Cambridge IGCSE and O Level Business Studies

Section 4 – Mind maps

15  Production of goods and services
Methods to improve labour productivity

Provide training to improve

employees’ skills

Labour productivity is a measure of

the efficiency of employees (how many
units of output each employee Improve employee motivation
produces in a given time period)
Methods to improve labour
productivity

Introduce more
automation/technology

Improve the quality of management

decsions

Business costs of holding inventories

Purchase or rent of storage

space − warehouse

Costs of damage to, or

theft of, inventories

The inventory of raw materials,
work-in-progress and finished
goods held by a business
Inventories
Insurance costs
Costs of holding inventories
Inventories becoming
out of date or obsolete
Costs of not holding
inventories
Handling costs of moving
inventories into and out
of storage

• Opportunity costs
• Inventories tie-up cash which
could be put to better use
• Too many inventories might
worsen liquidity and cause
cash-flow problems

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Cambridge IGCSE and O Level Business Studies

Main methods of production

Methods of
production

Job production Batch production Flow production

Items produced in Continuous

Items produced one batches; each batch production of a large
at a time completes production quantity of identical
one stage at a time items

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Cambridge IGCSE and O Level Business Studies

Technology and the production process

Increases
productivity

Reduces unit
Advantages
costs

Improves quality

For business Often very

expensive to
purchase

Needs to be
Disadvantages updated as new
technology is
developed

May increase
training costs

Lower prices

Advantages
Better quality
products with
more features

For consumers
Products
New technology become out-
in the dated more
production quickly
process Disadvantages
Can be more
expensive to
repair if products
develop a fault

Work is easier
and simple
boring tasks are
completed by
machines

Advantages Businesses using

the latest
technology are
often more
successful so
provide greater
job security
For employees
More capital
intensive −
reduces the
need for employees,
resulting in
redundancy
Disadvantages
Work becomes
less interesting
and requires less
skill, which can
demotivate
employees

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Cambridge IGCSE and O Level Business Studies

16  Costs, scale of production and break-even analysis

Classifications of costs

Classification of costs

Fixed costs Variable costs Total costs Average costs

All of the costs involved in The costs of producing

Do not change with output
Change with output – if
producing and bringing a one unit of output
output increases by 50%
product to market (fixed (total costs divided by
then so do variable costs
costs + variable costs) total output)

For example, raw

For example, factory rent
materials and
and salaries
components

Economies of scale

Purchasing economies Bulk-buying discounts

• Larger businesses often find it easier to

Reduction in average
costs as a business
grows in size
Economies of scale
obtain finance from lenders or investors
Financial economies
• Money is usually borrowed at a lower rate
of interest than borrowing by smaller firms
• Change production method from job to
batch, or from batch to flow
Technical economies
• Can purchase larger and more
technologically advanced equipment

Employ specialist managers for finance,

Managerial economies operations, human resources, marketing
and research and development

Marketing costs do not increase at the same

Marketing economies rate as output; for example output might
increase by 40% but costs of marketing the
extra output only increase by 10%

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Cambridge IGCSE and O Level Business Studies

Diseconomies of scale

Diseconomies of scale

The business becomes too large

and average costs rise

Lack of commitment
Poor communication Weak coordination
from employees

Managers find it more difficult to

Chain of command becomes control and coordinate many
Managers lose day-to-day
longer and messages take longer departments, products or
contact with employees and this
to get from sender to receiver production units, especially if
leads to employees’ demotivation
and might get misunderstood they are located in different
geographical areas

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Cambridge IGCSE and O Level Business Studies

17  Achieving quality production

Importance of quality to businesses

Why quality is
important

Reduce waste, Get

Develop strong Keep existing Charge Quality products
customer complaints wholesalers and
brand customers and premium usually have a longer
and returns and so retailers to stock the
image attract new ones prices product life cycle
reduce costs product more easily

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Cambridge IGCSE and O Level Business Studies

18  Location decisions

Factors influencing location and relocation decisions

Cost of site Price of land to buy or rent

Cost and availability of Average weekly wage,

suitable employees skill level of employees

How close is the site to suppliers?

Quantitative factors Transport costs How easy is it for customers to
access the site?

How close is the market?

Market potential
What is the size of the market?

Are there any grants or other

Government incentives
Factors influencing location help from government?
and relocation decisions

Is it large enough for current and

Size of site
future needs?

Planning rules and restrictions

Legal controls on location in certain areas will
vary from country to country
Qualitative factors
How good are transport links
Infrastructure and facilities such as water and
power?

How might relocation affect

Ethical issues existing employees − will they be
made redundant?

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Cambridge IGCSE and O Level Business Studies

Reasons for locating operations to another country

Lower labour costs

Access to global markets

Avoidance of legal barriers

Benefits
and import tariffs

Incentives offered by
foreign governments to
locate in their country

Might locate closer to the

market, which reduces
Locating production in transport costs
another country

Communication problems

Cultural differences

Limitations

Quality issues

Ethical concerns

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