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Starting a Business - What is enterprise? The term enterprise has two common meanings. Firstly, an enterprise is simply another name for a business. You will often come across the use of the word when reading about start-ups and other businessesSimon Cowells enterprise or Michelle set up her successful enterprise after leaving teaching. Secondly, and perhaps more importantly, the word enterprise describes the actions of someone who shows some initiative by taking a risk by setting up, investing in and running a business. Look again at two key words above initiative and risk. A person who takes the initiative is someone who makes things happen. He or she tends to be decisive. A business opportunity is identified and the person does something about it. Showing initiative is about taking decisions and being bold not everyone is like that! Risk-taking is slightly different. In business there is no such thing as a sure fire bet. All business investments carry an element of risk which is the chance or probability that things will go wrong. At the worst, the risk of an enterprise might mean the person making the investment loses all his/her money or becomes personally liable for the debts of the business. The trick is to take calculated risks, and to ensure that the likely returns from taking a risk are enough to make the gamble worthwhile. Someone who shows enterprise is an entrepreneur.

Starting a Business - Objectives of a new business What motivates someone to become an entrepreneur? Money of course! The chance to earn significant profits, buy a yacht, take numerous holidays, buy designer goods and send the kids to the best private schools. But, wait a minute! Is money and personal wealth really the main motivation? Evidence suggests that there are many more reasons why someone wants to start a business. Every business starts small. But by taking on some calculated risks, a lot of determination and some luck, a start-up business can become very large, profitable and valuable. However, not every entrepreneur wants to build a big business and earn a fortune. The objectives when starting a business can be broadly split into two categories: Financial objectives, and Non-financial objectives The media tend to focus on the financial objectives so lets deal with these first.

Financial objectives
Most business start-ups begin with one main financial objective to survive.

Why survival? Because a large percentage of new businesses do not survive much beyond their launch. The entrepreneur discovers that the business idea is not viable the business cannot be run profitably or it runs out of cash. Start-ups have a high failure rate. Survival is about the business living within its means. To survive, the business needs to have enough cash to pay the debts of the business as they arise suppliers, wages, rent, raw materials and so on. To survive, a business needs to have: Sufficient sources of finance (e.g. cash, a bank overdraft, share capital) A viable business model i.e. one which can make a profit If survival can be assured, then profit is the next most important financial objective for a new business. A profit is earned when the revenue of the business exceeds the total costs. The entrepreneur can choose to reinvest (aka retain) the profit in the business, or take it out as a personal payment or dividend. For many small business owners, profit is the return for all the hard work and risks taken. Profit is the reward for taking a risk and making an investment. Ideally, the profit earned is sufficient to provide the entrepreneur with enough income to live. In many cases it will be more than sufficient, once the business has been trading successfully for a few years However, it is important to appreciate that, to make a sustainable profit, a new business needs to be able to: Add value Sell into a large enough market Another financial objective is personal wealth. Some entrepreneurs have an objective that goes beyond wanting to earn an adequate income. They aim to build a valuable business that can substantially increase their personal wealth.

Non-financial objectives
Contrary to popular belief, starting a business is not always about financial objectives. Very often a new business is started with other, non-financial objectives in mind. Here are some of the non-financial motives that are often quoted by entrepreneurs: More control over working life want to choose what kind of work is done. The need for greater independence is a major motivator. Need a more flexible and convenient work schedule, including being able to work from or close to home. This motive is an important reason behind the many home-based business start-ups Feel that skills are being wasted and that potential is not being fulfilled Want to escape an uninteresting job or career A desire to pursue an interest or hobby Fed up with being told what to do want to be the boss! Want the feeling of personal satisfaction from building a business Want a greater share of the rewards from the effort being put in compared with simply being paid by an employer Fed up with working in a business hierarchy or bureaucratic organisation (people with entrepreneurial characteristics often feel stifled working and having to co-exist with others!

As a response to a shock or other major change in personal circumstances e.g. redundancy, divorce, illness, bereavement Starting a Business - What is an entrepreneur? There are many definitions of what is meant by an entrepreneur, but they tend to say the same thing, which is that an entrepreneur is Someone who takes a risk by starting a business An entrepreneur is someone who is enterprising. In other words he/she: Takes the initiative in trying to exploit a business opportunity Takes time to understand and calculate the risks involved Makes an investment to set up the business Goes ahead, despite the risk that the business venture might fail When deciding whether or not to take the risk of starting a business, an entrepreneur asks questions such as: Do I have a clear idea about the vision for the business? Am I really determined and committed to making the business work? Do I appreciate and accept the personal challenges and sacrifices that I will have to make? Can I handle the inevitable feeling of isolation and insecurity that a start-up brings? Can I afford to fail? What are the financial implications if the business does not succeed? Will customers really buy the product, assuming that I get it right? Who already provides this product (or something similar) and can I do it better or cheaper? How will I know if the business is succeeding or failing? Is my business plan sufficiently realistic, particularly in terms of cash flows and likely start-up losses? Can I access the resources (cash, supplies, distribution) that are needed to make the idea work? Do I need to obtain legal protection for the idea? In recent years the media have glamorised the challenge of starting and growing a business. A quick search on Amazon.co.uk will display many books by entrepreneurs and other business experts describing how they made it, my first million etc. Prime-time television shows such as Dragons Den, Risking it All and The Apprentice have proved hugely popular by showcasing the challenges faced in setting up a business. Entrepreneurs such as Lord Sugar, Sir Richard Branson and Sir James Dyson have earned enormous fortunes and provide inspiration for the next generation of budding business leaders. Entrepreneurs play an important role in society. They make a major contribution to economic activity. Imagine how many jobs are created by the thousands of new businesses that are set up every year and by the small businesses that prosper and take on more staff. Entrepreneurs encourage innovation through investment and risk-taking. Many of the products and services you use every day have been developed through entrepreneurial activity rather than in the research laboratories or board-rooms of large multinationals.

However, it is important to realise that starting a business is rarely glamorous. In fact it is nearly always very hard work. For every success story there are almost certainly many more business failures or businesses that dont meet the expectations of the people who set them up. Starting a Business - Sources of business ideas Where does an entrepreneur come up with the idea for his/her business? In practice there are many ways in which the business opportunity and idea is first spotted. As we shall see, sometimes luck plays a big part; at other times there is a role for approaches which encourage deliberate creativity. Here are some of the main sources of business ideas for start-ups: Business experience Many ideas for successful businesses come from people who have experience of working in a particular market or industry. For the start-up, there are several advantages of applying this experience to a new business: Better and more detailed understanding of what customers want Knowledge of competitors, pricing, suppliers etc Less need for start-up market research Entrepreneur is able to make more realistic assumptions in the business plan about sales, costs etc Industry contacts, who might then become the first customers of the start-up! All of the above help the business planning process and you could argue that they reduce the risks of a start-up. On the other hand, you might argue that familiarity breeds contempt. In other words, detailed experience of an industry means that the budding entrepreneur doesnt have a fresh perspective. Someone who is new to a market may be able to exploit approaches that have worked in other industries to make an impact with the start-up. Personal experience Many ideas come to entrepreneurs from their day-to-day dealings in life, or from their hobbies and interests. For some of us, frustrating or bad experiences are a source of irritation. For the entrepreneur they might suggest a business opportunity. It is often said that one of the best ways to spot a business opportunity is to look for examples of poor customer service (complaints, product returns, persistent queues etc). Such examples suggest that there is an opportunity to do something better, quicker or cheaper than the existing products. Hobbies and interests are also a rich source of business ideas, although you have to be careful to avoid assuming that, just because you have a passion for collecting rare tin openers, there is a ready market from people with similar interests! Many people have tried to turn their hobby into a business and found that generates only a small contribution to household income. Observation Simply observing what goes on around you can be a good way of spotting an idea. Often an idea will be launched in another country and has not yet been tried in other, similar economies. When

Stephen Waring was in the USA attending a wedding, by luck he sat next to someone who ran a household service business (treating lawns). After some brief market research, Stephen found out that there was no similar business in the UK, so he launched one. It has since become a hugely successful franchise business Green Thumb. It is worth looking at some other examples of how successful start-ups got their ideas in order to appreciate the diversity of sources. Here are some good ones: Entrepreneur Business Glasses Direct James Murray-Wells James was fed-up with being charged rip-off prices for prescription glasses. He researched the supply chain and found he could offer consumers the same product at substantially cheaper prices by selling direct. Will King Will found traditional wet-shaving painful due to his sensitive skin. His girlfriend suggested using oil to smooth the process. An oil-based solution to shaving was developed and is now a world leader. Will needed to find an alternative use for the output from his loss-making potato farm. He added value to the potatoes by turning them into premium-priced crisps. Fraser turned his grandmothers recipe for sugar-free jams into a best-selling grocery brand. Neil & Richard spotted the potential for grooming machines whilst working in entertainments industry. Gill made a lifestyle choice to move out of the corporate world and set up her own business. She combined her personal interest in teaching music to children with an idea for a franchise format. Where the Idea Came From

King of Shaves

Tyrrells Crisps

Will Chase

Superjam Beautiful Vending Jo Jingles

Fraser Doherty Neil Mackay & Richard Starrett Gill Thomas

Starting a Business - Risks and Rewards Taking a calculated risk An entrepreneur cannot avoid risk in a start-up and everyone knows that a large proportion of new businesses eventually fail. The trick is to assess: What the main risks are in a new business (e.g. unexpected costs, lower than expected sales, failure to secure distribution) The probability of the risks happening (this has to be an estimate) What would happen if the risks occur cost, cash etc The third part of the assessment above is perhaps the most important. For the small business, often starved of cash, even a relatively small event can prove disastrous. The entrepreneur has to assess the potential impact on the business of a risk, but also assess the upside (where things turn out to be better than expected).

So, a calculated risk can be defined as follows: A risk that has been given thoughtful consideration and for which the potential costs and potential benefits have been weighted and considered Entrepreneurs take calculated risks everyday, since they take decisions everyday. Each time they take a decision they are weighing up the significance of the options and (often intuitively) working out whether to go ahead. Rewards from enterprise Thats enough about the negative side of setting a business up. What about the rewards? We looked earlier at the motivations for setting up a business. Many of the intangible rewards that arise from being in business happen because these motives are achieved. A sense of satisfaction Building something Being in control Making that first sale Opening a new location Employing more people Getting an industry award or good publicity Getting great feedback from customers These are the kind of non-financial rewards that give entrepreneurs a buzz. However, ultimately, it is the financial rewards that justify the effort and make taking the risk worthwhile. To illustrate the potential financial rewards, here are some examples: Karen Darby sold her business SimplySwitch, a service allowing consumers to compare rates for gas and electricity suppliers among other things, to the Daily Mail for 22million Linda Bennett, one of Britains most successful female entrepreneurs, sold her womens fashion chain, LK Bennett, to two venture capitalists for 70million Gerry Pack started up his business Holiday Extras providing airport hotel rooms and parking with just 100. He sold it in 2005 for 43million Darren Richards started up his online dating agency (DatingDirect.com) with just 2,500 and sold it eight years later for 30million You should also remember that there is a strong tradition of entrepreneurs who have built and sold one business for a substantial amount going onto build other successful businesses. They never lose the entrepreneurial buzz. Such people are called serial entrepreneurs. Starting a Business - Creative thinking to create business ideas An entrepreneur is always on the look out for a business opportunity the thinking process takes place constantly. However, it can also be argued that a formal process of creative thinking can also help someone set up a new business. This is often referred to as deliberate creativity. Here are some of the models or approaches to deliberate creativity which might be used by a start-up:

Blue skies thinking: This is a kind of brainstorming in which the thinking process allows no limits in what is suggested and no preconceptions about what the answer might be. Blue skies thinking encourages contributors to throw in as many ideas as possible. Only when the flow of ideas has stopped does the process go on to consider which ideas might have commercial potential. Lateral thinking Originally created by Edward De Bono, lateral thinking is about reasoning that is not immediately obvious and about ideas that may not be obtainable by using only traditional step-by-step logic. Lateral thinking is sometimes called thinking outside the box it tries to come up with new and unexpected ideas. Six thinking hats Another approach to creative thinking from De Bono - this is a thinking tool for group discussion and individual thinking. The approach identifies six types of styles of thinking which can be used to come up with ideas and focus the group on good ideas:

Neutrality (white Hat)

Considering purely what information is available, what are the facts? Quantitative data on a market (e.g. sales, existing products) would be considered with this hat on. Instinctive gut reaction or statements of emotional feeling (but not any justification). Many entrepreneurs rely on their instinctive or gut feel with their business idea. Logic applied to identifying flaws or barriers, seeking mismatch. The black hat encourages the entrepreneur to think about the things that might go wrong with an idea. Logic applied to identifying benefits. This is the opposite of the black hat what are all the positives or upsides from the idea. What is the best that might happen? Statements of provocation and investigation, seeing where a thought goes. This is the hat which encourages lateral thinking. Thinking about thinking. The blue hat encourages the entrepreneur to consider and evaluate the ideas coming from the other five hats!

Feeling (red hat)

Negative judgement(black hat) Positive Judgement(yellow hat) Creative thinking (green hat) Process control (Blue hat)

Starting a Business - Invention An invention is something genuinely new something that has not been done before. It could be a substance, a product, a process etc.

Many of the entrepreneurs who climb the steps leading up to the Dragons Den believe that not only is their invention unique, but that it also has great business potential. Several questions usually follow from the Dragons: Is the invention really an original idea? Have any already been sold (i.e. is there any evidence of demand?) Can it be, or has it been protected by patents to prevent competitors from copying it? Inventions arise after a period of research often taking many years. The research process is usually costly, both in terms of cash spent and time taken. So it seems reasonable that a genuine invention should be capable of protection. For an invention, the protection comes from a patent.

A common question asked of applicants on Dragons Den is "have you got patent protection"? However, there are some strict rules that must be applied in order for a patent to be granted. In order for a patent to be granted, the invention must be: (1) New (2) Be an innovative step (i.e. not obvious to other people with knowledge of the subject) (3) Be capable of industrial application (i.e. it can be made and used!) (4) Not be excluded (certain types of invention don't count - e.g. scientific theories, artistic creations) If granted, a patent gives the owner the right to take legal action against others who try to take commercial advantage of the invention without getting the permission of the patent owner. A patent can last for up to 20 years. A key benefit of a patent is the ability of the patent owner to "licence" the right to use the invention. For example, a patent owner could grant a larger manufacturing business the right to use the idea in a product, in return for a royalty. Starting a Business - Invention An invention is something genuinely new something that has not been done before. It could be a substance, a product, a process etc. Many of the entrepreneurs who climb the steps leading up to the Dragons Den believe that not only is their invention unique, but that it also has great business potential. Several questions usually follow from the Dragons: Is the invention really an original idea? Have any already been sold (i.e. is there any evidence of demand?) Can it be, or has it been protected by patents to prevent competitors from copying it? Inventions arise after a period of research often taking many years. The research process is usually costly, both in terms of cash spent and time taken. So it seems reasonable that a genuine invention should be capable of protection. For an invention, the protection comes from a patent.

A common question asked of applicants on Dragons Den is "have you got patent protection"? However, there are some strict rules that must be applied in order for a patent to be granted. In order for a patent to be granted, the invention must be:

(1) New (2) Be an innovative step (i.e. not obvious to other people with knowledge of the subject) (3) Be capable of industrial application (i.e. it can be made and used!) (4) Not be excluded (certain types of invention don't count - e.g. scientific theories, artistic creations) If granted, a patent gives the owner the right to take legal action against others who try to take commercial advantage of the invention without getting the permission of the patent owner. A patent can last for up to 20 years. A key benefit of a patent is the ability of the patent owner to "licence" the right to use the invention. For example, a patent owner could grant a larger manufacturing business the right to use the idea in a product, in return for a royalty. Starting a Business - Innovation Inventing something new is one thing. But making it commercially viable is quite another. That is where innovation comes in. Innovation is about putting a new idea or approach into action.

Innovation is commonly described as 'the commercially successful exploitation of ideas'. Successful innovation is mainly about creating or adding value. It does so either by: Improving existing goods, processes or services (process innovation), or by Developing goods, processes or services of value that have not existed previously (product innovation) However, both kinds of innovation require a business to: Challenge the status quo Have a deep understanding of customer needs Develop imaginative and novel solutions Innovation can come in many forms: Improving or replacing business processes to increase efficiency and productivity, or to enable the business to extend the range or quality of existing products and/or services Developing entirely new and improved products and services - often to meet rapidly changing customer or consumer demands or needs Adding value to existing products, services or markets to differentiate the business from its competitors and increase the perceived value to the customers and markets Whatever form it takes, innovation is a creative process. The ideas may come from:

Inside the business e.g. from employees, in-house designers, sales staff Outside the business, e.g. suppliers, customers, media reports, market research insights or from contacts at local universities or other research organisations Successful innovation comes from filtering those ideas, identifying those that the business will focus on and applying resources to exploit them.

The benefits can be significant, including: Improved productivity & reduced costs Building a brand Establishing an advantage over competitors Higher sales and profits Starting a Business - Planning a new business What is a business plan? A business plan is a written document that describes a business, its objectives, its strategies, the market it is in and its financial forecasts. The business plan has many functions, from securing external funding to measuring success within the business. Benefits of business planning to a start-up The main reasons why a start-up should produce a business plan are: Provides a focus on the business idea - is it really a good one, and why? Producing a document helps clarify thoughts and identify gaps in information The plan provides a logical structure to thinking about the business It encourages the entrepreneur to focus on what the business is really about and how customers and finance-providers can be convinced It helps test the financial viability of the idea - can the business achieve the required level of profitability and not run out of cash? The plan provides something which can be used to measure actual performance A business plan is essential to raising finance from outside providers - particular investors and banks Questions a start-up business plan should answer A business plan needs to address the issues of interest to the reader and user. Assuming that the plan is meant to be read by potential finance providers (e.g. a bank, business angel or venture capitalist) then it ought to provide convincing and realistic answers to questions such as: What is the business idea or opportunity? What is the product and how is it different or unique? What is the target market segment and who are the potential competitors? How large is the target market and is it growing? Who are the customers; how much will they buy and at what price? What will it cost to produce and sell the product? Can the product be made and/or sold profitably? At what stage will the business break-even and what are the likely profits? What investment is required to launch and establish the business? Where will the money come from and what type of finance is required? What are the main risks facing the business and how to handle them?

Starting a Business - What goes into a startup business plan? For a start-up there are usually two kinds of business plan - a simple one and a detailed one. Some businesses need to produce both. The simple business plan is rarely shown to outsiders of the business. It is written by the entrepreneur, for the entrepreneur. The simple plan helps summarise the key aims and targets of the business and the actions required to make the business a reality. It is likely to be written in quite an informal way. What would go into the simple plan? Areas such as: The idea - a simple description of the proposed business Where the idea came from and why it is a good one Key targets for the business - sales, profit, growth (gives a sense of direction for the business), ideally for the next 3-4 years Finance required - how much from the founder, how much to be loaned over how loan and from who Market overview - main segments, market size (value, quantity), growth, market shares of main competitors (if known) How the business will operate (location, premises, staff, distribution methods) Cash flow forecast (important) + trading forecast A detailed business plan is needed if a more complicated or larger business is planned as a start-up, or if the entrepreneur needs to raise money from business angels or get a substantial loan from a bank. Here is a summary of the key content: Executive summary: a brief 1-2 page summary of the detail! Should contain nothing new, but highlight the key points Market: a profile of the target market based on market research Product: what it is and how it is different from the competition (the "unique selling point") Competition: an honest description of the competition in the target market - what they do well, their weaknesses and their likely response Protecting the idea: how the product and business can be protected from competition e.g. patents, trademarks, distinctive approaches to marketing or distribution that competitors will find hard to replicate Management team: a crucial area for any investor. Who is involved in the start-up and what will they be doing? What experience and expertise do they bring? Which management roles will need to be filled as the business grows? Marketing: the key elements of the marketing mix should be explained here. Remember that for a start-up the marketing budget is likely to limited, so the plan should describe a credible approach to promoting the product and include realistic assumptions about how many customers will buy and at what price Production /operations: this explains what is involved in the production process, what capacity is needed, who will supply the business, where it will be located etc. Financial projections: a summary of the cash flow and trading forecasts. This section should highlight the key assumptions that have been made and also outline the main risks and opportunities in the forecasts (i.e. what might go wrong, or where things might prove better than forecast). Sources of finance: here the figures from the cash flow forecast are taken and used to highlight what funding the business needs, and when. Returns on investment: another key area for any investor. This is a description of how the entrepreneur expects investors to get a return on their investment. Who might eventually buy the business, when, and for how much?

Starting a Business - Starting a franchise A business idea for a start-up doesn't have to be original. Many new businesses are formed with the intention of offering an existing business idea. The use of franchises is a great example of that. The basic idea for a franchise is this. A franchisor grants a licence (the "franchise") to another business (the "franchisee") to allow it to trade using the brand or business format. That might sound a bit complicated! The trick is to remember that the franchisor is in charge the franchisor is the original owner of the business idea. Franchises are a significant part of business life in the UK: Franchises generated annual sales of 12.4 billion in the UK in 2007 There are over 800 different franchised business formats in the UK and that number is rising by around 5% each year The average sales turnover per franchise outlet is 360,000 90% of franchises are reported to be profitable A franchise has average borrowings of 70,000, suggesting that banks are happier to make loans to franchise businesses than other start-ups The typical franchisee is aged 47. 66% are men and 86% of franchisees are married! Franchises are particularly popular in the service sector Examples of well-known businesses that use franchising to expand their operations include: Subway McDonalds Starbucks Pizza Hut Thorntons Molly Maid Prontaprint You might have noticed from the list above that nearly all those businesses provide services rather than produce goods. Franchising is particularly suitable for service businesses. Advantages of running a franchise For a start-up entrepreneur, there are several advantages to investing in a franchise: It is still your own business even if you are sharing the profits with the franchisor The investment should be in a tried and tested format and brand The franchisee gets advice, support and training. The franchisor will also supply key equipment, such as IT systems, which are designed to support the operation of the business

It is easier to raise finance - the high street banks have significant experience of providing finance to franchises No industry expertise is required in most cases The franchisee benefits from the buying power of the franchisor It is easier to build a customer base the franchise brand name will already by established and many potential customers should already be aware of it The franchisee is usually given an exclusive geographical area in which to operate the franchise which limits the competition (since operators of the same franchise are not in direct competition with each other) Overall, investing in a franchise is a lower risk method of starting a business and there is a lower chance of business failure Disadvantages of running a franchise There are several disadvantages for the franchisee: Franchises are not cheap! The franchisee has to pay substantial initial fees and ongoing royalties and commission. He/she may also have to buy goods directly from the franchisor at a mark-up There are restrictions on marketing activities (e.g. not being allowed to undercut nearby franchises) and on selling the business There is always a risk that the franchisor will go out of business The franchise needs to earn enough profit to satisfy both the franchisee and franchisor there may not be enough to go round! There are many good franchise opportunities available for a start-up, but some poor ones too. So there is still a need for the entrepreneur to do market research into the franchise A franchise is a kind of "halfway house" for a budding entrepreneur. It is a lower risk method of market entry and it is often easier to raise finance. However, running a franchise does not offer the same kind of long-term financial rewards that owning a business outright can.

Starting a Business - Social enterprise One kind of business structure that has grown rapidly in the UK in recent years is the social enterprise. Social enterprises are the most common form of not-for-profit enterprises. The clue in the phrase not-for-profit tells you much about the aims and objectives of social enterprises. However, it is important to appreciate that a social enterprise is not a charity. Social enterprises are defined as: Businesses with primarily social objectives whose surpluses are principally reinvested for that purpose in the business or community, rather than being driven by the need to maximise profit for shareholders and owners. In other words, a social enterprise is a proper business that makes its money in a socially responsible way. These ventures are not necessarily formed to reinvest all profits into the communities. Social entrepreneurs can make a good profit themselves. However, their business model is also designed to benefit others.

Social enterprises complete alongside other businesses in the same marketplace, but use business principles to achieve social aims. A few things all social enterprises have in common are: They are directly involved in producing goods or providing services They have social aims and ethical values They are self-sustaining, and do not rely on donations to survive (i.e. they are not charities)

Well known examples of social enterprises include Divine Chocolate, the Eden Project and fairtrade coffee company Cafedirect. Recent government data suggests that there are more than 55,000 social enterprises in the UK with a combined turnover of 27bn. Social enterprises account for 5% of all businesses with employees, and contribute 8.4billion per year to the UK economy. Starting a Business - Adding value Adding value sounds like a bit of business jargon and it is! However, it also has quite a precise meaning which is important. So it is worth learning this: Adding value = the difference between the price of the finished product/service and the cost of the inputs involved in making it Added value is equivalent to the increase in value that a business creates by undertaking the production process. It is quite easy to think of some examples of how a production process can add value. Consider the examples of new cars rolling down the production line being assembled by robots. The final, completed and shiny new car that comes off the production line has a value (price) that is more than the cost of the sum of the parts. Value has been added. Exactly how much is determined by the price that a customer pays. Alternatively, imagine a celebrity chef preparing a meal at his luxury restaurant. Once the cooking is complete, the meal is being served and sold for a high price, substantially more than the cost of buying the ingredients. Value has been added. You dont have to use robots or have the culinary skills of Gordon Ramsay to add value. For example, businesses can add value by: Building a brand a reputation for quality, value etc that customers are prepared to pay for. Nike trainers sell for much more than Hi-tec, even though the production costs per pair are probably pretty similar! Delivering excellent service high quality, attentive personal service can make the difference between achieving a high price or a medium one Product features and benefits for example, additional functionality in different versions of software can enable a software seller to charge higher prices; different models of motor vehicles are designed to achieve the same effect. Offering convenience customers will often pay a little more for a product that they can have straightaway, or which saves them time.

A business that successfully adds value should find that it is able to operate profitably. Why? Remember the definition of adding value: where the selling price is greater than the costs of making the product. By definition, a business that is adding substantial value must also be operating profitably. Finding ways to add value is a really important activity for a start-up or small business. Quite simply, it can make the difference between survival and failure; between profit and loss. The key benefits to a business of adding value include: Charging a higher price Creating a point of difference from the competition Protecting from competitors trying to steal customers by charging lower prices Focusing a business more closely on its target market segment Starting a Business - Beating the competition With all that competition out there, how does a small business compete effectively? The starting point has to be by providing a great product! In most markets, customers are looking for the best value for money. This means that a product which is better than the competition, and which sells for the same price, will most likely prove to be a winner. It is often the case that a business needs to have more than one product in order to succeed in a market. Offering a product range enables a business to provide customers with more choice and potentially attract customers who buy for different reasons. For example, a product range might include a budget or best value product, a mid-range product, and a higher-price premium product. Walk down the aisle of any large supermarket and look at the own-label ranges to see this in action. Quality is another great way to compete effectively. A quality product is one that meets customer needs. Maybe the customer wants something that is 100% reliable, or which uses high quality materials. A successful business can compete by consistently achieving the required quality level. By focusing on a high quality product, a successful business is often able to develop its brand reputation. In many consumer markets, brands are an important source of advantage. Customers trust good brands, are more loyal to them, and are often prepared to pay a higher price too. Customer service is an important way of beating the competition. Buying the product is one thing but what about the level of after-sales service? Is that an area where a small business can gain an advantage? The overall selling experience for a customer can be made to be better than the competition are staff well-informed and friendly? Price is the other main method of competing. For many businesses, the price charged is a reflection of two factors: 1. What the other competitors are charging 2. What the product costs to make or buy

If a business operates efficiently, that gives it a better chance of being able to offer a lower price than competitors and still make a reasonable profit. Topic: Business aims and objectives

Introduction When a sole trader sets up they may have some unstated aims or objectives - for example to survive for the first year. Other businesses may wish to state exactly what they are aiming to do, such as Amazon, the Internet CD and bookseller, who wants to make history and have fun. An aim is where the business wants to go in the future, its goals. It is a statement of purpose, e.g. we want to grow the business into Europe. Business objectives are the stated, measurable targets of how to achieve business aims. For instance, we want to achieve sales of 10 million in European markets in 2004. A mission statement sets out the business vision and values that enables employees, managers, customers and even suppliers to understand the underlying basis for the actions of the business. Business Objectives Objectives give the business a clearly defined target. Plans can then be made to achieve these targets. This can motivate the employees. It also enables the business to measure the progress towards to its stated aims. The most effective business objectives meet the following criteria: S Specific objectives are aimed at what the business does, e.g. a hotel might have an objective of filling 60% of its beds a night during October, an objective specific to that business. M - Measurable the business can put a value to the objective, e.g. 10,000 in sales in the next half year of trading. A - Agreed by all those concerned in trying to achieve the objective. R - Realistic the objective should be challenging, but it should also be able to be achieved by the resources available. T- Time specific they have a time limit of when the objective should be achieved, e.g. by the end of the year. The main objectives that a business might have are: Survival a short term objective, probably for small business just starting out, or when a new

firm enters the market or at a time of crisis. Profit maximisation try to make the most profit possible most like to be the aim of the owners and shareholders. Profit satisficing try to make enough profit to keep the owners comfortable probably the aim of smaller businesses whose owners do not want to work longer hours. Sales growth where the business tries to make as many sales as possible. This may be because the managers believe that the survival of the business depends on being large. Large businesses can also benefit from economies of scale. A business may find that some of their objectives conflict with one and other: Growth versus profit: for example, achieving higher sales in the short term (e.g. by cutting prices) will reduce short-term profit. Short-term versus long-term: for example, a business may decide to accept lower cash flows in the short-term whilst it invests heavily in new products or plant and equipment. Large investors in the Stock Exchange are often accused of looking too much at short-term objectives and company performance rather than investing in a business for the long-term. Alternative Aims and Objectives Not all businesses seek profit or growth. Some organisations have alternative objectives. Examples of other objectives: Ethical and socially responsible objectives organisations like the Co-op or the Body Shop have objectives which are based on their beliefs on how one should treat the environment and people who are less fortunate. Public sector corporations are run to not only generate a profit but provide a service to the public. This service will need to meet the needs of the less well off in society or help improve the ability of the economy to function: e.g. cheap and accessible transport service. Public sector organisations that monitor or control private sector activities have objectives that are to ensure that the business they are monitoring comply with the laws laid down. Health care and education establishments their objectives are to provide a service most private schools for instance have charitable status. Their aim is the enhancement of their pupils through education. Charities and voluntary organisations their aims and objectives are led by the beliefs they stand for. Changing Objectives A business may change its objectives over time due to the following reasons:

A business may achieve an objective and will need to move onto another one (e.g. survival in the first year may lead to an objective of increasing profit in the second year). The competitive environment might change, with the launch of new products from competitors. Technology might change product designs, so sales and production targets might need to change.

Topic: Starting a business - what is required

An entrepreneur is defined as someone who has the ability to take risks and organise the factors of production. When starting a new business the entrepreneur faces a number of problems before they can start up. They need an idea and a will to succeed, but these are not enough on their own to be successful. A business needs: Finance to fund the other elements listed below: finance is usually the hardest thing to obtain in a start-up business. Labour to help develop a product or service and then to produce/deliver it. Customers without them, the business will fail. Obtaining customers means the business must undertake marketing. Suppliers provide many of the inputs, such as raw materials. Premises and equipment maybe a simple office, or possibly a large, modern factory; depending on what the business activity is. Management organisation & structure this is often very simple at the start-up stage (e.g. a sole trader!). Designed, researched and tested product or service a successful business is about more than just having a good idea the product needs to be brought to the marketplace in its best format. Dyson spent many years completing his first vacuum cleaner before being able to sell it. A business may also need to protect its idea or products. It can do this through: Copyright and patents make it illegal for other firms to copy directly the business idea or invention. Keep new products and services secret until they are ready for launch. Focus on retaining key staff that would be otherwise valuable for competitors to poach! Entrepreneurs An entrepreneur needs several skills to succeed: Have ideas

Ability to take risks Ability to persuade others to join the business or lend the business money Energy to keep the business going under tough circumstances it is often said that the best entrepreneurs are the most persistent

Topic: Business departments

A business is normally organised by its functions, e.g. marketing department, accounts department and so on. This is because being grouped together allows the functions to benefit from specialisation and division of labour. This leads to lower unit costs and a greater efficiency. However it can mean that there is departmental rivalry Larger businesses might have a number of businesses within the whole company. This would be coordinated by a Head Office, where all the major decisions are made. Other ways of organising the business could be more appropriate for different types of businesses: Product the functions are organised around the product so at a business like ICI, who are the UKs leading chemical manufacturer, a product manager would have a team of functions who would answer to them, like accounting, marketing and production Geographical a hierarchy might be split according to different places that the product is sold into for instance a business may have a Far Eastern division of its business, which would take into account the different cultural and supply differences of the region Market the organisation is based on market segments so an airline business like British Airways could concentrate on long haul, short haul, holiday makers, business clients and freight A business whose decision-making comes from one place only is known as a centralised organisation. Normally Head Office will decide on the major elements of strategy, no matter where the manufacturing plants and sales teams are positioned around the country or globe. This means that there are good opportunities for economies of scale. Other businesses, especially multinationals (see below) will opt for a more decentralised organisation where the individual businesses within the whole company group, make decisions for themselves. This means that there is more opportunity to react to the changing marketplace (one of the advantages of a small firm). However there is a possibility that these businesses (who may well be in different parts of the world) might be duplicating research or not bargaining in such as strong position as a bigger overall company. When a business reaches a certain size then it might split into different departments. These departments will specialise, employing people with expertise in these areas.

The main departments in a business might be:

Department Accounts

Role Provides a detailed record of the money coming in and going out of the business and prepares accounts as a basis for financial decisions

Human Resources Deals with all the recruitment, training, health and safety and pay or Personnel negotiations with unions/workers Production Purchasing Sales and marketing Makes sure that the production plans are met on time and products of the right quality are produced Buys all the raw materials and goods required for production Sales function deals with all aspects of selling to customers; the marketing function carries out marketing research, organises advertising and product promotion

Topic: Starting a business - getting the finance

The entrepreneur will need to finance to the business. This means they will need to find money to pay for: The purchase of plant & machinery, office equipment etc Renting or buying premises and offices (e.g. the first 3 months rent may need to be paid in advance) Essential business services such as insurance The purchase of stocks of raw materials and components to allow production to start The wages and salaries of the first employees to join the business (who may be needed before any goods or services are actually sold) To provide financial cover whilst the business waits for customers to pay The main ways in which an entrepreneur can find finance for a new business are: Own money Bank loans Bank overdraft Money from friends Grant assistance from government bodies These types of finance can be split into INTERNAL and EXTERNAL sources of finance. Internal sources of finance are generated from the business itself (e.g. cash from sales) and external sources of finance from outside the business (e.g. a bank loan). The business can also split the types of finance into categories relating to length of time the money is needed for Short-term: bank overdraft Medium term: bank loan; lease; hire purchase; government grants

Long term: bank loan; mortgage; share issue (for limited companies); debenture Business Plan A business plan sets out how a business is going to achieve its aims and objectives. It is extremely useful for a new business to use a plan because it can be used to show potential investors how their money is going to be spent. A business plan will probably contain the following elements: Statement of aims and objectives Description of market the business is selling to Main competitors (how will they respond to a new competitor?) Production and sales forecasts Equipment needed Distribution plan for how to get product to customers In the plan, great care should be taken to estimate and forecast how the cash will come into and leave the business in the early weeks and months. This is because in the early days of setting up a business, finance is hardest to manage. It is uncertain how easy it will be to find customers and will they buy the product or service at the price that is being asked? The business will be incurring significant start-up costs which will eat into the available funds. Topic: Growing a business

Introduction The growth of a business is when it expands in size. The size of a business can be measured by the following means: Sales turnover (or sales revenue) Number of employees Share capital (the number of shares times the price of each share) Market share the sales of the business of a particular product as a proportion of all sales of that type of product. A 5% market share would mean that 1 in 20 of all products sold are sold by that business. Number of outlets (e.g. shops) They may mean to grow in size or sometimes it just happens without the business making a conscientious effort to do so. Businesses either grow organically or by acquisition and mergers. Organic growth means the business grows by expanding its sales or their operations and is financed through its own profits. Acquisitions and mergers are when the business joins or buys other businesses, not necessary

of the same type. Businesses may wish to expand for the following reasons: Benefit from economies of scale lower unit costs due to an increase in size A larger market share (selling more products than before) means they can charge higher prices and gain more profit As means of survival if they wish to compete with other growing businesses Some businesses start selling or acquiring businesses that are not in the same market as the markets they are presently selling in. This is known as diversification. Businesses may wish to diversify because: Helps spread the risks across a number of products. If one product fails due to market conditions then other products in different markets should not be affected. Good way of expanding if present market seems already full. Gives the business fresh objectives and may act to motivate managers and staff. A business can grow organically in the following ways: Lower price - People will buy more at lower prices. Increase advertising - Customers are made more aware of the attraction of the products. Sell in different location - Selling to a new set of customers, more potential. Sell on credit - Customers are attracted by the ability to buy now pay later. Mergers and Acquisitions A merger is where two or more businesses AGREE to join together to become one larger firm. An acquisition is when one firm BUYS another firm. When a one business buys another it is possible that the acquisition or merger integrates the new product with the existing product. This integration can either be vertical or horizontal integration. Mergers and acquisitions are an important option for larger businesses that wish to grow rapidly. However, they are a high risk strategy it is easy to buy the wrong business, at the wrong price for the wrong reasons! The advantages of mergers and acquisitions are: Economies of scale, which reduces unit costs. Greater market share for horizontal integration, which means the business can often charge higher prices. Spreads risks if products different. Reduces competition if a rival is taken over. Other businesses can bring new skills and specialist departments to the business. It is easier to raise money if a larger business.

The disadvantages of mergers and acquisitions are: Diseconomies of scale if business becomes too large, which leads to higher unit costs. Clashes of culture between different types of businesses can occur, reducing the effectiveness of the integration. May need to make some workers redundant, especially at management levels this may have an effect on motivation. May be a conflict of objectives between different businesses, meaning decisions are more difficult to make and causing disruption in the running of the business. Constraints on Growth Though a business may wish to grow in size, there may be reasons why it cannot do this: Financial limitations a business may not be able to raise the necessary finance to grow any bigger perhaps it has not made enough profits to generate the cash or the bank is not keen to lend it more money at the moment. Size of the market there is often a limit to number of people who are willing to buy the type of product that the business is producing e.g. a printing press manufacturer will know that there are only a small number of publishers in the UK who will be able to buy the product. Government controls means that a business cannot necessarily have more than 25% of the market share. This often arises when one business joins with another. If the government thinks it is not in the public interest to have such a large business, then the joining together may not take place. Human resources are limited in terms of the skills available. Especially in more specialised areas it may be difficult to find enough qualified staff in the area to expand the business. In the South East of England, where unemployment is very low for some types of jobs, businesses have struggled to expand for this very reason. Topic: Sole Traders

A sole trader is a business that is owned by one person. It may have one or more employees. It is the most common form of ownership in the UK. The main advantages of setting up as a sole trader are: Total control of the business by the owner. Cheap and easy to start up few forms to fill in and to start trading the sole trader does not need to employ any specialist services, other than setting up a bank account and informing the tax offices. Keep all the profit as the owner, all the profit belongs to the sole trader. Business affairs are private competitors cannot see what you are earning, so will know less about how the business works and how it succeeds.

The reasons why sole traders are often successful are: Can offer specialist services to customers e.g. appliance repair specialists. Can be sensitive to the needs of customers since they are closer to the customer and will react more quickly, because they are the decision makers too. Can cater for the needs of local people a small business in a local area can build up a following in the community due to trust if people can see the owner they feel more comfortable than if the owner is in some far off town, not able to hear the views of the local community. The legal requirements of a sole trader are to: Keep proper business accounts and records for the Inland Revenue (who collect the tax on profits) and if necessary VAT accounts Comply with legal requirements that concern protection of the customer (e.g. Sale of Goods Act) The main disadvantages of being a sole trader are: Unlimited liability see below. Can be difficult to raise finance, because they are small, banks will not lend them large sums and they will not be able to use any other form of long-term finance unless they change their ownership status. Can be difficult to enjoy economies of scale, i.e. lower costs per unit due to higher levels of production. A sole trader, for instance, may not be able to buy in bulk and enjoy the same discounts as larger businesses. There is a problem of continuity if the sole trader retires or dies what happens to the business next? The reasons for being a sole trader are often a balance between business and personal costs and benefits. Many will prefer the satisfaction of running a business with little paper work against the risks, pressure and probably long working hours. A sole trader is liable for any debts that the business incurs. This means that any money that the owner has put into the business could be lost, BUT IMPORTANTLY, if the business continues to incur further costs then the owner has to pay these as well. In some cases they may have sell some of their own possessions to pay creditors. Such a risk often puts potential sole traders off setting up businesses, but also makes them consider the other forms of business structure.

Topic: Partnerships

A partnership is a business where there are two or more owners of the enterprise. Most partnerships are between two and twenty members though there are examples like John Lewis and some of the major world accountancy firms where there are hundreds of partners. A partner is normally set up using a Deed of Partnership. This contains: Amount of capital each partner should provide (i.e. starting cash). How profits or losses should be divided. How many votes each partner has (usually based on proportion of capital provided). Rules on how to take on new partners. How the partnership is brought to an end, or how a partner leaves. The advantages of a sole trader becoming a partnership are: Spreads the risk across more people, so if the business gets into difficulty then there are more people to share the burden of debt Partner may bring money and resources to the business (e.g. better premises to work from) Partner may bring other skills and ideas to the business, complementing the work already done by the original partner Increased credibility with potential customers and suppliers who may see dealing with the business as less risky than trading with just a sole trader For example, a builder, working originally as a sole trader, may team up with an architect or carpenter to form a partnership. Either would bring added expertise, but also might bring added capital and/or contacts. Of course the builder could team up with another builder as well sharing the risk, and potentially the workload. The main disadvantages of becoming a partnership are: Have to share the profits. Less control of the business for the individual. Disputes over workload. Problems if partners disagree over of direction of business. The next step for a partnership is to move towards becoming a private limited company. However some partnerships do not want to move to this stage. The advantages of remaining a partnership rather than becoming a private limited company are: Costs money to set up limited company (may need to employ a solicitor to set up the paper work). Company accounts are filed so the public can view them (and competitors). May need to spend money on an auditor to check the accounts before they are filed.

When a partnership finishes then, depending on how the Deed of Partnership is set up, each partner has an agreed slice of the business. Topic: Limited Companies

A limited company is a business that is owned by its shareholders, run by directors and most importantly whose liability is limited. Limited liability meansthat the investors can only lose the money they have invested and no more. This encourages people to finance the company, and/or set up such a business, knowing that they can only lose what they put in, if the company fails. For people or businesses who have a claim against the company, limited liability means that they can only recover money from the existing assets of the business. They cannot claim the personal assets of the shareholders to recover amounts owed by the company. To set up as a limited company, a company has to register with Companies House and is issued with a Certificate of Incorporation. It also needs to have a Memorandum of Association which sets out what the company has been formed to do, and Articles of Association which are internal rules over including what the directors can do and voting rights of the shareholders. Limited companies can either be private limited companies or public limited companies. The difference between the two are: Shares in a public limited company (plc) can be traded on the Stock Exchange and can be bought by members of the general public. Shares in a private limited company are not available to the general public; and The issued share capital of a plc (the initial value of the shares put on sale) must be greater than 50,000 in a plc. A private limited company may have a smaller share capital A private limited company might want to become a plc because: Shares in a private limited company cannot be offered for sale to the general public, so restricting availability of finance, especially if the business wants to expand. Therefore, it is attractive to change status It is also easier to raise money through other sources of finance e.g. from banks [Note: becoming a plc does not necessarily mean that the company is quoted on the Stock Exchange. To do that, the company must do a flotation (see below)] The disadvantages of a being a public limited company (plc) are: Costly and complicated to set up as a plc need to employee specialist bankers and lawyers to help organise the converting to the plc.

Certain financial information must be made available for everyone, competitors and customers included (would you want them to know how much profit you are making?) Shareholders in public companies expect a steady stream of income from dividends, which might mean that the business has to concentrate on short term objectives of creating a profit, whereas it might be better to work on longer term objectives, such as growth and investment. Threat of takeover, because another company can buy up a large number of shares because they are traded publicly (can be sold to anyone). If they buy enough, they can then persuade other shareholders to join with them to vote in a new management team. Shareholders own the company. They buy shares because: Shares normally pay dividends, which is a share of the profits at the end of the year. Companies on the Stock Exchange usually pay dividends twice each year. Over time the value of the share may increase and so can be sold for a profit this is known as a capital gain. Of course, the price of shares can go down as well as up, so investing in shares can be very risky. If they have enough shares they can influence the management of the company. A good example is a venture capitalist that will often buy up to 80% of the shares of a company and insist on choosing some of the directors. Flotation A company may float on the stock market. This means selling all or part of the business to outside investors. This generates additional funds for the business and can be a major form of fund raising. When shares in a plc are first offered for sale to the general public as the company is given a listing on the Stock Exchange. Divorce of ownership and control As a business becomes larger, the ownership and control of the business may become separated. This is because the shareholders may have the money, but not the time or the management skills to run the company. Therefore, the day-to-day running of the business is entrusted to the directors, who are employed for their skills, by the shareholders. The shareholders are therefore divorced from the running the business for 364 days of the year. They will have their say at the Annual General Meeting (AGM) of the company, where the directors present the accounts and results. Very recently a couple of businesses have had very strong shareholder unrest leading the company to tone down a number of their decisions. In practice directors tend to have at least a modest shareholding in the company. This provides the director with an incentive to achieve good dividends and capital growth for the share (an increase in the share price).

Topic: Franchises

A franchise is where a business sells a sole proprietor the right to set up a business using their name. Examples of major franchises are: McDonalds Clarks Shoes Pizza Hut Holiday Inn The franchisor is the business whose sells the right to another business to operate a franchise they may run a number of their own businesses, but also may want to let others run the business in other parts of the country. A franchise is bought by the franchisee once they have purchased the franchise they have to pay a proportion of their profits to the franchiser on a regular basis. Depending on the business involved, the franchiser may provide training, management expertise and national marketing campaigns. They may also supply the raw materials and equipment. The advantages of being a franchisor: Large companies see it as a means of rapid expansion with the franchisee providing most of the finance. If the franchise model works, then there are large profits to made from - selling franchises - royalty payments - selling raw materials and equipment. The advantages of setting up as a franchisee are: The franchisee is given support by the franchiser. This includes marketing and staff training. So starting a business in this way requires less expertise and is less lonely! The franchisee may benefit from national advertising and being part of a well-known organisation with an established name, format and product Less investment is required at the start-up stage since the franchise business idea has already been developed A franchise allows people to start and run their own business with less risk. The chance of failure among new franchises is lower as their product is a proven success and has a secure place in the market The disadvantages of setting up as a franchisee are: Cost to buy franchise can be very expensive (hundreds of thousands of pounds). Have to pay a percentage of your revenue to the business you have bought the franchiser from. Have to follow the franchise model, so less flexible. You would probably be told what

prices to set, what advertising to use and what type of staff to employ. In conclusion, a buying a franchise a good way of an individual setting up a business because: They do not have to establish themselves in the same as a sole trader might have to. They will have the support of a tried and tested business model, often with a national marketing campaign behind them. Topic: Cooperatives

A co-operative is where a number of individuals or businesses work together to achieve a common purpose. They are normally formed so individuals and small businesses can benefit from being part of a larger group, meaning they have more power to buy or bargain. There are three main types of co-operatives: Retail co-operatives Marketing or trader co-operatives Worker co-operatives A retail co-operative is probably the most familiar co-op. The Co-Op shops and Leo Hypermarkets are a regular sight in the high street. The objectives of a co-op tend to set them apart from other businesses. The objectives are normally more focused on the members of the co-operative, the local community and the world community. Though profits are required to enable them to reinvest in their business, they will not be a primary objective. Though co-operatives exist to overcome some of the trading difficulties faced by small businesses, they can still face of number of problems in their operation: The system of one member one vote in some societies means a long, drawn out decision-making process Co-operatives may find it difficult to raise finance since banks are not so willing to lend them money because their main aim is not to make a profit Idealistic and ethical aims may not be agreeable with all members, so creating unrest and disharmony The aims held by many co-operatives may not lead to profits in the long run (though many co-op shops will continue to exist at a loss because the owners feel they are providing an important service to the community.)

Topic: Span of Control and Hierarchies

In a business of more than one person, unless the business has equal partners, then there are managers and subordinates. Subordinates are workers controlled by the manager. A hierarchy describes the structure of the management of the business, from the top of the company the managing director, through to the shop floor worker, who reports to their foreman, in a manufacturing business. The hierarchy of a business is usually best understood by drawing an organisation chart showing which levels of management and employees report to whom. An example of a hierarchy is shown in the diagram below

A span of control is the number of people who report to one manager in a hierarchy. The more people under the control of one manager - the wider the span of control. Less means a narrower span of control. An example of a narrow span of control is shown in the diagram below:

The advantages of a narrow span of control are: A narrow span of control allows a manager to communicate quickly with the employees under them and control them more easily Feedback of ideas from the workers will be more effective It requires a higher level of management skill to control a greater number of employees, so there is less management skill required An example of a wide span of control is shown in the diagram below:

The advantages of wide span of control are: There are less layers of management to pass a message through, so the message reaches more employees faster It costs less money to run a wider span of control because a business does not need to

employ as many managers The width of the span of control depends on: The type of product being made products which are easy to make or deliver will need less supervision and so can have a wider span of control Skills of managers and workers a more skilful workforce can operate with a wider span of control because they will need less supervision. A more skilful manager can control a greater number of staff A tall organisation has a larger number of managers with a narrow span of control whilst a flat organisation has few managers with a wide span of control. A tall organisation can suffer from having too many managers (a huge expense) and decisions can take a long time to reach the bottom of the hierarchy BUT, a tall organisation can provide good opportunities for promotion and the manager does not have to spend so much time managing the staff Chain of command is the line on which orders and decisions are passed down from top to bottom of the hierarchy. In a hierarchy the chain of command means that a production manager may be higher up the hierarchy, but will not be able to tell a marketing person what to do. The advantages of hierarchies are: Helps create a clear communication line between the top and bottom of the business this improves co-ordination and motivation since employees know what is expected of them and when. Hierarchies create departments and departments form teams. There are motivational advantages of working in teams. The disadvantages of hierarchies are: The formation of departments can mean that: - Departments work for themselves and not the greater good of the business. - Departments do not see the whole picture in making decisions. Hierarchies can be inflexible and difficult to adjust, especially when businesses need to adapt to changing markets remember employees do not tend to react well to change.

Topic: Stakeholders and business ethics

Introduction A stakeholder is any individual or organisation that is affected by the activities of a business. They may have a direct or indirect interest in the business, and may be in contact with the business on a daily basis, or may just occasionally. The main stakeholders are: Shareholders (not for a sole trader or partnership though) they will be interested in their dividends and capital growth of their shares. Management and employees they may also be shareholders they will be interested in their job security, prospects and pay. Customers and suppliers. Banks and other financial organisations lending money to the business. Government especially the Inland Revenue and the Customs and Excise who will be collecting tax from them. Trade Unions who will represent the interests of the workers. Pressure Groups who are interested in whether the business is acting appropriately towards their area of interest. Stakeholders versus Shareholders It is important to distinguish between a STAKEHOLDER and a SHAREHOLDER. They sound the same but the difference is crucial! Shareholders hold shares in the company that is they own part of it. Stakeholders have an interest in the company but do not own it (unless they are shareholders). Often the aims and objectives of the stakeholders are not the same as shareholders and they come into conflict. The conflict often arises because while shareholders want short-term profits, the other stakeholders desires tend to cost money and reduce profits. The owners often have to balance their own wishes against those of the other stakeholders or risk losing their ability to generate future profits (e.g. the workers may go on strike or the customers refuse to buy the companys products).

Social Responsibility Social responsibility is the duty and obligation of a business to other stakeholders.

Stakeholder Shareholder Employee Supplier Customer Local community Government Environment

Example of responsibility to that stakeholder Good return on investment Fair pay and working conditions Regular business and prompt payment Fair price and safe product Jobs and minimum disruption Employment for local community Less pollution

Social responsibility for one group can conflict with other groups, especially between shareholders and stakeholders. Ethics Ethics refers to the moral rights and wrongs of any decision a business makes. It is a value judgement that may differ in importance and meaning between different individuals. Businesses may adopt ethical policies because they believe in them or they believe that by showing they are ethical, they improve their sales. Two good examples of businesses that have strong ethical policies are The Body Shop and CoOp. Some examples of ethical policies are: Reduce pollution by using non-fossil fuels. Disposal of waste safely and in an environmentally friendly manner. Sponsoring local charity events. Trading fairly with developing countries

External Environment: introduction to the external environment Introduction A business does not operate in a vacuum. It has to act and react to what happens outside the factory and office walls. These factors that happen outside the business are known as external factors or influences. These will affect the main internal functions of the business and possibly the objectives of the business and its strategies. Main Factors The main factor that affects most business is the degree of competition how fiercely other businesses compete with the products that another business makes. The other factors that can affect the business are: Social how consumers, households and communities behave and their beliefs. For instance, changes in attitude towards health, or a greater number of pensioners in a population. Legal the way in which legislation in society affects the business. E.g. changes in employment laws on working hours. Economic how the economy affects a business in terms of taxation, government spending, general demand, interest rates, exchange rates and European and global economic factors. Political how changes in government policy might affect the business e.g. a decision to subsidise building new houses in an area could be good for a local brick works. Technological how the rapid pace of change in production processes and product innovation affect a business. Ethical what is regarded as morally right or wrong for a business to do. For instance should it trade with countries which have a poor record on human rights. Changing External Environment Markets are changing all the time. It does depend on the type of product the business produces, however a business needs to react or lose customers. Some of the main reasons why markets change rapidly: Customers develop new needs and wants. New competitors enter a market. New technologies mean that new products can be made. A world or countrywide event happens e.g. Gulf War or foot and mouth disease. Government introduces new legislation e.g. increases minimum wage. Business and Competition Though a business does not want competition from other businesses, inevitably most will face a degree of competition. The amount and type of competition depends on the market the business operates in: Many small rival businesses e.g. a shopping mall or city centre arcade close rivalry.

A few large rival firms e.g. washing powder or Coke and Pepsi. A rapidly changing market e.g. where the technology is being developed very quickly the mobile phone market. A business could react to an increase in competition (e.g. a launch of rival product) in the following ways: Cut prices (but can reduce profits) Improve quality (but increases costs) Spend more on promotion (e.g. do more advertising, increase brand loyalty; but costs money) Cut costs, e.g. use cheaper materials, make some workers redundant Social Environment and Responsibility Social change is when the people in the community adjust their attitudes to way they live. Businesses will need to adjust their products to meet these changes, e.g. taking sugar out of childrens drinks, because parents feel their children are having too much sugar in their diets. The business also needs to be aware of their social responsibilities. These are the way they act towards the different parts of society that they come into contact with. Legislation covers a number of the areas of responsibility that a business has with its customers, employees and other businesses. It is also important to consider the effects a business can have on the local community. These are known as the social benefits and social costs. A social benefit is where a business action leads to benefits above and beyond the direct benefits to the business and/or customer. For example, the building of an attractive new factory provides employment opportunities to the local community. A social cost is where the action has the reverse effect there are costs imposed on the rest of society, for instance pollution. These extra benefits and costs are distinguished from the private benefits and costs directly attributable to the business. These extra cost and benefits are known as externalities external costs and benefits. Governments encourage social benefits through the use of subsidies and grants (e.g. regional assistance for undeveloped areas). They also discourage social costs with fines, taxes and legislation. Pressure groups will also discourage social costs.

External Environment: Economic sectors Business activity is the process of transforming inputs into outputs by adding value. There are three main sectors of business activity: Primary sector Involves the extraction and production of raw materials, such as coal, wood and steel. A coal miner and a fisherman would be workers in the primary sector. Secondary sector Involves the transformation of raw materials into goods e.g. manufacturing steel into cars. A builder and a dressmaker would be workers in the secondary sector. Tertiary sector Involves the provision of services to consumers and businesses, such as cinema and banking. A shopkeeper and an accountant would be workers in the tertiary sector. Goods move through a chain of production. The chain of production follows the construction of a good from its extraction as a raw material through to its final sale to the consumer. So a piece of wood is cut from a felled tree (primary sector), made into a table by a carpenter (secondary) and finally sold in a shop (tertiary). Some businesses have elements of all sectors in their chain of production. Others businesses choose to specialise.Specialisation occurs when a producer concentrates on making a small number of products, or on providing a narrowly defined service. Examples of specialisation: Baker only baking bread Machinery that only cuts sheet metal Lawyer dealing only with criminal law Advantages of specialisation Producer becomes more efficient because they learn the best way (all the short cuts) to produce at the lowest cost A producer may be able to charge a higher price from a customer the customer is prepared to pay more for expert/specialist knowledge (e.g. a cosmetic surgeon) External Environment: The Business / Economic Cycle Economies go through a regular pattern of ups and downs in the value of economic activity (as measured by gross domestic product or GDP. This is known as the business cycle (sometimes you also see it referred to as the economic cycle). The business cycle is crucial for businesses of all kinds because it directly affects demand for their products. The business cycle is characterised by four main phases: Boom: high levels of consumer spending, business confidence, profits and investment. Prices and costs also tend to rise faster. Unemployment tends to be low as growth in the economy creates new jobs

Recession: falling levels of consumer spending and confidence mean lower profits for businesses which start to cut back on investment. Spare capacity increases + rising unemployment as businesses cut back and reduce stocks Slump / depression: a prolonged period of declining GDP - very weak consumer spending and business investment; many business failures; rapidly rising unemployment; prices may start falling (deflation) Recovery: things start to get better; consumers begin to increase spending; businesses feel a little more confident and start to invest again and build stocks; but it takes time for unemployment to stop growing Every business is affected by the stage of the business cycle, but some businesses are more vulnerable to changes in the business cycle than others. For example, a business that relies on consumer spending for its revenues will find that demand is closely related to movements in GDP. During a boom, such businesses should enjoy strong demand for their products, assuming that the products are actually what customers want! But during a slump, the business has to ride out the storm suffering a sharp drop in demand. You can see lots of examples of this in the UK economy currently. During the housing-market inspired boom of the early 2000s, many retail and consumer goods businesses took advantage of the boom. Consumers were prepared to take on significant personal debt in order to finance their purchases. However, the sharp economic downturn during 2008 and 2009 saw many businesses suffer sales falls of between 10-30%. Some did not survive their fixed costs were just too high to be able to remain viable. Businesses whose fortunes are closely linked to the rate of economic growth are referred to as cyclical businesses. Examples include: Fashion retailers Electrical goods House-builders Restaurants Advertising Overseas tour operators Construction and other infrastructure firms By contrast, some businesses actually benefit from an economic downturn. If their products are perceived by customers as representing good value for money, or a cheaper alternative than more expensive products, then consumers are likely to switch. Good examples that were featured in the UK media during the recession of 2008/09 included: Value retailers (e.g. Aldi, Lidl, Netto) Fast-food outlets (e.g. Dominos, Subway) Domestic holidays (e.g. B&Bs and holiday cottages) Chocolate for some reason, chocolate sales always increase strongly during an economic downturn! External Environment: Business and Globalisation Globalisation is arguably the most important factor currently shaping the world economy. Although it is not a new phenomenon (waves of globalisation can be traced back to the 1800s) the changes it is bringing about now occur far more rapidly, spread more widely and have a much greater business, economic and social impact than ever before. Globalisation is best thought of as a process that results in some significant changes for markets and businesses to address: for example

An expansion of trade in goods and services between countries (an opportunity for many businesses; a threat for others) An increase in transfers of financial capital across national boundaries including foreign direct investment (FDI) by multi-national companies and the investments by sovereign wealth funds (e.g. Middle Eastern governments buying assets in the UK) The internationalisation of products and services and the development of global brands such as Starbucks, Nike, Sony and Google Shifts in production and consumption e.g. the expansion of outsourcing and offshoring of production and support services, which has traditionally benefitted countries with lower labour costs & skilled labour markets such as India, at the expense of jobs in developed economies like the UK Increased levels of labour migration which has the effect of lowering wage costs in many industries, but for others is a problem (e.g. a loss of skilled workers leaving an economy) The emergence of countries playing a bigger role in the global trading system including China, Brazil, India and Russia A key result of globalisation is the increasing inter-dependence of economies. For example: Most of the worlds countries are dependent on each other for their macroeconomic health Many of the newly industrialising countries are winning a growing share of world trade and their economies aregrowing faster than in richer developed nations All countries have been affected by the credit crunch and decline in world trade, but many emerging market countries have slowed down rather than fall into a full-blown recession There are several alternative approaches for a business looking to expand globally many choose to follow one or more of the following: Establish production sites overseas Licence technology & other intellectual property Joint ventures Franchising Offshoring / outsourcing Selling directly to overseas markets either with sales agents, distribution agreements or online The motivations for successful businesses to operate globally are strong, and growing. For example: Higher profits and a stronger position and market access in global markets Reduced technological barriers to movement of goods, services and factors of production Cost considerations a desire to shift production to countries with lower unit labour costs Forward vertical integration (e.g. establishing production platforms in low cost countries where intermediate products can be made into finished products at lower cost) Avoidance of transportation costs and avoidance of tariff and non-tariff barriers Extending product life-cycles by producing and marketing products in new countries

External Environment: Government Spending Government spending is also known as public spending and in Britain, it takes up over 45% of GDP. Spending by the public sector can be broken down into three main areas: Transfer Payments Transfer payments are welfare payments made available through the social security system including the Jobseekers Allowance, Child Benefit, State Pension, Housing Benefit, Income Support and the Working Families Tax Credit. The main aim of transfer payments is to provide a basic floor of income or minimum standard of living for low income households. Current Government Spending This is spending on state-provided goods & services that are provided on a recurrent basis every week, month and year, for example salaries paid to people working in the NHS and resources for state education and defence. The NHS claims a sizeable proportion of total current spending hardly surprising as it is the countrys biggest employer with over one million people working within the organisation! Capital Spending Capital spending includes infrastructure spending such as new motorways and roads, hospitals, schools and prisons. You can see the main categories of government spending (in the UK) from this table: Total bn Health Care Pensions Welfare Education Other Spending Defence Protection Interest General Government Transport Total Spending 120 117 109 86 84 44 35 31 25 21 669

How does government spending affect businesses?

The level of government spending has many direct and indirect effects on all businesses. For firms selling goods and services to individual consumers and to other firms: Increased government spending may mean higher taxes Higher taxes reduce the ability of customers to purchase goods and services, which is likely to reduce consumer spending

Consequently increased government spending is often at the expense of private sector spending and is therefore potentially harmful to some firms On the other hand, many businesses rely on government spending for their revenues and profits. For businesses that supply services to the public sector, demand is directly linked to how much government is spending. Good examples include: Construction firms that build and repair the road network Publishers who supply schools and colleges IT systems consultants who develop computer systems for public sector organisations In November 2010 the UK Government announced substantial cuts in government spending as part of a comprehensive review of all government spending programmes. The resulting cuts will directly affect many firms who rely on demand from the public sector for their revenues. External Environment: Government Taxation There are some key reasons why government needs to levy taxes; the main ones are: To raise revenue to finance government spending Managing aggregate demand - to help meet the governments economic objectives Changing the distribution of income and wealth Market failure and environmental targets taxes may help correct market failures (e.g. pollution) An important distinction can be made between direct and indirect taxes: Indirect taxation Direct taxation Direct taxation is levied on income, wealth and Indirect taxes are levied on spending by profit consumers on goods and services Direct taxes include: Examples: Income Tax VAT (15% - 20%) National Insurance Contributions Excise duties on fuel and alcohol, car tax, Corporation Tax betting tax and the TV licence Capital Gains Tax Who pays? The burden of an indirect tax might be passed onto the consumer by the producer Depends on the price elasticity of demand and supply for the product The effects of the main types of taxation on businesses (in the UK) can be summarised as follows: Levied on Tax Income & National Insurance Income Impact Affects disposable income of households An increase in income tax would potentially lower consumer spending Higher income tax may also reduce the incentive for employees to work (impact on motivation?) Reduces profits available to retain and reinvest in a

Corporation

Business profits

VAT

Capital gains

business A decrease in corporation tax may act as an incentive for a business to invest (to achieve greater profits) Spending by Directly affects the selling prices of products bought by households consumers and households An increase in VAT results in higher inflation and potentially lowers the disposable income of consumers On profits from shares Reduces benefits from financial investment

External Environment: Business & Exchange Rates An exchange rate is the value of one currency expressed in terms of another. So 1 may be worth $1.55 and 1.33. A currency that is getting stronger or appreciating is a currency that is going up in value against another. So 1:$1.5 moving to 1:$1.8 means the pound is getting stronger A currency that is becoming weaker or depreciating is a currency that is going down in value against another. So 1:$1.8 moving to 1:$1.5 means the pound is getting weaker Currencies change in value against each other all the time. This is because most currencies are based on flexible exchange rates. The notable difference is in the Euro zone (see below). Currencies change in value because there is a change in demand for holding that currency. Households, governments and businesses need other countries currencies to buy their goods and services (e.g. holiday makers for purchasing wine or a business buying spare parts for machinery from France will need Euros). A change in exchange rates might affect a business in the following ways: Exchange rates changes can increase or lower the price of a product sold abroad The price of imported raw materials may change The price of competitors products may change in the home market For example an increase in the exchange rate will mean that price abroad goes up, lowering sales; price of imported raw materials falls, either leading to a fall in price and more sales, or an increase in profits; competitors prices fall, meaning lower sales. Exchange rate Originally 1:1.5 appreciates 1:1.8 depreciates 1:1.2 French car (15,000) 10,000 in the UK 8,333 12,500 UK car (12,000) 18,000 in France 21,600 14,400 French raw materials (4 per kilo) 2.67 to UK businesses 2.22 3.33

External Environment: Interest rates - introduction An interest rate is the cost of borrowing money or the return for investing money. For example, a bank charges interest on amounts loaned out or on the balance of an overdrawn bank account. A bank will also pay interest to the owner of an account with a positive balance. Interest rates vary depending on the type and provider of borrowing. The base interest rate in the UK economy is set by the Bank of England. Each month, the Monetary Policy Committee of the Bank of England to decide what the base rate should be. During the credit crunch, the base interest rate has fallen sharply to as low as 0.5% The base interest rate set by the Bank of England affects other interest rates in the economy because it is the rate at which banks can themselves lend from the Bank of England. In theory, a lower base rate will lead to lower interest rates on borrowings paid by businesses but not necessarily. The effect of a change in interest rate will be affected by whether borrowing is at a variable or fixed rate: With a variable rate, the interest charged varies in relation to the base rate. So a fall in the base rate to 0.5% in early 2009 should mean that businesses with variable-rate overdrafts pay lower interest. A fixed interest rate means that the interest cost is calculated at a fixed rate which doesnt change over the period of the credit, whatever happens to the base rate. External Environment: Business and the Environment

Introduction
Twenty years ago, environmental issues were rarely a priority on the agenda of business management. Now, there is an argument that operating an environmentally-friendly business is a top priority for business, particularly those whose operations and activities are nationwide and international. The environment has become a key external influence on businesses. The key environmental issues which potentially constrain the ability of a business to achieve its objectives include:

Key Environmental Concerns Sustainability A green supply chain Minimising packaging Promoting environmental policies

Complying with environmental laws Carbon emissions Waste disposal

Business & environmental regulation

Business activities are regulated by three main agencies in the UK: Environment Agency in England and Wales Northern Ireland Environment Agency Scottish Environment Protection Agency And also by Local authorities who regulate Air quality & pollution Noise, odour and light pollution Land contamination Environmental health Environmental laws and regulations are wide and varied, but essentially businesses have to make sure that they: Store and treat waste safely and securely Protect employees and environment from air pollution Don't produce excessive noise, smoke, fumes & other forms of pollution Comply with rules for storage and use of hazardous substances & waste To meet their obligations, businesses need to focus on: Use of raw materials, water and other resources (inputs) Energy use and its impact on climate change Waste and pollution produced by the business The impact the business has on employees and the local, wider and international community Whilst complying with these regulations and laws inevitably imposes additional costs on many businesses, it is possible to identify some advantages that arise for the environmentallyconscious business. These include: Lower raw material costs & waste disposal charges Longer life of assets which are recycled or repaired Trading opportunities with organisations that will only use environmentally-friendly suppliers Improved customer goodwill

Sustainable business
You will see the word sustainable or sustainability used in many businesses these days.

A sustainable business is a business that has no negative overall impact on the environment. That definition makes it quite hard to quantify whether the goal of sustainability has been met, since it assumes the net effect of a business activities on the environment can be measured in full.

In practice, a business that aims to be sustainable gets involved in a range of activities designed to minimise their net effect on the environment. These are activities such as: Using packaging that can be reused or recycled Minimising or eliminating the use of hazardous chemicals and processes that produce harmful by-products Working with suppliers to assess and improve their sustainability, or switching to more sustainable suppliers Using more energy-efficient equipment, or using renewable sources of energy Collaborating with other businesses that can use waste (or supply by-products that can be used as raw materials) Eliminating unnecessary activities e.g. replacing some business travel with conference calls instead To be effective, a strategy of building a sustainable business requires the drive and support of people through a firm particularly top management. Management need to: Understand how changes will affect employees and other stakeholders Gain commitment and support from those stakeholders Anticipate changes in environmental legislation - try to be "ahead of the game" Set short and long-term objectives for sustainability projects Review progress and objectives regularly External Environment: Labour market and unemployment The labour market is where businesses hire workers. A business needs people to help the day to day running of the operation. The amount of labour needed depends on whether the business is a labour intensive or capital intensive. A business that needs more people and less machinery is known a labour-intensive business. Hairdressing, house building, teaching and the fashion industry are examples of labour intensive industries. A capital-intensive industry is where a business relies heavily on machinery and technology in its transformation of inputs into outputs. Good examples include the car industry, steel production and the rail industry. Unemployment is where there are people you are willing and able to work but cannot find employment at the going wage rate. For example a machine worker who cannot get a job because there are no jobs for machine workers in the area. High unemployment, though it can be bad for local sales, can provide a business with a good source of cheap labour. On the other hand a shortage of labour might cause difficulties for a business: It may be more difficult to recruit new people - which might prevent the business from growing as fast as it wishes Existing workers may demand higher wages because they know that the business will be reluctant to release them. Competitors may try harder to poach the best staff. The business may have to invest further in staff training and development rather than rely on recruiting new skills into the business. Recruitment of personnel can also depend on the mobility of labour in the labour market.

Mobility of labour means the speed with which a person can move into a different job. There are two main types: Geographical mobility Can they physically move to that place of work? This depends on the transport links as well as peoples desire to move house to get a job. Occupational mobility Do they have the skills to do the new job? This depends on the education and training that people have. Even with GCSEs and A levels students will need more training to do many jobs. The state of the regional labour market will be a major influence on location decisions for businesses. In the South East, especially near London, there is low unemployment, so it will be difficult to find cheap labour, though there is good pool of skilled labour. This is because a business may be able to attract good workers from other businesses, at higher wages though. In the North East there are pockets of high unemployment, with skilled workers without jobs, because some of the more traditional industries have declined. External Environment: Business & Legislation - Introduction Legislation The way in which a business can operate is controlled by legislation. Laws can be imposed by the UK or European Union courts and government. Legislation mainly acts as a constraint on business. The main areas of legislation that affect businesses are: Employment law Consumer protection Competition law Employment law This is aimed at protecting the health, safety and rights of employees The main employment laws that a business needs to consider are: Health and Safety at Work Act 1974 Employers must provide safe premises and machinery. They must ensure that workers health is not affected by their work. The key costs and benefits of the Health and Safety at Work Act for a business are: - Adds to costs to businesses that need to train staff and spend money maintaining the standards set out. - BUT may reduce cost in the long term because of a reduction in staff absences and not having to pay compensation for injuries.

- Good health and safety record is a good way of encouraging recruitment of good workers. Equal Pay Act 1970 Employees who do equal work or work of equal value must receive the same pay as workers of the other sex. Sex Discrimination Act 1975 Employees cannot be sexually discriminated in employment, training or recruitment. Race Relations Act 1976 It is illegal to discriminate against someone on the basis of race, ethnic group or colour. Employment Protection Act 1978 Employees must be given a written contract of employment. It protects against unfair dismissal (without good cause) and says that redundancy pay must be paid if the worker has served more than two years and their job is to be abolished. Employment law imposes additional costs to the business because they have to spend additional money on training, recruitment and pay. Like the Health and Safety Act there are also benefits if the workers feel they are treated fairly and there is more security, they will be more motivated. Consumer Protection This is aimed at making sure that businesses act fairly towards their consumers especially since consumers are sometimes in a much weaker financial position. The main consumer protection legislation is: Sale and Supply of Goods Act (this states that goods must be of satisfactory quality) Trade Description Act (goods and services must perform in the way advertised by the business) Consumer Credit Act (this protects the consumer when borrowing money or buying on credit) Consumer protection imposes additional costs to businesses since they have to comply with the laws. If they do not comply they risk fines and ultimately being put out of business by the courts of law. Competition law Competition law aims to ensure that fair competition takes place in each industry. Governments believe that greater competition leads to lower prices, better quality goods and a wider variety of products. Competition Commission (CC) and the Office of Fair Trading (OFT) investigate any business that has more than 25% of the market share, especially if it merges with another business. They may feel that the business has too much power and can set high prices and provide poor quality

products. The CC and OFT has the power between them either to fine these businesses, or prevent the merger taking place. The OFT can also fine businesses who fix prices or prevent other businesses from trading in their market. Most recently they investigated the car industry and warranties offered by leading electrical retailers.

External Environment: Business & Technology Technological change refers to the changes in production techniques and production equipment. It could be a change in the machinery used to make a product or the computers to design a product. More recently it is the use of the computers and information technology (IT) to improve the efficiency and competitiveness of businesses that has led to technological change. Since technological is so rapid, there are important implications for businesses. A business can be affected by the following technological change: In production In provision of services In the office Technological change in production Technological change leads to improved production of goods and services due to: Computer-aided manufacturing ( CAM) this reduces labour costs, is more accurate and faster and can work at any hour of the day. The computer controls the machinery. Computer-integrated manufacturing (CIM) here, computers control the whole production line. Best example is in car production where robots undertake much of the work, reducing the need for labour to perform boring, routine tasks. Computer-aided design (CAD) Computers are used to help design products using computer generated models and 3D drawings. Reduces the need to build physical models to test certain conditions, known as prototypes. This can be expensive to produce just for testing purposes (e.g. aircraft or new cars. Therefore new production technology can increase the speed of production, improve the quality of the product and reduce costs per unit of production. Technological change can be seen in the shops and the provision of other services such as banking or repairs. Electronic point of sale (EPOS) and Electronic Funds Transfer at Point of Sale (EFTPOS) speed up transactions in shops and give vital information for businesses so can sort out their stock levels. EFTPOS means that shoppers can pay for goods and services using credit and debit cards.

Banks can use hole in the wall machines to deliver cash or take deposits therefore remain open all hours. Repair people can use handheld computers to work out what is wrong with the machinery they are examining. Technological change in the office helps speed up the movement of information and improves the analysis of information: Communication is improved through the use of the intranet and Internet. The intranet is an internal system of computer communication while the internet can be used to communicate with customers, suppliers amongst others in the outside world (through websites and email). Workers can work away from the office using mobile technology such as phones, laptops and modems. Computers can be used to process, analyse and store vast amounts of data to give the business more quality information. E-commerce is the ability of businesses to trade with the world via websites. This means that there is a larger market and the business is now open 24 hours a day. This has provided opportunities for businesses that could only trade locally to now expand the size of the market (e.g. Amazon as world wide book and CD sellers). Customers can also shop around for the best deals for new products. The Internet can also be useful for recruitment purposes. Job vacancies can be advertised and targeted to the right audience, often costing less than print alternatives. E.g. e-teach sends free emails every week detailing teachers posts to subscribers. Technological change can be very expensive: technology involves the following additional costs: Purchasing the equipment Installation Training staff Maintenance Replacement/upgrading There is legislation associated with the use of technology e.g. computer screens, noise levels. In summary technological change can bring the following benefits to a business: Reduced running costs Improved productivity Improved competitiveness Lower costs per unit of product Improved quality of service (e.g. speed of service) Reduced wastage If the benefits of the above outweigh the costs, then a business should be investing in new technology. However it may need to consider the social costs of new technology:

Job losses Motivation of workers worried about machines taking over their jobs (though extra training to work with machines may provide some increased motivation) Loss of traditional skills FExternal Environment: Business Ethics - introduction

What are business ethics?

Ethics are moral guidelines which govern good behaviour So behaving ethically is doing what is morally right Behaving ethically in business is widely regarded as good business practice. Ethical principles and standards in business: Define acceptable conduct in business Should underpin how management make decisions An important distinction to remember is that behaving ethically is not quite the same thing as behaving lawfully: Ethics are about what is right and what is wrong Law is about what is lawful and what is unlawful An ethical decision is one that is both legal and meets the shared ethical standards of the community Businesses face ethical issues and decisions almost every day in some industries the issues are very significant. For example: Should businesses profit from problem gambling? Should supermarkets sell lager cheaper than bottled water? Is ethical shopping a luxury we cant afford? You will probably note the link between business ethics and corporate social responsibility (CSR). The two concepts are closely linked: A socially responsible firm should be an ethical firm An ethical firm should be socially responsible However there is also a distinction between the two: CSR is about responsibility to all stakeholders and not just shareholders Ethics is about morally correct behaviour How do businesses ensure that its directors, managers and employees act ethically? A common approach is to implement a code of practice. Ethical codes are increasingly popular particularly with larger businesses and cover areas such as: Corporate social responsibility Dealings with customers and supply chain Environmental policy & actions

Rules for personal and corporate integrity

FExternal Environment: Business Ethics in practice

Ethics in practice
Youll find lots of examples of business ethical decisions and dilemmas in areas such as: Advertising Personal selling Business contracts Pricing Dealing with suppliers Lets take one of the above suppliers. A business cannot claim to be ethical firm if it ignores unethical practices by its suppliers e.g. Use of child labour and forced labour Production in sweatshops Violation of the basic rights of workers Ignoring health, safety and environmental standards An ethical business has to be concerned with the behaviour of all businesses that operate in the supply chain i.e. Suppliers Contractors Distributors Sales agents

Pressure for businesses to act ethically

Businesses and industries increasingly find themselves facing external pressure to improve their ethical track record. An interesting feature of the rise of consumer activism online has been increased scrutiny of business activities. Pressure groups are a good example of this. Pressure groups are external stakeholders they Tend to focus on activities & ethical practice of multinationals or industries with ethical issues Combine direct and indirect action can damage the target business or industry Direct consumer action is another way in which business ethics can be challenged. Consumers may take action against: Businesses they consider to be unethical in some ways (e.g. animal furs) Business acting irresponsibly

Businesses that use business practices they find unacceptable Consumer action can also be positive supporting businesses with a strong ethical stance & record. A good example of this is Fairtrade.

Is ethical behaviour good or bad for business?

You might think the above question is an easy one for businesses to answer? Surely acting ethically makes good business sense? As with all issues in business studies, there are two sides to every argument: The advantages of ethical behaviour include: Higher revenues demand from positive consumer support Improved brand and business awareness and recognition Better employee motivation and recruitment New sources of finance e.g. from ethical investors The disadvantages claimed for ethical business include: Higher costs e.g. sourcing from Fairtrade suppliers rather than lowest price Higher overheads e.g. training & communication of ethical policy A danger of building up false expectations FExternal Environment: Economics: Business & Europe The UK is part of the Single European Market, the European Union (EU). This means that it can trade one of fourteen other countries in that market without facing any barriers to trade. It also means there is no restriction in the employment of anyone in the EU or the ability to set a business in the EU. The benefits of EU membership to businesses are: Increase in market size (a greater number of potential customers) as a result of the freedom of movement of goods and services. UK business can now sell to any of the other fourteen countries without facing extra costs or restrictions on the types of products they can sell. Greater access to cheap factors of production e.g. raw materials, technology and labour. A business can employ individuals from any part of Europe. Football clubs have certainly benefited from this! The National Health Service has found this a good source of skilled doctors and nurses when they have had shortages of medical staff. Access to EU government contracts, not just UK government contracts, benefiting businesses who sell goods and services to government departments (e.g. road builders could be contracted to provide roads in Spain). Lower administration costs to trade, meaning that businesses do not have to pay to extra money to send their goods abroad, other than normal transport costs. The costs of EU membership to UK businesses are: Greater competition from other EU businesses. Increased costs due to compliance with EU regulations e.g. common technical standards.

Enlargement of the EU is likely to happen in the next few years with a number of Eastern European nations joining the EU. This will provide a further increase in the market size BUT the customers will have a lower average income and also be able to compete at lower prices with UK businesses. European Single Currency (Euro) At present the UK is outside the Euro zone. The Euro zone comprises 12 countries ( Belgium, Austria, France, Finland, Luxembourg, Italy, Netherlands, Germany, Portugal, Ireland, Greece and Spain) who share one currency - the euro. The advantages to businesses of being inside the Single Currency zone are: No uncertainty over pricing and costs when exporting or importing, because they all share the same currency No costs of changing currency

Marketing - The Marketing Mix The marketing mix deals with the way in which a business uses price, product, distribution and promotion to market and sell its product. The marketing mix is often referred to as the Four Ps - since the most important elements of marketing are concerned with: Product - the product (or service) that the customer obtains Price - how much the customer pays for the product Place how the product is distributed to the customer Promotion - how the customer is found and persuaded to buy the product It is known as a mix because each ingredient affects the other and the mix must overall be suitable to the target customer. For instance: High quality materials used in a product may mean that a higher selling price can be achieved An advertising campaign carried in one area of the country requires distribution of the product to be in place in advance of the campaign to ensure there are no disappointed customers Promotion is needed to emphasise the new features and benefits of a product What makes for an effective marketing mix? An effective marketing mix is one which: Meets customer needs Achieves marketing objectives Is balanced and consistent Creates a competitive advantage for the business

The marketing mix for each business and industry will vary; it will also vary over time. For most businesses, one or two elements of the mix will be seen as relatively more important than the others, as illustrated below:

Marketing - Types of Market Introduction Let's focus on the place where a business must compete; the place where buyers and sellers come together. Were talking about the market. Quite simply, a business is bound to fail unless it has a reasonable understanding of its target market. What does the business need to understand? The needs and wants of customers, and how these differ The buying behaviour of customers why, what and how they buy The ways in which a market is split up into different parts to serve different customer needs these are known asmarket segments The nature of demand in the market how are prices set & the factors that influence the quantity of demand The size and growth rate of the overall market and its segments The proportion of market demand that is taken by competitors an important concept known as market share Defining a market Lets start with a definition: A market is anywhere where buyers and sellers come together to transact with each other.

The traditional image of a market is a physical place where buyers and sellers come together in one place. This still happens, of course. Take a drive along any main road on a Sunday and you will come across car boot sales the classic example of aphysical market in action. The UK has many towns that are referred to as market towns, so-called because they host a towncentre market on regular dates throughout the year. However, the term market has a much wider relevance when it comes to business studies. A market exists whenever buyers and sellers come together. The buyer and seller dont have to be in the same place in order to conduct transactions with each other. Do you sell or buy items on EBay? Have you bought products from Amazon.co.uk, bought tracks from iTunes or iPhone apps from the App Store? Have you bought something from a catalogue by making a phone call? In all these examples, you have participated in a market, although you were not physically with the other party to the transaction! So, there are many different kinds of market. Here is a summary of the main market categories: Geographical markets The two main categories of geographical markets are:

Local markets Definition: Where customers are a short distance from suppliers

Common for the sale of fresh and locally-sourced products and the delivery of locally-supplied services. The car boot sale is a great example of a local product market. The use of local services (e.g. franchise operations, hairdressers) is another good example. Your local high street or retail park is another example, where consumer goods are sold to people who tend to live pretty close. Businesses operating in local markets enjoy several advantages. They are physically closer to their customers, so are better placed to understand local cultural issues and traditions. It is also easier to develop relationships with local customers, to engage in market research and to respond quickly to changes in the market. The main downside to operating in local markets is that the market size may be relatively small. National markets are very common in the UK. Here, the same product or service is offered to customers who are spread around the country. A business may have several (or many) locations in the country in order to reach those customers. One way to illustrate this is to think of businesses that seem to be everywhere as you travel round the UK. For example, youll see BT phone vans, BSkyB satellite dishes, Tescos, McDonalds and Subway branches in just about every town and city in the UK. These businesses are operating in national markets e.g. the markets for telephones, television, groceries and fast food. However, you will notice from the examples given that businesses which are national in terms of the scope of their operations are definitely not small businesses! Another way to think of a national market is in terms of the total sales of a product or service across the country. For example, the total demand for greetings cards, jams or loft conversions. A start-up or small business can be focused on a national market, although it is likely that it will have a very small share of the market.

National markets Definition: A market where customers are spread throughout the country or over a large area

Physical and electronic markets We have touched on these two categories already. A physical market brings buyers and sellers together in the same location. Weve already mentioned car boot sales and markets in town centres. Farmers markets are another good example. A much larger number of markets are now electronic. Businesses find their customers using a variety of electronic media, including the Internet, mobile telephony, digital television and via email. Transactions are completed electronically with the delivery method depending on the nature of the product sold. Both physical and electronic markets are important to start-ups and small businesses. For example, Fraser Doherty started hisSuperjam business by selling his homemade jams at farmers markets and then promoting them in the aisles of supermarkets. By contrast, Nick Jenkins specialist greetings card business Moonpig has always relied on using electronic markets, building sales by running a specialist website. The key points to remember about electronic markets are that: They provide an easier way for start-ups to enter a national market, particularly if the business has identified a small niche segment of that market Electronic markets tend to be highly price-competitive since it is quite easy for customers to search for products from a variety of suppliers and to compare the best prices available (just about every consumer goods market has one or more price comparison website). Setting up a new business in an electronic market tends to have lower start-up costs than entering a physical market. Marketing - Marketing orientation Businesses can develop new products based on either a marketing orientated approach or a product orientated approach. A marketing orientated approach means a business reacts to what customers want. The decisions taken are based around information about customers needs and wants, rather than what the business thinks is right for the customer. Most successful businesses take a market-orientated approach. A product orientated approach means the business develops products based on what it is good at making or doing, rather than what a customer wants. This approach is usually criticised because it often leads to unsuccessful products - particularly in well-established markets. Most markets are moving towards a more market-orientated approach because customers have become more knowledgeable and require more variety and better quality. To compete, businesses need to be more sensitive to their customers needs otherwise they will lose sales to their rivals. On the other hand some products are argued to create a need or want in the customer, especially products with a very high technological content. Mobile phones have moved from being a business accessory to being a big consumer brand item, with many additional gadgets, such as pictures, video and Internet access. Innovations create the need rather than the customer being able to second-guess how new technology is going to develop.

Marketing - Segmenting the market There are several important reasons why businesses should attempt to segment their markets carefully. These are:

Better matching of customer needs Better opportunities for growth

Customer needs differ. Creating separate products for each segment makes sense and provides customers with a better solution Market segmentation can build sales. For example, customers can be encouraged to "trade-up" after being introduced to a particular product with an introductory, lower-priced product By segmenting markets, target customers can be reached more often and at lower cost Through careful segmentation and targeting, businesses can often become the market leader, even if the market is small

More effective promotion Gain a higher share of the market

There are many ways in which a market can be broken down into segments. A very popular method of demographic segmentation looks at factors such as age, gender, income and so on. These are described briefly below:

Age

Businesses often target certain age groups. Good examples are toothpaste look at the variety of toothpaste products for children and adults) and toys (e.g. pre-school, 5-9, 10-12, teen, family) We all know that males and females demand different types of the same product. Great examples include the clothing, hairdressing, magazine, toiletries and cosmetics markets Many companies target rich consumers with luxury goods (e.g. Lexus, Bang & Olufsen). Other businesses focus on products that appeal directly to consumers on low incomes (e.g. Aldi and Lidl (discounted groceries) and fast-fashion retailers such as TK Maxx) Many businesses believe that a consumers "perceived" social class influences their preferences for cars, clothes, home furnishings, leisure activities and other products & services

Gender

Income

Social class

Another approach is known as geographic segmentation. This tries to divide markets using: Regions: e.g. in the UK these might be England, Scotland, Wales Northern Ireland or (at a more detailed level) counties or major metropolitan areas Countries: perhaps categorised by size, development or membership of geographic region City / town size: e.g. population within ranges or above a certain level Population density: e.g. urban, suburban, rural, semi-rural

It would be nice to think that market segmentation is the answer to an entrepreneurs problems. By spotting a clear niche market using segmentation, the start-up business can focus all its efforts on reaching the target customer base. Limitations of segmentation If only business life was that simple. It isnt. Here are some key limitations with market segmentation: Lack of information and data: some markets are poorly researched with little information about different customer needs and wants Difficulty in measuring and predicting consumer behaviour: humans dont all behave in the same way all of the time. The way that they behave also changes over time! A good example is the grey generation (i.e. people aged over 50). The attitudes and lifestyles of the grey generation have changed dramatically in recent years. Hard to reach customer segments once identified: it is one thing spotting a segment; it is another finding the right way to reach target customers with the right kind of marketing message Marketing - Marketing role in business Marketing is perhaps the most important activity in a business because it has a direct effect on profitability and sales. Larger businesses will dedicate specific staff and departments for the purpose of marketing. It is important to realise that marketing cannot be carried out in isolation from the rest of the business. For example: The marketing section of a business needs to work closely with operations, research and development, finance and human resources to check their plans are possible. Operations will need to use sales forecasts produced by the marketing department to plan their production schedules. Sales forecasts will also be an important part of the budgets produced by the finance department, as well as the deployment of labour for the human resources department. A research and development department will need to work very closely with the marketing department to understand the needs of the customers and to test outputs of the R&D section. Marketing - Segmenting the market There are several important reasons why businesses should attempt to segment their markets carefully. These are:

Better matching of customer needs Better opportunities for growth

Customer needs differ. Creating separate products for each segment makes sense and provides customers with a better solution Market segmentation can build sales. For example, customers can be encouraged to "trade-up" after being introduced to a particular product with an introductory, lower-priced product By segmenting markets, target customers can be reached more often and at lower cost Through careful segmentation and targeting, businesses can often become the market leader, even if the market is small

More effective promotion Gain a higher share of the market

There are many ways in which a market can be broken down into segments. A very popular method of demographic segmentation looks at factors such as age, gender, income and so on. These are described briefly below:

Age

Businesses often target certain age groups. Good examples are toothpaste look at the variety of toothpaste products for children and adults) and toys (e.g. pre-school, 5-9, 10-12, teen, family) We all know that males and females demand different types of the same product. Great examples include the clothing, hairdressing, magazine, toiletries and cosmetics markets Many companies target rich consumers with luxury goods (e.g. Lexus, Bang & Olufsen). Other businesses focus on products that appeal directly to consumers on low incomes (e.g. Aldi and Lidl (discounted groceries) and fast-fashion retailers such as TK Maxx) Many businesses believe that a consumers "perceived" social class influences their preferences for cars, clothes, home furnishings, leisure activities and other products & services

Gender

Income

Social class

Another approach is known as geographic segmentation. This tries to divide markets using: Regions: e.g. in the UK these might be England, Scotland, Wales Northern Ireland or (at a more detailed level) counties or major metropolitan areas Countries: perhaps categorised by size, development or membership of geographic region City / town size: e.g. population within ranges or above a certain level Population density: e.g. urban, suburban, rural, semi-rural It would be nice to think that market segmentation is the answer to an entrepreneurs problems. By spotting a clear niche market using segmentation, the start-up business can focus all its efforts on reaching the target customer base. Limitations of segmentation If only business life was that simple. It isnt. Here are some key limitations with market segmentation: Lack of information and data: some markets are poorly researched with little information about different customer needs and wants Difficulty in measuring and predicting consumer behaviour: humans dont all behave in the same way all of the time. The way that they behave also changes over time! A good example is the grey generation (i.e. people aged over 50). The attitudes and lifestyles of the grey generation have changed dramatically in recent years. Hard to reach customer segments once identified: it is one thing spotting a segment; it is another finding the right way to reach target customers with the right kind of marketing message

Marketing - Market mapping Once an entrepreneur has identified an appropriate segment of the market to target, the challenge is to position the product so that it meets the needs and wants of the target customers. One way to do this is to use a market map (you might also see this called by its proper name the perceptual map). The market map illustrates the range of positions that a product can take in a market based on two dimensions that are important to customers. Examples of those dimensions might be: High price v low price Basic quality v High quality Low volume v high volume Necessity v luxury Light v heavy Simple v complex Lo-tech v high-tech Young v Old Lets look at an illustrated example of a market map. The map below shows one possible way in which the chocolate bar market could be mapped against two dimensions quality and price:

How might a market map be used? One way is to identify where there are gaps in the market where there are customer needs that are not being met. For example, in the chocolate bar market, Divine Chocolate (a social enterprise) successfully spotted that some consumers were prepared to pay a premium price for very high quality chocolate made from Fairtrade cocoa. Green & Blacks exploited the opportunity to sell premium chocolate made from organic ingredients. Both these brands successfully moved into the high quality / high price quadrant (see above) before too many competitors beat them to it. The trick with a market map is to ensure that market research confirms whether or not there is actually any demand for a possible gap in the market. There may be very good reasons why consumers do not want to buy a product that might, potentially, fill a gap. Marketing - Understanding the customer Segmentation is all about splitting a market up into relevant sections to make marketing more effective. In order for a business to segment its market, it needs to understand and analyse its target customers.

A problem that faces any start-up or small business is that customers are not all the same! Think about how you behave as a customer. The things that you want from your mobile phone or night out are likely to be different from those wanted by someone of a different age, with other interests and so on. So how does a business address these differences? In short, the challenge for a business is to: Identify groups of customers who have similar needs and wants Find a way of offering (positioning) a product which is attractive to those customer groups Markets consist of customers with similar needs. For example, consider the wide variety of markets that exist to meet the need to: Eat (e.g. restaurants, fast food) Drink (e.g. coffee bars, pubs & clubs) Travel (for business and leisure, near or far) Socialise (as couples, with family, with friends) Be educated (as a child, adult, for work or other reasons) As you can imagine, such markets (if they were not further divided into smaller parts) would be very broad and difficult for a new business to target. The great news for any new business is that customers in any broad market are not the same. For example, within the market to provide meals, customers differ in the: Benefits they want (food quality, ambience, dietary health) Amount they are able to or willing to pay (budget, expensive) Quantities they buy (bulk buy or one-off purchase) Time and place that they buy (fast-food, up-market restaurant) It therefore makes sense for businesses to divide (or segment) the overall market and to target specific segments of a market so that they can design and deliver more relevant products. Marketing - Marketing's role in business strategy Marketing strategies explain how the marketing function fits in with the overall strategy for a business. Examples of marketing strategies could be: Business Strategy Grow sales Example Marketing Strategies Launch new products Expand distribution (e.g. open more shops) Start selling products into overseas markets Increase profits Increase selling prices Reduce the amount spent on television advertising Build customer awareness Implement a public relations programme

Invest more in advertising

Once a strategy has been identified, then the business must develop an action to turn the strategy into reality. The starting point for this plan is the setting of marketing objectives. Marketing objectives are the specific targets for marketing set by the business to achieve their corporate objectives. Examples of marketing objectives might be: Increase sales by 10% Launch a new product by the end of the year Achieve a 95% customer satisfaction rating Increase the number of retail outlets selling our products by 250 within 12 months It is important for a business to set marketing objectives because managers can then have targets for their work. They can then measure more effectively the success or failure of their marketing strategies to achieve these objectives. Marketing - Distribution (place) Place (or its more common name distribution) is about how a business gets its products to the customers. It is one thing having a great product, sold at an attractive price. But what if: Customers are not near a retailer that is selling the product? A competing product is stocked by a much wider range of outlets? A competitor is winning because it has a team of trained distributors or sales agents who are out there meeting customers and closing the sale? Distribution matters for a business of any size it is a crucial part of the marketing mix. The objective of distribution is clear. It is: To make products available in the right place at the right time in the right quantities Distribution is achieved by using one or more distribution channels, including: Retailers Wholesalers Distributors / Sales Agents Direct (e.g. via e-commerce)

The role of a distribution channel

A distribution channel can be defined as:

"all the organisations through which a product must pass between its point of production and consumption"

Looking at that definition, you can see that a product might pass through several stages before it finally reaches the consumer. The organisations involved in each stage of distribution are commonly referred to as intermediaries. Why does a business give the job of selling its products to intermediaries? After all, using an intermediary means giving up some control over how products are sold and who they are sold to. An intermediary will also want to make a profit by getting involved. The answer lies in efficiency of distribution costs. Intermediaries are specialists in selling. They have the contacts, experience and scale of operation which means that greater sales can be achieved than if the producing business tried to run a sales operation itself. The main function of a distribution channel is to provide a link between production and consumption. Organisations that form any particular distribution channel perform many key functions: Information Promotion Contact Matching Negotiation Physical distribution Financing Risk taking Gathering and distributing market research and intelligence - important for marketing planning Developing and spreading communications about offers Finding and communicating with prospective buyers Adjusting the offer to fit a buyer's needs, including grading, assembling and packaging Reaching agreement on price and other terms of the offer Transporting and storing goods Acquiring and using funds to cover the costs of the distribution channel Assuming some commercial risks by operating the channel (e.g. holding stock)

Marketing - Distribution channels A distribution channel can have several stages depending on how many organisations are involved in it:

Looking at the diagram above: Channel 1 contains two stages between producer and consumer - a wholesaler and a retailer. A wholesaler typically buys and stores large quantities of several producers goods and then breaks into bulk deliveries to supply retailers with smaller quantities. For small retailers with limited order quantities, the use of wholesalers makes economic sense. Channel 2 contains one intermediary. In consumer markets, this is typically a retailer. The consumer electrical goods market in the UK is typical of this arrangement whereby producers such as Sony, Panasonic, Canon etc. sell their goods directly to large retailers such as Comet, Tesco and Amazon which then sell onto the final consumers. Channel 3 is called a "direct-marketing" channel, since it has no intermediary levels. In this case the manufacturer sells directly to customers. An example of a direct marketing channel would be a factory outlet store. Many holiday companies also market direct to consumers, bypassing a traditional retail intermediary - the travel agent.

What is the best distribution channel for a product?

What factors should be taken into account in choosing the best distribution channel? Here is a summary: Nature of the product Technical/complex? Complex products are often sold by specialist distributors or agents Customised? A direct distribution approach often works best for a product that the end consumer wants providing to a distinct specification Type of product e.g. convenience, shopping, speciality Desired image for the product if intermediaries are to be used, then it is essential that those chosen are suitable and relevant for the product. The market Is it geographically spread? Does it involve selling overseas (see further below) The extent and nature of the competition which distribution channels and intermediaries do competitors use? The business Its size and scope e.g. can it afford an in-house sales force? Its marketing objectives revenue or profit maximisation? Does it have established distribution network or does it need to extend its distribution option How much control does it want over distribution? The longer the channel, the less control is available Legal issues Are there limitations on sale? What are the risks if an intermediary sells the product to an inappropriate customer?

Marketing - Selling using intermediaries (retailers, wholesalers etc)

Retailers
The most popular distribution channel for consumer goods, retailers operate outlets that trade directly with household customers. Retailers can be classified in several ways: Type of goods being sold (e.g. clothes, grocery, furniture) Type of service (e.g. self-service, counter-service) Size (e.g. corner shop; superstore) Ownership (e.g. privately-owned independent; public-quoted retail group) Location (e.g. rural, city-centre, out-of-town) Brand (e.g. nationwide retail brands; local one-shop name) Retailers enable producers to reach a wider audience, particularly if broad coverage by the major retail chains can be obtained. The big downside to using a retailer is the loss of profit margin. A high street retailer will typically look to take at least 40-50% of the final consumer price.

Wholesalers
Wholesalers stock a range of products from several producers. The role of the wholesaler is to sell onto retailers. Wholesalers usually specialise in particular products for example food products.

Distributors and dealers

Distributors or dealers have a similar role to wholesalers that of taking products from producers and selling them on. However, they often sell onto the end customer rather than a retailer. They also usually have a much narrower product range. Distributors and dealers are often involved in providing after-sales service.

Franchises
Franchises are independent businesses that operate a branded product (usually a service) in exchange for a licence fee and a share of sales. Franchises are commonly used by businesses (franchisors) that wish to expand a service-based product into a much wider geographical area.

Agents
Agents sell the products and services of producers in return for a commission (a percentage of the sales revenues). You will often find agents working in the service sector. Good examples include travel agents, insurance agents and the organisers of party-based selling events (e.g. Tupperware and Pampered Chef).

Marketing - Personal selling & merchandising Personal selling is where businesses use people (the sales force) to sell the product after meeting face-to-face with the customer. The sellers promote the product through their attitude, appearance and specialist product knowledge. They aim to inform and encourage the customer to buy, or at least trial the product. A good example of personal selling is found in department stores on the perfume and cosmetic counters. A customer can get advice on how to apply the product and can try different products. Products with relatively high prices, or with complex features, are often sold using personal selling. Great examples include cars, office equipment (e.g. photocopiers) and many products that are sold by businesses to other industrial customers. The main advantages and disadvantages of personal selling can be summarised as follows:

Disadvantages Advantages High customer attention Message is customised Interactivity Persuasive impact Potential for development of relationship Adaptable Opportunity to close the sale High cost Labour intensive Expensive Can only reach a limited number of customers

Point-of-sale merchandising is a specialist form of personal selling. Merchandising involves face-to-face contact between sales representatives of producers and the retail trade. A merchandiser will visit a range of suitable retail premises in his/her area and encourage the retailer to stock products from a range. The visit also provides the opportunity for the merchandiser to check on stock levels and to check whether the product is being displayed optimally. Marketing - What is a product? Products are at the heart of marketing. The product needs to exist for the other elements of the mix to happen. What is a product? A product is: anything that is capable of satisfying customer needs This definition therefore includes both: Physical products e.g. trainers, games consoles, DVD players, take-away pizzas Services e.g. dental treatment, accountancy, insurance, holidays, music downloads A product can be said to have three elements:

What the product does - the main functions of the product

Core benefits

E.g. washing machine it cleans clothes Cinema it shows a film you want to see What the product is made of; what it looks like; dimensions or duration E.g. 500g of ice-cream A flat-screen, plasma television which is HDTV compatible The extra elements which add to the perceived value of the product in the eyes of the consumer Augmented benefits can be tangible (e.g. materials, weight, extra features) or intangible (e.g. brand name, after-sales service, reputation for reliability) E.g. free installation, full money-back guarantee

Tangible or physical element Augmented benefits

Often the augmented benefits of a product are the key determinant of whether a customer decides to buy. Many successful businesses really understand this. A great example was cosmetics leader Elizabeth Arden. She certainly knew what she was selling. It wasnt pots of cream and cosmetics, it was much more than that, she understood what her customers where really buying from her... she said I dont sell cosmeticsI sell hope Products can be split into two broad categories: Goods physical products that you can touch and feel, e.g. food and clothing Services products that are non-physical watching a film, having a hair-cut It is important to appreciate that a service is still a product even though there is nothing you can touch. Marketing - Brands A brand is a product with unique character, for instance in design or image. It is consistent and well recognised. The advantages of having a strong brand are that it: Inspires customer loyalty leading to repeat sales and word-of mouth recommendation The brand owner can usually charge higher prices, especially if the brand is the market leader Retailers or service sellers want to stock top selling brands. With limited shelf space it is more likely the top brands will be on the shelf than less well-known brands. Some retailers use own-label brands, where they use their name of the product rather than the manufacturers like Tescos Finest range of meals and foodstuffs. These tend to be cheaper than the normal brands, but will give the retailer more profit than selling a normal brand. Some brands are so strong that they have become global brands. This means that the product is sold in many countries and the contents are very similar. Examples of global brands include: Microsoft, Coca Cola, Disney, Mercedes and Hewlett Packard.

The strength of a brand can be exploited by a business to develop new products. This is known as brand extension a product with some of the brands s characteristics. Examples include Dove soap and Dove Shampoo (both contain moisturiser); Mars Bar and Mars Ice Cream Brand stretching is where the brand is used for a diverse range of products, not necessarily connected. E.g. Virgin Airlines and Virgin Cola; Marks and Spencer clothes and food. The logo on a product is an important part of the product. A logo is a symbol or picture that represents the business. It is important because it is easy to recognise, establishes brand loyalty and can create a favourable image. Marketing - Product life cycles The product life cycle is an important concept in marketing. It describes the stages a product goes through from when it was first thought of until it finally is removed from the market. Not all products reach this final stage. Some continue to grow and others rise and fall.

The main stages of the product life cycle are: Introduction researching, developing and then launching the product Growth when sales are increasing at their fastest rate Maturity sales are near their highest, but the rate of growth is slowing down, e.g. new competitors in market or saturation Decline final stage of the cycle, when sales begin to fall This can be illustrated by looking at the sales during the time period of the product. A branded good can enjoy continuous growth, such as Microsoft, because the product is being constantly improved and advertised, and maintains a strong brand loyalty.

Extension strategies extend the life of the product before it goes into decline. Again businesses use marketing techniques to improve sales. Examples of the techniques are: Advertising try to gain a new audience or remind the current audience Price reduction more attractive to customers Adding value add new features to the current product, e.g. video messaging on mobile phones Explore new markets try selling abroad New packaging brightening up old packaging, or subtle changes such as putting crisps in foil packets or Seventies music compilations Marketing - Product portfolios and the Boston Matrix Why businesses have more than one product Most businesses sell more than one product. Often they will produce several similar products that appeal to different customers. A collection of such products is known as a product group or product range. Good examples of product groups include: Dells range of desktop and laptop computers Sonys range of DVD players and televisions There are several advantages to having a product range rather than just one product: Spread the risk a decline in one product may be offset by sales of other products Selling a single product may not generate enough returns for the business (e.g. the market segment may be too small to earn a living) A range can be sold to different segments of the market e.g. family holidays and activity holidays However a greater range of products can mean that the marketing resources (e.g. personnel and cash) are spread more thinly. Managing the product portfolio A business with a range of products has a portfolio of products. However, owning a product portfolio often poses a problem for a business. It must decide how to allocate investment (e.g. in product development, promotion) across the portfolio. Which products should it focus on? A portfolio of products can be analysed using the Boston Group Consulting Matrix. This categorises the products into one of four different areas, based on: Market share does the product being sold have a low or high market share? Market growth are the numbers of potential customers in the market growing or not How does the Boston Matrix work? The four categories can be described as follows:

Stars are high growth products competing in markets where they are strong compared with the competition. Often Stars need heavy investment to sustain growth. Eventually growth will slow and, assuming they keep their market share, Stars will become Cash Cows Cash cows are low-growth products with a high market share. These are mature, successful products with relatively little need for investment. They need to be managed for continued profit so that they continue to generate the strong cash flows that the company needs for its Stars Question marks are products with low market share operating in high growth markets. This suggests that they have potential, but may need substantial investment to grow market share at the expense of larger competitors. Management have to think hard about Question Marks which ones should they invest in? Which ones should they allow to fail or shrink? Unsurprisingly, the term dogs refers to products that have a low market share in unattractive, low-growth markets. Dogs may generate enough cash to break-even, but they are rarely, if ever, worth investing in. Dogs are usually sold or closed. Ideally a business would prefer products in all categories (apart from Dogs!) to give it a balanced portfolio of products. Marketing - Making a product stand out - differentiation and USPs An important part of the marketing of the product is through product differentiation. This means making the product different from its competitors. Product differentiation can be achieved through: Distinctive design e.g. Dyson; Apple iPod Branding - e.g. Nike, Reebok Performance - e.g. Mercedes, BMW A key term to remember is USP, which is the acronym for Unique Selling Point.

A Unique Selling Point is a feature or benefit that separates a product from its competitors. A USP could be a lower price, a smaller version of the product, offering extra functions, or even simply producing a standard product in a range of colours or designs. A business needs to look at its unique selling points compared to competitors. If it doesnt have any, the business will probably struggle to make the product seem attractive to customers (the remaining option is usually to compete solely on price). If a business finds that its customers are switching to competitors or buying purely on price, it should be asked whether the business has identified the USPs for its products and services. If it has, then the question is whether it is communicating USPs clearly to customers? Marketing - SWOT analysis and marketing An important part of the planning process is looking at the existing position of the business and trying to decide how factors external to the business may affect the business. A business can perform a SWOT analysis as a way of deciding which marketing strategy to use. The business performs an audit on the internal and external nature of the business looking at the current and future situation. An audit is a review of all the business activities.

Explanation Internal Strengths Reviews the business current strengths such as a good brand or strong sales performance

Strategy Implications

Can develop the strengths, perhaps in the way they promote the product, or wish to develop new products (Virgin have used their strong brand name to launch several products) Can implement strategies to eradicate these weaknesses e.g. more resources put into a better warehousing system for the despatch of goods.

Weaknesses

Reviews the business current weaknesses such poor response times to requests for information or late deliveries

External Opportunities Reviews the business future opportunities e.g. new technology making it easier to manufacturer certain goods or new markets abroad Reviews the business future threats, mostly from increased competition from other firms or from changes in the economic situation. Can use strategies to take advantage of the potential opportunities e.g. developing new products to meet the potential increased demand

Threats

Can employ strategies to ward off these problems, e.g. setting lower prices or increasing promotion

Thinking about the use of a SWOT analysis in assessing the contribution of marketing to a business strategy; Possible strengths in marketing might be: Specialist marketing expertise An innovative product or service The location of the business convenient for customers The reputation of the brand perhaps it is trusted or recognised as the highest quality Possible weaknesses in marketing might include: Lack of a clear product differentiation compared with competing products Weak distribution compared with competitors Inadequate online presence Potential marketing opportunities could include: The use of technology to develop new products Growing demand from overseas markets (e.g. China & India) The use of social media like Facebook and Twitter to reach new customers A list of possible marketing threats could include: Competitors introducing better products at lower prices Changes in the economic environment which encourage customers to be less loyal to established brands Changes in customer tastes and fashions Marketing - Promotion (introduction / overview) It is no longer enough for a business to have great products. Lots of businesses have those too. Customers need to know about a great product and be persuaded to buy. That is the role of promotion. Promotion is all about communication. Why because promotion is the way in a business makes its products known to the customers, both current and potential. The main aim of promotion is to ensure that customers are aware of the existence and positioning of products. Promotion is also used to persuade customers that the product is better than competing products and to remind customers about why they may want to buy. It is a common mistake to believe that promotion by business is all about advertising. It isnt. There are a variety of approaches that a business can take to get their message across to customers, although advertising is certainly an important one. It is important to understand that a business will use more than one method of promotion. The variety of promotional methods used is referred to as the promotional mix. Which promotional methods are used depends on several factors:

Stage in the life cycle Nature of the product Competition Marketing budget Marketing strategy Target market

E.g. advertising is important at the launch stage How much information is required by customers before they buy What are rivals doing? How much can the firm afford? Other elements of the mix (price, product, place etc) Appropriate ways to reach the target market

The main methods of promotion are: Advertising Public relations & sponsorship Personal selling Direct marketing Sales promotion

Main aims of promotion

Promotional activities have a variety of aims: To inform current and potential customers about the existence of products To explain the potential benefits of using the product To persuade customers to buy the product To help differentiate a product from the competition To develop and sustain a brand To reassure customers that they have made the right choice

Promotional methods above and below the line

The way in which promotion is targeted is traditionally split into two types: Above the line promotion paid for communication in the independent media e.g. advertising on TV or in the newspapers. Though it can be targeted, it could be seen by anyone outside the target audience. Advertising is the main methods of above-the-line promotion. Below the line promotion promotional activities where the business has direct control e.g. direct mailing and money off coupons. It is aimed directly at the target audience. Marketing - Advertising Advertising is defined as any paid-for method of promotion and is the main form of above the line promotion. Advertising presents or promotes the product to the target audience through a variety of media such as TV, radio, cinema, online and magazines to encourage them to buy. The problem with advertising is that consumers are bombarded with advertising messages every day. How can a business cut through the advertising noise and get a message across

effectively? And how can a business measure the effectiveness of an advertising campaign. It is often said that businesses waste half their advertising spend the problem is that they dont know which half! When deciding which type of advertising to use a business needs to consider factors like: Reach of the media national or local; number of potential customers it could reach; how long before the message is seen Nature of the product the media needs to reflect the image of the product; a recruitment ad would be placed in a trade magazine or newspaper but a lipstick ad would be shown on TV or womens magazines Position in product life cycle launch stage will need different advertising from products undergoing extension strategies Cost of medium & size of advertising budget e.g. local newspaper advertising is cheaper than radio, which in turn is cheaper than TV. But the business will also want to consider cost per head if reaching a larger audience Online or offline there has been substantial growth in businesses that advertise online as they swap some (sometimes all) of their advertising budgets to reach Internet users. Advertising can also be split into two main types: Persuasive advertising - this tries to entice the customer to buy the product by informing them of the product benefit Informative advertising - this gives the customer information. Mostly done by the government (e.g. health campaigns, new welfare benefits) Sometimes a business will employ an advertising agency to deal with its needs. An agency plans, organises and producesadvertising campaigns for other businesses. The advantage of an agency managing the campaign is that it has the expertise a business may not have, e.g. copywriters, designers and media buyers. The main advantages and disadvantages of advertising as method of promotion are:

Advantages Wide coverage Control of message being promoted Repetition means that the message can be communicated effectively Can be used to build brand loyalty

Disadvantages Often expensive Impersonal One way communication Lacks flexibility Limited ability to close a sale

Marketing - Selling direct A key decision a business has to make about distribution is whether to sell direct. Direct marketing means selling products by dealing directly with consumers rather than through intermediaries. Traditional methods include mail order, direct-mail selling, cold calling, telephone selling, and door-to-door calling. More recently telemarketing, direct radio selling, magazine and TV advertising, and on-line computer shopping have been developed.

The main advantages of selling direct are that there is no need to share profit margins and the producer has complete control over the sales process. Products are not sold alongside those of competitors either. There may also be specific market factors that encourage direct selling: There may be a need for an expert sales force, to demonstrate products, provide detailed pre-sale information and after-sales service Retailers, distributors, dealers and other intermediaries may be unwilling to sell the product Existing distribution channels may be owned by, or linked to, competing producers (making it hard to obtain distribution by any other means than direct) However, there are significant costs associated with selling direct which may be higher than the costs associated with using an intermediary to generate the same level of sales. There are several potential advantages of using an intermediary: More efficient distribution logistics Overall costs (even taking into account the intermediaries margin or commission) may be lower Consumers may expect choice (i.e. the products and brands of many producers) at the point of sale Producers may not have sufficient resources or expertise to sell direct Marketing - Sales promotion Sales promotion is the process of persuading a potential customer to buy the product. Sales promotion is designed to be used as a short-term tactic to boost sales it is not really designed to build long-term customer loyalty. Some sales promotions are aimed at consumers. Others are targeted at intermediaries (such as agents and wholesalers) or at the firms sales force. When undertaking a sales promotion, there are several factors that a business must take into account: What does the promotion cost will the resulting sales boost justify the investment? Is the sales promotion consistent with the brand image? A promotion that heavily discounts a product with a premium price might do some long-term damage to a brand Will the sales promotion attract customers who will continue to buy the product once the promotion ends, or will it simply attract those customers who are always on the look-out for a bargain? There are many methods of sales promotion, including: Money off coupons customers receive coupons, or cut coupons out of newspapers or a products packaging that enables them to buy the product next time at a reduced price Competitions buying the product will allow the customer to take part in a chance to win a prize Discount vouchers a voucher (like a money off coupon) Free gifts a free product when buy another product

Point of sale materials e.g. posters, display stands ways of presenting the product in its best way or show the customer that the product is there. Loyalty cards e.g. Nectar and Air Miles; where customers earn points for buying certain goods or shopping at certain retailers that can later be exchanged for money, goods or other offers Loyalty cards have recently become an important form of sales promotion. They encourage the customer to return to the retailer by giving them discounts based on the spending from a previous visit. Loyalty cards can offset the discounts they offer by making more sales and persuading the customer to come back. They also provide information about the shopping habits of customers where do they shop, when and what do they buy? This is very valuable marketing research and can be used in the planning process for new and existing products. The main advantages and disadvantages of sales promotion are: Disadvantages Advantages Effective at achieving a quick boost to sales Encourages customers to trial a product or switch brands Sales effect may only be short-term Customers may come to expect or anticipate further promotions May damage brand image

Marketing - Public relations & sponsorship Public relations covers a broad series of activities where a business manages its relationships with different parts of the public, e.g. customers, the media, local communities, suppliers, employees and investors. The main objectives of public relations are: To achieve favourable publicity about the business To build the image and reputation of the business and its products, particularly amongst customers To communicate effectively with customers and other stakeholders Public relations, which is often shortened just to PR, has several advantages over advertising in terms of promotion: No direct charge is made for PR, though a business will need to pay for its own PR department or external PR consultant PR is arguably more powerful because the message the business communicates through PR is often more believable than paid for advertising However there is no guarantee that PR will reach its target audience (the media may fail to feature the story) whereas advertising must be displayed since the space in the newspaper is paid for. Sponsorship is a specialised kind of public relations and increasingly popular, particularly with larger businesses. A business will sponsor an event, team or individual in order to build brand awareness. A secondary objective might be to emphasise social or ethical credentials, but most sponsorship really does have a commercial objective at heart.

The 2012 Olympics in London, together with all major sporting events, sports celebrities and sporting teams all benefit from substantial corporate sponsorship. At a local level, it is common for small businesses to sponsor local teams. Marketing - Market research - introduction The entrepreneur has come up with what he/she believes is a good business idea. But, how does the entrepreneur check that the business idea actually meets customer needs and has the potential to become a viable business? The answer is to do some market research. Market research for a start-up or small business needs to focus on the fundamental issues, such as: How big the market is (measured by sales, volume etc.) How fast the market is growing ) & the market growth potential Who the existing competitors are and their share of the market How the market is divided up into segments (segments are the different parts of a larger market e.g. low price or high quality) What kind of customers there are in the market. It is important to known what their preferences are in terms of when and where they buy, and the prices they pay The main purpose of the market research is to help a business find a position in a part of the market where it charge a reasonable price and to earn reasonable profits. Often this happens when a business targets a niche market.

A niche market is a smaller part of a large market where customers have quite specific needs and wants. By comparison, many of the goods and services you buy are offered in a mass market where customer needs and wants are not too specific. Here are some examples of how niche and mass markets compare: Niche Market Industry Holidays Motor cars Eating out Chocolate Magazines Trekking in Nepal Porsche 911 Turbo Exclusive restaurant Hotel Chocolat Snowboard UK magazine Beach holiday in Ibitha Fiat Uno Burger King Cadburys Dairy Milk Hello! Magazine Mass Market

Why should start-ups and small businesses aim for a market niche? Because surviving in high volume or mass-marketsegments is almost impossible. Mass markets are dominated by wellestablished businesses that enjoy lower costs and can charge lower prices than a smaller business. In other words, a start-up or small business will face stiff competition if it tries to compete in a mass market.

A business needs to be satisfied that there is likely to be a demand for the product. However, funds are often in short-supply which restricts how much market research can be carried out. However, dont worry. Effective market research is not about getting hold of lots of statistics or detailed reports. It is about getting the right information to make good decisions. Remember that a small business can learn much about the market by simply trading, talking to customers and suppliers on a day-to-day basis and reading the trade newspapers and magazines. Marketing - Market research - questionnaires Questionnaires are one the main tools in the use of field research. A questionnaire contains a series of questions which gather primary marketing research data for the business. Questionnaires need to be designed carefully. The design of the questionnaire depends on the following: Objectives of the questionnaire what information is needed, at a minimum, from customers who complete the questions? The type of person who is going to be asked questions need be easy to understand and also easy to answer depending on the person who is answering. How the questionnaire is going to be taken? A face-to-face questionnaire might include different questions to an emailed questionnaire. An interviewer will be filling in a face-to-face questionnaire and the person may be able to ask for the question to be rephrased if they do not understand it the first time. The types of questions that can be asked can be split into three groups: Simple yes/no answers e.g. have you seen the new advert for cornflakes Multiple choice a number of options are available to the answer Sliding scale a value is placed on an answer e.g. how do rate the performance of this product less than satisfactory, satisfactory, excellent (or could use a scale of 1-10 with 10 being excellent and 1 being dreadful!). Once the questionnaires are complete, the data is collated and analysed.

Marketing - Market research - primary There are various methods of primary research:

Method Observation

Comments Watching how consumers behave provides many insights, but can leave questions unanswered. Observation works well in retail markets; sit outside a shop and watch how many people walk by, look at the window display etc. Sent to the address of potential customers who complete the form and send back in a pre-paid envelope. Relatively cheap, a postal survey can cover a wide geographical area and avoids the potential for interviewer bias. However, response rates (the proportion of people sending back a completed survey) are often very low and it can take be a long time before enough surveys are returned Not to be confused with telesales (which is a method of selling), the telephone interview allow quicker feedback than a postal survey. However, potential customers are often wary of being called and may be reluctant to give anything other than short answers Increasingly popular and relatively low cost, online surveys are widely used by small businesses as a way of capturing the views of existing and potential customers Personal interviews conducted face-to-face. A costly, but good way to get detailed insights from an individual Groups of potential customers are brought together to discuss their feelings about a product or market. Focus groups are a good way of getting detailed information about customer tastes and preferences This involves selling a new product in a small section of the market in order to assess customer reaction. For example, a start-up could start by selling to a limited local area in order to iron-out product issues. Software firms often test-market their products by offering beta versions for testing by a small group of potential customers. Test marketing can be a good predictor of how a new product or service will be received by the larger market (provided that it can be kept secret from competitors!)

Postal surveys

Telephone interviews

Online surveys

Face-to-face surveys Focus groups

Test marketing

Marketing - Market research - quantitative and qualitative The distinction between primary and secondary research is really about the different sources of market information. A different way of thinking about market research is to consider the two main approaches qualitative and quantitative.

Qualitative research Qualitative research is based on opinions, attitudes, beliefs and intentions. This kind of research deals with questions such as Why? Would?, or How? Qualitative research aims to understand why customers behave in a certain way or how they may respond to a new product. Given that these opinions are often obtained from small numbers of people, the findings are not necessarily statistically valid. However, such data can highlight potential issues which can be explored in quantitative research. Focus groups and interviews are common methods used to collect qualitative data. This kind of data is often revealing and useful, but it is costly and time-consuming to collect, particularly for a start-up or small business. Quantitative research This is research based on larger samples and is, therefore, more statistically valid. Quantitative research is concerned with data and addresses question such as how many?, how often, who?, when? and where? The results of quantitative research will generally be numerical form for example: 35% of customers rate the new product as attractive 70% of potential customers use the Internet to buy their hotel accommodation in Dorset 3 out of 5 customers will buy a new food product after being offered a free in-store sample The main methods of obtaining quantitative data are the various forms of surveys i.e. telephone, postal, face-to-face and online.

Marketing - What is price & pricing? You come across the concept of price every time you buy something whether it is in a shop, on the move or surfing online. Price is: The money charged for a product or service Everything that a customer has to give up in order to acquire a product or service Usually expressed in terms of per unit You can see from the above that price is not the same thing as cost. The price is the amount customers pay for a product. The cost is the amount spent by a business making the product. However, as we see later, a firm needs to take account of the cost of production when setting price to ensure that it is making a profit on the products it offers. The price a business charges for its product or service is one of the most important business decisions management take.

For example, unlike the other elements of the marketing mix (product, place & promotion), pricing decisions directly affect revenues rather than costs. Pricing also has to be consistent with the other elements of the marketing mix, since it contributes to the perception of a product or service by customers. Setting a price that is too high or too low will - at best - limit the business growth. At worst, it could cause serious problems for sales and cash flow. So pricing is important, but it is really tough to get right. There are so many factors to consider, and much uncertainty about whether a price change will have the desired effect. Marketing - Pricing approaches and strategies There are three main approaches a business takes to setting price: Cost-based pricing: price is determined by adding a profit element on top of the cost of making the product. Customer-based pricing: where prices are determined by what a firm believes customers will be prepared to pay Competitor-based pricing: where competitor prices are the main influence on the price set Lets take a brief look at each of these approaches;

Cost based pricing

This involves setting a price by adding a fixed amount or percentage to the cost of making or buying the product. In some ways this is quite an old-fashioned and somewhat discredited pricing strategy, although it is still widely used. After all, customers are not too bothered what it cost to make the product they are interested in what value the product provides them. Cost-plus (or mark-up) pricing is widely used in retailing, where the retailer wants to know with some certainty what the gross profit margin of each sale will be. An advantage of this approach is that the business will know that its costs are being covered. The main disadvantage is that cost-plus pricing may lead to products that are priced un-competitively. Here is an example of cost-plus pricing, where a business wishes to ensure that it makes an additional 50 of profit on top of the unit cost of production.

Unit cost Mark-up Selling price

100 50% 150

How high should the mark-up percentage be? That largely depends on the normal competitive practice in a market and also whether the resulting price is acceptable to customers.

In the UK a standard retail mark-up is 2.4 times the cost the retailer pays to its supplier (normally a wholesaler). So, if the wholesale cost of a product is 10 per unit, the retailer will look to sell it for 2.4x 10 = 24. This is equal to a total mark-up of 14 (i.e. the selling price of 24 less the bought cost of 10). The main advantage of cost-based pricing is that selling prices are relatively easy to calculate. If the mark-up percentage is applied consistently across product ranges, then the business can also predict more reliably what the overall profit margin will be.

Customer-based pricing
Penetration pricing You often see the tagline special introductory offer the classic sign of penetration pricing. The aim of penetration pricing is usually to increase market share of a product, providing the opportunity to increase price once this objective has been achieved. Penetration pricing is the pricing technique of setting a relatively low initial entry price, usually lower than the intended established price, to attract new customers. The strategy aims to encourage customers to switch to the new productbecause of the lower price. Penetration pricing is most commonly associated with a marketing objective of increasing market share or sales volume. In the short term, penetration pricing is likely to result in lower profits than would be the case if price were set higher. However, there are some significant benefits to long-term profitability of having a higher market share, so the pricing strategy can often be justified. Penetration pricing is often used to support the launch of a new product, and works best when a product enters a market with relatively little product differentiation and where demand is price elastic so a lower price than rival products is a competitive weapon. Price skimming Skimming involves setting a high price before other competitors come into the market. This is often used for the launch of a new product which faces little or no competition usually due to some technological features. Such products are often bought by early adopters who are prepared to pay a higher price to have the latest or best product in the market. Good examples of price skimming include innovative electronic products, such as the Apple iPad and Sony PlayStation 3. There are some other problems and challenges with this approach: Price skimming as a strategy cannot last for long, as competitors soon launch rival products which put pressure on the price (e.g. the launch of rival products to the iPhone or iPod). Distribution (place) can also be a challenge for an innovative new product. It may be necessary to give retailers higher margins to convince them to stock the product, reducing the improved margins that can be delivered by price skimming. A final problem is that by price skimming, a firm may slow down the volume growth of demand for the product. This can give competitors more time to develop alternative products ready for the time when market demand (measured in volume) is strongest. Loss leaders The use of loss leaders is a method of sales promotion. A loss leader is a product priced below cost-price in order to attract consumers into a shop or online store. The purpose of making a

product a loss leader is to encourage customers to make further purchases of profitable goods while they are in the shop. But does this strategy work? Pricing is a key competitive weapon and a very flexible part of the marketing mix. If a business undercuts its competitors on price, new customers may be attracted and existing customers may become more loyal. So, using a loss leader can help drive customer loyalty. One risk of using a loss leader is that customers may take the opportunity to bulk-buy. If the price discount is sufficiently deep, then it makes sense for customers to buy as much as they can (assuming the product is not perishable). Using a loss leader is essentially a short-term pricing tactic for any one product. Customers will soon get used to the tactic, so it makes sense to change the loss leader or its merchandising every so often. Predatory pricing (note: this is illegal) With predatory pricing, prices are deliberately set very low by a dominant competitor in the market in order to restrict or prevent competition. The price set might even be free, or lead to losses by the predator. Whatever the approach, predatory pricing is illegal under competition law. Psychological pricing Sometimes prices are set at what seem to be unusual price points. For example, why are DVDs priced at 12.99 or 14.99? The answer is the perceived price barriers that customers may have. They will buy something for 9.99, but think that 10 is a little too much. So a price that is one pence lower can make the difference between closing the sale, or not! The aim of psychological pricing is to make the customer believe the product is cheaper than it really is. Pricing in this way is intended to attract customers who are looking for value.

Competitor-based pricing
If there is strong competition in a market, customers are faced with a wide choice of who to buy from. They may buy from the cheapest provider or perhaps from the one which offers the best customer service. But customers will certainly be mindful of what is a reasonable or normal price in the market. Most firms in a competitive market do not have sufficient power to be able to set prices above their competitors. They tend to use going-rate pricing i.e. setting a price that is in line with the prices charged by direct competitors. In effect such businesses are price-takers they must accept the going market price as determined by the forces of demand and supply. An advantage of using competitive pricing is that selling prices should be line with rivals, so price should not be a competitive disadvantage. The main problem is that the business needs some other way to attract customers. It has to use non-price methods to compete e.g. providing distinct customer service or better availability.

Marketing - Factors to consider when setting a price The price a business charges needs to take account of, and be consistent with, the objectives of the business. For example, it may be that the objective is to position the business as the highest quality provider in this case, a higher price should be used to signal high quality to the consumer. Exclusive designer fashion labels and luxury holiday businesses apply this strategy (using premium or luxury prices). At the other end of the pricing scale, a business that positions itself as a lowcost or discount provider will look to set prices that are lower or as low as any rival. The strategy is to gain advantage by offering the lowest prices (not just in the short-term). The battles in the discount supermarket and low-cost airline markets are great examples of this strategy in action. Factors to consider when setting price There are several factors a business needs to consider in setting the price: Objectives what are the marketing objectives of the firm? Competitors this is really important. Competitor strength influences whether a business can set prices independently, or whether it simply has to follow the normal market price Costs a business cannot ignore the cost of production or buying a product when it comes to setting a selling price. In the long-term, a business will fail if it sells for less than cost, or if its gross profit margin is too low to cover the fixed costs of the business The state of the market for the product if there is a high demand for the product, but a shortage of supply, then the business can put prices up. The state of the economy some products are more sensitive to changes in unemployment and workers wages than others. Makers of luxury products will need to drop prices especially when the economy is in a downturn The bargaining power of customers in the target market who are the buyers of the product? Do they have any bargaining power over the price set? An individual consumer has little bargaining power over a supermarket (though they can take their custom elsewhere). However, an industrial customer that buys substantial quantities of a product from a business may be able to negotiate lower or special prices. Legislation in the market some businesses operate in markets where prices are regulated by government legislation e.g. the rail industry Other elements of the marketing mix it is important to understand that prices cannot be set without reference to other parts of the marketing mix. The distribution channels used will affect price different prices might be charged for the same product sold direct to consumers or via intermediaries. The price of a product in the decline stage of its product life-cycle will need to be lower than when it was first launched.

Finance - Introduction to Financial Accounting Introduction Financial accounts are the records of the financial dealings of the business, their every day transactions. The main role of financial accounting is to: Record financial transactions; e.g. collecting money from sales, paying suppliers, salaries and wages. Help the managers to manage the business more efficiently by preparing regular financial information e.g. monthly management accounts showing sales, costs and profits against budgets, forecasting cash flows, cost investigations. Provide other stakeholders with legal/vital information (financial accounts: trading account, profit and loss, and balance sheet). Shareholders how their investment is doing. Suppliers can they give the business trade credit. Banks and lenders can the business meet repayments of loans and risks of loaning the business money. Inland revenue tax returns. The main accounting records kept by the business are records for keeping the details of transactions: Sales ledger: shows how much is owed by customers who have bought on credit. Purchase ledger: shows how much is owed by the business to suppliers who have provided goods and services on credit. Cash book and bank statements: shows all transactions involving cash (e.g. receipts from customers, payments to suppliers, employee wages). Nominal (or General) ledger: used to categorise the transactions of a business under headings e.g. sales of widgets, raw materials, electricity, and postage. These records are used to maintain the information that is used to make up the main financial statements. Financial Statements Financial accounting produces the following key documents: Profit and loss account showing how the business has traded for a specific period. Balance sheet a statement of the assets and liabilities of a business at a particular time, and how those assets and liabilities have been financed.

Cash flow statement a statement showing how cash has come into the business and what it has been spent on Finance - Why Businesses Need Finance Finance is the money available to spend on business needs. Right from the moment someone thinks of a business idea, there needs to be cash. As the business grows there are inevitably greater calls for more money to finance expansion. The day to day running of the business also needs money. The main reasons a business needs finance are to: Start a business Depending on the type of business, it will need to finance the purchase of assets, materials and employing people. There will also need to be money to cover the running costs. It may be some time before the business generates enough cash from sales to pay for these costs. Link to cash flow forecasting. Finance expansions to production capacity As a business grows, it needs higher capacity and new technology to cut unit costs and keep up with competitors. New technology can be relatively expensive to the business and is seen as a long term investment, because the costs will outweigh the money saved or generated for a considerable period of time. And remember new technology is not just dealing with computer systems, but also new machinery and tools to perform processes quicker, more efficiently and with greater quality. To develop and market new products In fast moving markets, where competitors are constantly updating their products, a business needs to spend money on developing and marketing new products e.g. to do marketing research and test new products in pilot markets. These costs are not normally covered by sales of the products for some time (if at all), so money needs to be raised to pay for the research. To enter new markets When a business seeks to expand it may look to sell their products into new markets. These can be new geographical areas to sell to (e.g. export markets) or new types of customers. This costs money in terms of research and marketing e.g. advertising campaigns and setting up retail outlets. Take-over or acquisition When a business buys another business, it will need to find money to pay for the acquisition (acquisitions involve significant investment). This money will be used to pay owners of the business which is being bought. Moving to new premises

Finance is needed to pay for simple expenses such as the cost of renting of removal vans, through to relocation packages for employees and the installation of machinery. To pay for the day to day running of business A business has many calls on its cash on a day to day basis, from paying a supplier for raw materials, paying the wages through to buying a new printer cartridge.

Choosing the Right Source of Finance A business needs to assess the different types of finance based on the following criteria: Amount of money required a large amount of money is not available through some sources and the other sources of finance may not offer enough flexibility for a smaller amount. How quickly the money is needed the longer a business can spend trying to raise the money, normally the cheaper it is. However it may need the money very quickly (say if had to pay a big wage bill which if not paid would mean the factory would close down). The business would then have to accept a higher cost. The cheapest option available the cost of finance is normally measured in terms of the extra money that needs to be paid to secure the initial amount the typical cost is the interest that has to be paid on the borrowed amount. The cheapest form of money to a business comes from its trading profits. The amount of risk involved in the reason for the cash a project which has less chance of leading to a profit is deemed more risky than one that does. Potential sources of finance (especially external sources) take this into account and may not lend money to higher risk business projects, unless there is some sort of guarantee that their money will be returned. The length of time of the requirement for finance - a good entrepreneur will judge whether the finance needed is for a long-term project or short term and therefore decide what type of finance they wish to use. Finance - Things for a start-up to consider when raising finance Often the hardest part of starting a business is raising the money to get going. An entrepreneur might have a great business idea and clear plan for how to exploit a market opportunity. However, unless sufficient finance can be raised, the entrepreneur will struggle to make the most of the opportunity. Raising finance for a start-up requires careful planning. The entrepreneur needs to decide: How much finance is required? Raising finance is hard work and expensive the startup should avoid having to go through the process too often! When and for how long the finance is needed? A useful distinction can be made between long-term, medium-term and short-term finance What security (if any) can be provided? This will affect the ability of the business to raise a bank or other loan where the lender requires some security (or collateral) Whether the entrepreneur is prepared to give up some control (ownership) of the start-up in return for investment?

Whether the cost of the finance (e.g. interest charged) is justified The finance needs of a start-up should also take account of these key areas: Set-up costs -the costs that are incurred before the business starts to trade Getting ready to produce - the fixed assets that the business needs before it can begin to trade Working capital (the stocks needed by the business e.g. raw materials + allowance for amounts that will be owed by customers once sales begin) Growth and development (e.g. extra investment in capacity) An important consideration when obtaining finance for a business is when and for how long the finance is needed. A useful distinction can be made between long-term, medium-term and shortterm finance. The table below summarises the main examples and uses of each category:

Long-term Finances the whole business over many years Examples: Retained profits Share capital Venture capital Mortgages Long-term bank loans

Medium-term Finances major projects or assets with a long-life Examples: Bank loans Leasing Hire purchase Government grants

Short-term Finances day-to-day trading of the business Examples: Bank overdraft Trade creditors Short-term bank loans Factoring

Finance - Entrepreneurs finance - personal sources In practice, most start-ups make use of the personal financial sources of the entrepreneur. This can be personal savings in the building society, a bank balance. It can be providing assets for the business (e.g. a car). It can also simply be working for nothing! The following notes explain these in a little more detail. Savings and other nest-eggs An entrepreneur will often invest personal cash balances into a start-up. This is a cheap form of finance and it is readily available. Often the decision to start a business is prompted by a change in the personal circumstances of the entrepreneur e.g. redundancy or an inheritance. Investing personal savings maximises the control the entrepreneur keeps over the business. It is also a strong signal of commitment to other potential investors and banks. Re-mortgaging is the most popular way of raising loan-related capital for a start-up. The way this works is simple. The entrepreneur takes out a second or larger mortgage on a private property and then invests some or all of this money into the business. The use of mortgaging like this provides access to relatively low-cost finance, although the risk is that, if the business fails, then the property will be lost too. However, the credit crunch falling house prices has made remortgaging harder. Borrowing from friends and family This is also common. Friends and family who are supportive of the business idea provide money

either directly to the entrepreneur or into the business. This can be quicker and cheaper to arrange (certainly compared with a bank loan) and the interest and repayment terms may be more flexible than a bank loan. However, borrowing in this way can add to the stress faced by an entrepreneur, particularly if the business gets into difficulties. Credit cards This is a surprisingly popular way of financing a start-up. In fact, the use of credit cards is the most common source of finance amongst small businesses. It works like this. Each month, the entrepreneur pays for various business-related expenses on a credit card. 15 days later the credit card statement is sent in the post and the balance is paid by the business within the credit-free period. The effect is that the business gets access to a free credit period of around 30-45 days! Working for nothing! How can this be a source of finance? Simple - by working for nothing, an entrepreneur saves the business cash. By working long hours and multi-tasking, the entrepreneur reduces the need to employ others - and therefore saves cash that would otherwise have to be paid out in wages in salaries. In just about every start-up, the founders look to save cash (i.e. reduce the finance needed) by putting in the "hard yards" Finance - Tackling a cash flow problem The best way to improve cash flow is to have a reliable and up-to-date cash flow forecast. This provides the information which highlights the main cash flow issues. In terms of actions which management can take, here are the main options: Cut costs by far the most important method of improving cash flow. Every business can identify savings in non-essential costs if it looks hard enough. The recent credit crunch and recession has proved that businesses can take drastic actions to cut overheads and other costs, which immediately reduces cash outflows. Cut stocks: reduce the amount of cash tied up by buying and holding raw materials or goods for resale. This can be done by (a) ordering less stock from suppliers and/or (b) offering discounts on stocks held to encourage customers to buy (ideally for cash). Delay payments to suppliers a dangerous game, but widely used in business. By taking longer to pay bills owed, a business can reduce cash outflows (at the risk of damaging relationships with suppliers though). Reduce the credit period offered to customers this is easier said than done. By asking customers to pay for their purchases quicker, a business can accelerate cash inflows. However, there is no guarantee that customers will agree. They may need to be given a financial incentive, such as a prompt-payment discount. Cut back or delay expansion plans many of the biggest cash outflows occur when a business is expanding (e.g. opening new offices or shops, adding a production line or factory). By delaying this expansion, cash can be conserved in the short-term.

Finance - Understanding Demand Demand is defined as: The amount (quantity) that customers are prepared to buy at a given price As customers, in an ideal world we would be able to buy whatever we wanted. However, we are restricted by a simple problem we dont have unlimited money! So, economists often prefer to talk about effective demand which means the quantity that customers are able to buy. Effective demand is all about the ability and willingness of customers to pay or how much they can afford. Normally, the quantity demanded for a product will increase if the price falls. Conversely, an increase in price will normally lead to a fall in quantity demanded. The relationship between quantity demanded and price can be shown graphically by drawing a demand curve, as illustrated below:

Factors that affect demand The demand for a product will be influenced by several factors:

Price

The most important factor that affects demand. Products have different sensitivity to changes in price. For example, demand for necessities such as bread, eggs and butter does not tend to change significantly when prices move up or down When an individuals income goes up, their ability to purchase goods and services increases, and this causes demand to increase. When incomes fall there will be a decrease in the demand for most goods Can have a significant effect on demand for different products. Persuasive advertising is designed to cause a change in tastes and preferences and thereby create an increase in demand. A good example of this is the surge in sales of smoothies! Competitors are always looking to take a bigger share of the market, perhaps by cutting their prices or by introducing a new or better version of a product When a product becomes unfashionable or out-dated, demand can quickly fall away. The rapid decline in sales of Crocs is a great example

Income levels

Consumer tastes and preferences

Competition

Fashions and technology

Finance - Understanding Business Revenues A business exists to provide goods and services. Those products are sold to customers. When a customer buys a product, that transaction becomes a sale for the business. Thats what businesses do they make sales. The value of sales made is the revenue of the business. You will come across some different ways of describing sales. Alternative terms for sales include: Revenue (the official accounting term) Income Sales turnover Takings (often used by retailers) So we know that sales arise through the trading activities of a business. How are sales measured? The value of revenue in a given period is a function of the quantity of product sold multiplied by the price that customers paid. Total revenue can be calculated by this formula:

Total revenue = volume sold x average selling price A business that wants to increase revenue needs to either: Increase the amount or volume sold (higher quantity), Achieve a higher selling price, Or (ideally) both of the above!

Calculating revenue To see how the revenue formula works, lets look at an example. Sheila runs a web design business. Her budgeted revenue for next year is as follows: Number of jobs Quarter Jan-Mar Apr-Jun Jul-Sep Oct-Dec Total 6 7 5 8 26 Average value per Job 2,500 2,500 3,000 2,750 2,673 Total revenue 15,000 17,500 15,000 22,000 69,500

In the example above, Sheila is budgeting to achieve total revenues of 69,500. These sales come from a total of 26 jobs, with an average selling price per job of 2,673. How might Sheila do better than her estimated revenue for next year? Winning more jobs might help, although 26 jobs already looks a lot of work. Sheila may find it hard to handle higher sales volumes, unless she is able to raise capacity by employing extra designing or outsourcing elements of the work. In Sheilas case, the solution to higher sales can probably be found in the average selling price achieved. By focusing on smaller number of higher-value jobs, Sheila may be able to increase revenues and deliver a better service. For example, if Sheila did just 20 jobs next year (6 fewer than budget) at an average price of 4,000 per job, then her total revenues would be 80,000 (20 x 4,000), an increase over the existing sales budget of 10,500. Finance - Introduction to cash flow Cash flow describes the movements of cash into and out of a business When you look at the bank statement of any business, you soon realise that cash flow is a dynamic and often unpredictable part of business life.

In business, cash is always on the move Cash flows into the bank account when customers pay for their sales, when a loan is received from the bank, interest is received or when assets are sold Cash flows out of the bank account when suppliers are paid, employee wages and salaries are paid; interest is paid to the bank and so on You need to be able to distinguish between: Cash inflows: movements of cash into a business Cash outflows: movements of cash out of the business The difference between the cash inflows and cash outflows during a specific period (e.g. a week, month) is known as the net cash flow. The challenge for any business (particularly a start-up) is to ensure that it manages its net cash flow to ensure that it does not run out of money. Main types of cash inflow and outflow The main types of cash flow can be summarised as follows:

Finance - The Cash Flow Forecast The cash flow forecast predicts the net cash flows of the business over a future period. The forecast estimates what the cash inflows into the bank account and outflows out of the bank account will be. The result of the cash flow forecast is an estimate of the bank balance at the end of each period covered (normally this is for each month). An example of a simple cash flow forecast is shown below:

Jan '000 Cash at start of month Cash inflows Cash outflows Net cash flow Cash at end of month 25 20 25 -5 20

Feb 20 25 30 -5 15

Mar 15 20 30 -10 5

Apr 5 15 10 5 10

May 10 20 10 10 20

Jun 20 25 20 5 25

A business uses a cash flow forecast to: Identify potential shortfalls in cash balances for example, if the forecast shows a negative cash balance then the business needs to ensure it has a sufficient bank overdraft facility See whether the trading performance of the business (revenues, costs and profits) turns into cash. Analyse whether the business is achieving the financial objectives set out in the business plan (which will almost certainly include some kind of cash flow budget) Why the cash flow forecast is so important If a business runs out of cash and is not able to obtain new finance, it will become insolvent. It is no excuse for management to claim that they didnt see a cash flow crisis coming. So in business, cash is king. Cash flow is the life-blood of all businesses particularly start-ups and small enterprises. As a result, it is essential that management forecast (predict) what is going to happen to cash flow to make sure the business has enough to survive. Here are the key reasons why a cash flow forecast is so important: Identifies potential shortfalls in cash balances in advance think of the cash flow forecast as an early warning system. This is the most important reason for a cash flow forecast Makes sure that the business can afford to pay suppliers and employees. Suppliers who dont get paid will soon stop supplying the business; it is even worse if employees are not paid on time Spot problems with customer payments preparing the forecast encourages the business to look at how quickly customers are paying their debts. Note this is not really a problem for businesses (like retailers) that take most of their sales in cash/credit cards at the point of sale As an important discipline of financial planning the cash flow forecast is an important management process, similar to preparing business budgets External stakeholders such as banks may require a regular forecast. Certainly if the business has a bank loan, the bank will want to look at cash flow forecasts at regular intervals

Finance - Estimating revenues One of the hardest tasks an entrepreneur faces with a start-up business is coming up with a realistic estimate of revenues. The main problems concern the uncertainties about: The size of the available market how much do customers already spend in the market? Not every market is well researched, particularly those which do not involve retailing or which are not covered by official statistics. The price that customers will be prepared to pay for a new product. A new business will often assume that customers will pay a higher price than they actually will. A new product into a market often has to be offered at a discount (lower price) in order to encourage customers to buy for the first time The timing and source of sales: where will customers buy and which methods will they use (e.g. from a physical store, marketing leaflet or online store?) The effectiveness of marketing activities by definition, new businesses start without an established customer base. Launch marketing activities often do not generate the excitement and customer buzz that is intended! The response of competitors how will they respond to a new challenger entering the market? A start-up business cannot expect to enter a market without a challenge from the existing operators. In general, experience shows that start-ups tend to overestimate their expected revenues in the first year or two. Finance - What is Profit? Profit is a very important concept for any business particularly a start-up Profit is the financial return or reward that entrepreneurs aim to achieve to reflect the risk that they take. Given that most entrepreneurs invest in order to make a return, the profit earned by a business can be used to measure the success of that investment. Profit is also an important signal to other providers of finance to a business. Banks, suppliers and other lenders are more likely to provide finance to a business that can demonstrate that it makes a profit (or is very likely to do so in the near future) and that it can pay debts as they fall due. Profit is also an important source of finance for a business. Profits earned which are kept in the business (i.e. not distributed to the owners via dividends or other payments) are known as retained profits. Retained profits are an important source of finance for any business, but especially start-up or small businesses. The moment a product is sold for more than it cost to produce, then a profit is earned which can be reinvested. Profit can be measured and calculated. So here is the formula:

PROFIT = TOTAL SALES less TOTAL COSTS Here is an example which illustrates the formula in action:

Finance - How profit is used by a business Profit arises when total sales exceed total cost for a period. Once a profit has been made, the owners of the business have a choice: Take the profit out of the business (e.g. pay a dividend to shareholders) Retain the profit in the business either in cash or by investing the profit into new assets

Most entrepreneurs reinvested or retain profits in a business. Why? Profit is the most important source of finance for a business. It is defined as being an internal source in the sense that it is generated from within the business. Why is profit important as a source of finance? Because it is entirely within the control of the business it is not provided by outsiders. Another reason is that retained profits are relatively cheap. They do have a cost which is the return that the business owners could obtain by taking the money out of the business. However, the true cost of retained profit is much less than paying interest on a bank loan or overdraft. What can profit be reinvested in? Essentially to help the business grow: e.g. Additional production capacity Investment in information technology To buy more stocks of raw materials and components

The alternative use for profit is to pay it as a reward or return to the business owners. For shareholders in a company, this method is known as a dividend.

A dividend provides a shareholder with one part of his/her return on investment. The second part of the return comes when the value of the shares in the company increases. Finance - Introduction to Business Costs Introduction A business has many different costs, from paying for raw materials through to paying the rent or the heating bill. By careful classification of these costs a business can analyse its performance and make better-informed decisions. The main ways in which a business needs to manage its costs are as follows: Classification of costs into fixed and variable, direct and indirect. Variance analysis to see if the business is keeping control of its costs. Break even analysis which tells a business what it needs to sell to cover its costs. An opportunity cost is the financial benefit forgone of the next best alternative use of money. A business can measure the outcome of a decision by comparing it with the benefits (probably measured in profits or revenue) it could have had if it had taken the next best option. The opportunity cost of buying a new piece of machinery might be compared with the benefits of spending the money on a new advertising campaign. Fixed and Variable Costs Variable costs change in proportion to the amount of output produced. Fixed costs remain the same, no matter how much the business produces. The main kinds of costs are: Variable costs Raw materials Workers wages Energy/fuel for machines Fixed costs Rent Salaries of head office workers Heating and lighting Insurance Interest on loans Semi-fixed costs are costs which only change when there is a large change in output. For example, costs associated with buying a new machine to cope with increased production. Also telephones and electricity for instance have a fixed and variable element: a standard line rental and then a charge for each call/unit of electricity after that. Direct costs are costs which can be identified directly with the production of a good or service; e.g. raw materials.

Indirect costs are costs which cannot be matched against each product because they need to be paid whether or not the production of good or services takes place; e.g. rent on the premises. Classification of costs help allocate costs to right parts of the profit and loss account and also helps analysis of the break even point of the business. Finance - Breakeven - Introduction Breakeven A business can work out how what volume of sales it needs to achieve to cover its costs. This is known as the break even point. The key to break even is to work out the contribution made from the sale of each unit. The amount of money each unit sold contributes to pay for the fixed and indirect costs of the business. Contribution = selling price less variable cost per unit E.g. a product sells for 15 and has variable costs per unit of 11. Each unit sale therefore makes a contribution of 4 towards the fixed costs of the business. If the business had fixed costs of 20,000, then it would need to sell 5,000 units (4 x 5,000 = 20,000 contribution) in order to break even. The margin of safety is the difference between the number of units of planned or actual sales and the number of units of sales at break even point. If, using the example above, planned sales were thought to be 6,000 units, then the margin of safety would be 6,000 units break even 5,000 units = 1,000 units. The business would be able to sell 1,000 less than planned before they were in danger of making a loss. A break-even chart plots the sales revenue, different costs and helps identify the break even point and margin of safety.

Drawing break-even charts To draw a chart the following steps need to be followed: 1. Label the vertical axis sales and costs in pounds. 2. Label the horizontal axis sales/production (units). 3. On another piece of paper sketch the scales that you want to use given the data, then use this plan on the chart. 4. Plot any two points from the sales revenue data for the sales revenue line and then draw a straight line for sales revenue (assumes that the price per unit does not change) if the

information is not given for sales revenue, then work out two points, e.g. for 1000 units sold and 1500 units sold. The start of the line should be through the origin (where the axes meet). 5. Draw a horizontal line for total fixed costs starting at the point on the vertical axis at the level of costs. 6. At the same starting point it is possible to draw the total costs line. Total costs are fixed costs plus variable costs. Work out what the total costs are for say 1000 units and 1500 units. Then draw the straight line starting at the same point as the fixed costs started and then through the two plotted points. 7. Where the sales revenue crosses the total costs line is the break even point. Read off the units of sales to give the break even level of sales. 8. The gap between the total costs line and sales revenue line after the break even point represents the level of profit.

It is important for a business to understand its break-even point because the contribution from every unit sold above the break-even point adds to profit. The break-even point provides a focus for the business, but also helps it work out whether the forecast sales will be enough to produce a profit and whether further investment in the product is worthwhile. The main limitations of break-even charts are: Do not take into account possible changes in costs over the time period. Do not allow for changes in the selling price. Analysis only as good as the quality of information. Do not allow for changes in market conditions in the time period e.g. entry of new competitor.

Finance - Breakeven - Contribution Contribution looks at the profit made on individual products. It is used in calculating how many items need to be sold to cover all the business' costs (variable and fixed). Let's start with a really important definition & formula (you really do need to know these!) Definition: Contribution is the difference between sales and variable costs of production Formulae: Contribution = total sales less total variable costs Contribution per unit = selling price per unit less variable costs per unit Total contribution can also be calculated as: Contribution per unit x number of units sold Let's look at a simple worked example of contribution. Here is some information about a business that just sells one product: Selling price per unit 30 Variable cost per unit 18 Contribution per unit 12 (i.e. 30 less 18) Units sold 15,000 Using the formulae, we can perform the following calculation: Contribution = 180,000 (i.e. 12 x 15,000 units) Looking at the contribution per unit above (12), you should be able to see that it can be increased by: Increasing the selling price per unit - i.e. more than 30 Lowering the variable cost per unit - i.e. less than 18 Note that the total contribution of 180,000 is not the total profit made by the business. Why? This is because we have not yet taken account of the fixed costs of the business. Let's do that now... Imagine that, in the example above, the business has the following fixed costs: Admin: 18,000 Marketing: 25,000 Payroll: 50,000 Other overheads: 23,000 Total: 116,000 The total fixed costs of the business are 116,000. If we take these away from the contribution (180,000), then we can calculate the overall profit or loss of the business:

Total profit = contribution less fixed costs Total profit = 180,000 - 116,000 = a profit of 64,000 (i.e. 180,000 less 116,000) In the above example we calculated contribution per unit by subtracting variable cost per unit from selling price per unit. Contribution per unit is a really useful number to have when answering questions on break-even. Finance - Introduction to Financial Accounting Introduction Financial accounts are the records of the financial dealings of the business, their every day transactions. The main role of financial accounting is to: Record financial transactions; e.g. collecting money from sales, paying suppliers, salaries and wages. Help the managers to manage the business more efficiently by preparing regular financial information e.g. monthly management accounts showing sales, costs and profits against budgets, forecasting cash flows, cost investigations. Provide other stakeholders with legal/vital information (financial accounts: trading account, profit and loss, and balance sheet). Shareholders how their investment is doing. Suppliers can they give the business trade credit. Banks and lenders can the business meet repayments of loans and risks of loaning the business money. Inland revenue tax returns. The main accounting records kept by the business are records for keeping the details of transactions: Sales ledger: shows how much is owed by customers who have bought on credit. Purchase ledger: shows how much is owed by the business to suppliers who have provided goods and services on credit. Cash book and bank statements: shows all transactions involving cash (e.g. receipts from customers, payments to suppliers, employee wages). Nominal (or General) ledger: used to categorise the transactions of a business under headings e.g. sales of widgets, raw materials, electricity, and postage. These records are used to maintain the information that is used to make up the main financial statements.

Financial Statements Financial accounting produces the following key documents: Profit and loss account showing how the business has traded for a specific period. Balance sheet a statement of the assets and liabilities of a business at a particular time, and how those assets and liabilities have been financed. Cash flow statement a statement showing how cash has come into the business and what it has been spent on. The Balance Sheet Balance sheets provide a snap shot of the assets and liabilities of a business at a point of time. It shows what the business owns, is owed and owes: Owns assets such as buildings, stock and cash. Is owed money from debtors. Owes money to creditors and the bank. Owes to the investors and owners of the business (they own the profit). A typical balance sheet would look like this: Balance sheet for XYZ plc as at 31 st March 2003 000 1,800 300 250 150 700 (400) 300 2,100 Notes Likely to find sub-totals for buildings, equipment and vehicles

Fixed assets Current assets Stock Debtors Cash Total current assets Current liabilities Net Current Assets Net assets employed Financed by: Long term liabilities Share capital Profit and loss reserves Capital employed

Stock + debtors + cash Current assets current liabilities; also known as working capital Fixed assets + net current assets

700 1,000 400 2,100

e.g. loans from banks Amounts invested by shareholders The profit accumulated that has been retained by the business Long term liabilities + share capital + profit and loss reserves

Note that net assets employed = capital employed. This is always the case, because the capital employed is the amount of long-term money put into the business and the net assets employed how it is used. Fixed assets Fixed assets are: Assets that provide a benefit for the business in the long-term (normally for at least a year), e.g. buildings and machinery Assets that the business intends to keep Note that fixed assets are depreciated over their useful life Current assets Current assets are assets that will be used up or sold in the next year + the cash balances kept in the business. The main categories are: Stocks finished goods, work in progress and raw materials (note: you may also see stocks called inventories). Debtors people who owe the business money (customers who owe money are known as trade debtors). Cash in the bank and in the cash box. Current liabilities Current liabilities are what the business owes in the short run. The main categories are: Creditors money owed by the business in the short term (suppliers who are owed money by the business are known as trade creditors). Bank overdraft amounts due within the next 12 months. The total of current assets minus current liabilities is known as working capital. This is amount of money available for the day to day running of the business. A negative figure can be a problem for some businesses that may need to pay for outstanding debts, but do not have enough spare cash to do so. Long-term liabilities are the monies the business has borrowed for a period of more than a year mainly bank loans. Share capital is the money invested in the business by the owners. Profit and loss reserves are the profits due to the owners that have not already been paid out in dividends. This money is not necessarily held in cash (see the current assets), but may have been used to buy more stock or fixed assets. Shareholder funds are the share capital and reserves added together. Capital is the amount of long-term money put into the business to buy assets. Main forms of capital: owners money (share capital) and long term bank loans.

Finance - Profit and Loss Account Profit and Loss Account The purpose of the profit and loss account is to: Show whether a business has made a PROFIT or LOSS over a financial year. Describe how the profit or loss arose e.g. categorising costs between cost of sales and operating costs. A profit and loss account starts with the TRADING ACCOUNT and then takes into account all the other expenses associated with the business. Trading account The trading account shows the income from sales and the direct costs of making those sales. It includes the balance of stocks at the start and end of the year. An example of the trading account of a business would look this: Trading account for XYZ plc for the year ended 31 st March 2003 Category Sales Opening Stock Purchases less Closing Stock Cost of Sales Other Costs Gross Profit 150,000 400,000 (220,000) 330,000 1,200,000

(330,000) (70,000) 800,000

Note that the closing stock figure would appear in the balance sheet under Stock.

Profit and loss account The trading account now has all the other expenses now deducted. It would look like the table below: Trading, profit and loss account for XYZ plc for the year ended 31 st March 2003 000 1,200 Examples e.g. 400 cars at 3,000 each

Turnover (sales) revenue Cost of sales

The amount of money generated by sales The cost of making the goods or buying them

(400)

Raw materials Cost of labour working directly on each product Cost of running the machines/equipment

Gross profit Overheads or expenses

800 (320)

Turnover minus cost of sales Costs not directly involved in the production process (indirect costs)

Cost of premises e.g. rent, insurance, repairs Office costs e.g. stationery, postage, computer maintenance, staff salaries and wages Sales and marketing costs e.g. salaries of salesmen, advertising Finance costs e.g. bank charges, interest on bank loans

Operating profit Interest and taxation payable Net profit after tax and interest Dividends Retained profit

480

(200)

Gross profit minus overheads Also known as NET PROFIT The money that is due to be paid in interest on loans and to the Inland Revenue as tax The money available to be distributed to shareholders

280

(170) 90

Money paid to shareholders as a reward for holding shares The money left for the business to reinvest

The business has to pay tax at the rate determined by the government and interest at the rates determined by the lenders.

Finance - Choosing the Right Source of Finance Choosing the Right Source of Finance A business needs to assess the different types of finance based on the following criteria: Amount of money required a large amount of money is not available through some sources and the other sources of finance may not offer enough flexibility for a smaller amount. How quickly the money is needed the longer a business can spend trying to raise the money, normally the cheaper it is. However it may need the money very quickly (say if had to pay a big wage bill which if not paid would mean the factory would close down). The business would then have to accept a higher cost. The cheapest option available the cost of finance is normally measured in terms of the extra money that needs to be paid to secure the initial amount the typical cost is the interest that has to be paid on the borrowed amount. The cheapest form of money to a business comes from its trading profits. The amount of risk involved in the reason for the cash a project which has less chance of leading to a profit is deemed more risky than one that does. Potential sources of finance (especially external sources) take this into account and may not lend money to higher risk business projects, unless there is some sort of guarantee that their money will be returned. The length of time of the requirement for finance - a good entrepreneur will judge whether the finance needed is for a long-term project or short term and therefore decide what type of finance they wish to use. Short Term and Long Term Finance Short-term finance is needed to cover the day to day running of the business. It will be paid back in a short period of time, so less risky for lenders. Long-term finance tends to be spent on large projects that will pay back over a longer period of time. More risky so lenders tend to ask for some form of insurance or security if the company is unable to repay the loan. A mortgage is an example of secured long-term finance. The main types of short-term finance are: Overdraft Suppliers credit Working capital The main types of long-term finance that are available for to a business are: Mortgages Bank loans Share issue Debentures Retained profits Hire purchase

Internal and External Finance Internal finance comes from the trading of the business. External finance comes from individuals or organisations that do not trade directly with the business e.g. banks. Internal finance tends to be the cheapest form of finance since a business does not need to pay interest on the money. However it may not be able to generate the sums of money the business is looking for, especially for larger uses of finance. Examples of internal finance are: Day to day cash from sales to customers. Money loaned from trade suppliers through extended credit. Reductions in the amount of stock held by the business. Disposal (sale) of any surplus assets no longer needed (e.g. selling a company car). Examples of external finance are: An overdraft from the bank. A loan from a bank or building society. The sale of new shares through a share issue. Finance - Bank Loans and Overdrafts Bank Loans and Overdrafts A bank overdraft is a limit on borrowing on a bank current account. With an overdraft the amount of borrowing may vary on a daily basis. A bank loan is a fixed amount for a fixed term with regular fixed repayments. The interest on a loan tends to be lower than an overdraft. Example of a loan: A business borrows 12,000 from a bank over 3 years at an interest rate of 5%. The approximate repayments on this loan would be 392 a month for 36 months (14,112). A fixed term means how many months or years before the loan has to be repaid in full. Normally a fixed term loan will be for a greater amount than an overdraft. Overdrafts Flexibility can change the amount borrowed within limits Interest is only paid on amounts borrowed Cannot be used for large borrowing Rates of interest higher than loans Bank can change limit at any time or ask for money to be paid back sooner than expected Loans Larger amounts can be borrowed Lower interest rates than overdrafts Regular repayments help plan cash flow Less flexible than an overdraft Have to pay back in stated time or risk further financial problems

Advantages

Disadvantages

Debentures A debenture is a long term loan which is usually secured against a specific asset (e.g. the factory) or the overall assets of a business. A debenture is repayable at a fixed date and has a fixed rate of interest. Debentures are different from ordinary shares because: The lender has no voting rights in the company. The loan attracts interests whereas holders of ordinary shares get dividends. The providers of loans are paid out before ordinary shareholders in the event that the business fails (assuming there is some cash left).

Finance - Share capital Share capital is the money invested in a company by the shareholders. Share capital is a long-term source of finance. In return for their investment, shareholders gain a share of the ownership of the company. An illustration of an example company share ownership structure is shown below: Number of Shares Shareholder Angela Nicolas Gordon Barack Total 300 400 600 700 2,000 15% 20% 30% 35% 100% Shareholding

Shareholders benefit from the protection offered by limited liability they are only liable for the amount they invest in share capital rather than the overall debts of the company. The founding entrepreneur is very likely to invest in the share capital of the start-up. This is a common method of financing a start-up. Ideally the founder will try to provide all the share capital of the company, retaining 100% control over the business. A key point to note is that the entrepreneur may use a variety of personal sources (e.g. cash, personal investments) to finance the purchase of shares. Once the investment has been made, it is the company that owns the money provided. The shareholder obtains a return on this investment through dividends (payments out of profits) and/or increases in the value of the company when it is eventually sold. A start-up company can also raise finance by selling shares to external investors this is typically to a business angel or venture capitalist.

Finance - Other Sources of External Finance Leasing Leasing is like renting a piece of equipment or machinery. The business pays a regular amount for a period of time, but the item belongs to the leasing company. Most company cars are leased to businesses. The business pays a monthly fee for the car and at the end of the period (normally about two years), the business swaps the car for a newer model. The advantages of leasing are: Cheaper in the short run than buying a piece of equipment outright. If technology is changing quickly or equipment wears out quickly it can be regularly updated or replaced. Cash flow management easier because of regular payments. The disadvantages of leasing are: More expensive in the long run, because the leasing company charges fees which make the total cost greater than the original cost. Hire Purchase Business hires the equipment for a period of time making fixed regular payments. Once payments have finished it then owns the piece of equipment. Hire purchase is different to leasing in that the business owns the equipment when it has finished making payments. With an equipment lease, the equipment is handed back to the leasing provider. Debt Factoring A business sells its outstanding customer accounts (those who have not paid their debts to the business) to a debt factoring company. The factoring company pays the business - say 80-90% of face value of the debts - and then collects the full amount of the debts. Once it has done this it will pay the remaining amount to the business less a charge. It is a good way of raising cash quickly, without the hassle of chasing payments. BUT it is not so good for profits since it reduces the total revenue received from those sales. Government Finance The government and the European Union provide help to businesses for the following reasons: Protect jobs in failing/declining industries. Help create jobs in areas of high unemployment. Help start up new businesses. Help businesses relocate to areas of high unemployment. Some of the main sources of funds are:

European Structural Fund Assisted Areas Regional Selective Assistance Small Loans Guarantee Scheme Trade Credit A business does not always have to pay their bills as soon as they receive them. They are given period of credit, normally around 30-60 days. By trying to extend this period they can improve their short-term finance position. Small businesses now have some protection under law that prevents larger firms exploiting their credit terms. Trade credit is an important source of finance for nearly all businesses since it is effectively a free source of finance. Retained Profits The cheapest form of finance is the business own profits. In the UK over 80% of retained profits are reinvested back into the business. Since it is not being borrowed from anyone, it does not cost money to use. Own Capital For sole traders and partnerships a common source of finance, especially for start up is money from the individuals who are forming the business. They may also borrow money from family and friends. Own capital is a costless form of finance, but carries the risk of the money being lost. Working Capital Working capital is the amount of money available for the day to day running of the business. It is the difference between current assets and current liabilities. See below for more details of how working capital can be used. Sources of Finance for Public Sector Organisations Public sector organisations receive from both the normal sources that most businesses receive money, but also from tax revenues. Most public sector organisations, such as schools and hospitals obtain more straight from the government - who have previously collected the money from tax payers. Other organisations gain money from sales, e.g. stamps for the Post Office, and licences for the BBC.

Finance - Depreciation of Fixed Assets Depreciation A fixed asset reduces in value over its useful life due to wear and tear and (when it is no longer useful) obsolescence. Depreciation is the tool used by accountants to record the reduction in the original value of an asset. Depreciation is charged every year of a fixed assets useful life to the profit and loss account. In the balance sheet the original cost of the fixed asset is reduced by the amount of depreciation. There are two main methods of depreciation: Straight line depreciation this is where the same amount is charged every year using the following formula to calculate it: Original Cost of the Fixed Asset / Useful Life of the Asset For example; a machine bought for 20,000 has a useful life of ten years. Management decide to charge depreciation on a straight line basis. So the annual depreciation cost is 20,000 / 10 = 2,000 Reducing balance depreciation the same percentage of an assets value is taken off every year, e.g. 20%. Most businesses use straight line depreciation, but it is possible to argue that reducing method is better because it reflects the fact that most assets lose most of their value in the first years of use. Depreciation appears in the profit and loss account under expenses it reduces the profit for that year because some of the asset was used up in that time period. It appears in the balance sheet by reducing the value of the fixed assets. This means that the balance sheet reflects a true and fair value of the assets. Finance - Why businesses need credit Some small businesses trade in cash and nothing else. Customers pay in cash and the expenses and costs of the business are settled in cash. There is no need for credit. However, most businesses cannot survive simply with the cash they have in the bank. They need to borrow or lend from banks, suppliers and others in order to trade. So in business, credit is about borrowing owing money to others for a period of time. For example, credit arises when: A business makes use of a bank overdraft facility e.g. the bank account goes 50,000 into the red or overdrawn A business takes out a bank loan e.g. 100,000 loaned over five years A business buys goods or services from a supplier and agrees to pay for them in 30 days this is known as trade credit The amount of credit that a business can raise will depend on several factors such as: Whether the business is profitable and is likely to remain so in the future The ability of the business to generate a positive cash flow to allow it to repay credit

The strength of the relationship between the business and its creditors The industry or market in which the business operates You may have heard about the credit crunch during 2008 and 2009. The credit crunch was about a reduction in the availability of credit for businesses. As lenders struggled to stay in business, they lost confidence in the ability of businesses to repay credit. So many businesses found themselves in financial trouble due to: Banks withdrawing or lowering overdraft facilities Banks refusing to provide bank loans, or making the repayments and interest charges worse Suppliers insisting on earlier payment of invoices Customers taking longer to pay their bills The effects of the credit crunch notably an increase in failed businesses show just how important credit is to the business community. People management - Communication (introduction) Communication can be defined as: The process by which a message or information is exchanged from a sender to a receiver Communication can be: Internal: between people in the same business External: with people outside the business Internal communication is particularly important. It links together all the different activities involved in a business. It also aims to ensure that all employees are working towards the same goal and know exactly what they should be doing and by when. Examples of internal communication include: Formal meetings and briefings E-mail Intranets Wikis, blogs, podcasts, internal social media tools Informal meetings where employees can meet with senior management Conference calls & webinars Internal newsletters, brochures, and other printed materials Team briefing sessions Message boards Training packs (e.g. induction materials) External communication is where the business communicates with people & organisations outside of the business. This is closely linked with the idea of stakeholders i.e. those who have an interest in the activities and results of the business

Examples of external communication include: Press releases Marketing materials (e.g. adverts, brochures, direct mailings) Published financial information (e.g. accounts) Letters, emails and telephone conversations with customers and suppliers Reports to government and other agencies People management - Effective communication What would be considered good or effective communication? It would be communication in which: The sender and receiver of information are properly matched The message is communicated clearly i.e. without misunderstanding or misinterpretation Communication is made using an appropriate communication channel and/or method The receiver of the communication is able to pass on any relevant and appropriate feedback (i.e. two-way communication) There are many reasons why it is important for a business to achieve effective communication: Motivates employees helps them feel part of business Easier to control and coordinate business activity prevents different parts of business going in opposite directions Makes successful decision making easier decisions are based on more complete and accurate information Better communication with customers will increase sales Improve relationships with suppliers Improves chances of obtaining finance e.g. keeping bank up-to-date about how business is doing The link between communication and motivation is particularly important. Good communication is an important part of motivating employees and the main motivational theorists recognised this: Mayo emphasised importance of communication in meeting employees social needs Maslow and Herzberg stressed importance of recognising employees achievements and self-esteem needs Amongst the other reasons for using communication to boost motivation are: Ensures that everyone is working towards same company goals Enables employees to be involved in decision-making Employees can offer feedback and give suggestions People are motivated by having clear targets set for them Recognise employee achievements

People management - Barriers to good communication Aiming to achieve effective communication is one thing actually doing it is another. There are several barriers to communication, including:

Explanation Barrier Language The communication message might not use vocabulary that is understood by the receiver e.g. too much use of technical or financial jargon Various things stop a message from getting through or being heard e.g. poor connection, background noise, distractions, too many people speaking Too much information can cause problems e.g. slow down decision making The relationship between the sender and receiver of communication might adversely affect the message which could be ignored or misinterpreted Too many intermediaries (e.g. too many layers in hierarchy through which message has to be passed) might prevent or distort the message If people receive conflicting or inconsistent messages, then they may ignore or block them

Noise

Overload Emotion

Gaps

Inconsistency

People - Management styles What makes a good leader or manager? For many it is someone who can inspire and get the most from their staff. There are many qualities that are needed to be a good leader or manager. Be able to think creatively to provide a vision for the company and solve problems Be calm under pressure and make clear decisions Possess excellent two-way communication skills Have the desire to achieve great things Be well informed and knowledgeable about matters relating to the business Possess an air of authority Do you have to be born with the correct qualities or can you be taught to be a good leader? It is most likely that well-known leaders or managers (Winston Churchill, Richard Branson or Alex Ferguson?) are successful due to a combination of personal characteristics and good training. Managers deal with their employees in different ways. Some are strict with their staff and like to be in complete control, whilst others are more relaxed and allow workers the freedom to run their own working lives (just like the different approaches you may see in teachers!). Whatever approach is predominately used it will be vital to the success of the business. An organisation is only as good as the person running it.

There are three main categories of leadership styles: autocratic, paternalistic and democratic. Autocratic (or authoritarian) managers like to make all the important decisions and closely supervise and control workers. Managers do not trust workers and simply give orders (one-way communication) that they expect to be obeyed. This approach derives from the views of Taylor as to how to motivate workers and relates to McGregors theory X view of workers. This approach has limitations (as highlighted by other motivational theorists such as Mayo and Herzberg) but it can be effective in certain situations. For example: When quick decisions are needed in a company (e.g. in a time of crises) When controlling large numbers of low skilled workers. Paternalistic managers give more attention to the social needs and views of their workers. Managers are interested in how happy workers feel and in many ways they act as a father figure (pater means father in Latin). They consult employees over issues and listen to their feedback or opinions. The manager will however make the actual decisions (in the best interests of the workers) as they believe the staff still need direction and in this way it is still somewhat of an autocratic approach. The style is closely linked with Mayos Human Relation view of motivation and also the social needs of Maslow. A democratic style of management will put trust in employees and encourage them to make decisions. They will delegate to them the authority to do this (empowerment) and listen to their advice. This requires good two-way communication and often involves democratic discussion groups, which can offer useful suggestions and ideas. Managers must be willing to encourage leadership skills in subordinates. The ultimate democratic system occurs when decisions are made based on the majority view of all workers. However, this is not feasible for the majority of decisions taken by a business- indeed one of the criticisms of this style is that it can take longer to reach a decision. This style has close links with Herzbergs motivators and Maslows higher order skills and also applies to McGregors theory Y view of workers.

Summary of management styles

Description Autocratic Senior managers take all the important decisions with no involvement from workers

Advantages Quick decision making Effective when employing many low skilled workers

Disadvantages No two-way communication so can be de-motivating Creates them and us attitude between managers and workers

Paternalistic

Managers make decisions in best interests of workers after consultation

More two-way communication so motivating Workers feel their social needs are being met

Slows down decision making Still quite a dictatorial or autocratic style of management Mistakes or errors can be made if workers are not skilled or experienced enough

Democratic

Workers allowed to make own decisions. Some businesses run on the basis of majority decisions

Authority is delegated to workers which is motivating Useful when complex decisions are required that need specialist skills

People management - Employee representation Employee representation or participation arises when employees are part of a formal structure for involving them in the decision-making process of an organisation. Of course all businesses communicate with their employees in some way everyday. However, there are some situations when the law requires this communication to take place. The law requires a business to consult with employees on things such as: Redundancy programmes When employees are transferred from one employer to another (e.g. the sale of the business) On changes to pension arrangements Proposed changes to working time arrangements In additional to the mandatory requirements for employee representation, there are several strong reasons why a business should have a formal system of employee representation. For example, to: Make employees' views known to management Help strengthen both management's and employees' understanding of workplace issues and other matters affecting the business

Help create an atmosphere of mutual trust between employees and management and therefore improve workplace relations The main benefits and drawbacks of employee representation to a business include the follows:

Advantages Increased empowerment and motivation of the workforce Employees become more committed to the objectives and strategy of the business Better decision-making because employee experience and insights taken into account Lower risk of industrial disputes

Disadvantages Time-consuming potentially slows decisionmaking Conflicts between employer and employee interests may be a block to essential change Managers may feel their authority is being undermined

People management - Functions in a business Once a business has been properly established and has taken on a reasonable number of employees, the organisational structure will involve the business being splits into number of different departments, each of which has a specific job or task to do - these are called 'functions'. The main functional areas of a business are outlined briefly below:

Human Resources / People What it does: Responsible for all aspects of managing the people who work in a business. Main activities: Organise hiring employees (recruitment) Set up and manage employment rules Organise employee training & appraisal Monitor the working conditions for employees Manage communication with staff Ensure business complies with employmentrelated legislation Production / Operations What it does: Organises the transformation process that turns inputs (e.g. materials, people) in finished goods and services Main activities: Organising suitable method of production

Marketing What it does: Responsible for understanding the needs and wants of customers Main activities: Research into the market New product development Development and delivery of promotional campaigns Setting and monitoring prices Ensuring suitable distribution Obtaining and auctioning customer feedback Accounts / Finance What it does: Manages the financial resources of the business and reports on the financial position & performance Main activities: Allocating and monitoring the use of financial

Controlling the use of inputs to produce efficiently Managing the quality of finished output

resources through budget Ensuring business has sufficient cash to enable it to pay its liabilities as they fall due Reporting on financial performance Ensuring business meets legal requirements re financial reporting

People management - Functions in a business Once a business has been properly established and has taken on a reasonable number of employees, the organisational structure will involve the business being splits into number of different departments, each of which has a specific job or task to do - these are called 'functions'. The main functional areas of a business are outlined briefly below:

Human Resources / People What it does: Responsible for all aspects of managing the people who work in a business. Main activities: Organise hiring employees (recruitment) Set up and manage employment rules Organise employee training & appraisal Monitor the working conditions for employees Manage communication with staff Ensure business complies with employmentrelated legislation Production / Operations What it does: Organises the transformation process that turns inputs (e.g. materials, people) in finished goods and services Main activities: Organising suitable method of production Controlling the use of inputs to produce efficiently Managing the quality of finished output

Marketing What it does: Responsible for understanding the needs and wants of customers Main activities: Research into the market New product development Development and delivery of promotional campaigns Setting and monitoring prices Ensuring suitable distribution Obtaining and auctioning customer feedback Accounts / Finance What it does: Manages the financial resources of the business and reports on the financial position & performance Main activities: Allocating and monitoring the use of financial resources through budget Ensuring business has sufficient cash to enable it to pay its liabilities as they fall due Reporting on financial performance Ensuring business meets legal requirements re financial reporting

People management - Organisation charts & hierarchy The simplest way to show how a business is organised is to look at an organisation chart. This shows the managementhierarchy in a business and works from top to bottom. Here is an example organisational chart:

Hierarchy
The levels of hierarchy refer to the number of layers within an organisation. Traditional organisations were tall with many layers of hierarchy and were often authoritarian in nature. The organisation chart above shows a business with four levels of hierarchy from the Managing Director at the top, to assistants and team members at the bottom. Below is another organisation chart, which shows a taller hierarchy.

People management - Span of control The span of control is the number of subordinates for whom a manager is directly responsible. The two diagrams below illustrate two different spans of control:

A span of control of 7 would be considered to be quite wide. Contrast this with a span of 3 below, which would be considered narrow

Is there an ideal span of control? The answer is generally no a suitable span of control will depend upon a number of factors: The experience and personality of the manager The nature of the business. If being a line manager requires a great deal of close supervision, then a narrower span might be appropriate The skills and attitudes of the employees. Highly skilled, professional employees might flourish in a business adopting wide spans of control The tradition and culture of the organisation. A business with a tradition of democratic management and empowered workers may operate wider spans of control

Should spans of control be wide or narrow? Here is a summary of the relative advantages and disadvantages of each:

Narrow Span of Control Allows for closer supervision of employees

Wide Span of Control Gives subordinates the chance for more independence More appropriate if labour costs are significant reduce number of managers

More layers in the hierarchy may be required

Helps more effective communication

People management - Delayering As we have seen earlier, there are some strong arguments in favour of a business have fewer rather than many layers in the hierarchy. A business may develop a tall hierarchy over time which becomes costly and inefficient. If management attempt to remove one or more layers from the hierarchy, this is known as delayering. Frequently, the layers removed are those containing middle managers. For example, many highstreet banks no longer have a manager in each of their branches, preferring to appoint a manager to oversee a number of branches. Some schools adopt this policy too with a director of studies looking after several schools in a local area. Delayering usually means increasing the average span of control of senior managers within the business and is seen as a way of reducing operating costs, particularly as a response to the economic downturn. De-layering can offer a number of advantages to business: It offers opportunities for delegation, empowerment and motivation as the number of managers is reduced and moreauthority is given to shop-floor workers It can improve communication within the business as messages have to pass through fewer levels of hierarchy It can remove departmental rivalry if department heads are removed as the workforce is organised in teams It can reduce costs as fewer employees are required and employing middle managers can be expensive It can encourage innovation It brings managers into close contact with the business customers But disadvantages exist too, making a decision to delayer less clear cut: Not all organisations are suited to flatter organisational structures - mass production industries with low-skilled employees may not adapt easily De-layering can have a negative impact on motivation due to job losses, especially if it is really just an excuse for redundancies

A period of disruption may occur as people take on new responsibilities and fulfil new roles Those managers remaining will have a wider span of control which, if it is too wide, can damage communication within the business People management - Centralised organisational structures One of the issues that a business needs to address is where decision-making power resides in the organisational structure. Decision-making is about authority. A key question is whether authority should rest with senior management at the centre of a business (centralised), or whether it should be delegated further down the hierarchy, away from the centre (decentralised) The choice between centralised or decentralised is not an either/or choice. Most large businesses necessarily involve a degree of decentralisation when it starts to operate from several locations or it adds new business units and markets. The issue is really how much independence do business units or groups within a business have when it comes to the key decisions? Centralised structures Businesses that have a centralised structure keep decision-making firmly at the top of the hierarchy (amongst the most senior management). Fast-food businesses like Burger King, Pizza Hut and McDonalds use a predominantly centralised structure to ensure that control is maintained over their many thousands of outlets. The need to ensure consistency of customer experience and quality at every location is the main reason. The main advantages and disadvantages of centralisation are:

Advantages Easier to implement common policies and practices for the business as a whole Prevents other parts of the business from becoming too independent Easier to co-ordinate and control from the centre e.g. with budgets Economies of scale and overhead savings easier to achieve Greater use of specialisation Quicker decision-making (usually) easier to show strong leadership

Disadvantages More bureaucratic often extra layers in the hierarchy Local or junior managers are likely to much closer to customer needs Lack of authority down the hierarchy may reduce manager motivation Customer service does not benefit from flexibility and speed in local decision-making

People management - Decentralised organisational structures In a decentralised structure, decision-making is spread out to include more junior managers in the hierarchy, as well as individual business units or trading locations.

Good examples of businesses which use a decentralised structure include the major supermarket chains like WM Morrison and Tesco. Each supermarket has a store manager who can make certain decisions concerning areas like staffing, sales promotions. The store manager is responsible to a regional or area manager. Hotel chains are particularly keen on using decentralised structures so that local hotel managers are empowered to make on-the-spot decisions to handle customer problems or complaints. The main advantages and disadvantages of this approach are:

Advantages Decisions are made closer to the customer Better able to respond to local circumstances

Disadvantages Decision-making is not necessarily strategic More difficult to ensure consistent practices and policies (customers might prefer consistency from location to location) May be some diseconomies of scale e.g. duplication of roles Who provides strong leadership when needed (e.g. in a crisis)? Harder to achieve tight financial control risk of cost-overruns

Improved level of customer service

Consistent with aiming for a flatter hierarchy

Good way of training and developing junior management Should improve staff motivation

People management - Motivation at work (introduction)

What is motivation?
Motivation is essentially about commitment to doing something. In the context of a business, motivation can be said to be about The will to work However, motivation is about more than simply working hard or completing tasks. Entrepreneurs and staff can find motivation from a variety of sources. Motivation can come from the enjoyment of the work itself and/or from the desire to achieve certain goals e.g. earn more money or achieve promotion. It can also come from the sense of satisfaction gained from completing something, or achieving a successful outcome after a difficult project or problem solved. Why does motivation matter in business? In short, peoples behaviour is determined by what motivates them. The performance of employees is a product of both their abilities (e.g. skills & experience) and motivation. A talented employee who feels de-motivated is unlikely to perform

well at work, whereas a motivated employee can often deliver far more than is expected from them!

Benefits of a well-motivated workforce

A well-motivated workforce can provide several advantages: Better productivity (amount produced per employee). This can lead to lower unit costs of production and so enable a firm to sell its product at a lower price Lower levels of absenteeism as the employees are content with their working lives Lower levels of staff turnover (the number of employees leaving the business). This can lead to lower training and recruitment costs Improved industrial relations with trade unions Contented workers give the firm a good reputation as an employer so making it easier to recruit the best workers Motivated employees are likely to improve product quality or the customer service associated with a product People management - Financial methods of motivation Though there are many reasons why people work for a living, it is undeniable that money, or other financial rewards, play a key role in motivating people in the workplace. There is a wide variety of ways in which a business can offer money (or financial rewards) as part of the pay package, including: Salaries: fixed amounts per month or year for performing a role; these are common for most managerial positions (e.g. Accountant, Payroll Manager) Benefits in kind (fringe benefits) very common in businesses of all kinds; these include staff discounts, contributions to travel costs, staff uniforms etc Time-rate pay: pay based on time worked; very common in small businesses where employees are paid per hour. Piece-rate pay: pay per item produced becoming less common Commission: payment based on the value of sales achieved. Other performance-related pay: e.g. bonuses for achieving targets Shares and options: less common in small businesses, but popular in businesses whose shares are traded on stock markets Pensions becoming less common and generous. Small businesses tend not to offer pension benefits. In most cases, an employee might expect to have a mixture of the above in a pay package. How important is money as a motivator? It is widely accepted that poor or low pay acts as a demotivator. Someone who feels undervalued or under-paid may soon leave to find better-paid employment. However, it is less clear that paying people more results in better motivation. For most people, motivation (the will to work) comes from within. More money can help us feel better about out work, but it is unlikely to encourage us to work harder or to a higher standard.

People management - Ways to pay employees and management There is no doubt that most people are motivated (at least in part) by the financial rewards they gain from their work. So, getting employee pay right (often referred to as the remuneration package) is a crucial task for a business. Why is pay important? It is an important cost for a business (in some labour-intensive businesses, payroll costs are over 50% of total costs) People feel strongly about it Pay is the subject of important business legislation (e.g. national minimum wage; equal opportunities) It helps attract reliable employees with the skills the business needs for success Pay also helps retain employees rather than them leave and perhaps join a competitor Because pay is a complex issue, there are several ways in which businesses determine how much to pay: Job evaluation / content; this is usually the most important factor. What is involved in the job being paid? How does it compare with similar jobs? Fairness pay needs to be perceived and be seen to match the level of work Negotiated pay rates the rate of pay may have been determined elsewhere and the business needs to ensure that it complies with these rates. Market rates another important influence particularly where there is a standard pattern of supply and demand in the relevant labour market. If a business tries to pay below the market rate then it will probably have difficulty in recruiting and retaining suitable staff Individual performance increasingly, businesses include an element of performancerelated reward in their pay structures.

Structuring the financial package

With so many methods of pay available, how should a business decide to structure the pay package it offers to employees, and what rate of pay should it use? The starting point is usually to find out what the market rate is. Factors that help determine the market rate for a job include: Whether the skills that are required are widely available The overall level of unemployment in the employment catchment area Whether the job requires specialised (or even highly specialised) skills There are several ways in which a business can obtain data on market rates: Local employment agencies & job centres Job adverts Industry associations (who often perform annual surveys of pay in an industry) The next question is should the business pay MORE or LESS than the market rate? Factors to consider here include:

Does the business need above-average employees (e.g. salesmen with an industry reputation for being strong performers) Does the business need trained employees or is it prepared to invest in training beginners? Are the skills wanted by the business needed urgently (in which case the business would probably want to pay more) Do factors affecting the mobility of labour need to be addressed e.g. are there transport problems that need to be solved (e.g. pay for a rail season ticket) or relocation allowances to be offered to encourage new employees to move home? The third important question is how to structure the remuneration package. Should employees be paid on the basis of time spent working (e.g. time-rates) or the amount they produce (e.g. piece rates) or some other measure of performance? Should the remuneration package be a combination of approaches (e.g. some basic pay per month + a commission-related incentive)? In deciding the answers to these questions, a business should try to construct a pay structure that is simple (to help employees understand it), logical and fair

Time-rate pay
Time rates are used when employees are paid for the amount of time they spend at work. This is the most common method of payment in the UK. The usual form of time rate is the weekly wage or monthly salary. Usually the time rate is fixed in relation to a standard working week (e.g. 35 hours per week). The employment contract for a time-rate employee will also stipulate the amount of paid leave that the employee can take each year (e.g. 5 weeks paid holiday). Time worked over this standard is known as overtime. Overtime is generally paid at a higher rate than the standard time-rate reflecting the element of sacrifice by an employee. However, many employees who are paid a monthly salary do not get paid overtime. This is usually the case for managerial positions where it is generally accepted that the hours worked need to be sufficient to fulfil the role required. The main advantages of time-rate pay are: Time rates are simple for a business to calculate and administer They are suitable for businesses that wish to employ staff to provide general roles (e.g. financial management, administration, maintenance) where employee productivity is not easy to measure It is easy to understand from an employees perspective The employee can budget personal finance with some certainty Makes it easier for the employer to plan and budget for employee costs (e.g. payroll costs will be a function of overall headcount rather than estimated output) The main disadvantages of time-rate pay are: Does little to encourage greater productivity there is no incentive to achieve greater output Time-rate payroll costs have a tendency to creep upwards (e.g. due to inflation-related pay rises and employee promotion

Piece-rate pay
Piece-rate pay gives a payment for each item produced it is therefore the easiest way for a business to ensure that employees are paid for the amount of work they do. Piece-rate pay is also sometimes referred to as a payment by results system. Piece-rate pay encourages effort, but, it is argued, often at the expense of quality. From the employees perspective, there are some problems. What happens if production machinery breaks down? What happens if there is a problem with the delivery of raw materials that slows production? These factors are outside of the employees control but could potentially affect their pay. The answer to these problems is that piece-rate pay systems tend, in reality, to have two elements: A basic pay element this is fixed (time-based) An output-related element (piece-rate). Often the piece-rate element is only triggered by the business exceeding a target output in a defined period of time

Commission
Commission is a payment made to employees based on the value of sales achieved. It can form all or (more often) part of a pay package. Commission is, therefore, a form of incentive pay. Commission, like piece-rates, is a reward for value of work achieved. In most cases, the employee is paid a flat percentage of the value of the good or service that is sold. The rate of commission depends on the selling price and the amount of effort required in making the sale. For example, commission rates could range from 5% where the product sells easily (e.g. household goods sold door-to-door) to 30% where the effort is substantial. The main advantage of commission from an employees point-of-view is that it enables high performing sales people to earn huge amounts. The main advantage to the employer is that the payroll cost is related to the value of business achieved rather than just the amount produced. After all, businesses exist to sell goods and services for profit not just to make things. However, there are several drawbacks with using commission payments: Sales people may cut corners to make sales (e.g. not explain the product or service in enough detail to potential customers) i.e. customers are misled & missold High commission earnings enjoyed by some of the sales team may be resented elsewhere in the business particularly if the sales actually depend on a team effort It is difficult to change what proves to be an over-generous commission structure without upsetting and demoralising the sales team Once commission payments have been made, the sales force may lose some motivation until they begin to focus on the next payment (which might be up to 12 months away)

As a result of the above disadvantages, most businesses that use commission as an incentive payment method offer a basic pay plus a moderate commission level. In this way, if sales and profits justify the change, the commission rate can always be increased slightly.

Performance related pay

Performance-related pay is a financial reward to employees whose work is considered to have reached a required standard, and/or above average Performance related pay is generally used where employee performance cannot be appropriately measured in terms of output produced or sales achieved. Whilst the detail of real performance-related schemes varies from business to business, there are several common features: Individual performance is reviewed regularly (usually once per year) against agreed objectives or performance standards. This is the performance appraisal At the end of the appraisal, employees are categorised into performance groups which determine what the reward will be The method of reward will vary, but traditionally it involves a cash bonus and/or increase in wage rate or salary Performance-related pay has grown widely in recent years particularly in the public sector. This is part of a movement towards rewarding individual performance which reflects individual circumstances. There are several problems with performance-related pay: There may be disputes about how performance is measured and whether an employee has done enough to be rewarded Rewarding employees individually does very little to encourage teamwork There is doubt about whether performance-related pay actually does anything to motivate employees. This may be because the performance element is usually only a small percentage of total pay

Fringe benefits
Fringe benefits are financial benefits that are not paid out directly in cash (or cash equivalents such as shares). Examples of these include: Company cars Discounted season tickets Health insurance Pensions Holiday and other entitlements to take time off work Childcare provision Staff uniforms Staff discounts Benefits in kind have become a much more popular and widespread form of remuneration. This is partly because businesses pay less tax on providing them, but also because they cause a business less hassle and can help to differentiate the remuneration package.

Profit sharing
Profit sharing refers to any system whereby employees receive a proportion of business profits. Profit sharing is generally accepted as having many advantages, providing that all employees are able to participate. Key advantages include: Creates a direct link between pay and performance Creates a sense of team spirit- helps remove them and us barrier between managers and workers if all employees involved May improve employees loyalty to company Employees more likely to accept changes in working practices if can see that profits will increase overall People management - Keeping hold of employees (staff retention) Recruiting suitable employees is one crucial business task. Keeping them is another. The proportion of employees who leave each year is known as staff turnover. In some industries this can be as much as 30-50% each year. Employee retention is the ability of a business to convince its employees to remain with the business. This isnt always easy! It is important to remember that all businesses lose staff for a variety of reasons: Retirement / maternity / long-term illness Unsuitability Changes in strategy (e.g. a factory is closed) The above reasons can be called voluntary staff turnover employees who leave of their own accord. It is important to remember that staff turnover varies between industries. A high proportion of staff leave each year in the leisure sector (e.g. hotels, restaurants). Staff turnover levels also vary from region to region. The highest rates are found where unemployment is lowest and where people find it quite easy to move onto another job. There are many reasons why a high staff turnover figure (poor employee retention) may cause problems for a business: Increases recruitment costs (e.g. advertising for replacement staff; employing temporary staff whilst the job vacancies are filled) Reflects poor morale in workforce and so low productivity levels Increases training costs of new workers Loss of productivity while new worker settles in However, there are some advantages of a firm experiencing staff turnover: It gives the chance for new people to be brought into the business who may have fresh ideas and up to date market knowledge. Workers with specialist knowledge or expertise can be employed rather than having to train up existing lower skilled employees.

A business can improve its employee retention by offering: Financial incentives (e.g. bonus, salary rise) Non-financial incentives (e.g. promotion, more decision making power) Improving the effectiveness of its recruitment and selection processes so that fewer unsuitable employees are recruited in the first place Conducting research to understand why employees are leaving (through exit interviews or surveys) A business may also have to adopt more flexible working practices in order to retain staff and fit in with the changing trend in UK employment and working patterns. For instance, there is a greater emphasis currently being placed on flexible hours contracts and part-time working. This is mainly to allow for the growing number of women joining the workforce who have to juggle childcare and their working lives.

People management - Non-financial methods of motivation Most businesses recognise the need for non-financial methods of motivation. The main ones are described briefly below:

Job enlargement
Job enlargement involves adding extra, similar, tasks to a job. In job enlargement, the job itself remains essentially unchanged. However, by widening the range of tasks that need to be performed, hopefully the employee will experience less repetition and monotony. With job enlargement, the employee rarely needs to acquire new skills to carry out the additional task. A possible negative effect is that job enlargement can be viewed by employees as a requirement to carry out more work for the same pay!

Job rotation
Job rotation involves the movement of employees through a range of jobs in order to increase interest and motivation. For example, an administrative employee might spend part of the week looking after the reception area of a business, dealing with customers and enquiries. Some time might then be spent manning the company telephone switchboard and then inputting data onto a database. Job rotation may offer the advantage of making it easier to cover for absent colleagues, but it may also reduce' productivity as workers are initially unfamiliar with a new task. Job rotation also often involves the need for extra training.

Job enrichment
Job enrichment attempts to give employees greater responsibility by increasing the range and complexity of tasks they are asked to do and giving them the necessary authority. It motivates by giving employees the opportunity to use their abilities to the fullest. Successful job enrichment almost always requires further investment in employee training.

Teamworking and empowerment

Empowerment involves giving people greater control over their working lives. Organising the labour force into teams with a high degree of autonomy can achieve this. This means that employees plan their own work, take their own decisions and solve their own problems. Teams are set targets to achieve and may receive rewards for doing so. Empowered teams are an increasingly popular method of organising employees at work.

People - Theories of Motivation There are a number of different views as to what motivates workers. The most commonly held views or theories are discussed below and have been developed over the last 100 years or so. Unfortunately these theories do not all reach the same conclusions! Taylor Frederick Winslow Taylor (1856 1917) put forward the idea that workers are motivated mainly by pay. His Theory of Scientific Management argued the following: Workers do not naturally enjoy work and so need close supervision and control Therefore managers should break down production into a series of small tasks Workers should then be given appropriate training and tools so they can work as efficiently as possible on one set task. Workers are then paid according to the number of items they produce in a set period of timepiece-rate pay. As a result workers are encouraged to work hard and maximise their productivity. Taylors methods were widely adopted as businesses saw the benefits of increased productivity levels and lower unit costs. The most notably advocate was Henry Ford who used them to design the first ever production line, making Ford cars. This was the start of the era of mass production. Taylors approach has close links with the concept of an autocratic management style (managers take all the decisions and simply give orders to those below them) and Macgregors Theory X approach to workers (workers are viewed as lazy and wish to avoid responsibility). However workers soon came to dislike Taylors approach as they were only given boring, repetitive tasks to carry out and were being treated little better than human machines. Firms could also afford to lay off workers as productivity levels increased. This led to an increase in strikes and other forms of industrial action by dis-satisfied workers. Mayo Elton Mayo (1880 1949) believed that workers are not just concerned with money but could be better motivated by having their social needs met whilst at work (something that Taylor ignored). He introduced the Human Relation School of thought, which focused on managers taking more of an interest in the workers, treating them as people who have worthwhile opinions and realising that workers enjoy interacting together.

Mayo conducted a series of experiments at the Hawthorne factory of the Western Electric Company in Chicago He isolated two groups of women workers and studied the effect on their productivity levels of changing factors such as lighting and working conditions. He expected to see productivity levels decline as lighting or other conditions became progressively worse What he actually discovered surprised him: whatever the change in lighting or working conditions, the productivity levels of the workers improved or remained the same. From this Mayo concluded that workers are best motivated by: Better communication between managers and workers ( Hawthorne workers were consulted over the experiments and also had the opportunity to give feedback) Greater manager involvement in employees working lives ( Hawthorne workers responded to the increased level of attention they were receiving) Working in groups or teams. ( Hawthorne workers did not previously regularly work in teams) In practice therefore businesses should re-organise production to encourage greater use of team working and introduce personnel departments to encourage greater manager involvement in looking after employees interests. His theory most closely fits in with a paternalistic style of management. Maslow Abraham Maslow (1908 1970) along with Frederick Herzberg (1923-) introduced the NeoHuman Relations School in the 1950s, which focused on the psychological needs of employees. Maslow put forward a theory that there are five levels of human needs which employees need to have fulfilled at work. All of the needs are structured into a hierarchy (see below) and only once a lower level of need has been fully met, would a worker be motivated by the opportunity of having the next need up in the hierarchy satisfied. For example a person who is dying of hunger will be motivated to achieve a basic wage in order to buy food before worrying about having a secure job contract or the respect of others. A business should therefore offer different incentives to workers in order to help them fulfill each need in turn and progress up the hierarchy (see below). Managers should also recognise that workers are not all motivated in the same way and do not all move up the hierarchy at the same pace. They may therefore have to offer a slightly different set of incentives from worker to worker.

Herzberg Frederick Herzberg (1923-) had close links with Maslow and believed in a two-factor theory of motivation. He argued that there were certain factors that a business could introduce that would directly motivate employees to work harder (Motivators). However there were also factors that would de-motivate an employee if not present but would not in themselves actually motivate employees to work harder (Hygienefactors) Motivators are more concerned with the actual job itself. For instance how interesting the work is and how much opportunity it gives for extra responsibility, recognition and promotion. Hygiene factors are factors which surround the job rather than the job itself. For example a worker will only turn up to work if a business has provided a reasonable level of pay and safe working conditions but these factors will not make him work harder at his job once he is there. Importantly Herzberg viewed pay as a hygiene factor which is in direct contrast to Taylor who viewed pay, and piece-rate in particular Herzberg believed that businesses should motivate employees by adopting a democratic approach to management and by improving the nature and content of the actual job through certain methods. Some of the methods managers could use to achieve this are: Job enlargement workers being given a greater variety of tasks to perform (not necessarily more challenging) which should make the work more interesting. Job enrichment - involves workers being given a wider range of more complex, interesting and challenging tasks surrounding a complete unit of work. This should give a greater sense of achievement. Empowerment means delegating more power to employees to make their own decisions over areas of their working life.

-------------------Review performances and progress with tools like SuccessFactors performance appraisal software to predict and improve your business -------------------People management - Recruitment (introduction) Recruitment and selection is the process of identifying the need for a job, defining the requirements of the position and the job holder, advertising the position and choosing the most appropriate person for the job. Retention means ensuring that once the best person has been recruited, they stay with the business and are not poached by rival companies. Undertaking this process is one of the main objectives of management. Indeed, the success of any business depends to a large extent on the quality of its staff. Recruiting employees with the correct skills can add value to a business and recruiting workers at a wage or salary that the business can afford, will reduce costs. Employees should therefore be carefully selected, managed and retained, just like any other resource

People management - Recruitment methods The methods of recruitment open to a business are often categorised into: Internal recruitment is when the business looks to fill the vacancy from within its existing workforce. External recruitment is when the business looks to fill the vacancy from any suitable applicant outside the business.

Advantages

Disadvantages

Internal Recruitment

Cheaper and quicker to recruit

Limits the number of potential applicants No new ideas can be introduced from outside the business May cause resentment amongst candidates not appointed

People already familiar with the business and how it operates Provides opportunities for promotion with in the business can be motivating

Business already knows the strengths and weaknesses of candidates External Recruitment Outside people bring in new ideas

Creates another vacancy which needs to be filled Longer process

Larger pool of workers from which to find the best candidate

More expensive process due to advertisements and interviews required

People have a wider range of experience

Selection process may not be effective enough to reveal the best candidate

The four most popular ways of recruiting externally are: Job centres - These are paid for by the government and are responsible for helping the unemployed find jobs or get training. They also provide a service for businesses needing to advertise a vacancy and are generally free to use. Job advertisements - Advertisements are the most common form of external recruitment. They can be found in many places (local and national newspapers, notice boards, recruitment fairs) and should include some important information relating to the job (job title, pay package, location, job description, how to apply-either by CV or application form). Where a business chooses to

advertise will depend on the cost of advertising and the coverage needed (i.e. how far away people will consider applying for the job Recruitment agency - Provides employers with details of suitable candidates for a vacancy and can sometimes be referred to as head-hunters. They work for a fee and often specialise in particular employment areas e.g. nursing, financial services, teacher recruitment Personal recommendation - Often referred to as word of mouth and can be a recommendation from a colleague at work. A full assessment of the candidate is still needed however but potentially it saves on advertising cost. People management - Recruitment interviews An interview is the most common form of selection and it serves a very useful purpose for both employer and job candidate. The main benefits of an interview include: For the Employer: Information that cannot be obtained on paper from a CV or application form Conversational ability - often known as people skills Natural enthusiasm or manner of applicant See how applicant reacts under pressure Queries or extra details missing from CV or application form For the Candidate Whether job or business is right for them What the culture of company is like Exact details of job There are though other forms of selection tests that can be used in addition to an interview to help select the best applicant. The basic interview can be unreliable as applicants can perform well at interview but not have the qualities or skills needed for the job. Other selection tests can increase the chances of choosing the best applicant and so minimise the high costs of recruiting the wrong people. Examples of these tests are aptitude tests, intelligence tests and psychometric tests (to reveal the personality of a candidate). Once the best candidate has been selected and agreed to take up the post, the new employee must be given an employment contract. This is an important legal document that describes the obligations of the employee and employer to each other (terms and conditions) as well as the initial remuneration package and a number of other important details.

People management - Job applications For many jobs, a business will ask applicants to provide a Curriculum Vitae (CV). This is a document that the applicant designs providing the details such as:

Personal details

Name, address, date of birth, nationality

Educational history

Including examination results, schools/universities attended, professional qualifications Names of employers, position held, main achievements, remuneration package, reasons for leaving A chance for applicants to sell themselves

Previous employment history Suitability and reasons for applying for the job Names of referees

Often recent employer or people who know applicant well and are ideally independent

Sometimes job applicants are asked to fill in a firms own application form. This is different from a CV in that the employer designs it and sends it to applicants, but it will still ask for much of the same information. It has the benefit over a CV in that a business is able to tailor it to their exact needs and ask specific questions. Once a business has received all the applications, they need to be analysed and the most appropriate form of selection decided upon. When analysing applications, a business will normally split the applications into three categories.

Those to reject

Candidates may be rejected because they may not meet the standards set out in the job specification such as wrong qualifications or insufficient experience or they may not have completed the application form to a satisfactory standard Often comprises 3-10 of the best candidates who are asked to interview

Those to place on a short list Those to place on a long list

A business will not normally reject all other candidates immediately but keep some on a long list in case those on the short list drop out or do not appear suitable during interview. The business would not want to incur costs putting them through the selection process, such as interviews, unless they have to

People management - Recruitment planning There are a number of possible reasons as to why a business may have to recruit more employees: Business is expanding due to: - Increasing sales of existing products - Developing new products - Entering new markets Existing employees leaving to work with competitors or other local employers Existing employees leaving due to factors such as retirement, sick leave, maternity leave Business needs employees with new skills Business is relocating and not all the existing workforce wants to move to the new location In each of these circumstances a business will normally carry out Workforce Planning to find out how many workers and what types of workers are required. The workforce plan will establish what vacancies exist and managers then need to draw up ajob description and job specification for each post. A job description is a detailed explanation of the roles and responsibilities of the post advertised. Most applicants will ask for this before applying for the job. It refers to the post available rather than the person. A job specification is drawn up by the business and sets out the kind of qualifications, skills, experience and personal attributes a successful candidate should possess. It is a vital tool in assessing the suitability of job applicants and refers to the person rather than the post. These documents are an important part of the recruitment and selection process and provide the basis as to where the job may be advertised and whether an applicant is suitable for the post. They also help provide a framework for questions to be asked at an interview. People management - Appraisal A key task of management is to identify how employees in the firm are performing and what is required to ensure that employee performance supports the objectives of the business. Most businesses operate some kind of performance review or appraisal system. This might be relatively informal (particularly in smaller businesses). Large and more complex businesses tend to operate formal and structured appraisal systems. The word appraisal implies making a judgement about how well an employee is doing. However, the appraisal process needs to be more than simply scoring or judging past performance. It needs to look forward too. A suitable appraisal system appraisal can help employees feel that their good work is recognised and that they are valued. It can also provide the opportunity to discuss any weaknesses or problems they may have, and to come up with solutions. There are four key elements to effective employee appraisal; 1. Set objectives - decide what is needed from employees and agree these objectives with them. If appropriate, set timescales for achieving them.

2. Manage performance - give employees the tools, resources and training they need to perform well. If appropriate, set timescales for achieving objectives. 3. Carry out the appraisal - monitor and assess employees' performance, discuss those assessments with them and agree on future objectives. 4. Provide rewards/remedies - consider pay awards and/or promotion based on the appraisal and decide how to tackle poor performance. Many businesses carry out an appraisal after a set period for new employees or those who have changed jobs within the company. After that, appraisals once or twice a year may be enough.

People management - Trade unions Trade unions are organisations of workers that seek through collective bargaining with employers to: Protect and improve the real incomes of their members Provide or improve job security Protect workers against unfair dismissal and other issues relating to employment legislation Lobby for better working conditions Offer a range of other work-related services including support for people claiming compensation for injuries sustained in a job Individual trade unions have historically been associated with specific industries, trades and professions. Examples of trade unions which are still active include: Association of Flight Attendants (AFA) Communication Workers Union (CWU) Prison Officers Association (POA) Association of Teachers and Lecturers (ATL) Fire Brigades Union (FBU) Professional Footballers Association (PFA) Bakers, Food and Allied Workers Union (BFAWU) National Union of Journalists (NUJ) Transport and General Workers' Union (T&G)

The two main functions of a trade union are to represent their members and to negotiate with employers. The basic concept behind a trade union is that of increased bargaining and negotiation power which comes from acting together. Not surprisingly, trade unions often refer to a traditional rallying call unity is strength. The traditional view of the employer/trade union relationship has been one of confrontation. However, in most cases employers and union representatives have a constructive relationship. Indeed, it is possible to identify several advantages of unionisation from the employers point of view: Negotiating with trade unions (ideally a single union) saves time and cost rather than dealing with all employees individually Unions are part of the communication process between the business and employees Employee morale and motivation may be improved if they know that their interests are being protected by a union

The trade union can be a supportive partner in helping a business undergo significant change In the UK there has been a long term decline in union membership. In 2008, only 28% of people in a job in the UK were members of a trade union. That percentage is much lower in the private sector where less than one in six employees is in a union. Unionisation is much higher in the public sector at over 50%. The overall level of trade union membership in the UK is shown in this chart produced by the Office of National Statistics:

From the chart, you can see that total trade union membership in the UK has almost halved from its peak of over 13 million in the late 1970s. The extent of trade union representation also varies enormously by sector. For example, nearly 60% of people working in education are members of a trade union but only 6% of people in hotels and restaurants and only 11% of people working in wholesale, retail and motor trades The main reasons for the decline in union membership are: Decline in employment in manufacturing (where union membership is traditionally strong) and an increase in employment in the service sector (e.g. retail) where unions are less well established Growth in the number of small firms which tend not to recognise (or need) trade unions Significant growth in flexible working (part-time, temporary, seasonal) where employees see less need for union protection Improved employee involvement in the workplace so less perceived need for collective bargaining

Partly as a result of their declining membership, unions now have significantly less power and influence to determine pay and conditions than twenty years ago although in some industries (including postal workers, railway worker, fire fighters and prison officers) unions are still prepared to exert their industrial muscle. Under UK law employers must recognise a trade union in pay and employment discussions when a majority of the workforce want to be represented and has voted for it. But there is little evidence that union members secure any significant wage mark-up or greater job protection than people in non-union jobs. People management - Industrial disputes and industrial action Back in the 1970s and 1980s the news was often dominated by industrial disputes and action taken by trade unions. However, in the last two decades the incidence of industrial disputes has reduced dramatically, as evidenced by the chart further below.

However, industrial disputes and action do arise. The main forms of industrial action are:

Method Work-to-rule

Description Employees follow the strict conditions of their employment contract no voluntary overtime, no participation in supporting activities. Staff still get their basic pay. Employees refuse to work overtime. Can have a significant effect on production capacity during period of peak demand, but ineffective as a bargaining tool during quieter periods! Employees work at the slowest or least-productive pace that is allowable under their employment contracts The action of last-resort; fraught with danger for both employer and employee and strictly policed by legislation on industrial action.

Overtime ban

Go-slow

Strike

There are rarely any winners from industrial action. It is just about possible to argue that industrial action can lead to a better long-term relationship between employer and unions and that a dispute that is settled might improve the deal earned by employees. However, wherever you look in a prolonged industrial dispute, you can see many problems and costs. The damage from industrial action includes:

Damage for the Business Lost sales and profits from the lost output Damage to customer satisfaction

Damage for the Employee Lost pay Potential loss of jobs if the action results in action to cut costs Possible loss of customer and public support (depending on the reasons for the action)

An internal distraction for management and the business (worse if competitors are not affected) Damaged relationship with staff may adversely affect motivation, productivity etc

Risk that illegal action will result in legal proceedings

Given the costs involved, what can a business do to prevent industrial action in the first place? The priority for management should be to encourage a workplace culture that prevents conflicts from arising. This involves informing and consulting workers and their representatives on employment matters and business developments more widely Depending on the size of the business, management could set up: Regular consultations with a recognised trade union - an effective working relationship with union officials can pick up problems before they escalate

A staff forum or joint working group to pass on information and collect ideas from workers and consult with workers An employee consultative body to discuss major issues as they arise Team and group meetings and feedback sessions Many employers, especially those which recognise trade unions, have written procedures in place to discuss with representatives collective grievances or other significant issues affecting all or part of the workforce. Those procedures are important and can be used to address emerging problems at an early stage. European Union legislation formalised many of the above actions in relation to firms that operate in two or more EU countries and have more than 1,000 employees. These businesses are required to set up Works Councils. Works Councils are now an increasingly popular method for a larger business to communicate with employees. The typical agenda on a Works Council meeting would include: Business objectives and performance Workforce planning issues (e.g. recruitment, staffing levels) Employee welfare issues (working conditions, health & safety) Training and development programmes Compliance with legislation (e.g. discrimination) People management - What is training? Training can be defined as: The process of increasing the knowledge and skills of the workforce to enable them to perform their jobs effectively Training is, therefore, a process whereby an individual acquires job-related skills and knowledge. Training costs can be significant in any business. However, many employers are prepared to incur these costs because they expect their business to benefit from employees' development and progress. Training takes place at various points and places in a business. Commonly, training is required to: Support new employees (induction training) Improve productivity Increase marketing effectiveness Support higher standards of customer service and production quality Introduction of new technology, systems or other change Address changes in legislation Support employee progression and promotion Effective training has the potential to provide a range of benefits for a business: Higher quality Better productivity

Improved motivation - through greater empowerment More flexibility through better skills Less supervision required (cost saving in supervision) Better recruitment and employee retention Easier to implement change in the business Effective training starts with a training strategy. The three stages of a training strategy are: Identify the skills and abilities needed by employees Draw up an action plan to show how investment in training and development will help meet business goals and objectives Implement the plan, monitoring progress and training effectiveness Given the costs involved, you might not be surprised to learn that many businesses do not invest enough in training. Some firms dont invest anything in training! Here are the most common reasons for underinvestment in training: They fear employees will be poached by competitors (who will then benefit from the training) A desire to minimise short-term costs They cannot make a justifiable investment case Training takes time to have the desired effect management are impatient! Sometimes the benefits of training are more intangible (e.g. morale) than tangible so they are harder to measure People management - Types & methods of training at work

Induction training
Induction training is important as it enables a new recruit to become productive as quickly as possible. It can avoid costly mistakes by recruits not knowing the procedures or techniques of their new jobs. The length of induction training will vary from job to job and will depend on the complexity of the job, the size of the business and the level or position of the job within the business. The following areas may be included in induction training: Learning about the duties of the job Meeting new colleagues Seeing the layout of the premises Learning the values and aims of the business Learning about the internal workings and policies of the business

On-the-job training
With on the job training, employees receive training whilst remaining in the workplace. The main methods of one-the-job training include: Demonstration / instruction - showing the trainee how to do the job

Coaching - a more intensive method of training that involves a close working relationship between an experienced employee and the trainee Job rotation - where the trainee is given several jobs in succession, to gain experience of a wide range of activities (e.g. a graduate management trainee might spend periods in several different departments) Projects - employees join a project team - which gives them exposure to other parts of the business and allow them to take part in new activities. Most successful project teams are "multi-disciplinary" The advantages and disadvantages of this form of training can be summarised as follows: Advantages Generally most cost-effective Employees are actually productive Opportunity to learn whilst doing Training alongside real colleagues Disadvantages Quality depends on ability of trainer and time available Bad habits might be passed on Learning environment may not be conducive Potential disruption to production

Off-the-job training
This occurs when employees are taken away from their place of work to be trained. Common methods of off-the-job training include: Day release (employee takes time off work to attend a local college or training centre) Distance learning / evening classes Block release courses - which may involve several weeks at a local college Sandwich courses - where the employee spends a longer period of time at college (e.g. six months) before returning to work Sponsored courses in higher education Self-study, computer-based training The main advantages and disadvantages of this form of training can be summarised as follows:

Advantages A wider range of skills or qualifications can be obtained Can learn from outside specialists or experts Employees can be more confident when starting job

Disadvantages More expensive e.g. transport and accommodation Lost working time and potential output from employee New employees may still need some induction training Employees now have new skills/qualifications and may leave for better jobs

Trainings link to motivation

An important part of managing people is to let them know how they are performing. Various methods of performance appraisal can be used and an important output from this process should be an assessment of an employees training needs. Training programmes should be focused on meeting those needs.

Assuming training is effective: then: Employees feel more loyal to the business Shows that business is taking an interest in its workers Employees should benefit from better promotion opportunities Employees to achieve more at work and perhaps gaining financially from this (depending on the remuneration structure) People - Legislation affecting employment

Equal pay and minimum wage laws

The basic rule that a start-up business has to remember is that: Men and women are entitled to equal pay for work of equal value Looking at that rule in a little more detail: Pay includes everything in the employment contract - bonuses and pension contributions, as well as basic wages or salary Workers have the right to ask their employer for information to check equality using the equal pay questionnaire If employees believe their pay is unequal, they can take the employer to an Employment Tribunal The right of employees to be paid at least the National Minimum Wage (NMW) is also protected by legislation. It makes no difference when a worker is paid (monthly, weekly, daily, hourly) - the NMW still applies. The NMW is reviewed and usually changed every year. The current rates are shown here:

Discrimination
Discrimination is the treatment in an unacceptable way of anyone who is termed to be different. In the UK, it is illegal for an employer to discrimination against an employee on the basis of: Sex, including pregnancy and maternity Marital / civil partnership status A person's disability Race Age Sexual orientation Religion/belief Trade union membership or non-membership Status as a fixed-term or part-time worker Discrimination laws apply in many areas of employing staff - i.e. Recruitment Employee contract - terms and conditions Promotions and transfers Providing training

Deciding what fringe benefits employees receive Employee dismissal

Employment rights
An employment right is something to which an employee is entitled which is protected by law. Laws provide a variety of rights for employees, including: Reasonable notice before dismissal Right to redundancy Right to a written employment contract Right to request flexible working Right to be paid national minimum wage Right to take time off for parenting

Health and safety

Health and safety is about preventing people from being harmed at work or becoming ill, by taking the right precautionsand providing a satisfactory working environment. The important thing for management to remember is that it is not just about protecting staff health & safety applies to any people who come into contact with the business. That means that proper health and safety needs to be provided to: Employees working at the business premises, from home, or at another site Visitors to the premises such as customers or subcontractors People at other premises where the business is working, such as a construction site Members of the public - even if they're outside the business premises Anyone affected by products and services the business designs, produces or supplies For most start-up or small businesses, complying with health and safety isnt too much trouble. However, in some industries health & safety is really important for example: Food processing (hygiene) Hotels (guest safety, hygiene) Chemical production (dangerous processes, waste disposal) Air travel (passenger safety) Tour operators (holidaymaker safety) Production & operations - Business location for a new business Where to start a new business? It is a tough question that often leaves an entrepreneur agonising over the decision. A small business starting up 10-15 years ago would soon be agonising over a key decision. Where can I find some premises? What kind of premises do I need and what will they cost? These days the decision about locating a start-up business is a very different one. It is possible to run a new business, even with several people, without ever having separate business premises. The so-called virtual business is now a reality, made possible by easy communications and the enthusiasm of many people to work from home, as freelancers or consultants. Setting up a virtual business, often from home, is not without its problems. However, this is a very popular approach to locating a new business.

Not every kind of start-up can be based at home. When addressing the question of business location, the textbooks often use the example of a new retail business. For retailing, the search for a good location is vitally important. In general, the most important consideration for a start-up is the cost of the business location. In your exam, it is best to assume (unless you are told otherwise) that a start-up has limited financial resources and that it will seek to minimise the start-up costs. Setting up in a new business location can add significantly to overheads a business will incur rent, rates, insurance and many other on-going costs simply from the decision to take some premises.

Factors affecting the choice of location

Whatever the business, there are several general factors that influence the choice of location. These are: Factor Communications Comments This includes transport facilities (road, rail, air) as well as information infrastructure. Transport links are particularly important if the business delivers products, sells direct using a sales force or is dependent on import and export. Information technology is less of an issue these days most start-ups can quickly establish reliable broadband Internet connections. When a start-up needs to hire employees, then access to a reliable pool of staff with relevant skills is important. Businesses that are labour-intensive often look to locate in areas of traditionally low wages.

Labour

Market - customers A start-up may need to be located near particular centres of & population population. For example, if the product is a service targeted at affluent older-aged people, then it is important to be located where there is a sufficient population of such people. Franchise businesses often analyse the population characteristics of a potential new territory before setting up in a new location. Suppliers The business may be dependent on supplies of a particular raw material, so costs will be lower if the business is located near the source of supply (e.g. where the raw material is grown or where a distributor is based). This factor tends to be more important for manufacturing businesses rather than service businesses. Government policy has often been designed to influence the locations of new businesses. If the start-up is location-independent (i.e. the other factors above dont really make a difference to the choice of location), then it may be that deals and incentives offered by Government can influence the choice. Some poorer areas of the UK are designated as assisted areas. These include many parts of north-east England, Wales, East Yorkshire, Cornwall etc. Locating a new business in one of these areas potentially makes government grants and loans available.

Government assistance

There is no magic formula which can be applied to decide the most important factors in choosing a location. Where two possible locations have been identified, it might be that the availability of government grants or other incentives is the deciding factor. Making a choice of location involves drawing up a list of criteria of what the start-up is looking for from business premises and then using qualitative judgement about what will work best.

Topic: Stages of production

Production within an economy can be divided into three main stages: primary, secondary and tertiary. Primary production Primary production involves the extraction of raw materials (e.g. coal, iron, agricultural commodities). Raw materials can be: Extracted e.g. coal, iron ore, oil, gas and stone Harvested / collected e.g. fish Grown e.g. timber, cereal crops There is little value added in primary production. The aim is usually to produce the highest quantity at lowest cost to a satisfactory standard. Secondary production Secondary production involves transforming raw materials into goods. There are two main kinds of goods: Consumer goods e.g. washing machines, DVD players. As the name implies, these are used by consumers Industrial / capital goods e.g. plant and machinery, complex information systems. Industrial and capital goods are used by businesses themselves during the production process. In the secondary production sector, value is added to the raw material inputs. For example, foodstuffs are transformed into ready meals for sale in supermarkets; metals, fabrics, and plastics are transformed into motor vehicles. There are many different industry sectors in secondary production. For example: Construction Electronic instruments Pharmaceuticals (drugs) House-building Tertiary production Tertiary production is associated with the provision of services (an intangible product). As with the secondary sector, there are many tertiary production markets. Good examples include: Hotels Private healthcare and education

Accountants Tourism

Production & operations - Economies of scale Consider the following questions: Why can you now buy a high-performance laptop for just a few hundred pounds when a similar computer might have cost you over 2,000 just a few years ago? Why is the average price of digital cameras falling all the time whilst the functions and performance level are always on the rise? How can IKEA profitably sell flat-pack furniture at what seem impossibly low prices? The answer is economies of scale. Scale economies have brought down the unit costs of production and have fed through to lower prices for consumers. Economies of scale are a key advantage for a business that is able to grow. Most firms find that, as their production output increases, they can achieve lower costs per unit.

Economies of scale are the cost advantages that a business can exploit by expanding their scale of production. The effect of economies of scale is to reduce the average (unit) costs of production. Here are some examples of how economies of scale work: Technical economies of scale: Large-scale businesses can afford to invest in expensive and specialist capital machinery. For example, a supermarket chain such as Tesco or Sainsburys can invest in technology that improves stock control. It might not, however, be viable or cost-efficient for a small corner shop to buy this technology. Specialisation of the workforce Larger businesses split complex production processes into separate tasks to boost productivity. By specialising in certain tasks or processes, the workforce is able to produce more output in the same time. Marketing economies of scale A large firm can spread its advertising and marketing budget over a large output and it can purchase its inputs in bulk at negotiated discounted prices if it has sufficient negotiation power in the market. A good example would be the ability of the electricity generators to negotiate lower prices when negotiating coal and gas supply contracts. The major food retailers also have buying power when purchasing supplies from farmers and other suppliers.

Financial economies of scale Larger firms are usually rated by the financial markets to be more credit worthy and have access to credit facilities, with favourable rates of borrowing. In contrast, smaller firms often face higher rates of interest on overdrafts and loans. Businesses quoted on the stock market can normally raise fresh money (i.e. extra financial capital) more cheaply through the issue of shares. They are also likely to pay a lower rate of interest on new company bonds issued through the capital markets. Production & operations - Dis-economies of scale Increasing the size of a business does not always result in lower costs per unit. Sometimes a business can get too big! Diseconomies of scale occur when a business grows so large that the costs per unit increase. Diseconomies of scale occur for several reasons, but all as a result of the difficulties of managing a larger workforce. Poor communication As the business expands communicating between different departments and along the chain of command becomes more difficult. There are more layers in the hierarchy that can distort a message and wider spans of control for managers. This may result in workers having less clear instructions from management about what they are supposed to do when. In addition, there may be more written forms of communication (e.g. newsletters, notice boards, e-mails) and less face-to-face meetings, which can result in less feedback and therefore less effective communication. Lack of motivation Workers can often feel more isolated and less appreciated in a larger business and so their loyalty and motivation may diminish. It is harder for managers to stay in day-to-day contact with workers and build up a good team environment and sense of belonging. This can lead to lower employee motivation with damaging consequences for output and quality. The main result of poor employee motivation is falling productivity levels and an increase in average labour costs per unit. What can a business do about this? Possible solutions include: Delegation of decision-making (empowerment) Making jobs more interesting (job enrichment) Splitting employees into teams (teamworking) There is also a close link between communication and motivation (which the motivational theorist Elton Mayo recognized) and so as communication becomes harder, motivation will decline. This is particularly true as managers are less able to take a personal interest in the workers.

Loss of direction and co-ordination It is harder to ensure that all workers are working for the same overall goal as the business grows. It is more difficult for managers to supervise their subordinates and check that everyone is working together effectively, as the spans of control have widened. A manager may be forced to delegate more tasks, which while often motivating for his subordinates, leaves the manager less in control. Production & operations - Productivity and efficiency It is important that every business makes effective use of its assets. The investment in production capacity is often significant. Think about how much it costs to set up a factory; the production line with all its machinery and technology, or to set up and operate a call centre. Another good way to look at how efficiently a business operates is to look at productivity. Productivity measures the relationship between inputs into the production process and the resultant outputs. Productivity can be measured in several ways: e.g. Output per worker or hour of labour Output per hour / day / week Output per machine Unit costs (total costs divided by total output) The unit cost measure is particularly important. A falling ratio would indicate that efficiency was improving. Why is achieving high productivity important? Most importantly, a more efficient business will produce lower cost goods than competitors. That means the business can either make a higher profit per unit sold (assuming that the product is sold for the same price as a competitor) or the business can offer customers a lower price than competitors (and still make a good profit/ Investing in production assets (e.g. equipment, factory buildings) is expensive a business needs to maximise the return it makes on these assets There are various ways in which a business can try to improve its productivity: Training e.g. on-the-job training that allows an employee to improve skills required to work more productively Improved motivation more motivated employees tend to produce greater output for the same effort than de-motivated ones More or better capital equipment (this links with the topic of automation) Better quality raw materials (reduces amount of time wasted on rejected products) Improved organisation of production e.g. less wastage

Production & operations: Production efficiency All businesses should try to operate efficiently. However, this is particularly important for a growing business. In many markets, a business needs to be at least as efficient as its main competitors in order to be able to compete and survive in the long-term. A more efficient business will produce lower cost goods than competitors and may generate more profit possibly at lower prices Increasing efficiency will also boost the capacity of a business, assuming there is no change in the number of inputs employed. The capacity of a firm refers to how much a business can produce during a specific period of time. What do we mean by efficiency? Where a business has efficient production, it is operating at maximum output at minimum cost per unit of output. Efficiency is, therefore, a measure of how well the production or transformation process is performing. However, this is not always easy to assess. There are several ways to measure efficiency Productivity This measures the relationship between inputs into the production process and the resultant outputs. The most commonly used measure is labour productivity, which is measured by output per worker. For example, assume a sofa manufacturer makes 100 sofas a month and employs 25 workers. The labour productivity is 4 sofas per person per month. There are several other measures of productivity. Output per hour / day / week Output per machine Unit costs Unit cost (also referred to as cost per unit) divides total costs by the number of units produced. A falling ratio would indicate that efficiency was improving. Stock levels A business will have set itself a target stock level of finished goods that it should achieve. This is calculated to satisfy the demand expected by the marketing department plans and based on what the production department thinks they can produce. If the stock level falls below this level then the productive efficiency has reduced since the output per worker has not met the planned requirements.

Non-productive (idle) resources Which resources are not in constant use in the business? Are employees often left with nothing to do? Are machines only used for part of available time? Too many idle resources are a common sign of inefficiency in production

Production & operations: The transformation process

Introduction
A good way to think of a business is to imagine inputs entering an imaginary black box. What come out of the box areoutputs. The black box is the business what is does how it does it and so on. A business needs resources in order to trade. The activities of a new business should be designed to turn those resources into products and services that customers are willing to pay for. This process is known as the transformation process. If the value of what customers pay for the outputs is more than the cost of the inputs, then the business can be said to have added value. So, in summary, the transformation process is about adding value. That sounds pretty theoretical. So, lets take a look at some practical examples of what is involved in the transformation process.

Inputs to the transformation process

In order to make products and deliver services, a business needs resources i.e. inputs. The textbooks often refer to these as factors of production, which is a slightly boring way of describing real resources such as: Labour the time and effort of people involved in the business: employees, suppliers etc Land think of this as the natural resources that are used by the business e.g. actual land, energy, and other natural resources Capital capital includes physical assets such as machinery, computers, transport which are used during production. Capital can also include finance the investment that is required in order for the business activities to take place. Enterprise enterprise is the entrepreneurial fairy-dust that brings together or organises the other inputs. The entrepreneur takes the decisions about how much capital, what kind of labour etc and how & when they are needed in the business. You will probably agree that enterprise is the most important input for a successful business. Inputs by themselves are rarely enough for a start-up to succeed. They need to be the right kind of inputs, in the right mix. So, for example, a successful entrepreneur will be keen to ensure: High quality people are employed (the best the business can afford at each stage of development) and that these people are retained and invested in (training)

Capital investment is focused on efficiency and quality use of modern machinery or IT systems of the right kind can have a significant effect whether a small business is able to compete

Outputs from the transformation process

The outputs of business activities are reflected in the products and services sold to customers. It is quite useful to think of ways in which similar business activities can be grouped based on those outputs. Economists and business examiners alike have traditionally categorised the outputs from the transformation process into these three groups: Sector Primary Secondary Businesses involved in Extraction of natural resources (e.g. oil, gas) and farming activities Production of finished goods and components (e.g. flat-screen TVs, computer memory chips, games consoles, industrial equipment, motor vehicles. The secondary sector is also often referred to as the manufacturing sector. Providing a service of some kind. E.g. health, travel, legal, finance, building, security. The list of potential services is endless. Think of this as any business activity that involves people doing things for you! Retail businesses are in the tertiary sector.

Tertiary

In recent years, some textbooks have also suggested that there is a fourth sector the Quaternary sector. The quaternary sector consists of those industries providing information services, such as computing and ICT (information and communication technologies), consultancy (offering advice to businesses) and R&D (research, particular in scientific fields). In most textbooks you will see the outputs of the Quaternary sector included in the tertiary sector. Dont worry; the distinction isnt important. What is important is that you remember that the Tertiary sector in the UK has grown strongly over recent decades and now accounts for about 75% (three quarters) of all business activity. A final word about the categorisation of business activities (outputs) into sectors. Remember that is perfectly possible for a single business to be operating in more than one sector. For example, many farms in Britain (farming = primary sector) also offer holiday accommodation (tertiary sector) and produce processed foods such as cheese and ice-cream from farm supplies (secondary sector). Here is another example. Morrisons supermarkets (i.e. tertiary sector - one of the four largest supermarkets in the UK) also own and operate its own factories that make many of the food products sold in store (secondary sector).

Production & operations: Flow production As a business grows the scale of its operations, it often needs to change its method of production to allow greater production capacity.

A small business might use job or batch production to provide a personalised or distinctive product. However, if the product is intended for much larger, mass markets, then alternative methods of production may be required in order for the product to be produced efficiently. A key production method in these circumstances is flow production. Flow production involves a continuous movement of items through the production process. This means that when one task is finished the next task must start immediately. Therefore, the time taken on each task must be the same. Flow production (often known as mass production) involves the use of production lines such as in a car manufacturer where doors, engines, bonnets and wheels are added to a chassis as it moves along the assembly line. It is appropriate when firms are looking to produce a high volume of similar items. Some of the big brand names that have consistently high demand are most suitable for this type of production.

Advantages
Flow production is capital intensive. This means it uses a high proportion of machinery in relation to workers, as is the case on an assembly line. The advantage of this is that a high number of products can roll off assembly lines at very low cost. This is because production can continue at night and over weekends and also firms can benefit from economies of scale, which should lower the cost per unit of production.

Disadvantages
The main disadvantage is that with so much machinery it is very difficult to alter the production process. This makes productioninflexible and means that all products have to be very similar or standardised and cannot be tailored to individual tastes. Another disadvantage of using flow production is that the work can be pretty boring for employees involved. Keeping staff motivated is therefore an important issue for management.

Production & operations - Business location for a new business Where to start a new business? It is a tough question that often leaves an entrepreneur agonising over the decision. A small business starting up 10-15 years ago would soon be agonising over a key decision. Where can I find some premises? What kind of premises do I need and what will they cost? These days the decision about locating a start-up business is a very different one. It is possible to run a new business, even with several people, without ever having separate business premises. The so-called virtual business is now a reality, made possible by easy communications and the enthusiasm of many people to work from home, as freelancers or consultants. Setting up a virtual business, often from home, is not without its problems. However, this is a very popular approach to locating a new business. Not every kind of start-up can be based at home. When addressing the question of business location, the textbooks often use the example of a new retail business. For retailing, the search for a good location is vitally important. In general, the most important consideration for a start-up is the cost of the business location. In your exam, it is best to assume (unless you are told otherwise) that a start-up has limited financial resources and that it will seek to minimise the start-up costs. Setting up in a new business location can add significantly to overheads a business will incur rent, rates, insurance and many other on-going costs simply from the decision to take some premises.

Factors affecting the choice of location

Whatever the business, there are several general factors that influence the choice of location. These are: Factor Communications Comments This includes transport facilities (road, rail, air) as well as information infrastructure. Transport links are particularly important if the business delivers products, sells direct using a sales force or is dependent on import and export. Information technology is less of an issue these days most start-ups can quickly establish reliable broadband Internet connections. When a start-up needs to hire employees, then access to a reliable pool of staff with relevant skills is important. Businesses that are labour-intensive often look to locate in areas of traditionally low wages.

Labour

Market - customers A start-up may need to be located near particular centres of & population population. For example, if the product is a service targeted at affluent older-aged people, then it is important to be located where there is a sufficient population of such people. Franchise businesses often analyse the population characteristics of a potential new territory before setting up in a new location. Suppliers The business may be dependent on supplies of a particular raw material, so costs will be lower if the business is located near the source of supply (e.g. where the raw material is grown or where a distributor is based). This factor tends to be more important for manufacturing businesses rather than

service businesses. Government assistance Government policy has often been designed to influence the locations of new businesses. If the start-up is location-independent (i.e. the other factors above dont really make a difference to the choice of location), then it may be that deals and incentives offered by Government can influence the choice. Some poorer areas of the UK are designated as assisted areas. These include many parts of north-east England, Wales, East Yorkshire, Cornwall etc. Locating a new business in one of these areas potentially makes government grants and loans available.

There is no magic formula which can be applied to decide the most important factors in choosing a location. Where two possible locations have been identified, it might be that the availability of government grants or other incentives is the deciding factor. Making a choice of location involves drawing up a list of criteria of what the start-up is looking for from business premises and then using qualitative judgement about what will work best. Production & operations - Batch production Batch production occurs when many similar items are produced together. Each batch goes through one stage of the production process before moving onto next stage. Good examples include: Cricket bat manufacture Baking / meal preparation Clothing production

The benefits and drawbacks of batch production include: Advantages Making in batches reduces unit costs Can still address specific customer needs (e.g. size, weight, style) Use of specialist machinery & skills can increase output and productivity Disadvantages Time lost switching between batches machinery may need to be reset Need to keep stocks of raw materials. Cash also investment in work-in-progress Potentially de-motivating for staff

Production & operations - Lean production (overview) Lean production is an approach to management that focuses on cutting out waste, whilst ensuring quality. Lean production aims to cut costs by making the business more efficient and responsive to market needs. The lean approach to managing operations is really about: Doing the simple things well Doing things better Involving employees in the continuous process of improvement and as a result, avoiding waste The concept of lean production is an incredibly powerful one for any business that wants to become and/or remain competitive. Why? Because waste = cost Less waste therefore means lower costs, which is an essential part of any business being competitive.

The pioneering work of Toyota (a leader in lean production) identified different kinds of waste which can be applied to any business operation. These are: Type of waste Over-production Waiting time Transport Stocks Motion Defects Description Making more than is needed leads to excess stocks Equipment and people standing idle waiting for a production process to be completed or resources to arrive Moving resources (people, materials) around unnecessarily Often held as an acceptable buffer, but should not be excessive A worker who appears busy but is not actually adding any value Output that does not reach the required quality standard often a significant cost to an uncompetitive business

Production & operations - Lean production methods

Cell production
In traditional production, products were manufactured in separate areas (each with a responsibility for a different part of the manufacturing process) and many workers would work on their own, as on a production line. In cell production, workers are organised into multi-skilled teams. Each team is responsible for a particular part of the production process including quality control and health and safety. Each cell is made up of several teams who deliver finished items on to the next cell in the production process. Cell production can lead to efficiency improvements due to increased motivation (team spirit and added responsibility given to cells) and workers sharing their skills and expertise.

Kaizen
Kaizen is a Japanese word for an approach to work where workers are told they have two jobs to do: Firstly to carry out their existing task; and Secondly to come up with ways of improving the task The concept known as continuous improvement therefore implies a process where the overall progress and gains in productivity within a firm, come from small improvements by workers being made all the time. For example, an employee may simply re-organise the lay out of his work area, which saves 2 minutes looking for and filing paperwork each day. When added up the course of a week, 10 minutes extra productive time is gained, which over a year equates to an extra days work. If other workers also adopt this, then a firm can benefit from a significant increase in output per worker (productivity) over a year.

Just in time
JIT means that stock arrives on the production line just as it is needed. This minimises the amount of stock that has to be stored (reducing storage costs). JIT has many benefits and may appear an obvious way to organizes production but it is a complicated process which requires efficient handling. For example, JIT relies on sophisticated computer systems to ensure that the quantities of stock ordered and delivered are correct. This process needs to be carried out very accurately or production could come to a standstill. Advantages of JIT Reduces costs of holding stock e.g. warehousing rent No money tied up in stock, can be use better elsewhere Disadvantages of JIT Needs suppliers and employees to be reliable

May find it difficult to meet sudden increase in demand

Production & operations - What is quality? Quality is important to businesses but can be quite hard to define. A good definition of quality is: Quality is about meeting the needs and expectations of customers Customers want quality that is appropriate to the price that they are prepared to pay and the level of competition in the market. Key aspects of quality for the customer include: Good design looks and style Good functionality it does the job well Reliable acceptable level of breakdowns or failure Consistency Durable lasts as long as it should Good after sales service Value for money Value for money is especially important, because in most markets there is room for products of different overall levels of quality, and the customer must be satisfied that the price fairly reflects the quality. Why quality is important to a growing business Good quality helps determine a firms success in a number of ways: Customer loyalty they return, make repeat purchases and recommend the product or service to others. Strong brand reputation for quality Retailers want to stock the product

As the product is perceived to be better value for money, it may command a premium price and will become more price inelastic Fewer returns and replacements lead to reduced costs Attracting and retaining good staff These points can each help support the marketing function in a business. However, firms have to work hard to maintain and improve their reputation for quality, which can easily be damaged by a news story about a quality failure. Production & operations - Managing quality Achieving high quality does not happen by accident. The production process must be properly managed to achieve quality standards. Quality management is concerned with controlling activities with the aim of ensuring that products and services are fit for their purpose and meet the specifications. There are two alternative approaches to managing quality

Quality control
A definition of quality control is: The process of inspecting products to ensure that they meet the required quality standards This method checks the quality of completed products for faults. Quality inspectors measure or test every product, samples from each batch, or random samples as appropriate to the kind of product produced. The main objective of quality control is to ensure that the business is achieving the standards it sets for itself. In almost every business operation, it is not possible to achieve perfection. For example there will always be some variation in terms of materials used, production skills applied, reliability of the finished product etc. Quality control involves setting standards about how much variation is acceptable. The aim is to ensure that a product is manufactured, or a service is provided, to meet the specifications which ensure customer needs are met. At its simplest, quality control is achieved through inspection. For example, in a manufacturing business, trained inspectors examine samples of work-in-progress and finished goods to ensure standards are being met. Advantages of quality control With quality control, inspection is intended to prevent faulty products reaching the customer. This approach means having specially trained inspectors, rather than every individual being responsible for his or her own work. Furthermore, it is thought that inspectors may be better placed to find widespread problems across an organisation.

Disadvantages of quality control A major problem is that individuals are not necessarily encouraged to take responsibility for the quality of their own work. Rejected product is expensive for a firm as it has incurred the full costs of production but cannot be sold as the manufacturer does not want its name associated with substandard product. Some rejected product can be re-worked, but in many industries it has to be scrapped either way rejects incur more costs, A quality control approach can be highly effective at preventing defective products from reaching the customer. However, if defect levels are very high, the companys profitability will suffer unless steps are taken to tackle the root causes of the failures.

Quality Assurance
A definition of quality assurance is: The processes that ensure production quality meets the requirements of customers This is an approach that aims to achieve quality by organising every process to get the product right first time and prevent mistakes ever happening. This is also known as a zero defect approach. In quality assurance, there is more emphasis on self-checking, rather than checking by inspectors. Advantages of quality assurance include: Costs are reduced because there is less wastage and re-working of faulty products as the product is checked at every stage It can help improve worker motivation as workers have more ownership and recognition for their work (see Herzberg) It can help break down us and them barriers between workers and managers as it eliminates the feeling of being checked up on With all staff responsible for quality, this can help the firm gain marketing advantages arising from its consistent level of quality Total quality management (TQM) is a specific approach to quality assurance that aims to develop a quality culture throughout the firm. In TQM, organisations consist of quality chains in which each person or team treats the receiver of their work as if they were an external customer and adopts a target of right first time or zero defects.

Quality Control or Quality Assurance which is best? Which approach to managing quality is best? Here is a summary of the main considerations: Quality Assurance A medium to long-term process; cannot be implemented quickly Focus on processes how things are made or delivered Achieved by improving production processes Targeted at the whole organisation Emphasises the customer Quality is built into the product Quality Control Can be implemented at short-notice Focus on outputs work-in-progress and finished goods Achieved by sampling & checking (inspection) Targeted at production activities Emphasises required standards Defect products are inspected out

Production & operations - Stock control There are three types of stock that a business can hold: Stocks of raw materials (inputs brought from suppliers waiting to be used in the production process) Work in progress (incomplete products still in the process of being made) Stocks of finished products (finished goods of acceptable quality waiting to be sold to customers) The aim of stock control is to minimise the cost of holding these stocks whilst ensuring that there are enough materials for production to continue and be able to meet customer demand. Obtaining the correct balance is not easy and the stock control department will work closely with the purchasing and marketing departments. The marketing department should be able to provide sales forecasts for the coming weeks or months (this can be difficult if demand is seasonal or prone to unexpected fluctuation) and so allow stock control managers to judge the type, quantity and timing of stocks needed. It is the purchasing departments responsibility to order the correct quantity and quality of these inputs, at a competitive price and from a reliable supplier who will deliver on time. As it is difficult to ensure that a business has exactly the correct amount of stock at any one time, the majority of firms will hold buffer stock. This is the safe amount of stock that needs to be held to cover unforeseen rises in demand or problems of reordering supplies. Stock management Good stock management by a firm will lower costs, improve efficiency and ensure production can meet fluctuations in customer demand. It will give the firm a competitive advantage as more efficient production can feed through to lower prices and also customers should always be satisfied as products will be available on demand.

However, poor stock control can lead to problems associated with overstocking or stock-outs. If a business holds too much buffer stock (stock held in reserve) or overestimates the level of demand for its products, then it will overstock. Overstocking increase costs for businesses as holding stocks are an expense for firms for several reasons. Increases warehouse space needed Higher insurance costs needed Higher security costs needed to prevent theft Stocks may be damaged, become obsolete or perish (go out of date) Money spent buying the stocks could have been better spent elsewhere The opposite of an overstock is a stock-out. This occurs when a businesses runs out of stocks. This can have severe consequences for the business: Loss of production (with workers still having to be paid but no products being produced) Potential loss of sales or missed orders. This can harm the reputation of the business. In these circumstances a business may choose to increase the amount of stock they hold in reserve (buffer stock). There are advantages and disadvantages of increasing the stock level. Advantages Can meet sudden changes in demand Disadvantages Costs of storage rent and insurance

Less chance of loss of production time because Money tied up in stocks not being used of stock outs elsewhere in the business Can take advantage of bulk buying economies of scale Large stocks subject to deterioration and theft