaces @ Herzberg identified the two-factor theory. He argued that there were two eee ase The ‘Motivating Factors, such as praise and promotion, are important. Buti certain ot abseng, there will be actual dissatisfaction. loyees, but @ He called these the Hygiene Factors ~ they do not by themselves hep to none employees, but ig they aren't there, dissatisfaction may occur and people may be de-motivated. i vation @ Hygiene Factors must be satisfied before any attempt can be made to improve mot Scanned with CamScanner1050 wll * Personal achievement. * Responsibility coe * Stimulating work © Praise and recognition it Hyglene Factors * Status * Promotion are satisfied first. BYEERE| ° Working conditions © Job security factors + Pay levels, ‘© Closeness of supervision '* Company policy ‘* Relations with co-workers Problems with Herzberg's ideas... ‘© As with Maslow there is a basic assumption that happy and satisfied workers will be more productive. ‘Some researchers challenge this. {© Different individuals will respond in different ways to the various factors, © For some employees, the Hygiene Factors may actually be motivating factors. © Critics of Herzberg's theory argue that the two-factor result is observed because itis natural for people to take credit for satisfaction and to blame dissatisfaction on external factors. Financial incentives These include a variety of payments that are related to performance in the workplace. The assumption is that staff performance will improve if there is a monetary reward for teaching an agreed target. Financial incentives range all the way from individual piecework schemes to the so-called ‘at-cat’ bonuses of city traders. © Financial incentive Features Problems 2 | Piecework means that each» Anagreed amount set Quality may suffer as, | production worker gets paid for each item produced. workers try to get as much | according to their level of «There isan incentive to be done as possible. output. as productive as possible. " Keommission payment is ‘* An incentive to increase» No incentive to build / | usually based on a percentage worker productivity. relations with customer. ; FpieFbusines aenerted yan kening that entre effort» Income can be uneahle tat | employee such as @ means more pay can especially na recession, eS motivate. i "Bonus schemes are designed» Canhelptorecuit, __» Notalljobsshowa clear | to motivate employees by motivate and retain staff. link between performance | rewarding them for achieving —_« can increase employee and productivity or profit. | particular targets or standards” commitment to the + Employees may neglect | set by the employer. business. ‘other goals to concentrate j on the bonus targets. } | Profitshare meansthatan _ Employeeshavean —* Notlinked to individual agreed share of the profitsis incentive to be as, performance, | pad to employes productive as possible + External factors can reduce f + Can take the form of, profit through no fauitof ; ash or share options. employees. er disputes | Performance related pay» An appraisal (review of + There may be disputes over | fee scheme where wages performance) is conducted performance measurement ‘or salaries are linked to by senior managers. ‘+ Employees may disagree performance in the workplace. payment may be based with the appraiser | There are many siferent ‘on specific targets + Some research suggests i | schemes... ‘Goals and/ortargets are that these schemescan pee set for the next appraisal, __demotivate, i Scanned with CamScannerJob enrichment Non-financial techniques to improve performance Non-financial strategies may be more effective. A combination of financial and non-financial strategi, may work well. A business may move away from a hierarchical structure by delayering, leading to a mo democratic approach. Many employees may be given more responsibilities and find this motiv Delegation ~ allowing decisions to be taken ata lower level, giving employees more financial techniques to get the best from staff ’hs far as possible, decisions can be taken by those who have to carry them out. Consultation involves discussions between managers and employees covering all aspects of the work. Empowerment - giving employees some discretion as to how they carry out their tasks, Team working organises employees into groups that take responsibilty for quality |__and finding the best ways to work. In manufacturing referred to as cell production, Encourages a sense of responsibilty and gives, ‘a chance to review areas of difficulty; can enhance efficiency. ‘Goes a stage beyond delegation, giving employees more control over theit working situation. ‘This creates opportunities for employees to solve problems and make improvements to the production process, as well as acquiring a range of skills. _ Flexible working ~ choosing the hours to be an create a family friendly working situation worked and having a variable work schedule. and improve motivation, | | Job enrichment means making work ‘meaningful and creating opportunities to acquire more skills. Herzberg defined it as “Giving people the ‘opportunity to use their ability” It can increase motivation for some people. i Job rotation — allows employees to change to different jobs from time to time Helps to avoid boredom and carelessness and is way to gain more experience. Job enlargement means requiring the employee to carry out a varied range of tasks. Fits in with teamwork and job enrichment. Similarly, it can be motivating, creating more interest in the job and offering more 1.4.5 Leadership Leadership has been defined as the at of motivating and organising a group of people to achieve 2 common goal, It involves deciding on business objectives and inspiring employees to work towards them. The distinction between management and leaderst Leaders have people who follow them while managers have people who work for them. Warren Bens: (1925-2014) pioneered leadership studies. He said there is an “important distinction between them. The! are both distinctive of each ather as well as complementary to each other in today’s business world. manager administers, a leader innovates.” €@ Inthe past, leadership and management were seen as being different and separate, ‘@ Managers do need to organise effectively, ensuring thatthe business i effi ‘avoiding expensive delays by planning effectively. ‘© Now, most people in business usually see leadership as relevant at all levels of the hierarchy. icient, minimising waste 29 a Scanned with CamScannerMotivating employees ‘Successful entrepreneurs are usually good at both leading and managing. © Successful entrepreneurs are usually good at both leading and managing. © Leading requires “the capacity to create a compelling vision and translate it into action and sustain it.” (Bennis again). © Encouraging staff to develop their skills and capabilities and recognising their achievements is an important part of both management and leadership. ‘Types of leadership style Leaders need to provide their employees with the motivation to work effectively. But different business situations require different leadership styles, depending on the nature of the business. All owners and managers bring their own personal qualities to the task of leadership but there are four broad types of leadership style. ‘Autocratic leaders take top-down decisions without consultation. There will be little information ‘on the reasoning behind decisions. Delegation is rare. Rewards and recognition may be limited and the leader does not share thoughts on future planning, Socially they will tend to keep their distance; their primary concem will be profitability. Autocratic leadership is sometimes described as authoritarian. Democratic leaders guide rather than dictate, consulting widely and encouraging everyone to participate in the decision-making process. The leader mixes informally with the group and is usualy well-known at the personal level. Individuals will have choices about how they work. Rewards are ‘open and fair in their distribution. paternalistic leaders behave rather as a parent might in making family decisions. They consult early ‘on and at every level and explain their reasons, but take the final decision themselves. They will Took for ways to develop employees’ skills and capabilities through regular training. They show concern for employees’ wellbeing and social needs. Nevertheless, they will take crucial decisions on their own. Laissez faire leaders will set the initial agenda, then stand back, giving staff complete freedom to complete the task as they see fit. They are content to sit back and are confident enough to let trait staff follow their own initiative to get the job done, There is litle involvement from the vr this does nat mean that the manager is inactive, rather that they are there to answer na i aoa supply information and step in if needed. Scanned with CamScannerand A Le Responsibility Good leaders Laissez faire Autocratic Paternalistic Democratic 135° Consultation No Sometimes Yes ee hare Employees No Sometimes ‘Yes Yes involved in decisions and take responsibility | Delegation No Mostly top-down, Yes Yes ce | Communication Top-down, * Some ‘+ Two-way Informal one-way only consultation Advantages «Can be seful_« Needs of staff « Consultation Staff can thive | for guiding new looked after increases on responsibilty i employees motivation increased ' + siden Aides motvation making can be considered so and output j crucial in a crisis better decisions Disadvantages Suggestions «Sti mostly Lengthy + Does not suit t from employees autocratic decision making all businesses maynotbe though less, Result may be» Some staff may heard harsh f a compromise, not be able to. + Staff may resent * Some staff not necessarily work without this and become wil not lke it thebest” one direction de-motivated Leadership styles {© There is no such thing as an ideal leadership style; much will depend on the personality of the ‘entrepreneur or the manager. ‘© Much wll depend on the situation the business is in; normally democratic leaders may become autocratic intimes of crisis. © ood leaders may need to adopt more than one leadership style if they are to make the most of the ‘opportunities they have. Scanned with CamScannerEntrepreneurs and leaders j 1.5.1 Role of an entrepreneur ‘An entrepreneur organises a business venture, devises the product, decides how it will ke produced, chooses an appropriate price and is responsible forthe risks involved. ‘The entrepreneur has two roles. © To create the business in the first place by combining resources in order to produce a good or a service that will sell, © Once the business has started, to be responsible for the progress and success of the business. Creating and setting up a business © Businesses are created when an entrepreneur combines Combining resources, Grom (eos resources in order to produce either a product or a freed service. echoes oo : i poe © Resources are land, labour and capital, sometimes called i human ei oe ca the factors of production. © Enterprise, provided by the entrepreneur, is the creative catalyst that brings them together to create a business. er) Factors of) | em step st new fw 't9 alse anc production. ce to cover start-up costs. Running, expanding and developing a business Setting up a new business requires vision and willingness to take risks, Developing it into a successful company requires many other ski Example (One very famous entrepreneur is Sir Stelios Haji loannou who set up easyJet in 1995 at the age of 28. The business was phenomenally successful and in 2000 it was floated on the stock | exchange, eventually becoming one of the UK's biggest businesses. A few years after the start-up, it became clear that, brilliant as he was at developing new | ideas, Stelios was not cut out for day- to-day management. Although he still ‘owns 35% of the shares, he left the | management to others but kept the ‘easy brand, going on to set up e2syCar ‘and many other easy businesses. Scanned with CamScanneree ee Process innovation Cultural attitudes: a. ting a business fail sig, © Creating a business is just the start of it. Many entrepreneuts find starting ie forward; surviving and then expanding is harder. vide leadership but shoul sy © When the business starts to grow, the ee ciscourage itive and motasy” i fer! delegate, letting others control the detail. Too muc fea bik tust cine © Some entrepreneurs concentrate on new projects they listen and take advice "the business. : © For example, market research must continue; planning ahead and careful financial management wig be needed; in particular, cash flow must be watched. Innovation within a business (intrapreneurship) rh Intrapreneurs work from inside the business, taking risks to on weber crate a) entrepreneurial skills but use them within a company, rather than launching © Intrapreneurs are employees within a business who have many of the attributes of entrepreneurs ~excey that they take fewer risks. (© Whilst the entrepreneur has an overall vision of the company as 2 whole, the intrapreneur will usualy focus on product development or new and better production methods. © They tackle difficult problems and look to improve overall productivity through process innovation, increasing the capacity of the business. © Toyota has repeatedly demonstrated intrapreneurial action, primarily by developing new ways toinceae Productivity reliability and the minimisation of waste. (Think of quality, JIT and other aspects of lan management, see pages 98-102.) © Good entrepreneurs understand the importance of intra preneurship and go out of their way to encourage it Barriers to entrepreneurship There are several broad areas of difficulty that act as barriers to entrepreneurship. {© Business survival and expansion entails risk but many © The biggest barrier to entrepreneurship. People with good ideas are unwilling to run ists tay be access to finance, Banks are usually unwilling tolendto businesses without collateral, (page 65), eee (© There sppears tobe tle cultura undestanding and appreiton of en ia re sector and in society as a whole. Changing a pee hia both in the pobc titudes in schools, trains be helpful ing centres and Universities would i pal ™ lsabled stil find it harder than it should be to become (© These difficulties have many causes including discrimination, lack of Opportunity, bureaucracy andre tape, Culturl attitudes can be hard to change ies that make it possi "isk and be ready fort: (© Financial conto and franc planning are imponane pects of SOF risk redu ition, Scanned with CamScannerEES 2 eT Morket research and financial control ‘con reciuce uncertainty ‘Conduct Market research Wiete business plan set argets { Monitor business against gets ff N Lpdate Adapt businoss busines pan ‘ohereneedea NE” Contingency planning {7.5.2 Entrepreneu ‘@ Some people say that entrepreneurs are born not made; skills. © On the other hand, there are many highly qualified ent taken MBAs (Master of Business Administration). many have © Either way, © Uncertainty is not predictable. Market change, natural catastrophes and political change may all take a business by surprise. © Uncertainty can be minimised by being well informed. Watching for any change in sales, costs and profits may give a warning signal. Similaly, doing market research and watching consumer behaviour the availabilty of labour, business competitors and the economy will help keep the business nimble. © Successful businesses are usually flexible and able to adapt rapidly to any changes in the market. Reacting quickly is critical so the ability to rethink strategies and respond is crucial. © Contingency planning means having a draft plan ready in case of a criss of an unwanted event. It is not just about major disasters lke a terrorist attack. It's also about preparing for events on a smaller scale such as the loss of data, employees, customers or supplies. motives and characteristics they have an instinctive grasp of entrepreneurial itrepreneurs often with specialist qualifications; entrepreneurs all share common characteristics and ski Scanned with CamScannerCharacteristics and skills required Characteristics and skills required iene w vowed. Commited (© Wirhout hard work an a etches ond xia io tenrepreneurs wil constant be inking Improve it a strong desire to succoes, © Anentreprenour needs to be well motivated with a song ‘There wil inevlaby be eetbacks and problems to soe. recs rhe ting ealeted is at he ight ne, odo be ict * ale oneopersr whore fo cao ae haf belt bain. «© Enrepreours do not need o be tot wat to 6. They see and siz upon every oppatiniy. ‘© Enicepreneurs need o beable to come up with goad Ideas ofan innovative way of looking a things inorder to create and maintain a compettve advantage, {© ‘Needing to survive porods when nothing goes according to plan, © Abiaty to withstand or recover from cifout stuations helps the entrepreneur oc © Witrout 100% commitment to the business itis unkely to succeed and there wil be Conard ‘constant series of problems o solve. RLCTELUTIUE] © Good envopreneurs know thelr customers needs and wants, ther vals andthe orice ‘ection and future ofthe markets as a whole, Reasons why people set up businesses Some entrepreneurs want to make money but others have nom personal satisfaction. Financial motives may involve profit sufficient for some. financial motives, relating to lifestyle a! ‘maximisation but profit satisficing may be | Profit maximisation Profit satisficing | Profit is the efference between sales revenu \ le ‘Not all entrepreneurs are motivated solely ee reteea ae een encas oe) tr ot ori ey ee. ar for both the hard work and the risks they ‘many, a level t Tce level of profit that enables them £0 continue in business may be enough. | Some entrepreneurs want tomake as much They may nog pmee They may not be - money as possible; ther primary objective is the additional tekand efor meat profit maximisation. Ban eon z its. This a ee caine satiofctng, si called profit Scanned with CamScannerEthics Non-financial motives Ethical and Green ‘An increasing number of entrepreneurs have social consciences. considerations Their businesses focus on providing ethical and/or environmentally friendly products. Social entrepreneurs Social entrepreneurs use their entrepreneurial skills to achieve benefits for society. The main aim of social entrepreneurship is to further social and environmental goals. Self-actualisation Developing an ambition may be sufficient to compensate an entrepreneur for the risks and anxieties. Others want tocaryona long-standing family business. Creativity “The satisfaction of designing a new product or one with unique features, coming up with inventive ways to market the product and solving problems in constructive ways can all help to motivate the entrepreneur. Satisfaction of making Being able to get things moving, creating and achieving deals that things happen lead to more business, can provide successful entrepreneurs with deep satisfaction. Independence Taking all your own decisions can be very motivating. Putting your ‘own ideas into action means having complete control over their development. Working hard but not necessarily from 9 to 5 is attractive to many. 1 Home working Many entrepreneurs want to be in control of their working hours and fit their working lives around other commitments, while having the ‘opportunity to develop their business idea. Itis highly unlikely that just one of these motives will apply to an entrepreneur. Itis far more likely to be a combination of them: each entrepreneur will have their own individual mixture, dictated by t and ambition. i i t Thinkd How important is profit to a business? Explain attitudes to profit in two businesses that you know about. [53 "Business objectives ‘Aims are long-term aspirations, general achievements such as achieving a strong reputation for quality or value for money. Business objectives are the intermediate targets and goals that will keep the business ‘moving in the right direction to achieve long-term success. ‘Business objectives are the goals and targets that the business needs to achieve in order to make progress towards the long-term aim. Initially, the main objective for a new business may simply be to survive. In time, the objective may change to growing the business or profit maximisation. For small businesses the predominant objective may be survival or satisficing, Larger businesses may want to maximise growth and market share, Objectives are ako shaped by the influence of stakeholders within the organisation; employees may want to maximise their welfare while managers may want to pursue sales targets to achieve bonuses. Shareholders may exert pressure to increase dividends or perhaps to fulfil environmental and social objectives, Scanned with CamScanner‘Size and ‘situs, Employee Shortterm wollte 6 longterm fond cor Social Eyeing Consu objectives qui pressure Importance Economic of proft™ environment Survival All businesses will consider survival to be their main objective at various times. There are three main circumstances that will cause a business to prioritise survival. @ In the early stages of development businesses may lack resources and experience; sles canbe ‘unpredictable and competition can be fierce for @ new business. The business is likely to have sunita as its main objective untilit can grow and become established. © Difficult trading conditions, such as those experienced in the recession (2008-12), can alter business ‘objectives. This may be due to reduced consumer spending in the high street. Falling commodity pres caused some oil and mining companies to struggle to survive after prices fell sharply in 2014-15. In a takeover bid the survival ofthe business in its existing shape becomes paramount. Directors rd managers may try to persuade shareholders not to sell shares to the rival company. In 2014 shareholdes in the UK drug company AstraZeneca rejected a hostile takeover bd from the US company Pfizer becast both the managers and the shareholders preferred to continue as an independent British compat. In the long term, the objective of survival usually gives way to other objectives. Owners may start to thik about profit maximisation and business growth. Profit maximisation \ Profit maximisation m ‘when the business sets out with the ‘aim of making as much profit ‘possible. © Some entrepreneurs are motivated by a desire to get rch, as rich as the rewards oftheir own ideas and efforts. They may want a luxuri success in terms of wealth, €@ Shareholders may favour profit maximisation as a way of increasing dividends. @ Profit provides some security and retained profit can keep a business deteriorate and losses mount up. © Retained profit can be used to fund the investment needed for ‘employees as well as shareholders. {© Those entrepreneurs who do seek to maximise profits must be car aspects of the business, ‘@ Maximising profits in the short run can make it ess easy to maintain run, Short-termism can be destructive, strong market positon in theo" possible. Others simply want to ket? ‘exansion; this approach may appeal? reful that they do not neglect othe Scanned with CamScanner ious material lifestyle or simply deft going if trading conditios |as Growth Market share | mere Sales maximisation Sales maximisation is simply sling as many items 2s possible regard “such as profitability. This often means cutting prices, © An alternative to profit maximisation is to maximise sales or sales revenue. © Asmall business may be seen as fragile and risky, whereas growth can bring some stability and increase the chances of survival. ‘© Building up a customer base and earning their loyalty can make the future less insecure, for example. © A larger business might also have a stronger competitive position, becoming more powerful in their market. ‘© A Not for Profit Organisation (NPO) may do this simply to reach as many people as possible. © Maximising sales clears unsold stock before launching a new version of a product. (© Managers may concentrate on maximising sales if it triggers a bonus for sales levels. | Stay clear on the difference betwee isnot the same as profit maxi if increased sales are brought about by price reductions. Other objectives @ Market share is measured by percentage of total sales. A business may decide that its objective is to increase its share to a certain amount and make that its target. © Cost efficiency is all about getting the maximum output from a given amount of resources, i. keeping production costs to a minimum. This could allow the business to achieve a competitive advantage by reducing prices, generating more sales, or to keep price the same and make more profit. © Employee welfare means looking after the interests of the employees, perhaps by paying a living wage cr in non-financial ways. twill help to improve employee motivation and this should benefit the business with increased productivity and staff loyalty If this reduces labour turnover it will also reduce recruitment and training costs. © Customer satisfaction can be the objective for those businesses that rely on their reputation and customers’ loyalty for repeat purchases. Ina competitive market with similar prices and products, those businesses that prioritise customer service can acquire a good reputation and gain a competitive advantage. © Social objectives can lead a business to concentrate on benefiting the community or society. This may be shown by a genuine commitment to environmental friendliness or other ethical goals, [5 Forms of business z @ All businesses need a legal structure; the choice depends upon its particular situation and needs. @ The most common types are Sole trader, partnershi imited company (p10. ‘@ Each of these business structures have their advantages and disadvantages. Liability mean: or all the financial debts oft the business, Limited liability, ‘means that the company is responsible for its debts; if these mount up, the owner(s) cannot lose” ‘more than the amount of money that has already been invested in the business, Scanned with CamScanner© Sole traders and partnerships have unlimited liability which means that any debts Incured by \ business become the personal debts of the owners. © They may have to sell personal possessions such as their houses to clear the debts s0 unlimited tabi, is risky. © Limited liability companies are legal entities in their own right and therefore the owners (shareholdes) ‘re not personally responsible for business debts. © Limited liability is much less risky for the owners. Sole traders, partnerships and private limited companies Description Advantages Disadvantages ‘A sole trader is self-, ‘= Keeps all the profit from the «/Risky=no one to share work ‘employed and runs his business. and responsibility. 1 bares sineses «Has the satisfaction of being _* Responsible for all business ; in full control. Uebts. I ‘* The structure is simple to Long hours and hard work. t set-up and run. « Difficulty ifill or on holiday. | « There are no legal costs. | (Apartnership is two ‘© A partner may contribute ‘© The business still has ~ \ormore people working capital and have useful _ \ together. skills /abilities. « Each partner Wable forall) i «Responsibility can be shared; _the business debts. holidays and illness can be it . covered. ‘¢ Requires a legal partnership agreement. i , | A limited company * Shareholders have limited | Weeowned by ts liability and are not personally | \ shareholders. \responsible for debts of the f Sane May be more ait rs ‘* The most that shareholders meee | an lose is their original ‘vee after its name. Setting up requires registration with Companies House. (@ Most are smaller companies and are not listed on the Stock Exchange. ‘@ Shares cannot be bought and sold by the public. Most partnerships are small but some, like John Lewis, grow very large. Example ‘John Lenis prides itself on giving value for money and good customer service, as well as treating employees fairy. Survival is certainly important, but profit maximisation is not, although th partnership does compete vigorously with other retail outlets and partners do benefit from profits Scanned with CamScanneros | / i | t Franchisor control Social enterprise Lifestyle business Franchising v A franchise inv hes hag ot aU Yanchise) Ts ents the an, 2 Heese by one party (the franchise) to another (he brand, reso the franchisee to own and operate their own ir Uurces and existing business model of the franchisor. el eer lerted brea ‘Many famous brand Hut Each rapehon ames erate 2 tance system, such as Starbucks, Home Farm Fods and Piza over the way in which — ova by the franchisee. However, the franchisor retains some control cae and services are marketed and sold, and controls the quality and standards For the franchisor For the franchisee Advar . | ntages ‘A’quick way to expand the business. « ce TC=TFC + TVC in also be calculated as: cost per unit of output x quantity produced. Average Variable Cost (AVC) = Total Variable Costs (TVC) + Output (0) Average Fixed Cost (AFC) = Total Fixed Costs (TFC) + Output (Q) | Average Total Cost (ATC) = Total Costs (TC) + Output (Q) Note that ATC is often just written as AC. 2.23 Break-even fe of a business and the total costs. Profit is the difference between the value of the total sales revenu involved in producing that output, Its Total Revenue minus Total Costs > TR~TC. Of course, if Total Revenue is ess than Total Costs, a loss will be made. In business documents, losses are placed in brackets e.g, a £20,000 loss would be shown as (£20,000). ¢ revenue. Abusiness breaks even wiien total costs are exactly equal to total sal i to a business! No losses means survival - atleast for now. A key factor ‘bove and beyond the variable costs, to make a contribution to You can see how important this i he easier itis to cover the fixed costs. Once fixed costs are paid in this is having enough sales revenue, a fixed costs. The bigger the contribution, t for, the business starts to make a profit. Success! Contribution the difference between the price ‘ontibution is can be very helpful toa business. variable cost or P ~ AVC. 19 Price ~ Variable Cost per unit Sas i the unit price the actual costs of producing that one item are paid off profit; fixed costs still need to be paid for. the amount left over ~ the contribution, can be Knowing what the of a product and its [contribution = Sellin @ By subtracting the AVC from © What is left over is contribution, iti no itis sold and the VC fs taken away, the fixed costs. en paid off by all the individual contributions, the break-even point is ‘ble and fixed, have been accounted for. int is reached will now contribute to profit because all the fixed costs © So each time 2 uni used to help pay of © Once the fixed costs have al be reached. All the costs, both varia €@ items sold after the break-even Pol have been paid off. © This shows contribution per unt bution so that they can calculate the break even level of output. ose anecdotal coinonzo he [ouoeam ‘Contribution = Sales Revenue ~ Total Variable Costs a Scanned with CamScanner| Contribution Cal — warket in their town centre. The fixed BestBurger sells high quality handmade beefburgers at the m: n 30 itch rental and insurance. Variable costs fy costs are £2,500 a month, This covers staff salaries, pitc ce re each burger (bun, meat, salad and packaging) are £1.50 and the price Is contribution? (Answers on page 114) Break-even point The Break Even Point (BEP) is the level of output at which the Total Revenue is exactly the same as the Total Costs. At this point, neither a profit nor a loss is being made. TR = TC. When sales revenue is above the break-even point the business wil start to make 2 profit. When sales revenue is below the break-even point the business will start to make a loss. At the break-even poi xed Costs + Total Variable Costs = Total SalesRevenue me Using contribution to calculate the break-even point ‘A joiner makes wooden benches for the garden, each bench sells for £145. The joiner calculates that her fixed costs each month will be £1500. The variable costs of each bench are £95. Her monthly break-even point will be... FC 3 £1500 (145= £95) > This gives us another way to calculate profit. We now know that the break-even level of output is 30 benches per month. If sales in June were 35 benches, then the profit can be calculated as (35-30) x contribution, because for each of the benches sold beyond the BEP, the contribution is now profit. (Total Sales ~ Breakeven Sales Level) x Contribution = Profit ] (G5-30) x £50 = £250 Calculation Go back to the BestBurger question above. What will be the breakeven level of output? Margin of safety The margin of safety is the difference between the actual level of output and the break-even level of output. In our example above in June it would be 5 benches. Looked at another way, it shows by how much sales can fall before the business makes a loss. Generally the greater the margin of safety the better the postion for the business. Interpretation of break-even charts The concept of break-even analysis can be expressed in graphical form. On a breakeven chart a business can plot its total revenve, total cost variable cost and fied cost curves. Scanned with CamScannerFigure 1: The break-even level of output 7000 1 © On this chart it s easy to see that the BEP forthe joiner is 30 benches per month. (© The chart can also be used to see the ranges of output where a loss or profit is © The TR line is below the TC ne to begin with, output is low and revenue from sales does not yet cover FC; the business is making a loss. | © Eventually the lines cross and this is the break-even point where TR = TC. © Beyond this point the TR line is above TC indicating that a profit is now being made, 1g made. | Limitations of break-even analysis Break even analysis is a very useful device but it does have its limitations. | @ Unpredictable evens can occur and the further ahead the projections ae made the more unreliable they become. Costs may change, for example. © The model is also based on assumptions about future events that are not always realistic. ‘© It assumes that variable costs rise steadily, but they may not; bigger businesses can take advantage of their size to reduce average costs (these are called economies of scale and appear in Theme 3 later in the course). An example of this is bulk buying which can reduce the cost per unit. © It also assumes that output will be soldat a given price and that may not be the case; that depends on | consumer reactions and what competitors do. I | | Nevertheless it can be a useful guide and t does show the potential impact of changes in costs and revenues ‘on the break-even point, the amount of profit or loss and the margin of safety Assumptions 22) Budi TA budget isa financial plan forthe future that sets out targets to be met, the costs of achieving them and how that spending might be financed. {© Budgets can be used for any business variable asa means of both financial planning and control setting targets and enhancing motivation €@ They cover revenues and costs and canbe lage such asthe budget fora nationwide advertising campaign or emalter such asthe office budget for photocopying. © Busgets are normally set fr the financial year but can be st for any length of time depending on their purpose. ‘© They are usualy drown up or approved by senior managers and it is then upto th or departments to implement them and keep to them, p to the relevant managers fe this may mean achieving 2 certain level of sales and not spending more than the sum allowed © When the time period is over the actual figures can be compared to the ‘Asa result action can be taken if necessary. budget figures and reviewed, i Scanned with CamScanner| Review performance | : } Preparation of budgets Temes ct tai Piet Caen errr © Set objectives — managers decide what they want to achieve. © Use data — budget may be based on previous figures or other market information. © Prepare budget — decide on the actual figures to be used, setting revenue targets and cost ceiling, © Monitor progress - budgets may have to change in the light of unforeseen circumstances, © Review — when the budget period is over, check to see how well the business, cost centre or department performed Disadvantages of budgets © Can cause resentment and/or rivalry as departments compete for funding. Advantages of budgets ‘* Help to control income and expenditure. * Provide clear targets for managers. « Ifa budget is too inflexible the business | © Authority is delegated to managers which can be motivating in itself might miss opportunities when markets change. «Restrictive budgets may stifle creative managers and be de-motivating. '* Help to focus on costs. ‘* Force managers to constantly monitor their | budget and highlight waste and ineffic y iget and highlight waste and inefficiency. sting budgets can be time consuming ‘+ Help to coordinate departments and managing _—_and expensive. the business in general. rakes + IF the actual results are very different, then the value of the budget is «Help to reveal areas where corrective action is | necessary. } diminished. Preparing a budget - historical figures For an existing business it may be best to produce a budget based on previous figures, such as lat yea" sales and costs. This approach uses extrapolation to model the next year’s targets. Extrapolation means assuming that past trends wll continue into the Future. It must be used with cere because changes in business conditions may require adjustments to be made. {© As the product moves through its life cycle, it places different demands on budgets, for example less advertising may be needed. © Allowances need to be made for inflation, to ensure estimates are accurate, © IF the business wishes to expand how much extra should be added to sales targets? ‘© iF the business has grown by say, 159 in the previous yea, is this going to be a realistic target again? @ Sales figures can be unpredictable. © Costs may not stay the same. mnomic variables such asthe business cycle can affect budget figures. ‘events such as the euro crisis can affect budgets. Some Eurozone economies (though not had difficulty in competing on international markets and have experienced enforced ‘This has reduced their demand for UK exports, @ Ecor @ Unforeseen Germany) hav austerity policies. Scanned with CamScannerEfficiency Flexibility Unforeseen events such as the euro crisis con affect budgets. Preparing a budget — a new business New businesses have a problem in that they have no historical dat on instinct, experience or the competition or they can use a zero base they will have some historical data on which to base future budgets. 2. They can make a “best guess’ based .d approach. When the first year is over Preparing a budget - zero based budget is set and no money is allocated to cover costs. Zero based budgeting means just that. No stify spending on their departments. This forces them Managers must be prepared to bid for and ju to examine all their costs. Disadvantages of zero based budgets ‘Advantages of zero based budgets | T)pesources should be allocated more efiiently._« Can be more expensive, | +s Easier to adapt as circumstances change. ‘* Can be more time consuming. ' ives more flexibility in response to changes» Forceful managers may be more © nthe market or economy. successful in attracting funds than others Forces managers to think and plan more carefully. who may have more worthwhile projects. it -based budgeting every few years, or use a mixture of the expense, some businesses use Zer0 geen te receive a ‘base’ budget and have to negotiate for the rest. the two systems i.e. department Variances .d figure and the actual figure. the difference between the budgetes ‘A variance i i Jyse business performance. A favourable or postive vari ga useful tool with which to anal 2 positive variance Avatey the actu ies ve et than te budgeted ones. This may mean that sales were higher eae ied tat coms Wee lower. An unfavourable or negative variance means the opposite. ” ————————— tool wit Scanned with CamScannerthan the budgeted 0n@s- EUV taeey | ° The actual figures are worse’ ear rdea: Rout] © e.g, sales prove to be lower or costs higher EUAITIEy| © The actual figures are ‘better’ than the budgeted Seto Seirus ‘* eg. sales prove to be higher or costs lower than plann Variance analysis © Adverse variances need to be investigated, for example why have the distribution costs been 20% over budget? © Favourable variances may indicate that a department is capable of rising to challenges, and needs tobe encouraged to develop. © Small variances are not necessafly a problem; it is unlikely that the actual figure will be exactly the same as the budgeted figure. @ In terms of costs a business may well be satisfied to ‘come in under budget’. © When the variances are large, particularly if they are large negative variances, the business must take action, identifying the cause and overcoming the problem. Difficulties of budgeting Budgeting is not easy; can you accurately predict your spending level over the next year? @ Sales figures can be affected by many variables in demand such as changes in tastes, the actions of a competitor and so on. © Costs can both rise and fall atthe time of writing energy prices are falling but they can easily rse again ina short period of time. © The economy can affect both sales and costs, exchange rates change from day-to-day, inflation can increase costs and prices, the economy may move into recession and so on. (See 2.5.1.) © Government fiscal and monetary policies and new regulations may affect the business, (© Markets are dynamic; competitors are always trying to take market share and may affect sales. ‘© What happens one year may not happen the next, good sales figures one year may not be repeated, particularly if the product is reaching the end of the product lifecycle. Budgets are an essential tool in the management process. But it s also important for businesses to be flexible and respond to change in dynamic markets. Scanned with CamScanner23.7 Profit Sara _ Businesses need to know whether they are p 7 = Susanne know het thy ae potable deinen peta salt ation mat been Profit can be measured in diffe ifferent ways. The important ones fortis theme Gree profitand profit forthe ear net po, eee oft: Gr is Gross profit | Gross profits turnover (or sales revere or total even) minus variable costs, sual shown 3s cost of sales (or cost of goods sold, COGS). Gross Profit ‘Tumover - Variable Costs This provides a useful guide, but does not take into account fied costs (overheads). Businesses need t0 know how much money is left after oll costs have been paid (ie. the profit). Operating profit Operating profit is gross profit minus the fixed costs (overheads) patna profit © Turnover (Fined + Varable Coss) Operating profit i a key indicator of business performance and a figure that shareholders will watch very carefully overtime. Its also known by the acronym EBIT (Eamings Before Interest and Taxes). This does |interest from | not include any profit eared from any investments the business might have or the effects of interest investments | payments and taxes | | Profit for the year (net prof | profit minus tax plus interest, Interest may be positive or negative. Profit for the year is operating net prof, net income and net earings are different terms forthe same thing. Profit for the year, ars atthe bottom of the income statement. | | | | | | | cto enn no Je tes what i leftover afterall ests and expenses have been paid for ‘out of total revenue, i rts gots tenes of te bss who ten cheoe what od with | | | | ] } @ It is the amount of it can provide a dividend for owners/shareholders. © te can be ploughed back into the business or statement of comprehensive income (profit and loss account) Gross and operating profiad prof forthe year areal Par of the statement of comprehensive income (previously called the profit and loss account) ‘asive income sets out figures for sales revenue (turnover) and then ie statement of comprefe Te statement of cor toupof costo ave at 2 igure for profit (ors, is sometimes refered statement. It deducts each dl ioe measures the financial performance of the business. to,as the income Scanned with CamScannerEl at of comprehensive income but in any nF monitoring needs 25 wel a5 the txmay, fed period, usually a Year OF @ arte, produce a statemer All Fiited companies must by law lansing need to keep financial records for their own Pl | income statement summarises all transactions over @ Pec! : tants do not all use the sam, er. Account tems © Income statements vary from one business to ancth exactly the same way. fe same att | bone pt by tape compet they al falow ough Te sme PRE Sang ay sales revenue and deducting all costs to show how profit has been cal 1. The stages of the comprehensive income statement | ay eee | mes :: Coe Q> Ge | | income statement for Halfords Group plc for year ended 31st March 2015 5 ~ gotsem 2014 £m ——_Change én | Revenue 1025.4 9397 a7 | Gaitof sates 2791 855 86 | Gross profit 546.3 504.2 ai | Operating expenses 459.0 2266 2a Qa eZ | eee ai rencawionloeen Es 5 aa | i ae, Profit for year = 58 555 103 “The income statement for Halfords Group plc has been simplified but it shaws clearly the stages describe! above. Note that it also shows the previous financial year’s figures for comparison. Some account show the figures for upto five previous financial years, ——S.....ti‘COCOCSCSCti*tCSCSCSS Profitability describes the ability of a business to generate profits from its resources, Profit ign con their own may not help in making comparisons. Profitability relates profit levels tothe size oft business. ‘© The income statement shows that Halfords Group has increased the amount of profit for the ¥" | ten dnb £1038 |e cut we ean tel proftabity has improved without sng a prof ma ° i jin, whic | ratio Feu clelted fom te income statement gues to ge wseflinfrmation te ese aoe) ‘A profit margin tells the business just what percentage ofits turnover i ratio of profit to turnover expressed as a percentage eel Scanned with CamScanner_ profitability Interpreting operating Profit margins Sereno Calculating profit margins For all these profit margin calculations the formula is the same: Profit Turnover * 100 = (the answer will be expressed as a %) Gross profit margin = ST0ss profit x 100 turnover Operating profit margin = P&Fating profit x 100. turnover Profit for the year margin “_, Profit for the year x 100 turnover Profit for the year margin for Halfords Group 2014 = £2257 100 = 5.91% 538.7m Profit for the year margin for Halfords Gr = _f5.8m_ = 6.41% iin for Halfords Group 2015 = a We can now see that profitability (as measured by profit for the year margin) has improved by a small percentage. Try this Using the figures from Halfords calculate the gross and operating profit margins for 2014 and 2015. ‘Comment on the changes. (Answers on page 114) * The Golden Rule * By itself a profit margin is not very useful. As with any financial figure or ratio, a profit margin is only meaningful if compared with another figure, either figures for the same business in earlier years, or figures from other businesses in a similar situation for the same year. © The profit forthe year margin for Halfords Group of 6.1496 tells us little by itself. However, compared to the figure for the previous year, 5.91 %, we can see that profitability has improved, but only a little. sus another useful © Knowing that in 2015 the operating profit margin for Evans Cycles was 3.29% ‘comparison by which to judge Halford Group's financial performance. © Managers use financial Information lke this to monitor the performance of the business, Increases in profitability suggest that ther strategies are working, Decreases suggest a problem or problems that need attention. © Operating profit margins vary from industry to industry and also by size. Businesses can run on a low profit margin if turover is high. For Halfords, with 2 turnover of £1025.4m, an operating profit margin Pr sound 696s fine. Buta small Independent cycle shop with a turnover of £90,000 should want more. © Operating profit neds to be higher ifthe business i risky. Example ‘Aircraft, manufacturing is quite risky because new models have to be developed at great expense and | Jome components may fll safety tests. Costs are unpredictable but so is demand: a recession leads saree passengers fying and reduced orders, Profit margins need to be high enough to cary the business through bad patches. Scanned with CamScannerProductivity Ways to improve profitability (© Profitability depends on the relationship between price and cost. ‘© Put simply, for profitability to increas, the ‘gap’ between revenues and costs has to widen. © The strategy required will vary from one business situation to another. Price + Ratsing the price will increase the amount of profit made on each unit sold but may also cause a fall in sales. + Whether this works depends on the price elasticity of demand for the product. les + Increasing the quantity sold will improve profitability. * Fixed costs are spread over a wider range of output thus reducing average costs, + However, increasing sales is not always possible and may require extra promotion, which adds to costs Costs * Reducing costs i a straightforward way to increase profitability * The danger is that cutting costs may mean compromising on quelit, reliability or standards of service. Efficiency + Increased efficiency will help to cut costs. * Cutting back on waste, improving efficiency and concentrating on quality will help (see pages 98-102). Productivity + Producing more output with the same level of inputs will reduce average costs, | * This can mean making better use of resources, training staff and investing in ‘modem capital and up to date technology. Distinction between profit and cash © Cash and profit are ifferent. © Potentially successful businesses may fail because they have run out of cash, even though on paper they could be profitable. © Its possible to stay in business fora longtime without making a profit but without cash to pay the bill, failure is swift and inevitable. Cash is usualy in the form of money or bank deposits, some businesses would also include assets that can easily be converted into money e.. finished products. Profit isthe difference between total sales revenue and total production costs, Reasons for cash problems © Profit only begins to appear some time after considerable cash expenditures have been made, in the meantime there may not be enough cash to finance the day-to-day needs ofthe businere {© When all the up-front costs of a new business must be paid before sales can take place ‘working capital will be required. (More on working capital on page 88-89.) : © Cash flow problems caused by customers delaying payment can cause problems © A business can couse serious cash problems for itself by expanding too quickly leavi leaving it large outgoings before the benefits of expanding are realised. Ths i called overtrading ae significant Overtrading happens when a business expands too quickly and tres to engage j than the investment in working capital will allow. Working capital is cash that can be used to pay bills and employees, more business Scanned with CamScannersuccess OF insolvency Income Statement Assets and liabilities ALevel Business © New and growing our in ard the anes te particulary at sk here, Following a successful launch, orders begin to that it does not hace a Kee" £2 succeed, accepts all the orders and rushes to fulfil them, only to find '3¥e enough working capital to fund the extra suppies/workers distribution needed. 2.3.2 Liquidity ui viey refers to the ability ofthe business to pay its debts. In practical terms this means how Imuch cash the business has and whether there are other assets that can easily be turned into cash Liquidity is crucial. Without it a business may be unable to pay its bills, quickly becoming insolvent. Management must be able to watch the liquidity position continuously The three vital financial documents used by accountants and business owners are the statement of comprehensive income (see Section 2.3.1, pages 81-82), the statement of financial position and the cash flow forecast (Section 2.1.4, pages 69-72), The statement of financial position shows the assets, liabilities and net worth of a business on a given date. (In the past it was known as the balance sheet.) represents a period of time. Income Statement (Profit & Loss account) jon (Balance Sheet) _represents a single moment in time. ‘Statement of financial po: The statement of financial position... © ....is particularly useful in highlighting liquidity problems © .... shows all the assets that the business owns and allits liabilities (Le. its debts, the bills to be paid); the difference is the actual financial value of the business. ‘Assets include all the things that could be of benefit to the organisation. Those that appear on the statement of financial position are the ones that can be given a money value. Liabilities include all debts that must be repaid at some time in the future © The statement of financial position below shows the basic layout. © ‘It contains figures that can be used to obtain further financial information, including liquidity Ine ravenna cn taal production cnet Scanned with CamScanner