Book 1 Revision Notes O Level

O
REVISION NOTES –– 01
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O-LEVEL E
USMAN AKHTER
( ACCP, M.B.A “BANKING & Finance” )
V
E
EMAIL : usmanakhter@hotmail.com
CELL PHONE: 0300 6161330
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BOOKS CONSULTED:
o BUSINESS STUDIES — PETER STIMPSON
Business Studies Resource Prepared By Usman Akhter

SYLLABUS CONTENTS
BUSINESS STUDIES O-LEVEL QUICK REVISION NOTES
Unit Name O Level Topics Page No
(1) Business Activity . . . . . . . . . . . . . . . . . . . . . . . . . . . 01
1. (2) Classification of Businesses . . . . . . . . . . . . . . . . . . . 07
Understanding (3) Enterprise, Business Growth & Size . . . . . . . . . . . . . 12

Business
(4) Types of Business Organisation . . . . . . . . . . . . . . . . 22
Activity
(5) Business Objectives & Stakeholders . . . . . . . . . . . . . 33
(6) Motivation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
2. People in (7) Organisation & Management . . . . . . . . . . . . . . . . . . . 51
Organisation (8) Human Resources Management . . . . . . . . . . . . . . . . 61
(9) Internal & External Communication . . . . . . . . . . . . . . 71
(10) Marketing, Competition & Consumers . . . . . . . . . . . . 82
(11) Market Research . . . . . . . . . . . . . . . . . . . . . . . . . . 89
(12) The Marketing Mix: Product . . . . . . . . . . . . . . . . . . 101

3. Marketing (13) The Marketing Mix: Price . . . . . . . . . . . . . . . . . . . . 108
(14) The Marketing Mix: Promotion . . . . . . . . . . . . . . . . 115
(15) The Marketing Mix: Place . . . . . . . . . . . . . . . . . . . . 122
(16) Marketing Strategy . . . . . . . . . . . . . . . . . . . . . . . . 129
(17) Production of Goods & Services . . . . . . . . . . . . . . . 133

4. Operations
(18) Costs, Scale of Production & Break-even . . . . . . . . . 143
and Project
(19) Achieving Quality Production . . . . . . . . . . . . . . . . . . 150
Management
(20) Location Decisions . . . . . . . . . . . . . . . . . . . . . . . . . 153

(21) The Need for Business Finance . . . . . . . . . . . . . . . . . 159
(22) Forecasting Cash flows . . . . . . . . . . . . . . . . . . . . . . 168

5. Finance &
(23) Income Statement . . . . . . . . . . . . . . . . . . . . . . . . . 174
Accounting
(24) Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . 178
(25) Analysis of Accounts ....................... 181
6. External (26) Government Economic Objectives & Policies . . . . . . . 186
Influence on (27) Environmental & Ethical Issues . . . . . . . . . . . . . . . . 194

Business
(28) Business & International Economy . . . . . . . . . . . . . . 200
Activity
This Book For O Level Business Studies Contains 28 Chapters
Section 1
Understanding
Business Activity
Book-01 Chapter 1 | Business Activity 1
Business Activity — Chapter 01

( 1 ) The Economic Problem: Needs, Wants & Scarcity
KEY DEFINITIONS
A business is any organization that uses resource to produce the goods and
services to meet the needs and wants of the customer profitably.
The Economic Problem — Needs & Wants
Need:
A NEED is a good or service essential for living.
Examples — Water, Food, Clothing, Warmth and protection through Shelter.
Want::
A WANT is a good or service which people would like to have, but which is not essential for
living. People wants are unlimited.
Examples — Mobile Phones, Cars, Perfumes, Computers, KFC.
Consumer Goods
These are the physical and tangible goods sold to the general public. They include cars,
computers, microwaves, and washing machines, which are referred to as durable and food,
drinks, sweets, soap, shampoo, petrol as non-durable goods.
Consumer Services
These are non-tangible product that are sold to the general public and include hotel
accommodation, insurance services, cargo services, banking, education, internet and train
journeys.
Business Studies O-Level 7115, Resources Prepared By Usman Akhter . . . .

The Economic Problem
The Economic Problem results from there being unlimited wants but limited resources to
produce the goods and services to satisfy those wants. This creates scarcity which is the lack of
sufficient products to fulfill the total wants of the population.
Unlimited
Wants + Limited Resources = Scarcity
( 2 ) Factors of Production
KEY DEFINITIONS
Factors of Production are those resources needed to produce goods and

services, there are four factors of production and they are limited in supply.
The real cause of the shortage of goods and services in a country is not having too little money.
It is too few FACTORS OF PRODUCTION (also called resources of production).
These resources needed to produce goods or service; There are four factors of production.
Land
This is general term not only includes land itself but all of the natural resources of nature, such
as coal, crude oil, minerals, mines, fertile land, and timber extracted from the earth.
Labour
This is the efforts of people needed to make products. These efforts include mental and
physical efforts of the workforce who put their knowledge, skills, and abilities.
Capital
This is the finance, machinery and equipment needed for manufacture of goods.
Enterprise
This is the skill and risk-taking ability of the person who brings the other resources or factors
of production together to produce a good or service. This is also considered as a driving force
for a firm.

( 3 ) Opportunity Cost
KEY DEFINITIONS
Opportunity Cost is the next best alternative given up by choosing another item.
We make choices every day as we have limited resources but so many wants. We therefore
have to decide which wants we will satisfy and those which we will not. All choices giving
something left ─ and this is called OPPORTUNITY COST.
We do not have the resources to satisfy all our wants so the next best alternative that we give
up becomes our opportunity costs. This problem of ‘What to give up’ exist not only consumers
like us but for governments and businesses too. In making choices we need to consider carefully
that the opportunity cost to make sure it is not worth more to us than the item we are buying.
Exmpl1:: The individual chooses to buy the holiday so the car becomes the opportunity cost.
Exmpl2:: Company decides to buy Machine A, So Machine B becomes the opportunity cost.
Exmpl3:: The government chooses to build road so the school becomes the opportunity cost.

( 4 ) Specialisation: The Best Use of Limited Resources

KEY DEFINITIONS
Specialisation ▬ Occurs when people and businesses concentrate on what they

are best at.
In all societies the factors of production are in limited supply. It is therefore important to use
these resources in the most efficient ways possible. The ways in whit these resources are used
have changed greatly in the last 200 years. Very few products are now made just by the
efforts and skills of one worker. Nearly all workers specialize in one skill and more business
specialize on one product. Specialisation is now very common because:
 Specialised machinery and technology are now widely available and beneficial.
 Increasing competition means that businesses have to keep costs low.
 Most people recognize that higher living standards can result from being specialized.
( 5 ) Division of Labour (Specialisation)
Making the Best Use of Limited Resources
The resources we need to make goods and provide services ─ are in limited supply. So there is
need to effectively utilize these resources.
KEY DEFINITIONS
Division of Labour ▬ Division of Labour is when the production process is split up into
different tasks and each worker performs one of these tasks known as Specialisation.
This specialisation leads to greater efficiency and higher economic output.
Division of labour is an economic concept which states that dividing the production process
into different stages enables workers to focus on specific tasks. If workers can concentrate on
one small aspect of production, this increases overall efficiency – so long as there is
sufficient volume and quantity produced.

Advantages of Specialisation & Division of Labour:
o Workers are trained in one task and specialise in it ─ this increases efficiency.
o Less time is wasted moving from one workbench to another.
o Unit costs are reduced, because manufacturing processes can take place more
efficiently and easily.
o Higher pay for specialized work and improves skills for the particular job.
Disadvantages of Specialisation & Division of Labour:
o Workers can become bored doing just one job ─ efficiency might fall and quality
of the products may suffer.
o If one worker is absent and no one else can do the job, production might be
stopped.
o Greater cost of training workers.
o Some workers may replace by machinery which result in job losses.
( 6 ) Business Activity
KEY DEFINITIONS
Business combines factors of production to make goods and services to

satisfy the needs and wants of the people in order to earn profit.
Businesses operate within markets in which buying and selling takes place. Businesses can be
small ─ or large. Some businesses can be privately owned or owned by the public sector.
They can be owned by a single person or thousands of people such as shareholders.
Benefits of Business Activity
Business activity combines scarce factors of production in order to produce goods and services,
business produce those goods which people really needed and demanded, it also provide jobs
to unemployed people and creates the employment for the society, it also provide some
social benefits to the society. Business activity raises the living standards of the people by
creating wealth and other facilities.

( 7 ) Value Added
Value ADDED is the difference between the selling price of a completed item and the value of
the inputs or bought in materials and components.
50%
Added Value Added
Selling Value to By the Business
Price of Cost
---------------
Product
-------> Cost of
Less Business
----------
This is a very important idea and all businesses plan to add value so that sales revenue is
greater than the cost of materials. If value is not added to the materials and components that
a business buys in then::
 Other costs cannot be paid for.

 No profit will be made.
Example::
 The selling price of a newly build house is $100000.
 The value of the bought in bricks, cement, wood and other materials was $45000.
 The added value of the building firm was $55000.
 This is not profit ─ out of this the builder must pay other expenses too such as
advertising, rents and utility bills.
How Could a Business Increase Added Value?

Methods of Increasing added Value::
o Increase advertisement and promotion for the product.
o Produce high quality products that satisfy the needs and wants of the consumers.
o Create exclusive luxury environment to sell the products.
o Develop and promote the brand image of the products.

Book-01 Chapter 2 | Classification of Businesses 7
Classification of Businesses — Chapter 02

( 1 ) Stages of Economic Activity
Primary Sector:: (Stage 1)
The PRIMARY SECTOR of industry extracts

and uses the natural resources of the
earth. Activities in this sector include farming,
fishing, forestry, mining and the extraction of
natural resources such as oil, gas, copper
and other metals.
Secondary Sector:: (Stage 2)
The SECONDARY SECTOR of industry

manufactures goods using the raw materials
provided by the primary sector and converting into
processed goods. Activities include building and
construction, aircraft making, car manufacturing,
computer assembly and baking.
Tertiary Sector:: (Stage 3)
The TERTIARY SECTOR of industry provides

services to consumers and the other sectors
of industry. This stage involves providing
services to both consumers and other
businesses. Activities include transport,
banking, software developments, insurance,
teaching, hotels, hairdressing, wholesaling,
retailing, free health and rescue services.

( 2 ) Relative Importance of Economic Sectors
Which sector of industry is most important in your country? This depends on what is meant
by ’important’. Normally the three sectors of industry are compared by::
 The numbers of workers employed in each sector.

 The value of output of goods and services. (Gross Domestic Product)
Developing Countries
In some countries, primary industries such as farming and mining employ many more people
than manufacturing or service industries. These countries are often called developing countries
─ where manufacturing industry has only recently been established. As most people still live in
the rural areas with low incomes, there is little demand for services such as transport, hotels and
insurance.
Example:
Pakistan, Brazil, Iran, Nepal, Mexico, Malaysia, Thailand, Venezuela, Zimbabwe.
Developed Economies
In some countries which started up manufacturing industries many years ago, the secondary
and tertiary sectors are likely to employ many more workers than the primary sector. In
economically developed countries, most of the workers will be employed in the service sector.
The output of the tertiary sector is often higher than the other two sectors combined. Such
countries are often called the most developed countries.
Example:
Japan, USA, Australia, Canada, France, Germany, New Zealand, Turkey, UK.

( 3 ) Changes in Sector Importance
De-Industrialisation
DE-Industrialisation occurs when there is a decline in the importance of the secondary,

manufacturing sector of industry in a country, the reasons is that because most of the people
are moved from secondary to tertiary sector of industry.
In China and India, the relative importance of the tertiary and secondary sector has
increased since the 1980s, compared to the primary sector. There are several reasons for
changes in the relative importance of the three sectors over time.
 The reason of de-industrialization is that developed countries such as USA and Japan
move their secondary sector in to low costs developing or undeveloped countries
to reduce their costs of production.
 Most developed economies are losing competitiveness in manufacturing to the newly
industrialized countries such as Brazil, India and China.
 As a country’s total wealth increases and living standards rise, consumers tend to
spend a higher proportion of their incomes on services such as travel and
restaurants than on manufactured products produced from primary products.
 Sources of some primary products, such as timber, oil, gas, become depleted. This has
been true for Somalia with the cutting down of most of its forests.

( 4 ) Mixed Economy
A Mixed Economy has both a private sector and a public sector. It combines both the
features of market and command economy. Nearly every country in the world has a mixed
economy.
Private Sector
Made of businesses owned by the private people. These businesses will make their own
decisions about what to produce, how it should be produced and in what quantities.
These businesses aim to fulfill the wants of the people like luxury products and other
essential products. Most businesses in the private sector will aim to run profitably.
Public Sector
These businesses own and controlled by the government with the aim to fulfill the needs of
the people like food, education, health, medical and houses. Most of the services are low costs
or free of cost for the consumers. The money for these services collected from the taxes paid
by the people. The public departments makes decisions about what to produce and how
much to charge consumers. The money for these comes not from the user but from the
taxpayer.
Examples:: Health, Education, Defence, Public Transport, Water Supply, Street lights and
Rescue Services.
Advantages of Mixed Economy::
o In a mix economy system necessary services such as medical and education are
provided by government free of cost or in a very cheap prices so that everyone can
easily get the benefit from it.
o Private sector produces the luxury goods such as cars, computers and mobiles and
increase the variety and choice for the consumers.
o Competition is high and prices are kept low through fair competition taking place.

( 5 ) Privatization
KEY DEFINITIONS
Privatization ▬ Selling state-owned and controlled business organisations
to investors in the private sector is called privatization.
The policy of privatization leads to selling some public sector organisations such as schools,
hospitals, airlines and local authorities to private business. The main argument used by
supporters of privatization is that private business enterprises will use resources much more
efficiently, as they will be driven by the profit motive. In recent years, many governments
have changed the balance between the private sector and public sector in their economies.
Advantages of Privatization::
The profit motive of private sector businesses will lead to much greater efficiency as
compared to the businesses operated by the state, because their main objective is to earn
high profit and therefore costs must be controlled. Also private sector owners might invest
more capital in the business than the government can afford. Competition between private
sector businesses can help to improve product quality.
Disadvantages of Privatization::
However, the state should take decisions about essential industries which can be based on
the needs of society and not just the interest of stakeholders. The business in the private
sector might make more workers unemployed than a public sector business in order to cut
costs. A private sector business is also less likely to focus on social objectives.
In many European and Asian countries the water supply, electricity supply and public transport
systems have been privatized.

Book-01 Chapter 3 | (Enterprise, Business Growth & Size) 12
Enterprise, Business Growth & Size
Chapter 03
( 1 ) Enterprise and Entrepreneurship
KEY DEFINITIONS
Entrepreneur is a person who organises, operates and takes the risk for a
new business venture.
Benefits of Being an Entrepreneur Disadvantages of Being an Entrepreneur
o Risk ▬
Many new entrepreneurs’ businesses
fail, especially if there is poor
o Independence ▬ able to choose how
planning for future.
to use time and money.
o Capital ▬
o Able to put own ideas into practice.
Entrepreneurs will have to put their
o May become famous and successful
own money into the business and
if the business grows.
needed to find other sources of
o May be profitable and the income
finance.
might be higher than working as an
o Lack of knowledge and experience
employee for another business.
in starting and operating a
o Able to make use of personal
business.
interest and skills.
o Opportunity Cost ▬
Lost income from not being
employee of another firm.

( 2 ) Characteristics of Successful Entrepreneurs
Would everyone make a good entrepreneur? Probably not ─ some people do not like risk to
invest their capital ─ they might prefer to be an employee of a large scale business instead.
Characteristics of
Successful Reasons Why Important
Entrepreneurs
Long hours and short holidays are typical for many entrepreneurs
Hard Working
to make their business successful.
Making decisions such as starting a business and producing

Risk Taker
goods and services that people might buy is potentially risky.
A new business needs new ideas ─ about products, services,

Creative ways to attracting customers ─ to make it different and unique
from other existing firms.
Looking forward to a better future is essential ─ if you think only of

Optimistic
failure you will fail.
Being self-confident is necessary to convince other people of your

Self-confident skills and to convince banks and customers that your business is
going to be successful.
Being able to put new ideas into practice in interesting and

Innovative
different ways is also important.
Entrepreneurs will often have to work on their own before they can
Independent afford to employee others. Entrepreneurs must be well motivated
and be able to work without any help.
Talking clearly and confidently to banks, customers,

Effective
shareholders, suppliers and government agencies about the
Communicator
new business will raise profits and will be a successful one.

( 3 ) Why Government Support Business Start-ups
Most governments offer support to entrepreneurs. This encourages them to set up new
businesses. There are several reasons why this support is given.
o Reduce Unemployment ▬ New businesses will often create jobs to help reduce
unemployment.
o Increase Competition ▬ New businesses give consumers more choice and compete
already established businesses.
o Increase Output ▬ The economy benefits from increased output of goods and services.
o Benefit Society ▬ Entrepreneurs may create social enterprises which social offer
benefits to society other than jobs and profit.
o Can Grow Further ▬ All large businesses were small once! By supporting new firms
the government may be helping some businesses that grow to become very large and
important for the economy in future.
( 4 ) Business Plan
KEY DEFINITIONS
Business Plan is a detailed document giving detailed information about a

new or existing business that aims to convince external investors and lenders
to raise finance for the business.
A bank will almost certainly ask an entrepreneur for a business plan before agreeing to a loan to
help finance the new business.
By completing a business plan the entrepreneur is forced to think ahead and plan carefully for
the first few years. The entrepreneur will have to consider:
o What products and services do business is needed to provide and which consumers
are targeted to sell these products.
o What will be main costs of production and will enough products be sold to cover the
costs.
o Where will the firm be located?
o What machinery and how many people will be required in the business.

A business plan aims to convince external stakeholders::
(1) Introduction::
This will contain the nature of the business, its main aims and objectives, the amount of
finance required and the specific use to which this finance will be put.
(2) Business Description::

Containing evidence of past performance, legal structure, capital structure and the
background and business experience of the main owners and the board of directors selected
from the shareholders.
(3) Market Research and Marketing Plan::

This section will provide evidence of the research to support the view that the goods and
services will be successful. The business will have to make a sales forecast for the new product.
The marketing strategies such as product, price, promotion and place that will be adopted
for the successful launch and market growth of the product will be outlined.
(4) Production Plan::

This production plan will detail how the firm intends to produce the good or service in
sufficient quantities and to the necessary quality levels. Decision about the method of
production such as job, batch or flow production has to be selected.
(5) Human Resource Planning::

This part of the business plan contains the details about manpower planning, training
programs designed for employees and other employee benefit schemes such as PRP, bonus,
fringe benefits and employee welfare.
(5) Financial Information::

Financial information contains forecasted cash flow budgets, a projected profit & loss
account and balance sheet and even a forecasts break-even analysis will all help to
convince investors that this business proposal is worth supporting.
Without this detailed business plan the banks and financial institutes will be reluctant to provide
money to the business.

An example of a business plan is shown in a table below::
Name of Business Pizza Place Ltd.
Type for Organisation Private Limited Company.
To provide a high-class takeaway pizza in different flavours

Business Aim
and providing services including home delivery.
Product High-quality home-cooked pizzas.
Price Average price of $5 with $1 delivery charge.
Market Aimed for Young people, office workers and families.
Market Research
Research in the area conducted using questionnaires, research
Undertaken and the
into national trends in takeaway sales and local competitors.
Results
Human Resource Plan Eight staff members are employed initially.
Details of Business Peter Yang ─ chef of 15 years’ experience.

Owners Sabrina ─ deputy manager of a restaurant for three years.
Main suppliers ─ P & P wholesalers.

Production Details and
Fixed costs of business ─ $50000 per year.
Business Costs
Variable costs ─ approximately $1 per unit sold.
Location of Business Site in shopping street just away from the town center.
Second-hand kitchen equipment ─ $4000

Main Equipment
Second-hand motorbike ─$1000
Summary: in the first year of operations the total costs:

Forecast to be $55000 with revenue of $85000.
Forecast Profit
Forecasts Expected Profit = $30000.
Level of output to break-even ─ 12500 units per year.
Due to the high set-up and promotion costs there will be negative
Cash flow
cash flow in the first year
$10000 invested by each of owners.

Finance
Request to bank for a further $10000 plus an overdraft.

( 5 ) Comparing the Size of Businesses

Businesses can vary greatly in terms of size. Some stakeholder groups find it useful to compare
the size of businesses.
o Investors ▬ before deciding which business to put their savings into.

o Governments ▬ often there are different tax rates for small and large businesses.
o Workers ▬ to have some idea of how many people they might by working with.
o Banks ▬ to see how important a loan to the business according to its overall size.
o Competitors ▬ to compare their size and importance with other firms.
Business size can be compared in number of ways. The most common are::
o By Number of Employees
o By Sales / Profits
o By Capital Employed
o By Value of Output
By Number of Employees
This method is suitable for labour-intensive firms which hire workers to produce output, and
not suitable for automated factories which use the machines in replacement of labour.
By Capital Employed
This means the total amount of capital invested into the business. This method is more useful
for capital-intensive firms producing product using high quality of machines and
equipment’s.
By Value of Output
This method is useful for comparing the same industries through measuring the total output
of goods and services at the end of every year.
By Sales/Profits
This is often used when comparing the size of highly competitive businesses by calculating
the total sales and profits and the end of the year.
Note:: There is no perfect method for measuring the size of the firm. It is quite common that
more than one method can be used to compare the results.

( 6 ) Why do owners often want their businesses to grow?

The owners of businesses often want their firm to expand. The advantages will a business and
its owners gain from expansion are::
 The possibility of higher profits for the owners with lower average cost.
 More status and prestige for the owners and managers ─ higher salaries are often
paid to managers who control the bigger firms.
 Larger share of market ▬ the proportion of total market sales it makes is greater.
 The business has more power over suppliers, distributors and consumers.
( 7 ) How can businesses grow?

Internal Growth
Internal Growth occurs when a business expands its already existing operations.
Example:: Open new branches, build new premise, buying more machines and
equipment’s and hiring more workers within the business is considered as internal growth.
External Growth
External Growth is when a business takes over or merges with another business. It is often
known as integration as one firm integrated with other one. The two important forms of
external growth are merger and takeover.
Merger
A MERGER is when the owners of two businesses agree to join their firms together to make
one business. Two firms join together and have equal ownership.
Example: Procter & Gamble is the best example in household product maker.
ebay and skype merge their businesses.
Takeover
A TAKOVER or acquisition is when one business buys out the owners of another business. One
firm takes over another firm and has the ownership of that business. It is probably against the
wishes of the other business. For example Hewlett-Packard's takeovers Compaq and Royal
Bank of Scotland (RBS) takeovers ABN Amro Bank.

Horizontal Integration
When one firm merges with or takes over another one in the same industry at the same
stage of production. Example:: A food restaurant buys another food restaurant.
Advantages of Horizontal Vertical Integration
o The merger reduces the number of competitors in the industry.

o There are opportunities for economies of scale.
o The combined business will have a bigger market share.
Vertical Integration
When one firm merges with or takes over another one in the same industry but at a
different stage of production. Vertical integration can be forward and backward.
Forward Vertical Integration
Forward ▬ When a firm integrates with another firm at a later stage of production. Closer to
the consumer. For example, a car manufacturer takes over a car retailing business.
Advantages of Forward Vertical Integration
o The merger gives an assured company outlet for their product.

o The profit margin made by the retailer is absorbed by the expanded business.
Backward Vertical Integration
Backward ▬ When a firm integrates with another firm at an earlier stage of production.
Closer to the raw material suppliers, in case of manufacturing firm.
For example, a car manufacturer takes over a firm supplying car body panels.
Advantages of Backward Vertical Integration
o The merger gives an assured supply of important components.

o The profit margin of the supplier is absorbed by the business.

Conglomerate Integration
Conglomerate Integration ▬ is when one firm merges with or takes over a firm in a
completely different industry. This is also known as DIVERSIFICAITON.
Example:: A business building houses merges with a business making clothes.
Drawbacks of External Growth
The businesses may have different objectives and targets, the way of working and
organisation culture may be different which cause the conflict between two organizations.
It costs a lot of money to merge with or takeover another business.
Drawbacks to Customers::
Possibly less choice in the market and possibly higher prices to pay.
Drawbacks to Workers:: Possible job losses and job insecurity.
( 8 ) Problems of business growth ─

and how to overcome them
Not all business expansion leads to success. There are several reasons why business
expansion can fail to increase profit or achieve objectives set by managers.
Problem resulting from expansion Possible ways to overcome problem
Operate the business in small units ─ for example

Larger business is difficult to control.
using decentralized management structure.
Larger business leads to poor

Use latest IT equipment and telecommunications.
communication.
Expansion costs will be very huge for

Expand more slowly ─ use profits from slowly
that business which is short of
expanding business to pay for further growth.
finance.
Integrating with another business is Introducing a different style of management to

more difficult than expected due to effectively communication with the workforce ─
differentiations in culture, way of they will need to understand the reasons for the
working of different organisations. change.

( 9 ) Why do some businesses stay small?
Not all businesses grow. Some stay small, employing few people and using relatively little
capital. There are several reasons why many business remain small::
(1) The type of industry the business operates in::
Here is some example of industries where most firms remain small::

Hairdressing, car repairs, window cleaning, and convenience stores.
(2) Market Size::
Market size means the total number of consumers ─ if small; the businesses are likely to
remain small like shops exists in rural areas far away from cities, such as luxurious cars.
(3) Owner’s Objectives::
Some business owners prefer to keep their firm small. They could be more interested in
keeping control and knowing all of their staff and customers of their small business.
( 10 ) Why some businesses fail
Not all businesses are successful. The rate of failure of newly formed businesses is high ─ in
some countries, over 25 percent close within two or three years of being set up. Even old-
established businesses can close down because they make losses or run out of cash.
Poor Management ▬ is a common cause of new business failures. Lack of experience can
lead to bad decisions, such as locating the business in an area with high costs but low
demand or not using a good style of leadership for the workers.
Failure to Plan for Change ▬ The business environment is constantly changing. This adds
to the risk and uncertainty of operating a business. New technology, powerful new
competitors, change in taste, fashion and major economic changes are just some of the
factors that can lead to business failures if they are not responded to effectively.
Poor Financial Plan ▬ Shortage of cash means that workers, suppliers, creditors and
government cannot be paid on time. Failure to plan the cash flow can lead to this problem
and is a major cause of business failure.

Book-01 Chapter 4 | Types of Business Organisation 22
Types of Organisation — Chapter 04

( 1 ) Business Organisations: The Private Sector
There are five main forms of Business organization in the private sector::
o Sole Trader o Public Limited Companies

o Partnerships o Co-operatives
o Private Limited Companies o Franchise (A Legal Contract)
Business Organisations
Private Sector Public Sector
Sole traders Partnership Companies Cooperatives Other forms Public Municipal

Corporations Corporations
Private Limited Public Limited
( 2 ) Sole Trader
KEY DEFINITIONS
Sole Trader ▬ It is a business owned and operated by just one person

─ the sole trader can employ others, the owner is called the sole proprietor.
Procedure of establishing a sole trader business::
o The name of the business must be selected.

o The owner should register the firm, a send annual accounts to the government tax office.
o The sole trader observes certain laws which apply to all form in that industry.

Advantages of a sole trader::
o There were few legal requirements for sole trader business.

o Sole trader has complete control over his business and no need to consult with
others before making decisions.
o Sole trader has freedom to choose his own holidays, hours of work.
o Sole trader has an incentive to work hard as he was able to keep all of the profits.
o The firm is usually small-scale, so small amounts of capital are needed.
Disadvantages of a sole trader::
o Sole trader has no one to discuss business matters.

o Sole trader doesn’t have lot of capital to expand the business.
o There is no limited liability in a sole trader business.
o Sole trader bears all the losses from the business.
Limited Liability::
Limited Liability means that the owners of the company and the shareholders ─ cannot be held
responsible for the payments of debt the company own. The owner’s personal possessions
are not at risk.
Unlimited Liability::
Unlimited liability means that the owners of a business can be held responsible for the debts of
the business they own. Their liability is not limited to the investment they made in the
business.
Note::
Sole trader and partnership business has unlimited liability and considered to be
unincorporated businesses does not exist separately from the owners.

( 3 ) Partnership
KEY DEFINITIONS
Partnership ▬
A partnership is a group or association of between 2 to 20 people who agree to
own and run a business together. They contribute their capital in a business.
Partnership Agreement:: (Partnership Deed)
A Partnership Agreement is the written and legal agreement between business partners.
Things included in partnership deed::
o Firstly the names of all the partners written in the deed of partnership.
o The amount of capital invested in the business by all partners.
o The tasks and responsibilities to be undertaken by each partner.
o The way in which the profits would be shared between the partners.
o How long the partnership would last mostly settled at will.
o Arrangements for absence, retirement and how new partners could be admitted.
Advantages of Partnership::
o More capital could now be invested into the business from all the partners’ savings
and this would allow expansion of the business.
o The responsibilities of running the business would now be shared between the
partners.
o All partners were motivated to work hard because they would be all benefit from the
profits made.
Disadvantages of Partnership::
o More capital could now be invested into the business from all the partners’ savings
and this would allow expansion of the business.
o The responsibilities of running the business would now be shared between the
partners.
o All partners were motivated to work hard because they would be all benefit from the
profits made.

( 4 ) Private Limited Companies: (Pvt)

KEY DEFINITIONS
A private limited company has a separate legal identification form its

owners. Shares can be sold to friends and family members of the company.
Incorporated Businesses::
Incorporated businesses are companies that have separate legal status from their owners. A
private limited company has a separate legal identification form its owners. This means::
o A company exists separately from the owners and will continue to exist if one of the
owners dies.
o A Company can make contracts and legal agreements.
o Company accounts are kept separate from the accounts of the owners.
Shareholders:: Shareholders are owners of an incorporated business who invested in the

business by means of buying shares. They have the right to vote in the annual general
meeting, have limited liability and receive dividends. They buy shares which represent part
ownership of a company.
Advantages of a Private Limited Companies::
o Shares can be sold to a large number of people. These would be likely to be friends or
family members of the owner.
o All shareholders have limited liability.
o The people who started the company are able to keep control of it as long as they do not
sell too many shares to other people.
Disadvantages of a Private Limited Companies::
o There are so many legal formalities for a private limited company.

o The shares in a private limited company cannot be sold or transferred to anyone else
without the agreement of the other shareholders.

The accounts of a company are much less secret than for unincorporated firms.
When a private or public limited company establish, two documents memorandum of
association and article of association has to submit in the registrar office.
Memorandum of association contains details of how the company related to its external world.
Legal Formalities in Setting up a Company::
Memorandum and Articles are public documents. They are inter-linked and require to be
registered for the formation of a company. These two documents have nothing in common
and differ from one another in the following respects::
(1) A Memorandum of Association must be completed. This states the name of the company,
the address of the head office, the maximum share capital for which the company seeks
authorization and the declared aims of the business. It is the charter of the company and defines
the scope of its activities.
(2) Article of Association of the company is a document which regulates the internal
management structure and defining the rules made by the company for carrying out the
objects as set out in the memorandum. For example, the names of directors and the
procedures to be followed at meetings will be detailed.
When these documents have been completed satisfactorily. The Registrar of Companies will issue
a Certificate of Incorporation.

( 5 ) Public Limited Companies

KEY DEFINITIONS
Pubic limited companies are owned by the private people. These are listed
companies and register (listing) in stock exchange. General public having an
opportunity to buy the shares of a public limited company from stock exchange,
and the shares of a public limited company are openly available for everyone.
Advantages of a Public Limited Companies::
o This form of business organization still offers limited liability to all shareholders.
o It is an incorporated business and has a separate legal unit. Its accounts are kept
separately from those of the shareholders and have feature of continuity.
o There is now the opportunity to raise very large sum of capital to invest in the
business. There is no limit to the number of shareholders a public limited company can
have.
o There is no restriction on buying, selling and transfer of shares.
o A business trading as a public limited company has high status and should find it easier to
attract suppliers, banks and customers.
Disadvantages of a Public Limited Companies::
o The legal formalities of forming such a company are quite complicated and time
consuming.
o There are many more regulations and controls over plc have in order to try to protect
the interest of stakeholders, such as publication of accounts.
o Some public limited companies grow so large that they become difficult to control and
manage.
o Selling shares to the public is expensive and need advertising. The publication and
printing of thousands of copies of the prospectus is an additional cost.
o The accounts of a company are much less secret.
o Risk of takeover due to the availability of the shares on the Stock Exchange, this risk
is called divorce of ownership and control.

Annual General Meeting (AGM):
AGM held at the end of every year in a public limited company, it is a legal requirement for all
companies. Shareholders may attend and vote on who they want to be on the board of
directors for the coming year, it has mainly two major functions.
Function 1::
At annual general meeting performance of the business during last year is discussed and
explained to all the shareholders.
Function 2::
Election for selecting the board of directors is held to run the affairs of the company on behalf
of the shareholders and every shareholder has one vote for the selection.
Prospectus:: (Published Accounts of a Public Limited Company)
A PROSPECTUS is a detailed annual document issued by the directors of a public limited

company. This prospectus containing an annual report that shows the financial position of the
company at the end of the year. These are also called published accounts of a limited
company.
Dividends:
Dividends are payments made to shareholders from the profits of a company after it has paid
corporation tax. They are the return to shareholders for investing in the company.

( 6 ) Joint Ventures
KEY DEFINITIONS
A joint venture is when two or more businesses agree to start a new project
together, sharing the capital, risks and profits and create a separate business division.
This is not the same as a merger; but it can lead to mergers of the businesses if their joint
interests matched and if the joint venture is successful.
Sony-Ecricson is a joint venture by the Japanese consumer electronics company Sony

Corporation and the Swedish telecommunications company Ericsson to make mobile phone to
share research facilities and expertise of both companies.
Advantages of Joint Ventures:
o Sharing of costs ─ important for expensive projects.

o Local knowledge when Joint Venture Company is already based in the country.
o Risks are shared.
Disadvantages of Joint Ventures:
o If the new project is successful, then profits have to be shared.

o Disagreements over important decisions.
o Styles of management and culture might be so different that the two teams do not
blend well together; such as crysler and mercedeez benz.

( 7 ) Franchising
KEY DEFINITIONS
A FRANCHISE is a business based upon the use of the brand names,

promotional logos and trading methods of an existing successful business.
For example:: McDonald’s, KFC, Tessco Retail and Levis.
Franchisor: (Owner):: The franchisor sells the license to the franchises.
Franchisee (Employee):: The franchisee buys the license to operate this business from the
franchisor and responsible for operating the firm according to the policies of company.
Advantages for the Franchisor Disadvantages for the Franchisor
o The franchisor gets money through o Poor management of one

selling the license. franchised outlet could lead to a bad
o Expansion of the business is much reputation for the whole business.
faster as compared to personal outlet. o The franchisee keeps most of the
o Products will be easily sold through profits from the outlet.
franchisee.
Advantages for the Franchisee Disadvantages for the Franchisee
o The chance of business failure is much o Less independence than with

reduced because of a well-known operating a non-franchised
brand. business.
o The franchisor pays for advertising. o May be unable to make decision
o Training for staff and management is that would suit local area.
provided by the company. o Licensee fee must be paid to
company, and profits must be
shared.
Examples of Multinational Companies offer Franchise Contracts::
Domino’s, Second Cup, Pizza Hut, Subway, One Potato Two Potato, Hardees, Nestle, DHL
Logistics, 7-Eleven.

( 8 ) Business Organisations: The Public Sector

KEY DEFINITIONS
Public Sector consists of those organisations owned and control directly by

the central or local government with social objectives.
The objectives of public sector are to provide cheap or free services to everyone and to
facilitate the people living in the country. There are two main types of business organisations
in public sector::
(1) Public Corporations

(2) Municipal Enterprises
Public Corporations
KEY DEFINITIONS
Public Corporations::
These are wholly owned and managed by the central government.
Examples of these are electricity services, gas supply, hospital, education, public
transport and rail services.
Public corporations are owned by the government but the government does not directly operate
the business. These businesses are contract out to other firms and government ministers
appoint a Board of Directors, who will be given the responsibility of managing the business.
Objectives of Public Corporations::
o To keep prices low so that everybody can afford the services.

o To keep people in jobs so that unemployment does not rise.
o To offer health, education, and rescue service to the public in all areas of the country.

Advantages of Public Corporations::
o Most important services like medical and education are in public sector so that
everyone can easily get the benefits from these low costs services.
o If an important business is failing and likely to collapse, the government can step in to
nationalize it.
Disadvantages of Public Corporations::
o Subsidies can lead to the poor efficiency of public sector.

o Less competition and consumer don’t have more choice.
o Governments can use the business for the political reasons.
Municipal Enterprises
KEY DEFINITIONS
Municipal Enterprises::
These public sector organisations owned and control by local government, and
are called municipalities.
Local government authorities called municipalities usually operate some local trading activities.
Some of these services are free of cost and paid out from local taxes, such as street lighting,
schools, water Supply, local library, fire services, rescue services, cleaning services, roads repair
services, parks and theatres.

Book-01 Chapter 5 | Business Objectives & Stakeholder Objectives 33
Business Objectives & Stakeholder Objectives
Chapter 05
( 1 ) Business Objectives ─ why set them?
An objective is an aim or a target to work towards. All businesses should have objectives. They
help to make business successful. The benefits of setting objectives are::
The Benefits of Setting Objectives
 They give workers and managers a clear sense of direction to work towards and
increase motivation level.
 Clear and measurable objectives help unite the whole business towards the same goal.
 They allow an assessment to be made, at a later date, of how successful the business
has been in achieving its objectives.
( 2 ) What objectives do businesses set?
The most common objectives for businesses in the private sector are to achieve::
o Business Survival
o Profit
o Returns to Shareholders
o Growth of the Business
o Maker Share
o Service to Community
Business Survival::
When a firm has recently been set up, or when the economy is moving into recession, a
business could be more concerned with survival than anything else.
New competitors can also make a firm feel less secure. The managers of a business
threatened in because of increasing competition and could decide to use marketing
strategies such as lowering prices in order to survive.

Profit::
The owners of a business will aim for a satisfactory level of profits which will save them
having to work too many hours or paying too much in tax to the government. Profits are needed
to pay a return to the owners of the business and to fulfill the expenses. It is mostly the
case in the private sector that the business is operated with the aim of making profit. Profits are
needed to::
o Pay a return to the owners of the business for the capital invested and the risk taken.
o Provide finance for further investment in the business.
Without the profit, the owners are likely to close the business.
Returns to Shareholders::
Shareholders are the owners of limited companies. The managers of companies will often set
the objective of ‘increasing returns to shareholders’. This is to discourage shareholders
from selling their shares. Returns to shareholders are increased in two ways::
o Increasing share of profit paid to shareholders as dividends.
o Increasing share price ─ directors and managers try to make business more
successful to increase the worth and the price of shares in the stock market.
Growth::
The owners and managers of a business may aim for growth in the size of the business for a
number of reasons::
o To maximizes the profits and to increase the status of the firm.

o To provide job security and to increase the salaries and status of managers and
workers as the business expands.
o To open up new branches & offering more products to spread the risk of the firm.
o To obtain a higher market share in order to become more competitive.
Growth can only be achieved if the business’s customers are satisfied with the products or
services being provided.

Market Share::
KEY DEFINITIONS
Market Share ▬ The market share of a business is the proportion which its
sales represent of total market size.
If the total value of sales in a market is $100 million and company A sold $20 million, the
company A’s market share is 20%.
Current Business Sales

Market Share (%) = × 100
Total Market Size / Sales
Increased market share gives a business::

o Good publicity, as they could claim that they are becoming ‘the most popular’.
o Increased power over suppliers, banks and customers.
( 2 ) Social Enterprise
KEY DEFINITIONS
Social Enterprise is a business with mainly social objectives that reinvests most
of its profits into benefiting society rather than maximizing and providing
returns to owners and shareholders.
Social Enterprise is a proper private sector business that makes its money in socially
responsible ways and uses most of any surplus made to benefit society.
The features of social enterprises are::
 They directly produce goods or provide services;

 They have social aims and use ethical ways of achieving them;
 They need to make a surplus or profit to survive as they cannot rely on donations
and charities.

Objectives of Social Enterprise
Social enterprises often have three main aims. These are called Triple Bottom Line::
Economic  Make a profit to reinvest back into the business for providing benefits to
society.
Social  Provide jobs and support for poor people.
Environmental  To protect the environment and to manage the business in an

environmentally sustainable way.
Example::
Shaukat Khanum Memorial Cancer Hospital & Research Centre is an example for social
organisation that reinvests most of its profits and charities for the benefit of the society.
( 3 ) Why business objectives could change
The objectives of the businesses change over time. Here are some examples of situations in
which a business might change its objectives.
1 A business set up recently has survived for one to two years of operation and then
owners now aim to work towards for other objectives such as higher profit,
growth.
2 A business has achieved higher market share and now has the objective of earning
higher returns to shareholders.
3 A profit-making business operates in a country facing a serious economic recession

so now has the short-term objective of survival.

( 4 ) Stakeholder in Business
Which stakeholder groups are involved in business activity?
KEY DEFINITIONS
A STAKEHOLDER is any person or group with a direct or indirect interest in

the performance and activities of a business.
The following groups of people are involved in business activity and affected with the activities of
the business organisation.
Owners, Consumers, Workers, Government, Managers, Banks, The Whole Community.
(1) Owners::
They put capital in to set up and want to expand the business; they also want to have
satisfactory rate of return on their investment and they are actually the risk takers, because
the success of the business cannot be guaranteed.
o A share of the profits so that they gain a rate of return on the money
Aims: invested into the business.
o Growth of the business so that the value of their investment increases.
(2) Workers::
They are employed by the business; may be full or part time. They have to follow the
instruction of managers and may need some training and development.
o Regular payment for their work along with other fringe benefits.
Aims: o Job security – and other incentives like medical facilities.
o A job that gives satisfaction and provide motivation.

(3) Managers::
Important decisions are taken by mangers; successful decisions could lead to the business
expansion, while the poor decisions may cause the failure.
o High salaries of the important work they do.

Aims:
o Job Security and growth of the business.
(4) Government::
Government is responsible for the economy of the country; they pass laws to protect
consumers and workers. Government is also responsible for making policies that lead to
increase in Gross Domestic Product (GDP).
o Governments want businesses to succeed in their country, so that they

Aims: can pay taxes to government which is the main revenue source.
o Many laws for the protection of employees and customers.
(5) Local Community::
The community or society is greatly affected by business from dangerous products and
pollution from dirty plants and equipment’s might harm the population, and they also want
to get the jobs and some social benefits from the business activity.
o The people from the society expect more jobs, environmental

protection, socially responsible products, least dirty machines and
Aims:
equipment’s, production methods that does not damage the
environment, ethical business practices and merit goods.
(6) Consumers::
Consumers Purchase goods and services produce by the business and Provide revenue from
sale, which allows the business to function and expand.
o To receive goods and services that meet local laws regarding health and
Aims: safety, design, performance, reliable products, value for money, proper
after sales service.
(7) Other stakeholders such as bankers, suppliers and the competitors.

( 5 ) Objectives of Public Sector Businesses
The public sector comprises organizations accountable and controlled by central or local
government. The objectives of this sector are to provide low cost or even free services to
everyone living in the economy. In most countries, certain important goods and services are
provided by these state-run organizations include health and education services,
infrastructure facilities, defense and public law.
The other objectives are::
o Financial ▬ Meet profit targets set by government ─ most of the time profit is
reinvested back in the business to provide benefit to the society.
o Service ▬ Provide a service to the public in all areas of the country and meet
quality targets set by government.
o Social ▬ Protect or create employment in all areas ─ especially poor regions with
few other business employers.
( 6 ) Conflict of Objectives
Owners of the Company ▬ They are likely to want the business to work towards as much
profit as possible.
Directors & Managers ▬ They will be interested in growth of the business as their status of
the job and salaries are likely to depend on this.
Workers ▬ They will want as many jobs as possible with high salaries, good working
conditions and security of employment.
Local Community ▬ It will be concerned about jobs and environmental factors such as
pollution and ethical business practices.
Consumers ▬ They will want quality products with reasonable prices.
In practice, these stakeholder objectives could conflict with each other. For examples a cheap
method of production increase profits for the owners but cause pollution and harmful
effects for the society.

Section 2
People in Organisation

Book-01 Chapter 6 | Motivation 41
Motivation — Chapter 06
( 1 ) Why People Work
KEY DEFINITIONS
Motivation is a tool used by leaders and managers to encourage their

employees to work willingly as hard as they can.
One of the tasks of management is to get their workforce to contribute fully to the success of
the business. Four main theories are explained in this chapter to motivate the workforce.
The best-motivated workers will help an organization to achieve its objectives as cost
effectively as possible. Motivated workers will also by trying to reach their own personal goals.
Benefits of a Motivated Workforce
o Higher levels of productivity ▬ motivated employees will work harder and be more
productive.
o Better-quality products offered to customers.
o More loyalty from employees.
o Lower absenteeism rate and lower staff turnover.

( 2 ) Motivating Factors ─ Financial Motivators
It is the responsibility of management and often Human Resources Department to motivate

the workforce. A well-motivated workforce helps to raise overall productivity and efficiency.
So managers can motivate the workforce using the following methods::
Financial Rewards
Non-Financial Rewards
Introducing ways to give job satisfaction
Financial Rewards
Money may be seen as a main reason for working, it can be used to give incentives to
employees to encourage them to work harder and work more effectively. These financial or
monetary rewards are essential for motivating the employees working in an organisation.
Salaries
This is an annual sum that is usually paid on a monthly basis, normally straight into a bank
account or paid in cash. It is the most common form of payment for professional, supervisory
and management staff (white collar). The salary level is fixed each year and it is not
dependent on the number of hours worked or the number of units produced.
Wages
WAGES are often paid every week. The worker gets paid on a regular basis and does not
have to wait long for getting their regular money.
If the employee works longer than their normal working hours, they will usually be paid
overtime. This is their regular amount per hour plus an extra amount usually double the
actual hour.

Time Rate
This is payment by the hour (payment for a period of time).
 This makes it easy to calculate the worker’s wages and the worker knows exactly
what they will be paid for working a certain period of time.
 Workers will not rush their work and this could lead to high quality.
This system takes time. Good and bad workers get paid the same amount of money.
Often supervisors are needed to make sure the workers keep working and producing
high quality products, this is an expensive activity.
Note::
Time rate is often used where it is difficult to measure the output of the worker such as
tertiary sector of industry. Example a bus driver or hotel receptionist.
Piece Rate
This is where the workers are paid depending on the quantity of products made, the more
products they make, the more they get paid.
Piece rate can be applied to bonus systems where employees who produce more than a set
target of output can be rewarded.
 It encourages workers to work faster and produce more goods.

 The labour cost for each unit is determined in advance and this helps to set a price for
the product.
Workers may concentrate on making a large number of products and ignore

quality.
If the machinery breaks down, the employees will earn less money.

Commission
KEY DEFINITIONS
Commission ▬ A fee charged by an employee for providing services and facilitating

a business transaction, such as the buying or selling the goods and services.
Commission is often paid to sales staff. The more sales they make the more money they are
paid ─ similar to piece rate. This encourages the sales staff to sell as many products a possible.
Example:: Sales representatives, property dealers, commission agents and marriage beuros.
Bonus
A lump sum paid to workers when they have worked well. It can be paid at the end of the
year or at internals during the year. A sum of money in addition to basic salary that is given
to employees in order to motivate and encourages to use their full potential.
Performance Related Pay (PRP)
Employee pay is linked to the effectiveness of their work. For example police officers,
teachers, research analysts, managers and manual workers. To assess their performance,
businesses often use a system of APPRAISAL.
Profit Sharing
Employees receive a share of the profits in addition to their basic salary; this will motivate
the workers to work hard as they all receive a share of the profits earned by the business at
the end of the financial year.
Share Ownership
Employees are given some shares in the company. This should encourage them to work hard
as they will receive dividends along with their regular pay if the company performed well. They
also get the capital gain over shares.

( 3 ) Fringe Benefits as Non-Financial Motivators
FRINGE BENEFITS are non-financial rewards given to employees.

These rewards may include::
o Health & Medical Facilities o Subsidized Meals

o Medical Insurance o Company Transportation Benefits
o Children’s Education Fee o Discount on Company Products
o Generous Expense Account o Flexible Work Schedule and Hours
o Free Trips/Local/Abroad o Free Accommodation
o Free Refreshments o Utility Bills
Appraisal:: An APPRAISAL is a method of assessing the effectiveness of an employee.
( 4 ) Other Non-Monetary Ways of Motivation

Job Satisfaction
JOB SATISFACTION is the enjoyment derived from feeling that you have done a good job.
Employees have different ideas about what makes their jobs satisfying, these include::
 High Pay ▬ The amount of money paid to an employee.

 Opportunities for promotion, training and development.
 Good working conditions, normal working hours and normal room temperature
 Fringe benefits and other incentives.
 Colleagues, team working and informal groups lead to job satisfaction.
 Level of Responsibility, Authority and Delegation.
 Recognition for good work.
 Status and designation of the job.
 Lenient company policy.

Job Rotation
JOB ROTATION involves workers swapping round and doing each specific task for only a
limited time and then changing round again. Workers on a production line may carry out
simple but different tasks. Job rotation increases the variety in the work itself and also
makes it easier for the managers to move workers around the factory if some workers are not
present and their jobs need covering.
Job Enlargement
JOB ENLARGEMENT is where extra tasks of a similar level of work are added to a worker’s
job description. The extra task should not add extra work or increased responsibility to the
employee, but they should give greater variety to work and therefore increase job
satisfaction.

Job Enrichment
KEY DEFINITIONS
Job Enrichment involves adding extra tasks which will not matched with the worker’s
previous job, this is a way to organizing work so that employees are encouraged and
allowed to use their full abilities, and it leads to Self-actualization.
JOB ENRICHMENT involves looking at the job and adding tasks that require more skill and
responsibility. Additional training may be necessary to enable the employee to take on extra
tasks. Job enrichment is a way to motivate employees by giving them more responsibility and
variety in their jobs of challenging nature.
Autonomous Work Groups or Team Working
This is where a group of workers is given responsibility for a particular process, product or
development. They can decide as a group how to complete the tasks or organize the jobs. The
workers can become more involved in the decision making and take responsibility for this
process.

( 5 ) Motivation Theories
Several people have put forward theories about what they believe motivates people at work.
Managers need to be familiar with the motivation theories to encourage people to reach their
full potential.
( 6 ) F.W. Taylor’s Theory: (Scientific Management)
Taylor based his ideas on the assumption that all individual are motivated by personal gain
and therefore, if they are paid more, they will work more effectively. He broke down the
employees jobs into simple processes and then calculated how much output they should be
able to do in a day. If they produced this target output, they would be paid more money.
So according to Taylor’s view employees as disliking work and concluded that they should be
paid high wages and be closely supervised if they are to be made to work hard for the
business.
How to improve productivity:: (Taylor’s Scientific Approach)

(1) Select workers to perform a task.
(2) Observe them performing the task and note the key elements of it.
(3) Record the time taken to complete each part of the task.
(4) Identify the best and quickest method recorded.
(5) Train all workers in this quickest method and do not allow them to make any changes in
it.
(6) Supervise workers to ensure that this ‘best way’ is being carried out and check that
the set time is not being exceeded.

(7) Pay workers on the basis of performance ─ based on the theory of ‘Economic Man’.
Theory of Economic Man ▬

Taylor still believe that money is the only way to motivate staff according to the theory of
economic man, and the only factor that could stimulate further effort is the chance of earning
extra money.
Taylor’s ideas resulted in big productivity gains and many businesses adopted this idea.
However, the more general view is that workers have a wide range of needs, not just
money.

( 7 ) Maslow’s Theory:: (Hierarchy of Needs)
Maslow trying to identify and classify the main needs that humans have. The importance of his
work to business managers is this, ‘our needs determine our actions’ ─ we will always try to
satisfy them and we will be motivated to do so.
Maslow summarized these human needs in the following hierarchy::
Self-actualization:: Offer challenging work that stretches the individual ─ this will give a
sense of achievement and chance of promotion.
Esteem Needs:: Offer recognition for work done well through appreciation. Status,
advancement and responsibility will gain the respect of others.
Social Needs:: Working in teams or groups and ensuring good communication and
co-ordination to make workers feel involved in the business.
Safety and Security Needs:: Offering a contract of employment with some job security. A
structured organization that gives clear view of job security to reduce uncertainty. Ensuring
health and safety conditions are met.
Physical Needs:: Income from employment — high enough to meet essential & basic needs.

( 8 ) Herzberg’s Two Factors Theory
Herzberg research was based around questionnaires and interviews with employees with the
intention of discovering::
(1) Those factors that led to them having very good feelings about their jobs.
(2) Those factors that led to them having very negative feelings about the jobs.
His conclusions were that::
Job Satisfaction resulted from five main factors::
Achievement, Recognition for Achievement, Work itself, Personal Growth and Advancement.
Job Dissatisfaction resulted from five different factors::
Strict Company Policy and Administration, High Supervision, Low Salary,

Relationships with others and Poor Working Conditions. He termed these ‘Hygiene Factors’.
The Improvements of Herzberg’s two factor theory for business::

Pay and working conditions can be improved with less heavy handed supervision will help to
remove dissatisfaction about work and workers to be prepared to work willingly and to always
give of their best; but they will not provide conditions for motivation to exits.

Book-01 Chapter 7 | Organisation and Management 51
Organisation & Management
Chapter 07
( 1 ) What is Organisational Structure?
KEY DEFINITIONS
Organisational Structure refers to the levels of management and division of

responsibilities within an organisation. It is the internal formal framework of a
business that shows the way in which management is linked together and how
authority is transmitted within different layers of the managers.

Levels of Hierarchy: (Managers)

Levels of hierarchy refer to the layers of management in a pyramid of organizational structure.
Managers are leaders who play an integral role in the organizations for which they work. In
most organizations, this hierarchy consists of three primary levels.
Top Managers ▬ Set Business Objectives, Plan and Make Decisions.
Middle Managers ▬ Report to Top Management, Organize their Departments, Allocate
Responsibilities and Resources.
Lower Managers ▬ Report to Middle Manager, Supervise Employees, Co-ordinate Activities,
Involved in Day-to-Day Operations.
Superior::
A superior is someone with higher rank or status from others and have some authority, that
person is responsible for organising the immediate subordinates within the business.
Subordinate::
A person under the authority or control of another within an organization, who performs the
tasks and responsibility according to the instruction given by the superior manager.
A subordinate is someone who works for someone else.

( 2 ) Organisational Charts
KEY DEFINITIONS
Organisational Chart::
An organizational chart is a diagram that shows the structure of an organization,
relationships and relative ranks of its parts and positions of everyone.
An organizational chart is useful to the employees as they can identify the chain of command for
the purpose of formal communication, and will know who has line authority over them. The
most important features of organisational chart are as follows::
o The chart shows how everybody is linked together in the organisation. All employees
are aware of which communication channel is used to reach them with messages and
instructions.
o Organizational chart help build and design the organization structure to meet the
business objectives.
o Organizational chart can guide the employees to know their rights, responsibilities and
the relationships.
o It is organised into departments and each of these departments has a particular job
area of responsibility.
o There is a hierarchy that shows the chain of command. This is how power and
authority is passed down from the top to the lower levels in the organisation and
every level has a different degree of authority.

( 3 ) Key Principals of Organisational Structure

(1) Chain of Command:
KEY DEFINITIONS
CHAIN OF COMMAND is the structure acting as a route in an organisation which

allows instructions to be passed down from senior management to lower levels of
management.
There are two types of chains or structure within a business organisation.
(1) Tall or Narrow Structure ▬ It means more levels of hierarchy exists in an

organisational structure, and there is a narrow span of control in tall structure.
(2) Short or Wide Structure ▬ It means only few levels of hierarchy exists in an
organisational structure, and there is a wider span of control in short structure.
(2) Span of Control:
KEY DEFINITIONS
Span of Control ▬ The SPAN OF CONTORL is the number of

subordinates working directly under a manger.
There are two types of span of control within a business organisation.
(1) Wider Span of Control ▬ Wider span means more number of subordinates working
under a manager, responsibilities are delegated to workers with low supervision.
(2) Narrow Span of Control ▬ Narrow span means only few subordinates working under a
manager, and there will be less delegation with high supervision.

Advantages of Short Chains of Command:
 Communication is quicker and more accurate. Each message has fewer levels to pass
through before reaching the intended person.
 Top managers are less remote from the lower level of the hierarchy.
 Spans of control will be wider. This means that each manager is responsible for more
subordinates, it will encourage managers to delegate more and there will be less
direct control of each worker and they will feel more trusted and obtain more job
satisfaction.
( 4 ) The Role of Management
All organizations, including businesses, have managers to organize. Different titles can be used
─ leader, director, chief executive, supervisors, line managers, head teacher, and so.
KEY DEFINITIONS
Managers are responsible for setting objectives, organising resources and

motivating staff so that the organizations aims are met. Managers get things
done by working with and through other people.
( 5 ) Functions or Roles of Managers within a Business
1) Planning
2) Organising
3) Co-ordinating
4) Commanding
5) Controlling
Planning
Planning for the future of the organisation involves setting aims or targets. The aims or targets
will give the organisation a sense of direction and purpose. These aims also used to plan for
the resources which will be needed.
Key Points::
Setting aims and targets, defining goals, making strategies, forecasting sales and budgets.

Organising
A manager cannot do everything. Tasks must be delegated to others in the organisation. These
people must have the resources to be able to do these tasks successfully. It is therefore the
manager’s responsibility to organize people and resource effectively.
Key Points:: Delegating task and responsibilities to workers, allocation of resources, organising
all other activities of the business.
Co-ordinating
Co-ordinating means ‘bringing people and resources together’. A manager may be very
good at planning and organising but may have failed to ‘bring people in the organisation
together’.
In functional form of organisation different department can be working away in their own
specialist area without making contact with people from other departments. A manager will
make sure that all departments and people in the organisation work together to achieve the
plans set by the manager.
Key Points:: Developing relationships of workers, linking all departments with each other,
establishing co-ordination between different regions.
Commanding
The task of management is more concerned with guiding, leading, motivating and
supervising people than just telling them what to do. Managers have to make sure that all
supervisors and workers are keeping to targets and deadlines. Instructions and guidance
must be provided by managers.
Key Points:: Guiding, leading, supervising, motivating.
Controlling
Managers must try to measure and evaluate the work of all individuals and groups to make
sure that they are on target. If certain groups are failing to do what is expected of them, then
managers may have to take some corrective action.
Key Points:: Measuring and evaluating the performance against the pre-set targets, take
corrective actions for poor performance, target achievements.

( 6 ) Delegation
KEY DEFINITIONS
DELEGATION means giving a subordinate the authority to perform particular

tasks. It is very important to remember that it is the authority to perform a
task which is being delegated – not the final responsibility.
Advantages of Delegation for the Managers::
Managers cannot do every job themselves, so that they assign the task and
responsibilities to the workers. Managers are less likely to make mistakes if most of the
tasks are being performed by specialized subordinates. Managers can measure the
success of their staff more easily.
Advantages of Delegation for the Subordinates::
The work becomes more interesting and rewarding for the workers. Employees feel more
important and believe that trust is being put in them to perform job well. Delegation also
helps to train workers and they can then make progress in the organisation.
Diagram helps to explain the

concept of delegation.

( 7 ) Leadership
KEY DEFINITIONS
Leadership is the art of motivating a group of people to act towards achieving a

common goal; the leader is an inspiring personality and director of the action.
Leadership Styles::
LEADERSHIP STYLES are three different approaches to dealing with people when in a
position of authority.
o Autocratic (authoritarian)
o Laissez-Faire (let them do it)
o Democratic (participative)
Autocratic Leadership
Autocratic leaders take decisions on their own with no discussion with anyone. They set
business objectives themselves, issue instructions to workers and check to ensure that they
are carried out. Workers can become so familiar to this style that they are dependent on
their leaders for all guidance and will not show any initiative. Motivation levels are likely to
be low so high supervision of staff will be essential. Autocratic leaders use one-way
communication link.
Example:: Armed Forces and the Police, Railway Track Changers.
Benefits::
Experience leaders take all the decisions and supervise workers closely, so there is a less
chance of making mistakes.
Drawbacks::
It de-motivates staffs who want to contribute and accept responsibility.

Laissez-Faire Leadership Style
Laissez-faire is a French word means ‘leave to do’. This style of leadership tends to make the
broad objectives of the business known to employees, but then they are left to make their
own decisions and organize their own work.
Benefits::
Managers delegate all authority and decision making powers to the workers and this will
increase motivation levels and productivity of the business.
Drawback::
Leaving workers to their own devices with little direction might lead to a lack of confidence,
poor decisions and poor motivation as they are never sure if that they are doing is ‘right’ or
‘wrong’.
Democratic Leadership
This type of leadership will get other employees involved in the decision making process.
Information about future plans will be openly discussed before the final decision will be made
by the leader.
Full participation in the decision making process is encouraged. This may lead to better final
decisions as the staff have much to contribute and can offer valuable work experience to
new situations. Democratic leaders use two-way communication link.
Benefits:: Participation encourages workers to give their ideas and suggestion using two
way communication, this involvement increases number of ideas and power of decision
making.
Drawbacks::
Consultation can be time consuming and
not suitable where the quick decision will
be required, some issues might be
sensitive and not possible to share with
workers, such as strategic issues deals by
most senior directors without the
involvement of employees.

( 8 ) Trade Union
Trade Unions are organisations of working people with the objective of improving the
financial rewards and working conditions of their members and providing them with
support and legal services to ensure fair and equal treatment.
Forming a trade union is a type of pressure group which helping employees to achieve
improvements in different aspects of their employment ─ such as improving their pay,
having a pleasant environment in which to work, being treated fairly by their employee,
being given proper training and working in a safe environment.
Advantages to Employees of Trade Union Membership
(1) Workers have strong bargaining power because they have strength in numbers.
(2) Improved conditions of employment, for example, rates of pay, holidays, hours of work
and other fringe benefits.
(3) Improved environment where people work, for example health and safety, noise, heating.
(4) Improved benefits for members who are not working because they are sick, retired.
(5) Improved job satisfaction by encouraging training.
(6) Being treated fairly by their employer.
(7) Advice and/or provide financial support if a member thinks that he has been unfairly
dismissed or made redundant from the job.
(8) Trade unions provide members with the opportunity to access the benefits of collective
bargaining; they collectively negotiate better pay and conditions on behalf of their members.

Book-01 Chapter 8 | Recruitment, Selection & Training of Workers 61
Human Resources Management

Chapter 08
( 1 ) The Role of Human Resources Department
KEY DEFINITIONS
Human Resource Management (HRM)

The Department in organization designed to effectively manage and maximize
employee performance so that they help the business gain a competitive advantage.
The purpose of Human Resource Departments is to recruit capable, flexible and committed
people, managing and rewarding their performance and developing their key skills to the aims
and objectives of the business organisation.
(1) Recruitment & Selection

(2) Internal & External Recruitment
(3) The Contract of Employment
(4) Training Programs
(5) Workforce Planning
(6) Dismissal & Redundancy
(7) Protecting Employees

( 2 ) Recruitment & Selection

KEY DEFINITIONS
Recruitment ▬ The process of attracting, selecting and appointing suitable

employee, defining the job to be filled and the type of person needed to fill it,
sort listing suitable candidates for the job and selecting the best one.
When an employee leaves a job, when a new business is starting up or when a business is
successful and wants to expand, the process of recruitment and selection starts.
The recruitment process also gives the business an opportunity to reassess the nature of
people’s jobs and consider future requirements through the process of job evaluation.: Needs
( Step 1 ) Job Analysis
A JOB ANALYSIS identify the nature and records the responsibilities, tasks and essential
functions as well as the competencies, knowledge, skills and abilities needed to perform the
job. If the post is already exists in the organisation, then it is relatively easy to draw up.
( Step 2 ) Job Description
A JOB DESCRIPTION outlines the responsibilities and duties to be carried out by someone
employed to do a specific job. A job description has several functions.
It is given to the candidate for the job so they know exactly and carrying out the
job effectively.
It will allow a JOB SPECIFICATION to be drawn up, to see if the candidates ‘match
up to the job’, so that people with the right skills will be employed.

( Step 3 ) Job Specification
A JOB SPECIFICATION is a document which outlines the requirements such as qualifications,

expertise, experience and physical characteristics, for a specified job. The list of desirable and
essential requirements for the job called a job, or person, specification.
The listed requirements will usually include::
The level of educational qualifications.

The amount of experience and type of experience.
Special skills, knowledge or particular IQ.
Personal characteristics, such as nature and type of personality.
( Step 4 ) Preparing a Job Advertisement Reflecting the Requirements
This can be displayed within the business premises using notice board, company news letter,
and prospectus or company website. (Internal Recruitment)
Job advertisement can also be placed in newspapers, magazines, specialist journals and
government job centers. (External Recruitment)
( Step 5 ) Drawing up a Shortlist of Applicants:: CV or Resume
A short list of applicants is drawn up from the application forms and personal details, often
contained in CV (Curriculum Vitae). References may have been obtained in order to check on
the character, honesty level and previous work performance of the applicants.
CV contains the following details: name, address, cell no, date of birth, nationality,
education, experience, achievements and hobbies.
( Step 6 ) Conducting Interviews
Interviews are conducted which will be designed to question the applicant on their skills,
experience and character. Candidates are assessed according to achievements,
intelligence, skills, interests, personal manner, and physical appearance.

( 3 ) Types of Recruitment
Internal Recruitment
INTERNAL RECRUITMENT is when a vacancy is filled by someone who is an existing

employee of the business. It means post could be filled from inside the organisation.
Advertisement of the job:: Company News Paper, Notice Board, Intranet links.
Advantages of Internal Recruitment::
 It saves time and money, compared with recruiting someone from outside the business.
 The person is already known to the business and his reliability, ability and potential
are already known to the company.
 It can be very motivating for other employees to see their fellow workers being promoted.
Disadvantages of Internal Recruitment::

No new ideas or experience come into the business.
There may be jealousy and rivalry amongst existing employees.
External Recruitment
EXTERNAL RECRUITMENT is when a vacancy is filled by someone who is not an existing
employee and will be new to the business. This involves advertising the vacancy by using::
Local Newspapers:: These will normally be for clerical or manual positions and do
not require a high level of skill and therefore local people are more suitable.
National Newspapers:: These will normally be used for more senior positions where
there may be few local people who have the right experience, skills and qualifications to
do the job. So the job advertisement can also be read by many people who live in
different parts of the country.
Specialist Magazines and Journals:: These will be used for particular technical
people such as scientists, computer experts and accountants.
Recruitment Agencies:: These are specialists in recruiting employees. They will

advertise and interview people for particular types of jobs. They keep details of
qualified people on their books. When a suitable vacancy arises, they will put forward
candidates to be interviewed for the job.
Centers Run by the Government:: These are places where job vacancies can be
advertised. Details of vacancies are given to interested people.
( 4 ) The Contract of Employment
In many countries in the world it is a legal requirement for employers to provide a new
employee with a contract of employment to sign. It will set out the terms of the
relationship between the employee and the employer in written format.
 Name of employer and name of the employee.

 Job title.
 Date when employment is to begin.
 Hours to be worked.
 Rate of pay and any other benefits such as bonus, sickness pay, pension.
 When payment will be made.
 Holiday entitlement.
 Amount of notice to be given to terminate the employment that the owner or worker
must give to end the employment.
( 5 ) Part-time and Full-time
A part-time worker is someone who works fewer hours than a full-time worker. There is no
specific number of hours that makes someone full or part-time, but a full-time worker will work
48 hours.
The advantages to the business of employing part-time workers are::

 More flexible in the hours of work.
 Easier to hire employees just to work at busy times.
 Easier to extend business hours by hiring part-time employees.
The disadvantages to the employer are::

 Less likely to be trained because the workers see the job as temporary employment.
 Can be less committed to the business.
 More difficult to communicate with part-time workers when they are not in work.

( 6 ) Training & Development
The objectives for training employees are very clear. Training is often needed to::
 Introduce a new process or new equipment.
 Improve the efficiency of the workforce.
 Provide training for the unskilled workers to make them more valuable and skilled.
 Decrease the supervision needed.
 Improve the opportunity for internal promotion.
 Decrease the chance of accidents.
There are three main types of training::
Induction Training
On-the-Job Training
Off-the-Job Training
Induction Training
INDUCTION TRAINING is an introduction given to a new employee, explaining the firm’s

activities, customs and procedures and introducing them to their fellow workers. A new
employees needs to know about the company’s rules and regulations, working procedures,
organisation premises, safety precautions, necessities such as canteen and first aid facilities.
The purpose of induction training is to make new worker more comfortable with the work
environment.

On-the-Job Training
On-the-Job training involves instruction at the place of work by watching more

experience and senior workers performing the responsibilities. The purpose of the on-the-job
training is to train workers to be skilled and productive and to reduce the costs of external
training.
Benefit of On-the-Job Training::

It has the advantage that is
individual training is given and it
is in the workplace so the employee
does not need to be sent away.
Off-the-Job Training
This is where the worker goes away from the place of work. This may be in a different part
of the building or it may be at a different place such as a college or specialist training
centers.
Off-the-Job training often

involves classroom learning,
using lecture, role play, case
studies or computer simulations.
Draw Back of Providing Training::
Training can be expensive. It can also lead to well-qualified staff leaving once they have
gained qualifications from a business with a good training structure.
Cost of Not Providing Training::
The costs of not training are also substantial. Untrained staff will be less productive, less able
to do a variety of tasks (inflexible) and will give a less satisfactory customer service.

( 7 ) Workforce Planning (Man Power Planning)

KEY DEFINITIONS
Workforce Planning ▬ Workforce planning means thinking ahead and

establishing the number and skills of the workforce required by the business for the
foreseeable future. This concept is also called man power planning.
The number required will depend upon the firm’s sales forecasts, its future plans such as
expansion or automation, and its objectives, for example, introducing new types of
products, and improving the quality of customer services.
o Finding out the skills of all the present employees.

o Counting out anyone who will be leaving soon, for example due to retirement.
o Consulting with existing staff as to who could and would want to retrain to fill the new job.
( 8 ) Dismissal & Redundancy of the Workers
Dismissal
This is when a worker is told to leave the job because his work or behavior is
unsatisfactory. For example an employee, who was constantly late for work, caught
stealing or unable to perform the job would probably be dismissed. Firms have to follow a
proper dismissal procedure before dismissing the particular worker such as giving the warning
before dismissal.
Redundancy
REDUNDANCY is when an employee is no longer needed and so loses their job. It is not due
to any aspect their work being unsatisfactory.
Reasons for employee making redundant:: The reasons of redundancy may be some
occasions when a business needs to reduce the number of employees, either because it is
closing down a branch/factory or because it is experiencing falling sales and profits and
so needs to reduce to cost of the business and to save money by getting redundant some of
the workers.
Redundancy Payment:: “When an employee is made redundant, they are given some money
to compensate them for losing their job”, this is called redundancy payment.

( 9 ) Protecting Employees
Employees are workers in a business. This section also covers the legal rights of those who
wish to become employees and who apply for jobs.
Employees need protection in the following areas::
o Against Unfair Discrimination at work and when applying for Job;

o Against Unfair Dismissal;
o Health and Safety at work;
o Wage Protection.
( 1 ) Against Unfair Discrimination
Discrimination means to make a choice. The discrimination we are concerned with here is when
it is based on unfair reason. For example, some employers discriminate unfairly against
workers or people applying for jobs because they.
o Are of a different race or color o Are considered too old / young for the job
o Belong to a different religion o Are Disabled in some way
o Are of the opposite sex
( 2 ) Protection Against Unfair Dismissal
Once in work, employees need protection from being dismissed unfairly. Obviously if the
worker has stolen from the employer or is always late for work, dismissal would be
reasonable. The following examples of dismissal are unfair::
o For joining a trade union;

o When no warnings are given before dismissal.

( 3 ) Health & Safety at Work
Most employers now care for their workers’ safety. One reason for this is that many laws have
been passed that have forced them to improve health and safety at work. In most countries
there are certain laws which make sure that all employers::
o Protect Workers from dangerous machinery.

o Provide Safety Equipment and clothing.
o Maintain reasonable workplace temperatures.
o Provide hygienic conditions and washing facilities.
o Do not insist on excessively long shifts and provide breaks in the work timetable.
( 4 ) Wage Protection
Workers have a right to be paid for work they do for employers. There should be a written
agreement between worker and employer ─ the CONTRACT OF EMPLOYMENT ─ which will
contain details not only of the hours of work and the nature of the job but also of::
o The wage rate to be paid. o How frequently wages will be paid.

o What deductions will be made from wages, for example, income tax.
Advantages of a Legal Minimum Wage::

o It should prevent strong employers from exploiting unskilled workers who could not
easily find other work.
o Low paid workers will earn more and will be able to afford to spend more.
Disadvantages of a Legal Minimum Wage::

o It increases business costs which will force them to increase prices.
o Some firms will not be able to afford minimum wage. They may make workers
redundant instead, unemployment may rise.

Book-01 Chapter 9 | Internal & External Communication 71
Business Communication — Chapter 09

( 1 ) What is effective communication?
KEY DEFINITIONS
Communication is the transferring of a MESSAGE from the sender to the

receiver of verbal and nonverbal messages. Communication is considered effective
when it achieves the desired reaction and response from the receiver.
Message ▬ A MESSAGE is the information or instructions being passed by the
sender to the receiver.
What is Effective Communication? Why is it necessary?

Effective communication means the information or message being send is received,
understood and acted upon in the form of feedback.
For businesses, ineffective communication, or communication failure, between people in the

firm can have serious consequences.
The Process of Effective Communication::
Effective Communication involves the following four features::
Sender or Transmitter ▬
A sender of the message is the person starting off the process of communication by sending
the message and wishes to pass on the information to others. This person has to choose the
next two features carefully in order to make sure that communication occurs effectively.
Medium of Communication ▬
A medium is used as a method for sending the message for example, letter, and notice
board for written communication, air and cell phones in case of verbal communication.
Receiver ▬ A RECEIVER is the person who receives the message from the sender. The
person to whom the message should be sent.
Feedback ▬ FEEDBACK is the reply from the receiver which shows whether the message has
arrived, been understood and, if necessary, acted upon.

( 2 ) One Way & Two Way Communication

One-way Communication::
ONE-WAY communication involves a message which does not call for or require a response.
An example would be an instruction to take these goods to the customer. One way does not
allow the receiver to give feedback. TV adds, messages on notice board, books, billboards
messages, safety tips on children toys, safety notes on machines, road safety instructions.
Two-way Communication::
TWO-WAY communication is when the receiver gives a response to the message and there is
a discussion about it. It is when there is a reply or a response from the receiver. Both people
are involved in the process. This could lead to better and clearer information.
Group meetings, one-to-one talk, telephonic conversation, visual conference.
The Advantages of Two-Way Commutation::
o It should become absolutely clear to the sender whether or not the person receiving the
message has understood it and acted upon it.
o Both people are now involved in the communication process. The receiver feels more a
part of the communication process.

( 3 ) Types of Communication
Internal Communication::
INTERNAL COMMUNICATION is when messages are sent between people working in the
same organisation. Examples include::
o A manager talking to workers;
o A report sent from one director to another.
Media’s and Examples for Internal Communication::

Reports, bulletins, job descriptions, posters for safety precautions, notes, employee manuals,
memos, meetings, face to face discussions, presentations, notice boards, company newsletters
and magazines.
External Communication::
EXTERNAL COMMUNICATION is when messages are sent between one organisation and
another organisation or outside individual.
o Orders for goods from suppliers.

o Sending information to customers about prices and delivery times.
o Advertising goods or services.
o Asking customers to pay bills on time.
o Placing request for the loan to the bank.
Media’s and Examples for External Communication::

Letters, reports, proposals, telephone, mobile phones, emails, websites, fax, postcards,
catalogues, brochures and prospectus.
Why external communication has to work well?

External communication is very important to the image and efficiency of a business.
Customer ▬ If it sends inaccurate information to a customer, he/she may buy a product from
another firm.
Supplier ▬ If a firm communicates ineffectively with suppliers, it may be sent the wrong
materials.

( 4 ) Different Ways of Communicating

Communication Forms and Medias::
Information can be sent or transmitted in a number of different ways::
(1) Verbal Forms of Communication

(2) Written Forms of Communication
(3) Visual Forms of Communication
Verbal Forms of Communication
Verbal forms of communication involve the sender of the message speaking to the receiver.
o One-to-One Talks Between the Sender and the Receiver

o Telephone Conversations
o Video Conferencing
o Meetings
Advantages of Verbal Communication::
o Information can be given out quickly without any disturbance.

o Opportunity for immediate feedback and two-way communication.
o The message is often reinforced by seeing the speaker who could use body language
and facial expressions to help to make message more important.
Disadvantages of Verbal Communication::
o When an accurate and permanent record of the message is needed, such as a

warning to a worker, a verbal method is inappropriate.
o In a big meeting, there is no way of telling whether everybody is listening or has
understood the message.
o It can take longer to use verbal methods when feedback occurs than to use a written
form.

Written Forms of Communication
These include letters but may increasingly involve the use of information technology.
o Letters:: Used for either internal or external communication.
o Memos:: Letters used within an organisation. (instruction to employee)
o Reports:: Detailed documents produced by experts on different issues and problems.
o Notice:: Used to display information which is open to everyone.
o Faxes:: Written messages sent using an electronic means.
o Email:: Fastest and cheapest method of communication using an IT technology.
o Information Racks or Display Stands::
Information racks or stands are usually placed at places like front lobby, factory gate,
cafeteria, shop or at a place which is used by employees.
o Suggestion System:: Some organizations use suggestion system for employees to
provide an opportunity to share ideas and give their suggestions in order to improve
the quality and efficiency of the business organisation.
Advantages of Written Communication::
o There is ‘hard’ evidence of the message which can be referred to in the future. It helps
to reduce the disagreement between the contracts.
o It is essential for certain messages involving complicated details which might be
misunderstood in verbal form, so there should be something in-writing to make it
clear.
o A written message can be copied and sent to many people.
Disadvantages of Written Communication::
o Direct feedback is not always possible.

o It is not so easy to check that the message has been received and acted upon.
o The language used can be difficult for some receivers to understand.
o No opportunity for body language and facial expressions.

Visual Forms of Communication
Visual forms include methods such as diagrams, charts and videos.
o Films, Videos and Power Point Displays::

Often used by businesses to help train new workers.
o Posters::
Can be used to explain any important message by means of a picture or cartoon.
o Charts and Diagrams::
Can be used in reports or letters to show numerical data in graphical format in order
to make it clearer and more understandable for the people.
Advantages of Visual Communication::
o These methods can present information in an appealing and attractive way. People
are often prepared to look at films or posters than to read letters because of the
interesting way.
o They can be used to make a written message clearer by adding a chart or diagram to
explain the point being made.
Disadvantages of Visual Communication::
o There is no feedback and the sender of the message may need to use other forms of
communication to check the message is understood.
o Charts and graphs are difficult for some people to interpret. The overall message
might be misunderstood if the receiver is unsure of how to read values from a graph.

( 5 ) Choosing the appropriate Communication Method
There are several factors that needed to be consider before choosing the most appropriate
method of communication:
Speed ▬ It is important that the receiver gets the information really quickly, then electronic
media’s are most useful methods to send and receive messages.
Cost ▬ It is important to keep costs low along with effectiveness of the message.
Message Details ▬ If a message contains technical plans, figures, then written and visual
forms of communication are likely to be essential.
Leadership Style ▬
It is depend on the leadership style such as autocratic or democratic. Autocratic manager’s
uses one way while democratic used to apply the two way communication norms.
The Receiver ▬ If just one person has to be communicated with then one-to-one
conversation is used while meetings and group briefing methods are used for crowed.
Importance of Feedback ▬ If it is essential that the sender receives feedback, then a direct
verbal method is important.
( 6 ) Formal & Informal Communication
Formal Communication::
This is when communicating during an interview or a meeting with the manager and with fellow
workers for discussing business matters.
For example instructions from supervisor to shop floor worker or from departmental manager to
junior manger.
Informal Communication::
This communication occurs when talking to fellow workers, friend, family, and people from the
society.
Informal channels are not part of the organisation structure but exist because people cannot
stop talking to or emailing each other. Meetings in the staff canteen during break times or
message sent between friends over the intranet are often referred to as the ‘grapevine’
method of communication. It can be useful for releasing the exaggeration of the workload.

( 7 ) Barriers to Effective Communication

KEY DEFINITIONS
Communication Barriers ▬ Any factor that prevents a message being received

or correctly understood is termed a ‘Barrier to Effective Communication’.
Communication can fail if any one of these four parts does not operate as it should. If one part
fails, it would be called a barrier to effective communication. This would cause a breakdown in
communication which could lead to serious problems for the organisation.
Problems with the Sender::
Barrier Description How the barrier can be overcome
Language which is too The sender should ensure that the

difficult is used, such as message uses language which is
‘Jargon’. understandable.
The sender should make the

The sender uses verbal means
message as clear as possible.
Problems with the of communication but speaks
Feedback should be asked to
Sender:: too quickly or not clear
ensure the message is being
enough.
understood.
The sender communicates the The sender must make sure that
wrong message or passes it the right person is receiving the
to the wrong receiver. right message.
Jargon::
Special words or expressions that are used by a particular profession and are difficult for
others to understand, for example Liquidity Crisis, Pyrexia Medical Term.

Problems with the Medium::
It is important to insist on
feedback. If no feedback is received
The message may be lost.
then the sender assumes the
message was lost.
The sender must select the

The wrong channel has been
appropriate channel for each
Problems with used.
message sent.
the Medium::
Reduce the level of hierarchy in

If the message is sent down a the management structure and
long chain of command, the design a wider span of control.
original meaning of the message Use de-layering to reduce the
may be lost. number of layers from the
organisational Structure.
Problems with the Receiver::
The importance of the message

should be emphasized. The
They might not be listening or
receivers should be asked for
paying attention.
feedback to ensure
Problems with
understanding.
the Receiver::
The receiver may not like or trust There should be trust between
the sender. sender and receiver.

Problems with the feedback::
Perhaps no feedback was asked

There is no feedback. for, or medium did not allow
feedback.
Problems with
Direct lines of communication
the Feedback::
between subordinates and managers
It is received too slowly or is
must be available. Direct
distorted.
communication is always more
effective.

Section 3
Marketing

Book-01 Chapter 10 | Marketing, Competition & the Customer 82
Marketing, Competition & Customer

Chapter 10
( 1 ) The Marketing Department
Marketing Department term used to refer to the orientation of an organisation which has
established a separate department to look after its marketing activities such as promotion,
sales, research & development and distribution.
Marketing Department
Sales Research Department Promotion Distribution
Advertising Promotion
Sales Representatives
(Above the Line (Below the Line
Promotion) Promotion)
Research
Market Research
& Development
Sales Department::
This is responsible for the selling, introducing and promoting the product and providing the
after sale service. It will have separate sections for each region to which the product is
distributed. Products are also exported through export department.
The Research & Development Department::

Market Research is usually responsible for market research for conducting consumer
behaviors and research & development department is responsible for innovating and testing
new products to see if they might be suitable to start selling to consumers. Exiting products are
also research in order to improve the quality and features.

The Promotion Department::

This department deals with organizing the advertising for products. It arranges for
advertisements to be produced as an above-the-line promotion and giving the purchase
incentives to the consumers as below-the-line promotion.
The Distribution Department::

Responsible for transports and deliver the products to the wholesalers and retailers by using
different channels of distribution.
( 2 ) The Role of Marketing
Marketing is not just about advertising and selling a good or service, as can be seen by the
different marketing activities found in marketing department. The central role of Marketing
department is to look after its marketing activities such as promotion, sales, market
research, research & development and distribution.
Identify Customer Needs by finding out what kind of products customer want, the prices they
willing to pay, where and how they want to buy the products and after sale service required.
Satisfy Customer Needs in order to achieve high sales of the products, business should offer
the right product, in the right place and at the right price.
Maintain Customer Loyalty by building customer relationships. Keeping close links with
customers and finding out if products are continuing to meet their needs will help to ensure the
success of the business.
Gain Information About Customer to meet their changing needs and to establish a long-
term relationship with them. Building a relationship with customers means that market
research information can be used to understand why customers buy products and how they
become loyal to the business.
Anticipate Changes in Customer Needs by identifying businesses can produce goods

according to new trends in customer demand so that businesses can produce products which
are not currently available.

If the marketing department is successful in identifying customer requirements and predicting

future customer needs, it should enable the business to meet the following objectives::
o Raise customer awareness about the goods and services offered.
o Increase sales revenue and profitability.
o Increase and maintain market share.
o Maintain or improve the image of products or a business.
o Target a new market or market segment.
o Develop new products or improve existing products.
( 3 ) Understanding Market Changes
Sales of goods and services from particular businesses do not stay the same year after year or
even month after month, such as mobile phones, LCD’s and other technological products.
Why Customer/Consumer Spending patterns Change::
1) Consumer Taste & Fashions Change ▬ fashions may change for clothes and so
consumers may want different styles of clothes to those they wore last year.
2) Changes in Technology ▬ With new products being developed, such as IPads and
notebooks, sales of standalone computers have become outdated in most of the countries. New
products mean old versions do not have high sales anymore.
3) Change in Incomes ▬ If an economy has high unemployment then many consumers will
buy cheaper products. If the economy then grows and unemployment falls the sales of
more expensive products will increase.
4) Aging Populations ▬ The age structure of the population in many countries is changing
to a greater percentage of older people. This has changed the type of products which are
increasing in demand, such as anti-ageing face creams for women.
( 4 ) The Power and Importance of Changing Customer Needs
If businesses fail to respond to customer needs then they are likely to fail. Customers are
‘King’ because as their needs change, it is the businesses which research and know what these
changes are, and respond to them, that will be the ones which are successful.

( 5 ) Why have some markets become more competitive?
1) Globalisation of markets has meant that products are increasingly sold all over the world.
2) Transportation improvements have meant that it is easier to get products from one part of
the world to another part of the world.
3) Internet/E-Commerce has meant that consumers can search for products and buy from
overseas markets. Increased consumer information about products and the different
international businesses that produce them makes a market much more competitive.
( 6 ) How can businesses respond to changing

spending patterns and increased competition?
A business will have to take action to maintain its market share whenever there is growth
amongst its competitors.
1) Maintain Good Customer Relationships ▬

This has a key role in containing to meet customer needs and it also provides market research
information about customers. Marketing departments which become experts on customer needs
will respond to these needs and maintain customer loyalty.
2) Keep Improving its Existing Product ▬

This is especially true if its competitors improve their products. By making the goods it sells very
different from those produced by competitors the business will become well known for
differentiated products such as Apple.
3) Bring Out New Products to Keep Customers’ Interest in their company rather than their
competitors. This will help them to maintain or increase their market share. An example would be
Microsoft, which keeps on improving and developing its operating systems.
4) Keep Costs Low to Maintain Competitiveness ▬ As this should help to keep low prices.
( 7 ) What is meant by a Market?
A market for a particular good or service is made up of the total number of customers and
potential customers as well as sellers for that particular product. It can be measured by the
total number of sales by all suppliers to that particular good or service.

( 8 ) Mass Market
KEY DEFINITIONS
Mass Marketing involves selling a very large number of the same products to the
whole market with not attempt to target groups within it and there is no market
segmentation carries out. Examples include Coca-Cola and household products such as
soap, shampoo, olive oil, grocery products.
Advantages of Mass Marketing::
o Mass Market businesses are likely to enjoy substantially lower average costs of
production, so helps to gain the economies of scale.
o Mass market strategies run fewer risks than niche strategies. It contains large numbers
of consumers and car spread risk over multiple products.
Disadvantages of Mass Marketing::
o Standardised products are produced and so may not meet the specific needs of all
customers and high level of competition between firms.
( 9 ) Niche Market
KEY DEFINITIONS
Niche Marketing involves identifying and exploiting a segment of a larger market,

which is not previously identified by any other competitor.
Niche Market is a small specialized, segment of a much larger market. By finding out the
different segments in a market, a business can sometimes identify a segment whose needs are
not being met; here is a gap in the market which is not previously identified by any other firm.
For example iphone, diet coke, Mercedes S-class, hybrid car.
Advantages of Niche Marketing::

Small firms may be able to survive and large firms to create status and image, offering niche
increase the chance to sell at high prices and to earn high profit margins. The needs of
consumers and be focused on and therefore targeted by the firm in a niche market.
Disadvantages of Niche Marketing::

o Niche markets are small with limited number of sales, and the business will specialize
in just one products.

( 10 ) Market Segmentation
KEY DEFINITIONS
Market Segmentation is where the market has been divided up into groups of
consumers who have similar needs, Identifying these different groups and
marketing different products and services to them is called market segmentation.
This helps the business to select the right customers.
Advantages of Market Segmentation::
o Businesses can define their market precisely and design and produce goods that are
specifically focused on target groups of consumers.
o Marketing strategies can be focused on the target market groups and this avoids wasting
resources on trying to sell products to the whole market.
Ways of Segmenting a Market::
By Income Income groups can be defined by grouping people jobs according to how
Group much they can pay for the goods and services.
The products bought by people in different age groups will not be the
By Age
same. For examples products for mature, adults, teenagers, and babies.
Different products are offered for males and females.

By Gender
Such as shaving razor are offered to male and lipsticks are offered to females.
By Region In different regions of a country people might buy different products.
By Use of For example, cars can be used by consumers for domestic use or for
the Product business use. These cars will be marketed in a different way.
For example, a single person earning the same income as a married

By Life Style person with three children will spend that income differently, buying
different products.

( 11 ) Decide the Best Place to Advertise to Increase Sales
A marketing manager would take all these factors into account when deciding which segments
might buy new products or improved products. Therefore, once the segments have been
identified, this will influence how the products are packaged and advertised. It will also
affect the choice of shops the products are sold in order to get maximum sales.
( 12 ) Potential Benefits of Segmentation to Business
The business can use market segmentation to sell more products. They do this by making
different brands of a product and then aiming each brand at a different market segment. By
finding out the different segments in a market, a business can sometimes identify a segment
whose needs are not being met. They can then produce a suitable product to meet these
customer needs and again increase sales.

Book-01 Chapter 11 | Market Research 89
Market Research — Chapter 11

( 1 ) Product Orientated & Market Orientated
Product-Orientated Businesses
KEY DEFINITIONS
A Product-Orientated business is one whose main focus of activity is on

product itself.
Some businesses produce the product first and then try to find a market for it. This is known
as being product led approach. Product led businesses often produce basic necessities required
for living, such as agricultural tools and fresh foods. Sometimes when new technologies are
being developed, this is done without first investigating possible markets. Examples include
iphone, bugatti veyron, fighter jets.
Market-Orientated Businesses
KEY DEFINITIONS
A Market-Orientated business is one which carries out market research to

find out consumer wants before a product is developed and produced.
The business has to identify the wants and desires of customers, both new and in the
future, in order to produce the right goods which will sell well and make a good profit for the
business. Market-Orientated businesses are better able to survive and be successful because
they are usually more prepared for change in customer tastes.
Marketing Budget
KEY DEFINITIONS
A Marketing Budget is a financial plan for the marketing of a product or

product range for some specified period of time.
It specifies how much money is available to market the product or product range, so that the
marketing department knows how much they may spend in a year for the marketing department.

( 2 ) Why is market research needed?
A business needs to find out how many people would want to buy the product it is planning to
offer for sale. It is very important that market research is carried out accurately.
is
Market Research
KEY DEFINITIONS
Market Research ▬ Gathering data about the market size and trends,
competitors, consumer buying habits and likely sales levels through
primary and secondary research. It is the process of collecting and analyzing
data relating to demand for a good or service in a specific market.
Market research is used to try to find out the answers to these questions::
o What feature of my product do people like or dislike?

o Would they be willing to buy my product?
o What price would they be prepared to pay?
o Where would they be most likely to buy my product?
o What type of customer would buy my product?
o What type of promotion would be effective with these types of customers?
o What is the competition like?
By carrying out market research, a business can identify customer needs in a changing and
competitive international environment. This is essential if a business is to remain
competitive.
Types of Information
Quantitative Information ▬ This type of research answers questions about the quantity of
something, for example, how many liter of petrol were sold in the month of December? Or ‘What
percentage of children drinks a certain sort of cola?’
Qualitative Information ▬
This type of research answers questions about the quality of the products required by the
people and an opinion or judgment is necessary, for example, ‘What do customers like about a
particular product?’ or ‘Why do more women than men buy the company’s products?’

( 3 ) Types of Market Research

(1) Primary Research, or Field Research
(2) Secondary Research, or Desk Research
( 4 ) Primary Research
KEY DEFINITIONS
Primary Research is the collection of original data via direct contact with potential
or existing customers using the process of gathering information from people
within your target market, it is also called field research or firsthand research.
Primary research involves direct contact with the customers in the actual market place. This
research will have been planned and carried out by the people who want to use the data; it is
first-hand. It can be an expansive way to gather information and will usually be for a
specific purpose. There are various types of primary research method::
o Questionnaires o Experiments
o Interviews o Observation
o Consumer Panels o Samples
Questionnaires
A questionnaire is a research method consisting of a series of questions and other prompts

for the purpose of gathering information from respondents. Questionnaires may be
conducted face-to-face for example in the actual market, roads and streets, by telephone or by
post. Online Surveys can also be carried out on specialised websites. These allow the
researcher to put a questionnaire on the website or collecting through sending emails.
Advantages of Questionnaires::
o Detailed qualitative information can be gathered about the product or service.

o Customers’ opinions about the product can be obtained.
Disadvantages of Questionnaires::
o If questions are not well thought out, the answers to them will not be very accurate. It
may be very misleading for the business.
o Carrying out questionnaires can take a lot of time and money.

Interviews
Interviews consist of ready-prepared questions for the people and usually collected face-to-
face using direct contact with the customers.
Advantages of Interviews::
o The interviewer is able to explain any questions that the person does not understand.
o Detailed information about what the people like or dislike about the product can be
gathered.
Disadvantages of Interviews::
o Interviews are very time-consuming to carry out and, therefore often an expansive way
of gathering information.
Focus Groups
This is where groups of people agree to provide information about a specific product and
general spending patterns over a period of time. Panels may also test new products and then
discuss what they think about the product, explaining what they like and what they dislike
about them.
Advantages of Consumer Panels::
o They can provide detailed information about consumers’ opinions.
Disadvantages of Consumer Panels::
o They can be time-consuming, expensive and some people in the panel are influenced
by the opinions of others.

Experiments:: (Test Marketing)
An example of this type of research is where samples of new products are given out to
consumers in supermarkets to test. The consumers are then asked to say what they think and
feel about the products.
Advantages of Experiments::
o They are relatively easy to set up and carry out and are an easy way of gathering
consumers’ first reactions to products.
Disadvantages of Experiments::
o People might not give their real feelings.
o Many other potential customers may shop elsewhere and they will not be asked.
Observation
This can take the form of::

Ant
o Recording::
For example, meters can be fitted to monitor which television channels are being
watched.
o Watching::
This includes such activities as counting how many different types of vehicles pass
particular billboards or posters, or counting how many different types of people go into a
particular shop and also come out having bought something.
o Audits::
For example, counting of stock in the shops to see which products have sold well.
Advantages of Observation::
o It is quite an inexpensive way of gathering data.
Disadvantages of Observation::
o The information only gives basic figures. It does not provide the business with reason
for consumer decisions.

( 5 ) Samples
KEY DEFINITIONS
Sampling is the process of selecting a suitable target audience, who are

selected for asking the questions from the whole target audience.
When deciding who to ask to fill in a questionnaire or who to interview, a sample would have
to be selected as it would be too expensive and impractical to try to include all the relevant
population in the market research. This could be:: an
Random Sample::
A RANDOM SAMPLE is when people are selected at random as a source of information for
market research. This means that every member of the population has an even chance of being
selected. This is type of sampling is useful for mass products.
Quota Sample::
A QUOTA SAMPLE is when people are selected on the basis of certain characteristics such as
age, gender or income and family size as a source of information for market research.

( 6 ) Secondary Research
KEY DEFINITIONS
Secondary Research / Desk Research is the use of information that has

already been collected and is available for use by others. The information
may be available from either internal sources or external sources.
Secondary research is also called desk research.
Internal Sources of Information::
A lot of information may be readily and cheaply available from the firm’s own records. Relevant
qualitative information will be available from the sales department, which will hold detailed
data on which brands of products have been selling well and in which area.
o Sales department provides sales records, pricing data, customer records, sales reports.
o Opinions of distribution and public relations personnel.
o Finance Department provides information about the last year’s successful and
profitable products.
o Customer Service Department provides data about consumer complains, opinions,
ideas and suggestions about different products.
External Sources of Information::
This is when information is obtained from outside the company. External sources are many and
varied and tend to depend on the type of product that is being researched.
Examples are::
Internet ── provides an easily accessible source of a very wide range of information,

including the information about competitors, government statistics, newspapers and these can be
very easily and quickly accessible.
Libraries ── Local population census returns with details of total numbers, age, average
income and occupation distributions, and number of households in the area, the
proportions of the local population for different religious and cultural groups.

Specialist Journals ── Used to get the buying habits related to the specific products such as
computers, fashion related and households.
Research Reports ── These are the research findings of different companies related to society,
income groups, social trends and behavior.
Newspapers ── may have useful articles, for example general state of the economy and
whether consumers are expected to increase or decrease their spending in future.
Media Reports ── Relevant to current economic, social and political situation and affairs.
Trade and Employer Associations ── it often provides information for the businesses in
that industry, for example information about surgical, agriculture and motor industry.
Government Reports and Statistics ── provide detailed information about total

population, rate of inflation, per capita income.
Market Research Agencies Report ── are specialist agencies who carry out research on
behalf of companies and charge some amount of commission as a fee.
Advantages of Secondary Market Research::
Secondary research is often a much cheaper way of gathering information as the research
has already been done by others. It may be needed to help assess the total size of a market by
finding out the size of the population and its age structure.
Disadvantages of Secondary Market Research::

Secondary research may not be as accurate as first thought because it was initially carried
out for some other purpose and business would not know how the information was actually
gathered. Secondary research may not regularly updated so may contain lack of changes
about consumer taste, fashion and income levels.

( 7 ) Accuracy of Market Research Data
The reliability and accuracy of the data that has been collected depends largely on:
o How carefully the sample was drawn up.

o The size of the sample — the larger the sample, the more accurate the results are
likely to be.
o Who carried out the research — secondary research may not be as accurate as first
though because it was initially carried out for some other purpose.
o Bias — articles in newspapers sometimes have a bias and important information is left out
deliberately.
o Well-phrased questions — trying out questionnaires on a small group of people before
using them on a large sample can help to see if any of the questions could be
misinterpreted.
( 8 ) How to design and use a questionnaire
Writing the Questionnaire::
o When deciding what questions to ask, it is advisable to ask no more than 12 questions.
o Keep the questions short and clear. It is a good idea to keep the answer simple too, for
example, ask for yes/no answer or provide a choice from which the respondents have
to choose. (Shown in figure).
o If you want to know the age of the interviewee, give a choice of age groups for example
21 ─ 40.
o Avoid open-ended questions.
o Be careful not to lead the interviewee into an answer that may not be true by asking
too direct a question.
o Think about the order in which you ask the questions.
( 9 ) Presentation of Data
The raw data will need to be converted into a form which is easy to understand. Numerate
data might be presented in the form of a table. This allows ease of reference and
understanding. Tables, charts, graphs, diagrams and pictures can be used to present a
mass of data in a precise way.

Pictogram::
A pictogram shows the data using columns, a symbol for the item is used. A key must be
included to explain what the symbol is showing.
For example a pictogram used in a business to calculate the number of assets.
Asset No 1:: (Printers)
Asset No 2:: (Component Bins)
Bar Charts::
Bar charts one of the most frequently used forms of presenting data. These use bands of
equal width but of varying length or height to represent relative values. They allow
easy comparison over time or between different items.
Uses of Bar charts::

When the absolute size of results needs to be presented and compared.

Line Graphs::
Line graphs are most commonly used for showing

changes in a variable over time. The line graph
formed by joining the coordinates together allows easy
references to trends in the data and shows up
seasonal or other fluctuations clearly.
Uses::
When the trend and regular variations need to be
identified, useful for sales forecasting and for
planning the future decisions.
Pie Charts::
A Pie chart consists of a circle with segments.

Each segment represents the size of a particular
proportion relative to the total allow easy
comparison between sets of results.
For example, a pie chart could represent the

total costs of running a factory for a year, and
each slice of the pie chart could represent the
costs of each of the expense.
Pie chart is calculated in the following way::
Value of One Section

× 360
Total Values of all Sections
Region 2010 Sales ($m) Uses of Pie Charts:: Visually useful to
South 300 show the relative importance of sections
North 260 or segments out of total result ─ these
West 400 can then be visually compared with other
East 640 time periods.
Total Country Sales 1,600
400
× 360 = 90 degrees
1,600

Charts & Diagrams::
Diagrams can be used to simplify information. For example, the break-even charts are the very
useful way to present the expected profit & loss of the business over a period of time.
Appropriateness of Methods of Presentation::
Managers will always find it easier to use and apply data to help in decision making if they are
presented in the most appropriate pictorial form.

Book-01 Chapter 12 | The Marketing Mix: Product 101
The Marketing Mix: Product — Chapter 12

( 1 ) The Marketing Mix
The marketing mix is a term which is used to describe all the activities which go into marketing
a product. All of these activities are part of the marketing mix for a product. They are often
summaries as the 4 Ps.
The four Ps of the Marketing Mix (4p’s)
Product::
This applies to the product itself, its design, features and quality and the product compare
with its competitor’s product.
Price::
This is the price at which the product is sold. A comparison must be made with the prices of
competitor’s products. Pricing strategies are used to set the price of the goods and services in
this segment.
Promotion::
This is how the product is advertised and promoted and the choice of advertising media. It
also include below the line promotion such as given the discount, loyalty cards, point of sale
display, buy one get one free and other promotion offers.
Place:: This refers to the channels of distribution that are selected. This would be through
wholesalers, retailers, personal outlets and direct selling. The place also considered to be the
actual place where the product is going to be sold.
Some people also talk about packaging as

being a fifth P, but it can be included as
part of both product and promotion.

( 2 ) The Role of Product in the Marketing Mix
The product itself is probably the most important element in the marketing mix ─ without the
product, the rest of the marketing mix is pointless. After deciding the market segment for the
product, the other parts of the marketing mix ─ price, promotion and place will be decided.
Types of Product
Consumer Goods::
These are goods which are consumed by people. They can be goods that do not last long, such
as food and cleaning materials called non-durable goods. Some goods last a relatively long
time and give enjoyment over a long time, such as cars, microwave oven, furniture and
computers called durable goods.
Consumer Services::
These are services that are offered to the people. Examples include repairing cars, insurance,
banking, hairdressing, cargo services, transportation and education services.
Capital Goods:: (Producer Goods)

These are goods that are produced for other businesses to use. They are bought to help with
the production process. Examples included lorries, machinery, plant and components.
Capital Services:: (Producer Services)

These are services that are produce to help other businesses.
Examples include financial auditing and advisory service, insurance and advertising agencies.
Features of Product
Producing the right product at the right price is an important part of the marketing mix.
o The product needs to satisfy consumer needs and wants.

o The product also needs to be of the right quality to perform to a standard expected.
o The costs of production must ensure that a price to be set that will produce a reasonable
profit.
o Design of the product is very important to attract the consumers.
o The packaging should be appropriate and according the product.

( 3 ) Product Development
Large businesses are looking for new products all the time. Smaller businesses are also trying to
stay competitive and therefore need to keep up with other companies.
Customer Competitors Research and

Suggestions Production Development Department
Employees
1 Generate Ideas Sales Department
Need to decide which ideas to skip and which to

2 Select the best idea for
research further, some product would not sell well
further research
and some may be too expensive to produce.
3 Decide if the company The marketing department now looks in detail at

will be able to sell the remaining ideas. They assess how large they
enough for the product to think the sales would be and the likely size of the
be a success market share.
A prototype allows the production department to

see how a product could be manufactured. It also
4 Develop a prototype
allows them to foresee any problems with the
manufacturing process.
The product is launched in to one small part of

5 Launch the product in
the market. This allows the company to see how
one part of the country to
well the product sells without employing large
test the market
amounts of money for a national launch.
The product is launched on to the main market.

6 Go to a full launch of This will probably be the national market to begin
the product to the whole with. Later it could be exported.
market This is considered to be the introduction stage of
the product life cycle.

( 4 ) The Costs & Benefits of Developing New Products
There are various benefits for the business when developing new products, such as::
 Unique Selling Point (USP) will mean the business will be first into the market with
new product.
 Diversification for the business means giving a broader range of products to sell.
 It allows the business to expand into new markets and existing markets as well.
However, there are also costs for the business when developing new products, such as::
The costs of conducting the market research.

The costs of producing trial products.
Loss of company image if the new product fails to meet customer expectations.
( 5 ) The Importance of Brand Image

Brand Name::
The BRAND NAME is the unique name of a product that distinguishes it from other brands.
Branded products are sold as being of higher quality and higher prices then unbranded products.
It is the assurance of a standard quality that makes consumers confident in buying branded
product, and can create a powerful image or perception in the minds of consumers. Brand can
give one firm’s products a unique identity.
For example::
BMW, Nike, McDonalds, Sony, Microsoft, Mark & Spencer, Nissan.
Brand Image::
BRAND IMAGE is an image or identity given to a product which gives it a personality of its
own and distinguishes it from its competitors’ brand. Brand image surrounds all over the
markets and will be reinforced by advertising.
For example::
Coca-Cola has an image of being a superior quality cold drink.
BMW, Nokia, Nevea, Sony, Apple, Seiko has unique brand names and images.

Brand Loyalty::
BRAND LOYALTY is when consumers keep buying the same brand again and again instead
of choosing a competitor’s brand. These consumers are also called the potential customers.
For example:: Loyalty with Iphone, Black Berry, Porte.
( 6 ) The Role of Packaging in the Marketing Mix

KEY DEFINITIONS
Packaging is the physical container or wrapping for a product. It is also used

for promotion and selling appeal.
Protection:: (Functions of Packaging)
(1) Packaging has to give protection to the product and not allow it to spoil.
(2) It also has to allow the product to be used easily.
(3) It has to be suitable for transporting the product from producer to people.
Promotion:: (Functions of Packaging)

(4) Packaging is used for promoting the product. It has to appeal to the consumer.
(5) The brand image will be reinforced by the packaging in which the product is sold.
(6) It carries information about the product such as ingredients, cooking recipes or
features of the product.

( 7 ) The Product Life Cycle

KEY DEFINITIONS
The PRODUCT LIFE CYCLE describes the stages a product will pass through from its
introduction, through its growth until it is mature and then finally is decline.
(1) Development:: The prototype will be tested and market research carried out before the
product is launched in to the market. There will be no sales at this time.
(2) Introduction:: It is then introduced or launched on to the market. Sales will grow slowly at
first because most consumers will not be aware of its existence. Informative advertisement is
used until the product becomes popular in the market.
(3) Growth:: Sales start to grow rapidly. The advertising is changed to persuasive to encourage
brand loyalty. Prices are reduced a little as new competitors enter the market and try to take
some of your costumers. Profits starts to be made as the development costs are covered.
(4) Maturity:: Sales now increase only slowly. Competition becomes intense and pricing
strategies are now competitive or promotional pricing. A lot of advertising is used to maintain
sales growth.
(5) Saturation:: Sales have reached saturation point and stabilize at their highest point.
Competitive pricing is used. A high and stable level of advertising is used, but profits start to fall
as sales are static and prices have to be reduced to be competitive.
(6) Decline:: Sales of the product will decline as new products come along or because the
product has lost its appeal. The product will by withdraw from the market so far that the product
becomes unprofitable to produce. Advertising is reduced and then stopped.

The exact length of the life cycle, in

terms of time, varies a great deal
from product to product. It is
affected by the nature and type of
product; for example, fashionable
times will go out of fashion quickly
whereas food products may last a
very long time such as zinger burger of KFC.
Some products considered to be the life time product and standing at maturity stage of the
product life cycle, such as coca-cola.
Extending the Product Life Cycle::
When a product reaches the maturity or saturation stage of its product life cycle, a business
may stop sales starting to fall by adopting extension strategies. These are ways that sales
may be given a boost. Some possible ways businesses might extend the life cycle of their
products are given below::
1) Introduce new variations of the original product.
2) Sell into new markets, such as export markets.
3) Make small changes to the product’s design,
color or packaging.
4) Increase the advertisement of the product and
offer promotions.
5) Introduce a new, improved version of the old product.
6) Sell through additional different retail outlets.

Book-01 Chapter 13 | The Marketing Mix Price 108
The Marketing Mix: Price — Chapter 13

( 1 ) The Role of Pricing Decisions in the Marketing Mix
When deciding a price for an existing product or a new product, the business must be very
careful to choose a price which will fit in the rest of the marketing mix for the product.
( 2 ) Pricing Decision:: (Price Determinants)
There are many determinants of the pricing decision for any product. Here are the main ones::
o Costs of Production::
Before deciding the best price for the product, a business must calculate the costs
of production in order to add value into the product.
o Competitive Conditions in the market::

If the firm is a monopolist then is likely to have more freedom in price setting
then if it is one of many firms making the same type of product.
The more competition there is the more likely it is that prices will be fixed similar
to those fixed by other competitors businesses.
o Competitors Prices::
Related to the previous point, it may be difficult to set a price very different from
that of the ‘market leader’ and other competitors unless true product
differentiation can be established such as niche features.
o Business and Marketing Objectives::

Pricing decisions will depend on the current objectives such as profit, growth,
capturing a high market share and survival.
o Price Elasticity of Demand::

The price elasticity of demand measures how responsive the quantity demanded of a
good is to a change in its price, so setting the price is depending on whether the
product is elastic or inelastic demand in the market.

( 3 ) Pricing Strategies
KEY DEFINITIONS
Pricing strategy refers to method used by the companies in order to set the
prices of their goods or services.
If the product is manufactured can easily be distinguished from other products in the market
then it is probably a branded product, with unique name and quality packaging. It will be
important to select an appropriate price to suit the brand image; and should return a value for
money.
If a product has a lot of competitors, then the business constantly monitor what its competitors
are charging for their products, to select price more competitive.
A business can adopt effective pricing strategies for several reasons::

o To try to break into a new market.
o To try to increase its market share.
o To try to increase its profits.
o To make sure all its costs are covered and a particular profit is earned.

Cost-Plus Pricing
KEY DEFINITIONS
COST-PLUS PRICING involves estimating how many of the product will be

produced, then calculating the total cost of production and finally adding a
percentage mark-up for profit.
 The method is easy to calculate and apply.

 Reduced risks and uncertainties for the business that may accept a pricing formula
that seems reasonable for reducing uncertainty.
Business could lose sales if the selling price is a lot higher than competitor’s price.
Cost-Plus pricing ignores the competition and demand of the economy.
For example, if the total cost of making 1000 chocolate bars is $2000 and firm want to make a
50 percent profit on each bar, the following calculation will be use::
Total Costs
+ % Mark-up = Selling Price
Output
$2000
+ 50% = $3
1000
Penetration Pricing
KEY DEFINITIONS
PENETRATION PRICING is when the price is set lower than the competitors’
prices in order to be able to enter a new market or capturing a highly
competitive market.
 It ensures that sales are made and the new product enters the market.
 As this technique creates a quick turnover it keeps its retailers and distributors happy.
The product is sold at a low price and therefore the sales revenue may be low.
Penetration pricing creates low quality image of the products and may attract
customers who are looking for a bargain, rather than customers who will become
loyal to the business and its brand.

Price Skimming
KEY DEFINITIONS
PRICE SKIMMING is where a high price is set for a new product on the market. The
produce is usually a new invention, or a new development of an old product, and
therefore it can be sold on the market at a high price in order to create a high status.
 Skimming can help to establish the product as being of good quality.

 This approach is used to generate substantial profits during the first few months of the
release of a product.
It may put off some potential customers because of the high price.
Competitive Pricing
KEY DEFINITIONS
COMPETITIVE PRICING is when the product is priced in line with or just

below competitors’ prices to try to capture more of the market.
Competitive pricing method used by those businesses usually sells household products such as oil,
shampoo, rice, sugar and salt.
 Sales are likely to be high as price is at a realistic level and the product is not under or
overpriced.
In order to decide what this price should be, a firm would have to research the price
charged by the competitor.
Note: Gorment and Bake Master use competitive pricing strategy.

Promotional Pricing
KEY DEFINITIONS
PROMOTIONAL PRICING is when a product is sold at a very low price for a short
period of time, for example sales promotions, 50% Off, get one buy one free.
 It is useful for getting rid of unwanted stock that will not sell.
 It can help to renew interest in a business if sales are falling.
The sales revenue will be lower because the price of each item will be low.
Psychological Pricing
KEY DEFINITIONS
Psychological Pricing is a marketing practice based on the theory that certain prices
have a psychological impact and have consumers’ perceptions of the product.
o This might involve charging a very

high price for a high quality product
so that high income customers wish
to purchase it as a status symbol.
o It could also involve charging a price

for a product which is just below a
whole number, for example, 99$ is
just below 100 and create the
impression of being much cheaper.

Dynamic Pricing
KEY DEFINITIONS
Dynamic Pricing happens when customers are split into two or more groups and
they are charged different prices for the same product and service because they
are different demand levels.
Firms do this because the price sensitivity of these two groups is different. Some customers will
be very price sensitive and firms will need to be careful not to put the price too high to
avoid losing customers. In contrast other customers, often business customers, are not price
sensitive and firms can charge a higher price.
For example, airlines regularly use dynamic pricing and charge different prices for flights to the
same airport at different times of the day, month or year. They offer business class, first
class, economy class flights.
Dynamic pricing can also be

used to reflect the level of
demand, if demand
increases then the price
will be raised and at times of
low demand then the price
will be reduced.
For example as samosa

prices raised in Ramazan
.
Some effects of dynamic pricing are::
 Increased sales revenue and profits.

 Ensuring all products are sold and no wastages of stocks.
 Also beneficial for those customers who are not be able to enjoy the products at full
price.

( 4 ) Elasticity of Demand
KEY DEFINITIONS
Elasticity of Demand means the percentage change in quantity demanded

is greater than the percentage change in price.
The responsiveness of the demand for a product is to changes in price is affected by how many
close substitutes there are. If there are many close substitutes then even if its price rises only a
little, consumers will respond by buying the substitute product.
-
If there are not really any substitutes for a product, for example, petrol, then an increase in price
of 15 percent will not cause much of a fall in sales — perhaps 5 percent, as most consumers will
carry on buying the product at the higher price. Such products are said to have an inelastic
demand curve — the percentage change in quantity demanded is less than the
percentage change in price.
There if the demand for the products of a business is price elastic then it is not a good idea to
raise price unless there has been rising costs. If the price elasticity of demand is inelastic
then businesses can increase revenue by increasing price.

Book-01 Chapter 14 | The Marketing Mix: Promotion 115
The Marketing Mix: Promotion — Chapter 14

( 1 ) The Role of Promotion Decisions in the Marketing Mix
KEY DEFINITIONS
Promotion ▬ The use of advertising, sales promotion, personal selling, direct mail,
trade fairs, sponsorship and public relations to inform consumers and persuade them to
buy. Promotion is designed to encourage new and repeat sales.
Promotion gives the consumer information about the rest of the marketing mix ─ without it,
consumers would not know about the product, the price it sells for or the place where the
product is sold and available for the customers.
Promotion is not just about advertising the product, but it includes several different types of
promotion as well as advertising.
(1) Advertisements (Above-the-Line Promotion) (3) Personal Selling

(2) Promotion (Below-the-Line Promotion) (4) Public relations
( 2 ) The Aims of Promotion
Promotion includes many activities that are undertaken by businesses. They all have one thing in
common ─ their purpose, which is to raise awareness of the firm’s products and encourage
consumers to make a purchase. Other most appropriate aims are::
o To increase consumer awareness of a product ─ important for newly launched ones;
o To encourage increased purchases by existing consumers by offering sales
promotions such discount offers, buy one get one free, reward points;
o To create or reinforce the brand image or ‘personality’ of the product.
o To develop the brand and public image of the business ─ through corporate
advertising.

( 3 ) Different type of Advertising

Advertising can be either INFORMATIVE OR PERSUASIVE.
Informative Advertising::
INFORMATIVE ADVERTISING is where the emphasis of advertising or sales promotion is to

give full information about the product.
Examples:: Computers, Laptops, Digital Cameras, IPods, Mobile Phones.
Persuasive Advertising::
PERSUASIVE ADVERTISING is advertising or promotion which is trying to persuade the

consumer that they really need the product and should buy it.
Example:: Rolex watches, Mercedes Benz, cross roads.
Target Audience::
The TARGET AUDIENCE refers to people who are potential buyers of a product or service.
These are also called focus groups of consumers.
Examples:: Lipsticks are targeted to ladies and toys are target to children.
( 4 ) Advertising Media’s
The following table shows types of advertising media that businesses can use, together with the
advantages and disadvantages of each and some examples of when they may be used.
Examples of suitable
Advertising Media Advantages Disadvantages
products
The advert will go Food products, drinks,

Very expensive form
Television out to millions of cars and household
of advertising.
people. product.
Cannot put a visual Local services or

Cheaper then TV
message and events, local channels,
Radio and reaches a large
expensive relative to local shops, car
audience.
other medias. showrooms, schools.

The advert will read Only in black and Household products

out by millions of white form and not and events, cars,
Newspapers
people, and contains eye-catching and banks, jobs,
details. little bit expensive. universities advert.
Read by a specific Perfume, computers,

Often published once a
group of people, sports goods, medical
Magazines month and relatively
colorful and instruments, fashion
more expensive.
attractive. and clothing.
They are permanent, Can easily be missed

Local events, shops,
relatively cheap and as people go pass
fast food products, cell
Posters/Billboards often seen by them, and not
phone advert, fashion
everyone who containing detailed
and clothing.
passes them. information.
Can give visual

Seen by only a limited Coca-cola, fashion
image and relatively
Cinemas number of people who jeans, cell phone,
low cost and
go to watch the movie. soaps shampoo.
effective.
Cheap method and

Use for local events,
given out in the street
May not be read by promote retail outlets,
Leaflets to a wide range of
most of the people. universities courses,
people, and
pizza offers.
permanent.
A large amount of Internet searches may

CD’s, Books, Mobile
information can be not find the web or
phones, cars, jewelries,
Internet placed on a website, access is limited
ticketing, insurance,
and online order because of security
laptops.
facility. reasons.
Very cheap form of

advertising. On Coca-Cola, McDonald,
delivery vehicles May not be seen by Tessco Retails,
Others
and on the sides of everyone. Marks & Spancer,
shopping bags form KFC.
shops.

( 5 ) Sales Promotion:: (Below the Line Promotion)
Below the line promotions also called sales promotions are used to give incentives on
purchase and to support advertising, encourage consumers to buy the product. It is very
helpful in the short term to give a boost to sales. Examples are given below::
Price Reduction::
Examples include reduce prices in shops and money-off coupons to be used when a product is
next purchased. Money-off coupons are sometimes found on the bottom of leaflets, in
newspaper or on the packet of the product itself or in offices and school for children’s.
Gifts::
Sometimes small gifts are placed in the packaging of a product to encourage the consumer to
buy it. For example ‘toy with breakfast cereals or McDonald’s happy meal offer aimed at
children’s.
Free Sample::
A free sample can be handed out in the shop to encourage the customer to try the product
and hopefully buy it. Free samples can be delivered to people houses or along with other
products such as a new washing machine often contains a free sample of washing powder.
Loyalty Card::
These are now widely used by retailer around the world. By scanning electronically the
customer’s loyalty card at the same time as the items bought, the shopper receives reward
points and a delayed incentive in the form of a future discount.
After-sales Service::
With expensive products, like cars, mobile and computers, providing an after-sales service are
very useful way of encouraging the customer to buy and repeat purchase. They can be
reassured that, if the product goes wrong in the first few weeks or months after they have
bought it, they will be able to take it back and get it repaired with no extra charges.
Sponsorship::
Sponsorship of sports or cultural events. This is now a huge part of the total promotion
industry.

Point of Sale Display::

Producers are very keen to obtain the ‘best’ position for their products in retail shops and will
develop eye-catching displays to draw consumer’s attention. The advantage of such preferred
position tends to be reserved by retailers for ‘brand leader’ products with the highest market
share.
The Advantages of Sales Promotion
o It can promote sales at times in the year when sales are low due to off-season.
o It encourages consumers to try a new product and buy in greater quantities.
Which Type of Promotion Should be Used?
o The stage of the product life cycle

o The nature of the product itself
o The advertising budget
o The cultural issues involved in international marketing
o The nature of the target market
( 6 ) Public Relations
Companies use sponsorship and public relations to improve their image, notably through
financing sports events, the arts and public information services.
This is mainly concerned with promoting a good image offer the company and its products. Public
relations can take many forms, like sponsoring events such as football matches, to publicity
stunts where employees, or owners of the company, take part in a sponsored activity for a good
cause.
Another example is where companies donate some of their products to charity ─ for relief when
there has been a natural disaster, or food for victims of a famine.
All these type of activity raise the public’s awareness of the company and its products, and
increase the brand image over its competitors.

( 7 ) How Technology Influences the Marketing Mix
New technology is becoming integrated into marketing decisions it presents new

opportunities for businesses to market their products and services and it means there are
frequent changes to all four elements of the marketing mix.
The product part of the marketing mix may be changed to respond to new technology. For
example, new features added to mobile phones. Social networking sites such as face book are
changing the way businesses reach their potential customers. Twitter, pop-ups, sponsored
links, paying search engines to put your websites at the top of searches, own reviews on
websites are the most common ways to promote the businesses and their products.
The internet allows businesses to gather information about customer buying habits, taste and
fashion, trends, income levels and facilitating the widespread use of online shopping.
The Benefits & Drawbacks

of Social Networking Sties
There are number of benefits to a business of advertising on social networking sites::
 Targets specific demographic group.

 Guarantees target customers see advert when they use social networking sites.
 Speed in response to market changes.
 Cheap to use ─ it has no costs if just placing advertisements.
 Reaches to those groups that are difficult to approach using other ways.
However, there are disadvantages too::
Can alienate customers if they find the adverts annoying.

Lack of control of advertising if used by other people.
May be altered or used in a bad way and shared with other people giving the business
bad publicity.

The Benefits & Drawbacks

of Using Company’s Website
If a business advertise the products on its own website it will enjoy the following benefits::
 No extra cost if own website is already designed and working.

 Control of advertising and can change and update quickly.
 Interactive adverts can make the adverts more attractive using colors, pictures and
animations.
 Can provide more information in adverts and link to other pages with further
information and pictures.
However, there are disadvantages too::

Design costs of the website may be high.
Potential customers may not find the website because of information overload.

Book-01 Chapter 15 | The Marketing Mix: Place 122
The Marketing Mix: Place — Chapter 15

( 1 ) The Role of Place Decisions in the Marketing Mix
After deciding the best product and right price along with effective promotion, the
business has to get product to the consumer. The product or service has to be available where
and when customer wants to buy. Where consumers can buy the product will affect how well it
will sell.
( 2 ) Channels of Distribution
KEY DEFINITIONS
“A CHANNEL OF DISTRUBUTION is the means by which a product is

passed from the place of production to the customer or retailer.”
Concept of Distribution::
Getting the right product to the right consumer at the right time in a way that is most
convenient to the consumer is a good definition of distribution. The main purpose of
distribution is not necessarily to aim for lowest cost but would it be most convenient for
consumers.
Businesses have to decide where to sell their products. They also have to decide how to get
the product to the consumer, which is the purpose of channel of distribution to use. The four
types of Channel of distribution are::

Channel of Distribution 1::
KEY DEFINITIONS
CHANNEL OF DISTRUBUTION 1 involves manufacturers selling their products

directly to the consumer.
Example:: Products can be sold by mail order catalogue or via the internet; another example is
McDonald’s home delivery services in which a consumer can get the food products sitting at
home. Agriculture products are also sold directly to farmers. Door to door selling, and selling
the products through company outlets.
Producer Consumer
Advantages of Channel of Distribution 1::

o Cuts out the profit margins of middleman or intermediaries;
o The manufacturer has full control over the pricing and marketing of products;
o Direct marketing can be selective and targeted at the most likely potential consumers
by using personal selling.
Disadvantages of Channel of Distribution 1::

o Manufacturer is directly responsible for holding stocks;
o Due to distance from the manufacturer the consumer is unlikely to have any chance to
see or try the product ─ after sales service could be a problem too.
KEY DEFINITIONS
CHANNEL OF DISTRUBUTION 2 is where the producer sells directly to

the retail outlets and then they sell the product to the consumer.
This is most common where the retailer is large, such as large supermarket, or when the
products are expensive, such as computers, furniture, clothes, shoes and jewellery.
Producer Retailer Consumer

o Retailer undertakes stock holding for the manufacturer and distributes the product to
consumers over a wide geographical area;
o Manufacturer can concentrate on ‘making products’ and not spend time or
resources on selling to consumers directly.
o Retailer will expect a profit margin which either comes from the manufacturers profit
margin or leads to higher prices than using the direct selling route;
o Final decisions on marketing policy are under the control of retailers such as price.
KEY DEFINITIONS
CHANNEL OF DISTRUBUTION 3 involves using a wholesaler, who performs

the function of breaking bulk, where wholesaler buys products from
manufacturers in large quantities and then divides up the stock into much
smaller quantities for retailers to buy.
Many smaller retailers can get the benefit from buying the products from wholesaler because
they can’t afford to buy large number of products.
Producer Wholesaler Retailer Consumer

o Wholesaler performs important stock holding and ‘breaking bulk’ functions ─ they
order in large quantities but sell to retailers in smaller quantities;
o Can provide a wider coverage, especially if the wholesaler is abroad.

o Slows down the overall distribution chain; and increase the price for consumers.
o Wholesaler will expect to make a profit which will reduce profit margin for manufacturer.

CHANNEL OF DISTRUBUTION 4 when products are exported, the manufacturer sometimes

uses an AGENT in the other country. The agent sells the products on behalf of the producer.
This can allow the manufacturer to have some control over the way the product is sold to
consumers. The manufacturer may export the products to many countries and may not know
the best way to sell the product in other markets.
Producer Agent Wholesaler Retailer Consumer
Note:: An AGENT is an independent person or business that is appointed to deal with the
sales and distribution of a product or range of products. The agent will put an additional
amount on the price to cover their expenses or will receive a commission on sales. Agents
will be aware of local conditions and will be in the best position to select the most effective
place in which to sell.
( 3 ) Selecting the Channel of Distribution
When deciding which channel of distribution to use, producers have to ask themselves a
number of questions::
What type of product is it? ▬ It is sold to business customer or for ordinary consumers.
Is the product very technical? ▬ If it is, it should be sold to the customer by someone with
technical knowledge who can explain how it works.
How often is the product purchased? ▬ If a product is bought every day, it will need to be
sold in many retail outlets, such as the mass selling products.
How expensive is the product? ▬ If the product is marketed as being expensive and of high
quality, it will be sold using a limited number of outlets.
How perishable is the product? ▬ If the product goes rotten quickly, such as fruit or bread,
then it will need to be widely available in many shops so that it can be sold quickly.
Where are the customers located? ▬

This will depend on the how far the customers are located.
Where do the competitors sell their products? ▬ Most of the manufacturer will probably
sell their products in the same outlets as their competitors to compete directly.

( 4 ) Methods of Distribution
The methods of distribution used for distributing the products can include the following::
Method of
Description
Distribution
A department store is a retail establishment which specializes in

Department Stores satisfying a wide range of the consumer's products and household
durable goods.
Chain stores are retail outlets that share a brand and central
Chain Stores management, and usually have standardized business methods
and practices, such as Chen-one.
A discount store is a type of department store, which sell products

Discount Stores at lower price than those offered by department stores and other
household markets.
A big-box store (also super center, superstore, or mega store) is a

Superstores physically large retail establishment, usually part of a chain stores,
self-service store selling mainly food and grocery items.
A supermarket, also called a grocery store, is a self-service store

Supermarkets offering a wide variety of food and household merchandise,
organized into. These markets are diversified in their nature.
Direct selling is a company outlet for the distribution of goods and

Direct Sales services at a basic level. It may be defined as marketing and selling
the goods and services directly to the consumers.
Mail order is a term which describes the buying of goods or services

by mail delivery. The buyer places an order for the desired
Mail Order products with the producer through some remote method such as
through a telephone call or web site. Then, the required products
are delivered to the specific customer.

Electronic Commerce, commonly known as e-commerce is the buying and

selling of products or services over electronic systems such as
Internet /
the Internet and other computer networks. Electronic commerce draws
E-Commerce
on such technologies as electronic funds transfer, online buying and
selling, Internet marketing, online transaction processing.
( 5 ) Wholesaler
KEY DEFINITIONS
Wholesaler ▬ Person or firm that buys large quantity of goods from various
producers, hold goods in warehouse, and resells in small quantities to retailers.
Wholesalers who carry only non-competing goods or product lines are called
distributors.
Advantages of Wholesaler::
 Breaking Bulk ▬ The wholesaler buys in large quantities from the manufacturer, and
sells to the retailer in small quantities.
 Reduces storage space needed by the manufacturer and the small shop. This reduces
the storage cost.
 Fewer transactions are needed for the manufacturer so using a wholesaler is cheaper.
 Gives credit facilities to retailers.
 May deliver to the small retailer thus saving them money on transport costs.
 Promotion carried out by wholesaler instead of manufacturer reduces promotion costs.
 Wholesaler can give advice to producer and small retailers about the best selling
products.
Disadvantages of Wholesaler::
May be more expensive for the small shop to buy from a wholesaler than if they
bought straight from the producer.
May not have the full range of products to sell.
Takes longer for fresh products to reach the shops and so it may not be as good
quality.
Wholesaler may be a long way from the small shop.

( 6 ) E - Commerce
This is the use of the internet and electronic communication to carry out business
transactions. Businesses also use e-mail to inform potential customers of new promotions or to
answer queries about product. Producers can be used e-commerce as the channel of
distribution 1 for consumers and channel of destitution 2 for retailers.
Opportunities of E-Commerce for Business & Consumers::
o Websites can be used to promote the company and its products worldwide much more
cheaply as compared to other forms of marketing.
o Businesses can also make online purchases of supplies and materials from other firms.
o There is no need for consumers to leave house for shopping.
o Comparisons between products and prices can be easily made by using the web surfing.
Threats of E-Commerce for Business & Consumers::
o With so many firms now offering e-commerce websites, competition is very high;
consumers can easily find an alternative supplier.
o Websites design must be very clear, attractive and easy to operate and this could be
expensive.
o No face-to-face contact with consumer, no market research and no product testing.
o Consumer need access to internet and also requires computer systems.

Book-01 Chapter 16 | Marketing Strategy 129
Marketing Strategy — Chapter 16

( 1 ) What is meant by marketing strategy
KEY DEFINITIONS
Marketing Strategy is a long-term marketing plan designed to achieve marketing

objectives. It includes marketing research, and then developing a right marketing mix
strategy to capture customers.
A Marketing Strategy is a plan to combine the right combination of the four elements of
the marketing mix for a product to achieve a particular marketing objective.
The marketing strategy developed by a business will differ depending on the size of the market
and number of competitors. It will depend on the finance available, marketing objectives and the
target audience.
Marketing Objectives Examples::
o Achieving a higher market share; (Objective)

o Maximizing sales and profitability of the firm. (Objective)
o Market Development ▬ selling existing products or introducing innovative ones ─ to
new markets; (Objective)
o To increase sales revenue and profitability; (Objective)
o To maintain or improve the image of products or a business; (Objective)
o Increasing sales in niche marketing; (Objective)
Marketing Strategies Examples::
o Increase product awareness among the target audience though advertisement and
offer promotion deals; (Strategy)
o Offering a huge product portfolio in order to provide the greater choice to consumers;
(Strategy)
o Market penetration ▬ increasing sales in existing markets using modification of
existing products; (Strategy)

( 2 ) Entering New Markets Abroad
Opportunities::
These days a large number of businesses both produce and sell in many different countries,
the reasons to for selling abroad are::
 Growth potential of new markets in other countries which are now developing and
enjoying higher living standards.
 Home markets might be saturated and new markets give the chance for higher sales.
 Wider choice of location to produce products and encourage businesses to sell and
produce in many different countries such as multinationals.
 Trade barriers have been lowered in many parts of the world making it easier and
profitable to enter in to new markets.

Potential Problems of Selling Abroad::
Lack of Knowledge ▬ The business may not be aware of competitors, consumer

buying habits, culture, taste and fashions of different markets.
Exchange Rate Changes ▬ If the exchange rate is not very stable then
exchange rate changes can mean the price of imported goods change and the
products can become too expensive to sell in new markets.
Import Restrictions ▬ If there are tariffs and quotas on imported products
then the price of these products may be higher than domestic goods.
( 3 ) Methods to Enter into the International Markets
Joint Ventures
For example McDonald’s, has a 50-50 joint venture with two Indian restaurant chains, Hard
Castle Restaurant and Connaught Plaza Restaurants. This allows the business to know the
local knowledge so that culture and customs can be easily adopted to become more
successful.
Licensing
This is where the business gives permission for another firm in the new market being
entered to produce the branded products under license. This means the products do not have
to be physically transported to the new market which saves time, transport costs.
International Franchising
This means the foreign franchises are used to operate a business’s franchise outlet abroad.
For example Dunkin’ Donuts sold the franchise agreements in the United Arab Emirates.
Localising Existing Brands Through Direct Investment
There is a phrase ‘Thinking Global ─ Acting Local’ which is being used by several
multinational businesses, it means that successful brands still adopted to local tastes and
culture to act like a local business.

Section 4
Operation Management

Book-01 Chapter 17 | Production of Goods & Services 133
Production of Goods & Services
Chapter 17
( 1 ) What is meant by the Production
Production is the provision of a product or a service to satisfy consumer needs and wants.
The process involves firms adding value to a product.
Level of Production::
The level of production is the output of the business. It is the measured quantity of output that
a firm produces in a given period of time, it means that the total capacity of the business in a
particular time period.
Productivity::
“PRODUCTIVITY is the output measured against the inputs used to create it.” This is
measured by dividing the output over a given period of time by the number of employees::
Formula for labour productivity::
Output (over a given period of time)

Productivity =
Number of Employees
Note::
Businesses could increase productivity in order to become more competitive. Productivity can
be increase by providing training and developments, increasing motivation levels, and
maintaining high quality machines and equipments. As employees become more efficient,
the amount of output produced per employee will rise and therefore the costs of producing the
product will fall.

( 2 ) Stock Control & Lead Time
Stocks can take various forms, including raw materials and components, partly finished
goods, or finished products ready for delivery.
When stock levels get to a certain point (reorder point), they will be reordered to bring stocks
back up to the maximum level again. The business must reorder before stocks get too low
that they might actually run out if there is an unexpectedly high demand for the goods. If
too high a level of stock is held then this costs a lot of money.
Buffer Inventory Level:

The Buffer Inventory Level is the inventory held to deal with uncertainty in customer demand
and deliveries of supplies.

( 3 ) Lean Production
KEY DEFINITIONS
LEAN PRODUCTION techniques used by businesses to cut down on waste and

therefore increase efficiency, for example, by reducing the time it takes for a
product to be developed and become available for sale as quick as possible.
There are seven types of waste that can occur in production and they are:
1) Overproduction — Producing ahead of demand, high storage costs.

2) Waiting — delays in the production process.
3) Transportation — unnecessary transportation of raw material and components.
4) Motion — Unnecessary movements of workers, machines and raw materials.
5) Over-processing — Complex machines used to perform simple tasks.
6) Defects — products that do not come up to quality standards.
Benefits of Lean Production
o Less storage of raw materials and components and less money tied up in inventories.
o Quicker production of goods and services.
o No need to repair defects and provide a replacement service.
o Better use of machines and equipments.
o Improved health & Safety leading to higher job satisfaction and high productivity.
( 1 ) Kaizen:: (Continuous Improvement)
“KAIZEN is a Japanese term meaning ‘Continuous Improvement’ through the elimination of

waste in the production process.”
The improvement does not come from investing in new technology and equipment but
through the ideas of the workers themselves. Small groups of workers meet regularly to
discuss work related problems and possible solutions. This has proved effective because
no one knows the problems that exist better than the workers who work with them all the
time.

Kaizen eliminates waste, for example, by getting rid of piles of stock or reducing the amount of
time taken for workers to walk between jobs so that they eliminates unnecessary movements.
As the workers have ‘hands-on’ experience of the issues being discussed, it is possible that one
of the team will arrive at the best solution to a problem. This group of workers is called
Quality Circles and it is a very successful method of allowing the participation of all staff.
Advantages of Kaizen::
 Increased productivity.
 Reduced amount of space needed for the production process.
 Work-in-progress is reduced.
 Improved layout of the factory floor may allow some jobs to be combined, thereby
freeing up employees to carry out some other job in the factory.
( 2 ) Just-in-Time
JUST-IN-TIME or JIT is a production method that involves reducing or eliminating the need
to hold stocks of raw materials and unsold stocks of the finished product. Supplies arrive just
at the time they are needed. The makings of parts are just in time to be used in the next
stage of production and the finished product is made just in time to be delivered to the
customer.
All this reduces the costs of holding stock, as no extra stock is ordered to keep in the
warehouse just in case it is needed. Therefore warehouse space is not required, again
reducing costs. The finished product is sold quickly and so money will come back to the
business more quickly helping its cash flow.
Note:: In Order to operate just-in-time production system the business will need very reliable
suppliers with healthy relationships and an efficient system of ordering components.
( 3 ) Cell Production
Cell production is where the production line is divided into separate, self-contained units
(Cells), each making an identifiable part of the finished product, instead of having a mass
production line. This method of production improves the morale of the employees and makes
them work harder so they become more efficient. The employees feel more valued and gets
motivated. The idea of cell production is a way to introduce a team work environment that’s
creating learning and developing culture of the business organisation.

( 4 ) Methods of Production
There are three methods of production::
o Job Production o Batch Production o Flow Production
Job Production
KEY DEFINITIONS
Job Production ▬ Producing a one-off item specially designed for the customer.
JOB PRODUCTION is where a single product is made at a time. This is where products are
made specifically to order, for example, a customer would order a particular product and
producer would make it according to the exact requirements of the customer, and this order
may or may not repeat.
Other examples include:: Bridges, Underground Tunnels, Cinema films, Ships, Rolls Royce and
Business Customized Computer Programs that perform specialized tasks.
Advantages of Job Production:

 The product meets the exact requirements of the customer.
 The workers often have more varied jobs (they don’t carry out just one task).
 More varied work increases employee motivation ▬ gives them greater job
satisfaction.
Disadvantages of Job Production:

Skilled labour is often
required for the production of
goods.
The costs are higher because it
is often labour intensive.

Batch Production
KEY DEFINITIONS
Batch Production is producing a limited number of identical products ─ each item in

the batch passes through one stage of production before passing on to the next stage.
BATCH PRODUCTION is where a quantity of one product is made, and then a quantity of
another item will be produced, batches, normally as orders come in. Batch production is
mostly used where similar products are made in blocks or batches. A certain number of
products are made of one type, and then a certain number of another product is made, and so
on.
Examples include::
A bakery making batches of bread, Cakes, Ice Creams and other goods in batches and in
multiple quantities.
Other examples include several houses built together using the same design, furniture production
─ a certain number of tables are made, then a certain number of chairs, or clothing ─ a batch of
a particular size of jeans is produced and then a batch of another size.
Advantages of Batch Production::
 It is a flexible way of working and production can easily be changed from one
product to another product line.
 It still gives some variety to workers jobs and increase level of motivation.
 Production may not be affected to any great extent if machinery breaks down.
Disadvantages of Batch Production::
It can be expensive as semi-

finished of finished products will
need moving about.
Warehouse space will be needed

for stocks of raw materials and
components, this is costly.

Flow Production
KEY DEFINITIONS
Flow Production involves a continuous movement of items through the

production process. This means that when one task is finished, the next task must
start immediately. Therefore, the time taken on each task must be the same.
“FLOW PROUDCTION is where large quantities of a product are produced in a continuous

process.” Sometimes referred to as mass production because of the large quantity of a
standardized product that is produced. Large numbers of identical products are made and the
costs of production are low (the business will gain from economies of scale).
Examples of products produced in this way include::

Cars, Cameras, CD Players, Packaged Foods and drinks such as Coke and Pepsi.
Advantages of Flow Production::
 Costs are kept low and therefore prices are also lower.
 It is easy for capital-intensive production methods to be used ─ reducing labour costs
and increasing efficiency.
 Goods are produced quickly and cheaply.
Disadvantages of -Job Production::
It is a very boring system for the workers, so there is little job satisfaction.
The capital costs of setting up the production line can be very high.
If one machine breaks down the whole production line will have to be halted.

( 5 ) Affecting Which Method of Production to Use
The Nature of the Product::

If a fairly unique product or service is required, job production will be used. If business had
demand to offer range of different products then batch product would be most suitable
method to produce. If the product can be mass produced using an automated production line
then flow production will be used.
The Size of the Market::

If demand is higher and more products can be sold will be produced in a certain quantities,
batch production will be used.
The Nature of Demand::

If there is a large and fairly steady demand for the product, such as soap, shampoo, it
becomes economic to set up a flow production line and continuously produce the product.
The Size of the Business::

If the business is small and does not have the access to large amounts of capital then it will
not produce one a large scale using automated production lines. Small businesses are more
likely to use job or batch production methods.
( 6 ) How Technology has Changed Production Methods
Technological advances have allowed the mechanization and automation of production

methods in many industries. For example::
Automation::
AUTOMATION is where the equipment used in the factory is controlled by a computer to
carry out mechanical processes such as paint spraying on car assembly line.
For example automatic car production and assembly line plants.
Mechanization::
MECHANIZATOIN is where the production is done by machines but operated by people, for
example, a printing press and harvesting process.

CAD (Computer Aided Design)::

CAD is computer software that draws items being designed more quickly and allows them to be
rotated to see the item from all sides instead of having to draw it several times.
For example car model designing using CAD technology.
CAM (Computer Aided Manufacturing)::

CAM is where computers monitor the production process and control machines and robots on
the factory floor. For example on the production line of a car plant computers will control the
robots that spot-weld the car body together.
CIM (Computer Integrated Manufacturing)::

CIM is the total integration of CAD and CAM. Computer-integrated manufacturing (CIM) is the
manufacturing approach of using computers to control the entire production process.

EPOS (Electronic Point of Sale)
This is used at checkouts where the operator

scans the bar code of each item individually. The
price and description of the item is displayed on
the checkout monitor and printed on the till receipt.
EFTOPS (Electronic Funds Transfer at Point of Sale)
This is where the electronic cash register is

connected to the retailer’s main computer and also to
banks over a wide area computer network. The
shopper’s card will be swiped at the till and the bank
information will automatically be read from the card. The
money will be directly debited from the customer’s
account after they have signed for the debit to be made
or have entered their PIN.
The Advantages of New Technology
o Productivity is greater as new production methods are used.

o Greater job satisfaction motivates workers, as routine and boring job are now done by
machines.
o Better quality products are produced using high-tech machines and equipment.
o New products are produces according the market demand.
The Disadvantages of New Technology
o Unemployment rises as computer replace people.

o It is expensive to buy because of high setup costs.
o Employees are unhappy with the changes in their work practices when new
technology is introduced.

Book-01 Chapter 18 | Costs, Scale of Production & Break-even Analysis 143
Costs & Break-even Analysis — Chapter 22

( 1 ) Business Costs
All Business activities involve costs of some sort. These costs cannot be ignored. Example::
o Rent of the factory o Bank charges

o Insurance of the factory and stock o Management and staff salaries
o Raw materials and components used o Repair and maintenance charges
The main types of costs are FIXED and VARIABLE costs.
Fixed Costs
FIXED COSTS are costs which do not vary with the number of items sold or produced in the
short term. They have to be paid whether the business is making any sales or not. They are also
known as OVERHEAD COSTS. For example:: Rent, Salaries of permanent managers, Interest
on bank loan, Insurance Charges.
Variable Costs
VARIABLE COSTS are costs which vary with the number of items sold or produced. They are
often called DIRECT COSTS as they can be directly related or identified with a particular product.
Example::
Wages for the Labour, Raw Material for production and Direct Overheads.
Total Costs
Total Costs are the addition of fixed and variable costs.

Total Costs (TC) = Fixed Costs (FC) + Variable Costs (VC)

Direct Costs
DIRECT COSTS are those that can be directly related or identified with a particular product or
department.
For example, material costs, wages for labour and direct overheads.
Indirect Cost
INDIRECT COSTS are those costs which cannot be directly related to a particular product.
They are often termed OVERHEADS or OVERHEAD COSTS.
For Example, Electricity, Rent, Insurance, Interest on bank loans.
Marginal Costs
KEY DEFINITIONS
Marginal Costs ▬ The cost associated with one additional unit of production,
also called incremental cost, it’s the rise in total cost when output raises one
unit. Marginal revenue is the rise in total revenue when output raises one unit.
MARGINAL COSTS are the extra costs a business will incur by producing one more unit of
output.
Average Cost / Unit Cost
AVERAGE COST PER UNIT is the total cost of production divided by total output.
Use of Costs Data
The costs data can be used to help make business decisions.
o The costs data is used for setting Prices of goods and services offered.
o Deciding whether to stop production of the loss making products.
o Deciding on the best location.

( 2 ) Economies of Scale
ECONOMIES OF SCALE are the factors that lead to a reduction in average costs as a business
increases in size. There are five economies of scale::
( 1 ) Purchasing Economies: (Bulk Buying Economy)
When businesses buy large numbers of components, for example materials or components, they
are able to gain discounts for buying in bulk. This reduces the unit cost of each item.
( 2 ) Marketing Economies
Large businesses might be able to afford to purchase vehicles to distribute goods as rather
then depend on other firms. Advertising rates in paper and on television do not go up in the
same proportion as the size of and advertisement ordered by the business.
( 3 ) Financial Economies
Larger businesses are often able to raise capital more cheaply than smaller ones. Bank
managers often consider then lending to large organizations is less risky then to small ones. A
lower rate of interest is therefore often charged.
( 4 ) Managerial Economies
Small businesses cannot afford to pay for specialist managers, for example marketing
managers and qualified accountants. This tends to reduce their efficiency. Larger companies can
afford specialists and this increases their efficiency and helps to reduce their cost.
( 5 ) Technical Economies
Large firms often use flow production methods. Specialist machines are used to produce items
in a continuous flow with workers responsible for just one stage of production. Small businesses
cannot afford this expensive equipment.

( 3 ) Diseconomies of Scale
DISECONOMIES OF SCALE are the factors that lead to an increase in average costs as a
business increases in size. There are two basic diseconomies of scale::
( 1 ) Poor Communication
The larger the organization the more difficult it becomes to send and receive accurate
messages. It often takes longer for decisions made by managers to reach all groups of workers
and this could mean that it will take a long time for workers to respond and act upon
manager’s decisions.
( 2 ) Low Morale of the Workforce
Large businesses can employ thousands of workers. It is possible that one worker will never see
the top manages of the business. Workers may feel that they are unimportant and not valued
by the management. In small firms it is possible to establish close relationships between
workers and top managers.

( 4 ) Break-Even Charts:: Comparing Costs with Revenue
BREAK-EVEN CHARTS are graphs which show how costs and revenues of a business change
with sales. They show the level of sales the business must make in order to break even.
KEY DEFINITIONS
Break-Even Point - The break-even point in any business is that point at which the
volume of sales or revenue exactly equals total expenses ▬ the point at which there
is neither a profit nor a loss made by a business.
Revenue::
The REVENUE of a business is the income during a period of time from the sale of goods or
services.
Sales Revenue (Total Revenue) = Quantity × Selling Price
Contribution Method: (Equation Method)
The CONTRIBUTION of a product is selling price less variable cost.

Step1:: Selling Price ▬ Variable Cost = Contribution
Fixed Cost
Step2:: Break-Even Level of Production =
Contribution
Drawing a Break-Even Chart: (Graphical Method)
In order to draw a Break-Even Chart we need information about the fixed costs, variable costs
and revenue of a business. For example, in the following business::
o Fixed costs are $5000 per year.

o The Variable costs of the business are $3 per unit of output.
o Each unit is sold at $8.
o The factory can produce a maximum output of 2,000 products.

Now we can plot the information on the graph. Note the following points::
o The ‘y’ axis (the vertical axis) measures money amounts. (Revenues and Costs)
o The ‘x’ axis (the horizontal axis) shows the number of units produced and sold.
o The Fixed costs do not change at any level of output. (Straight Line Always)
o The total cost line is the addition of variable and fixed cost.
BREAK-EVEN POINT is the level of sales at which,

Total Cost = Total Revenue. ( Profit = Loss )
Uses of Break-Even / Charts
Charts are used to identifying the break-even point of production, calculating maximum profit
and safety margins of the business.
Sales ($) = 0 Sales ($) = 2,000 Units
Fixed Costs 5,000 5,000
Variable Costs 0 6,000
Total Costs 5,000 11,000
Sales Revenue 0 16,000

Advantages of Break-Even Charts:
 Managers are able to read of from the graph the expected profit or loss to be made at
any level of output.
 The impact on profit or loss of certain business decisions can also be shown by
redrawing the break-even graph.
 The break-even chart can also be used to show the safety margin the amount by which
sales exceed the break-even point.
Disadvantages of Break-Even Charts::
Break-even charts are constructed assuming that all goods produced by the firm are
actually sold ▬ the graph does not show the possibility of wastage the stock.
Fixed costs only remain constant if the scale of production does not change. For
example, a decision to double the output is almost certainly going to increase fixed costs.
The simple charts used in this section have assumed that costs and revenues can be
drawn with straight lines. This will not happen in real life.

Book-01 Chapter 19 | Achieving Quality Production 150
Achieving Quality Production

Chapter 19
( 1 ) What Quality means & why it is important
KEY DEFINITIONS
Quality means to produce a good or a service which meets customer expectations.
A business needs to try to ensure that all the products it sells are free of faults and defects.
This will helps the business for::
o Establishes a unique brand image.

o Builds brand loyalty.
o Will maintain a good reputation.
o Will help to increase sales.
o Attracts new customers.
But if quality is not maintained the business will::
o Lose customers to other brands.

o Have to replace faulty products which raise costs for the business.
o Have customers who tell other people about their experience and this may give the
business a bad reputation leading to lower sales and profits.
(Word of Mouth Recommendations)
A manufacturing business needs a product with a good design using high quality raw
materials, and then it needs to ensure that it is manufactured without any faults and the
product needs to satisfy the customer requirements. A service providing business needs to
match customer expectations with its quality of customer service, delivery times and
convenience.
Quality can also be assessed in terms of the original specifications for the product such as
exact size, weight, performance standards, reliability, customer service, delivery times
and so on.

( 2 ) Quality Control & Quality Assurance
A quality product is on the best fulfils the particular needs of consumer at a price that they
are willing to pay. If a product fulfils the customer’s expectations, the customer will be
consider that the product is of acceptable and even high quality.
Quality Control
Quality Control is about checking to ensure that products and services
KEY
come up to an agreed standard and use an inspection system to make
DEF
sure that products went out of factories with no defects.
A most common way to make sure that products went out of factories with no defects is the
responsibility of Quality Control Departments whose job it was to take samples at regular
intervals to check for errors. If errors are found then a whole batch of production might
have to be reworked or scrapped.
“The Quality Control Department would check that quality was being maintained during
the production of goods, try to eliminate errors before they occurred, and find any
defective products before they went out of the factory to customer.”
Quality Assurance
Quality Assurance is based on checking the quality standards at all
stages in the production of a good or service in order to ensure that
KEY customers’ satisfaction is achieved.
DEF
Quality Standards are the expectations of customers expressed in terms
of the minimum acceptable production or service standards.
This takes a slightly different approach to quality. The business will make sure quality
standards are set and then it will apply these quality standards throughout the business. The
purpose of quality assurance is to make sure that the customer is satisfied, with the aim of
achieving greater sales, increased added value and increased profits.
To implement a quality assurance system, several aspects such as design of the product, the
components and materials used, delivery schedules, after-sales service and quality
control procedures. TQM is one approach to implementing a quality assurance system.

Total Quality Management:: (TQM)

KEY Total Quality Management (TQM) is the continuous improvement of
DEF products and processes by focusing on quality at each stage of production.
Total Quality Management is an approach to quality that aims to involve all employees in
the quality-improvement process. It tries to get it right first time and not have any
defects, so that customer is always satisfied. This should mean that quality is maintained
throughout the business and no faults should occur. TQM should mean that costs will fall
along with improving the quality at each stage of production process.
TQM use Quality circles where groups of workers meet regularly and discuss problems
and possible solutions. Advantages Include::
 Quality is build into every part of the production of a product or service and becomes
central to the ethos of all employees.
 Eliminates all faults and errors before the customer receives.
Total Encourages everyone to think about quality

Quality Quality is the aim for all staff
Management Customers needs are satisfied
Inspection during and after production

Quality Aim is to stop faults from happening
Assurance Aim is to ensure products attain a pre-set standard
Team working and responsibility
Inspectors checking finished goods

Quality
Detection of components or products that are faulty
Control
Involves considerable waste
(Q) How can a customer be assured of a quality product or service?
If a customer wants to be sure that a product or service will meet particular standards then
they can look for a quality mark associated with the product or service. The business can
apply to have this quality mark on their goods and services and they will have to follows certain
rules to be able to keep this quality mark.
An example is the ISO (International Organisation for Standardization).

Book-01 Chapter 20 | Location Decisions 153
Location Decisions — Chapter 20

( 1 ) Location of the Industry
The location of a business is considered either when the business is first setting up or when its
present location proves unsatisfactory for some reason. The businesses may decide to look
for an alternative site or may decide to set up additional factories/shops either in the home
country or abroad.
( 2 ) Factors Affecting the Location of a Manufacturing Business
Factors affecting manufacturing businesses discussed separately even though some factors will
be common with services sector industry.
( 1 ) Production Methods & Location Decisions
Production methods such as job, batch and flow production have a significant influence on
the location, small scale location is required for the job production, and batch production
requires warehouse space so medium sized location is suitable. Flow production requires a
large scale location with easy access of components and transportation.
( 2 ) Market
Locating a factory near to the market for its products used to be thought important when the
product gained weight and became heavier so therefore, more expensive to transport. If the
product perished quickly and needs to be fresh when delivered to the market, such as milk,
bread or cakes, the factory may be located close to its retail outlets.

( 3 ) Raw Materials / Components
Raw materials may be considerably heavier and more expensive to transport than the
finished product. If a particular process used many different components, a business might
choose the location that provides easy accessibility of raw materials and components.
( 4 ) Availability of Labour
To be able to manufacture products at least some labour will be necessarily required. If

particular skilled labour is needed, it may be easier and cheaper to sets up in an area where
people with the relevant skills live.
( 5 ) Government Grants and Subsidies
Certain regions of most countries are able to offer financial support from both central
government and local authorities. Grants may be offered to act as an incentive. Existing
businesses in a country can also be provided with financial assistance by the government to
retain existing jobs.
( 6 ) Transport & Communication
Businesses need to be near to a transport system, be it road, rail, inland waterway, port and
airport. Where the product will be possible to deliver easily to the destination. This will
reduce the costs of transportation and speeding up the time spends delivering the products.
( 7 ) Electricity & Gas
Today electricity and gas is available in most places and these energies are very important for
some industries such as textile industries and flow production manufacturing operations.

( 8 ) Water Supply
A reliable supply of water, gas and power will be needed. If large supplies of water are needed
such as cooling purposes, then being near to a water supply such as the sea or a river will be
important.
( 9 ) Management Preferences
Senior managers often influences a location decision of there is an option to set up in an

area with substantial ‘quality of life’ benefits. These could include excellent schools for their
children, sports and shopping facilities and airport.
( 10 ) Climate
Climate might be very important for different areas of the industry, such as availability of
labour, raw materials and transportation in different climates.
( 11 ) Site Costs
These are the most important fixed costs of location. They include purchase or rent of land
and property as well as conversion or fitting out costs.
( 12 ) Infrastructure
The quality of the local infrastructure, especially transport and communication links, roads,
water, supply will influence the choice of location.
( 13 ) Break-even Analysis
Break-even method is relatively straightforward of comparing two or more possible

locations. The lower this ‘break-even’ level of output, the better that site is.

( 3 ) Factors Affecting the Location of

Service Sector / Retailing Businesses
Factors affecting service sector businesses are considered to be very important while choosing
a location for a shops, banks, insurance office, and fast food restaurants.
These factors are::
( 1 ) Shoppers / Customers
An area is visited regularly by many shoppers is going to main concern while choosing a
location for a service sector business. Most retailers will want an area which is popular, such as
shopping malls/centers and market plazas.
( 2 ) Nearby Shops / Other Businesses
Being able to locate near to shops/businesses which are visited regularly, such as post office
or popular fast food outlet, will mean that a lot of people pass your shop on the way to other
shops and businesses. Using this factor consumer can easily get variety of goods and
services available at the same place.
( 3 ) Customer Parking Available
Where many of the customers use their cars and bikes, the ability to park their vehicle will be
very important as to whether they visit particular shops. Where parking is convenient and
near to the shops, this will encourage shoppers to that area and therefore possibly increase
sales.
( 4 ) Availability of Suitable Vacant Premises
If a suitable vacant shop or premises are not available for purchase or rent, the business may
not be able to locate in the area it wishes. Prime locations will be in short supply.

( 5 ) Rent / Taxes
The more important the site for tertiary sector, the higher the rent and taxes will usually be
because there will be a high demand for sites in this area and cost of buying or renting
these locations will be higher comparatively with other areas.
( 6 ) Access for Delivery Vehicle
Access for delivery vehicles might be a consideration if it is very difficult for them to gain
access to the premises.
( 7 ) Security
The rate of crime in an area might be of importance to a business. High rates of crimes such
as theft may prevent a business from locating in a particular area.
( 8 ) Legislation
In some countries there may be laws restricting the trading and marketing of goods in
particular areas. For example tobacco cafés are restricted in household grocery markets.
( 9 ) Climate
Services sector firms need to locate themselves where the climate is good in order to serve the
needs of their customers.

Section 5
Finance &
Accounting

Book-01 Chapter 21 | Business Finance: Needs and Sources 159
Business Finance — Chapter 21

( 1 ) What do Finance Department do?
Finance departments fulfill a very important role in business. They have the following
responsibilities:
o Record all financial transactions, such as payments and sales revenue.

o Preparing final accounts.
o Producing accounting information for managers.
o Forecasting cash flows.
o Making important financial decisions, which source of capital to use for different
purposes within the business.
( 2 ) Why do Businesses Need Finance?

Finance is money. Business need finance in the following situations::
o Starting up a business
o Expending an existing business
o A business in difficulties
Starting up a business::
When an individual plans to start their own business, they should consider all of the assets
they will need to buy in order to start trading. Usually firm will need to obtain finance to
purchase fixed and current assets, for example buildings, machines, vehicles and stocks.
The finance needed to launch a new business is often called “Start-up Capital” or “Initial
Capital”.
Expanding an existing business::
The owners of a successful business will often take a decision to expand it in order to increase
profits. Some fixed assets need to be purchased, such as buildings and machinery. Another
business could be purchased through a takeover (Integration). The business needs money to
expand the operation either internally or externally.

A business in difficulties::
Finance may also be needed by businesses that are not doing so well. For example a loss
making business may need to purchase new machinery in order to become more efficient. A
firm with negative cash flow may need finance to cover short-term expenses.
In all three cases above, businesses may need finance to pay for either CAPITAL EXPENDITURE
or REVENUE EXPENDITURE.
( 3 ) Capital & Revenue Expenditure
Capital Expenditure
Capital Expenditure:: is money spent on fixed assets which will last for more than one year.
For example buying machines and equipments, vehicles, building or extending the premises.
Revenue Expenditure
Revenue Expenditure:: Revenue Expenditure is money spent on day-to-day expenses

which do not involve the purchase of a long-term asset, for example wages, salaries, rent,
repair and maintenance and other utility bills.

( 4 ) Sources of Finance
The two most common ways of doing this are to define whether the finance is::
1) Internal or external
2) Short-term, medium-term or long term
( 5 ) Internal Sources of Finance
This is money which is obtained from within the business itself. The most common examples
for internal sources of finance are::
( 1 ) Retained Profits
This is profit kept in the business after the owners have taken their share of the profits. It is
often called ploughed back profit, and has the following advantages and disadvantages.
Advantages of Retained Profits
 Retained profit does not have to be repaid.
Disadvantages of Retained Profits
A new business will not yet have any retained profits.

( 2 ) Sale of Existing Assets
Existing assets that could be sold are those assets which are no longer required by the
business, for example, redundant buildings or surplus equipment.
Advantages of Selling Existing Assets
 This makes better use of the capital tied up in the business.
Disadvantages of Selling Existing Assets
A It may take some time to sell these assets
( 3 ) Running Down Stocks to Raise Cash
Businesses sell the extra stock to raise money.
Advantages of Reducing Stocks
 This reduces the opportunity cost and storage cost of high stock.
Disadvantages of Reducing Stocks
It must be done carefully to avoid disappointing customers if not enough goods

are kept in stock.

( 6 ) External Sources of Finance

Short-Term Finance
This provides the working capital needed by businesses for day-to day operations. It is finance
which is needed for up to one year. Shortages of cash in the short-term can be overcome in
three main ways.
( 1 ) Bank Overdrafts
The bank gives the business the right to ‘overdraw’ its bank account, spend more money
from the account than is currently in it.
Advantages of Using Bank Overdrafts
 The firm could use this finance to pay wages or suppliers.

 The overdraft will vary each month and said to be a flexible type of loan.
Disadvantages of Using Bank Overdrafts
Interest rates are variable.

The bank can ask for the overdraft to be repaid at very short notice.

( 2 ) Factoring of Debts
Debt factors are specialist agencies that ‘buy’ the debts of firms for immediate cash. They may
offer 90 percent of an existing debt. The debtor will then pay the factor and the 10 percent
represents the factor’s profit.
Advantages of Factoring of Debts
 Immediate cash is made available.

 The risk of collecting the debt becomes the factors.
Disadvantages of Factoring of Debts
The firm does not receive 100 percent of the value of its debts.
( 3 ) Trade Credit
This is when a business delays paying its suppliers, which leaves the business in a better cash
position.
Advantages of Trade Credit
 It is almost an interest fee loan to the business for the length of time that payment is
delayed for.
Disadvantages of Trade Credit
The supplier may refuse to give discounts or even refuse to supply any more
goods if payment is not mad quickly.

Medium-Term Finance
This finance which is available for between one to ten years. It is usually needed to purchase
machinery and vehicles, which often have useful lives for this period.
The common methods are::
( 1 ) Medium Term Bank Loan
These are payable over a fixed period of time.
Advantages of Bank Loan
 Usually quick to arrange and can be for varying lengths of time.

 Large companies are often offered low rates of interest.
Disadvantages of Bank Loan
A bank loan will have to be repaid and interest must be paid.

Security or collateral is required for taking the loan.
( 2 ) Hire Purchase
This allows a business to buy a fixed asset over a long period of time with monthly payments
which include an interest charge.
Advantages of Hire Purchase
 The firm does not have to find a large cash sum to purchase the asset.
Disadvantages of Hire Purchase
A percentage of cash deposit is paid at the start of the period. Interest

payments can be quite high.

( 3 ) Leasing
Leasing an asset allows the firm to use an asset but it does not have to purchase it. Monthly
leasing payments are made. The business could decide to purchase the asset at the end of
the leasing period.
Advantages of Leasing
 The firm does not have to find a large cash sum to purchase the asset.
Disadvantages of Leasing
The total cost of the leasing charges will be higher than purchasing the asset.
Long-Term Finance
( 1 ) Issue of Shares
This is finance which is available for more than ten years. Usually this money would be used to
purchase long-term fixed assets and capital investments. Private and public limited
companies can raise more capital by selling shares.
Advantages of Issuing Shares
 A share issue provides permanent capital which does not have to be repaid.
 There are no interest payments.
Disadvantages of Issuing Shares
Dividends are paid after tax.

The balance of ownership can be affected by a large share issue.
( 2 ) Selling Debentures
These are long-term loan certificates issued by limited companies considered to be debt
finance.
 Debentures can be used to raise very long-term finance, for example 25 years.
As with loans, these must be repaid and interest must be paid.

( 7 ) How the Choice of Finance is made in a business?
(1) Purpose and Time Period::
What is the finance to be spent on? If purpose and time period involved is of long term
nature, then it would be met by long term source and vice versa.
(2) Amount Needed::
Different sources will be used depending on the amount of money needed.

(3) Status and Size::
Limited companies have greater choice of finance available unlike sole trader or partnership.
(4) Control of Ownership::
Owners of business may lose control over the business if they ask other people to invest in.
(5) Cost of Credit:: Interest to be paid on source of finance is also important factor.
Business usually prefers those sources which carry lower interest rates.
(6) Risk and Gearing:: The gearing of a business measures the proportion of total capital
raised from long-term loans. If this proportion is very high ─ the business is said to be highly
geared. This is said to be a risky way of financing a business.
( 8 ) Will Banks Lend and Shareholders Invest?
A business can never be sure of being able to raise finance. Banks often refuse to lend to
businesses ─ and shareholders may be reluctant to buy more shares. A business owner, will
increase the chances of obtaining loan finance if the following is available:
o A cash flow forecast which shows why the finance is needed and how it will be used.
o An income statement ─ for the last time period ─ and forecast one for the next year.
o Details of existing loans and sources of finance being used.
o Evidence that ‘security’ is available to reduce the bank’s risk if it lends.
o A business plan to explain clearly what the business hopes to achieve in the future
and why the finance is important to these plans.
Shareholders are most likely to buy additional shares when::
o The company’s share price has been increasing.

o Dividends are high ─ or profits are rising so dividends might increase in the future.
o Other companies do not seem such a good investment.
o The company has a good reputation and has plans for future growth.

Book-01 Chapter 22 | Cash flow 168
Cash flow — Chapter 22

( 1 ) What is meant by Cash flow?
Liquid Assets:: Cash is a liquid asset. This means that it is immediately available for
spending on goods and services. The two forms of cash are cash-in-hand and cash-at-bank.
Cash Flow::
The CASH FLOW of a business is the cash inflows and outflows over a period of time.
Cash Inflows::
CASH INFLOWS are the sums of money received by a business during a period of time::
o By the sale of goods for cash

o Through payments made by debtors
o By borrowing money from an external source
o Through the sale of assets of the business (sometimes un-useful assets)
o From investors and shareholders’ funds
o Through other incomes such as rent
Cash Outflows::
CASH OUTFLOWS are the sums of money paid out by a business during a period of time::
o By purchasing goods or materials for cash

o By the payment of wages, salaries
o By purchasing fixed assets
o By repaying loans
o By paying creditors of the business
o By paying utility bills
o By paying taxes to the government

( 2 ) Cash Flow Cycle

KEY DEFINITIONS
A CASH FLOW CYCLE shows the stages between paying out cash for labour,
materials and receiving cash from the sale of goods.
1 Cash Needed to 2 Materials 3 Goods
Pay for Wages, Rent, etc Produced
5 Cash Payment
4 Goods Sold
Received for Goods Sold
Can Profitable Businesses run out of cash?
This is possible for the number of ways::

o By allowing customers too long a credit period, perhaps in order to encourage sales.
o By purchasing too many fixed assets at once.
o By purchasing or producing too high level of stocks. This is also called overtrading of
stocks.

( 3 ) Cash Flow Forecasts
A CASH FLOW FORECAST is an estimate of future cash inflows and outflows of a business,
usually on a month by month basis. This will then show the expected cash balance at the
end of each month.
A CASH FLOW FORECAST can be used to tell the manager::
o How much is available for paying bills, repaying loans or for buying fixed assets.
o How much the bank might need to lend in order to avoid insolvency?
o Whether the business is holding too much cash which could be put to a more
profitable use.
Uses of Cash Flow Forecasts

Cash flow forecasts are useful in the following situations::
o Starting up a business o Running an existing business
o Keeping the bank manager informed o Managing cash flow
Starting up a business::
When planning to start a business, the owner will need to know how much cash will be needed
in the first few months of operation. This is a very expensive time for new businesses as
premises have to be purchased or rented, machinery must be purchased or hired, costs of stock
and advertising.
Keeping the bank manager informed::
Banks provide loans to businesses. Before lending bank managers need to see the firm’s cash
flow forecast. Through this managers want to check the surety of repayment.
Running an existing business::
Any business can run out of cash and require an overdraft, perhaps because of an expensive
fixed asset being bought or a fall in sale. Borrowing money needs to be planned in advance so
that the lowest rates of interest can be arranged.

Managing Cash Flow: (effective Utilization of Cash)
Too much cash held in the bank account of a business means that this capital could be better
used in other areas of the business.
Opening Cash (or Bank)::
OPENING CASH balance is the amount of cash held by the business at the start of the month.
Closing Cash (or Bank)::
CLOSING CASH balance is the amount of cash held by the business at the end of the month.
This will be the opening balance for the next month.
Net Cash Flow::
NET CASH FLOW is the difference between monthly cash inflows and outflows.
Net Cash flow = Monthly Cash Inflows ▬ Monthly Cash Outflows
( 4 ) How can cash flow problems be solved?

There are several ways in which a short-term cash flow problem could be overcome.
Method of overcoming
How it works? Limitations
cash flow Problem
Bank loans in the form of Interest must be paid which

Increasing Bank Overdraft overdraft will inject more reduce profits.
cash into the business. The loans will have to be repaid.
Suppliers could refuse to supply.

Delaying Payments Cash outflows will decrease in
Supplier could offer lower
to Suppliers the short term.
discounts for late payments.
Asking Debtors Customer may join another
Cash inflows will increase in
to Pay more Quickly, business that still offer credit
the short-term.
or Sell on Cash Only terms.
The long-term efficiency of the
Delay the Purchase Cash outflows for purchase of
business could decrease without
of Capital Equipment equipment will decrease.
up-to-date equipment.

Format for Cash Flow Forecasts Statement::
January February March
Cash Inflows (A) 35000 45000 50000
Cash Outflows (B) 30000 65000 40000
Opening Balance (C) 10000 15000 (5000)
Net Cash Flow (D) ( = A — B) 5000 (20000) 10000
Closing Balance ( = C + D) 15000 (5000) 5000
Activity:: Using a Cash flow Forecast
January February March April
Cash Inflows:
Sales 15000 15000 20000 25000
Payments from Debtors 5000 5000 7000 8000
Total Cash Inflows: 20000 20000 27000 33000
Cash Outflows:
Materials 5000 5000 8000 5000
Wages 4000 3000 6000 6000
Rent 4000 4000 4000 4000
Other Expenses 5000 6000 12000 7000
Total Cash Outflows: 18000 18000 3000 z ?

Opening Balance: 3000 5000 7000 4000
Net Cash Flow: 2000 x ? (3000) 11000
Closing Balance: 5000 7000 y ? 15000

( 5 ) The Importance of Working Capital

KEY DEFINITIONS
Working Capital is the capital available to a business in the short-term to pay

for day-to-day expenses.
Working capital is the life-blood of a business. Having enough working capital assists in raising
the credit reputation of a business. A sufficient amount of working capital gives an opportunity to
buy raw materials and receive the special orders from the customers. The overall success of a
business depends upon its working capital position.
Working Capital = Current Assets ▬ Current Liabilities
Working Capital may be held in different forms:
o Cash is needed to pay day-to-day costs and buy inventories.
o The value of a firm’s debtors is related to the volume of production and sales. To
achieve higher sales there may be a need to offer additional credit facilitates.
o The low level of inventories may cause production to stop. On the other hand, a very
high inventory level may result in high opportunity costs.

Book-01 Chapter 23 | Profit & Loss Statement 174
Profit & Loss Statement — Chapter 23

( 1 ) Profit & Loss Statement
KEY DEFINITIONS
The profit and loss account records the income and expenses of a business,
and the profit or loss it makes, over a period of time.
Accounts are the financial records of a firm’s transactions.
Accountants are the professionally qualified people who have responsibility for keeping
accurate accounts and for producing the final accounts.
Final Accounts are produced at the end of the financial year and give details of the profit or
loss made over the year and the worth of the business.
Why is profit important?
1) Reward for Enterprise and Reward for Risk Taking.
2) Source of Finance. 3) Indicator of Success.

(Q) What do final accounts contain?
Trading Account
(First Section of Profit & Loss Account)
KEY DEFINITIONS
The TRADING ACCOUNT shows how the gross profit of a business is calculated.
The SALES REVENUE is the income to a business during a period of time from the sale of goods
or services. This is also considered to be the total income of the firm.
The COST OF GOODS SOLD is the cost of producing or buying in the goods actually sold by
the business during a time period. This cost includes the costs of raw material and costs of
direct labour.
A GROSS PROFIT is made when sales revenue is greater than the cost of goods sold.
Formula: Gross Profit = Sales Revenue ▬ Cost of Goods Sold
Case Study Example:: ( Newtown Garden Nursery )
Newtown Garden Nursery:: Trading Account for year ending 31/3/2012
Sales Revenue $55,000
Opening Stock $10,000
Purchases $25,000
Total Stock available $35,000
Less Closing Stock $12,000
Cost of Goods Sold $23,000
Gross Profit $32,000
The gross profit is not the final profit for the business because all of the other expenses have to
be deducted. Costs such as salaries, lighting and rent of the buildings need to be subtracted
from gross profit. This is done in Profit and Loss Account.

Profit & Loss Account

(Second Section of Profit & Loss Account)
KEY DEFINITIONS
The PROFIT AND LOSS ACCOUNT shows how the net profit of a business is
calculated. NET PROFIT is the profit made by a business after all costs have
been deducted from sales revenue. It is calculated by subtracting overhead
costs from gross profits.
o The profit and loss account begins with the gross profit calculated from the trading
account. And all other expenses and overheads of the business are subtracted.
( Newtown Garden Nursery ) Profit & Loss Account for 2012
Gross Profit $32,000

Non-Trading Income (Other Income) $5,000
$37,000
Less Expenses:
Wages and Salaries $12,000
Electricity $6,000
Rent of the Factory $3000
Depreciation Expense $5,000
Selling and Advertising Expenses 5,000
$31,000
Net Profit $6,000
Profit & Loss Accounts for Limited Companies::
The final accounts for limited companies follow exactly the same principles as those shown
above. The main differences are that::
o Corporation tax paid on company profits will be shown.

o The final section of the profit and loss account is called the APPROPRIATION ACCOUNT
─ it shows what the company has done with the profits made.

Appropriation Account
(Third Section of Profit & Loss Account)
An APROPRIATION ACCOUNT is the final section of the profit and loss account shows how
the profits after tax of the business are distributed between the owners ─ in the form of
dividends to company shareholders and retained profits.
Dividends::
This is the share of the profits paid to shareholders as a return for investing in the company at
the end of every financial year.
Retained Profit::
This is the profit left after all deductions, including expenses and dividends, have been
made. This is ‘ploughed back’ into the company as a source of internal finance for expansion
or solving cash flow problems.
Format of Profit & Loss Account

Sales Turnover
Cost of Sales
Section 1
Trading Account
Gross Profit
Other Expenses \ Overheads
Operating Profit
Interest Section 2
Net Profit Before Tax
Profit & Loss
Account
Corporation Tax
Net Profit After Tax
Dividends to Shareholders Section 3

Appropriation
Retained Profit Account

Book-01 Chapter 24 | Balance Sheets 178
Balance Sheets — Chapter 24

( 1 ) Balance Sheets
KEY DEFINITIONS
The balance sheet records the value or worth of a business at just one moment in
time ─ at the end of the financial year. This is an accounting statement that records
the values of a business’s assets, liabilities and shareholders’ equities.
Fixed Assets::
Fixed Assets are those items of value which are owned by the business. Land, Buildings,
Machines & Equipment and Vehicles are examples of fixed assets. They are likely to be kept by
the business for more than one year.
Current Assets::
Cash, stocks and debtors are only held for short periods of time and are called current
assets.
Liabilities::
Liabilities are items owned by the business; again, there are two main forms of these.
Long-term Liabilities::
Long-term Liabilities are long-term borrowings which do not have to be repaid within one
year. Total Assets ─ Total Liabilities = Owner’s Wealth (Shareholders’ funds)
Current Liabilities are amounts owed by the business which must be repaid within one year,
for example, bank overdraft and creditors.
Net Current Assets::
This is the difference between current assets and current liabilities. It is also known as
working capital.

Share Capital & Reserves:: (Shareholder’s Equity)
These are collectively called the shareholder’s funds. They represent the capital originally
paid into the business when the shareholders bought shares and the retained profits of the
business that the shareholders have accepted should be kept in the business.
Capital Employed::
This is the total value of all of the long-term finance of the business. It is the sum of share
capital, reserves and long-term liabilities. These funds are used to finance the company’s
assets and, for this reasons, assets employed always equals to capital employed.
Goodwill:: (Intellectual Property)
The reputation and prestige of a business that has been operating for some time also give
value to the business over and above the value of its physical assets, this is called the goodwill
of a business and should normally only feature on a balance sheet just after it has been
purchased for more than its physical assets are worth or when the business is being prepared
for sale.
Accounts Receivables A/R:: (Debtors)
The value of payments to be received from customers who have bought goods on credit.
These are also known as ‘Trade Receivables’. (A/R)
Accounts Payables A/P:: (Creditors)
The value of debts for goods bought on credit payable to suppliers. These are also known as
‘Trade Payables’. (A/P)
Interpreting Balance Sheet Data
o Shareholders can assess their stake in the business has increased or fallen in value
over the last 12 months by looking at the ‘total equity’ figures for two years.
o Shareholders can also analyze reserve profits, liabilities & assets over a period of time.
o Working capital can also be calculated, which is the amount of money needed by a
business for day-to-day activities.
o Capital employed can also be calculated by using data from the balance sheet.
Capital Employed = Shareholder’s Funds + Long-term Liabilities + Profit & Loss Reserves.
Balance Sheet Format

Case Study Example Ace Engineering Ltd Balance Sheet as at 31/12/2015 ($000)
2015 2014
Fixed Assets
Land and Buildings 450 440
Machinery 350 320
Fixtures & Fittings 350 280 S
Vehicle 200 150
E
1,350 1,190
C
Current Assets
Cash in Hand 40 25 T
Cash at Bank 40 25
I
Debtors 50 60
Stocks 10 15 O
140 125
N
Current Liabilities
Bank Overdraft 65 40
Creditors 65 60
1
130 100
Working Capital
10 25
(net current assets)
Net Assets =
1,360 12,15
(Fixed Assets + Working Capital)
Finance By Section:: S
Shareholder’s Funds:: E
Share Capital 700 650 C

T
Profit & Loss Reserves 360 320
I
Long Term Liabilities::
O
Long-term Bank Loan 300 245
N
Capital Employed 1,360 1,215 2

Book-01 Chapter 25 | Analysis of Published Accounts 181
Analysis of Published Accounts

Chapter 25
Published accounts tell us about::
o The Performance of the Company.
o The Financial Strength of the Company.
( 1 ) Ratio Analysis of Accounts

KEY DEFINITIONS
Ratios are very useful as a quick way of comparing a firm’s performance and liquidity.
Ratio results may be compared with::

o Other years
o Other businesses
Most commonly used ratios are performance and liquidity ratios.
( 2 ) Performance Ratios
These ratios are used to measure and compare the performance of the business.
(1) Return on Capital Employed::
KEY DEFINITIONS
The Return on Capital Employed Ratio (ROCE) tells us how much percentage of
profit we earn from the investments the shareholders have made in their company.
Formula::
Net Profit
Return on Capital Employed (%) = × 100
Capital Employed
Note:: Return on Net Assets is another name of this ratio.

(2) Gross Profit Margin::
KEY DEFINITIONS
Gross Profit Margin ▬ This ratio compares gross profit with sales turnover. It
can be increased by reducing the cost of sales, and increasing the sales
revenue. It is a good indicator that how effectively managers have ‘added
value’ to the cost of sales.
Formula::
Gross Profit
Gross Profit Margin (%) = × 100
Sales Turnover
(3) Net Profit Margin::
KEY DEFINITIONS
Net Profit Margin ▬ This ratio compares net profit with sales turnover. This
could be reduce by reducing the overhead expenses and maintaining and
increasing sales without increasing overhead expenses.
Formula::
Net Profit
Net Profit Margin (%) = × 100
Sales Turnover

( 3 ) Liquidity Ratios
KEY DEFINITIONS
Liquidity is the ability of a business to repay its short term debts. These give a
measure of how easily a business could repay its short-term debts or liabilities.
The common ratios are::

o Current Ratio
o Acid Test Ratio
(1) Current Ratio
Indicator of a firm's ability to meet short-term financial obligations, many experts

recommend a result of around 1.5-2.
Formula::
Current Assets
Current Ratio =
Current Liabilities
(2) Acid Test or Liquid Ratio: (also called Quick Ratio)
By eliminating the value of inventories from the acid-test ratio, the users of accounts are
given a clearer picture of the firm’s ability to repay short-term debts.
Formula::
Current Assets ▬ Stock

Acid Test Ratio / Quick Ratio =
Current Liabilities

( 4 ) Users of Accounting Information
Managers::
They will use the accounts to help them keep control over the performance of the business to
assess the strength and weaknesses of different financial areas. These ratios also provide help
in decision making such as expanding the firm, change price levels or closing down a factory.
Shareholders::
They want to know how much profit and loss the company made. The higher the
profitability ratio results are the more likely shareholders will want to invest by buying more
shares.
Creditors & Banks:

Creditors use the liquidity ratios to compare the financial position; these ratios indicate the
ability of the company to pay back the credit amount.
Government::
The government and the tax office will want to check on the profit tax paid by the company.
Loss making companies are the bad news for the whole economy.
Workers::
Workers will want to assess whether the future of the company is secure or not and whether
the profits of the company are increasing or not.
( 5 ) Limitations of Ratio Analysis
o Ratios are based on past results and may not indicate how a business will perform in
the future.
o Accounting results over time will be affected by inflation and comparisons between
years may be misleading.
o Different companies may use different accounting methods.

Section 6
External Influence
on
Business Activity

Book-01 Chapter 26 | Government Economic Objectives & Policies 186
Government Economic Objectives
Chapter 26
( 1 ) Government Economic Objectives
Most governments consider that the following objectives are desirable::
o Low Price Inflation

o Low Level of Unemployment
o Economic Growth
o Balance of Payments (Equality between Import and Export)
( 2 ) Low Inflation:: (Low Price Inflation)
KEY DEFINITIONS
Inflation is the increase in the average price level of goods and services
over time.
Inflation occurs when prices rise. Low inflation is a very important aim of the government. When
prices rise rapidly it can be very serious for the whole country. These are the problems which a
country will have if there is a rapid inflation::
o Worker’s wages will not buy as many goods as before. This means that people REAL
INCOME will fall. Real Income is the purchase power of a person.
o Prices of the goods produced in country will be higher than those in other countries.
People may buy foreign goods instead results, job losses.
o Businesses will be unlikely to want to expand and create more jobs in the future. The
living standards in country are likely to fall.

( 3 ) Low Level of Unemployment

KEY DEFINITIONS
When people want to work but cannot find a job, they are unemployed.
o Unemployed people do not produce any goods or services. The total level of output
(GDP) in the country will be lower than it could be.
o The government of Country pays unemployment benefits to those without jobs. A
high level of unemployment will cost the government a great deal of money. This
cannot be spent on other things such as schools and hospitals.
o High unemployment reduces output and can reduce living standards.
Therefore, low level of unemployment will help to increase the output of a country and
improve workers living standards.
( 4 ) Economic Growth
KEY DEFINITIONS
Economic Growth ▬ “An economy is said to grow when level of output

of goods and services in the country increases.”
Gross Domestic Product::

The value of goods and services produced in a country in one year is called Gross
Domestic Product (GDP). When a country is experiencing economic growth, the standard of
living of the population is likely to increase.
When Country GDP is falling, it has no economic growth. These are the problems this causes::
o As the country’s output is falling, fewer workers are needed and unemployment will
occur.
o The average standard of living of people in the country ─ the number of goods and
services they can afford to buy in one year ─ will decline. In effect, most people will
become poorer.
o Business owners will not expand their firms as people will have less money to spend
on the products they make.
Note:: Economic growth, however, makes a country richer and allows living standards to rise.

( 5 ) Economic Growth & Trade Cycle
The trade cycle (sometimes known as Business cycle) has four main stages.
Growth::
Economic growth is the increase in the amount of the goods and services produced by
an economy over time. This is when GDP is rising, unemployment is generally falling and the
country is enjoying higher living standards. Most businesses will do well at this time.
Boom::
An economic boom occurs when real GDP grows faster than the trend rate of economic
growth. The period of productivity increases, sales increases, wage increases and
rising demand. This is caused by too much spending. Prices start to rise quickly and there will
be shortages of skilled workers. Business costs will be rising.
Recession::
A recession is a period of economic slowdown and declining economic output, often caused
by too little spending. This is a period when GDP actually falls. Most businesses will
experience falling demand and profits. Workers may lose their jobs.
Slump::
A slump is a period of poor performance of an economy, market and industry. In economic
terms, a serious and long drawn out recession. Unemployment will reach very high levels and
prices may fall. Many businesses will fail to survive in this period.

( 6 ) Balance of Payments
EXPORTS are goods and services sold by one country to people and businesses in
another country. These bring money (foreign currency) into a country.
IMPORTS are the goods and services bought in from other countries. These must be
purchased with foreign currency so these lead to money flowing out of a country.
Governments will aim to achieve equality or balance between these imports and exports over a
period of time.
Def:: The difference between a country’s import and export is called the balance of payments.
If a country imports more than it exports – it has a balance of payments deficit. These are the
problems that could result::
o The country could ‘run out’ of other countries’ currencies (foreign currencies) and it may
have to borrow from abroad.
The price of country’s currency against other currencies ─ the EXCHANGE RATE will be likely to
fall. This is called EXCHANGE RATE DEPRECIATION.

( 7 ) Government Economic Policies
Governments raise taxes and spend this money on a wide range of services and state benefits.
Government make different polices to control the economy of a country. These policies are::
o FISCAL POLICY ─ Taxes and government spending;
o Monetary policy and Interest Rates ─ The cost of borrowing money;
o Supply Side Policies.
( 8 ) Fiscal Policy:: Taxes & Government Spending

KEY DEFINITIONS
“FISCAL POLICY is any change by the government in tax rates and

public sector spending.”
All government spends money. They spend it on schools, hospitals, roads, defence, and so on.
The government raises finance to pay for these schemes through taxation, and the main tax
revenues comes from income tax, corporation tax, value added tax an excise duties.
Direct Tax::
Direct Taxes are paid directly from incomes ─ and the profits of the businesses.
O Income tax O Profit Tax or Corporation Tax
Indirect Tax::
Indirect Taxes are added to the prices of goods and taxpayers pay the tax as they
purchase the goods ─ for example, VAT.
O Indirect Taxes, for example Value Added Tax (VAT); O Import Duties & Tariffs.
Income Tax::
This is a tax used by most governments. It is a tax on people incomes. Usually, the higher
a person’s income the greater will be the amount of tax they have to pay to the
government. Income tax is set at a certain percentage of income, for example 25 percent of
income. In many countries, income tax is progressive. This means that the rich pay tax at a
higher rate than the poor.

Individual taxpayers would have a lower disposable income. They would have less money
to spend and save. Businesses would be likely to see a fall in sales. Managers may decide to
produce fewer goods as sales are lower. Some workers could lose their jobs in this situation.
Disposable Income is the level of income a taxpayer has left after paying income tax.
Profit & Corporation Tax::
This is tax on the profits made by businesses ─ usually companies. How would an
increase in the rate of corporation tax affect businesses?
o These businesses would have lower profits after tax. Managers will therefore have less
money to put back into the business. The business will find it more difficult to expand.
o Lower profits after tax is also bad news for the owners of the business. There will be
less money to pay back to the owners who originally invested in the business.
Valued Added Tax:: (VAT)
Indirect taxes, such as Value Added Tax (VAT), are added to the prices of the products
we all buy. The obviously make goods and services more expensive for consumers,
governments often avoid putting these taxes on really essential items, such as food, because
this would be considered unfair, especially to poorer consumer.
Prices of Goods in the shops would rise. Consumers may buy fewer items as a result. This will
reduce the demand for products made by businesses.
Import Tariffs and Quotas::
KEY DEFINITIONS
Import Tariffs ▬ Many governments try to reduce the import of products

from other countries by putting special taxes on them. These are called
duties or IMPORT TARIFFS and they raise money for the government.
How businesses in a country would be affected if the government put tariffs on imports::
o Firms will benefit if they are competing with imported goods. These will now become
more expensive, leading to an increase in sales of home produced goods.
o Businesses will suffer higher costs if they have to import raw materials or components.
Another method a government can use to limit imports is to introduce an IMPORT QUOTA or
physical limit on the quantity of a product that can be brought in.

( 9 ) Monetary Policy
KEY DEFINITIONS
MONETRAY POLICY is a change in interest rates by the government or

central bank.
Def2:: Monetary policy is the process a government, central bank, or monetary authority of a
country uses to control (i) the supply of money, (ii) availability of money, and (iii) cost of
money or rate of interest to attain a set of objectives oriented towards the growth and stability of
the economy.
What impact would higher interest rates, imposed by the government, have on businesses in
that country? The following are likely to be the main effects.
o Firms with existing loans will have to pay more in interest to the banks. This will reduce
their profits.
o Manager thinking about borrowing money to expand their business may delay their
decision.
o If consumers have taken out loans such as mortgages loans to buy their houses, then
the higher interest payments will reduce their disposable incomes. Demand for all
goods and services could fall.
Benefit of High Interest Rates::

Higher interest rates in one country will encourage foreign banks and individuals to deposit
their capital in that country.

( 10 ) Supply Side Policies

KEY DEFINITIONS
Supply Side Policies are used by government to provide the efficient

supply of goods and service in their country.
Governments want the businesses in their country to expand, produce more and employ
more workers, so SUPPLY SIDE POLICIES use by the government to improve the supply of
goods and services.
Privatisation::
Privatisation is now very common. The aim is to use the profit motive to improve business
efficiency to improve the supply of goods and services.
Improve training and Education::

Government plan to improve the skills of the country’s workers. This is particularly important
in those industries such as computer software which are often very short of skilled staff.
Increase Competition in all Industries::

This may be done by reducing government controls over industry or by acting against
monopolies.
( 11 ) How Business might react

to changes in economic policy?
Government Policy Change Possible Business Decision & Problems
Increase income tax — this reduces the Lower prices on existing products to increase
amount consumer have to spend demand which might lead to lowering the profits.
Focus more on the domestic market a locally

Increase tariffs on imports
produced goods new seem cheaper.

Book-01 Chapter 27 | Environmental & Ethical Issues 194
Environmental & Ethical Issues

Chapter 27
( 1 ) Business Activity and the Environment
SOCIAL RESPONSIBILITY is when a business takes decisions that may benefit stakeholders
other than shareholders, for example decision to reduce pollution of the local environment by
using the latest and least ‘dirty’ production equipment.
Manager A::
‘I know that my factory pollutes the air and the river with waste products but it is very
expensive to use cleaner methods. We make a profit from making and these are what
consumers want.
Manager B::
‘We have recently spend $10 million on new boilers that produce only 10 percent of the
pollution of the old ones and we now recycle 75 percent of our waste ─ consumers prefer
firms that are aware of their SOCIAL RESPONSIBILITY.
Here are some examples of how business activity impacts on the environment:
o Aircraft jet engine emissions damage the atmosphere.
o Pollution from factory chimneys reduces air quality.
o Waste disposal can pollute rivers and seas.
o Transport of goods by ships and trucks burns fossil fuels such as oil which create carbon
emissions and may be linked to ‘global warming’ and climate change.

Let’s look at both sides of the argument::
Argument A:: Argument B::
Business should produce goods and services Businesses have a social responsibility
profitably and not worry about the towards the environment and this can
environment. benefit them too.
Protecting the environment can be

Global warming and global pollution
expensive. Reducing and recycling waste
affect us all and the businesses have a
and reducing polluting smoke all cost
social responsibility to reduce these
businesses money and this reduces
problems.
profits.
Using scarce natural resources which are

Firms might have to increase prices to pay non-renewable, such as rainforest
for environmentally friendly policies. timber, leaves less for future generations
and raises prices.
This could make firms uncompetitive and

Most scientists and environmentalists
they could lose sales to businesses, perhaps
believe that business activity can damage
in other countries, that are not
the environment permanently.
environmentally friendly.
Consumers are becoming more socially

aware ─ they are increasingly demanding
Consumers will buy less if they have to pay
products from ‘environmentally friendly’
higher prices.
firms and this can become a marketing
advantage.
If business damages the environment, then

If pollution is a problem, then
pressure groups could take action to harm
governments should pay to clean it up.
the firm’s reputation and sales.

( 2 ) Externalities
Externalities are the consequences of an industrial or commercial activity which affects

society such as the pollination that spoils the surrounding environment and affects the
health of nearby residents is an example of a negative externality.
Most business activities ─ such a locating a factory or producing goods and service ─ lead to
many different costs and benefits. It is important to distinguish between private costs and
benefits and external costs and benefits. The following case study explains these differences.
Private Costs
PRIVATE COSTS are the costs of a business decision actually paid for by the business.
For example:: paying wages, utility bills, taxes and insurance, and raw material costs.
Private Benefits
PRIVATE BENEFITS are the financial gains made by a business as a result of a business
decision. For example Profits and revenues earn by the business.
External Costs
EXTERNAL COSTS are the costs paid by the rest of society, other than the business, as a
result of a business decision. It includes the effects of any increased pollution as a result of the
increased output. Pollution of air or water is the prime example of an external cost. Driving a car
contribute to climate change. Smoking creates harmful effects in to the health of the society.
External Benefits
EXTERNAL BENEFITS are the gains to the rest of society, other than the business, resulting
from a business decision.
An external benefit is a benefit that someone gains because of someone else's action. It also
includes any improvements in technology that other firms can benefit from. Another example
of a positive externality is the effect of a well-educated labor force on the productivity of a
company.

Social Costs
SOCIAL COST is the addition of the private and external costs of a business decision.
For example:: Business provides some medical facility and street lights for the society. In
Pakistan, Sialkot international airport is an excellent example for social costs.
Social Benefits
SOCIAL BENEFITS is the addition of the private and external benefits of a business decision.
For example least dirty equipments provide clean environment to the society and increase
the productivity of the business.
( 3 ) Sustainable Development
KEY DEFINITIONS
Sustainable Development is development which does not put at risk the

living standards of future generations.
Sustainable development means trying to achieve economic growth but without damaging the
environment and society for future generations.
Sustainable development: What can business do?
1) Use Renewable Energy — by finding solar panels or buying energy that uses renewable
sources such as wind or tidal power.
2) Recycle Waste — by re-using water and other products that would otherwise be wasted or
disposed of, total use of resources is reduced.
3) Use Fewer Resources — Lean production is about managing production so efficiently that
he minimum quantity of resources is used.
4) Develop New ‘Environmentally Friendly‘

Products and Production Methods —
For example, replacing drink cans and bottles
with biodegradable packaging that will not
damage the environment.

( 4 ) Responding to Environment
Pressure Groups:::
PRESSURE GROUPS are formed by people who share a common interest and who will take
action to try to change government policy or business decisions by acting together.
Example: Powerful worldwide pressure groups, such as Greenpeace, publicise the damaging
activities of some companies. This gives the companies a bad reputation and can lead to
consumer boycotts and loss of contracts from people concerned about the environment.
Consumer Boycotts:: Sometimes pressure groups will run campaigns in order to stop
consumers from buying certain products. These are known as consumer boycotts.
Ways to make business more environmentally friendly::
Laws passed by government::

Government can make the following business activities illegal::
o Locating in environmentally sensitive areas.

o Dumping waste products into rivers or the sea.
o Making products that cannot easily be recycled.
Financial Penalties, Including Pollution Permits::
Pollution permits are licenses to pollute up to a certain level. Governments can sell a permit to
a factory that produces pollution. Firms producing much less pollution can sell their permits to
‘dirty’ firms. This encourages firms to produce goods in less polluting ways.

Consumer Action and Pressure Groups::
If a firm is reported as destroying an important natural site or dumping waste in the sea, then
many consumers will stop buying its products.
o They have popular public support and receive much media coverage.
o Consumer boycotts result in much reduced sales for the firm.
o The group is well organized and financed.
( 5 ) Ethical Issues
KEY DEFINITIONS
Business Ethics includes a wide range of moral and ethical values that arise in a
business environment related to different stakeholder groups.
Ethical Decisions are based on a moral code. Sometimes referred to as doing the right thing.
Examples of Ethical Issues::

 Employ child workers.
 Buy in supplies that have led to damage to the environment, for example wood obtained
from cutting down rain forests.
 Agree to ‘fix high pries’ with competitors?
Potential benefits of Ethical Decisions::

 Consumers may be against buying clothing products made by children and increase
purchase from company.
 Good publicity about company’s ethical decisions will provide promotion and good will.
 Long-term profits of company could increase.
 Some workers and investors may want to be linked to an ‘ethical’ business; company
might find it easier to find best workers.
 There is less risk of legal action being taken against company.
Potential Limitations of Ethical Decisions::

Higher costs will be paid more than child workers and good working conditions add to
business cost to.
Company’s prices might have to be set higher than those of other firms because of
higher costs.
If consumers are only interested in low prices then sales of the firm could fall.
Short-term profits of the firm will fall.

Book-01 Chapter 28 | Business & the International Economy 200
Business & International Economy

Chapter 28
( 1 ) Globalisation
KEY DEFINITIONS
Globalisation is the term widely used to describe increasing freedom of worldwide

trade and movement of goods, capital and people around the world without
any trade barriers.
There are several reasons for this increase in global trade and movement of products, people
and capital.
o Increase number of free trade agreements and economic unions between countries
has reduced protection for industries. Consumers can buy goods and services from
other countries.
o Improved and cheaper travel links and communications between all parts of the
world have made it easier to transport products globally.
Globalisation ─ Opportunities & Threats::

Increasing free trade and the rising mobility of labour and capital is having many effects on
business all over the globe. Some of these effects are positive ─ opportunities ─ and some are
potentially negative ─ threats.

Opportunities Impact on Business
These increase potential sales, in countries with fast growing

Start selling products to markets.
other countries through
But it can be expensive to sell abroad, & faced some problems
exports
such as cultural, religions and language differences.
It could be cheaper to make some goods in other countries

Open factories in other with low wage and low costs of raw materials.
countries and become a
multinational But faced some quality problems along with the ethical
issues, such as employment practices.
With no trade restrictions it could be profitable to import

Import Products & Raw
products and raw materials to sell to local markets.
materials from other
countries to sell to
But the problem of reliable suppliers, costs of
customer in ‘home’ country
transportation and distance.
Threat Impact on Business
If these competitors offer cheaper products, than sales of

Increasing imports into home local firms might fall.
market from foreign
competitors. But the increased competition could force the local firms to
become more efficient.
This will create further competition — and the multinational

Increasing investment from may have economies of scale and have best employees.
multinationals to set up
But some local firms could become suppliers to these
operations in home country
multinationals and their sales could increase.
In some professions, employees will now have more choice of

Employees may leave
work — firms have to make efforts to maintain these people.
businesses that cannot pay
the same than international
But this might encourage local firms to use a range of
competitors
motivational method to keep their workers.

( 2 ) Why Some Governments Introduce Tariffs & Quotas
Import Tariffs::
Taxes imposed on imported goods to make them more expensive than they would otherwise
be, this helps to improve the balance of trade.
Quotas::
An Import Quota is a restriction on the quantity of a product that can be imported.
Protectionism is when government protects domestic firms from foreign competition using
tariffs and quotas. Foreign competitors might be able to produce products much more cheaply
and if they are allowed to import cheaply without any restriction then local firms might be
forced out of business.
( 3 ) Multinational Businesses
KEY DEFINITIONS
Multinational Businesses are those with factories, production and

service operations in more than one country.
It is important to remember that a multinational business is not one which just sells goods in
more than one country. To be called a multinational, a business must produce goods and
services in more than one country. Example Shell, Phillips, Nissan, HSBC, McDonald’s.
Why do firm become multination?
These are some of the reasons why firms become multinational organizations::
o To produce goods in countries with low costs, such as low wages.

o To extract raw materials which the firm may need for production and refining. For
example crude oil and other primary resources.
o To produce goods nearer the market to reduce transport costs.
o To avoid barriers to trade put up by countries to reduce the imports of goods. For
examples Japanese now make cars in Europe to avoid barriers.
o To expand into different market areas to spread risks.

Advantages of Multinationals Operating in a Country
 Jobs are created, which reduces the level of unemployment.

 New investment in buildings and machinery increases output of goods and services
(GDP) in the country.
 Some of the extra output may be sold abroad, which will increase the exports of the
country also, imports may be reduced a more goods are now made in the country.
 Taxes are paid by the multinationals, which increases the tax revenues to the
government.
Disadvantages of Multinationals Operating in a Country
The jobs created are often unskilled assembly-line tasks. Skilled jobs such as those in
research and design, are not usually created in the host country.
Local firms may be forced out of business. Multinationals are often more efficient and
have lower costs than local businesses.
Profits are often sent back to a multinational’s ‘home’ country.
Multinationals often use up scarce primary resources in the host country.
As multinational are very large they could have a lot of influence on both the
government and the economy of the host country. They might ask the government for
large grants to keep them operating in the country and might not accepting some laws
passed by the government.

( 4 ) Exchange Rates
KEY DEFINITIONS
Exchange Rate ▬ The Exchange rate is the price of one currency in terms
of another. For example £1:$1.5.
Every country has its own currency and to be able to buy things in other countries you have to
use the local currency. How much of another currency do you get in exchange for your won
country’s money? This will depend on the EXCHANGE RATE between your currency and the
foreign currency you wish to buy.
How are exchange rates determined?
Most currencies are allowed to vary of float on the foreign exchange market according to the
demand and supply of each currency. Just as the prices of goods can vary according to supply
and demand in a free market ─ so exchange rates will vary between currencies on a day–by–
day basis depending on supply and demand for currencies.

How are businesses affected by changing exchange rates?
Changes in the exchange rate affect businesses in several different ways.
Exporting Businesses
KEY DEFINITIONS
Currency Appreciation ▬ occurs when the value of a currency rises ─
it buys more of another currency than before.
For example, consider the impact of changing exchange rates on an exporting business ─ one
which sells goods and services abroad.
The change in the exchange rate described above is called an appreciation because the value
of the currency has increased. Exporters have a serious problem when the currency of their
country APPRECIATES.
Importing Businesses
KEY DEFINITIONS
Currency Depreciation ▬ Occurs when the value of a currency falls ─
it buys less of another currency than before.
For example, consider the impact of changing exchange rates on an importing business ─ one
which buys goods and services abroad ─ might be affected by changing exchange rates.
We have shown that an importing firm will have higher costs if the exchange rate of its
currency depreciates, but will have lower costs if the exchange rate appreciates; whilst an
exporting firm will be able to reduce its prices with currency depreciation, but might have to
raise prices with a currency appreciation.
You can now see how seriously businesses can be affected by exchange rate movements. This
help to explain why some international organizations such as the European Union (EU) are trying
to reduce exchange rate movements.

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Business Studies Resource Prepared By Usman Akhter

Unit Name O Level Topics Page No

(1) Business Activity . . . . . . . . . . . . . . . . . . . . . . . . . . . 01

1. (2) Classification of Businesses . . . . . . . . . . . . . . . . . . . 07

Understanding (3) Enterprise, Business Growth & Size . . . . . . . . . . . . . 12

2. People in (7) Organisation & Management . . . . . . . . . . . . . . . . . . . 51

Organisation (8) Human Resources Management . . . . . . . . . . . . . . . . 61

(9) Internal & External Communication . . . . . . . . . . . . . . 71

(10) Marketing, Competition & Consumers . . . . . . . . . . . . 82

(11) Market Research . . . . . . . . . . . . . . . . . . . . . . . . . . 89

(12) The Marketing Mix: Product . . . . . . . . . . . . . . . . . . 101

(14) The Marketing Mix: Promotion . . . . . . . . . . . . . . . . 115

(15) The Marketing Mix: Place . . . . . . . . . . . . . . . . . . . . 122

(16) Marketing Strategy . . . . . . . . . . . . . . . . . . . . . . . . 129

(17) Production of Goods & Services . . . . . . . . . . . . . . . 133

Business Studies Resource Prepared By Usman Akhter

(22) Forecasting Cash flows . . . . . . . . . . . . . . . . . . . . . . 168

(25) Analysis of Accounts ....................... 181

6. External (26) Government Economic Objectives & Policies . . . . . . . 186

Influence on (27) Environmental & Ethical Issues . . . . . . . . . . . . . . . . 194

This Book For O Level Business Studies Contains 28 Chapters

Business Activity — Chapter 01

The Economic Problem — Needs & Wants

Examples — Water, Food, Clothing, Warmth and protection through Shelter.

Examples — Mobile Phones, Cars, Perfumes, Computers, KFC.

Business Studies O-Level 7115, Resources Prepared By Usman Akhter . . . .

The Economic Problem

Factors of Production are those resources needed to produce goods and

Business Studies O-Level 7115, Resources Prepared By Usman Akhter . . . .

Business Studies O-Level 7115, Resources Prepared By Usman Akhter . . . .

( 4 ) Specialisation: The Best Use of Limited Resources

Specialisation ▬ Occurs when people and businesses concentrate on what they

( 5 ) Division of Labour (Specialisation)

Making the Best Use of Limited Resources

Business Studies O-Level 7115, Resources Prepared By Usman Akhter . . . .

Advantages of Specialisation & Division of Labour:

Disadvantages of Specialisation & Division of Labour:

Business combines factors of production to make goods and services to

Benefits of Business Activity

Business Studies O-Level 7115, Resources Prepared By Usman Akhter . . . .

 Other costs cannot be paid for.

How Could a Business Increase Added Value?

Business Studies O-Level 7115, Resources Prepared By Usman Akhter . . . .

Classification of Businesses — Chapter 02

Primary Sector:: (Stage 1)

The PRIMARY SECTOR of industry extracts

Secondary Sector:: (Stage 2)

The SECONDARY SECTOR of industry

Tertiary Sector:: (Stage 3)

The TERTIARY SECTOR of industry provides

Business Studies O-Level 7115, Resources Prepared By Usman Akhter . . . .

( 2 ) Relative Importance of Economic Sectors

 The numbers of workers employed in each sector.

Business Studies O-Level 7115, Resources Prepared By Usman Akhter . . . .

( 3 ) Changes in Sector Importance

DE-Industrialisation occurs when there is a decline in the importance of the secondary,

Business Studies O-Level 7115, Resources Prepared By Usman Akhter . . . .

Advantages of Mixed Economy::

Business Studies O-Level 7115, Resources Prepared By Usman Akhter . . . .

Privatization ▬ Selling state-owned and controlled business organisations

to investors in the private sector is called privatization.