O.L Business PDF

Content
Part 1- Business activity
 Chapter 1: Business activity

 Chapter 2: Classification of business
activity
 Chapter 3: Enterprise, business growth
and size
 Chapter 4: Types of business organization
 Chapter 5: Business and stakeholder
objectives
Part 2- People in business
 Chapter 6: Motivating Employees

 Chapter 7: Organization and management
 Chapter 8: Recruitment, selection and
training
 Chapter 9: Internal and external
communication
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Part 3-Marketing
 Chapter 10: Marketing, Competition and

the customer
 Chapter 11: Market research
 Chapter 12: Marketing Mix: Product
 Chapter 13: Marketing Mix: Price
 Chapter 14: Marketing mix: promotion
 Chapter 15: place
 Chapter 16: Marketing strategy
Part 4 – Operation Management
 Chapter 17: production of good and

services
 Chapter 18: Costs and break even
 Chapter 19: Achieving quality production
 Chapter 20: Location
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Part 5 – Finance
 Chapter 21: business finance

 Chapter 22: Cash flow
 Chapter 23: income statement
 Chapter 24: Balance sheet
 Chapter 25: Analysis of accounts
Part 6- External Influence
 Chapter 26: Government economic

objectives
 Chapter27: Environmental and ethical
issues
 Chapter28: business and international
economy
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Chapter 1
Business activity
Business
A business is any organization/firm that uses resources to meet the needs of
customers by providing a good or services that they demand to satisfy their
needs or wants.
The difference between goods and services
Goods Services
Any physical (tangible) item such as Are intangible items. Such as
cars, shoes and machines which can insurance, tourism and banking.
be touched and seen.
Factors of production: Are the resources needed to produce goods or

services.
Land This term is used to cover all the
natural resources provided by nature
and includes fields and forests, oil,
gas, metal and other mineral
resources.
Labor The people who are available to
work to produce goods and services.
Capital Finance, machinery and equipment
needed to produce goods and
services.
Enterprise This is the skill and risk taking
ability of the person who brings the
other resources of factors of
production together to produce a
good or service.
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Needs and wants
A Need A Want
Is a good or service essential for Is a good or service which people
living would like to have but is not
Example: water, clothing and food essential for living.
People wants are unlimited.
The Economic Problem

The Economic problem results from being unlimited wants but limited
resources to produce all the goods and services to satisfy those wants, this
creates scarcity.
The economic problem is not shortage of money. It is the shortage of factors
of production (resources) in a country and the world as a whole, as these
factors of production are limited in supply.
Scarcity: is the lack of sufficient products to meet the total want of the
population.
Opportunity Cost: is the next best alternative that was given up due to
choosing another alternative.
We do not have the resources to satisfy all our wants so the next best
alternative that we give up becomes our opportunity cost. This problem of
what to give up exists for consumers but for businesses too.
Specialization and division of labor;

Specialization: occurs when people and business concentrate on what they are
best at.
Division of labor: is when the production process is split up into different
tasks and each worker performs one task only.
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Advantage of specialization Disadvantage of specialization
1. Workers are trained in one task 1. Workers can become bored
and specialize in it which doing only one job. So their
increases efficiency. efficiency and motivation
2. Less time is waste moving from might drop.
one workbench to another (time 2. If one worker is absent and no
saving) one else can do the job,
3. Workers can produce more production might be stopped.
output and reduce business
cost.
The Concept of adding value and how added value can be increased
Added Value: Is the difference between the selling price of a product or

service and the cost of bought in materials and components to make it.
Added Value = the selling price of a complete item – the value of inputs or
bought in materials and components.
The importance of added value
Higher added value means that the value of the firms output rises, it sells
goods in a more expensive market and has the chance to earn higher profits.
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How can business increase added value?
Business can increase added value in two ways.
1- Increasing selling price but keeping the cost of materials the same.
This can be done by:
A- Branding: creating a recognized brand making the product more
appealing to consumers through advertising than unbranded products
which allows the companies to charge a higher selling price.
B -Increasing product features: products that have more features and
functions that similar products on the market will allow the producer to
charge a higher selling price.
2- Reduce the cost of materials and cost of production but keep the
selling price the same.
This can be achieved by buying in bulk therefore getting a reduction in the
cost of materials (economies of scale), or finding a cheaper supplier
without affecting the quality of the product.
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Chapter 2
Classification of business activity
Types of business activity

Businesses can be categorized in three different category or stages:
Primary Sector
Business activity involves extracting or harvesting natural resources from land
or sea. These include agricultural products such as rice, fish, coal, and oil.
Examples of primary sector business are:
 Farming
 Fishing
 Forestry
 Mining
Primary sector activities tend to account for a large percentage of output and
employment in less economically developed countries.
Secondary sector
Secondary sector business activity takes place the natural resourses produced
by the primary sector activity and turns these raw materials into finished goods.
The activities of the secondary sector include:
 Construction
 Manufacturing
 Food processing
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Tertiary sector
Tertiary sector business activity involves providing services to the

final consumers or business. Examples of the tertiary sector business
include:
 Shops
 Restaurants
 Banks
 Transportation
 Insurance companies
Each sector of the three sectors of industry are measured and compared
by:
1- The numbers of workers in each sector
2- The number and value of output of goods or services of each sector
Chain of production: The production and supply of goods to the final
consumer involves activities from primary, secondary and tertiary sector
businesses.
Difference between developing and developed countries.

Developing countries: primary industries employ most of the people than
secondary and tertiary sector
Developed countries: most employees will be employed in the tertiary sector.
And the output of the tertiary sector is often higher than the other two sectors
combined.
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De-industrialization: occurs when there is a decline in the importance of the
secondary sector (manufacturing sector) in a country.
Mixed Economy
Most countries in the world have mixed economies. These are Economies that
have both private sector and public sector organizations. And the economic
resources are controlled by private and public sectors.
Private Sector Public Sector
The part of the economy where The part of the economy that is
businesses are owned and controlled controlled by the state or
by individuals and companies for government.
profit
Private Sector purpose: The purpose of most of the private sector business is
to make profit. Business in the private sector only produced goods or services
that consumers want only if they can make profit from doing so.
Public sector purpose: The purpose of most of public sector is to provide

essential goods and services that all people in the population need like
electricity, water, education and health care. The decisions are based on
providing good quality service to the public rather that making profits.
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Chapter 3
Enterprise Business growth and size.
Enterprise and entrepreneurship:

Entrepreneur: is a person who organizes, operates and takes the financial
risk for starting up a new business.
Advantage of being an Disadvantage of being an
entrepreneur entrepreneur
 Independence- as able to  High risk. Many new business
choose how to use time and fail especially when there is
money. poor planning
 Able to put own idea into  Capital. Entrepreneurs may
practice need a lot of capital to start a
 May be profitable and the business and may have to put
income might be higher than their own money in the
working as an employee for business
another business  Lack of knowledge and
experience in starting and
operating a business
 Opportunity cost. Lost income
from not being an employee for
another business.
Characteristics of a successful entrepreneurs:

Characteristics of a Reason why important
successful entrepreneurs
Hard working Long hours and short holidays are typical
for many entrepreneurs to be successful
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Risk taker They should always be prepared to take
risks, knowing that failure is a possibility.
Multi skilled They should have good understanding of the
functions of finance, operations, human
resources and marketing.
Innovative They are good at thinking up new ideas for
goods and services or new ways of
presenting existing goods and services.
Self-confident They have strong believe in their own skills
and ideas.
Effective communicator Communicating effectively with banks,
investors, partners, and other businesses.
Most governments offer support to entrepreneurs. This encourages them

to set up new businesses.
Why governments support business startup.
 Reduce unemployment: new business will often create new job
opportunities which will help decrease unemployment levels.
 Increase output: the economy benefits from increased output of goods
and services
 Increased competition: new business gives consumers more choices
and compete with already established businesses which can result in
lower prices
 Benefit society: entrepreneurs may create social enterprises which may
benefit society (such as supporting disadvantage groups)
 Can grow further: all large businesses were small once. By supporting
todays new firms, they may grow and become very large and importante
in the future.
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How governments support start-up business?
 Grants: these are non-repayable sums of money
 Low cost loans: zero or low interest rates loans because banks may be
unwilling to lend to inexperienced entrepreneurs.
 Low cost or rent free premises: cheap land paid for or offered by the
governments to new businesses
 Free and low cost advice and training: government can organize for
classes, trainings and experts advice from professionals so that
entrepreneurs can learn relevant skills for the business.
Business plan
A business plan: a written document that describes a business, its objectives
and important details about the operations, finance and owners of the new
business.
Content of a business plan:

 An overview of the new business and its strategies
 Details about the products to be sold, where and to whom it will be sold
 The market-the current size of the market, the potential for growth and
products main competitors
 Objective of the business-this is what the business hopes to achieve
 Financial forecasts-a cash flow forecast on expected sales, revenue and
profit for the first year of trading.
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How a business plan assists entrepreneurs.
1- To assess whether it’s possible to turn a business idea into a

successful business: a business plan gives sense and direction to the
business idea and can turn it into a business capable of production and
selling goods or services to consumers.
2- Assist gaining Finance: The information in the business plan can be
used to persuade lenders such as banks and investors to provide finance
to the business. Without a detailed business plan lenders may be
reluctant to give money to the business
3- Careful planning reduces risk: financial forecast and cash flow
forecast included in the business plan shows how much the business will
need to setup and what are the sources of finance.
4- To measure how well the business is doing against its objectives and
plan.
Measuring and comparing business size.

There are several ways to measure and compare the size of different
businesses.
1- Capital employed in the business.
This is the value of all long term finance invested in the business to buy the
things the business needs before it can produce goods or services, for example
factory, office buildings, machinery. These are knows as assets.
Limitation: using capital employed to compare the size of the business in
different industries is a problem because some industries like car
manufacturing, need a very large capital investment in machinery. Others such
as computer software design don’t. So it is hard to identify the exact value of a
business using this method alone.
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2- Number of employees.
Large business usually employ more employees than small businesses to
produce larger levels of output to cover the demand of their customers
Limitation: however some companies uses advanced technology and
machinery in production which leads to having very few workers. These
companies are called capital intensive companies.
Also some companies may hire a lot of part time workers instead of full time
workers which may also give inaccurate indicator of the size of the company.
3- Market share.
The size of the market for a product or a service is measured by the total
amount spent by consumers on that product or service. The larger the share of
a business in the total market the bigger the business.
Limitation: the comparison between two or more business has to be in the
same industry and not different. For example you can’t compare soft drinks
Company to a phone manufacturing company.
4- By value of output and sales.

This is a very common way of comparing business size in the same industry.
By how much they produce and how much they sell.
Limitation: the value of goods produced and selling price may differ from
one business to the other, so the comparison must be done in the same
industry.
Who would find it useful to compare the size of the business?

Government: because there are different tax rates for small and large
businesses
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Investors: before which business should they invest their money in
Banks: to decide whether a loan is suitable to a business compared to its size.
Workers: to have an idea of how many people they will be working with
Competitors: to compare their size and importance in the market to other
companies.
How to measure business success?

 Whether the business is achieving their objective or not.
 Whether the business is making profits or not.
 Increase in market share.
 Customer satisfaction level.
 Good reputation in the market.
 Survival in different situation like recession or competitor.
Business growth
Why business want to grow?
 To increase market share
 To increase profits
 Have greater power to control the market and better competition
 Protection from the risk of takeover
 More prestige for the owners and managers.
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There are different ways a business can grow.
Internal growth External growth
Occurs when a business increase the Occurs when the business takeover
number of goods it produce by another or merges with another
buying more machinery. By business. This process is known as
developing new products and integration.
expanding into a differ market. Or
finding a new market for its
products.
What is the difference between a merger and a takeover? (Integration)

Merger Takeover
Merging is when the owners of two Takeover or acquisition is when the
business agree to join their firms owners of one business buys another
together to form one business entity business.
There are three types of integration shown below, they all involve 2 firms
coming together to form one business but in different ways.
1- Horizontal integration.
When two firms in the same industry, also in the same sector of business
activity (primary, secondary or tertiary) come together to form one business.
For example 2 farming companies (primary sector), shoes manufacturers
(secondary), two banks (tertiary).
Horizontal integration
Primary Business + Primary business
Secondary business + Secondary business
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Tertiary Business + Tertiary business
Benefits of Horizontal integration.
 The merger reduces the number of competitors in the industry.
 Higher opportunity for economies of scale
 The combines business will have a bigger market share
2- Vertical integration.
When a firm takes over or merges with a business in the same industry but at a
different level of production. There are two types of vertical integration.
Forward vertical integration Backward vertical integration
When a firm join or take over When a firm merges or take over
another company but in a later stage another company but in an earlier
of production stage of production.
Example: a secondary sector Example: A tertiary sector company
company takes over a tertiary sector takes over a secondary sector
company. company.
Benefits of Vertical integration

Forward Backward
 The merger gives as assured  The merger gives as assured
outlet for their product supply of components and
 The profit margin made by the goods
retailer is absorbed the  The profit margin of the
expanded business. supplier is absorbed by the
 Consumer information can now expanded business
be obtained directly from  The supplier could be
manufacturer. prevented from supplying to
 The retailer could be prevented other competitors
from selling other competitors
products.
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 Costs of components and
supplies could be controlled
and lowered.
3- Conglomerate integration.
When a company takes over or merges with another company in completely
different industry. For example a soft drink manufacturer takes over a
computer manufacturer.
Benefits of conglomerate integration.
 This means that the business has diversified its activities and this will
spread the risk takes by the business.
 There might an exchange and transfer of ideas and benefits from one
business to another although they operate in different industries.
Why does some business fail?

1- Poor management, planning or lack of experience
2- Poor financial management
3- Very high competition
4- Failure to adapt to change
5- Over expanding the business
Problems occurring when business grow and how to overcome them.

Problem Solution
Larger business is harder to Operate the business in smaller
control units to regain control on every
unit separately.
Expansion can cost a lot that *Expanding slowly and using
business may be short on finance profits earned and saved from
after expansion business to pay for future growth.
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*Ensure sufficient long term
finance is available for expansion.
Integrating with another business Because managers from different

may cause a lot of problems that business may have different ways
internal expansion in running the business. So
introducing different style of
management requires good
communication so the workforce
can understand the reason for the
change.
Why do some business remain small?

Some business never grow and remain small businesses. There are different
factors that explain why.
1-owners choice.
Some business owners prefer to keep their business small. So they can control
their business better and know all of their staff and customers, than running a
large business.
2-Market size
If the total number of consumers in a specific market is small the business is
more likely to stay small. This is why business which provide specific goods
or services of a specialized kind which is only demanded by a small number
of consumers, such as handmade luxuries jewelry remain small
3-The type of industry they operates in.
The type of industry limits sometimes limits the growth of the business. As
the business may offer specialized, close and personal services.
Example: Hair dressers, car repair and tailored made clothes.
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Chapter 4
Types of business organizations.
Business organization in the private sector.
Unlimited liabilities: The owners of a business are responsible for all the
debts of the business. Their liabilities are not limited to the investment they
made. But also to their personal belongings and savings (Unincorporated).
Limited liabilities: The liability of shareholders in the company is only

limited to the amount they invested (Incorporated).
Unincorporated Incorporated
This means that the business does not This means that the business have a
have a separate legal identity from its separate legal identity from its
owners. Which means that the owners.
business and the owners are
considered as one entity.
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private sector
business
Unilimited Limited
liabailties liabilites
Private Limited Public limited

Sole trader Partnership
Company Company
1- Sole traders
A sole trader is a form of unincorporated business that is owned and
controlled by just one person who takes all of the risk and receives all the
profits. It’s a very common form of organizations because there are very few
legal requirements to form and usually doesn’t need a lot of finance.
Advantages Disadvantages
 Very few legal requirements to  The owner has unlimited
set up the business (easy to liabilities
setup)  It’s usually hard for sole traders
 The owner has full control of to raise funds to expand the
the business and can take his business
own decisions  Huge work load on the owner
 The owner can keep all the alone.
profits to himself
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 The owner has a very close  Difficult to compete with large
relationship with his customers business in same industry.
and employees.
2- Partnerships.
A partnership is a form of unincorporated business that is owned and

managed by two or more people. They are usually formed to overcome
some of the disadvantage of sole traders. All the partners will contribute to
the capital of the business. They will usually share the management of the
business and share the profits made from the business.
Partnership agreement contains:
1- The percentage of profit shared to each partner
2- The duties and tasks of each partner
3- The amount of capital invested in the business by each partner.
Advantages of partnerships Disadvantages of partnerships
 Access to finance more that  Partners have unlimited
sole traders as there is more liabilities, so if the business
partners investing the business. fail, the creditors can force the
 Easy to set up as it require few partners to sell their own
legal requirement to set up the property and personal
business. possessions to pay the debts.
 More experience is brought to  Profits have to be shared
the business which leads to a between the partnerships
better decision making.  Not always easy to gain access
 The responsibilities and to more finance because they
workload of running the are usually small business.
business is shared.  Unincorporated form of
business.so if one of the
partners died then the business
would end.
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Limited Companies.
1-Private limited Companies.
A form of incorporated business (which means that the company have a

separate legal identity from their owners). The company is owned by the
shareholders who invested in the company, these people buy shares so
they are called shareholders. Who are, family or close friends or a few
close people, and they have limited liabilities. They hire directors to run
the business for them, and sometimes the shareholders can be the
directors.
 Owners have limited  Complicated and a lot of
liabilities legal formalities.
 Shares can be sold to more  Shares can’t be sold or
number of people, so the transferred to anyone
business can raise funds without the agreement of all
easier and expand faster. the current shareholders.
 If one of the owners dies the  Shares can’t be sold to the
business still continue. public so the company can’t
raise large amounts of funds
in short time.
 The accounts of the company
are much less secret that a
sole trader or partnerships
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2-Public Limited Company.
It is an incorporated form of business where the shares are sold the

general public. And all the shareholders have limited liability. This is the
most common form of business for large companies.
 Shareholders have limited  Very large and complicated
liabilities. legal formalities to set up the
 Can easily raise very large business
capital to invest in the  Sometimes public limited
business by selling shares to companies are so large it
the public becomes hard to control and
 No limit to the number of run the company
shareholders.  Selling shares to the public
 Public limited companies are is expensive
usually large businesses and  Danger of losing control of
can easily attract suppliers the company as the original
and banks. owners of the company
when the company goes
public
A board of director: Are professional managers who are elected to run

the company. They don’t have to be shareholders, but they are given the
responsibilities of running the company and taking decisions.
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Annual general meeting: a meeting held every year so the shareholders
can vote for whom to be in the board of directors, to vote for the
company’s strategy and the amount of dividends to be distributed.
Dividends: Payments made every year by the company to the

shareholders from the profit of the company. Dividends are the returns
to the shareholders for investing in the business.
Other forms of business in the private sector.
Joint venture
Is a form of a company where two, or more business start a project

together. Sharing the risk, capital, and the profits.
Advantages Disadvantages.
 Cost of setting and running  Profits are shared between
the business are shared, so the businesses in the joint
the risked also is shared in venture.
case of loss.  Disagreement might occur
 Knowledge and expertise on important decisions.
are shared between the  Different management styles
businesses in the joint between the two business
venture.
Franchising.
Franchise: a business system where entrepreneurs buy the right to use

the name, logo and product of an existing business.
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Advantage disadvantage
franchisor  The business can expand faster than if the  Poor
franchisor tries to expand and finance the management of
expansion of every outlet himself. one outlet could
 The management of the outlet is a lead to a bad
responsibility of the franchisee reputation for
 All products sold must be obtained from the whole
the franchisor. business
 The franchisee
keeps profits
from the outlet
Franchisee  Chances that the business fail are low  Less
because the business is already successful independence
and known than operation a
 The franchisor pays for the advertisement. non-franchisee
 Training of the staff and management is business
provided by the franchisor  Very expensive
 Banks are usually willing to lend to to buy a
franchisees due to low risk. franchise
license and a
part of the profit
is taken by the
franchisor.
Franchising: It is a form of a business in which a firm which already

have a successful product or a service (called the franchisor) agrees to
allow another business (called the franchisee) to use the franchisor trade
name, product and logo in exchange of a fee.
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Public organizations in the public sector.
The term public sector includes all the business that are owned by the
government, such as hospitals, schools and national services.
Public corporations: a business organization that are owned and

controlled by the government.
 They are owned and controlled by the state

 They are financed through taxation
 Mostly they have social objective and not profit objectives, for example
provide a service to the community.
Objectives of public Corporations.

 Try to keep prices low so low income people can afford the service
 To keep unemployment levels low
 To offer a service to the public
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Chapter 5
Business objectives and stakeholder objectives.
Business objectives.
These are the aims or the targets that the business works towards
achieving.
The benefits of setting business objectives:

 Gives workers and managers a clear target to work towards.
 Help motivate people in the business.
 Help in taking decisions.
 Unite the whole business toward the same goal.
 Managers can compare how the business has performed with their
objectives
What are the most common business objectives?
 To make profit
 To increase market share
 To expand the business(growth)
 To achieve survivals in the market
 To provide a service or product to society (public corporations or social
enterprises)
Survival
Many new business fail in their first or second year of trading, so
survival is a very important short term goal for the business.
 when there is a very high competition
 when the business has recently been set up (new business)
 the economy is in recession
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Profit
 Profit is usually the main objective of the business that is owned by

private individuals
 profits are important to reward investors in a business and to finance
future growth
Growth
Growth is one of the main objective of most businesses because:

 increase in the market share of the business
 increase sales and produce new products and move into new markets
 take advantage from economies of scale
 To increase the status and salaries of managers and employees in the
business.
To provide a service to society.

Social enterprises: are operated by private individuals in the private sector,
they have social objective as well as make profits.
 Social: to make jobs available and provide support for people in need
 Environmental: to protect the environment
 Financial: to make profit so they can invest it back in the social
enterprises and increase the social work that they do.
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Stakeholders
Internal stakeholders
1- Shareholders(owners)
Owners of the business who invested their money in the business, they will
share the profits and losses of the business.
Shareholders objectives:
 Share in the profits made by the business
 Growth of the business so the value of their investments increase
2- Employees
Workers of the business who give their time and effort to make a business
successful, they can be hired on full time or part time contacts.
Employee’s objectives:
 Job security and job satisfaction
 Regular payment and higher wages
 Chance for promotions
3- Managers
Managers who are hired by the business owners to run the business and lead
the workers to achieve business objectives.
Manager’s objectives:
 Higher salaries
 Jobs security
 Higher status
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External stakeholders
Consumers Objectives:
 Safe and reliable products
 Value for their money
 Well-designed products with good quality
 After sales services
Government Objectives:
 Successful business increase so that unemployment rates decreases
 Increase taxes
Banks objectives:
 They expect the business to be able to pay the interest and repay the
loans.
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Chapter 6
Motivating workers
Why does people work?
 For money: to pay for life necessities and other needs

 For self-esteem: So they can feel important or what they do is important
 Job satisfaction: feeling that you have done a good job
 Security: knowing that your job and pay are safe
 Social needs: being a part of a group or an organization, meeting people
and making friends.
Motivation
In business motivation results from the individuals desire to achieve

objectives and to satisfy needs.
When your staff is highly motivated the business gains high employee
productivity, low level of absenteeism, low labor turnover and overall
improvements.
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Motivation Theories.
F.W Taylor
Taylor believed that employees are motivated by money alone. To get

employees to increase their efforts they have to be rewarded with more
money.
Taylor calculated how much output they should produce in a day, if they
produced this target output, they would be paid more money.
This is sometimes known as the theory of economic man.
Maslow’s Hierarchy
self
actulaizat
ion needs
Esteem
needs
Social needs
Safety needs
phyysical needs
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Physical needs: are the basic needs we must have in order to survive,
such as water, food, shelter, clothing and rest. (Wages high enough to
pay bills)
Safety needs: we need to be safe from physical danger and also need to
have job security (job contract).
Social needs: people want to feel they are accepted by others and feel
they are loved and trusted. (Belonging to an organization)
Esteem needs: to be respected and have their achievements recognized

by others (given recognition for a job done well)
Self-actualization: reaching their full potential.
Maslow’s hierarchy of needs:

According to Maslow’s theory all humans start at the lowest level of
needs. Once they have satisfied a need they are motivated to try to reach
the next level. Once a need is satisfied it’s no longer a motivator.
Herzberg:
According to Herzberg, humans have two sets of needs, one for the basic
needs which is called ‘hygiene’ factors or needs. And the second called
‘motivational’ needs or ‘motivators’
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Hygiene Factors Motivators
 Status  Achievement
 Security  Recognition
 Work conditions  Personal growth
 Relationship with supervisor  Promotion
 Salary  Work
According to Herzberg, the hygiene factors must be satisfied. If they are

not satisfied, they can act as de-motivators to the employees. However
they do not act motivators.
Motivating Factors
Financial rewards:
1- Hourly Wage rate

Workers are paid a fixed amount per hour worked. The longer an employee
work the more they get paid. This is the most common way of paying
production workers and non-managerial staff.
Benefits Disadvantages
 They business pays the  Good and bad employees are
employees for only the number paid the same amount of
of hours that they worked. money.
 Also the workers know exactly
how much they will be paid.
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2- Salary
Employees are paid fixed amount per year. Salaries are paid monthly usually
into a bank account. And it is the most common way of payment for
managerial levels and office staff.
Advantage Disadvantage
Employees do not receive more pay Salaries are not linked to
if they have to work longer hours to performance or amount worked or
complete a task produced.
3-Piece Rate
This is where the workers are paid depending on the quantity of products
made or produced. The more they make the more they get paid.
Ex; if a worker produces 200 unit and is paid 0.75 for every unit produced
then they are paid 200*0.75= 150 dollars
 Workers are only paid for the  Worker may concentrate on
amount they produced. making large number of units
 Encourages workers to work and ignore quality, which could
faster result in low quality products.
 Quality system needs to be
implemented to insure the
quality of products. (expensive)
Other forms of payments:

Commission (Sales personnel) Often paid to sales staff. The more
sales they make the more they get
paid. This should be good because
the business sales may increase.
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Profit sharing This will make workers and
managers to work hard as they will
receive a share of the profit made by
the business
bonus A lump sum paid to employees when
they have achieved a target or done a
good job.
Performance related pay Employee pay is linked to the
effectiveness of their work.
Fringe Benefits:
Are alternatives to cash payments, they include discounts on company
products, company cars, health insurance, pensions and free accommodation.
Job satisfaction
How happy and motivated an employee with their job. Different employees
have different ways to increase job satisfaction.
Other factors to increase job satisfaction levels

 Job rotation: instead of doing the same task, employees switch from
one task to another, this makes the work more interesting and helps
prevents boredom. And gain more experiences and skills.
 Job enlargement: attempting to increase the scope of a job by
broadening or deepening the task undertaken. This is where extra tasks
of a similar level of work are added to a worker’s tasks.
 Job enrichment: involves looking at jobs and adding tasks that require
more skill and responsibility. Additional training may be needed to
enable the worker to take more tasks.
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Chapter 7
Organization and management.
Organizational Structure:
It refers to the level of management and divisions of responsibilities within an
organization. This structure is often presented in the form of an organizational
chart.
The above figure shows a simple hierarchical structure, which includes

1- levels of hierarchy
2- chain of command
3- span of control
Hierarchy: the number of levels in an organizational structure

The levels of hierarchy in the above figure are four levels with the CEO in the
heist levels and the workers in the lowest level of hierarchy.
39
Chain of command: is the structure in an organization which allows
instructions to be passed from senior management to lower levels.
A chain of command may be described as short or tall chain of commands.
When the chain of command is short the span of control will be wide.
Span of control: the number of subordinates working directly under a

manager or supervisor.
Span of control can be described as wide or narrow depending on how many
subordinates a person is responsible for
Wide: figure 1
Narrow: figure 2
In the above figures we can that the manager in figure 1 has a wide span of
control because he is responsible for 7 subordinates, while the director in
figure 2 has a narrow span of control because he is responsible for 3
subordinates.
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Wide span of control short chain of command.
1- Less expensive as fewer 1- fewer managers and
supervisors and manager supervisors reduces promotion
needed. opportunities
2- Less supervision which 2- less control over subordinates
improves employee motivation. 3- Effective communication may
3- Faster communication and be difficult.
decision making.
4- Encourages managers to
delegate responsibility more to
subordinates.
Narrow span of control tall chain of command

1- Better control over 1- More expensive because more
subordinates and their work. managers are needed.
2- Increases chances of promotion 2- More supervision may reduce
which increases motivation. employee motivation.
Delegation: delegation is the giving a subordinate the authority to perform a

particular task.
Sometimes it is not possible for managers to complete all the tasks. Therefore
they have to delegate tasks and authority and responsibility to subordinates.
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Advantages to managers Advantage to subordinates
 Managers are less likely to  The work becomes more
make mistakes if some of the interesting and rewarding for
tasks are being delegated to the employees
subordinates  Increases employee motivation
 Managers can measure the as they can feel they are more
success of their staff. They can important and trusted
see how well they have done in  Helps train workers and make
performing the tasks given to them gain more skills when
them. they do more advances tasks
 Managers can focus more on
advanced and complex tasks
Why some managers not delegate

Despite the advantages of delegation some managers refuse to delegate. Here
are the reasons some managers are reluctant to delegate:
 Some managers are afraid that the subordinate will fail
 The manager wants to control everything by themselves
 Fear that the subordinate may do a better job than the manager which
can make the manager insecure.
Why is it important to have good managers?

 To motivate employees
 To give advice and guidance to employees
 To keep cost under control
 To increase success and profitability of the business.
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General functions and roles of a managers
Planning:
Planning is about looking at where the business is now and where it wants to
be in the future. Once this has been decided, managers must then set clear
objectives and decide on the actions needed for these objectives to be
achieved.
Organizing:
A manager is responsible to people and resources to achieve the planned goals
and objectives.
Co-coordinating
Co-coordinating is making sure that all the business departments are of the
business (finance, operations, marketing and sales) are working together to
achieve the business goals and objectives.
Commanding
This function involves the control and supervision of subordinates.
Commanding should also aim to motivate employees towards achieving the
planned objectives.
Controlling
This is a never ending task of management. Managers must try to measure and
evaluate the work of all individuals and groups to make sure they are on
target.
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Leadership styles.
Leadership Main Features Disadvantages
Style
Autocratic - Leader take all the decisions -demotivates staff who want to
- Gives little information to staff be involved and take
- Close supervision on workers responsibility
- Only one way communication -decision are not based on staff
inputs
Democratic -participation required -consulting with staff can be time
-two way communication used consuming
-workers are given information -some issues may be too
about the business to allow staff sensitive to share, such as job
involvement losses or the development of new
products.
Laisses- -managers delegate nearly all the -lack of control which may lead
faire authority and decision making to mistakes.
power -Workers and employees may
-very few supervision on workers lack guidance and sense of
-employees are provided with tall directions.
the information needed to perform
tasks.
Autocratic leadership: a leadership style where the leader makes all the
decisions
Democratic style: a leadership style where managers and employees takes
part in decision making
Laissez-faire leadership: a leadership style where most of the decisions are
left to the employees.
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Trade unions.
An organization of employees who have joined together to ensure their
interests are protected. It is a type of pressure groups.
Employees usually shares the same benefits, such as:
- Improving their pay
- Having a safe environment to work in
- Being treated fairly by their employer
- Being given proper training
Trade unions seek to:
- Put forward their views to the media and influence government
decisions, for example on minimum wage legislation and employment
laws.
- Improve communication between workers and management.
Advantages of trade unions to the business:

- Simplifies the negotiation process to deal with only one representative or
group of representatives from the trade union rather than negotiating
with multiple employees.
- Deal with trade unions and having employees who are a part of a trade
union maintain good reputation for the business in the market.
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Advantages and disadvantages of trade unions.
- Strength in numbers - Costs money to be a member of
- Improves condition of a trade union
employment, such as rates of - Members may be required to
pay, holidays and hours of take actions even if they don’t
work agree.
- Improve environment where
people work such as health and
safety conditions.
- Support for employees who
have been unfairly treated,
dismissed, made redundant.
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Chapter 8
Recruitment, selection and training of employees.
One of the main tasks of the human resources department is the recruitment
process. And requiting the right number of people with the right skills is a key
factor to the success in any business.
Recruitment process: it is the process that starts with identifying that the
business needs to employee someone up to the point at which applications
have arrived at the business.
Stages of recruitment and selection of employees
1- vacancy arises
2- job analysis
3- Job description
4- job specification (Person specification)
5- job is advertised
6- receiving application forms and shortlisting
7- interviews and selection
Job analysis: The job analysis is identifying the tasks and activities to be
performed by the new employee.
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Job description: a list of the key points about the job, job title, key duties,
responsibilities and accountability.
It is a written document that provide all the details about what a job involves.
It will be sent to anyone interested in applying for the job and it should help in
attracting the best applicants for the job.
It should include:
1- job title
2- the main duties of the post
3- responsibilities
Job specification: (person specification): a list of the qualifications, skills

experience and personal qualities looked for in a successful applicant.
A list that indicates the type of qualities, skills, qualifications and experiences
that the business is looking for in a candidate.
It includes:
1- personal qualifications
2- specific job skills
3- level of education
4- amount of experience
Internal and external recruitment.

Internal recruitment
The vacancy can be advertised and filled from inside the company
(internally). On the company notice board or internal email within the
company. This is a good chance for employees looking for a promotion.
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- It saves time and money - No new ideas or experiences
compared to external will come into the business
requirement. -
- The person is already known to
the business and managers
- The person knows the business
and it’s way of work
- It can be a great motivation for
employees
External requirement
This is when the vacancy is filled from outside the company by someone who
is not an existing employee of the company, this involves advertising the
vacancy on different platforms, there are several places the advertisement can
be placed.
1- Local newspaper: usually used for office or factory positions. That

doesn’t require a high level of skills
2- National newspaper: used more for senior positions
3- Specialist magazines and journals: used usually for technical jobs and
scientists.
4- Requirement agencies: these are specialist agencies in requirement
employees. They will advertise and interview people for a particular
type of jobs.
5- Job centers (government): places where job vacancies can be
advertised, for unskilled and semi-skilled people.
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When advertising the vacancy the business will need to decide:
-Where the advertisement should be made?
-What should be included in the advert?
-how much the advert will cost?
Contract of employment
In many countries it is a legal requirement for employers to provide new
employees with a contract of employment to sign. It will set out the terms of
the relationship between the employer and the employee. It may include job
title. Date when to begin, hours worked, rate of pay.
Part time and full time

Part time workers are someone who works less hours than a full time worker.
Advantages and disadvantages of part time job
- Costs less to hire a full time -Businesses may need to hire more
worker. than one person for the same vacancy
- More flexible working hours to rather than a one full time worker.
the employer and the employee. -Less likely to stay at the job because
the workers see the job as temporary.
-Less likely to be promoted as they
didn’t gain experience from being a
half-time employee.
-can be less committed to the
business.
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Training.
Training objectives:
- improve the efficiency of the workers
- provide skills for the untrained workers of employees to make them
more valuable to the company
- improve opportunity for internal promotion
- Decrease mistakes in the business.
- Training managers increases the quality and efficiency of decisions in
the business.
There are three methods of training
Induction training: a training program that help new recruits to get familiar
with their workplace, the people they with, the company rules and the new
job.
-helps new employees get familiar Time consuming and costly without
with their job quickly. any job being done.
-may be useful to give health and
safety training at the start of the job.
Workers are less likely to make
mistakes.
On the job training: training at the place of work, watching or following and
experienced employee
-Ensures some production from the -the trainer will not be as productive
workers as usual
-costs less than off-the job training -the trainer may have bad habits and
-skills gained from experienced can pass them to the trainee
employee
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Off-the job training: training that takes place away from the workplace, it
may involves classrooms, workshops or lecturers.
-does not disturb the production of -very high costs
other employees. -Wages are paid but no work is being
-a broad range of skills can be taught done by the employee.
-uses expert trainers who have up to
date knowledge
If a business needs to reduce the number of employees this can be done in

one of two ways, redundancy and dismissal.
Dismissal Redundancy
Termination by the employer Termination of employment by the
because the employee has broken employer because the employee job
company rules or is not performing is no longer required.
well in his job
Retire: because employee gets older and want to stop working.

Resign: because they have found another job.
Legal controls over employment issues

Equal employment opportunities laws
Laws that states that people should be treated equally in the workplace and
should be paid equal amount for doing similar work. And not being
discriminated based on gender, race or people with disabilities.
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Protection against unfair dismissal
Employees need protection from being dismissed unfairly such as:
- For joining a trade union
- Being pregnant
- When no warning are given before dismissal
Health and safety

Laws that have been passed in many countries that forced the employers to
improve the health and safety rules and standards at work.
- Protection and training against dangerous machinery.
- Providing safety clothing and equipment.
- Provide hygienic conditions.
Wage protection
Workers have the right to be paid for work they do. There should be a written
agreement between worker and employer. The contract of employer can
contain the wages to be paid, how frequent wages will be paid and deductions
from the wages such as income taxes.
Protection against unfair discrimination

Protection of the employees from unfair treatment by the employers from
discriminating against workers based on unfair reasons such as age, gender,
race, or religion
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Chapter 9
Internal and external communication
Communication is transferring a message from the sender to the receiver who
understand the message, it happens when a message is transferred from one
person to another.
Internal communication: happens between member of the same organization
(inside of the same company)
External Communication: is when the messages are sent between one
organization and another or between members of 2 different organization.
- order good from supplier
- sending information to customers
Accurate external communication is very important to the image of the
company and the efficiency of the business. If the business communicates
ineffectively with suppliers, the supplier may send wrong materials.
The process of effective communication involves four factors:

1- transmitter or sender of the message :the person that passes the message
to other
2- a medium of communication : the method of sending a message
3- receiver: the person whom the message should be sent
4- Feedback: confirmation that the message is received.
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One way and two way communication.
One-way communication: occurs when the receiver of the message has no
chance to reply or respond to the message.
Two-way communication: occurs when the receiver has the chance to reply
to the message. Both sender and receiver are involved in the communication
process and this will lead to more effective communication.
Advantages of two way communication

1- It is clear to the sender of the message that the person receiving the
massage has understood the message and accepted upon it. Which
insures effective communication.
2- This may help motivate the receiver because he now can contribute to
the process or the topic being discussed.
Communication methods
Verbal communication
This involves the sender of the message speaking to the receiver. Such as one
to one talks, telephone, meeting and video conferencing.
- Information can be given out - When a record of the message
quickly is required such warning to a
- There is information for worker verbal communication
immediate feedback and two- is inappropriate.
way communication
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Written communication
This method may include letters, emails, social networks, test messages and
reports.
- There is hard evidence of the - Direct feedback is not always
message which will reduce possible
disagreements between sender - The language used can be
and receiver. difficult to understand by the
- Written message can be copied receiver or the message may be
and sent to many people. confusing.
- Electronic communication is - There is no use of body
very cheap and fast way of language to reinforce the
communication message.
Visual communication.
- Film, PowerPoint presentations to inform people about products.
- Posters
- Photographs
- Easier to read, present and can - There is no feedback from the
be more attractive. receiver.
- Can be made clearer by adding - May be hard for some people to
a chart or diagram. be understood (language barrier
for example)
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Formal and informal communication.
Formal Communication: is when messages are set through established
channels using professional languages.
Informal communication: is when information is sent and received casually
with the use of everyday language. (Usually used by managers to find out the
reactions to new ideas or products).
Direction of communication
- Downward communication: when messages are sent from managers to
subordinates
- Upward communication: when a message is sent from subordinates to
managers
- Horizontal communication: when messages are sent between
employees that are at the same level in an organization.
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Chapter 10
Marketing, competition and the customer
The Marketing Role
The marketing is more than just advertising and selling the goods and services of a
business, the marketing department includes a lot of sections.
 The sales department: responsible for the sales process of the product.
 Market research department: responsible for knowing the customer’s needs,
market changes and competitors actions and decisions.
 The promotion department: advertising for the product.
 Distribution department: transportation and logistics of products to the market.
The main roles of marketing
1- Identifying customer needs

Knowing what products or services does the customer needs, how much are the
customers willing to pay, how and where they want to buy the product.
2- Satisfying customer needs

Knowing exactly the right product, at the right place, at the right price and with the right
price. Because without delivering all of these factors will lead to failure and losing the
customers to the competitor.
3- Maintain the customer loyalty

It is very important to keep the existing customers and not just focusing on attracting
new customers. Keeping close relationships with customers is Very important to know
how satisfied they are of the products or services.
4- Anticipating market changes

Trying to anticipate and adjust to the market trends and customers new needs and
wants to produce new goods and services that wasn’t produced before.
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Marketing objectives
Creating brand image for a product or a business
Increasing sales revenue and profitability
Increase and maintain market share
Targeting and entering new markets
Increase market share
Reasons for changes in market and consumers patterns
Change in population size and structure

When the population in a country increases the size of the market also increases, which
could increase business sales. Also when the age structure of the population include
more young people than older people for example, the demand for older people
product decreases.
Changes in tastes and fashion

Fashion may change for clothes so the customers may want different styles each year.
Or when tastes changes and people want more healthy diets so this increases the
demand for more healthy food and drinks.
Changes in income levels

If an economy is booming and has high level of incomes then there will be demand for
more expensive products, if an economy is in recession and has high levels of low
income individuals then there will be more demand for cheaper products.
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Market
A market is consisted of all the customers and sellers for a particular customers for a
particular good or service.
Why some markets become more competitive
Globalization of markets: products are sold all over the world.
Internet and e-commerce: many business have developed their own website and use
other websites to sell their products all over the world and not just in their own country.
This has increased the size of the market but also increased the level of competition
between companies in the market.
Improvement of logistics and transportation: it is much easier to move products from

one country to another country now than before.
Businesses response to increasing competition
 Maintain good customer relationship and loyalty.

It is always cheaper to keep existing customers than gaining new customers. So it
is always important to continue to meet customer expectations and satisfy
customer needs.
 Product development and product improvements.

Developing new products and improving existing products and services to keep
customers interested and compete with different competitors.
 Increase advertising and promotion.

Increase advertising and promotion to persuade customers to buy your product
rather than the competitor is one way a business can respond when competition
is high.
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Mass Markets and niche markets
Mass Market Niche Market

Definition Markets with a very large Market with specialized
number of costumers and products that are only sold
standardized products. to a small number of
Products are designed for customers who form a
the whole market so the small segment of the total
marketing is designed to market
attract to most of the
consumers.
Advantages *Sales are very large * Special needs of
*higher profits customers can be focused
*less risk because the on and targeted by the
business will usually selling business
different product in *small firms can focus and
different areas. produce special products
*larger opportunity for to the niche market while
growth than niche market. bigger business can’t,
*business can benefit from which lead to less
economies of scale competition with larger
business.
Disadvantages *very high level of *are small markets and
competition therefore sales and profits
*high cost of advertising made are small. If the
*Standardized products business wants to grow
will not be appealing to all they will have to shift to
customers because some mass market.
customers are looking for *usually business in the
specialized products which niche markets are
will lead to lost sales. specialized in one or two
products only. So if the
product is no longer in
demand then the business
will fail.
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Market Segmentation
Segmentation is when a market is broken down to smaller groups which share the same
characteristics or preferences
How can segmentation help a business?

 Make marketing expenses cost effective by producing a product which closely
meets the needs of these customers and only targeting these segments.
 Business can start making more revenues and profits, because of cost effective
marketing and increased sales.
 Business can make different product for each market segment and then aiming
each brand/product at each target segment
 Identify a gap in the market, and then produce a suitable product to meet these
customer needs and increase sales.
Ways on how a market can be segmented
By age
The products bought by people in different age groups will not be the same. Old people
buy different products than younger people.
By lifestyle
A single person earning the same income as a married person with three children will
spend that income differently, buying different products.
By use of products
Products can be used by consumers for personal use or business use. So the advertising
and promotion methods will be different in each case.
By gender
Some products are bought only by women or only by men
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Chapter 11
Market research
Product oriented and market oriented businesses.

Product oriented business: is a business who focuses mainly on the product
they produce rather than focusing on the market needs. They mainly produce
general products that consumers need to buy that may not have a brand name
or logo.
Market/customer-oriented business: is a business who find out the market

and customers wants through market research, before developing and
producing a product. They will have the advantage of knowing the exact
customers’ needs and new market trends and opportunities. So they can
launch their new products with more confident.
Market research.
Market research is the process of gathering, analyzing and interpreting
information about the market.
Carrying put market research is very important to business as they can identify
customer needs and market changes in a competitive market environment.
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What are the information that can be obtained by market research?
1- Quantitative information: quantitative information answers questions
about quantity of something (numbers). Such as “How many bottle of
perfumes were sold last year? ” or maybe “the percentage of women
who goes to the gym regularly”
2- Qualitative information: these types of information answers questions
that requires judgment or opinion. Such as “what customers like or
dislike about a certain type of product or service?” or “why more
teenage boys buys running shoes than teenage girls?”
Samples
When conducting a market research we need to identify and choose who will
we ask the questions, or who will we conduct the interview with or who will
answer the questionnaire. A specific sample of people should be chosen as it
would be very expensive and impractical to try to include everyone or all the
relevant population (target customers). A sample is a group of people selected
to answer the questions and respond to the market research.
Quota sample Random sample
These is when people are selected This type of sampling means that
based on a specific characteristics everyone and all individuals of the
(market segmentation) for example population have an equal chance of
age, gender, location or income. being selected and interviewed.
Researches are gives a quota that People here are selected randomly on
they will interview. So the researches the streets or random phone numbers.
have a number of people they should This is an advantage because
interview, who have certain everyone can be selected but
characteristics. sometimes the people being
interviewed are not a user of the
product being researched.
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There are two types of market research that can be used to gather
information:
1- Primary research or field research.
2- Secondary research or desk research.
Primary research
Primary research or field research is collecting of original data for the first
time. It involved direct contact and direct questioning of the potential or
existing customers.
This research is done first hand. It is very expensive and costs more than
secondary research. But is usually done for a specific purpose, such as testing
the market to know what people think of a new product that would be
produced.
There several types of primary research.
1- Interviews
Interviews are a form of primary research where the interviewer (the person
asking the questions) will have a set of specific questions for the interviewee
(the person answering the questions).
Interviews can be conducted with one person or in a group where there is one
interviewer giving questions to a group of people.
Advantages of interviews Disadvantages of interviews
*The interviewer is able to explain *the interviewer may lead the
any question that the interviewee interviewee to answer the question in
may not understand a certain way that may lead to
*detailed face to face information inaccurate information due to
can be obtained about what the interviewer bias.
customers may like or dislike about *interviews are very expensive and
the product. time consuming method of gathering
information.
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2- Questionnaires
Questionnaires is the basis and most important form of primary research. They
may be conducted face to face, by telephone or online through emails and
websites.
Online questionnaire: online surveys can be carried out on specialized

websites or on the company website. Then the targeted samples may be asked
to fill out the questionnaire on the website. But the questions have to be
chosen carefully to obtain accurate results.
Advantages of questionnaire Disadvantage of questionnaire

*detailed qualitative information can *it may be hard to think about the
be obtained about the product or questions asked, if the questionnaire
service. have the wrong questions the data
*they can be carried out online which collected may not be accurate which
makes it cheaper and faster to collect may lead to a misleading result (the
the information. business may think the customers
like the product while the customers
doesn’t really like it)
*carrying out questionnaire in person
can be very expensive and time
consuming
*collecting and analyzing the
information can be time consuming
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3- Focus groups
This is where a group of people (focus groups) agree to provide information
about specific product, general spending patter or behavior over a period of
time. Groups may also test new or existing products and discuss their
experience with the product. Explaining what they like or dislike about them.
Detailed and specific information can They can be very expensive and time
be gathered about consumers consuming to conduct. And the
opinions and behavior opinions some people may be biased
or influenced by the opinions of
others.
4- Observation
This can take forms of recording, watching and audits
Example: watching how consumers behave in stores or watching how many
customer buy a specific product in a store.
Advantage of observation. Disadvantage of observation.

It is an inexpensive way of gathering It doesn’t give the business reasons
information for the consumer behavior only basic
information.
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Advantages and disadvantages of primary research.
Advantages of primary research. Disadvantages of primary
research.
*relevant data: That are collected for *expensive: conducting a detailed
a specific reason and purpose that primary market research may cost
directly addresses the questions that thousands of dollars.
the business needs answers to. *time consuming: secondary
*confidential: As no other business research data can be obtained from
has access to this information the internet or reports easily and
*new and up to date: more useful faster
that secondary research. *high risk of error if the samples
chosen and the questions used wasn’t
accurate.
Steps of the primary research process
1- What is the purpose of the market research?

What do the business need to know or find out? What are the information
needed to be obtained? This will affect the type of market research that will be
chosen.
2- Choosing the most suitable method of research

Will we need to conduct a primary research or can we use secondary research
only? Will more or just one method of primary method be used? What is the
cost and amount of time needed to conduct the research?
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3- Deciding the sample size and who is going to be chosen as the
sample
Deciding on how big the sample will be to try to reduce the cost but gather
sufficient and accurate information. Which segment will be included in the
research? (Age group, location or income)
4- Carrying out the research

After choosing the appropriate way and methods we will start carrying out the
research
5- Collecting the data and analyzing the result.

All the information obtained from the research will be gathered and analyzed
in proper way to see what it shows exactly.
6- Produce a final report

This report includes the summery of the research finding, conclusion that was
acquired based on the results. And recommendations and the appropriate
actions needed to be done.
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Secondary research
Secondary or desk research is the use of information that is already available

and collected previously and is available to be used by others. The
information can be internal or external.
Internal sources of information

A lot of information can already be obtained from within the business own
previous records easily and cheaply. The sales department for example can
provide a lot of qualitative and quantitative information. Such as how much
was sold of each product, or how well certain products were sold in each area.
The production department may provide information about the cost of
production of each product.
Examples:
Sales department: sales records, pricing data, customer records and sales
reports.
Finance department: financial records and profit and loss records
Customer service department: customer preferences and complains
Distribution department: sales records in each area.
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External sources of information
This is when information is gathered from outside the company records. There
are many sources of external sources and can vary depending on the product
being researched.
 Market research agencies

Are specialized agencies in conducting market researches for other companies
and businesses. Sometimes they offer the reports or publish them. But
although the information can be specific and useful they can be very
expensive to buy the reports.
 The internet
There are always valuable and already published reports available on the
internet. But the accuracy may not always be correct.
 Trade association
Sometimes trade association for specific industries provide reports and
information to business in the same industry. Such as the agricultural
association that provide information to farmers to help them grow particular
crops.
 Newspaper and specialized magazines
Newspapers and magazines may have some very useful information about a
specific industry or the state of the economy and the spending patterns and
behavior of customers.
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Advantage and disadvantage of secondary market research
*cheaper than primary research *may be out of date and old
*can compare data from different information
sources *data collecting methods used and
*Can be used to gather information accuracy may be unknown
that helps with conducting a primary *not useful for new product
research development
*can be obtained quickly without *As it was collected for another
conducting a complicated primary business or product it may not be
research suitable for the business using it
Accuracy of primary and secondary market research.

The accuracy of the data collected by the market research depends on
1- The sample selected: the sample selected for the research has to be
chosen in an accurate way. As it is hard to include the whole population,
it has to be as near as possible. Choosing a quota sample is more
accurate than a random sample.
2- The size of the sample: the larges the sample chosen the more accurate
the results will be. But also the larger the sample the more expensive the
research will be
3- Accuracy of the questions used: the questions that was used in the
questionnaire or an interview has to be very accurate so they can be
easily understood and the answers can provide relevant information.
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Chapter 12
Marketing mix: Product
The marketing mix is the combination of four business activities that are used
in the marketing of a product of service. These activities are usually known as
the 4 P’s (Product, Price, Place and promotion).
1- Product: this is the part that concentrate on the product itself, its
design, is it the right product, how well does it satisfy customer
wants, does it compete well with the competitor.
2- Price: this the price at which the product is sold in the market. It
should be compared to the prices of the competitors. It should cover
the costs of production. And in some cases make profits.
3- Place: place refers to the way the producer get the way to the final
consumer, this is called the channel of distribution.
And also refers to the place where the consumer will buy the product,
for example small shop are large hyper market.
4- Promotion: this refers to how the product is advertised and

promoted. What type of advertising media will be used. And what
type of sales promotion will be used.
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Characteristics of a successful product.
1- It must satisfy customer wants and needs.

2- It has to be of the right quality compared to the price.
3- The costs of producing the product has to be and not too high in order to
be able to be sold and generate profits
4- Design, quality, durability and performance should be appropriate for
the brand image.
New product development

Most business as operating in a very competitive markets, the survival of the
business sometimes depends on developing new products in order to meet the
changes in the market and the changes in the customer needs and wants.
Costs for the business when developing new products

1- Developing new products may cost a lot (R&D and market research).
2- Sales loss if the target customer is wrong
3- Costs of producing trial products including costs of wasted material.
4- Loss of company image if the product doesn’t meet customer
expectation.
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Benefits of new product development
1- USP (unique selling point) having a new product before the competitors
gives the business a competitive advantage that allows it to charge
higher prices.
2- Diversification for the business, offering more than one product offering
the customer more options.
3- Allows the business to access new markets with its new products.
Branding
Brand name: is the unique name of a product that distinguishes it from the
competitor products
Brand / customer loyalty: is when a customer buys only one brand again and
again instead of choosing the competitor brand
Brand image: is an image or the unique identity of a product that
distinguished it from the competitor products.
Branded products: branded products are usually market oriented products
that are sold with higher quality and higher price than unbranded products.
When customers are looking for high quality or reliable products they buy
branded products.
Why branding is important

1- Promotes the company name and products especially through logos and
images.
2- Helps differentiate the company and its products from its competitors
3- One of the ways to add value to products.
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Packaging
Packaging is the container used to wrap the product providing protection and
easier storing and movement of the product.
 It plays huge role in promoting the product as the material and design of
the product can give the product attractive looks.
 The brand image of the company can be promoted using the design of
the packaging differentiating the products from the competitor products.
 One of the ways of adding value to the products ( using attractive and
special packaging)
Product life cycle
Every product have a life cycle. Which represents the sales of the product at
different stages. The product life cycle is divided into four main stages.
Before the product life cycle stages a product is developed, product is tested
and the market research will be carried out before the product is introduced
into the market. There will be no sales at this time.
1- Introduction: the product is introduced into the market, sales will be

low as customers are not aware of the product. No profits are made in
this stage as the cost are not covered yet due to low sales.
2- Growth: product becomes known to the customer and sales starts to
increase rapidly. Usually the product start making profits at this stage.
Competitors start entering the market and try to increase their market
share. So the competition start to increase.
3- Maturity: Sales increase slowly or stop increasing at all but doesn’t fall.
The competition is very high at this stage. And profits are very high.
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4- Decline: sales decline at this stage as new products are introduced, or
because the product lost its appeal and attractiveness. Product is
withdrawn from the market as it becomes unprofitable.
Extension strategies
The maturity stage is the most profitable stage of the product life cycle.
Businesses want the product to stay at this stage for as long as possible. So
business uses extension strategies to stop the sales from falling.
1- Finding new markets for the product, trying to sell the product in new
areas or maybe export the product to foreign markets.
2- Adding new features and making adjustments to the old product
3- Introducing new version of the product, for example “children version”
4- Using intensive advertising and promotional activities. Such as offers
and persuasive advertising.
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Chapter 13
Marketing mix: price
When deciding the price of a product or service. The business has to be very
careful to choose a price that is suitable. Because price influence the demand
of the product.
What are the factors affecting the price of a product/service?

1- is it a new or an existing product
2- The cost of producing the product
3- The buying power of the customers
4- The demand for the product
5- The prices of the competitors
6- The type of the product
Pricing strategies
There are several pricing strategy a business can use to determine the price of
the product. For several reasons such as:
1- Try to cover the costs of making the product
2- Trying to enter a new market
3- Try to increase market share
4- Try to increase the profits
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Cost plus pricing
Is calculating the final cost of making the product then adding the percentage
of profit to this value (+ profit mark-up)
Cost of making + percentage of profit
- This method is to calculate and If the selling price after calculating
apply the cost is higher than the competitor
- Insure all costs are being the business can lose sales as
covered customers will buy from the
competitor.
Competitive pricing
When prices are set close or same to the competitor to try to compete with
different competitors. Usually used when products are very similar to the
competitors.
Insure ales are high because price is Competitive pricing may lead to loss
realistic compared to the market if costs of making the product are
price. high.
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Price penetration
When the price is set lower than the competitors to try and enter new markets.
Insures high level of sales and Selling prices may be too low
increasing market share resulting in low revenue and profits
Promotional pricing
When a product is sold at a low price for a short period of time. Usually used
at the end of maturity stage and at decline stage.
Can be used to get rid of extra stock Sales revenue and profits are very
that is not selling. low
Dynamic pricing
When customers are split into two or more groups and they are charged
different prices for the same product or service based on the quantity
demanded or the demand level for the product.
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Price skimming
When a very high price is set for a new product on the market. The product is
usually very new innovation or invention and can be sold for a high price and
customers are willing to pay this high price because of the high status
provided by the new product (Introduction stage).
- Can provide high revenue and - Some potential customers may
profits. be discouraged to buy the
- Provide high quality image for product because of the high
the product prices
Price elasticity of demand.
Price elasticity: Measurement of how much demand (sales) of a product or

service changes when there is change in price.
Is the response of change in demand (increases or decreases) when there is
change in price (increases or decreases).
Some products demand fall greatly, maybe by 15% when the prices only
increase by 5%. Maybe because it has different substitutes, so if the price of
Coca-Cola rise by 10% a lot of customers will buy Pepsi instead. This product
is then known to have price-elastic demand.
Price elastic demand: when the percentage change in quantity demanded is

greater than the percentage change in price.
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But when a product price rises by 10%. And the demand only decreases by
5% or doesn’t decrease at all then this product is said to have price-inelastic
demand. Because this product is a necessity or doesn’t have any substitute,
such as petrol or medicines.
Price in-elastic demand: when the percentage change in quantity demanded

is less than the percentage change in price.
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Chapter 14
Marketing Mix: Promotion
What is the promotion role in the marketing mix?
Promotion gives the consumer information about the product and the rest of
the marketing mix. Without it the customers will not know about the product
or where it is sold or the price of the product. Promotional activities is
essential when a brand image is being created.
Promotion includes
1- Advertising: this is sometimes called above the line promotion. This
involves communicating with the customers through different media
forms such as television or billboards or printed media.
 Informative advertisement: provides information about the
product to create awareness about the product and to attract
customer interest.
 Persuasive advertisement: forms of advertisement where the
business try to convince the customers that they need the product
and that it’s better than the competitor’s product.
2- Sales promotion: this is sometimes called below the line promotion.

There are often used for short period of time to support advertisement or
to boost sales and attract new customers.
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Aims of promotion:
1- To inform the customers about the product or remind them that the
product is still on the market.
2- To introduce new products into the market
3- To compete with competitors in high competitive markets
4- Create a brand image
5- Increase sales
6- To improve the company image
Advertising
Advertising can either be informative or persuasive.
- Informative advertisement: provides information about the product to
create awareness about the product and to attract customer interest.
- Persuasive advertisement: forms of advertisement where the business
try to convince the customers that they need the product and that it’s
better than the competitor’s product.
Advertising media a business can use

Television
 Can reach large number of  Very expensive form of
people and seen by millions. advertisement.
 The product can be shown
in an attractive looks
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Radio
 Cheaper than T.V  Cannot provide a visual image
advertisement  Still more expensive than other
 Can reach large number of forms of advertisement
people
Billboards and posters

 relatively cheap  Can be missed my people
 can be seen by a lot people passing by
passing by  Not a lot of information can be
 best used in small towns and included in the advert.
areas
Internet
 A large amount of information  Very high competition from
can be placed in the internet for other competitiors
the customer and can reach  Customers in countries without
large number of people internet access can’t be reached
 Customers can buy instantly
online
 Sending mails to the customers
is cheap
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Leaflets
 Very cheap form of advertising  May not be read by customers
 Can be gives out personally to  Can only be used in small areas
customers and towns
 Can include sales-vouchers to
encourage the customers to
keep the leaflet
Newspapers
 Can reach large number of  Can’t always catch the
customers customer attention and can be
 Cheap form of advertising missed
 More information can be put in  Not as effective as television
the advert. and internet advertising.
Sales promotion
Sales promotion is used to support the advertising campaign and to encourage

new and existing customers to buy the product.
It can be used for a short period of time but not on the long run.
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Types of sales promotion.
Price reductions: it is reducing the price of a product for a short period of

time or a certain time of the year such as discounts.
Gifts: sometimes small gifts or gifts coupon can be places within the product
packaging or offering gifts to the customers who buy the product to encourage
the customers to buy the product.
BOGOF: to encourage the customers to buy more (buy 2 get one free)
Free samples: Mostly used with food products, where a free sample is given to
customers encourage customers to buy the product and buy it.
After sales services: often used with high tech products. Providing special
after sales services encourages customers to buy the product to re-assure them
that if something happens to the product it can be replaced or fixed.
Advantages of promotion
1- It can increase sales at times of the year when sales are low (off-season)
2- Encourages new customers to buy the product
3- It encourages existing customers to buy more quantities or more often.
4- Encourages customers to buy your product and not from your
competitors.
5- Can be used to sell extra stock of goods at the end of the season or at
then decline stage in the product life cycle.
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Type of promotion used by the business depends on
The stage of the product life cycle the product has reached. If the product
is in the introduction or growth stage then the advertising is more
informative. But if the product is more established then advertising can be
persuasive and sales promotion can be used.
The type of the product. If it is a consumer good or a producer good, clothes

manufacturing machines for factories for example can’t be promoted in the
same way as the clothes itself. And the sales promotion used is also different.
Advertising for the machines has to be informative where advertising for the
clothes will be persuasive.
Public relations/sponsorships
This is concerned with promoting a good image for the company and its
products. Public relations can take many forms such as sponsoring events like
football matches. Or when company managers and employees take place in
sponsored events for a good cause or raise awareness to a good cause.
Also another example is when companies donate some of their products to the
people in need or people affected by natural disasters.
 increase public awareness of the company and its products
 customers may choose company products instead of the competitor’s
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How technology affects Promotional activities
New technologies and E-commerce activities are affecting how companies

advertise and promote their products.
Business advertising on social media such as Facebook and Instagram.
Advantages. Disadvantages.
 Targets specific demographic  Customers may find adverts
groups annoying
 Guarantees customers see the  Very high competition from
adverts when they go on competitors
Facebook or Instagram  Lack of control of the
 Information can be updates advertising if used by others.\
quickly responding to market
changes
 Cheaper than other forms of
advertising
 Can reach different groups that
are hard to reach in other ways.
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A business can also advertise and sell products on the company website
 No extra cost if company  Designing a website for the
already has a website first time is expensive
 Total control on adverts  Potential customers may not
 Can provide all the information know about the website or may
needed and provide links to not find it easily.
other pages with extra
information or pictures
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Chapter 15
Marketing Mix: Place
In this part of the marketing mix the business has to decide two things
1- Where to sell the products.
2- How to get the goods from the producer to the final consumer- this is
known as the channel of distribution.
Distribution channels
A distribution channel is the way by which a product gets from the producer
to the final consumer.
Distribution channel 1
Producer Consumer
Producer Retailer Consumer
Producer Wholesaler Retailer Consumer
Producer Agent wholesaler Retailer Consumer
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 All profits are earned by the  Can’t use this method with all
producer products because not all customers
live near the factory of the producer.
 The producer controls all the parts
of the marketing mix  It will cost the producer a lot to
send the products to all the
 Products can get to the consumers
customers
quickly ( best used for fresh fruits
and vegetables )  All the promotion activities will be
done by the producer alone which
 The producer has direct contact with
will increase the cost.
the consumer so it’s easier to have
good customer relationship with the
customers and have useful market
research information
This channel is also very useful when selling directly from one big
manufacturer to another manufacturer, for example machines used in
manufacturing are sold to the factories directly.
This method is usually called direct selling where this is no middle men in
between producer and customer
Direct selling: the product is sold by the producer directly to the final
consumer directly without the use of middle men.
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Channel of distribution 2
In the second channel of distribution the producer sells the product to retailers.
The retailers then sells the products in their shops to the final customer.
 Producers can sell large quantities  The retailer takes part of the profit
to retailers from the producer
 Reduced transportation costs  Producers lose control on some
compared to distribution channel 1 parts of the marketing mix
 Retailers are located in better areas  The producer has no direct contact
closer to customers more than with the customers
manufacturer  Retailers will also sell competitors’
products.
 Retailers can participate in the
advertising the products.
This channel uses 2 middle men, wholesalers and retailers. Where the
producer sells the products in large quantities to wholesalers. The whole salers
sells the products in smaller quantities to retailers. And the retailers sells the
products to the consumers in their shops.
 Wholesalers saves cost and space of  Another middle man taking even
storage for the producers more profit from the producer
 Transportation costs to the retailers  Producer loses more control on the
are paid for by the wholesalers marketing mix
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 Wholesalers will advertise the  Takes a long time for the product to
products to retailers reach the retailers and then the
customers.
 Wholesalers buys in very huge
quantities
 Wholesalers can distribute the
products to more and larger areas.
When products are exported. The manufacturer sometimes uses an AGENT in

the other country. The agents then sells the products on behalf of the
manufacturer. The agent will have knowledge about the foreign market and
can help the manufacturer sell the products to the right wholesalers and
retailers.
 Agents have specialized knowledge  Less profit made by the
of the market which will save time manufacturer as one more
and money for the manufacturer. middleman is added to the
distribution channel.
B2B: Selling of goods and services from/to other business. This is called
business to business.
B2C: selling of goods and services from directly to the final consumer. This is
called business to consumer.
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Internet and E-commerce
Instead of looking at a catalogue, consumers view the goods on the business
website and then order on the internet or by phone or mail. Or business can
also sell their products through specialized websites such as amazon or eBay.
E-commerce: buying and selling of goods on services on the internet.
Advantages and threats of online selling to the business.
Advantages to the business Threats to the business

 Increased market share as the  More competition as now the
business is able to sell its business will be competing
products and services to with more business online from
customers worldwide. different parts of the world.
 Reduce costs selling products  No direct contact with the
online reduce costs of shops customers
and hiring sales people.  Transportation cost will be
 More information can be higher to deliver products to
provided on the website and customers compared to selling
customers can have access to through shops.
all information they need.
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Advantages and threats to the customers
Advantages to the customers. Threats to the customers.

 Customers can order products  Some customers fear the risk of
from their home without having fraud or hacking their personal
to go to shops or malls. information when buying
 Customers can order products online using their credit cards.
from business located in other  No personal contact between
countries. customers and seller.
 Customers can compare  Customers can try or have a
between different prices and close look at products before
products from different buying them.
websites.
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Chapter 16
Marketing Strategy
Marketing Strategy: is a plan to combine the four elements pf the marketing

mix of a specific product or service to achieve a particular marketing
objective.
Deciding on the marketing strategy

Once a business has decided on the marketing objectives needed to be
reached, the business will need to take decisions about the product, price,
place and promotion. These decisions depends on many factors such as the
marketing budget, the stage of the product, and the type of the product.
Product
Introduction Growth Maturity Decline

Product Only a basic Changes might be Extension The product
model of the made to the product strategies (for and packaging
product is as a result of the example, changes is not changes
available feedback from in the packaging)
customer who tried to keep the
the product product in this
profitable stage
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Price
Price Prices might be Prices may be Prices will be Prices will be
lower than lowered if they similar to the lowered to
competitor were low as brand competitor maintain sales
(penetration prices) loyalty increases. prices. As this is or sell the
if competition is Or decreased if the most remaining
high. Or very high competition competitive inventory.
(price skimming) if increases. stage.
the product has no (Competitive
direct competition pricing)
Promotion
Promotion High Promotional Promotional Promotional
promotional activity is still activities are activities are
activities such high to persuasive to remind only aimed to
as advertising persuade the the customers about advertise the
to create existing the product and to low price of the
product customers to convince them that product and
awareness and buy the the product is better sales
inform product again than the promotional
customers that and to attract competitor’s. Sales activities aimed
the product is new promotion might be to sell the
on the market. customers. added as an remaining
extension strategies. product.
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Place
Place The product The product is The product is The product is
will be offered more widely now available only available
for sales in available, for purchases in profitable
special outlets which helps to through a wide outlets.
that are used as increase sales distribution
“test market” channel.
Entering new markets
Many business now see opportunities in markets in other countries as a huge

potential to increase their sales and profitability.
Opportunities Threats
 Home markets might be saturated  Lack of knowledge: the business
and those new markets give the may not be aware of the competitors
changes for more sales. and the habits of consumers in these
 Trade barriers have been lowered markets.
between many countries which now  Cultural differences: religious or
make it easier to enter new markets. cultural difference may mean that
 Internet has made entering new some products can’t be sold in
markets easier and faster. Also specific countries
decreased the costs of entering new  Risk of no payment: methods of
markets. payments in other countries may be
different and it hard to insure that
payment will be made.
 Increases transportation costs: as
products have to be transported over
long distances then the cost of
transportation will increase.
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Methods to overcome the problems of entering new markets.
 Joint ventures: can be used to gain knowledge from the partnet that is
located in the country as they already have knowledge about the markt
customers and habits.
 Licencing: this is where the business gives permission for another firm
in the new market to produce the brand. This means that the products
doesn’t have to be transported to the new market.
 International franchising: using franchising is a very common way to
access new markets
Legal controls over marketing
Consumers needs protection against business which could, unfortunately.

Take advantage of the customers and advertise and sell products that are
unsuitable or poor of quality.
 Weights and measures: retailers and producers can’t sell underweight
goods to the consumers.
 Trade descriptions: it is illegal to give consumer misleading
information about a product.
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Chapter 17
Production of goods and services
Production term applies to all sectors of the economy (primary, secondary and tertiary
sectors) manufacturing and services industry. Business combines factors of production
to produce goods and services to satisfy needs and wants of consumers.
Operations department: operations department is responsible for the operations and
production process of turning inputs and converting them to finished goods.
Production: is the process of converting raw materials into finished products that satisfy
consumer needs and wants by adding value to the components used.
Productivity: is the level of production and output of a business, productivity is the
output measured against the inputs used in production, such as labor. It’s measured like
this:
Labor productivity = output (over a period of time) / number of employees

 As employees become more efficient, the amount of output produced per
employee will rise and therefore the costs of producing will decrease.
 Business try to increase efficient productivity in order to remain competitive.
Labor intensive vs capital intensive
 Labor intensive: is when the labor resources input is the key resource of
production used in the business.
 Capital intensive: is when capital resource (machines) is the key resource input
used by the business.
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How to increase productivity
1- Introduce new technology
2- Training of staff and employees to become more efficient
3- Use machines instead of people
4- Improve quality and assurance to reduce wastes
5- Improve employee motivation
6- Improve inventory control
Advantages of increasing efficiency and productivity

1- Increased output compared to the inputs required
2- Lower cost of production per unit
3- Fewer workers needed
Inventory or stock
1- raw materials
2- semi-finished products
3- finished goods
Business keeps enough stocks to insure that the demand of consumers is being satisfied.
Lean production
Lean production method consists of different techniques used by business to reduce the
waste of production and increase efficiency. It tries to reduce the costs of the business
by reducing waste, time of production and inputs needed to produce. While maintain
the quality of the products.
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Examples of production wastes
1- production defects
2- over production
3- high level of inventories
4- transportation costs
Benefits of lean production

1- decreases storage and transportation costs of too much inventory
2- faster production of goods and services
3- reduced amount of defects and faulty products
4- better use of equipment and resources
Methods of lean production

1- Just-in-time (JIT): a production method that focuses on reducing or maybe even
eliminating holding stocks by the business ( raw materials, semi-finished goods
and finished goods)
 Reducing costs of holding inventory
 Better cash flow for the business as no money will be tied up in stocks of raw
material and finished goods will be sold quickly so money will return to the
business faster.
However any business that use JIT needs very reliable and good suppliers.
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2- Kaizen
Kaizen is a Japanese system that means continuous improvement and it focuses on
elimination of waste and continuously improving the production process. But not
through new equipment or technology but through using the ideas of workers and
employees. Groups of workers meets regularly to discuss ideas and problems about
improving the production process because no one knows the problems and how to
solve them like the workers themselves.
Methods of production
Job production
It is where a single product is produced at a time. This is usually used when products
are specifically ordered. Each order is different and may or may not be produced
again.
Advantages
1- Product meets customer needs and wants specifically
2- Products are unique and of high quality
3- Workers are more motivated as the work is not boring
Disadvantages
1- Very skilled workers are needed rather than use of machines and selling prices are
high
2- Production costs are high and time consuming
3- Business using job production do not benefit from economies of scale
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Batch production
This method is when similar products are made in blocks or batches at a time. A certain
number of one product is made then another batch of another product is made.
Advantages
1- Unit cost of production is lower than job method
2- Flexible way of production because production can be changed from one product
to another if a machine broke down
3- Business can start benefit from economies of scale
Disadvantages
1- May require keeping stock of raw material and finished goods which increase
inventory costs
Flow/mass production
Flow production is a capital intensive method of production, where large quantities
of a similar product are produced in a continuous process.
Advantages
1- Large number of production
2- Low cost of production per unit which leads to lower selling process
3- Capital intensive methods of production which lower the labor cost
4- Goods are produced quickly and cheaply
5- Manufacturer can benefit from economies of scale
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Disadvantages
1- Very boring system for the workers, so there is little job satisfaction
2- The capital costs of setting up the production line can be very high
3- If one machine breaks down then the whole production line will have to be
damaged
Factors affecting which method of production to use

1- The nature of the product: if a fairly unique product or an individual service is
required then job production will be used.
2- The size of the market: if demand is higher and more products can be sold but not
in very large quantities. Batch production will be used. The product will be
produced in a certain quantity to meet the quantity demanded
3- The nature of demand: if there is a large and fairly steady demand for the product
such as soap it becomes better to use batch production as it is more economic
4- 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 be able to produce on large scale using
automated production lines. Then job or batch production methods can be used
How technology has changed production methods:
 Automation: is where the equipment used in the factory is controlled by a

computer to carry out mechanical process such as paint spraying on a car
assembly line
 Mechanization: is where the production is done by machines but operated by

people
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 CAD: (computer aided design) is a computer software that draws items being
designed more quickly and allows them to be rotated to see the item from all
sides before being produced
 CAM: (computer aided manufacture) is where computer monitor the production

process and control machines and robots on the factory floor
Advantages of new technology Disadvantages of new technology

 Larger productivity  Can be very expensive
 Reduces cost and time taken to  Requires a lot of training for
design and produce products employees which increases
 Reduces production costs costs
 Improves quality and reduces  Technology changes rapidly all
production waste the time which needs to be
 Work becomes easier with the changed and updated regularly
aid of technology in order to remain competitive
 Higher quality products for  Unemployment rises as
consumers technology increases which
replace people in production
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Chapter 18
Costs scale of production and breakeven analysis
Business costs
The costs of operating the factory can be compared with the revenue from the sales of a
specific product to calculate whether or not the business will make a profit or loss. This
calculation is one of the most important made in any business.
Also it would help the managers choose between two different locations for the new
factory based on the costs or help managers decide what price they should sell a
product.
Types of costs.
Fixed costs: are costs which do not change with the number of items sold or produced
on the short run. They have to be paid whether the business is producing or making any
sales or not they are also known as overhead costs
Variable costs: are costs which vary with the number of items sold or produced. That
are often called direct costs as they can be directly related to or identified with a
particular product.
Total costs: are the fixed costs and Variable costs combined.
Average costs: is the total cost of production divided by total number of units produced,
the cost of producing a single unit of output.
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Example: a clothes manufacturer produces 20,000 t-shirts each year, the fixed costs are
50,000 and the total variable costs are 100,000 this could be calculated as follows
1- Total costs of production = fixed costs (50,000) + total variable costs (100,000) =
150,000
2- Average cost of production =
Total cost of production / total number of output (over a time period)

150,000 / 30,000 = 5
3- Total costs = average cost per unit * number of output
Economies and diseconomies of scale

Economies of scale: they are the factors that lead to a reduction in average costs as a
business increases in size and gives advantage over small businesses.
1- Purchasing economies: when business buys large amounts of raw materials in
bulk, they are able to gain discounts for buying in bulk
2- Marketing economies: advertising costs can now be divided over more units of
sales as the business expands
3- Financials economies: larger business are able to raise funds faster and easier
than small business
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4- Managerial economies: small businesses can’t usually afford to pay salaries to
specialist managers and qualified employees. Which tends to reduce their
efficiency
5- Technical economies: large businesses use flow or mass production methods.
Using division of labor and special machines of production which increases
production efficiency.
Diseconomies of scale: are factors that lead to increase in average cost as a business
grows beyond a certain size.
Some research suggests that very large businesses may become less efficient than the
smaller ones and this could lead to higher average costs for big firms.
1- Poor communication: the larger the business the more difficult to send and
receive accurate messages. Then a serious mistake can occur which leads to
lowers efficiency and higher average cost. Also this poor communication can lead
to important information not reaching the managers which leads to slow or
wrong decision making.
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Break even chart: comparing costs with revenue
Break-even shows the owners or managers of a business the minimum level of output
that must be produced and sold to cover the total costs.
Break-even charts are graphs that shows how costs and revenues of a business change
with changes in sales. They show the level of sales the business must make in order to
break-even
Break-even: is the level of output where revenue equals total costs, the business is
making neither profit nor loss.
How to draw he break-even chart:
In order to draw the break-even chart we need information about the fixed costs,
variable costs, total costs and the revenue of the business.
For example, the clothes manufacturer business.
 Fixed costs are 5000 per year
 Variable costs of the business are 3 per unit of output ( per t-shirt)
 Each t-shirt is sold for 8
 The factory can produce a maximum output of 2,000 shirts per year
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In the following table note that the variable cost and revenue are zero when no output
is being made and sold, as there will be no variable cost if no production is being made
and no revenue if no sales is being made.
Sales= 0 units Sales= 200 units Sales = 2000 unit

Fixed costs 5,000 5,000 5,000
Variable cost 0 1,500 6,000
Total costs 5,000 6,500 11,000
revenue 0 4,000 16,000
Assuming that all output was sold

Variable cost will be 2,000 * 3 = 6,000
Total revenue will be 2,000 * 3 = 16,000
How to calculate break-even point without drawing the graph.
𝑭𝒊𝒙𝒆𝒅 𝒄𝒐𝒔𝒕𝒔
Break-even level of production =
𝑺𝒆𝒍𝒍𝒊𝒏𝒈 𝒑𝒓𝒊𝒄𝒆 𝒑𝒆𝒓 𝒖𝒏𝒊𝒕−𝒗𝒂𝒓𝒊𝒂𝒃𝒍𝒆 𝒄𝒐𝒔𝒕𝒔 𝒑𝒆𝒓 𝒖𝒏𝒊𝒕
The contribution per unit of a product is its selling price per unit less its variable cost
(selling price – variable cost)
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What does the break-even chart show?
Break-even point of production is where costs total and total revenue meet. The
business must sell certain amount of products in order to avoid making loss.
Advantages of break-even chart Drawbacks of break-even charts
 Identifying the break-even point  Assumes that all costs can be
of production and calculating separated into fixed and
maximum profit variable cost
 Managers are able to read off  Assumes that all output is sold,
from the graph the expected and doesn’t show the possibility
profit or loss to be made at any that stocks may build up if not
level of output all goods are sold.
 The impact on profit or loss of
certain business decisions can
also be shown by redrawing the
graph
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Chapter 19
Achieving quality production
Quality means to produce a good or service which meets or exceeds customer

expectations that are free of faults or defects, with good design and satisfy the wishes of
customers.
High quality Low quality
 Establishes a brand image  Lose customers
 Builds brand loyalty  Have to replace faulty products
 Maintain a good reputation which increase costs
 Helps increases sales  Bad reputation lead to lower
 Attracts new customers sales and profits
Quality control
It is the checking for quality at the end of production process, whether it is the
production of a product or a service.
Quality control department job is to take samples at the end of the production line to
check for errors. If errors were found then a whole batch of production might have to be
replaced.
 Replace faulty products before  Not very accurate way of quality
they reach the customers  Faults are discovered after they
 Requires less training to perform happen
 Saves time and money  Increases cost of quality
 Protect reputation inspectors salaries
 Only identify the faults but not
the reason for the error
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Quality assurance
It is checking for quality standards throughout the production process, whether it is the
production of a product or a service.
Problems with quality control methods made many businesses move from quality
control to quality assurance. This method focuses on preventing mistakes and poor
quality product from happening.
Attention is made to the design of the product, the components and raw materials used,
delivery schedules, after sales services and quality control procedures. The workers have
a big responsibility in order for the quality assurance to work.
 Eliminate faults or errors  Expensive to train employees to
 Fewer customer complains check the production process
 Reduced costs if products or  Relies on employees following
services don’t have to be standard instructions
repeated
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Chapter 20
Locations decisions
Location of industry
The location of a business is usually considered when:
1- Setting up the business
2- Problems with the current locations and needs relocation
3- Expanding and adding new locations either in home country or abroad
Factors affecting the location of a manufacturing business

Market Locating a factory near to the market for its products can
affect the decision of locating the factory especially with heavy
products
Raw materials The raw materials may be considerably heavy or more
and expensive to move than finished goods, if the suppliers are
components located near each other, then a business might want to
consider locating near the suppliers
Availability of Workers in that location should be professional and available.
labor
Government Government influence the decisions of location as business
influence should locate in areas with suitable tax regulation or locations
that government offer subsidies and grants
Power and A reliable source of power and water are essential for
water supply businesses
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Factors affecting the location of services business
Customers Locating near the customers is essential for certain types of
services business where direct contact between the customer
and the business is required
Near to other Some services serve the needs of large businesses, such as
businesses firms that repair heavy equipment in big companies. They will
need to be nearby to respond quickly. Also banks needs to be
located in busy areas for the convenience of customers
Rent costs If the business doesn’t require to be located in busy areas then
managers and owners will choose the location with low rent
costs.
Availability of If business required large number of employees then it can’t
labor locate in remote areas
Factors affecting location of a retailing business

Shoppers The type of customer the retailing business targets will
influence the business location. If the retailer sells expensive
goods then it needs to be located in an area where people
with high incomes might visit.
Busy areas It is best for retailers business to locate in busy areas with
other shops, which means that people will pass your shop on
the way to other shops and businesses.
Parking areas Locating in areas with available parking spots for customers
for customers will make it more convenient for customers and encourage
available them to visit the business more often.
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Locating in foreign countries
New markets Businesses may consider to relocate to other countries instead
overseas of exporting products from one country to another.
Cheaper Sometimes it is essential to locate the business near the raw
sources of raw material sources such as minerals and natural oil sources for
materials example.
Availability orIf a labor intensive business is located in areas where wages
cheaper labor are high, it may consider moving to another country where
wages are lower.
Avoiding trade Locating in the country where the customers are will avoid the
and tariff business the costs of tariffs and international trade barriers.
barriers
Rent and taxes If rent and taxes costs are very high in a country where the
consideration business is located, then the business may consider moving to
another country where the taxes or rent costs are less.
Role of governments and legal controls on location decisions.

Why do governments influence these locations decisions?
1- To encourage business: many governments provide grants or subsidies to

businesses to encourage them to locate in undeveloped parts of the country.
These undeveloped areas usually have a very high unemployment rate and there
is a great need for work.
2- To discourage businesses: from locating in overcrowded and over populated
areas. Or to prevent businesses to open factories in areas with lots of houses to
protect people from pollution.
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Chapter 21
Business finance: needs and sources
The role of the finance department

- Recording all financial transactions, such as payments and sales revenue
- Preparing final accounts
- Producing accounting information for managers
- Making important financial decisions
Why do business need finance
Finance is money, businesses need money and this is often called capital
1- Starting the business
When an individual plans to start a business, they should consider all the costs needed
in order to start the business, such as costs needed to buy the machinery and costs
needed to buy the inventory in order to start trading and making the products. The
finance needed to start a new business is called startup capital.
2- Expanding an existing business
- When expanding the business (growth) additional capital may be needed in order
to buy additional machinery and fixed assets
- Additional capital may be needed in order to finance the process of take over
- Or developing new products to enter new markets
-
3- Additional working capital
- Working capital is often described as the “blood” of the business, it’s the finance
needed to pay the day to day expenses of the business.
- They have to pay wages, electricity bills, and pay for raw materials.
- Many business fail not because they are not profitable. But simply because they
have suffered from shortages of working capital.
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The difference between capital expenditure and revenue expenditure.
Capital expenditure Revenue expenditure
Capital expenditure is money spent on Revenue expenditure is money spent on
fixed assets which will last for more than day to day expenses which does not
one year involve the purchase of a long term
These fixed assets are needed at the start assets. Example, wages and rent
of business and also
Sources of finance
Internal sources: this is money obtained from within the business itself. The most
common examples of internal finances are as follows
Source Advantages Disadvantages
1- Retained profits -retained profits does not -a new business will not
This is the profit kept in the have to be repaid unlike have yet any retained
business after owners and loans profits
shareholders have taken -there is no interest to be -many small firms could
their share of the profits paid find that their profits are
too low the expansion
needed
-keeping more profits in
the business will reduce
the amount of dividend to
shareholders
2- Sale of existing -this makes better use of -it may take a long time to
unused fixed assets the capital tied up in the sell the assets
unused fixed assets that business -this source of finance is
are no longer used by the -it does not increase the not available for new and
business such as old debts of the business as it small business as they may
machinery, trucks or is not repaid and no not have extra unused
buildings interests is paid assets
3- Sale of inventory to This reduces the amount of May result in disappointed
reduce inventory money tied up in inventory customers if not enough
levels and reduces the storage goods are kept in stock
costs
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4- Owner’s savings -it is a fast source of -saving maybe too low.
A sole trader or a finance It increases the risk taken
partnership can add No interest is paid by the owners
more of their savings
into the unincorporated
business
External sources: it is obtained from sources outside and separate from the business
Sources Advantages Disadvantages
1- Issuing shares -this is a permanent source -dividends will be expected
This source of finance is of finance that doesn’t by the shareholders.
only available to limited have to be repaid to -the ownership of the
company shareholders company may change if too
-no interest has to be paid many shares are sold
2- Bank loans -quick to arrange -security or collateral is
A sum of money obtained -They can be for varying required (sole traders and
from the bank that must be lengths of time partnerships may lose their
repaid in addition to -large companies are personal belongings)
interest offered low interest rates
by banks if they borrow
large sums
3- selling debentures Debentures can be used to These must be repaid and
these are long term loan raise very long term interest must be paid
certificates issued by finance. Example 25 years
limited companies
4- factoring of debts -immediate cash is made The firm does not receive
Debt factors are specialist available to the business. 100 percent of the value of
companies that buy the -the risk of collecting the the debts
debts of firms for debt becomes the factor’s
immediate cash. and not the business’s
5- Grants and subsidies Does not have to be repaid They are often given to
From agencies or the specific types of business
government or specific situations.
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Micro financing
Micro financing is providing financial services including small loans to poor people not
served by traditional banks. In many low income developing countries, traditional banks
are not willing to lend to poor people
Short and long term finance
1- Short term finance
This provides the working capital needed by a business for day to day operations.
Shortages of cash in the short term can be avoided in 3 main ways (cash flow problems)
Short term Advantages Disadvantages

1- Overdrafts -the firm can use this -interest rates are variable,
These are arranged by the finance to pay wages or unlike loans which have
bank, where the bank gives raw materials. fixed rates
the business the right to -it can vary with the needs -the bank can ask for the
overdraw it’s bank account of the business (flexible) overdraft to be paid at very
(take more money than is -interest will be paid only short notice.
currently in the account) on the amount overdrawn
-overdrafts can be cheaper
than loans on the short
term
2- Trade credit It is almost an interest free The supplier may refuse to
This is where a business loan to the business for the give discounts or even
delays payment to its length of time that refuse to supply any more
suppliers, which leaves the payment is delayed for. goods if payment is not
business in a better cash made quickly.
position.
3- Factoring of debts -immediate cash is made The firm does not receive
Debt factors are specialist available to the business. 100 percent of the value of
companies that buy the -the risk of collecting the the debts
debts of firms for debt becomes the factor’s
immediate cash. and not the business’s
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2- Long term finance
This is finance which is available for more than a year and sometimes for many years.
Usually this money would be used for:
- Purchase long term fixed assets

- To update or expand the business
- To finance a takeover of another firm.
Long term Advantages Disadvantages
1- Bank loans -quick to arrange -security or collateral is
A sum of money obtained -They can be for varying required (sole traders and
from the bank that must be lengths of time partnerships may lose their
repaid in addition to -large companies are personal belongings)
interest offered low interest rates
by banks if they borrow
large sums
2- Hire purchase The firm does not have to -a cash deposit is paid at
This allows a business to find a large sum of cash to the star of the period
buy a fixed asset over a purchase the asset -interest payments can be
long period of time with high
monthly payments which
include an interest charge
3- Leasing - The firm does not have to -the total cost of leasing
Leasing an asset allows the find a large sum of cash to charges will be higher than
firm to use an asset but it purchase the asset purchasing the asset
does not have to purchase -the maintenance of the
it. asset are carried out by the
Monthly leasing payments leasing company.
are made. The business
could decide to purchase
the asset at the end of the
leasing period
4- Issuing of shares -very common way for -Expensive to organize and
Shares are often referred limited companies to raise advertise.
to equities, therefore the additional capital. -dividends are expected by
sale of shares is sometimes -non repayable and no the shareholders to be
called equity finance interest is paid. paid.
123
5- Debentures Debentures can be used to These must be repaid and
these are long term loan raise very long term interest must be paid
certificates issued by finance. Example 25 years
limited companies
Sources of capital: how business takes the choice
Purpose and time period: if the business needs finance for long term such as buying
fixed assets then long term source should be used.
Amount needed: the amount of money needed decides the source of finance. If the
business needs a small amount of money they can’t start selling shares but better they
can just arrange for an overdraft.
Legal form and size: issuing shares is available only for public limited companies and not
an option for sole traders or partnerships.
Control: original owners of the business may start losing control of the business if they
ask others to invest in their firm. Like issuing more shares in a limited company.
Risk and gearing: gearing is measuring the proportion of total capital raised from long
term loans, the higher the gearing the more the risk because interest on loans must be
paid whether the business is making profits or not.
Required documents of the bank to give a loan:
1- A cash flow forecast which shoes why the finance is needed and how it will be
used.
2- An income statement for the last period and a forecast for the next period. This
shows the chances of the business making profits in the future
3- Details of existing loans and the sources of finance used.
4- Evidence that security or collateral is available to reduce the bank’s risk.
5- Business plan to explain clearly what the business hopes to achieve in the future
and why the finance is important to these plans
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Chapter 22
Cash flow forecasting and working capital
Importance of cash for a business
Cash is a liquid asset. This means that immediately available for spending in goods and
services
Cash flow: is the cash inflows and cash outflows over a period of time
Cash inflows: are the cash received by a business over a period of time
Cash outflows: are the money paid out by a business during a period of time
Cash inflows Cash outflows
1.By the sale of goods for cash 1.By purchasing goods or raw materials
2.Through payments made by debtors 2.by the payment of wages, salaries and
3.by borrowing money from an external other expenses
source 3.By purchasing fixed assets
4.Through the sale of assets by the 4.by repaying loans
business 5.by repaying creditors of the business
5.from investors putting more money
into the business
The business can have cash flow problems:

1- By allowing the customers too much credit period, in order to attract more
customers
2- By purchasing too many fixed assets at once
3- Expanding too quickly and keeping high inventory levels. This means that cash is
used to pay for higher stock levels. This is often called over trading
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Cash flow forecast
A cash flow forecast can be used to tell the managers:
1- How much available for paying bills, repaying loans or for buying fixed assets
2- How much the bank might need to lend in order avoid insolvency
3- Whether the business is holding too much cash which could be put to a more
profitable use
Example:
January February March
Opening bank balance 10,000 15,000 (5000)
Cash inflows 35,000 45,000 50,000
Cash outflows 30,000 65,000 40,000
Net cash flows 5,000 (20,000) 10,000
Closing bank balance 15,000 (5000) 5000
Opening cash balance: is the amount of cash held by the business at the start of the
month.
Closing cash balance: is the amount of cash held by the business at the end of the
month.
Note the following:
 A positive net cash flow will increase the closing cash balance
 A negative net cash flow will reduce the bank balance
 Each closing balance becomes the opening of the next month
 The bank account will become overdrawn in February
Using the cash flow forecast:
1- Starting up a business
The first new months in a new business is a very high cost period that requires too much
spending. Premises must be bought or rented, machinery, raw materials, advertisement.
New business usually fail because owners don’t realize how much cash is needed in the
first few months. A cash flow forecast usually can be used to avoid these problems from
occurring
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2- Keeping the bank manager informed.
The bank manager will need to see how big a loan or overdraft is needed, when is
needed, how long the finance is needed for and when it might be repaid therefore he
needs to see the firm’s cash flow forecast
3- Running on an existing business

Any business can run out of cash and require overdraft, perhaps because of an
expensive fixed asset being bought or a fall in sales. Borrowing money needs to be
planned in advance so that the lowest rates of interest can be arranged.
4- Managing cash flows

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. If it seems that the business is likely to have a
very high bank balance. The business may decide to:
- Pay of loans to reduce interest charges
- To pay creditors quickly to take advantage of discounts
Cash flow problems can be solved by:

 Bank loan: to borrow money over the time when you have a negative cash flow
problem
 Overdraft: which allows a business to borrow flexibly according to its needs up to
an agreed limit
 Leasing: a business can lease or rent instead of buying an asset, this will avoid the
business spending large sums of cash at one time
 Delay spending: on capital equipment
 Hire purchase: the business will not pay the full amount at once so this will avoid
the business paying large sums of cash at once.
 Cut overheads: spending that doesn’t directly affect output such as advertising
costs
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Chapter 23
Income statements
What are financial accounts and why are they necessary?
Accounts are financial record a firms transactions.

Final accounts are produced at the end of the financial year and give details about profit
and loss made over the year and the worth of the business. Limited companies are
required by law to publish their final accounts.
At the end of each financial year, the accountant will produce the final account of the
business. These will record the main financial results over the year and the current
worth or value of the business.
How profit is made

Profit = total sales revenue – total costs
If the costs exceed the sales revenue, then the business has made a loss. The profit
formula also suggests that this surplus can be increased by:
- Increasing sales revenue by more than costs
- Reducing costs of making products
- A combination of reducing the costs and increasing the sales revenue
Why is profit important?
Profit is important to private sector businesses for several reasons
1- Reward for enterprise
2- Reward for risk taking
3- Source of finance: this allows for expansion
4- Indicator for success
128
In public sector or state owned businesses, profit might also be important. The
government might set profit as one of the targets to be achieved for these businesses to
develop the state owned businesses or make it more efficient.
In social enterprises, profit also has an important role to play. Social enterprises cannot
usually survive unless they make a surplus from their operations in addition to making
with their own aims such as protecting the environment and benefiting disadvantaged
groups in society
Income statement (profit and loss account)
They show to managers and business owners and other account users, whether the
business had made a profit or loss over a period of time. This time period is usually one
year but income statements could be constructed monthly too.
The importance of income statements
In case of making profit In case of making loss
Managers should ask themselves Managers should ask themselves
- Is it higher or lower than last year - Is this a short or long term problem
- If lower why is profit falling - Are other similar business also
- Is it higher or lower than other making loses?
similar businesses - What decisions can we take to turn
- If lower what can we do to become losses into profits
more profitable as other businesses
The income statement for limited companies will also contain:

- Corporation tax paid on the company net profits
- The dividends paid out to shareholders
- The retained profits left after these two deductions
- Results from the previous year to allow for easy comparisons
Using income statement in decision making:
Managers can use the structure of income statement:
- To help them in making decisions based on profit calculations.
- To help them making decisions about launching or stop producing a product
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The information contained in the income statement
Sales revenue: this is the value of all goods and services sold during the year
Cost of goods sold: the cost of producing or buying the goods actually sold by the
business during the year
Gross profit: is the difference between sales revenue and the cost of goods sold.
Retained profit: is the profit left, or reinvested back into the business after all payments
have been deducted.
Example:
2021 2022
Sales revenue 1250 1300
Cost of sales (900) (900)
Gross profit 350 400
Other expenses including (155) (160)
interest
Net Profit 195 240
Corporation tax (35) (40)
Dividends (120) (130)
Retained profits for the year 40 70
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Chapter 24
Balance sheets
The balance sheet records the value or worth of the business’s assets and liabilities at a
particular time at the end of the financial year. Sometimes referred to as the statement
of the financial position.
Assets are those items of value which are owned by the business. They may be fixed
(noncurrent) or short term current assets.
Liabilities are debts owned by the business.
Interpreting balance sheet data

 Shareholders can see if their investments in the business has increased or fallen in
value over the last 12 months by looking at the total equity
 Shareholders can also analyze how expansion of the business has been paid for.
By taking out long term loans or by using retained profits or by increasing share
capital.
 No business can survive without working capital. It is used to pay off short term
debts. If these debts cannot be paid because the business does not have enough
working capital, the creditors could force the business to stop trading.
 This is the total long term and permanent capital of the business which has been
used to pay for the assets of the business.
Important calculations by using the data from the balance sheet:

 Working capital can be calculated from the balance sheet data. This is a very
important concept. It is also known as net current assets. It is calculated by :
Working capital = current assets – current liabilities
 Capital employed can be calculated by using data from the balance sheet
Capital employed = shareholder’s funds + long term loans
131
Items Explanation
Assets Items of value which are owned by the
business
Non-current assets Land, building, equipment and vehicles,
Likely to be kept by the business for
more than one year.
Current assets Cash, debtors and inventories. These are
assets that are owned by the business
and held for less than a year.
Total assets Non-current assets + current assets
Non- current liabilities (long term Are long term borrowings which does
liabilities) not have to be repaid within one year
Current liabilities Are amounts owned by the business
which must be repaid within one year
(bank overdraft & creditors)
Total liabilities Non- current liabilities + current
liabilities
Working capital Current assets – current liabilities
Net assets = total assets – total liabilities This figure will be equal to shareholders
funs (capital employed)
Shareholders fund ( capital employed) Is the total sum of money invested in the
business by the owners of the company
Share capital Is the money invested in the business
when shareholders buy shares in the
business
Profit and loss reserves Are retained profits from current and
previous years. This profit is owned by
the shareholders but it was not paid to
them as dividends. But kept and
reinvested in the business.
Total shareholder funds/equity Total assets- total liabilities
132
Balance sheet
Assets 2020 2021
Noncurrent assets (fixed assets)
Land Building 450 440
Machinery 700 600
1150 1040
Current assets
Inventory (stocks) 80 50
Trade/account receivables (debtors) 50 60
cash 10 15
140 125
Total assets 1290 1165
liabilities
Current liabilities
Trade/account payable (creditors) 65 40
Bank overdraft 65 60
130 100
Noncurrent (long term) liabilities
Long term bank loan 300 245
Total liabilities 430 345
Net assets (total assets – total liabilities) 860 820
Shareholder equity
(shareholder funds)
Share Capital 520 500
Retained profit/loss 340 320
Total shareholder equity/funds 860 820
133
Chapter 25
Analysis of account
Analysis of published account
Analysis of published accounts means using the data contained in the accounts to make
some useful observations about the performance and financial strength of the business.
Without analysis of accounts it is often impossible to tell whether a business is:
 Performing better this year than last year
 Performing better than other businesses
Ratio analysis of accounts
There are many ratios which can be calculated from a set of accounts
Profitability rations
Ratio Formula Analysis
The higher the result, the
Return on capital 𝑵𝒆𝒕 𝒑𝒓𝒐𝒇𝒊𝒕 more successful the
𝑿 𝟏𝟎𝟎
employed (ROCE) 𝑪𝒂𝒑𝒊𝒕𝒂𝒍 𝒆𝒎𝒑𝒍𝒐𝒚𝒆𝒅 managers are in generating
profit from the capital
Capital employed = employed in the business,
Shareholders’ funds + making higher profits from
long term loans each dollar invested in the
business.
This result is before other
Gross profit margin % 𝑮𝒓𝒐𝒔𝒔 𝒑𝒓𝒐𝒇𝒊𝒕 expenses have been
𝑿 𝟏𝟎𝟎
𝑺𝒂𝒍𝒆𝒔 𝑹𝒆𝒗𝒆𝒏𝒖𝒆 deducted. Business is more
successful at converting
sales revenue into profit.
The higher the result the
Net Profit Margin (also 𝑵𝒆𝒕 𝒑𝒓𝒐𝒇𝒊𝒕 more successful the
𝒙𝟏𝟎𝟎
known as profit margin) 𝑺𝒂𝒍𝒆𝒔 𝒓𝒆𝒗𝒆𝒏𝒖𝒆 managers are at generating
profit from sales (or the
more successful at
controlling their fixed costs
134
The concept of liquidity
Liquidity is the ability of a business to payback its short term debts. If a business cannot
pay its suppliers for materials that are important to production of if the business cannot
repay an overdraft when required to, it is said to be illiquid.
Liquidity ratios
Ratio Formula Analysis
This result means that

the business could only
just payoff all its short
Current ratio 𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝒂𝒔𝒔𝒆𝒕𝒔 term debts from current
𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝒍𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔 assets.
The safe current ratio
would be between 1.5
and 2. If the current
ratio is less than 1, it
would mean that the
business could have real
cash flow problems. It
could not off its short
term debts from current
assets
Because inventories
cannot be converted in
cash in a short period of
time. Therefore acid
Acid test ratio 𝒄𝒖𝒓𝒓𝒆𝒏𝒕 𝒂𝒔𝒔𝒆𝒕𝒔 − 𝒊𝒏𝒗𝒆𝒏𝒕𝒐𝒓𝒚 test ratio is used. A
𝒄𝒖𝒓𝒓𝒆𝒏𝒕 𝒍𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔 result of 1 would mean
that the business can
pay off its short term
debts from its most
liquid assets. This is
usually considered to be
an acceptable acid test
result.
135
Limitation of using accounts and ratio analysis
 Managers will have access to all accounts data but the external stakeholders will
only have access to published accounts which contain data required by law
 Ratios are based on past accounting data and may not indicate how the business
will perform in the future
 Accounting data will be affected by inflation over time, and comparison between
years may be misleading.
Users of the accounts

stakeholders Reason
Shareholders  Examine how profits have been used by the business
 Some shareholders may prefer receiving the max dividend
possible
 Other may be interested in long term reinvesting to increase
the value of their shares
 The balance sheet may contain some information that
indicates the value of the company
Managers  Important source of information regarding the performance

of the business
 Managers will monitor sales performance through revenue
figures and compare against costs
 Allow them to judge whether or not the business will face
liquidity problems in the near future
 Retained profits may also provide some indications of the
capital available to invest within the business
Employees  Employees may be interested in profits after tax if their pay
is related to the amounts of the profits made
 Interested in the level of dividends if they are shareholders
Banks  They will use the accounts to check whether the business is
able to pay back the loans or not
136
Suppliers  suppliers will have specific interest in the liquidity position of
the business
Government  government may be interested in the income statement to
check the income after tax value
Other  managers of other companies may be interested to check
businesses the financial documents before deciding whether to take
over the business or not
 competitors may be interested to compare the performance
to other competitors in the same field
137
Chapter 26
Government Economic Objectives and Policies
Government Economic Objectives:
 Low Inflation
 Low Unemployment
 Economic Growth
 Balance of payment between export and import.
Low Inflation:
- Inflation is the increase in the average price level of goods and services over time.
- It occurs when prices rise
These are the problems a country will have with rapid inflation:
- Workers’ wages will not buy as many goods as before, this means that people’s
real income will fall. Real income is the value of what can be bought of an income.
- Prices of goods produced in one country will be higher than those produced in
other countries. People may buy from foreign countries instead. Jobs in that
country will be lost.
- Business will be unlikely to want to expand and create more jobs in the future.
- The living standards are likely to fall.
Therefore, low inflation can encourage business to expand, and it makes it easier for a
country to sell to sell its goods and services abroad.
Low Unemployment:
- When people want to work but they cannot find jobs, they are unemployed
These are the problems unemployment causes:
- Unemployed people do not produce any goods or services. The total level output
of a country will be lower than it could be.
- The government pays unemployment benefits to those without jobs.
138
Therefore, low unemployment will help to increase the output of a country and improve
workers’ living standards.
Economic Growth:
- An economy is said to grow when the output of goods and services in a country
increases.
The Gross Domestic Product (GDP): The value of goods and services produced in a
country in one year. When a country is experiencing economic growth, the standard of
living of the population is likely to increase.
When the GDP of a country is falling, there is no economic growth. The problems will
be:
- As output is falling, fewer workers will be needed, and unemployment will occur.
- The number of goods and services people can afford to buy in one year will
decline.
- Business owners will not expand their firms.
Economic growth makes a country richer and allows living standards to rise.
139
The business cycle:
Economic growth is not achieved steadily every year. There are often years when the
economy does not grow at all, or when the value of GDP falls.
140
Stage of Business Key Features Reaction of the business
Cycle
Growth - Increase consumer - Opportunity to
expenditure charge higher prices
- Production rises - Number of start-up
- Business confidence business increases.
strengthens
- Investment increases
- Unemployment is
generally falling
- Higher living standards
- GDP is rising
Boom - Rate of inflation - Firms face increasing
increases pressure to increase
- Business costs will be prices.
higher - Businesses seek
- Firms will become alternative methods
uncertain about the to increase prices.
future. - Wages rise to retain
- There will be shortage skilled workers.
of skilled workers
Recession - Too little spending - Financially insecure
- GDP actually falls firms.
- Most businesses will - Firms seek new
experience falling markets for products.
demand and profits - Make workers
- Workers may lose their redundant
jobs
- Government interest
rate falls
Slump - Serious and long- - Firms offer basic
drawn-out recession products at low
prices
141
- Unemployment will - Business may close
reach very high levels factories to reduce
- Prices may fall capacities
- Many businesses will - Marketing
fail to survive this concentrates on low
period. prices.
Balance of Payment:
- Exports are good and services sold by one country to people and businesses in
other countries. This brings money (foreign currency) into a country.
- Imports are goods and services bought in by one country from other countries.
They must be purchased with foreign currency, so money flows out of the
country.
- Governments aim to achieve equality or balance between imports and exports
over a period.
The balance of payment is the difference between a country’s exports and imports.
Problems with imports:
- Delays in delivery might delay production
- Cost of returning any faulty product
- Higher cost of transport
- Quality issues/ speed of delivery is important
- Tariffs
- Quotas
- Language barriers
- Different quality standards between countries
Problems with Exports:

- Language Barriers
- Trade Barriers
- Culture
142
- Different Quality standards between countries
- Expensive if the currency is appreciated.
Government Economic Policies:

The main ways in which a government can influence an economy; sometimes called
economic policies are:
- Fiscal Policies: taxes and government spending
- Monetary Policies: interest rates
- Supply Side Policies
Government
Policies
Demand Side Supply Side

Policies Policies
Fiscal Policy Monetary Policy

Taxes Interest Rates
143
Fiscal Policy: Taxes and Government Spending
Direct Tax How would Businesses be affected?
Income Tax: By an increase in the rate of income tax:
This is a tax on people’s - Individual taxpayers would have a lower
income; usually the disposable income.
higher the person’s - They would have less money to spend and save
income, the greater the - Businesses would be likely to expect a fall in
amount of tax they sales.
have to pay to the - Managers decide to produce fewer goods.
government. - Some workers could lose their jobs.
Who is most affected by the increase in income tax?
- Businesses who produce luxury goods are likely
to be the most affected.
- Businesses producing essential goods and
services are less affected.
Profit Tax (Corporation There would be two main effects of lower profits
Tax): after tax:
These are taxes on 1. On the business:
profits made by - Managers would have less finances to put back
businesses, usually into businesses.
companies. - The business will find it more difficult to
expand; new projects, like additional factories
or shops may have to be cancelled.
2. On the Owners of a business:
- There will be less money to give back to the
investing owners.
- Fewer people will want to start their own
businesses if they consider that the
government will take a large share of any profit
made.
- Companies’ share prices could fall.
144
Indirect Tax How would businesses be affected?
Value Added Tax (VAT) - Prices of goods in the shops would rise.
Are added to the price - Consumers may buy fewer items as a result.
of the products. This - The demand on products will be reduced.
makes goods and - Businesses may become under pressure to
services more raise wages, which will force up the costs of
expensive for making products.
consumers.
Governments often
avoid putting these
taxes on really essential
items such as food,
because this would be
considered unfair.
Changes in Government Spending:

Governments in most countries spend the tax revenue they receive on programs such
as:
- Education
- Health
- Defense
- Law and order
- Transport- roads and railways.
When governments want to boost economic growth, they can increase their spending
on these programs. This will create more demand in the economy, more jobs and the
GDP will increase.
145
Monetary Policy- Interest Rates:
An interest rate is the cost of borrowing money. In most countries the level of interest
rates are fixed by the government or the central bank via monetary policy.
The following are likely to be the main effects of higher interest rates:
The Effect Explanation
Firms with existing - This will reduce their profit
variable interest loans - Less money is available to distribute to the
may have to pay more owners
interest to banks. - Less retained profit of the business for
expansion.
The decision of - New investment in business activities will be
expansion might be reduced
delayed - Fewer new factories and offices will be built.
- Entrepreneurs might not afford to borrow the
capital needed.
Consumers’ mortgage - The higher interest rate will reduce their

loans (to buy houses or incomes
expensive items as - Demand on goods and services will fall as
cars) consumers have less money to spend.
- Consumers will be unwilling to borrow money to
buy these expensive items.
- Business might have to reduce output and make
workers redundant.
Higher interest rates in - They will be able to earn higher rates on their
one country will capital. By switching their money into this
encourage foreign country, they are increasing the demand for it.
banks and individuals - The exchange rate will rise. This will have the
to deposit their effect of having imported goods appear cheaper
capitals in that and exports will be more expensive.
country.
146
Supply Side Policies:
These policies are used by governments to improve the efficiency of supply of good and
services:
- Privatization: It’s very common now. The aim is to use the profit motive to
improve business efficiency.
- Improve Training and Education: Governments aim to improve the skills of the
country’s workers. This is particularly important in industries like; computer
software which is often short of skilled staff.
- Increase competition in all industries: This may be done by reducing government
controls over industry or by acting against monopolies.
How businesses might react to changes in economic policies:
Government Policy Possible Business Decision Problem with Decision
Change
Increase income tax- - Lower prices on - Less profit will be
this reduces the existing products to made on each
amount consumers increase demand. item sold (reduces
have to spend - Produce cheaper gross profit
products to allow for margin)
lower prices. - The brand image
of a product might
be damaged by
using cheaper
versions of it.
Increase tariffs on - Focus more on - It might still be
imports domestic market as more profitable to
locally produced export
goods now seem - Foreign materials
cheaper. and components
- Switch from buying might be of a
imported materials higher quality.
and components to
locally produced ones.
Increase interest - Reduce investments - Other companies
rates so future growth will might still grow so
be less.
147
- Develop cheaper market share will
products that be lost.
consumers will better - Depends on the
be able to afford product, but
- Sell assets for cash to consumers start to
reduce existing loans think that the
quality and brand
image are lower.
- The assets might
be needed for
future expansion.
148
Chapter 27
Environment and Ethical Issues
Business Activity and the Environment
Social Responsibility: When a business decision benefits stakeholder other than
shareholders, for example a decision to protect the environment by reducing pollution
through using the latest and greenest production equipment.
Business activity aims to satisfy customers’ demand for goods and services- but it often
has an impact on the environment. The “environment” means our natural world.
Here are some examples of how a business activity impacts the environment:
- Aircraft jet engine emissions damage the atmosphere
- Pollution from factories’ chimneys reduce air quality
- Waste disposal can pollute rivers and seas
- Transport of goods by ship and trucks burns fossil fuels such as oil which create
carbon emissions and may be linked to global warming and climate change.
Externalities
It’s very important to distinguish between private costs and benefits for the business
and external costs and benefits that affect the society.
Private External
Cost Benefit Cost Benefit
The costs paid by The gains to a The costs paid by The gain to the
the business. business. the rest of the rest of the society
EX: Cost of goods EX: Sales revenues society other than other than the
sold and other that lead to profit business as a business, resulting
expenses result of the from business
business activity activity.
149
Benefit for the society Cost of the society
- Jobs will be created - Waste products will cause
- Variety of goods and services pollution
provided - Smoke damages health
- The firm will pay taxes and - Traffic jam
therefore government provides - Noise/visual pollution
public services.
Social Cost and Social Benefit:

Social benefits include financial benefits to a company and other positive benefits that
result from a particular business activity decision.
Social Costs = External Costs + Private Costs
Social Costs are the financial costs to the company and other negative costs that result
from a particular business activity or decision.
Social Benefits = External Benefits + Private Benefits
Sustainable Benefits:
Sustainable development is development that meets the needs of the present without
compromising the ability of future generations to meet their own needs. Trying to
achieve economic growth but without damaging the environment and society for future
generations.
Sustainable Development: What can businesses do?

1- Use renewable energy – by fitting solar panels or buying energy that uses
renewable sources such as wind and tidal power.
2- Recycle waste – by reusing water and other products that would otherwise be
wasted or disposed, total use of resources is reduced.
3- Use fewer resources – lean production is about managing production so
efficiently that the 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.
150
Responding to environmental pressures and opportunities:
The following three types of controls help to explain why many businesses now respond
to environmental pressures. Being “environmentally friendly” can create a positive
public opinion of a business and lead to opportunities for sustainable growth.
1- Pressure Groups:
A pressure group is made up of people who want to change business or
government decisions, and they take actions such as, organizing consumer
boycotts.
A consumer boycott is when consumers decide not to buy products from
businesses that do not act in socially responsible ways.
Pressure groups are becoming increasingly powerful. They can take some very
effective actions against businesses that are not socially responsible. Pressure
groups can organize consumer boycotts.
Pressure groups activities are unlikely to result in change in business actions

when:
- What the firm is doing is unpopular but not illegal, such as testing drugs on
animals.
- The cost to the business of changing its method is poorer image and lost sales
- The firm sells to other businesses rather than to consumers – public pressure will
be less effective.
2- Laws passed by the government:

Governments can make business activities illegal. For example:
- Locating in environmentally sensitive areas such as national parks.

- Dumping waste products in rivers or seas – though it’s sometimes difficult to
prove which form is responsible for this.
- Making products that cannot be easily recycled.
151
3- Financial penalties, including pollution permits
Pollution permits are licenses to pollute up to a certain limit. Governments can
sell a permit to factory that produces pollution. If it produces more pollution than
the permit allows, it must either buy more permits from “clean” firms or pay
heavy fines.
Either way, the cost of the business increases. Firms producing much less
pollution can sell their permits to “dirty” firms. This encourages firms to produce
in less polluting ways.
Other financial penalties could be additional taxes on goods or factories that

create pollution.
Ethical Issues:
Ethics are the values and principles that influence how individuals, groups, and societies
behave.
Business Ethics are values and principles that operate in the world of business. Ethical
issues are based on a moral code, sometimes referred to as “doing the right thing”.
Examples on business decisions:
- Take or offer bribes to government officials or people working for other firms, for
example, to get confidential information.
- Employ child workers, event though, it might not be illegal in some countries.
- Buy in supplies that have led to damage to the environment, for example, wood
obtained from cutting down rain forests.
- Agree to fix high prices with competitors.
- Pay directors large bonuses and pay large profit payouts to owners, while
reducing workforce at the same time.
People can have very different views to ethical decisions in business, this is because
people have different moral codes, therefore different ethical standards.
152
The two most extreme views are:
1- As long as the business does not deliberately break the law, then any decision it
makes is acceptable. Businesses want to make profit after all.
2- Even if certain activities are not illegal, it is unethical, and therefore it is wrong to
do them despite any increase in profits that might occur.
153
Chapter 28
Business and the international economy
Globalization: is the term being widely used now to describe the increases in worldwide
trade and movement of people and capital between countries.
In many ways, the world is becoming one large market rather than a series of separate
national markets. The same goods and services can be found in many countries in the
world. Workers are finding it easier to move between countries, and capital is also
moving more freely from one country to another.
There are several reasons for this increase in global trade and movement of products,
people and capital (globalization):
- Increasing numbers of free trade agreements and economic unions between
countries have reduced protection for industries. Consumers can purchase goods
and services from other countries with few or no import controls such as tariffs.
- Improved and cheaper travel links and communications between all parts of the
world have made it easier to transport products globally.
- The internet allows for easy price comparisons between goods and services from
many countries. Online or e-commerce is allowing orders to be placed from
anywhere in the world.
Globalization potential opportunities for business:
Opportunity Impact on the business
Benefits Drawbacks
- Start selling exports to This increases potential It can be expensive to
other countries sales, perhaps in sell abroad, and it may
- Opening foreign countries with fast affect domestic products
markets growing markets.
Online selling allows
orders to of goods to be
sent in from abroad.
- Open It could be cheaper to It is expensive to set up
factories/operations in make some goods in operations in other
other countries (multi- other countries than countries.
national) home.
154
- Import products from With no trade The product may need
other countries to sellrestrictions, it could be maintenance or repairs,
to customers in home profitable now to import and the parts may not be
country. goods and services from available in the foreign
other countries and sell country.
them domestically.
- Import materials and It could be cheaper to Will the suppliers be
components from other purchase these supplies reliable? Will the
countries – but still from other countries distance add too much
produce final products now that there is free to the transport cost?
in home country. trade. This will help
reduce costs. These
supplies could be
purchased online.
Globalization potential threats on a business

Threat Impact on the business
Benefits Drawbacks
Increasing imports into The increased If those competitors
home markets from competition could force offer cheaper products,
foreign competitors local businesses to or higher quality, local
become more efficient. sales will fall.
Increasing investment Local firms could become This will create further
from multinationals to suppliers to those competition – and the
set up operations in multinationals and their multinationals may have
home country sales could increase. economies of scale and
be able to afford the best
employees.
Employees may leave This might encourage In some professions,
business that cannot pay local businesses to use a employees will have
the same or more than range of motivational more choices about
multinational methods to keep their where they work and for
competitors workers which business.
Businesses will have to
make effort to retain
their best employees.
155
Why some governments introduce tariffs and quotas:
 Import tariffs were explained as being one form of taxes that governments can
use to raise revenues.
 They are forms of protectionism – to protect domestic industries from
competition that might otherwise close them down. Foreign competitors might
be able to produce products much more cheaply and if they were allowed to
import without any restrictions, then local firms might be forced out of business.
This would reduce employment and incomes.
Exchange Rates:
It is the price of one currency in relation to another.
How are exchange rates determined?
Most currencies are allowed to vary or float on the foreign exchange market according
to the demand and supply of each currency. For example, if the demand of Euro is more
than the demand for USD, then the price of Euro will rise.
Changes in Exchange rates affect business in several ways:
- Currency depreciation: occurs when the value of currency falls; it buys less of
another currency.
- Currency appreciation: occurs when the value of a currency increases; it buys
more of another currency.
 Exporting Business:
When the currency is appreciated it buys more of a foreign currency than before.
Exporters have a serious problem when the currency of their country appreciates
because they become more expensive for other countries, and this can affect the
sales of the business and their profit as a result.
 Importing Business:
- An importing firm will have higher costs if the exchange rate of its currency
depreciates, but will have lower costs if exchange rate appreciates; while an
exporting firm will be able to reduce its prices with currency depreciation, but
might have to raise prices with currency appreciation.
156
 Multi-national businesses:
- Are those businesses with factories, production, or operations in more than one
country.
- Following are some of the reasons why firms become multinational
organization:
 To produce goods in countries with low costs, such as low wages.
 To extract raw materials which the firm may need for production or refining
 To produce goods nearer to the market to reduce transport costs
 To avoid barriers to trade put up by countries to reduce the imports of
goods
 To expand into different market areas to spread risks
 To remain competitive with rival firms which may be expanding abroad.
- The impact on countries they operate in (Host Countries):

- Jobs are created, which reduces the - The jobs created are often for
level of unemployment unskilled assembly line tasks.
- New investments in buildings and Skilled jobs are not usually created
machinery, increasing outputs of in host countries receiving
goods and services in the host multinationals.
country. - Local firms may be forced out of
- New technology can benefit the business. Multinationals are often
host country by bringing in new more efficient and have lower costs
ideas and methods. than local businesses.
- Some of the extra output maybe - Repatriation of profit. Profit is often
sold abroad, which will increase the sent back to the multinational’s
exports of the country. Also, home country.
imports may be reduced as more - Multinationals often use up scarce
goods are now made in the country. and non-renewable primary
- Taxes paid by multinationals resources in the host country.
increase government funds. - As multinational businesses are
very large they could have a lot of
157
- More product choices are available influence on both the government
to consumers and more and economy of the host country.
competition. They might ask the government for
large grants to keep them operating
in the country.
158

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O.L Business PDF

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Part 1- Business activity

 Chapter 1: Business activity

Part 2- People in business

 Chapter 6: Motivating Employees

 Chapter 10: Marketing, Competition and

 Chapter 17: production of good and

 Chapter 21: business finance

 Chapter 26: Government economic

Factors of production: Are the resources needed to produce goods or

The Economic Problem

Specialization and division of labor;

Added Value: Is the difference between the selling price of a product or

Types of business activity

Tertiary sector business activity involves providing services to the

Difference between developing and developed countries.

Public sector purpose: The purpose of most of public sector is to provide

Enterprise and entrepreneurship:

Characteristics of a successful entrepreneurs:

Most governments offer support to entrepreneurs. This encourages them

Content of a business plan:

1- To assess whether it’s possible to turn a business idea into a

Measuring and comparing business size.

4- By value of output and sales.

Who would find it useful to compare the size of the business?

How to measure business success?

What is the difference between a merger and a takeover? (Integration)

Benefits of Vertical integration

Why does some business fail?

Problems occurring when business grow and how to overcome them.

Integrating with another business Because managers from different

Why do some business remain small?

Business organization in the private sector.

Limited liabilities: The liability of shareholders in the company is only

Private Limited Public limited

A partnership is a form of unincorporated business that is owned and

1-Private limited Companies.

A form of incorporated business (which means that the company have a

It is an incorporated form of business where the shares are sold the

A board of director: Are professional managers who are elected to run

Dividends: Payments made every year by the company to the

Other forms of business in the private sector.

Is a form of a company where two, or more business start a project

Franchise: a business system where entrepreneurs buy the right to use

Franchising: It is a form of a business in which a firm which already

Public corporations: a business organization that are owned and

 They are owned and controlled by the state

Objectives of public Corporations.

The benefits of setting business objectives:

 Profit is usually the main objective of the business that is owned by

Growth is one of the main objective of most businesses because:

To provide a service to society.

Why does people work?

 For money: to pay for life necessities and other needs

In business motivation results from the individuals desire to achieve

Taylor believed that employees are motivated by money alone. To get

Esteem needs: to be respected and have their achievements recognized