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O Level Business Studies by Faisal Durrani 0303-4898049 Topic: Purpose of Business Activity Any activity, which is carried out to satisfy the needs of people e.g. production, services or exchange. Reasons for Business Activity To pay for accruals or creditors of raw materials To re-invest in the business for the purpose of growth Added Value To satisfy the needs of people It is the second important objective of To provide jobs for the people private sector businesses. They want to To make best use of available add value in their products to maximize scarce resources To bring economic growth in the country profits and to increase the number of customers buying business products (i.e. market share). Objectives Added value is not a profit, which is the Objectives are the aims to work towards. difference between the excess income and These are the set targets towards which expenses and costs. Added value is the businesses devote all of their resources. simply the difference between sales and Business objectives might be long medium cost of material and components. or short term. When a business tries to make product Objectives in private sector worth more than its sales price, it is Profit maximization called adding value. Profit is excess of income over expenses. Two ways of adding Value Any private sector business operates with Use of modern technology in production the objective of profit maximization. It is New machines make less use of the prime motive of private sector raw material by less or no wastage businesses. of raw material; Assume you are the owner of private Improves quality business, and you want to maximize the Control the cost by saving on raw profit in your business. material and time on production State how will you do it? due to speedy production Profit is important for private businesses: Effective Marketing To attract future investors; Attractive packaging To pay back the loans Persuasive advertising To pay for the interest on loans Sales promotion such as buy one To bring the business in better cash get one free or discount prices position Page 1 O Level Business Studies by Faisal Durrani 0303-4898049 Growth Government or state owned business Internal growth is when business grows objectives its size by introducing new range of Providing services of public or products, or by opening of new branches merit goods to all regardless of External growth is when business merges people’s status in the economy or takes over Reasons for Growth Creating new jobs Offering higher status to the Charging lower or least possible prices Providing employment for every one owners and employees or Welfare of the community managers Operating at cost (break even – Economic growth neither loss nor profit) Minimizing the risks of losses or failure Economies of scale (i.e. when business operates at large scale and reduces its average cost ) Increase in market share Survival Survival is avoiding of going out of market. Survival is required at three occasions When business is at its initial stage of operations When business is facing stiff competition When economic conditions in the country are worse or in recession. Page 2 O Level Business Studies by Faisal Durrani 0303-4898049 Stakeholders The groups or individuals who have some interest in the activities of the businesses e.g. owners, workers, managers, consumers, government, community as a whole Types of Stakeholders Owners (or investors) Managers Employees Interest of stakeholders Ways of affecting the business Profits (or dividends); Performance Performance or growth; Satisfying all the stakeholders; Pay rise and fringe benefits Performance or growth; Pay rise and fringe benefits; Job security Taking out the investment or increasing the level of investment Making effective or ineffective decisions about the allocation of business resources Working with devotion, and motivation; Disrupting production or going on strike Buying more of existing products; buying new products; switching over demand to the products of other businesses Preparing rules and regulations Customers Reasonable prices; product quality; variety of goods Government Business growth; profitability; business dealings with employees and customers Business growth; caring of environment; creation of new jobs The whole community Forming pressure groups against business’ socially unacceptable activities Page 3 O Level Business Studies by Faisal Durrani 0303-4898049 Topic: Types of Business Activity When countries switch over from primary Levels of economic activity to secondary sector, it is called At primary stage of production goods as industrialization. raw material are extracted from natural When countries move from secondary to resources or from earth surface or sea. tertiary sector, it is called The extraction of resources involves oil or Deindustrialization. coal extraction, agriculture, fishing, or Deindustrialization is very much involved forestry. At this stage of production no in developed economies due to the reasons value is added but simply extraction takes below: place. (1) Improved Standard of living of At secondary stage of production goods people – People in developed or raw material extracted from natural economies have increased their resources at primary stage of production is income. Both husband and wife brought into process using machines or work, hence their standard of labour or combination of both to form living improved and they started finished goods. outsourcing of services such as At this stage of production goods laundry, catering, and baby sitters. previously called raw material now Hence tertiary sector grew. became finished goods, which means (2) Technological Advancement in value is added into raw material to form a primary and secondary sector – finished good. Capital insensitivity of primary and E.g. raw wood cut from the forests is now secondary sectors have increased, being transformed into furniture using saw which brought increase in mill and the labour. productivity of these sectors. In At tertiary stage of production goods order to deliver this increased produced at secondary stage are brought production of these sectors to into packaging, distribution, advertising, business customers or to the and sold to the final consumer. At this consumers, greater tertiary sector stage value is being added by advertising activities were needed. This also and delivering to the final consumers. grew tertiary sector. Reasons for growth of tertiary sector in (3) Imports from newly developed economies industrialized countries – Newly (Or reasons for growth in employment industrialized countries such as through tertiary sector) china, Taiwan, Korea are Page 4 O Level Business Studies by Faisal Durrani 0303-4898049 producing various types of Incentives for businesses and consumers’ durable goods at lower individuals to work hard as no costs. Hence developed economies tax is placed started importing from these Disadvantages of market / free market countries, which also demanded economic system greater of tertiary activities. Due to absence of government, following Growth of tertiary sector increased the demand for labour in this sector. drawbacks occur in this system Perfect competition but Economic Systems chances of monopoly An economic system is the environment No public or merit goods under which countries’ system of work is No or less law and order carried out. Such systems of the Demerit goods / Externalities economies are: are common Market Economy – also called Public and merit goods are both capitalistic economy services provided by the government. Advantages of market / free market Public goods are provided free of economic system charge such as road system within the Private ownership of property city. Merit goods are provided against Profit maximization as an some charges so that everyone could objective for all the businesses Price mechanism means prices afford it such as postal services, railway services, electricity, and are controlled by demand and telecommunication. supply (i.e. market forces) Command / Planned Economy Freedom of choice for consumers means they can buy what they wish to buy Variety of goods and services produced Advantages of Command / Planned Economy Government ownership for all the properties within the country Since all the businesses are run by Efficiency of businesses to win the government, therefore no profit larger share in the market or to maximization is set as an objective maximize sales or increase and every object is run for Social number of customers welfare. Page 5 O Level Business Studies by Faisal Durrani 0303-4898049 No one remains unemployed as state provides jobs for every one Availability of public and merit goods No incentives for individuals or businesses to work hard Natural monopoly exists means most free market economy, and China had the most command economy. Market economy is also called free economy, capitalistic or laissez faire economy. Command economy is also called communism, socialism, planned, and government is the only monopoly centrally planned economy. power to control the resources and If question is set on benefits of mixed allocate the economic resources economy, your answer will be based on efficiently benefits of both command and free market Control over economic conditions such as boom and recession economic systems Privatization (or De-nationalization) Disadvantages of Command / Planned It is when the government sector Economy organizations are sold to the private sector Instead of price mechanism, individuals or groups. When privatization Government controlled prices takes place public sector organizations prevail hence black marketing is become public limited companies and their common share are traded in stock exchange. No competition exists as all is controlled by the government and consumers get no choices, varieties and even if someone is rich, he or she may not spend for his standard of living. Advantages of privatization (or arguments in favour of privatization) New owners target profits hence work efficiently Competition in private sector increases hence privatized Mixed Economy organizations work efficiently Features of both command and market and keeps the prices lower economies are found in mixed economic Investment and growth in the system privatized organizations also There is no country in the world which increase completely follows either market or command economy. In past, USA had the Important decision of these businesses are taken without any political influences as there Page 6 O Level Business Studies by Faisal Durrani 0303-4898049 is no more government By capital employed intervention By amount of profit Government earns revenue By number of employees – this method when it sold the business on of measuring the size of the business profit and later when the require all the businesses under privatized business earns profit, comparison to be from the labour intensive government gets corporation method of production. Otherwise if one or tax on their profits others are capital intensive while others Disadvantages of privatization (or are labour intensive, it will not be a fair arguments against privatization) comparison. Profit motive of new owner of By value of output and sales – in this the privatized business require method we measure the sizes of the him to discontinue services in businesses using the value of nature of unprofitable areas output produced by the businesses. In Inefficient workers might lose order to use this method, it is necessary their jobs as the new owner that all the businesses under comparison wants efficiency; it will bring should be from similar industry otherwise unemployment it will not be a fair comparison. New owner might create By amount of capital employed – it is monopoly also as it is being obvious that capital intensive businesses inherited from natural usually have higher amounts of capital monopoly of the government employed due to the amount of money New owner might charge invested in machines or equipment. higher prices also as his Therefore, fair comparison using this objective is profit method requires that all the businesses maximization; this way poor under comparison should be from capital community of the country intensive nature of production. might not afford this service By amount of profit – profit is a good Comparing the size of the business method of measuring the size of the There are four major sources of measuring business if it is used in terms of profit as the size of the businesses including: return on capital employed, otherwise it By number of employees will not be a fair method of comparison, By value of output and sales because profit does not only depend on Page 7 O Level Business Studies by Faisal Durrani 0303-4898049 value of output and sales but also at Vertical Integration – there are two types effective decisions of managers. of vertical integration. Business Growth Vertical backward integration – when a Growth in businesses takes place manufacturer integrates with its supplier of internally and externally. In internal raw material or components. growth, businesses introduce new range of Benefits of vertical backward products or open the new branches of the integration business, whereas in external growth, merger and takes over takes place. Here we are referring to external growth Assured supply of raw material or components No more supply of raw means merger and take over. material or components to Merger – is when two or more businesses competitors from integrated join each other with their own consent; supplier both lose their original existence and Cost of raw material or become a new business. components will remain under Take Over – is when one business buys control as no more profit will another business, but the buying business be charged by integrated maintains its original existence and supplier business being bought becomes part of the Profit margin of the supplier buying business. will be enjoyed by the Integration – is a term being used for expanded business both merger and take – over. Vertical forward integration – when a Types of Integration manufacturer integrates with its retailer or Horizontal Integration – is when two retail outlets. similar types of businesses integrate with Benefits of vertical forward integration each other, e.g. two restaurants merge with each other. Assured outs for sales of manufacturers products Benefits of horizontal integration Reduces the competition among the businesses Opportunities of economies of scale for both the businesses Larger market share for the No more sales of competitors’ brands through integrated outlets Profit of the retailers will be enjoyed by the expanded business businesses Page 8 O Level Business Studies by Faisal Durrani 0303-4898049 Direct information about the customers’ preferences and complaints, hence greater consumers’ satisfaction Conglomerate – also called diversified integration; this type of integration takes place by taking over or merging with absolutely a new type of business. E.g. merging of shoe manufacturer with Construction Company Benefits of conglomerate integration Share of ideas among businesses Minimizing the risk of losses or failure – support of businesses to each other against failure or losses Businesses prefer to stay small due to the reasons below: Type of industry in which businesses are operating requires them to stay small because they need to have direct contact with the customers otherwise satisfaction of customers might not take place and business’ failure may be the result. E.g. retail industry Second factor is market size; the smaller businesses deal with less number of customers, hence they do not need to have large amounts of resources. Third factor is owners’ preference to keep business smaller, because he or she wants to have proper control and management of the business. If they go too large, they might experience diseconomies of scale. Page 9 O Level Business Studies by Faisal Durrani 0303-4898049 Topic: Types of Business Organizations Sole Trader Disadvantages of sole trader Risk of making ineffective or A business in which single owner owns wrong decisions as no one is the business; however, it could be considered for suggestion before controlled or run by more than one person, taking the decision which are the employees of the sole trader Unlimited liability of the owner such as shop assistants. means the owner is fully liable for Advantages of a sole trader the debts or losses of the business Few legal requirements to run the business – the only requirement is to register with government tax even he has to sell his personal property Expansion becomes difficult due to office, and in some countries the lack of finance as the owner name must be registered with the himself is the only source of Registrar of Business. investment The owner is his own boss, who Owner can not get the services of controls over his business and he specialists such as experienced does not need to ask any one accountants or sales men due to before making a decision lack of finance The owner is free to choose his Discontinuity may happen if the holidays, hours or work, prices of owner goes sick or become goods, and whom to employ unsound mind or dies The owners keeps personal Partnership contacts with customers and know A business which involves voluntary their needs, hence customers could association of two to twenty people as be satisfied to greater extent partners in the business The owner gets incentive to work Partnership Deed hard as he enjoys full amounts of Also called partnership agreement; all the profits partners are required to sign a written The owner can keep all the partnership agreement before starting business matters secrets except partnership business so that in business from tax office disputes could be avoided. A partnership agreement may include the following: Page 10 O Level Business Studies by Faisal Durrani 0303-4898049 The amount of capital invested in the debts and losses of the business the business by all the partners and he will be the one who will sell The nature of work the partnership will carry out The profit and loss sharing ratio all of his property to compensate the losses No separate legal identity which The duration of the partnership means in partnership also there will The arrangement for absence, be a risk of discontinuity but not as retirement, and how new partner much as in sole trader ship. If there will be admitted are two partners, one dies, Advantages of partnership More capital than that of sole trader business as there are more business could be at the risk of discontinuity. (Businesses with no separate legal than one person as investor in the identity is called unincorporated business (however in banking business) partnership, there could be more Risk of disagreement among than 20 partners as investors, partners on various decision because the banking business making needs as much capital as possible) Dishonesty of one particular Responsibility of work, decision partner may put every one into loss making, and burden of unlimited Limited capital as the partners will liability can be shared among the only be limited to 20 partners partners except banking partnership Motivation for all the partners as Limited Companies greater the hard work and Businesses with limited liability, dedication is contributed by the incorporate businesses (or separate legal partners, the more profit is enjoyed identity) and registered with registrar of by all the partners business are called limited companies. Disadvantages of partnership Limited Companies are of two types: Unlimited liability for all the Private limited Company partners, however in limited Public limited Company partnership, all the partners will Before we proceed to these two types of have limited liability except one limited companies, it is important to know partner who will be responsible for some terms: Page 11 O Level Business Studies by Faisal Durrani 0303-4898049 Shares – are the certificates, which show shareholders could elect new directors of the ownership of the shareholders in the the company. company according to the amount of Dividends – the profit share paid to the money they have invested in the company. shareholders as return of their investment; Shareholders – are the people who own it is not necessary that the shareholders are or hold shares in a company. paid dividend every year. Articles of association – a document Formation of limited companies shows set of rules under which company Step # 1 will run its business’ activity or day to day limited companies prepare and submit two operations documents to the registrar of companies Memorandum of Association – a for registration process, which are document which gives details about the completely checked company such as the official name of the Step # 2 company, and its address, the amount of checked and satisfied, the private limited share capital the directors intend to raise, company is issued certificate of and the number of shares to be bought incorporation; however public limited Certificate of Incorporation – a company will be issued certificate of certificate issued by the registrar of trading, which is a permission to issue company when either private or public prospectus and raise minimum share limited company gets completed the capital requirement of £50,000 from registration process general public by issuing shares Prospectus – a document issued by the Step # 03 company as an invitation to the investors capital, the public limited company is that they can make investment in the issued certificate of incorporation company; the prospectus include Private Limited Company – limited published accounts of the company and company which are called family run auditors report to help the investors in business and they are allowed to issue investment decisions. shares to friends, relations, and to the Annual General Meeting – an annual known people. meeting the directors of public limited Advantages of private limited company companies call upon so that shareholders Both public and private Once the document is After raising required share Large sum of capital unlike of the company could be informed about unincorporated businesses as there the performance of the company, and are no limited number of investors Shareholders have limited liability Page 12 O Level Business Studies by Faisal Durrani 0303-4898049 Control and ownership remains in Higher status of the company, the hands of shareholders and they hence providers of finance such as are directors of the company also banks are ready to lend, and trade Disadvantages of private limited creditors are available for credit company supplies Complex legal formalities to form the business (refer to formation of the business) No transferability of shares to others without the consent of other directors or shareholders No secrecy as registrar of companies require the business matters opened in the form of prospectus which could be seen by any member of the community Not allowed to issue shares to the Disadvantages of public limited company Complex legal formalities (refer to the formation of the company) Strict regulations and control over public limited companies to protect the interest or rights of the shareholders Large businesses hence difficult to control and manage Divorce between control and ownership as control remains in the general public hence finance hands of directors, and ownership problem might arise in the hands of shareholders Public Limited Companies Expensive to sell shares due to cost Companies which can issue shares to the of issuing shares such as general public to raise finance; they are commission for the intermediaries quoted or listed in stock exchange, which helping selling of shares such as means companies’ shares can be traded in banks or underwriters; and the stock exchange. thousands or even more number of Advantages of public limited company copies of prospectus Limited liability for the shareholders Very large capital as shares are issued to the general public Freedom of transferability of Co-operatives These are the groups of people who agree to work together and pool their resources. They can take two forms: Producers or workers co-operatives – shares to others by selling shares in type of co-operatives, which produce and stock exchange own the business Page 13 O Level Business Studies by Faisal Durrani 0303-4898049 Retail or consumers’ co-operative – type of co-operatives, which buy and own the business Features of co-operatives One vote for one member regardless of number of shares Active role by the members in running of the business Equal profit or loss sharing ratio Joint Ventures A joint venture is when two or more businesses agree to start a new project Advantages to the Franchisor Expansion without making investment by the franchisor Regular income for the franchisor in the form of license fee and percentage of franchisee’s sales revenue to the franchisor Management of the shop or the branch goes to franchisee International recognition of the franchisor’s business Advantages to the Franchisees together, sharing the capital, the risk and No direct cost of advertising the profits. No risk of failure as the brand is Advantages of joint venture Sharing cost of the project Sharing of risk of loss Enjoying the same project as enjoyed by the bigger businesses Disadvantages of joint venture Disagreement among joint ventured businesses on use of the project or its maintenance already well known Training of the staff goes to franchisor Décor of the shop is standard and franchisee does not have to worry about Important decisions are taken by the franchisor Status of the business in the market hence providers of finance are Franchise ready to lend A type of business in which a franchisee Supply of raw material or (the person who opens the branch of the ingredients come from the business) takes the permission from a franchisor or arranged by the franchisor (the actual owner of the franchisor business) to start an independent business Advantages of franchisor can be taken by getting a license to use the name of the as disadvantages of franchisee and product or symbol of the franchisor’s advantages of franchisee can be taken business. as disadvantages of franchisor Page 14 O Level Business Studies by Faisal Durrani 0303-4898049 Public Corporations or Public Companies are government run organizations; please do not confuse them with public limited companies which are part of private sector organizations; also called parastatals. Advantages of public corporations Financed by the government hence they do not have to worry about financial problems, but they are aimed operate at cost Natural monopolies, hence no competition; only providers of services Everyone gets the services of the business at reasonable charges Contribute in employment in the country Disadvantages of public corporations Inefficient as no fear of going bankrupt or competition Highly influenced by political decisions Financed through public finance, hence government may charge higher taxes to cover the financial needs Risk of denationalization or privatization if proves to be sick unit (i.e. which cannot run their own) Page 15 O Level Business Studies by Faisal Durrani 0303-4898049 Topic: Government economic influences on government’s expenditures (i.e. providing business public and merit goods). Government’s economic objectives Types of Taxes Sustainable economic growth Direct Taxes are paid directly from Low rate of inflation incomes – for example, income tax and Low unemployment rate profit tax (i.e. corporation tax) Favorable balance of payment Indirect Taxes are added to the prices of Business Cycle goods and taxpayers pay the tax as they It refers to four phases of economic purchase the goods – for example, VAT. conditions including: Other types of taxes are import duties Recovery – refers to growth also. This and tariffs when GDP is rising, unemployment is Effects of income tax on businesses generally falling and the country is Fall in people’s disposable income enjoying higher living standards; most Less able to spend on buying of businesses will do well at this time. Boom – This is caused by too much goods and services Fall in demand for business goods spending. Prices start to rise quickly and – if goods are basic necessities there will be shortages of skilled workers. demand will not fall drastically; Business costs will be rising and firms will however if the goods are luxurious become uncertain about the future. items, definitely demand will fall Recession – Often caused by too little with the large proportion. spending; this is a period when GDP Effects of profit or corporation tax on actually falls. Most businesses will businesses experience falling demand and profits. Lower profits after tax Workers may lose their jobs. Less profit available for dividends Slump – A serious and long drawn out – less attraction for investors to recession. Unemployment will reach very invest high levels and prices may fall. Many Lower retained profits available for businesses will fail to survive this period. reinvestment – limited business Government economic policies growth Fiscal policy Government policy concerning with government’s income (i.e. taxes), and Effects of Indirect Taxes on businesses Rise in prices of goods, fall in demand Page 16 O Level Business Studies by Faisal Durrani 0303-4898049 However if goods are addictive or Monetary Policy is a change in interest demerit goods such as alcoholic rates by the government or central bank of products or cigarettes, people will the country. Monetary policy is also still buy and increased taxes can be concerned with money supply and transferred to final consumers exchange rates. In case of substitute goods or Exchange rate is the price of local goods with high demand elasticity currency in terms of foreign currency. will have fall in their demand and Effects of higher interest rates on businesses will either have to pay businesses higher portion of tax on their own Firms with existing loans with or transfer smaller portion of tax to have to pay high interest amounts, the people to keep control on which will reduce their profits after prices and maintain the demand tax and interests. Import Tariff is a tax on an imported Less profit available for dividends product. – less attraction for investors to Import Quota is a physical limit to the invest quantity of a product that can be imported. Lower retained profits available for Effects of import tariffs and quotas on reinvestment – limited business businesses growth Demand for local businesses Delay in planned investment products as imported goods will decisions – new projects will get become expensive; therefore sale halted of local products will increase Consumers with mortgages will Businesses depending on imported have to pay higher interest hence raw materials will have increase in their disposable income will fall their cost of production and will too leading their demand for goods have to set prices at higher level to and services to be reduced – cover their costs demand for basic necessities might Exporting businesses will lose their export markets due to retaliation action of other countries; they will not fall much, but for luxurious goods demand will fall Higher interest will also attract also place the similar types of foreign investors, who will demand duties. local currency and exchange rate of local currency will get appreciated Page 17 O Level Business Studies by Faisal Durrani 0303-4898049 Effects of appreciation in value of Trade Description Act: Deals in currency – imports will be cheaper but the issues of misleading exports expensive; ingredients or descriptions of the Effects of depreciation in the value of products currency – exports will be cheaper but Consumer Credit Act: Deals in imports expensive. the problems of goods bought on Supply Side Policies credit Privatization – private investors Sale of Goods Act: Deals in and owners make the business quality issues, or the product does efficient therefore the supply not function as stated increases; Consumer Protection Act: Deals Improved training and education – in pricing issues in which trained labour brings higher consumers are being mislead about productivity prices cut off Increased competition in all Monopoly industries – competition puts the It is the level of competition in which the businesses in to efficiency and most or whole of the supply is controlled efficiency brings increased supply by single dominated business. Government controls over business Government discourages the monopoly activity due to the reasons below: Government interferes in the activities of 1. Exploitation of consumers by the business, when they do the following: charging higher prices to make Exploit the consumers Exploit the employees higher profits 2. Prevention of new businesses Deal in illegal or socially harmful goods such as weapons or drugs getting into the market 3. Exploitation of consumers by Consumer Protection offering the customers bad quality In order to protect the rights of the goods consumers, government has made the laws Protection of Employees below: Employees are exploited in the following Weight and measurement Act: Deals in issues of measurement and weight of the products areas: Unfair discrimination when they apply for the jobs Health and safety at work Page 18 O Level Business Studies by Faisal Durrani 0303-4898049 Against unfair dismissal Wage protection Effects of minimum wage legislation Cost of labour will rise and Discrimination could be on the businesses will have to increase the following basis: prices to cover their cost of labour Race or colour - Race Relation Act Gender Discrimination - Sex Discrimination Act Disability Discrimination Disability Discrimination Act Skilled workers will ask for wage differentials (i.e. difference between the wage levels of skilled and unskilled labour), it will increase the labour cost further Businesses who are not ready to Other discriminations could be on the pay for minimum wage they will basis of religion or the incumbent is too reduce the size of labour, it will young or too old create unemployment Health and Safety at Work Protect workers from dangerous machinery – cage around the machine Protect workers from any unpleasant incidence – safety Training for the unskilled workers to get maximum benefit out of their presence Improved standard of living of unskilled workers – no more exploitation by the producers equipment and clothing Maintain reasonable workplace temperature Provide hygienic conditions and washing facilities Do not insist on very long work hours without providing breaks in the work schedule Minimum Wage legislation It is government set wage rate, which exists above the equilibrium wage rate (i.e. wage rate at which both labour and producer agree to work with each other) Page 19 O Level Business Studies by Faisal Durrani 0303-4898049 Topic: External influences on business Businesses become efficient Technological Change Quality of the product rises It refers to adoption of modern technology Variety of the products increases production system. Prices fall too Advantages Monopoly breaks down Competitive advantage for the business if competitors are still not involved in usage of modern technology Increased productivity Businesses adopt efficient methods of production and train its labour Damages from business activity Global warming caused by energy consumption Lower average cost Pollution of air, sea, and rivers Reduced labour size and lower cost Use of natural resources that are of labour Changes in production are adapted quickly therefore flexibility in businesses’ production methods and possible to meet consumers changing needs about production Disadvantages Expensive to install new production methods Training of labour is also a cost to the business Redundancy phases bring demotivation among employees Redundancy brings industrial disturbance and cost for the business Competition An activity among the businesses to win larger market share Government encourages competition becoming scarcer Above damages could be controlled by Laws banning certain waste disposal Permits big polluters pay more taxes Public opinions and pressure groups Pressure Groups These are the social groups which represent the general public against any of the wrong doings by the businesses. Pressure groups do the following to force the businesses stop doing anti social activities: Communicate the top management of the businesses Carry out strikes and boycott against business products Conduct news conferences because: Page 20 O Level Business Studies by Faisal Durrani 0303-4898049 Communicate with the government to formulate laws against businesses wrong doings Cost Benefit Analysis: is the valuation by a government agency of all external an private costs and benefits resulting from a business decision. External costs are the costs paid by the rest of society other than the business as a result of a business decision. External benefits are the gains to the rest Private benefits 1. The money made from the sale of the chemical products External costs 1. Waste products will cause pollution 2. Smoke and fumes may damage the health of residents 3. Parkland cannot new be used by local residents External benefits of society other than the business resulting 1. Jobs will be created from a business decision 2. Other firms may move into the Private costs are the costs of a business area to provide services to the decision actually paid for by the business. chemical firm Private benefits are the financial gains 3. Important chemicals will be made by a business as a result of a produced to benefits society business decision. Social Cost is the addition of the private and external costs of a business decision. Social Benefit is the addition of the private and external benefits of a business decision. Examples Private costs 1. Cost of land 2. Cost of construction 3. Labour cost 4. Cost of running the plant when it has been built 5. Transport costs of materials and completed products Page 21 O Level Business Studies by Faisal Durrani 0303-4898049 Supervisor’s or accountant’s salary Topic: Business Costs and revenue Electricity / Telephone bill Reasons for accounting for cost Transportation expenses To calculate profit or loss of the business Depreciation Break Even and Break Even Chart To make good financial decision Break Even – is the point where total such as which supplier to buy or revenue equals total cost; at this point where to locate there is neither profit, nor loss. To set a price Revenue – is the amount of money earned Types of Costs by the business through selling of goods or Direct Costs rendering services. The costs which are directly related to Revenue is calculated by: production; or the one which can not be Quantity sold * sales price avoided Sales price = Total revenue / number of These are usually Variable Costs, which units sold vary with the levels of production; the Break Even Chart – can be drawn to find higher the production level, the greater out the point of sales or production where will be variable cost. if business operates, it can avoid loss. Examples of direct / variable costs To draw break even chart following Cost of raw material Wages of factory labour information are required: Units sold / produced Indirect Costs Sales price The costs which are indirectly related to Variable cost per unit production or without which production Fixed cost may take place; they are also called Steps to draw break even chart overhead costs or fixed costs; they do not Step # 1 change with the level of production. Y-axis, and units sold / produced at X-axis Production is zero or 1,000; fixed cost will Step # 2 remain the same. total revenue However, overhead costs are semi-variable Step # 3 Plot the fixed cost or semi-fixed costs in which some portion Step # 4 Plot the total cost from the of the cost is fixed and the rest is variable. origin of fixed cost Examples of overheads / fixed / indirect Step # 5 costs the origin of zero Scale the costs / revenue on Calculate total costs and Plot the total revenue from Page 22 O Level Business Studies by Faisal Durrani 0303-4898049 Where total revenue line intersects total number of units produced and sold, cost line, it is a breakeven point where other factors may also bring Break Even can also be calculated using a this change such revenue increases formula: as quality increases, or variable Break Even = Total Fixed Cost / cost increases with overtime Contribution per unit payment for the labour Contribution per unit = Sales price per Average Cost unit – variable cost per unit It is the cost of one unit produced. It is The results of break even will be the same calculated by: using chart or the formula Total cost / number of units produced Uses of Break Even Chart Marginal Cost Easier to see profit or loss at a particular level Possible to see the effects of price or cost change on profit or loss Shows safety margin (i.e. Cost of one extra unit produced. It incurs only variable portion of total cost or marginal portion of total cost. Economies of Scale It is when business operates at large scale difference between maximum level and reduces its average or unit cost of of output and break even level of production. output) Purchasing Economies of Scale – when Limitations of Break Even Chart Assumes no closing stock, which is impractical Does not guide the managers about business buys large quantity of goods and gets discounts on bulk buying Marketing Economies of Scale – when sales of the business increases, its average other decisions such as controlling cost of distribution or advertising falls the wastage of raw material or Financial Economies of Scale – When quality improvement businesses borrow larger sum of capital Requires separate break even chart for every product Assumes fixed cost as fixed but and due to higher security against loan and larger amounts of loans, they are charged lower amounts of interest. sometimes in the long run fixed Technical Economies of Scale – cost increases as businesses grow Businesses adapts new technology and use Assumes sales revenue and variable costs increase with them to full extent, which reduces their average cost of production Page 23 O Level Business Studies by Faisal Durrani 0303-4898049 Diseconomies of Scale – Businesses In case of costs, if budgeted amounts are operate at large scale, but their average less than actual, the result is favourable costs start rising due to the reasons below: otherwise adverse or unfavourable Managers lose their control over In case of revenues, if budgeted amounts businesses and poor are less than actual, the results are communication takes place, which unfavourable otherwise favourable is not properly acted upon and Topic: Business Accounting work becomes ineffective Trading Account: shows how the gross Labour goes demotivated due to profit is calculated. their unsolved problems at work Cost of Sales: is the cost of items which place; this way labour loses its are being sold. It is calculated by: interest in work and productivity Opening stock + Purchases – Closing starts falling Stock Forecasts – are the estimates about the Sales Revenue: is the income earned by future changes in the market. the business from the sales of the goods. It Budgets – are the financial plans about the is calculated by: targeted incomes and expenses / costs of Sales Revenue = Units sold * Sales price the business. Gross Profit is the total profit earned by Budgets are useful in the following the business. ways: It is calculated by: Direction for employees and managers to work towards Motivation to work hard to achieve those targets Feeling of responsibility among employees No supervision cost because Sales revenue – cost of sales Profit and Loss Account: shows the net profit of the business. It is the detailed account of business income and expenses. Net Profit is calculated by: Gross profit – expenses Profit and Loss Appropriation Account: employees are responsible for is the detailed account showing the target achievement themselves distribution of profit. Decision making based on variance analysis It shows the amount of retained profit. Retained profit is the amount of profit Variance Analysis is the difference after payment of dividends, interest and between actual and budgeted amounts taxes. Page 24 O Level Business Studies by Faisal Durrani 0303-4898049 Retained profit is also called ploughed Shareholders’ funds + Long term back profit. liabilities + retained profit Balance Sheet: is the snapshot of the Analysis of published accounts business. It shows the total worth of the Accounting is called language of business. business. It speaks about the business’ profitability, Current Assets: are the short term assets liquidity, performance / efficiency, of the business, which include stocks, shareholders’ interest, and gearing. debtors, cash in hand, and cash at bank. In order to communicate about the Fixed Assets: are the long term assets of business, a distinct tool of the business is the business which remain in business and “Ratio Analysis”. for use for a longer period of time. They Ratio Analysis include land, building, motor vehicles, In ratio analysis, various formulas and computers etc. interpretation of results are carried out to Current Liabilities: are the short term communicate with the stakeholders of the debts of the business. It includes creditors, business. bank overdraft, and accruals. Profitability Ratios Long term liabilities: are the long term These compare the profits of the business debts of the business. They are long term with sales, assets and the capital employed bank loans or mortgages, and debentures. in the business. Working Capital: is the amount of capital These are used to assess how successful which business requires to run its day to the management of a business has been at day activities; without working capital earning profits for the business from sales business might not able to run its and from the assets employed. They are activities. widely used to measure the performance It is calculated by: of a company as it makes profit on sales Current assets – Current Liabilities by controlling the costs and expenses, and Net Assets: are the addition of fixed assets on the capital invested in the business. and working capital. It shows the net Gross Profit Margin worth of the business which is equal to It measures the gross profit at each one capital employed. unit of sales. It shows business’ Capital Employed: is the money invested performance of increasing sales and in the business using all of its resources. controlling cost of sales. Capital employed is also calculated by: Gross profit margin = Gross profit / Sales turnover * 100 Page 25 O Level Business Studies by Faisal Durrani 0303-4898049 Gross profit margin can be improved by These ratios show the liquidity of the following steps: business; means ability to pay for its short 1. Increase in sales through improving the term debts. product quality, advertising and marketing This ratio effects the business working activities capital position. 2. Controlling cost of production through Current Ratio reducing wastage of raw material and This is the proportion of current assets to labour idle time current liabilities. The standard ratio is Net Profit Margin 2:1. It means business should have double It measures the net profit at each one unit of its current assets than its current of sales. It shows business performance of liabilities to maintain its liquidity position. increasing sales, controlling cost of sales, Current Ratio = Current Assets / Current and expenses. Liabilities Net profit margin = Net (or operating) Always show your answer in ratio form. profit / Sales turnover * 100 Current Ratio can be improved by: Net profit margin can be improved by the 1. increasing cash or bank balance following steps: 2. increasing sales on credit or by cash Point 1 and 2 above under gross profit 3. by making more of closing stocks margin, and the point below: available in stock 3. Controlling expenses or overheads by 4. by depending less on credit supplies identifying excess amounts of expenses 5. by depending less on bank overdraft Return on Capital Employed It shows the profit earned at each $1 of Acid Test Ratio capital invested. This is the proportion of quick assets or Return on Capital Employed = Net acid test ratio to current liabilities. The (operating) profit / Capital Employed * standard ratio is 1.5:1. It means business 100 should have one and half times of its Return on Capital Employed can be assets more than its current liabilities to improved by: maintain its liquidity position. 1. Increasing profit Acid Test Ratio = Current Assets – Stocks 2. Decreasing capital employed / Current Liabilities Liquidity Ratios Always show your answer in ratio form. Acid Test ratio can be improved by all of the above points except point number 3. Page 26 O Level Business Studies by Faisal Durrani 0303-4898049 Ways of comparison Inter firm comparison – comparison between similar businesses Historical Comparison – comparison of current year’s result with the previous years Advantages of Ratio Analysis Shows liquidity, profitability, and performance of the business Helps managers in decision making Communicates with shareholders, and loan providers about business performance Shows comparison with previous years or similar businesses Disadvantages of Ratio Analysis Does not show the effects of inflation, economic conditions, and management’s policies for the business Possible to hide the facts such as reducing or increasing expenses (i.e. called window dressing) Does not indicate future performance Page 27 O Level Business Studies by Faisal Durrani 0303-4898049 Topic: Cash flow Planning Purchasing too many fixed assets at once Cash flow Planning Cash flow of a business is the cash inflows Purchasing or producing too high a and outflows over a period of time level of stocks when expanding too Cash inflows are the sums of money quickly. This is called overtrading. received by a business during a period of Cash flow forecast time It is an estimate of future cash inflows and Cash outflows are the sums of money paid outflows of a business usually on a month out by a business during a period of time. by month basis. This will then show the Sources of cash inflows expected cash balance at the end of each Sales of goods for cash month. Payments made by debtors Cash flow forecast is important: Borrowing from a bank or any other external source Sale of fixed assets or stocks Sources of cash outflows Purchase of goods or materials for cash Payment of wages, salaries or any other expense To manage the starting of a new business or the business already in existence and its expansion is required (most of the businesses fail at their initial stage, because they do not manage their expenses properly or their managers do not know the inflows and outflows Repayment of loans properly and business goes out of Payment to creditors cash. It happens due to overtrading Cash flow Cycle It shows the stages between paying out cash for labour, materials, etc. and receiving cash from the sale of goods. or buying too many fixed assets. To keep bank manager informed about overdraft needs To simply manage the cash so that Profit is the surplus after total costs have business does not face cash flow been subtracted from sales revenue. problem. A profitable business may also face cash flow problem, because profit depends on Solving cash flow problem Borrowing money from the bank sales and expenses. either long term loan or bank Reasons for cash flow problem overdraft Allowing customers too long credit Reduce or delay planned expenses period Page 28 O Level Business Studies by Faisal Durrani 0303-4898049 Running down stock levels by No repayment or interest payment selling excess stocks or selling of idle fixed assets or giving the idle burden Source of improving cash flow fixed assets on rent Topic: Source of finance position Avoiding the increase in cost of depreciation Internal sources of finance Retained Profit also called ploughed back profit. It is the amount of profit, which is Disadvantages of sale of fixed assets In future if business needs the left over after payments of all amounts of fixed assets, it might have to pay expenses, interest, and dividends. It is the more than what it got against sale amount of profit available with the of fixed assets business for re – investment purpose. Might not get large sum of capital Advantages of retained profit No burden of repayment to meet larger financing needs New businesses might not have No interest charges this source of finance available Ready source of investment Sale of excess stocks or running down Best use of business’ savings stock levels Disadvantages of retained profit New businesses do not have this source of finance available Sometimes not enough to meet all the financing needs Shareholders might be unhappy Sometimes businesses may have stocks available more than required Advantages of running down of stock levels Recovery of tied up capital Reduction in opportunity cost of with this source of finance, which could be available to them as stock Reducing cost of stock storage or dividend Sale of existing fixed assets warehouse cost Best use of idle stock for Sometimes business may have some of the investment purpose fixed assets idle or no more in its used can Disadvantages of running down of stock be sold for the purpose of financing. levels Advantages of Sale of fixed assets Getting tied up capital in best use In future if business increases its demand for production, and it does as investment Page 29 O Level Business Studies by Faisal Durrani 0303-4898049 not have the stocks available, it Available on demand will lose its customers Interest rate is according to number Available finance from this source might not be very large New businesses will not have this source of finance available Advantages of internal source of finance No direct cost to the business such as interest payments No increase in liability of debts Disadvantages of internal source of finance Involves other charges such as lease charges if sold and leased back Not available for all types of businesses Solely depending on internal source of finance slows down of days the loan is being used Disadvantages of Bank Overdraft Has to be paid back as bank demands Normally interest rate is higher Trade Credit – is getting raw material on credit from suppliers Advantages of Trade Credit Brings the business in better cash position because business does not have to pay for the raw material immediately No interest payment up to a certain period of time Trade discount is available on buying Cash discount is available if business growth as pace of payment is made on a specified or development will be limited by the within given time period annual profits or the value of assets Disadvantages of Trade Credit to be sold; thus rapidly expanding If payment is not made on time or companies are often dependent on substantial delay in payment may external sources for much of their lead to legal action by the creditor finance External Source of finance Shorter creditors’ days may bring cash flow problem Short term sources Debt factoring – is sale of debtors in Bank Overdraft – it is the short loan from discount houses of banks or financial a bank institutions Advantages of Bank Overdraft Mostly meet working capital or cash flow financing needs Page 30 O Level Business Studies by Faisal Durrani 0303-4898049 Advantages of debt factoring Immediate cash available to the Asset is taken back if series of payments are not made regularly business after deduction of certain Leasing – is taking the assets such as payment machinery, vehicles, and even premises or Responsibility of collection is shared between bank and the business Risk of delay in payment is also shared between bank and the business Disadvantages of debt factoring Loss of certain percentage out of the whole amount of debt building on rent Advantages of leasing Immediate possession of the fixed asset Business does not have to pay a large sum to acquire fixed asset, only leasing charges on agreed period are paid Repair services is provided by the Business has to repay the whole leasing firm amount in case of bad debt Disadvantages of leasing Cash flow problem if payment is not made Sources of medium term finance Hire purchase - it is buying of fixed Ownership of the fixed asset is never given unless paid for the fixed asset Periodic payments of rental assets such as motor vehicles or equipment charges in full are more than actual on installments in which business has to price of the fixed asset pay certain sum as down payment and the Sources of long term finance rest on installment. Issue of shares – the source of finance is Advantages of hire purchase available only to the public limited Business does not have to pay the whole price of fixed asset at once Possession of asset is immediate Ownership is possible on full payment for the fixed asset Disadvantages of hire purchase Business has to pay more than actual price of the asset companies; they can issue shares to the general public to raise share capital Advantages of issue of shares Many of the financing needs can be met No burden of repayment as it is a permanent source of finance No interest payment Page 31 O Level Business Studies by Faisal Durrani 0303-4898049 Disadvantages of issue of shares Dividend payments but not regular Burden of shareholders’ queries Interest is charged according the period the loan is demanded Disadvantages of Bank Loan about the performance of the Burden of repayment business and details about the use Interest payment regardless of of their finance Debentures – are the long term loans obtained by the businesses against issue of certificates stipulating regular interest payment regardless of business profit or loss business profit or loss Demands collateral or security against risk of non payment Risk of losing business property if due payment is not made Advantages of debt financing Advantages of debentures Business meets many of the financing needs Solves cash flow problem Usually available for more than five years hence ample time to return the loan out of business profits Disadvantages of debentures Interest payments regardless of business profit or loss Ultimately repayment takes place Business’ assets have to be pledged against the loan No shares are sold hence any risk of losing control over the business does not take place Loan repayment is ultimately made therefore no permanent liability takes place No voting rights of lender on annual general meeting Interest payment is before the tax is charged; hence lower amounts of taxes are paid Disadvantages of debt factoring Gearing of the company increases and this makes the business riskier Bank Loan – available for short, medium, for the shareholders and they get and long terms discouraged of investment Advantages of Bank loan Equity financing – it never has t be Ready source of finance repaid; it is permanent capital; dividends Available for various periods do not have to paid every year in contrast, Easier to match with business interest on loans must be paid hen financing needs demanded by the lender. Page 32 O Level Business Studies by Faisal Durrani 0303-4898049 Making the financing decision In flat Factors influencing finance choice Job Description Purpose of finance – why does business need finance Time period – how long the business needs finance Available sources of finance – internal or external (all above are matched to It is an official documents which gives the details of duties and responsibilities of a would be or an existing employee. Job Description includes the following: Title of the job Department of work Responsible for – Who is choose the best source of finance) answerable to him Responsible to – Whom the Status of the business – to employee is answerable decide which source of finance Main Duties is available to the business Occasional Duties according to its incorporate or Delegation unincorporated It is giving responsibility of work to Control of the business – subordinates by the managers, but the especially for public limited given responsibility goes to the managers, companies they should remain The responsibility given to the in control over the business subordinates is temporary and if they do Gearing ratio – if already not perform well it is taken back from business’ dependency on loans them. is more or equal to 50% then Advantages of delegation to managers they should not go for further Time saving for managers, and loans otherwise business will they will have more time for become risky and less managerial task such as planning, attractive for the investors. organizing, controlling, leading, Topic: Organizational Structure Organizational Structure It refers to the levels of management and division of responsibilities within an organization. and commanding. Less work load for the managers and they make less mistakes Time for staff evaluation and efficiency rises An organizational structure could be either flat or tall. Page 33 O Level Business Studies by Faisal Durrani 0303-4898049 Advantages of delegation to subordinates Work become interesting, challenging, and rewarding Workers or subordinates feel Benefits of organizational chart Shows how people working in various departments are interlinked with each other Creates sense of belonging among important as they are selected best employees and managers when ones to delegate they see their positions in the Career opportunities for subordinates they become good organizational structure Employees could see their managers of future, and their positions and identify whom they motivation level rises too. are answerable and who is Reasons for managers’ hesitation to delegate Fear what if subordinates do answerable to them Employees also know about chain of command and span of control mistake, the whole responsibility Span of control – refers to number of will go to managers subordinates working directly under one What if subordinates perform the manager job better, they will lose their Span of control could be either wider or position narrower Simply autocratic and want to do every work on their own Chain of Command – refers to the way the information passes from top to bottom Organizational Chart level of management. Chain of command It is a graphical presentation of could be either short or long. organizational structure. Along structure organization will have Organizational Structure shows the narrow span of control and long chain of following: command. Nature of organization / Structure A flat structure organization will have of the organization – tall / flat wider span of control and short chain of Hierarchy of management command. Departments of the organization Advantages of short chain of command Chain of command – short / long Communication will be quicker Span of control – wider / Narrower and accurate – because message crosses less level of management Page 34 O Level Business Studies by Faisal Durrani 0303-4898049 Top managers will be less remote Line employees go confuse that to lower level of hierarchy – time whom to follow line or staff saving managers Span of control will be wider – benefits of delegation Decentralized Decisions All types of decisions which are delegated Today’s organizations prefer to keep their to lower level of management such as organization’s structure flat. Hence the operational or tactical decisions. All technique of delayering is used. department decisions are decentralized Delayering is removing the whole level of decisions. management by promoting the lower level Centralized Decisions of management to higher level. The decisions which are taken by the top Line Management – includes managers management of the organizations; such who are responsible for the departments or decisions are usually taken by chief can be called department’s managers executive of the organization and they are Staff Management – includes managers strategic decisions. who are supportive and advisory Advantages of decentralized decisions managers. Better decisions by the line Advantages of employing staff and line managers and supervisors because managers they know better their departments Staff mangers advice to the line managers on various issues such as technological advancement or economic conditions Spare time available for line managers for managerial task such as planning and organizing Trust of higher management increases on lower management Quicker decisions because lower managers do not have to ask top management before taking such decisions. Should all the decisions be centralized Disadvantages of employing staff and or decentralized line managers If the decisions involve millions of dollars Conflict and frustration among of investment and likely to effect all the both types of managers due to stakeholders, then they should be different view point centralized. Such decisions could be: Opening of new branches abroad Page 35 O Level Business Studies by Faisal Durrani 0303-4898049 Take over or merger with other businesses well, otherwise finding the reasons if the reasons are external, then objectives If the decisions are of routine nature and should be changed. If the reasons are may not affect all the stakeholders, then internal, then those reasons should be they should be decentralized. overcome. Introduction of new products Qualities of a good manager Advertising on a particular media Intelligent Borrowing from a particular bank Initiative – the one who takes the Setting level of stock or deciding first step to solve the problem on number of labour required Topic: Managing a business Self confidence Assertiveness and determinant – Managerial Functions assertiveness means positive in The functions of managers which are thinking and determined is firm or performed by all types and levels of stick to do something managers Energetic and enthusiastic – able to Planning – involves setting aims or work longer hours and with targets to bring a sense of direction or emotions purpose towards which employees and Process of decision making managers work. Objectives of the business Organizing – refers to arranging and Identify and analyze the problem allocating resources to achieve set targets; Collect and analyze data it also involves distribution of work Consider options and take decision among the employees. Review – was it successful Co-ordination – the jobs done by the Types of Decisions employees and departments are widely Strategic Decisions spreaded and it is required to be Important decisions, which are taken less coordinated to move them towards set often and important decisions; they affect targets. the overall success of the business; they Commanding – is not ordering but are taken by the top management of the instructing, guiding and leading the organization. E.g. merger or takeover or employees or subordinates to lead them inaugurating new branch of the business towards set targets abroad Controlling – is checking whether the set targets are going to be achieved if yes Page 36 O Level Business Studies by Faisal Durrani 0303-4898049 Tactical Decisions Administration Such decisions are taken by the middle Clerical services management; they are taken once in six IT system months or quarterly; such decisions are Cleaning and maintenance department’s decisions. E.g. deciding Accounting and Finance which bank to borrow; which media to Keeping financial records advertise or which area to locate the Preparing accounts business Preparing budgets Operational Decisions Plan and control finance These decisions are taken by the Topic: Communication in Business operational or supervisory level of Communication – is the transferring of managers; these decisions are taken very message from the sender to the receiver, often such as deciding level of stock or who understands the message. labour working at factory floor. The message is the information or Business Functions instructions being passed by the sender to It involve all the functions which line the receiver. managers and staff perform in their own Elements of communication departments Transmitter (or sender) – also called encoder Marketing Market research Medium of communication – the Planning new products source of sending message Deciding on marketing mix Receiver (or decoder) Evaluating sales data Feedback – reply for the message Production (or Operations) Effective Communication – the message Ordering materials and resources is effective which is clear, to the point, and Developing new products easy to understand as well as free from all Location decisions the barriers either at sender, medium of Maintaining efficiency of communication, receiver or feedback production level. Human Resource One way communication – involves a Recruiting staff message which does not call for or require Training programmes a response. E.g. take these goods to the Negotiating with workers customer. One way communication does Staff records and control not allow the receiver to contribute to Page 37 O Level Business Studies by Faisal Durrani 0303-4898049 communication or to provide any feed Verbal or oral communication includes back. one-to-one talk, telephone conversations, Two Way Communications – is when the video conferencing, and meeting. receiver gives a response to the message Advantages of Verbal Communication and there is a discussion about it. Two Information passes out quickly in parties involve in communication process, an efficient manner to the large which bring better and clearer information. number of people Advantages of Two Way Communication Possible to make clear whether the Opportunity for immediate feed back Body language of the speaker or receiver has understood the facial expression can help to put message and acted upon the message across effectively Receiver feels more a part of the process of communication and make contribution and get motivated Internal Communication – the type of communication within the organization; it is when messages are sent between people working in the same organization. Disadvantages of Verbal Communication Not sure whether every body is listening or understanding the message Takes longer to get feedback from every one Not possible to keep permanent e.g. manager talking to workers; a report record of verbal communication sent from one director to another except recording of the oral External Communication – is when communication messages are sent between one Written Communication – includes organization and another organization or letters, memos, reports, notices on the outside individual. board, notices, faxes, e-mail, intranet, and e.g. orders for goods from suppliers; internet sending information to customers about Advantages of written communication prices and delivery times; advertising of Very hard evidence of the goods or services; asking customers to pay message, which can be referred bills on time back Verbal Communication Reduces disagreement among the senders and receivers Page 38 O Level Business Studies by Faisal Durrani 0303-4898049 Message can be copied and sent to many people Quicker and cheaper way to reach large number of people Formal and informal communication Formal communication – is carried out within the organization and caring with hierarchy of management. Disadvantages of written Informal Communication – is also called communication grapevine and carried out without caring Not possible or so easy to check of hierarchy of management and off the that the message has been received business environment. and acted upon as with verbal Barriers to Communication messages Barriers to communication can be at any Difficult for some receivers to one of the elements of communication understand No opportunity to see body language of the sender or his facial expression Visual Communication – includes films, videos and PowerPoint displays, posters, and charts and diagrams. Advantages of visual communication Presentation of information is appealing and attractive Makes written message clearer by adding a chart or diagram Disadvantages of visual communication No feedback and the sender of the message may need to use other forms of communication to check that the message is understood Charts and graphs are difficult for some people to interpret Page 39 O Level Business Studies by Faisal Durrani 0303-4898049 Element of Barriers’ Type Way to Overcome Communication Sender / Encoder / Use of technical words Use simple language / slangs Communicate slowly Speaks too fast Assure message is clear by Unclear message Message too long Transmitter reviewing it Keep message as short as possible Medium of Distortion Retry if distortion in channel communication Background noise Clear off the background Use of wrong channel of communication Overloaded channel Technical break down noise Learn which channel to choose for what purpose Use alternative channel for the same message Receiver / Decoder Feedback Less / no attention No trust on sender attentive and understand Unconscious what is said; Listen but do not Fully conscious understand Recover the trust No feedback / feedback Assure feedback is given not clear Request for resending of Assure the receiver is feedback Page 40 O Level Business Studies by Faisal Durrani 0303-4898049 Topic: Motivation at work with their needs hierarchically from lower Motivation – is the reason why employees to upper level of needs. want to work hare=d and work effectively Physiological / basic needs – wages high for the business. enough to meet weekly bills; food, rest, Motivation is the state of employees recreation, and shelter taking extra ordinary interest in the work Safety / security needs – Job security; and leading their work towards protection against danger, protection productivity. against poverty; fair treatment It is true that a well motivated worker Social needs – Work colleagues that bring higher productivity, increased output support you at work; friendship, a sense of and profitability for the business, and vice belonging to a team versa to this an unhappy employee does Esteem needs – being given recognition not work effectively and bring low output for a job well done; having status and and no profitability for the business. recognition, achievement, independence Motivation Theories Self – Actualization – being promoted Many leading management thinkers and given more responsibility; succeeding brought their own theories to suggest the to your full potential ways to motivate the employees at their He presented his theory of motivation by work. proceeding with Maslow’s hierarchy of You only need to remember the key points needs and stated his theory on two aspects: about their theories rather than learning Motivators – higher level of Maslow’s the whole history of these theories. hierarchy of needs including achievement, FW Taylor recognition, personal growth / He presented his theory saying workers development, advancement / promotion, should be brought on the following: and work itself Specialization in work according to Hygiene (or maintenance) factors – their skills and areas of interest lower level of Maslow’s hierarchy of Fair day’s work fair day’s pay needs including status, security, work Least intervention by the managers conditions, company policies and – let workers to work, and let administration relationship with managers to manage the business supervisor, and relationship with Abraham Maslow subordinates, and salary. He presented his theory as hierarchy of He stated that hygiene factors need to be needs that each worker should be satisfied satisfied before motivators to be satisfied. Page 41 O Level Business Studies by Faisal Durrani 0303-4898049 If an employee or worker remains Motivating Factors dissatisfied with hygiene factors though Financial motivators motivators are satisfied, the worker can It is true money motivates the employees / not be motivated. workers McGregor – presented his theory as Wages – a payment system work weekly management behaviour stating: Time Rate – a wage system which works Theory X (an autocratic manager) in accordance with time; under this Employees dislike the work and avoid it Employees should be threatened of punishment Employees have no ambitions and seek security only Employees only work for money Theory Y (democratic manager) Employees think work is natural and like to work Employees only need proper supervision, guideline and direction on the track of right job Employees accept and seek responsibility Employees need self actualization, have great creative potential but it is underutilized People work for following: Money Social needs / affiliation with other members of the society Security at work Job Satisfaction – work purposefully payment system workers are paid for basic 40 hours, and overtime working hours. e.g. Mr. Ahmed worked for 50 hours in a week. He is paid $8 per hour and overtime pay rate one and half times. Basic pay 40 hours @ $8 = $320 Overtime pay 10 hours @ $8 * 1.50 = $120 Total pay $320 + $120 = $440 Advantages of time rate Easier to calculate workers’ wages using time sheet in which sign in and sign out show employees’ total number of hours worked according total pay is calculated. No risk of any discrepancies on pay matters Motivates employees due to overtime pay Disadvantages of time rate Good and bad workers are paid the same Good workers get demotivated due to they are paid the same as Esteem needs – recognition due to their job Page 42 O Level Business Studies by Faisal Durrani 0303-4898049 workers not working or wasting time Business has to employ supervisors to keep workers working, which is an additional cost Piece rate A system under which employees are paid a basic pay rate and then greater they produce they earn. Advantages of piece rate Encourages workers to work faster and produce more goods, which is a source of increasing business Fixed pay helps employees to plan or budget their expenses Possible to have increments in pay periodically Disadvantages of salary Bad and good employees are paid the same Good employees get demotivated as they are paid the same as bad employees Supervision cost may incur for the business productivity and motivates the Commission employees A payment system offered to the sales Also motivates the workers that if staff in addition to fixed salary per month. they produce nothing due to Commision is paid as percentage of sales technical break down, they still Commission motivates the employees as earn a basic pay rate they are paid more with the increase in Disadvantages of piece rate Demotivate the employees who are their sales; external factors such recession in the economy may affect their quality workers and work slowly to performance and sales fall. produce quality Basic pay is too low to run the individuals’ Increase defection rate if the workers focus on quantity Bad reputation for the business if Advantages of salary expenditures. Profit Sharing Payment system under which employees bad quality production is produced are offered share in company’s profit in Supervisors or quality inspectors addition to their usual payment of wages have to be appointed so that or salaries defection rate could be controlled It motivates the employees as they get Salaries higher share in profit if the company earns A salary is a payment for work usually higher profit, but the business loses the paid monthly profit share. Page 43 O Level Business Studies by Faisal Durrani 0303-4898049 Bonus Non-financial motivators Usually bonus is offered to the employees They are also called perks or fringe annually when a festival approaches or benefits. Such rewards are mostly business has performed well and earned permanent and motivate the employees. profit more than usual. It motivates the Non – financial rewards include: employees because they can finance their Children’s education fees paid additional festival related expenses, but if Discounts on the firm’s products not paid due to some reasons they might Health care paid for be demotivated. Company vehicle (Car) Performance Related Pay Free accommodation The businesses where the services are Share options (where company offered to the customers and employees performance is difficult to measure, the shares are given to employees) Generous expense accounts (for employees are rewarded annually a good and clothing) performance based pay by conducting an Pension paid for by the business interview called appraisal interview. In Free trips abroad / holidays appraisal interview employees are Job Satisfaction discussed on work related problems, and One of the disadvantages of specialization judged with their overall performance on is boredom, which may partly create job customers’ satisfaction. But this creates satisfaction kind of feeling of injustice among Job satisfaction is the enjoyment derived employees that their performance is not from feeling that you have done a good judged properly. They might be entitled job. for higher pay rise. Job Rotation Share Ownership It involves workers swapping round and Employees are given ownership by issuing doing each specific task for only a limited company’s shares to them so that they time and then changing round again. could be with sense of ownership. Such Job Enlargement ownership motivates them to work hared It is where extra tasks of a similar level of so that the company earns higher profit work are added to a worker’s job and they get higher dividend. description. Page 44 O Level Business Studies by Faisal Durrani 0303-4898049 Job Enrichment employees must have work well or as It involves looking at jobs and adding expected. tasks that require more skill and / or Formal Group – is a group designated to responsibility. carry out specific tasks within a business Advantages of Job rotation / Informal Group – is a group of people enlargement / enrichment who form independently of any official Cure for boredom groups set up within the business and who Improves efficiency due to change have similar interests or something else in in job nature common. Financial benefits Topic: Recruitment, Training and Motivate employees due to higher human resources level of job Employees feel themselves important Remedy for absenteeism Disadvantages of job rotation / enlargement / enrichment Low productivity as job given is new Wastage of resources if employee is not performing well Training needs might be there Some might not accept additional work responsibility and get demotivated Refer to above for autocratic and Work of human resources department Recruitment and selection of new employees Setting or negotiating wages and salaries Developing industrial relations among employers and employees Arranging training programmes Providing health and safety for the employees through favourable work conditions Redundancy and dismissal Recruitment Process Vacancy arises Job analysis – is analysis of the democratic leadership styles existing job to find out existing and (3) Laissez Faire new job requirements Managers behave very much trustful on his employees; they delegate to the employees or subordinates and do not ask for the job done. Because they believe Job description and specification in accordance with job analysis Job advertisement according to the nature of the job Application forms and short listing Interview and selection Page 45 O Level Business Studies by Faisal Durrani 0303-4898049 Vacancy filled Person is already known to the Job Description – outlines the business and also his reliability, responsibilities and duties to be carried out ability, and potential by someone employed to do a specific job. No need for induction training Job Specification – is a document which Motivates the employee as he is outlines the requirements, qualification, expertise, physical characteristics etc. for a specific job. Contents of job specification Job title Department chosen for the post Disadvantages of internal recruitment No new ideas or experiences come into the business Create jealously and rivalry among other employees Details of job Above advantages are disadvantages of Qualification external recruitment and disadvantages Skills are advantages of external recruitment Physical fitness External recruitment – is when a Personal Characteristics vacancy is filled by someone who is not an How does job description help in existing employee and will be new to the recruitment of a new employee? business. Interviewer interviews the employee and Places to advertise for external asks about his skills and capabilities which recruitment he compares with the job description to Local newspaper – suitable for confirm whether the employees’ skills and production line workers / low level jobs capabilities match with the requirement or such as clerical jobs, because does not not, if it does the employee could be the require very high education or skills so it right one for the job. can be met within local market Internal recruitment – is when a vacancy National newspaper – specialist is filled by someone who is an existing employees and high level managers could employee of the business. be recruited through this form Advantages of internal recruitment advertisement, because very high level Saves time and money on advertisement and recruitment and education or skills are needed so that best among best employees could be recruited. selection process Page 46 O Level Business Studies by Faisal Durrani 0303-4898049 Other modes of advertisements could be specialist magazines, recruitment agencies, May raise employee expectations of promotion and government job centers. Cost of training Training – is a continuous learning Employees may leave once they process for employees to teach them skills are trained and then another and techniques by which they could business will benefit from training handle and work out existing problems at Induction Training job. The training given to the new employees Needs for training and it enables the new employees known To introduce a new process or new equipment To improve the efficiency of the workforce To make unskilled workers skilled one to the system of work and get introduced with their colleagues and bosses. Advantages of induction training Control the nerves of new employees Increased the chances of To minimize supervision cost employees’ stay with the To improve the opportunity for organization internal promotion To decrease the chances of accidents Advantages of training Greater motivation and Employees’ contribution to the work comes immediately Disadvantages of induction training Time consuming Delays new employees’ commitment of the employees – contribution to the work as long as because they learn new techniques he understands the system of work to perform their jobs efficiently On the job training Increased productivity The type of training which is given to the Improved quality of the output technical workers who learn while they are Improved customer service at work Greater flexibility of the labour Advantages of on the job training force – multiskilled Ability to use new technology Disadvantages of training Loss of output whilst training Workers’ skills improve / they learn new skills Learn how to handle their existing jobs better Page 47 O Level Business Studies by Faisal Durrani 0303-4898049 Minimizes incidence at work Topic: Trade Union Use the resources efficiently It is a group of workers who have joined Adapt the changes at production together to ensure their interest is line quickly Disadvantages of on the job training Reduces productivity due to learning process Sometimes bad habits of trainers get transferred to the trainees Off job training protected. A trade union is a social group representing labour to protect their rights against any unfair act of the business or the employer. Functions of Trade Union Getting Improved working It is the type of training given to the line conditions of employment managers in which they are temporarily Getting improved environment off from the work and join a college or where people work e.g. health and university for formal education. safety, noise, heating Advantages of off job training Manager becomes more qualified and develops new managerial skills Application of such skills bring better management and control for the business Improved benefits for members who are not working due to any problem such as sickness or retired etc Improved job satisfaction by encouraging training Business become modernize Financial advice or support Managers are more able to make Protection against unfair dismissal effective decisions Disadvantages of off job training or redundancy Closed Shop – is where all the employees No productivity at all become member of a single trade union Cost for the business i.e. A Single Union Agreement – is when a educational expenditures of the firm will deal with only one trade union manager and no others Managers if leave the job after training other businesses get benefits out of training Advantages of single union agreement One union to negotiate hence discussions are clearer Greater negotiation power No risk of disagreement among labour views Page 48 O Level Business Studies by Faisal Durrani 0303-4898049 Better working relationship among management and the union chosen by the trade union in order to cause a lot of disruption to the workplace Quicker solution of disputes An all out strke is when all members of the Easier to agree or change to the union stop working and leave the working conditions Time saving for the management workplace unitl the dispute or claim is settled. on negotiation and remain focused Picketing – is when employees who are as only single union taking industrial action stand outside their Collective Bargaining – is where place of work to prevent or protest at the representative of management and delivery of goods, arrival and departure of representative of labour negotiate on a other employees etc particular issue. Work To Rule – is when rules are strictly Individual Bargaining – is where single obeyed so that work is slowed down labour negotiates on his or her own Go Slow – is when employees do their individual’s problem with one of the normal tasks but more slowly than usual managers Non – Cooperation – is when employees Collective bargaining is more effective refuse to comply with new working because that is for the betterment of whole practices labour and the management does not have An over time ban – is when employees to deal with individuals’ problems. refuse to work larger than their normal Productivity Agreement – is where working hours. workers and management agree on Role of ACAS increase in benefits in return for an ACAS is Advisory Conciliatory increase in productivity. Arbitration Services Industrial Action – is action taken by the It is a mode of resolving an issue before trade unions to decrease or halt production the matter is taken to the industrial tribunal Strike – is when employees refuse to or labour court. ACAS is an independent work. body which is financed by the government A token strike is when a short stoppage of has the role of trying to improve industrial half a day, one day or even an hour to relations. It provides its services free and it indicate the strength of feeling about the is impartial. If the dispute goes to claim arbitration then both sides must agree to A slective strike is whn only a few abide by the ruling of ACAS. selected workers walk out; these will be Page 49 O Level Business Studies by Faisal Durrani 0303-4898049 The service provides: by carrying out attractive advertising or Advice and information on all areas of sales promotion to buy the product. Such employment to both employees and types of businesses have their major focus employers on product itself not on customers needs Conciliation - ACAS talks to both sides in therefore they can not be confident about a dispute to try to find areas on which both the sale of their products or after sale the sides can agree. This will allow both sides satisfaction of the product. The product in a dispute to start negotiation again if may or may not be successful. discussion have broken down Such types of businesses could traditional Arbitration - if a dispute ahs reached a grocery shops or fruit or vegetable sellers position where there is deadlock and or agricultural tool sellers. neither side will agree on a settlement they Market Orientated business may go to arbitration. ACAS arranges for These are the one which carries out market a n independent group to listen to both research to find out customers needs and sides in the dispute and to propose what then produces the product keeping in mind they think is a fair settlement. Both sides the needs of the customers about the must agree in advance to accept the product. Producing the product according arbitrator’s findings. to the needs of the customers give them Topic: Market and Marketing confidence that the product will become Market: successful. Once the product is being Any arrangement, which brings buyers produced, the market oriented businesses and sellers in contact to make it possible to inform the customers about the availability perform a transaction, is called market. It of the product through informative is not necessary that market should be a advertising. They persuade the customers physical place to perform a transaction; it to buy the product by persuasive can be any source even to make the advertising. transaction possible. In today’s business world, all or most of E.g. internet, telephone, some one’s the businesses are called market oriented home’s drawing room, or a traditional businesses. bazaar or a market. Marketing Types of Businesses Marketing can be defined as the Product Orientated managerial process of identifying the It is a type of business which produces the present needs of the customers and product and then convinces the customers Page 50 O Level Business Studies by Faisal Durrani 0303-4898049 anticipating their future needs and 4. Ready to respond the threats satisfying them profitably. Market Segmentation Functions of Marketing It is the process of dividing the whole Finding customers requirements market into small group, where each group Predicting future needs of has distinct needs. consumers The groups formed as a result of market Satisfying consumers needs segmentation is called a market segment. Making profit for the business Market segmentation is done in the Marketing Objectives following forms: Objectives of marketing To increase sales revenue and profitability To increase or maintain market share To maintain or improve the image of business products or services To target new market or market segment To develop new product or improve existing products By income By age By region By gender By use of the product By life style Advantages and Disadvantages of Market segmentation It is a time consuming process which is only possible after extensive market research. SWOT Analysis Market segmentation has the following SWOT Analysis is part of market benefits research to identify the strength, and weaknesses within the internal environment of the business; and to identify the opportunities and threats in the Easier to identify the needs of the customers Better able to satisfy the needs of the customers external environment of the business. Increase in business market share After the analysis are being carried out Survival in the market following is done by the business: 1. Improve the strengths of the business further 2. Cure the weaknesses of the business 3. Avail the opportunities Mass Market is where there is a very large number of sales of a product. Under this marketing strategy business considers every one as a target customer. Niche Market is where a particular market segment is focused as a target Page 51 O Level Business Studies by Faisal Durrani 0303-4898049 customer,. Under this strategy business Place becomes specialize in one particular Where the product will be sold? product sale. What will be the distribution Market Gap is when none of the products channel to send the product to the or services available in the market could final consumers. satisfy particular group of customers. Market Gap could be an opportunity for a business, which has capability to satisfy the need of these customers. Promotion How the product will be advertising? What will be the sales promotions Marketing Mix refers to the elements of to promote the sales of the successful product, which is consist of product? four Ps – product, price, place, and Topic: Market Research promotion; 5th P is packaging. It is the process of collection, recording, Writing about marketing mix of a product and interpreting the data about customers’ refers to the marketing strategy about a preferences for a product or service or product. knowing about the level of competition or In order to develop the marketing mix or any other market condition marketing strategy of a product, following Purposes of market research should be included: Product How the product is made of (i.e. ingredients of the product) Likes or dislikes of consumers about the product Customers’ willingness to buy the product How is the quality of the product? Price affordable for the consumers How is the product packaging Nature of customers (sizes of the packaging?) Product promotion or Who will buy the product (Target customers)? advertisement Competition stiff or lenient Place where customers want to buy Price What is the pricing strategy? Why this pricing strategy is being chosen? the product Types of information collected in the market research Quantitative Information – figure based e.g. sales record from previous years Page 52 O Level Business Studies by Faisal Durrani 0303-4898049 Qualitative Information – opinion based e.g. consumers’ preference about the product Types of market research Customers’ opinion about the product or service can be obtained Disadvantages of questionnaire If questions are not well thought, Primary Research – is the collection and the replies will not be accurate and collation of original data via direct contact the results will be misleading with potential or existing customers; it is Time and money consuming the type of research carried out for the method of primary research product itself, and the data collected is Interviews – individual face to face or by first hand data. This type of research is telephone or group interviews also called field research Advantages of interviews Advantages of primary research Accurate and up to date information about the product or service itself Variety of methods which could be matched against purpose of research Possible to explain the interviewee the difficult questions by the interviewer Detailed information about the interviewees like and dislike about the product can be gathered Disadvantages of interviews Both quantitative and qualitative Risk of bias data because the information can be gathered interviewer may lead the Disadvantages of primary research Expensive to carry out Time consuming Difficult to decide which method of research should be used interviewee consciously or unconsciously to reply as he wants Time and money consuming Questionnaires or interviews can not be applied on the whole population. Hence, Types of Primary Research sampling is carried out. Questionnaire – postal, face to face, or by Sample – is the representative of telephone something as a whole. Advantages of questionnaire Random Sampling – is when people are Possible to collect detailed selected at random as a source of qualitative information about the information for the market research. product or service Quota Sampling – is when people are selected on the basis of certain Page 53 O Level Business Studies by Faisal Durrani 0303-4898049 characteristics such as age, income, or gender as a source of information for Advantages of experiments Relatively easy to set up and carry market research. out and an easy way of gathering Consumer Panels consumers’ first reaction This is where groups of people agree to provide information about a specific product or general spending patterns over a period of time. Panel may test new products and discuss about its various Disadvantages of experiments People might not give real feelings to avoid offensive Many potential consumers might be missed aspects. Secondary research Advantages of consumer panels It is also called desk research; data already Provide detailed information about consumers’ opinions Disadvantages of consumer panels Time consuming, expensive and collected is recollected from company’s internal resources such as sales department, finance department, or customer services department; or using bias if some people in the panel are external source such as internet, trade influenced by the opinions of unions, magazines / newspapers, media others reports, and government statistical Observation department. It may take the forms of recording, Advantages of secondary market watching, and auditing research Advantages of observation Quite inexpensive way of gathering data Disadvantages of observation Only provides basic figures; does not provide details about consumers’ behaviour Experiments – Business takes its food items to a supermarket to taste it by the consumers Cheaper and less time consuming Available within and outside the Organisation Readily available data Disadvantages of secondary market research No up to date information Risk of inaccurate interpretation is greater Irrelevant information may also be there Page 54 O Level Business Studies by Faisal Durrani 0303-4898049 Who carries out market research? Topic: Presentation of information Company’s own research staff Once the research data is being collected, Research agencies it is required to be processed and presented Private individuals hired by the firm for into a meaningful way. research Ways of presenting data Accuracy of research depends on: Table or tally chart Size of sample Bar chart Method of research matched with Line graph the purpose of research The way of interpretation and report preparation and presentation Pie chart Case Study A survey about the type and number of To design a questionnaire one should vehicles and the number of people passing keep the following points in mind: a particular shop is collected in different Do not exceed questions more than timings given below: 12 Keep questions short and clear Avoid open ended questions Avoid making questionnaire bias Page 55 O Level Business Studies by Faisal Durrani 0303-4898049 Time Car Lorry Van Bicycle Pedestrian 1.00 – 1.59 p.m 12 18 3 9 24 2.00 – 2.59 p.m 18 24 12 6 18 3.00 – 3.59 p.m 24 18 18 6 18 4.00 – 4.59 p.m 26 18 15 18 15 5.00 – 5.59 p.m 32 12 9 30 39 Using the above collected data: Draw the following: (1) Tally Chart (2) Bar Chart (3) Pictogram (or picture) (4) Pie Chart (5) Line Graph Page 56 O Level Business Studies by Faisal Durrani 0303-4898049 Topic: Role of product and packaging Product Development in the marketing mix Existing products never sold forever, Product is the core of the whole marketing hence a process of product development is mix. It becomes the reason for customers’ inevitable in which the following steps are buying the product. Product performs its followed: function in the marketing mix as it attracts Idea generation the customers due to its quality, Selection of ideas for future ingredients or description, and the promise to satisfy the customers’ need or want. It research Deciding if the company will be makes the other marketing mix to be set. able to sell enough for the product Packaging if it is part of the product will or services make the product long lasting and helpful in transportation. Packaging makes the use of the product easier. Types of product Consumer goods – are the goods consumed by the consumers. These are the types of products which can be both durable and non-durable. Durable is the Developing a sample or a prototype Testing the product in part of the whole market – Test marketing Full launch Features of a successful product Satisfies the existing needs or wants of consumers one which remain long lasting with the Design, performance, reliability, customers e.g. furniture, house, car etc and quality should be consistent Non-durable is the one which is disposed with the product’s brand image off after few uses e.g. staple food tissue paper or shaving razor. Consumer services – are the services provided or rendered to the consumers such as banking, retail, laundry, or repair Capable of creating new demands from the consumers Lower cost of production / cheaper to produce Distinct feature in the product Producer Goods – are the goods which Branding – refers to deciding a unique are bought by the producers for production name for a product. Hence brand is a of other goods such as machines or capital symbol or unique name which makes the equipment product distinct from other products. Producer Services – are the services Brand Image – is the good will of the required by the producers e.g. accounting, brand due to the product insurance, and advertising Page 57 O Level Business Studies by Faisal Durrani 0303-4898049 Functions of Branding Helpful for the business in advertising Helpful for the consumers to Introduction Stage Product is launched after testing the market Growth in sales slower, because identify the product any where in most consumers are not aware of the market its existence Development of business good image Creation of brand loyalty Image of good quality Packaging – is the physical container or wrapping for a product. It is also used for promotion and selling appeal. Functions of Packaging Helpful in protection while transported Helpful in keeping the product long lasting Helpful in providing information to the consumers Helpful in making the use of product easier Helpful in making the product attractive Price Skimming or penetration is used Informative advertising is carried out No profit only development cost is covered However in case of price skimming profit is possible as price is high Growth Stage Sales rise is rapid Advertising switches to persuasive Creation of brand loyal customers Competition increases, hence price is made competitive to gives realistic image Profit starts to be made as development cost is covered Maturity / Saturation Stage Product Life Cycle – refers to stages of a Sales at maturity increases slowly product in its life in the market starting Intense competition from introduction to growth, then maturity Pricing strategy is competitive or and finally decline. promotional Stages of Product Life Cycle Advertising is extensive Development Stage Profit goes at their highest Product is developed Prototype is tested No Sales at this time Stable sales at saturation stage or at its highest point Stable advertising No more entry of competitors Page 58 O Level Business Studies by Faisal Durrani 0303-4898049 Decline Stage Sales start falling, because it has lost its appeal Product is usually withdrawn from the market Prices become promotional to get rid of present stock Advertising is reduced and then stopped Extension of product Life Cycle Introduction of new version of the product\ Selling product in the new market such as export market Changes in the product design, color or packaging Price of other goods such as complementary or substitute goods Population of the country Taxes on people’s incomes Trends or fashion Fear of war or starvation Similarly, supply is also affected by price. When price rises, supply increases; when the price falls, supply decreases too. This is general rule of supply. Determinants of Supply There are other factors which affect the supply of goods Cost of production Technological advancement Weather conditions Using new advertising campaign Indirect Taxes Selling through additional outlets Elasticity of demand Topic: Price The extent to which demand changes in Price shows the worth of a product. Hence, response to change in price. in order to create the right image of the Elastic Demand – When demand change product in the customers’ mind there is greater than price change should be a right price. Inelastic Demand – When demand Price = cost + profit change is less than price change In a free market economy, price is set in Elastic Goods are those which have lots of accordance with demand and supply. substitutes and consumers fall their When the price of good increases, demand demand for those goods as the price rises falls; when the price of a good falls, for them. Similarly, inelastic goods are demand rises. This called general rule of those which do not lose their demand demand. when the prices rise for them. The reason Determinants of demand is consumers find no substitutes hence There are other factors as well which keep on buying. Remember, if the price affect the demand for a product. for inelastic goods is increased, revenue Income of people will increase for those goods because of Page 59 O Level Business Studies by Faisal Durrani 0303-4898049 greater rise in price. Whereas if the prices Lower sales revenue for elastic goods are increased, revenue Price Skimming will fall, because consumers switch over to It is where a high price is set for a new other products. product on the market For a marketing manager of a company Advantages needs to understand the concept of price elasticity of demand to decide on the price. If he feels that his product is price elastic, he should not increase the price to avoid loss of revenue. Create a quality image of the product Attraction for quality conscious customers Disadvantages Pricing Strategies Losing price conscious customers Cost plus pricing Earns large sales revenue and Under this strategy, average cost of the profits product is calculated by: Competitive Pricing Total cost / no of units produced When price is set just below or equal to Then a targeted profit is added into it. competitors’ price Advantages Advantages Easy to calculate and apply Creates realistic pricing image Flexible pricing No risk of losing customers as Targeted profit could be earned Disadvantages Price might be set higher which result in loss of customers price is set similar to competitors’ prices Disadvantages Businesses do not have to spend so Penetration Pricing much of time on research for When price is set lower than the setting suitable pricing competitors’ price in order to be able to Promotional Pricing enter a new market It is when a product is sold at a very low Advantages price for a short period of time. Easier to enter into the market Attract price conscious customers Disadvantages Losing quality conscious customers Advantages Useful to get rid of unwanted stock that will not sell Helpful to renew the interest of consumers for the product Page 60 O Level Business Studies by Faisal Durrani 0303-4898049 Disadvantages Sales revenue will be lower because the price of each item will be low Consumers get latest product’s version, e.g. e-buying or order through company’s catalogue. Product satisfies to the customers Psychological Pricing as made for them only according to It is when particular attention is paid to the their given specifications, e.g. effect that the price of a product will have made to order furniture or dresses. upon consumers’ perceptions of the product. Advantages Create an image among consumers that price is low Sell the products rapidly Disadvantages Retailers charge the round figure Expensive and highly specialized goods Distribution Channel # 2 Whole sellers buy in bulk from producers and sell to the retailers in small quantity – it is called breaking bulk Producers and retailers both save and set off the effects of such costs of warehousing and stock prices holding Eventually consumers realize that Producers save administration cost it was just a strategy to attract them of ordering as they do not have to not a realistic price deal with many number of small Topic: Place Channels of Distribution It refers to the way the product reaches orders from retailers Distribution Channel # 3 Many of the large scale retailers from producers to consumers involving such as super or hyper markets buy intermediaries such as wholesalers and directly from producers retailers. It helps the retailers to buy goods Distribution Channel # 1 at lower prices and sell to the It is called direct sales. consumers at lower prices Producers deals with a bigger / Many of the producers pack and mass market, which increases their sell the goods under the name of sales super markets also Producers have to deal with small number of large orders, which save their ordering costs. Page 61 O Level Business Studies by Faisal Durrani 0303-4898049 They save on warehousing costs also Distribution Channel # 4 Mostly deal with the exporting intermediaries needed.” Producers who cater to small exclusive clientele my open their own retail outlets, e.g. boutiques which sell businesses, which face language expensive exclusively designed and cultural barriers ready made garments Producers appoint agents who are Quantity of goods bought – Most known to the local culture and of the producers are not willing to languages entertain small orders from small Agents find the demand for goods retailers because of the large in the local market and sell the amount of paperwork involved. goods to the wholesalers in large However orders from large quantity, who further distribute in retailers or wholesalers are small quantities to the retailers and normally very large. finally product reaches to the consumers. Size of firm producing the goods – very big firms which have the Factors influencing the choice of the financial and human resources type of channel of distribution normally not only produce the Nature of goods to be marketed – goods but also set up their own perishable goods such as cakes, retail outlets. Smaller sized bread and snacks need to be sold producers may prefer to quickly, hence direct sales channel concentrate on the technical aspect of distribution will be suitable; of producing and leave the goods that can last longer such as marketing of the goods to others. garments or footwear should be Topic: Promotion sold through distribution channels Role of advertising involving whole sellers and Purposes / Benefits of advertising retailers. Advertising performs the following Size of the market – The producers which want to sell their purposes: It informs the consumers about the goods in the mass market may sell products’ ingredients, price, their goods through wholesalers. benefits, method of usage, and side Thus “the bigger the market, the effects of the product larger will be the number of Page 62 O Level Business Studies by Faisal Durrani 0303-4898049 It helps us in improving our standard of living and quality of life It persuades the greater buying of the product or service It reminds the customers about the It makes the buying decisions of the consumers complex or difficult Types of Advertising Informative Advertising – is when the businesses inform about the launch of a new product; or a public message is product’s existence in the market conveyed to the consumers such as and reinforce the continuous use or smoking is injurious to health. buying of the product Persuasive Advertising – is when the It increases the sales of existing products It informs the launch of new products to the consumers It creates new job opportunities as businesses advertise the products or services with the attractive features of the product to maximize the sales of the product or proving the product better than the competitors’ ones. advertising itself is a profession Collective (or generic) Advertising – is It helps in increasing consumption when the businesses advertise a product and GDP of the country collectively without mentioning a Social aspects and dangers of particular brand of the product, but advertising promotes the use of the product itself, e.g. Advertising brings some social it is health to use tetra pack milk products. costs and dangers for the Competitive Advertising – is when the consumers businesses advertise the attractive features It condemns the other products and reduces the sales of other products It brings the increase in costs of the of a product and prove that the same are not in the other similar type of product, e.g. Surf Excel advertises the brightening businesses, which result in higher wash of clothes in one minute which is not prices of the products available with similar detergents. It misleads the consumers as Sales promotion businesses advertises the products Sales promotion vs. Advertising – with the features which it actually Promotion is a broader term which does does not have not only include sales promotion but also It persuades the buying of advertising consumers and overburdened them Sales promotion – includes all the with additional expenses techniques of marketing in which focus is Page 63 O Level Business Studies by Faisal Durrani 0303-4898049 on rapid sales rise such as buy one get one After sale service / Delivery free, price cuts, prize winning schemes, service – Both give the customers a and free gifts etc. satisfactory response that after Advertising – is a form of communication buying the product they will get with the consumers either to inform them free service up to certain number about the new launches or to persuade the of months or for a year; delivery buying of existing or new products or service saves their cost of services. transportation, which also Methods of promotion – include the promotes sales. following: Price reduction periodically when the business’ sales are falling or competition has gone stiff Free gifts / competition also responses the sales rise rapidly such as buy one get one free or prize winning schemes through raffle draw Page 64 O Level Business Studies by Faisal Durrani 0303-4898049 Advertising Advantages Disadvantages Media Examples of suitable Products / services to Advertise using this method Magazines Magazines are read by a specific types of person e.g. bicycle enthusiast reads bicycle magazines – Magazines are often only published once a month or once a week very effective way to reach the Advertisng in magazines is relatively Perfume in specialist magazines fro women more expensive than newspapers Golf equipment in golf magazines target population if there are specialist magazines which cover a particular activity. Magazine adverts are in colour and therefore can look more attractive Posters / They are permanent billboards Relatively cheap They are potentially seen by everyone who passes them Can easily be missed as people go past Local events them Products purchased by No detailed information can be a large section of the included in the advert population as posters are seen by everyone passing the advertisement Page 65 O Level Business Studies by Faisal Durrani 0303-4898049 Cinemas Can give visual image of the product and show the product in a Seen by only a limited number of people who go to watch the film Coca Cola when a film for teenagers is shown positive way Relatively low cost Can be very effective if your target audience go to see particular films Leaflets Cheap method of advertising Given out in the street to a wide May not be read Leaflets are often used to advertise local events range of people Could be given out to They could be delivered door to promote retail outlets door or mailed to a large number of and may contain a people money off voucher on Sometimes contain a money off the leaflet voucher to encourage the reader to keep the advert The adverts are permanent and can be kept for future reference Internet A large amount of information can be placed on a website which can be seen by a vast number of people at home and abroad Internet searches may not highlight the Products that customers website and it could be missed are already familiar In some countries internet access is with e.g. CDs, electrical goods, books Page 66 O Level Business Studies by Faisal Durrani 0303-4898049 limited Orders can be made instantly via the website Services such as train There is a lot of competition from information and other websites ticketing and insurance Security issues may discourage are also suitable customers from buying on line Others Very cheap forms of advertising e.g. May not be sent by everyone Shops use the bags on delivery vehicles and on the sides given out with of bags from shops purchases to advertise their name Coca Cola uses neon signs to advertise its name Page 67 O Level Business Studies by Faisal Durrani 0303-4898049 Page 68 O Level Business Studies by Faisal Durrani 0303-4898049 Choice of method of advertising depends on the following factors: Advantages of job production Greater customers’ satisfaction as Purpose of advertising the production is according to Nature of target audience and how customers’ needs do they get information Labour feels challenge in Advertising budget business has completing each type of production Nature of the product hence motivation for them Cultural and religious issues Each type of production is taken as Topic: Factors affecting production a target hence labour has a Production direction of work The process of converting raw material Time constraint is considered or into finished goods using machinery or more focused to assure on time labor and delivering them to the final delivery consumers. Productivity It is output more than input. It can be with regard to machines or labour; also called efficiency. It is measured by: Output / number of employees Disadvantages of job production Highly labour intensive hence expensive Takes time to complete due to labour involvement No or less standardization in Production Methods production due to variation in Job Production orders hence labour may feel less This method involves customized or used to the new orders or risk of customer based production. In other getting production spoiled words, customers are provided the Batch Production production according to their specific In this method of production, products are requirements. produced in variety and batches. Means one set of products are produced until the Advantages of batch production new batch of products get into production process. Variety and quantity of production is possible Partly labour and partly capital intensive hence not as expensive as labour intensive Page 69 O Level Business Studies by Faisal Durrani 0303-4898049 Involves flexibility in changing Lower cost and quality products production settings – changing the sell well hence benefit of high product specification profitability Technical break down does not spoil the product, it can be Disadvantages of flow production Highly automated machines might continued where stopped and then be expensive and require expert restarted labour to operate the machines Disadvantages of batch production Each group of product has separate Training to the staff is needed Businesses need to keep specification hence two groups of overhauling of machines so that products can not be mixed hygiene could be maintained If each group of products are Any halt at any one of the stages of demanded in smaller quantity, cost production may stop whole might be high in average production process If type of raw material used in each Lean Production different type of production Japanese methods of production in which method is less in quantity then cost lean or least level of resources are utilized of production might be higher and output is maximized by saving time Flow or line production on production as the method is with the Production method follows automated belief that time is also money and should production lines on which each stage of be saved as other resources. production is completed for single product Advantages of lean production with speed. Advantages of flow production Highly automated hence economies of scale due to bulk production Low average cost of production keep the products prices cheaper Standardized products are produced Continuous production, no idle time for labour, hence time is saved No additional production takes place Focus on quality Time delivery hence customers’ satisfaction Various methods of production such as JIT, Kanban, and Kaizen Page 70 O Level Business Studies by Faisal Durrani 0303-4898049 are taken to assist lean production effective Cost of production is saved by taking less production time Disadvantages of lean production No economies of scale hence benefits of economies are lost Ideal situation of getting every Wastage of time on production or raw material is avoided to minimize cost Highly automated production method is applied Disadvantages of JIT Has to assure that supply of raw material is timely available thing ready such as availability of Labour is motivated to work raw material or labour is difficult Risk of losing customers if the In mass production, lean is difficult to apply stock is not available Cell Production Large scale producers argue that lean It is when the whole production is divided production incurs high average cost due to into small parts where each part of the its small scale production, but lean production is completed by a specialist producers argue that they save time and group of labour and each part of the incur less average cost of production by production is considered as a complete having no idle time for labour or machines product, which labour keeps on producing and involving automation in production. without depending on previous part of the Just In Time method of production starts production. production when customers place the Cell production is same as division of orders and at the same time all the labour or specialization but without production processes including machinery interdependence on other part of the and labour is got ready. The raw materials production. are also ordered at the time customers Computer Aided Design (CAD) apply for the order. This is a technology using which all types Advantages of JIT of businesses may develop their new Saving on cost of warehouse products samples or prototype and without No risk of stock loss due to fire or incurring additional cost, the design or the theft Customers are assured quicker specification of the product can be changed. Using CAD, business may delivery hence greater customers’ maintain the records of its previous satisfaction designs to assure every new version of the Page 71 O Level Business Studies by Faisal Durrani 0303-4898049 product will be different from the previous Total Quality Management version. It refers to assurance of quality not only on Computer Aided Manufacturing production but in all the functions of (CAM) business. It is the responsibility of every A technological advancement in employee not just quality control manufacturing in which business may set department to maintain quality of standards of its products and when the production and work. Every employee is products get completed as finished goods, given empowerment to tackle quality in they can be checked against the standard his or her own way. Employees at each to assure quality and avoid any kind of stage of production or work should regard imperfection in the products. next stage of workers as their customers CAM may save the cost of business and assure quality. Here the target of TQM quality inspectors or controllers and earn is zero defects. Employees should work as reputation among customers. a team to share skills and ideas. Quality Control But the development of TQM environment A technique of quality maintenance in needs training costs and requires total which quality is checked all the way along commitment from the management. the production; quality controller or Stock inspectors check the quality of products at It is unsold or unused goods of raw each stage of production. material, work in progress, and finished Quality Assurance goods. The quality system in which it is ensured Stock control Charts that quality standards will be met to ensure Stock management or control is carried customers’ satisfaction; it involves out using a stock control chart. It includes: checking that standards are met within the Maximum stock level – the level of stock firm beyond which a business should not go, To make the difference between quality other wise following disadvantages may control and assurance, remember quality happen. assurance emphasizes preventing defects Ware house cost whereas quality control focuses on Risk of stock expiry detecting faults once they have occurred. Risk of theft or fire Quality assurance seeks to build quality However keeping higher level of stocks into the system. may have the following advantages Page 72 O Level Business Studies by Faisal Durrani 0303-4898049 Meeting excess demand of consumers Avoiding idle machine or labour hours Avoiding loss of customers towards competitors Topic: Factors affecting location Closer to customers’ and suppliers’ markets Availability of raw materials/Components Attractive infrastructure Meeting orders on time Availability of labour Discounts on bulk buying No Government influence such as Stock outs or shortage of stock When stock is out, it may bring the following disadvantages Customers’ orders will not be met planning permission Availability of power, gas, communication etc Transportation facilities on time and the business will lose Water supply its customers and reputation Climatic Suitability Labour and machines will remain Security idle and business average cost will Warehousing facilities be high Low cost of rent or cheaper Prices for completed orders have to be higher and sales may fall availability of land Topic: Business in International Minimum stock level or buffer stock Community level Implications of e-commerce The level of stock below which if business E-Commerce is trading through web falls, it may face the above mentioned browsing and internet. disadvantages of stock outs Advantages of E-Commerce Reorder Stock Level The level of stock at which order should Access to larger international market be place so that by the time stock reaches Access to suppliers of goods to minimum or buffer level, the delivery Quicker communication with could be received and the stock level could be boosted to maximum stock level. customers and suppliers Better exposure of the product by Lead Time giving extensive details of the The time between ordering of stock and product getting the delivery of stock Low cost of advertising Page 73 O Level Business Studies by Faisal Durrani 0303-4898049 Helpful in market research by giving e-questionnaire Customers orders processed rapidly Disadvantages of E-Commerce Knowledge of internet is important for the customers Making businesses more efficient and effective Increasing job opportunities GDP and Economic growth in the country Improved or better political relationships Issues of cyber crime Trade Barriers are the restrictions placed Cost of postage and dispatching by various countries’ governments to Packaging cost discourage imports or to protect local Risk of customers’ dissatisfaction industries. about the product because no They include the following: physical checking of the product Embargo – is a complete ban on imports by the consumers from other countries Trading blocs – these are the associations Quota – is limited number of quantity of among the countries around the world. imports a country’s government allows in They form custom unions (CU) to the country encourage free trade. Import Duty / Tariff – is an indirect tax Free Trade Areas (FTAs) placed on imported goods or raw material Countries around the world get to gather Exchange rate – government of a country and make FTAs, Such types of FTAs are depreciates the local currency to make EU; SADAC; ASEAN. foreign currency expensive The purposes of such FTAs are to have the Advantages of trade restrictions following: Bigger markets to trade Greater mobility of factors of production Operating at large scale Avoiding trade blocs among member countries Giving better exposure of products or services to the businesses Protection for local industries / infant businesses Maintaining production levels in the country Protection for foreign currency outflow Control on unemployment rate of the country Control over depreciation of local currency Protection against foreign debts Page 74 O Level Business Studies by Faisal Durrani 0303-4898049 Disadvantages of trade restrictions Even after the seal of official approval is Imported products become obtained, it must find buyers there. Can expensive Retaliation action against the country and fall in exports business No or less efficiency of local businesses Businesses dependent on imported the people afford to buy such a good? Is it offensive to their religious sentiments? Must the good be modified further to suit the climatic conditions there? Is the good produced and marked in units of measurement as regards weight, size, and raw material faces cost push capacity in accordance with local inflation requirements and in a language that is Problems of Exporting easily understood by the people there? Extra cost involved Such questions must be looked into to Higher insurance premiums are charged on goods sent overseas. Higher packaging costs are incurred for goods Need extra protection for a more ensure that the good is saleable in the foreign market Complex documentation and preparation for shipment Expertise is needed to handle the complex vigorous journey and transport documentation, the marking and costs are higher too packaging of goods for shipment and the So, the cost of goods exported must be customs procedures involved. Frequently, low enough for prices to be competitive licenses of both exports and imports are with similar goods in the overseas market needed. when these extra costs of premiums, Risk of fall in rate of exchange transport and packaging are added. If the payment is made in the currency of Compliance with foreign market importing country, there is the risk that the requirements rate of exchange between the two The goods exported must meet the countries will have changed between the governmental and customs requirements time that the price was quoted and the time overseas as regards quality, chemical that payment is made. Thus the exporter composition, technical specifications, etc. will receive less than what he expects if before they are admitted into the importing the exchange rate of the currency he is country paid in falls. Page 75 O Level Business Studies by Faisal Durrani 0303-4898049 Risk of the foreign buyer defaulting Easier access to loans from any The risk of non payment is higher for bank / financial institution exports than it is for goods sold locally. Easier to access research and This is because it is difficult to assess the development as no financial credit worthiness of the foreign buyer. problems Default on payment can also be due to Disadvantages of being multinationals political changes in the importing country Difficult to control and manage such as a revolution or the imposition of Face different rules and regulations exchange control by the government. Problems faced by importers 1. Trade blocs on imports 2. Language and cultural barriers in exporting countries in different countries Face language and cultural barriers Too much finance is required Country where multinationals operate is called host country 3. Letter of credit from the bank Advantages of multinationals to the host 4. Exchange rate for payment in country foreign currency may affect the Create jobs for local labour prices Bring new technology 5. Rising cost of raw material due to trade blocs Multinational Companies – are the type Increase competition in the local market Carry out research and of businesses which have their own stores, development, hence create new units, and factories in more than one ideas about product or service country. The country where they do operate is called host country. Advantages of being multinationals Economies of scale Cheaper factors of production – mainly by operating in developing countries Avoid transport cost or import duties / quotas by operating in the country where they want to sell the Political relationship among countries GDP of the country improves, hence economic growth Improved standard of living of the country’s people Balance of payment increases due to exports Bring investment in the country and foreign currency product Page 76 O Level Business Studies by Faisal Durrani 0303-4898049 Disadvantages of multinational to the host country Outflow of foreign currency when take the profit back to country of origin Barriers for local firms to grow Unemployment if they switch their production or operations units to other profitable countries Exploit workers by offering poor working conditions Tax evasion due to direct relationship with government authorities Rapid consumption of natural resources Page 77