Download O Level Business Studies by Faisal Durrani 0303

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
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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.
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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
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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
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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.
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 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
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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
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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
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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.
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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:
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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:
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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
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 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
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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
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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)
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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
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 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
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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
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 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)
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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:
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 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
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 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
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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
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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.
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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
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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.
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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
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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
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 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
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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
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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
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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.
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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.
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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
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 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
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 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
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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
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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
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 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
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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
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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.
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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
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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.
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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.
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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
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 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
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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
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 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
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 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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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.
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 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
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 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
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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
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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

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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
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
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
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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
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 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
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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
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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
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 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
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 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
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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.
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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
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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
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