Intrapreneur

→ intrapreneur: people within an established business who think and act like entrepreneurs.

benefits of an intrapreneur
1) More innovation and creativity - Entrepreneurial employees are risk takers - this is
beneficial as it may mean they find new methods to do what has already been done
before – this can help improve existing products and services or to fill a gap in the
market. As a result your business may evolve and grow as a result of having these
entrepreneurial-minded individuals.
2) Ability to spot opportunities - having an entrepreneurial mindset can allow these
individuals to try and seize new opportunities – this is because individuals with these
mindsets are always looking for ways to develop the business – as a consequence this
can lead to more success within the business and growth.
3) Improved employee morale and productivity - having intrapreneurs in a business
empower them to make decisions. This can allow employees to feel more engaged
within the business + understand their value within the business - if they feel more
engaged this can allow them to carry out their goals and targets + if they understand
their value it can make their job feel more meaningful and more likely to have a positive
associations with the business - as a result it can help increase productivity.

Business growth
1.3.3 Business growth
Reasons for business growth:
● More power over suppliers and customers - maximise profits
● Reach more customers - more sales - possibility of more profit
● Sense of achievement looking back at growth
● Business can raise its profile

Why and how a business might grow internally (organic growth)?

Expanding existing operations by..
● Grow sales of existing products
● Develop new products
● Diversify into new markets where it can sell the product

External growth
● Mergers - when two businesses (or more) mutually agree to join together
● Takeovers - when one business decides to unilaterally acquire another

Friendly takeover: majority of the shares are bought in order to help the business and directors
will advise shareholders not to resist
Hostile takeover: directors will advise current shareholders to resist and prevent the sales of
majority shares
Types of mergers
Horizontal - when one business joins with another at the same stage of the same production
process eg car manufacturer and another car manufacturer
Vertical - when a business acquires another business at a different stage of the same
production process
Conglomerate Diversification - when a business joins with another business operating in a
different sector eg;car manufacturer joins with a confectionery business.

impact of a merger/takeover on stakeholders

Investors: All deals are likely to cost money but higher returns are possible if the
deal is successful.

Managers: Duplication of roles is common in a merger or takeover and therefore this

can result in one losing their position.

Suppliers: Suppliers could benefit as their business may increase. However, bigger
businesses are likely to have more bargaining power.

why a merger/takeover may or may not achieve objectives

Problems of mergers and takeovers:
● Higher costs for doing deal eg legal and finance
● Clashes between people when working - different work styles, what they prioritise and
how they make decisions - can lead to friction, higher costs and mistakes being made.
● Inefficiency as business is too big - problems coordinating it, communicating to staff and
building a common sense of purpose.

importance of joint ventures and strategic alliances as methods of external growth

Joint venture = new legal entity to collaborate together

Advantage - share their expertise and assets in areas where they feel this will bring benefits

Strategic alliance = completely independent businesses but collaborate on a given project

Advantages:
 ● achieve economies of scale through lowering costs and increasing production (shared
resources).
● Enhancing businesses skills set by learning from each other

CRM
3.1.7 Customer relationship marketing (CRM)
→ Customer-relationship marketing (CRM): gathering and analysing data about customers to
understand their behaviours and take appropriate actions to move them towards a purchase.

Costs and benefits of CRM

Benefits
1 analysing customers buying patterns can allow you to make recommendations of what else
they may want to buy
2 allow you to understand what incentives to offer customers to gain their loyalty and repeat
purchases — if you’re able to generate repeat purchases it could lead to more revenue from its
customers while keeping its marketing costs low + can lead to more sales from the existing
customer base at relatively low cost — increasing sales, can enable the business to grow + It
can lead to more economies of scale and higher profit margins and profits.

Costs
1 investment required in data systems to gather tools and staff skills in order to analyse
information on customer enquiries and buying patterns - which can be expensive +
time-consuming

4.3 Capacity utilisation and outsourcing

4.3.1 Significance and measurement of capacity utilisation

Capcity: measures the maximum amount of output a firm can produce at a given moment with
its existing resources.
Factors of production: are inputs into the transformational process of business, such as land,
labour, capital and enterprise.
Capacity utilisation: measures the existing output relative to the maximum possible output

The capacity of a business depends on the number and quality of its factors of production.
(How many staff does the business have and how well trained are they? How efficient is its
transformation process?)

Formula for capacity utilisation

Impact of operating under capacity (low capacity utilisation)
If capacity utilisation is low this means existing output is low compared to what could be
produced. This means the business is inefficient as the resources are not being fully utilised
This is because the business could be producing more (assuming the demand was there). As a
result they aren’t earning the most revenue and profit they could receive if there was demand.

A business with low capacity utilisation not only wastes resources but has high unit costs. This
will reduce profit margins if the price stays the same. If the firm tries to increase the price to
cover the higher unit costs, it may find that sales fall and the situation becomes even worse.

Benefit of operating at higher levels of capacity

Higher levels of capacity utilisation are desirable because they spread the fixed costs of a
business over more units (eg 10m fixed costs and 1 unit produces vs 10m fixed costs and 10m
units produced = $1 per unit vs $10m). This is because as output expands, these fixed costs
can be divided by more units. Higher capacity utilisation therefore helps reduce unit costs and,
therefore, increase profit margins. This is very significant because it means there are major cost
advantages of having higher capacity utilisation

How can you improve business position - by increasing the capacity utilisation, either by
boosting demand (which may be through marketing activities) or reducing the capacity of the
business if some of it is no longer needed.

Methods of improving capacity utilisation

If Capacity is under- utilisation, in this situation the business may:

→ Do nothing - If it’s seen as a temporary issue, the business may accept under-utilisation for a
short time
→ Renew its marketing activities to boost demand - Changes in the promotional strategy may
be made: new offers, increased efforts by the sales team or more advertising may help increase
sales
→ Reduce the level of capacity - Overtime if demand is lower than capacity, the business may
rationalise. Rationalisation means the business may reduce its capacity levels. In general, it
is easier to reduce the labour input by making people redundant or asking them to go part-time.
Reducing the land and capital inputs can be more difficult.
→ Subcontract for other firms - If you do have excess capacity, you may offer your resources to
other firms and produce on their behalf. This is subcontracting.

Key terms:
Capacity under-utilisation occurs when a business is producing less than the maximum
amount it can produce, given its existing resources.
Rationalisation occurs when a business reduces the scale of its operations and reduces its
capacity level.
Subcontracting occurs when one business employs another business to undertake some of
the work.

High levels of demand relative to capacity

Why might it be not be sustainable in the long run?

If demand is high, a business may be operating close to 100 percent capacity utilisation. This
may be possible in the short run, but it may put pressure on resources if the business is
operating at full capacity for a sustained period of time. This may result in employees feeling
under pressure and becoming tired. Moreover, there may not be time for day-to-day
maintenance and repair of equipment, increasing the risk of breakdown or failure. As a result a
business may, therefore, wish to operate below 100 per cent capacity utilisation over a period.

How can a business respond to high demand

In the short term, they may try to increase the capacity by opening longer and asking employees
to work more hours than usual.

→ subcontract output to other producers - brings risks because the original business
is no longer directly responsible for the quality. It is also expensive because the subcontractor
will want to make a profit. However, using a subcontractor can allow a business to continue to
meet its customers’ orders and may maintain goodwill.
→ start a waiting list - can increase the sense of exclusivity, which may suit premium brands, but
customers may switch to another business where they can buy the products they want.
→ Increasing prices - Higher prices can be used to reduce demand. This can increase profit
margins, but the business will need to set the price at the right level to avoid ending up with
demand becoming too low.

—- However if demand is going to remain high, a business may look to invest to increase its
capacity over time.

Capacity shortage
● If demand is too high for the firm’s capacity, there is a capacity shortage
How to tackle capacity shortage:
1) Do nothing - some businesses may build on the image that they are difficult to get into or
exclusive as part of their brand. Moreover a business may think that the excess demand
is temporary and so not want to make any major changes, given that it may not last. As a
result In this situation people will simply have to wait. A business may start a waiting list
or limit the number any one person can buy.

2) Expand capacity - If you believe demand is likely to remain high then you may increase
capacity. This will require investment but may well be worthwhile due to the extra sales
you can generate

3) Outsource - use of other producers to produce for you - brings risks because the original
business is no longer directly responsible for the quality. It is also expensive because the
subcontractor will want to make a profit. However, using a subcontractor can allow a
business to continue to meet its customers’ orders and may maintain goodwill.

Alternatively, a business may outsource some of its non-core activities so that it can
focus on the essential elements of the business. This may enable managers to
concentrate on what they do best and make use of the skills and experience of
specialists in other areas. The other business / produced may have economies of scale
that make it cheaper to use them than to try to do it yourself

4) Increase the price - business may increase the price to bring demand down to the ‘right’
level. This means the price can therefore act as a rationing mechanism to reduce the
demand, and at the same time it can increase the profit margin per item.

4.3.2 Outsourcing

The impact of outsourcing on a business

Outsourcing occurs when the business uses other producers to undertake some of its
operations.

● A business may outsource some aspects of its operations which it does not regard as
critical to what it does and/or where it may benefit from the expertise and scale of others.

Outsourcing may enable a business to:

→ to use the specialist services of another business - outsourcing supplier may be using
specialist equipment which it is not cost-effective for the business to invest in for itself, given the
scale of this particular operation
→ benefit from lower costs - a business that specialises in an activity (such as customer credit
checks) rather than trying to learn how to do it itself
→ increase capacity
A business must consider this when outsourcing
→ impact on costs - Theproviderwillwanttotakea profit and therefore the business needs to
make sure that outsourcing is of better value than doing it itself. Sometimes a business may
outsource initially but, as the scale of the activity grows, it may be worth taking the activity back
in-house

→ impact on quality - quality work from a specialist provider may be better than the business
could produce itself, but the business needs to be sure. The business is not directly in control of
what is happening and therefore must ensure that specifications and expectations are clear and
that there are systems in place to monitor quality

→ reliability of delivery - must be able to deliver reliably, on time, so that the rest of the business’
operations are not held up

→ the response of the existing workforce - when outsourcing a business is moving production
away from the business itself. This may lead to a loss of jobs. This would reduce the need for
these jobs internally. As a result this may meet with resistance.

5.4 Costs

Costs: expenses that a business has to pay to engage in its trading activities.
Revenue: the income a business receives from selling its goods or services

formula for revenue

quantity sold x average selling price

formula for profit

total revenue - total cost
total costs = fixed + variable

The need for accurate cost information

1 help managers to make important decisions.
2 managers can calculate whether or not a business is likely to make a profit or a loss.

From this information, a range of other decisions may follow, including:

» whether or not to start up anew business
» whether to go ahead with a planned expansion
» whether there is a need to reduce waste
» whether to engage in some activity, such as increasing security to prevent loss or wastage.

Without precise information on costs, managers cannot make decisions that are likely to prove
beneficial to a business.
Types of costs
fixed costs
★ costs that do not change when a business alters its level of output.
eg, rent, management salaries and interest payments made by the business.
The reason that these costs do not alter is that the business simply uses its existing facilities
fully at times when it is receiving more orders.

variable costs
★costs that alter directly with the level of a firm’s output.
- This means that a firm increasing its output is likely to have to pay higher variable costs,
whereas one reducing its output could expect variable costs to fall.
eg, fuel, labour, raw materials and components
formula for total costs
fixed costs + variable costs

Use of total costs

Managers can use this information in making decisions on levels of output and prices to be
charged. For example, firms that have very high levels of fixed costs, perhaps due to needing
expensive equipment, will seek to produce large quantities of output. This reduces the effect of
fixed costs on the selling price by spreading them over a large quantity of sales.

direct costs: costs that can be related to the production of a particular product and vary directly
with the level of output.
- Can only be identified with each unit of production.
eg, Raw materials and fuel
- normally (but not always) variable costs.

indirect costs:
are overheads that cannot be allocated to the production of a particular product and relate to the
business as a whole.
- Cannot be clearly identified with a unit of production
eg, Rent, insurance, electricity.
- always fixed costs.

what is a problem faced by businesses when attempting to calculate costs accurately

1 allocating or dividing up indirect costs between different elements of the business. This can be
a particular problem for large businesses that produce a range of products. ( eg, marketing and
administration)
2 It is difficult to calculate the total cost of producing a single unit of output because indirect
costs can be allocated in different ways and this can result in different cost figures. As a
consequence, managers may make decisions that are incorrect.

full costing: full costing allocates all the costs of production for the whole business. Therefore,
these costs are absorbed into each output unit. This is also known as absorption costing.

Full costing
→ a method of deciding upon costs
- normally divides costs into direct costs and indirect costs
This approach to costing involves charging all the costs of a particular enterprise to a unit of
output --- Thus, all the costs associated with the production of a particular product are
‘absorbed’ by it.
- This approach may require managers to allocate indirect costs to all the business’ different
products.
can allocate (or divide up) indirect costs between different products produced by a business
using a range of criteria, such as the percentage of total indirect costs used in the production of
each product.

Contribution: can be defined as the difference between sales revenue and variable costs of
production.

Contribution costing
- based on clearly classifying costs as fixed or variable.
- used to pay the fixed costs incurred by a business. Any contribution remaining after this
transaction is profit for the business.

The contribution-costing method

sometimes referred to as ‘marginal costing’.
Contribution costing excludes fixed costs as a central part of the calculation and only allocates
variable costs.
- valuable in a business that has a number of products, or several factories or divisions

The difference between contribution and profit

Contribution is the surplus left over from sales revenue (or total revenue) once variable costs
have been paid.
Profit is any surplus from sales revenue over a trading period once all costs have been paid.

The limitations of contribution costing and when it might be used

Limitations
- It can be difficult to distinguish between fixed and variable costs accurately. For example,
some costs have elements of both and are known as semi-variable costs (eg, landline
telephone costs) -- The monthly line rental would be a fixed cost, because it remains the same
irrespective of the level of business activity. However, the call charges are variable as they are
likely to alter directly with a business’ level of activity.

- Fixed costs don't always remain constant when the level of output alters. Some fixed costs
tend to be higher as a result of a business increasing its level of output. For example,
promotional costs or website maintenance costs may increase in line with production levels ---
This makes the division of costs into fixed and variable elements less accurate.
- The tax authorities in some countries don't accept the use of contribution costing.

Uses
1) for 'one-off' special orders -- can help managers to decide whether to accept
an order as it shows the variable costs of producing products. If a business
receives a number of non-standard orders, it may use contribution costing to
determine whether or not to accept such orders.

- If the business were to use the full costing method, the order would be rejected
because the total costs (FC + VC) of producing the order would not be covered
by the price that the customer is willing to pay.
- Using contribution costing, however, it is only the marginal cost of the order that
needs to be considered. Any revenue gained above the marginal cost is a
contribution to fixed costs and will be profit after all fixed costs have been
covered.

2) for 'make or buy' decisions - this considers the difference between selling price
and variable costs
- business might need to make a decision whether it should continue to
manufacture all products or whether it is more profitable to buy them from
another business
-- If it continues to manufacture all its products, the business will be getting a
contribution to fixed costs if the price that it receives for the product is higher than the
variable costs of its manufacture.
--- If it decided to stop production and buy the products from another manufacturer, this
contribution to fixed costs would be lost. The products manufactured by the business
would have to cover more of the fixed costs than previously.

average costs: cost per unit

marginal costs: the extra cost resulting from producing one additional unit of output.
- In most situations the marginal cost of an additional unit of a product is the variable cost
of its production
what happens to average costs if business expands its levels of production
Average costs tend to fall as a business increases its production levels because its fixed costs
are spread over a larger output --- so the amount allocated to each product is smaller as the
level of production rises.

cost-plus pricing: the process of establishing the price of a product by calculating its cost of
production and then adding an amount which is profit.
contribution pricing: based on the notion that any price set that is higher than the variable cost
of producing a product is making a payment towards fixed costs

benefit of contribution pricing

1) offers firms flexibility when deciding upon the amount to charge for their products.
- setting price significantly higher leads to each sale making a major contribution to fixed
costs and profits
- this may be necessary if the business has high fixed costs

2) Using contribution as a guide for pricing may result in low levels of sales because
competitors’ prices are lower or their responses may be unpredictable

Managers of all businesses constantly monitor costs to ensure that…

» the costs incurred by separate areas of the business (divisions or branches, for example) do
not differ significantly without good reason

» costs are not increasing unexpectedly and are similar to the forecasts set out in the company’s
budgets

» the business continues to hit its profits targets.

how can a business improve costs and profit

1 company can use cost data as indicators of best practice and seeks to duplicate this approach
in other areas of its business to improve performance and profits.

2 senior managers to set cost targets for areas of the business controlled by junior managers
and to reward achievement of these targets -- motivate junior managers to reach these targets
--- can increase productivity as more motivated
In this way, large organisations are more able to control costs and improve profits.

benefits of cost decisions in making decisions to improve the business

1 to reduce its costs following such an analysis. If it is placing increasingly large orders with its
suppliers, it may be able to negotiate larger discounts for bulk orders. Alternatively, if it is not
using all of its supplies, it may reduce the size of its orders and its costs. This is vital if the
supplies are perishable.
2 Monitoring labour costs is important to maximise profits. For example, if a business hires too
much labour and that labour is not fully employed then the business is incurring costs that are
not matched by revenue. Profitability will be damaged as a consequence.

you can also use cost data to reveal underlying problems that can be corrected to
improve the business’ profits some examples are...

1 rising labour costs within a business when output is not

- increasing could show that employees are working less efficiently. This could be caused
by a range of factors, including a lack of training or poorly motivated employees. Once
the cause of the rising labour costs has been identified, managers can take appropriate
remedial action

2 rising costs of raw materials overtime could indicate that there are high levels of waste or that
suppliers have increased costs significantly. In either case, the cost information could alert
managers to a problem which needs attention to improve profits.

3 business’ fixed costs may increase more rapidly than might be expected over time. Managers
responsible for controlling these costs may take action in response.

special-order decisions: occur when a business’ managers have to decide whether or not to
accept unusual customer orders.

special order decisions: price lower than normal

In these circumstances, the concept of contribution can be applied to assist the business in
reaching a decision on whether or not to accept the order.
factors to consider:
1 Will additional fixed costs result from accepting the order? If a firm has to pay an extra, then
profits will be unchanged as a result of accepting the order. Therefore, having sufficient spare
capacity is an important prerequisite of accepting such an order.

2 Might the order lead to higher variable costs? accepting a large order might mean that
workers are paid overtime, pushing up variable costs. In these circumstances the order would
not be worth accepting.

3 business needs to ensure that the customer will not simply resell the product to other firms at
the usual selling price, thereby making a quick profit at the expense of the manufacturer.

A business may accept a lower price than normal, even if it doesn’t produce a positive
contribution, if it believes that it will result in more sales at higher prices in the future.
special order decisions: price higher than normal

could be seen as beneficial but if the order requires products to have a specification higher than
normal or to be delivered at short notice, it is likely that the supplier will face higher costs. This
may make the order unprofitable.

If the selling price exceeds the variable costs and no additional fixed costs are incurred, the
order would be worthwhile and would result in increased profits.
The firm must:
1 calculate the extra variable costs associated with the order – overtime pay for workers and
more expensive materials, for example

2 consider whether it had sufficient spare capacity to meet the order – avoiding additional fixed
costs

3 decide whether accepting the order would generate extra contribution and profits

benefit of accepting special order decisions vs risk to evaluate

1) may offer long-term benefits.

The customer may return with further orders and it may help to increase brand
awareness in new markets --- It may help the business concerned to achieve its
corporate aims, especially if these are growth or increasing market share.

risk to evaluate:
1) managers may believe that allowing their products to be sold in large quantities at lower
prices could damage its brand image -- it may, for example, make the product appear
less exclusive and make it difficult to charge higher prices in other markets --- Sales and
profit margins may fall as a consequence.

What is break even output?

the level of output or production at which a business’ sales generate just enough revenue to
cover all its costs of production.
- At the break-even level of output, a business makes neither a loss nor a profit.

reasons for business’ managers may use break-even analysis

1 to help decide whether a business idea will be profitable and whether it is viable
2 to help decide the level of output and sales necessary to generate a profit
3 to support an application by a business for a loan from a bank or other financial institution
4 to assess the impact of changes in the level of production on the profitability of the business
5 to assess the effects of different prices and levels of costs on the potential profitability of the
business
6 to judge whether launching a new product or entering a new market will be profitable given
expected sales forecasts

Calculating break-even output

fixed costs / (selling price per unit - variable costs per unit)
= fixed costs / contribution per unit

example of a complete break even chart

revenue
- begins at 0 incase of scenario of no customers = no revenue
- ends at 45 incase of scenario of where customers pay the average
fixed
straight line as it doesn't change
variable
- beings at 0 incase of scenario of no customers = no variable costs
total costs
- begin from where fixed costs is
- line should be parallel to the variable costs line

Showing profits and losses on a break-even chart

margin of safety: measures the quantity by which a firm’s current level of sales exceeds the
level of output necessary to break even.

formula for margin of safety

current level of sales − break-even output
- if percentage use same equation but divide by current level of sales and x 100

benefits of break-even analysis

1 It is a simple technique, allowing most entrepreneurs to use it without the need for expensive
training. Because of this, it is particularly suitable for newly established and small businesses.
2 can be completed quickly, providing immediate results.
3 can support a business' application to a bank for a loan.
4 businesses can forecast the effect of varying numbers of customers on its costs, revenues
and profits.
5 used to analyse the implications of changing prices and costs on the enterprise's likely
profitability.

limitations of break-even analysis

1 It assumes that all products are sold + Assumption that costs and revenue is represented by
straight lines is unrealistic.

2 Simplification of the real world. Businesses do not sell all their products at a single price and
calculating an average is unlikely to provide accurate data. The technique is also difficult to use
when a business sells a number of different products.

3 Costs do not rise steadily as the technique suggests. As we have seen, variable costs can rise
less quickly than output because of the benefits of buying in bulk.

4 only be as accurate as the data on which it is based. If costs or selling prices are incorrect,
then the forecasts will be wrong.

5 Unlikely that fixed costs remain unchanged throughout

Break-even analysis offers some support to businesses,and especially to start-up enterprises or

those seeking to expand by launching new products and/or entering new markets. However, it is
only a guideline and its value should not be overstated