Business NOTES

Contents
Topic 1; BUSINESS ACTIVITY ................................................................................................................... 2
Topic 2; BUSINESS ORGANIZATON ......................................................................................................... 6
Topic 3; CLASSIFICATION OF BUSINESSES .......................................................................................... 16
Topic 4; PRIVATIZATION......................................................................................................................... 19
Topic 5; PRODUCTION ............................................................................................................................. 22
Topic 6; BUSINESS LOCATION................................................................................................................ 26
Topic 7; EXTERNAL FACTORS AFFECTING BUSINESS LOCATION................................................... 30
Topic 8; MEASURING SUCCESS OF A BUSINESS ................................................................................. 34
Topic 9; REASONS FOR BUSINESS FAILURE ........................................................................................ 36
Topic 10; COMMUNICATION................................................................................................................... 39
Topic 11; ECONOMIES OF SCALE ........................................................................................................... 51
Topic 12; MOTIVATION............................................................................................................................ 58
Topic 13; CASH FLOW FORECASTING ................................................................................................... 67
Topic 14; COSTS AND BREAK-EVEN ANALYSIS .................................................................................. 72
Topic 15; RECRUITMENT AND SELECTION......................................................................................... 85
Topic 16; LEGAL CONTROLS OVER EMPLOYMENT AND THEIR EFFECTS ...................................... 93
Topic 16; TRAINING ............................................................................................................................... 100
Topic 17; MARKET RESEARCH ............................................................................................................. 108
Topic 18; IMPORATNCE OF MARKETING ........................................................................................... 120
Topic 19; MARKET SEGMENTATION ................................................................................................... 127
Topic 20; THE MARKETING MIX........................................................................................................... 129

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 Topic 1; BUSINESS ACTIVITY
INTRODUCTION
A business ~ is an organization which provide goods and services with the aim of
making profit. Example of business organization; hospitals, supermarkets, schools etc.
A business activity~ Refers to any action under taken by an individual or companies for the
purpose of generating profits or generating economic opportunities.
Examples of business activities, marketing,
investments etc. Features/

Characteristics of a business

activity

 A business activity produces an output i.e. goods and services.

 Goods and services are consumed e.g. students consuming teaching
services produced in schools.
 Resources are used up in a business activity e.g. raw materials,
employees, electricity, money etc.
 A business activity aims at making profit.
 A business activity can be affected by external factors.
 A number of business functions are carried in a business activity
e.g. production, marketing.

Goods and services

A good ~ is a physical product (tangible) i.e. it can be touched, seen and felt. for example,
mobile phone, shoes, books etc.
A service ~ is a non-physical product (intangible) for example banking, car washing,
shoemaking etc.

Goods Services

Smartphone Banking

Computer game Education

School bag Healthcare

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 Pizza Air travel

Classification of goods and

services Goods
i. Consumer goods~ these are goods sold to the ordinary people rather than businesses.
Examples are magazine, apple, hand bag etc.
ii. Producer goods~ are goods produced by one business for another. Examples of
producer goods is delivery van, tractor and tools.

Services.
i. Consumer services~ this are services sold to ordinary people. For example, health
care, education, air travel etc.
ii. Producer services~ are services produced by one business for another. Example
market research, insurance, software
N/B: what is a good~ a good is something you can see and feel. It is something you can see
use.
N/B: what is a service~ something done for someone else. Sometimes people are paid for
their service sometimes they are not.

Satisfying Needs and Wants

 Businesses have to satisfy human needs and wants using goods and services.
 Need~ are basic requirements for human survival. For example, food, shelter, warmth,
and clothing.
 Wants~ are not a must for human survival but they make life comfortable for
example wants for education, a car, gold watch etc.

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 Purpose of Business
Activity Business exists to provide
goods and services
 However different types of organization provide goods and services for different
reasons;
 Each type of business organization has a different purpose as explained below

a. Private enterprise/ private sector business

 They are owned by individual or group of individuals.
 The main purpose or objective of the private enterprise is to make money (profit) for the
owners.
b. Social enterprise
 Some organizations in the private sector are profit making. These enterprises exist
for other reasons other than profits, they provide goods and services for “good
cause” e.g. charities, clubs, societies, example UNICEF, RED CROSS etc.

c. Public enterprise
 Are business organizations owned by the government i.e. central or local government.
 The public business sector exists to produce quality goods and services that they
feel the private sector is not providing adequately.

ORGANIZATIONS

Types of organization

Private sector Public sector

Profit - making Non-profit making (Voluntary sectors)

Business Stakeholders
Business stakeholders~ an individual or group of individuals who have the interest in the
operation of a business.
Examples of business stakeholders include;
i) Owners~ they are responsible for setting up and running of the business. They
are also known as entrepreneurs.
Entrepreneur~ is a person who takes up the risks and set up a business.
ii) Customers~ they buy goods and services that the business sell.
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 iii) Managers~ are employed to run different departments in the business. Their
functions include;
Settle disputes, motivate workers, they show leadership, solve problems
iv) Financiers / lenders~ they lend money to the business. They may be banks or
individuals.
v) Suppliers~ are people or business that supplies raw materials,
components, commercial services, and utilities to the business.
vi) The local community / society~ they are the people who surround a business.
The business may impact the local community positively or negatively.
vii) The government~
The government has an interest in all business since businesses pay taxes and
create jobs, the taxes paid are used to fund government spending.

Note: Business stakeholders are divided into two

 Internal stakeholders
 External stakeholders

Internal stakeholders include

 Owners
 Employees
 Managers

External stakeholders include

 Customers
 Government
 Suppliers
 Financiers
 Local community
The changing business environment

 All business operates in a changing business environment. This means that business
may be affected by external factors which change overtime. Example;
 Strength of the competition
 Economic climate
 Population trends
 Social factors
 To survive business must produce goods and services that satisfy peoples’ needs and
wants.
 They must set clear objectives and be aware that the changing business environment
can bring new opportunities and impose new limitations.

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 REVISION QUESTIONS

Topic 2; BUSINESS ORGANIZATON

SOLE TRADER, PARTNERSHIP, SOCIAL ENTERPRISES AND FRANCHISES
 There are several different types of business organizations. They vary according
to size type of ownership and legal status.
1. Sole trader / sole-proprietor ~ it’s a business owned by one / single person.
2. Partnership ~ is business owned between 2 and 20 people.
3. Franchise~ is where a business (the franchiser) allows another operator
(franchisee) to trade under their name.

ENTREPRENEURS

 Entrepreneurs are people who set up a business.

 Entrepreneurs are the owners and without them business would not exist in the private
sector.
Roles of the entrepreneurs

1. Innovators~ entrepreneurs are innovators because they try to make money out of idea.
2. Organizers~ entrepreneurs are responsible for organizing other factors of
production. They buy or hire resources such as materials, labor and equipment.
Organizing involves giving instruction, making arrangements and setting up
system.
3. Decision making ~entrepreneurs is the owners of the business they make key
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 decisions on how to raise finance, product design, choice of production method,
prices, recruitment and wages.
4. Risk takers~ they are risk takers since they risk losing money they put into the business
if it fails.

UNINCORPORATED AND INCORPORATED BUSINESS

 Unincorporated business~ these are business where is no legal difference between the
owner and the business. Everything in the business is carried out in the name of the
owner. The owners of these businesses have unlimited liabilities.
Example of unincorporated business; sole trader, partnership etc.
 Incorporated business~ this is where the business has a separate legal identity from
that of its owners. These business can sue, be sued, taken over or liquidated.
 The owners of these businesses have limited liability.
Examples of incorporated businesses are, private limited company, public limited
company etc.

1. SOLE TRADER
 A sole trader is a business owned by one person.
 It is the simplest form of business organization.
 There are no legal requirements involved in forming a sole trader.

Advantages of a sole trader

1. They are independent ~ the owner has complete control over the business.
2. All the profits are kept by the owner.
3. A sole trader is flexible.
4. A sole trader can offer personal services to customers since they are small in nature.
5. It is simple to set up since it has no requirements.
6. Sole traders may qualify for government help.
7. Decision making is faster since the sole proprietor does not consult anybody.
8. The sole trader is able to keep the top secrets of his/her business.
9. Requires less amount of capital to start.

Disadvantages of a sole trader

1. Independence may be a problem.

2. Long working hours and a very hard work.
3. They are usually small to exploit the economies of scale.
4. A sole trader has no continuity i.e. when the owner dies the business also dies.
5. The owner struggles to raise finance.
6. Sole traders have unlimited liabilities.
7. The owner suffers all losses and risk alone.
8. Lack of consultation may lead to poor decision making.
9. May struggle to raise finance-considered too risky by those that lend money.

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 2. PARTNERSHIP

 A partnership is a business owned by 2-20 people jointly. The owners share

responsibility / responsibilities of running the business and profits.
 There are no legal formalities to complete when forming a partnership however partners
may draw up a partnership deed.
 A deed of partnership is a binding legal document which the formal rights of partners.

Content of partnership deed

1. How much capital each partner will contribute.
2. How profits (loses) will be shared amongst the partners.
3. The procedure for ending the partnership.
4. How much control each partner has.
5. Rules for taking on new partners.

Advantages of partnership
i) More capital can be raised due to more owners.
ii) The burden of running the business is shared
iii) Partners can specialize in their area of expertise.
iv) Easy to set up and run since no legal formalities are required.
v) Financial information is not published.
vi) Losses and risk are shared.
vii) Consultations in decision making results to good decisions.
Disadvantages of partnership
i) Profit has to be shared.
ii) Partners have unlimited liability.
iii) Partners may disagree and fall out.
iv) Any partner’s decision is legal binding on all.
v) Partnerships still tend to be a small business.
vi) Decision making process may be slow since all partners have to be consulted.

Limited partnerships

 A limited partnership is where partners provide capital but take no part in the management
of business.
 Such partners have limited liability and can only lose the original amount of money
invested in the partnership. These partners are called sleeping partners.
 In a limited partnership there must be a partner with unlimited liability.

3. FRANCHISE
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  This is where a business (the franchisor) allows another operator (the franchisee) to
trade under their name.
 Franchise suits someone who wants to run a business but does not have their own idea.
 Examples of international franchise are mc Donald, subway and Avis.

The franchisor offers the franchisee the following;

i) A license to trade under the recognized brand name of the franchisor.
ii) A start up package including help, advice and essential equipment.
iii) Training in how to run the business and operate the system used by the franchise.
iv) Materials, equipment and support services that are needed to run the business.
v) Marketing support which is organized on behalf of all franchisees.
vi) An exclusive geographical area in which to operate.
 In return for these services the franchise has to pay the following fees;
i) Startup fee – a lump sum.
ii) An ongoing fee (usually based on sales).
iii) Contribution to marketing cost.
iv) Franchisors may make profits on some of the materials make profits on some
of the materials, equipment and merchandise supplied to franchisees.

Advantages of a franchise to a franchisee

1. Back up support is given by the franchisor.
2. Set up costs are predictable.
3. National marketing may be organized.
4. Less risky since it is tried and tested idea.

Disadvantage of franchise to franchisee

i) Lack of independence.
ii) It can be an expensive way to start up the business.
iii) Profits are shared with the franchisor.
iv) Strict contracts have to be signed.

Advantages of a franchise to a franchisor

i) It is a factor method of growth.
ii) Franchisees take some risks.
iii) It’s a cheaper method of growth.
iv) Franchisees are more motivated than employees.

Disadvantages of franchise to a franchisor

i) The cost of support for franchisees may be high.
ii) Poor franchisors may damage brands reputation.
iii) Potential profit is shared with franchisee

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 4. SOCIAL ENTERPRISES

 Social enterprise is business that aim to improve human or environmental well-being

example, charities.
 They also referred to as nonprofit making organization.

Features of social enterprise

i) They have a clear social and environmental mission.

ii) They generate most of their incomes through trade or donations.
iii) They reinvest most of their profits.
iv) They are majorly controlled in the interests of social mission.
iv) Are accountable and transparent.

Forms of social enterprise

a) Co operatives
 These are organizations, companies or factories in which all the people working
their own an equal share of it.
 They are owned and controlled by their members.
 Members buy shares which entitle them to elect directors, to make key decisions.
 Any profit made by the cooperatives is

given to members. There are three types of

cooperatives.
i) Consumer cooperatives~ are cooperatives owned by customers.
ii) Worker cooperatives~ are cooperatives owned by employees.
iii) Retail cooperatives~ are cooperatives owned by retailers who work
together to assert their purchasing power.

b) By charities
 These are organizations that give money, goods or help the people who are poor, sick or in
need.
 Charities exist to raise money for a good cause and draw attention to the needs of
disadvantaged groups in society.

LARGE VS SMALL BUSINESSES

 Sole trader, partnership, social enterprise and franchise are most likely to operate
on or as a small business.
 Franchisors may be large business.
 Many social enterprises are small but some charities such as UNICEF and OXFAM are
large since they have an international presence.

LIMITED LIABILITY COMPANIES AND MULTINATIONALS

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  Limited company ~ is a business organization which has separate legal identity
from that of its owners.
 Limited companies have different features to sole traders, and partnerships.
They have different types of owners and raise capital in different ways. They are
also set up and run differently.
 Limited companies are incorporated. This means they have a separate legal
identity from their owners. Limited companies can own assets; form contracts
employ people, sue and be sued.
Features of limited companies
i) The owners have limited liability ~ this means that if a limited company has
debts, the owners can only lose the money they originally invested in the
business.
ii) Capital is raised by selling shares ~ the shareholders are the joint owners
of the company. Those with more shares have more control and get more
dividends.
iii) Are directed by directors ~ limited companies are run by directors elected by the
shareholders.
iv) Companies pay corporation tax ~ whereas sole traders and partnerships
pay income tax, companies pay corporation tax.

Procedure of forming a limited company

 Two important documents must be sent to the register of companies before a
limited company is formed i.e. Memorandum of association and article of
association
 A limited company must have a minimum of two members but no maximum limit.
 If the memorandum of association and article of association are accepted, the
company gets a certificate of incorporation which allows it to trade as a
limited company.
 The shareholders have legal rights to attend to AGM and must be told of the
date and venue in writing.
a) Memorandum of association (memo)

 This is a document that sets out the constitution and gives details of the company.
It contains the following details;
i) Name of the company
ii) Name and address of the company’s registered office
iii) Objectives of the company and the nature of its activities.
iv) The amount of capital to be raised and the number of shares to be issued.

b) Article of association
 These document deals with the internal running of the company
 It contains the following details.
i) Rights of the shareholders depending on the type of shares they hold.
ii) Procedures for appointing directors.
iii) Length of time the directors should serve before re-election.
iv) Timing and frequency of company meetings.

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 v) Arrangements for auditing company accounts.
1. Private limited companies

 These companies are small and medium sized. However, a small minority are large.
 They are mostly owned by family members or close friends.

Features of private limited companies

i) Their business name ends in limited or LTD.
ii) Shares can only be transferred “privately” from one individual to another. All
shareholders must agree on the transfer and they cannot be advertised for a sale.
iii) They are often family business owned by members or close friends.
iv) The directors of these firms tend to be shareholders and are involved in the
running of the business.
Advantages of private limited companies

i) More capital can be raised as compared to sole traders and partnerships.

ii) Shareholders have limited liability.
iii) Control of the company cannot be lost to the outsiders.
iv) Business continues if a shareholder dies.
v) It has more status than a partnership and sole traders’

Disadvantages of private limited companies

i) Financial information has to be made public.
ii) Costs money and takes time to set up.
iii) Profits are shared between more members.
iv) Takes time to transfer shares to new owner
v) Cannot raise huge amounts of money, like public limited companies

2. Public limited company

 A public limited company / companies are large private limited companies. There shares
can be bought and sold by the public on the stock exchange market.
 Anyone can buy shares in the public limited company.
Floatation ~ is the process of the company “going public”
 When going public the company is likely to publish “a prospectus “. This advertises
the company to potential investors. It also invites them to buy shares before
floatation.
 Prospectus ~ is a document distributed to prospective members, investors, buyers etc.
which describes the institution.
Going public can be expensive because;
i) The public limited company must have a minimum of 50000 share capital.
ii) The prospectus has to be printed and circulated.
iii) The company needs lawyers to ensure that the prospectus is legally correct.
iv) There are advertising and administrative expenses.
v) The company must insure against the possibility of some shares remaining
unsold, therefore a fee is paid to an under writer who most buy any sold

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 shares.
vi) The bank may be paid to process share application.
Advantages of public limited company

i) May be able to dominate the market.

ii) They can exploit economies of scale.
iii) Large amount of capital can be raised.
iv) Shareholders have limited liability.
v) Shares can be bought and sold very easily.
vi) They may have a high profile in the media.

Disadvantages of public limited companies

i) May be more remote from the customers.

ii) Setting up cost can be very expensive.
iii) Outsiders can take control by buying of shares.
iv) More financial information has to be made public.
v) More regulatory control due to company acts.

JOINT VENTURES

 Joint ventures ~ this where two or more companies share costs / responsibility and
profits of a business venture.
 Most joint ventures involve two firms and the costs and profits are shared equally.

Advantages of a joint venture

 Completion may be eliminated.

 Takeover is expensive because of heavy legal administrative cost.
 Each business can specialize in aspects of the venture to suit its expertise.
 They allow companies to enjoy some of the advantages of mergers e.g. higher turnover
without losing their identity.
 Mergers and takeovers are often unfriendly while most ventures are friendly
which may help in improving the success of the venture.

Disadvantages of joint venture

i) Some joint ventures do not workout.
ii) Disagreement may occur about the management of the joint venture.
iii) The profit from the joint venture is split between the investors
reducing potential profit.

MULTINATIONAL COMPANIES

 Multinational are companies with operations in different countries.

 Multinationals serves global markets and provide jobs and other benefits for the
countries in which they are located.

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 GLOBALISM
 Many markets today are global this means that firms expect to sell their products anywhere
in the world.
Globalization ~ is the growing integration of world’s economies.
Firms and people are behaving as though there is just one market in the whole world.

Features of globalization

i) Products are traded freely across international borders.

ii) There is high level of interdependency /interdependence between nations.
iii) In some areas such as EU, people are free to live and work in
any country they choose.
iv) Capital can flow freely between different countries.

Features of multination’s

i) Highly advanced and up to date technology.

ii) Powerful advisement and marketing capability.
iii) Very efficient since they can exploit economies of scale.
iv) Ownership and control is centered in the cost country.
v) Highly qualified and experienced professional executives and managers.
vi) Huge assets (land, building, plant machinery and money) and turnover.
vii) Highly influential both economically and politically.

Importance and growth of multination’s

 Multination’s plays a large role in the world’s economy. They contribute about 10% to the
world GDP
and about 2 of global exports.
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 The number of multination’s in the world has increased from about 7,000 in 1970 to about
78,000 in
2005. Between they employ 73 million workers i.e. around 3% of the global workforce.

Why have been multinationals created?

1. Economics of scale. Multinationals can exploit economies of scale. This means that
they enjoy low operation lost because of their size. Multinationals are powerful and
can put pressure on suppliers to lower their prices. Multinationals also have access to
cheap global resources such as labour, capital and commodities.
2. Marketing. Some firms have become multinationals by relying on effective marketing
e.g. Starbucks, MacDonald’s. These are low-tech firms that have developed a
successful brand at home and then exploited it globally. They are advertising and

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 innovative marketing to attract customers globally.
3. Technical and financial superiority. Most multinationals have developed into large
businesses over a period of time because of advanced technologies’ huge bank of
knowledge. They are experienced and
can afford to employ the most talented people available. They also have the resources to
take risks and diversity. As a result, they can take business ventures that small firms could
never think of.

Advantages of multinationals
1. Increase in income and employment~ when multinationals set up operation
overseas, income in these countries rises. They create new jobs in developing
countries. The extra output and employment generated by multinational will
increase economic growth and raise living standards for people in these countries.
2. Increase in tax revenue~ the profits made by multinationals are taxed by the host
nation. This increases the tax revenue for the government in that country and this
can be improve government services.
3. Increase in exports~ the output produced by a multinational in this country is
recorded as output for that country. Therefor if this output is sold out of the host
country it is counted as an export. This helps less developed countries to increase
their foreign currency reserves.
4. Improvement in the quality of human capital~ multinationals provides
training and work experience for workers in less developed countries. Also
government in less developed countries often spend more on education to help
attract multinationals.
5. Enterprise development~ the arrival of multinationals has encouraged more
people to set up businesses in less developed countries. Multinationals may have
provided skills and motivation needed for enterprise.
Disadvantages of multinationals
1. Environmental damage ~ many environmentalists are suspicious of multinationals
because they may cause environmental damage, this is because multinationals are
heavily involved in the extraction industry which are often destructive i.e. mining.
2. Exploitation of less developed countries ~ multinationals may exploit developing
nations e.g.
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  Multinationals often pay low wages.
 Resources are extracted and sold with little money going to host nation.
 Taxes paid to the host nations are normally minimal.
 As little as possible is put back into the country because this would
reduce the amount of profit made by multinationals.
 Some multinationals may encourage developing countries to rely on
producing primary products which is risky since the prices of primary
products can change sharply causing variation in income.

3. Repatriation of profits ~ the profits made by the multinationals are returned to the
country where the multinational is based. As a result, the host country loses out.
4. Lack of accountability ~ since multinationals is large and powerful they lack
accountability. This means they may be able to evade the law – especially in countries
where the government is weak and corrupt.

Topic 3; CLASSIFICATION OF BUSINESSES

 Business operates in different [Link] developed countries most businesses provide
services while in some like china, there are large number of manufacturers while in less
developed countries most business will concentrate on producing agricultural goods.

 Value is added to a product when it is transformed at each stage of production

process. Added value is the extra value given to a product and services as a
result of production or manufacturing processes, transport or storage. For
example; fresh oranges on the trees have a little value but once they have been
picked, (primary stage) and taken to the factory to have juice extracted and put
into cartons (secondary stage) value has been added.

 Each of the three industrial sectors are linked to form a chain of production.
Industry refers to a group of organizations that make, sell orprovide a
particular good or service.

Levels (Stages) of production:

1. Primary sector.
 In this sector business activity involves extracting raw materials from the earth. This is
the first stage of production. Most of the outputs of primary production are not in usable

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 form and have to be moved to secondary stage so that they are transformed into more
usable form.

Examples;

a) Mining and quarrying~ this is where the raw materials such as coal, iron ore, copper
and tin, salt and limestone are dug out of the ground.

b) Fishing~ this involves netting, trapping, angling and trawling fish. It also includes
catching or gathering other type of sea food such as, prawns, lobsters, crabs, scallops and
oysters.

c) Forestry~ this i9nvolves managing forests to provide timber for wood products.
Modern forestry involves protecting the natural environment, providing access and
facilities to the public and wildlife habitats.

d) Agriculture~ this involves arrange of farming activities. It is the most important primary
sector activity for most countries. Most agriculture is concerned with food production.

2. Secondary sector
 This sector involves converting raw materials into finished or semi-
finished goods. All of manufacturing, processing and construction lie
within this sector.

a) Manufacturing and processing activities

It involves processing of converting raw materials into
finished goods. Examples;

a) Oil refilling c) Food processing

b) Paper manufacturing d) Chemical processing
(b). Construction activities

It involves putting together various parts of raw materials or semi- finished goods to come
up with a whole item to satisfying a human want

Example of constructive activities;

a) Carpentry
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 b) Car assembly
c) Bridge construction
d) Tailoring

3. Tertiary sector
 The tertiary sector involves the provision of a wide variety of services such as;
a) Professional services~ accountancy, legal advice and medical care.
b) Transport~ train, taxi, bus and air services.
c) Household services~ plumbing decorating, gardening and house maintenance.
d) Leisure services~ Television, tourism, hotels and libraries.
e) Financial services~ banking, insurance, investment advice and pension.
f) Commercial services~ freight delivery, debt collection, printing and employment agencies.

Interdependence
 Business in each of the three sectors is likely to be interdependent. This means that
they rely on each other. For example
 In the primary sector cereal farmers rely on bakers to in the tertiary sector to
produce newspaper adverts for their products.
 The transport industry in the tertiary sector relies on the oil industry in the
primary sector to provide fuel for its vehicles.
 Workers both in the secondary sector and tertiary sector rely on the primary sector
for food.

Changes in sectors.

The number of employees in each sector does not stay the same. Different sector
grows and decline over time. In developed countries thetertiary sector has started
to expand at the expense of both agriculture and manufacturing. The decline in
manufacturing is called de- industrialization

De-industrialization~ is the decline in manufacturing.

Reasons why manufacturing has declined in developed countries while tertiary sector has
grown.
1. There is some fierce competition in the production of manufactured goods
from developing countries e.g. china.
2. People may prefer to spend more of their income on services than manufactured
goods.
3. Advances in technology means that employment in manufacturing falls

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 because machines replace people.
4. As some countries develop, the public sector grows since the public sector
mainly provides services this adds to the growth of the tertiary sector.

Topic 4; PRIVATIZATION
DEFINITION
It is the process of transferring public sector resources to the private sector. In many
countries, the number of public corporations has been reduced.

Privatization can take a number of forms.

 Sale of public corporations: the sale of public corporations has been a popular way
of transferring business activity from the public to the private sector. One way of
doing this is to sell shares in business to anyone that wants them. In some cases,
government have sold off some parts of state owned business over a period of time.
 Deregulation: this involves lifting legal restrictions that prevented private sector
competition.
 Contracting out: many government and local authority services have been
“contracted out’’ to private sector businesses. This is where contractors are given a
chance to bid for services previously supplied by the public sectors. For example,
provision of school’s meals, hospital cleaning and refuse(waste) collection.
 The sale of land and property: on example of this in the UK was the sale of
council- owned properties to tenants. They were given generous discounts if
they agreed to buy.

REASONS FOR PRIVATIZATION

1) To generate income: the sale of state assets generates income for the government.
2) To reduce inefficiency in the public sector: many public corporations lacked the
incentive to make a profit and often made losses. It was argued that in the private
sector they would have to cut costs, improve services and return profits for
shareholders. They would be more accountable.
3) As a result of deregulation: legal barriers were removed that allowed new
businesses in some markets, such as bus and coach services. Existing firms were
privatized so that new firms could be encouraged to join the market.
4) To reduce political interference: in the private sector, the government could not
use these organizations for political aims. They would be free to choose their own
investment levels, prices, products ranges and growth rates.

Appropriateness of Different Forms of Ownership

The type of organization structure that owners choose for their business will depend on a
number of factors such as;
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  Growth: many businesses start small and gradually get bigger. Most businesses
change their legal status as they grow. This is because they need to raise more
capital.
 Size: many small businesses are sole traders or partnerships. PLCs are much large
with thousands of employees and huge turnovers. It could be argued that a very large
business could only be run effectively if it were a limited company.
 The need for finance: finance is one of the main reasons why owners change
the legal status of their businesses.
 Control: some owners like their independence. They like to have complete control of
their business. This is why many owners remain as sole traders. Once new partners or
shareholders join the business, some control is lost because it is shared with the new
partners or owners. It is possible to keep control of a limited company by holding the
majority shares.
 Limited liability: owners can protect their own personal financial position if the
business is limited company.
 Type of business activity: business activity may influence the choice of legal
status. For example, services such as plumbing, decorating and gardening tend to be
provided by sole traders, while professional services such as accountancy, legal
advice and architectural design are usually offered by partnership. Relatively small
manufacturing and family businesses tend to be privately limited companies and
large banks, retail chains and manufactures are usually public limited companies.
(PLCs)
 The way in which a business plans to use its profits may be important: for
example, PLCs usually pay dividends to their shareholders. Therefore, a growing
business that prefers to reinvest a lot its profit may choose to remain as private
limited company.
 Stakeholders: different stakeholders such as employees and shareholders might
influence the choice of organization. For example, leading employees in a private
company might discourage the shareholders from going public. They may argue
that the company operates more effectively without external owners.

Objectives and the Type of Organization

It is likely that the different types of business organization will have different objectives.
Some are examples are given below.

 Small sole traders might be happy to make a modest amount of profit- just enough
to fund comfortable lifestyle. They may not want the responsibility associated with
other objectives such as growth. This is sometimes called profit satisficing.
 Family business and other medium- sized private limited companies often do not
wish to go public because they are afraid of losing control to outsiders. As a result,
their growth might be limited and other objectives are more important.
 Most multinationals want to grow. Their aim is often to get bigger and bigger so that
they dominate global markets. For example, McDonalds is one of the biggest
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 multinationals in the world.
PUBLIC CORPORATION

Definition

Public corporations are business organizations owned and controlled by the state/government.

FEATURES PUBLIC CORPORATION

1) State owned: The government owns public corporations. This means the
government appoints the people who run the organizations, often board of
directors. The government is also responsible for the corporation’s policies
2) Created by law: Public corporation are created by an act of parliament. The
powers and duties of each organization are specified clearly in the act.
3) Incorporation: Public corporation are incorporated businesses. This means they
have a separate legal identity. They can sue, be sued and enter into contracts
under their own name.
4) State funded: the government provide the capital needed by public corporations.
The money comes mainly from tax. All the assets and liabilities of public
corporations belong to the state, but corporations can also borrow money and are
free to re-use revenue from the sales of any goods and services.
5) Provide public services: most, but not all, public corporations do not aim to make
a profit. Their main objective is to provide a public service. For example, air India
provides international air transport in India. Profit is not usually the driving force
behind public corporations.
6) Public accountability: public corporations have to produce annual reports, which
are submitted to the government minister in charge of particular corporation.
Ultimately, they are accountable to taxpayers because state owned corporations are
accountable to the public. If a public corporation makes a profit, the money will
either be reinvested in the business or handed over to the government.

REASONS FOR THE PUBLIC OWNERSHIP OF BUSINESSES

(ADVANTAGES)
1. To avoid wasteful duplication: if industries are controlled by monopolies
because it would be wasteful to have competitors. For example, natural
monopolies are owned by government, it is argued that this will ensure that
consumers are not taken advantage of by privately owned monopolies.
2. Maintain control of strategic industries: it may be argued that it is better for
industries that are vital to the nation’s security, such as energy production and
water supplies, to be owned by the government, this would prevent outsiders
from another country taking them over and exploiting a nation. If the provision of
a particular service is vital to the well-being of the nation, it is considered
desirable for the government to maintain control so that a reliable supply and
quality can be guaranteed.
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 3. Save jobs: in some cases, businesses have been taken into public ownership to
save jobs. A government might take control of failing private sector business if it
employs very large number of people.
4. Fill the gaps left by the private sector: in some markets, the private sector will
not make an adequate provision to meet the market needs. For example, its
desirable that everyone gets an education because it benefits society as a whole.
However, the private sector would only provide school places for those who are
prepared to pay. Consequently, a large number will be left out if their parents
either could not afford to pay or would choose not to pay.
5. Serve unprofitable regions: in some markets, the private sector would not
deliver important services to nprofitable regions. For example, the cost of
providing electricity to a remote farm many miles away from the main power
lines would be too high for a private sector operator. However, a public
corporation may be prepared to meet this cost because profit is not a key
objective.

REASONS AGAINST THE PUBLIC OWNERSHIP OF BUSINESSES

(DISADVANTAGES)

1. There are no private shareholders to insist on high profits and efficiency.

The profit motive might not be as powerful as in private sector industries.
2. Subsidies can lead to inefficiency as managers will always think that the
government will help them if the business makes a loss. It is also considered
unfair if the public corporation receive subsidy but private firms in the same
industry do not.
3. Often there is no close competition to the public corporations. Therefor a lack
of incentive to increase consumer choice and increase efficiency.
4. Government can use these businesses for political reasons. for example, just
before an election they could create more jobs. This prevents the public
corporations being operated like other profit making businesses.
5. Sometimes there is difficulty in controlling such businesses for they are large,
spread all over and employ so many employees. This may make it difficult to
co-ordinate different parts of the business and run it effectively.

Topic 5; PRODUCTION
Production is the process of converting raw materials, human labor andenergy
into finished goods and services that satisfy the needs and wantsof consumers.
Factors of production

These are resources needed to produce goods and services. There arefour
factors of production:

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 1. Land- all natural resources provided by nature. They are not
byman. Example include: forests, wildlife, water bodies and
mountains.

The reward for Land is rent

2. Labour- the effects of people needed to produce goods

andservices. The reward for labour is salaries and
wages.
3. Capital- the money, machinery and equipment needed to
producegoods and services. The reward for capital is interest
4. Entrepreneurship/ Enterprise- the ability to organize the factors of
production. An entrepreneur is a person who organizes the factors of
production. The reward for entrepreneurship is profit or loss

Summary table

Factor of production Reward

Land Rent
Capital Interest
Labour Salaries or wages
Enterprise Profit or losses

Methods of Production

Businesses have to manage resource effectively. They have to choose asuitable

combination of materials, tools, equipment, machinery and labour for production. The
two methods achieve this include;

 Labour intensive method

 Capital intensive method
(a). Labour intensive production
This is the use of relatively more labour than capital in the process
ofproduction of goods and services. Labour intensive production is
common in the countries such as China, and Vietnam, where labour
cheap and plentiful.

Advantages of labour intensive

 People are creative and can solve

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 problems and make improvements
 Cheaper for small scale production. Requires less capital to start.
 Increases job opportunities leading to employment.
 Increased employment opportunities reduce the crime rate in thecountry.

 Generally, more flexible than machinery. Staff can be

retrained buta lot of machinery is highly specialized.

Disadvantages of labour intensive

 Production is slow as old methods of production are used.

 Less job satisfaction as employees do routine and boring jobsrepeatedly.
 People are more difficult to manage because the y
have feelingsand reactions
 People need breaks and holidays
 People sometimes need to be motivated to improve performance
(b) Capital intensive production
This where production of goods relies more on the use of machines and
computers in the production process e.g car assembly. The advance in
technology has resulted in more capital intensive production worldwide.

Advantages capital intensive production

 Productivity s greater as new methods of production are used.

Alsomachinery can operate 24/7
 Greater job satisfaction for workers as routine jobs are
done bymachines and computers
 New products are introduced as new methods are used.
 Better consumer service result from computers being
used tomonitor stock level.
 Better quality products are used owing to better
production methods. Machinery is often more precise
and consistent thanhuman beings

Disadvantages of capital intensive production

 Unemployment rises as machines and computers replace

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 [Link] leave the staff facing redundancy and affect
morale.
 Capital intensive requires skilled labour which is
expensive toobtain and maintain
 Huge set up costs. Requires more money to buy machines andcomputers
 Workers become unhappy with
changes in the way of production
when new technology is introduced.
 Technology keeps changing and therefore firms need
to keepupdating their methods of production.
 Long delays may occur when there is breakdown in a section
The best resource mix between labour and capital depends on
thefollowing factors:

i. The type of product

Mass produced fast – moving consumer goods are likely to be

producedin huge pants using large amounts of machinery. However, in
many western economies, most production is focused on providing
services that are often labour intensive. For example, provision of
financial services uses large amounts of labour relative to capital.

ii. The relative prices of the two factors

If labour costs are rising, a business may be encouraged to employ

morecapital. In countries like China and India, where labour is relative
cheap, labour – intensive production methods are likely to be preferred.
However, in Western Europe and the US, where labour is
moreexpensive, a great deal of manufacturing is capital
intensive.

The changing relationship between the factors of production

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Topic 6; BUSINESS LOCATION
The location of a business is a place where premises of the business are set up physically.
Factors to Consider When Choosing Location of the Business:
1. Proximity to raw materials- Business that uses large amounts of raw
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 materials that are difficult to transport may choose to locate their premises very
close to their sources. Businesses that are located near raw materials include:
Tea, Coffee and Sugar factories.
2. Proximity to the market or suppliers- Business that make large or heavy
products may be located close to their customers to keep transport costs down.
The manufactures of parts often locate close to their customers where
components are assembled into final products.
3. Cost and Availability of labour- Businesses needing large numbers of
workers have to consider wage costs and labour skills. Wage rates may vary in
different regions and large companies may also consider locating in countries
where labour is very cheap. Also, labour skills are not evenly distributed
throughout a country. If a firm needs a particular type of skilled labour, certain
locations may be more suitable than others.
4. Availability of Cheap source of Energy- If a firm needs electricity in its
production process, then it has to be located near cheap source of electricity.
5. Closeness to source of water- A reliable source of water is very
important in choosing location. Water is required for various business
activities and for worker’s consumption.
6. Transport and Communication- Availability of reliable means of
communication such as telephone services is very important. Businesses are
located where there are reliable means of transport to reduce transportation costs.
7. Nurture of Businesses- Some businesses, such as large supermarkets and
manufacturers, require large areas of land to locate buildings, staff car parks and
other facilities. As a result, they look to minimize land and property costs. For
example, they may set up areas where:
 Premises are cheap
 Business rates are low
 Land has been allocated for business development such as
brownfield sites or green sites.
8. Proximity to competitors- Most service providers will prefer to locate where
competition is minimized. However, some businesses deliberately choose locations
where competitors are closely concentrated. This might be important in industries
where comparison shopping is popular. It might also be possible to catch the excess
demand from existing business.
9. The government may influence by offering grants to encourage firms to
locate in an area. The government may also influence by refusing to grant a
permit to set up in a locality e.g near a hospital.
10. Trade Barriers – Some countries put up trade barriers such as tariffs and
quotas. This is to protect domestic businesses from foreign competition.
11. Political stability- Some countries, such as African states are unpopular with
multinationals because of political instability. Also, some countries are avoided by
multinationals because of their poor human rights record. To locate in these
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 countries could result in consumer boycotts or shareholder disapproval.
12. Language barriers- Language can be an important factor in location
decisions. For example, much of foreign investment over the past 10 years in
China has been by companies owned by Chinese people living outside of
China.
Location of different types of Business activities.
1. Service Businesses- Some service providers locate in specialist shopping areas
such as retail parks, centers or malls. These are usually designed for easy access
and contain very large numbers of outlets. They can attract many thousands of
visitors per day. Businesses need to choose locations where there is less traffic
congestion. It is particularly important for customers since they try to find
alternatives if they cannot park conveniently.
2. Office-based businesses- Many businesses locate their head offices in large and
popular cities. This gives employees, customers and other visitors access to a wide
range of other facilities, such as bars and sports stadiums. Locating in a high-
profile city such as London, Dubai or New York can also improve the image of
the business.
3. Manufacturing and Processing Businesses- Manufacturing that is labour
intensive will need to locate where there is a good supply of skilled and relatively
cheap labour.
Coal-fired power generators are likely to be located very close to coal mines or
access to coal imports keep transport costs. Oil refineries are often located on the
coast for the same reason: oil can be transferred straight from ships to the refinery
plants if they occupy costal locations.
Manufactures that need very large areas of land may choose locations where
land is relatively cheap and there is lots of space on the edge of towns and
cities.
4. Agricultural Business -Some farming activity needs a particular type of land. For
example, dairy farmers where grass can grow effectively so that cows can get
access to a good food source. Growers of vegetables generally need quite fertile
land whereas cereal crops can be grown on slightly less fertile land. Fruit growers
need land that sandy and well drained. Fishing businesses will tend to be located on
the coast.

The Impact of the Internet on Location Decisions:

1. Many people are switching to the internet when shopping rather than going
to stores. There has been huge growth in e-commerce, which has had a massive
impact on business locations.
2. Also businesses do not need to have fixed premises. They could run their
business from anywhere they can get an internet connection. For example, an
online business offering advice on personal investment and financial management
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 could be located anywhere in the world and still serve a global market.
3. As the importance of electronic data continues to grow, businesses will
require greater network speeds and capacity in order to operate effectively.
Many businesses operate in an increasingly global economy, which means that
access continuous communication systems are vital.
Influence of Legal Controls and Trade Blocs on Business Location The government
may use incentives such as:
1. Quick planning permissions
2. Investment grants
3. Tax breaks
4. Employment subsidies
5. Rent-free factory land e.g export processing zone

Reasons why government influence Business location:

1. To avoid congestion where there are already enough or too many industries in
order to reduce strain on existing infrastructure such as schools, roads and
hospitals.
2. To attract foreign business into the country
3. To help create employment and work for domestic supplies.
4. To help protect the environment.
5. To encourage firms to locate where unemployment is high.
[Link] improve the distribution of jobs in the country.
Opportunities and Threats of Changing Environment on Business location.

1. Creation of more home-based business- Many service providers can operate

from home e.g mobile bankers, hairdressers, mobile mechanics and child
cares.
2. The internet availability- Availability of internet has led to many people
switching to the internet buying rather than going to stores e.g. on-line book
stores.
2. Increased legislation- There is growing concern for protection of
environment that has put new constraints on businesses.
3. Changes in factors of production cost-The cost of resources such as
raw materials and labor keep rising. Businesses are located where the cost of
factors of production are cheaper.
4. New Markets- A multinational business may decide to locate a business in a
country where it can sell to new markets.

Reasons why many small retailers are located in town centers:

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 1. Larger footfall increasing possibility of making more sales /profit for survival.
2. Ease of access because of location due to good transport links for
suppliers, workers and customers.
3. Many consumers in the town may prefer to shop at small retailers as they
offer the goods that require personalized services.
4. Town council may have encouraged small shops to stay in business by
offering low rates and taxes that local residents may be able to walk/cycle to the
town Centre while others will have access by bus/road.

Topic 7; EXTERNAL FACTORS AFFECTING

BUSINESS LOCATION
The Nature of External Factors

Sometimes businesses have to deal with events and issues that are completely
beyond their control. These external forces can impact on businesses unexpectedly
and usually mean that the business have to make changes to the way they operate.
The effects of external factors can be both positive and negative.
Examples of External Factors

1. Social
Businesses have to adapt to changes that occur in society. Some examples of changes
that have occurred in recent years include;

 Increased consumer awareness: consumers have higher expectations

than ever before. They have easy access through the internet to lots of
information about products and are more aware of their rights. As a
result, many businesses have become more customer- focused.
 Changing demand patterns: changes in society bring about changes in
demand for products. For example, modern lifestyle mean many people
expect goods to be delivered to their doors. Consequently, there has been a
growth in home delivered goods such as takeaway food and domestic
services.
 Increased numbers of women at work: in many countries, more and
more women have abandoned the traditional children role and have
combined family life with employment and running of businesses. This
has increased the supply of labour and helped to increase the number of
new businesses.
 More part-time workers: in many countries there has been a huge
increase in the number of people taking on part- time work. This has
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 helped to improve flexibility in businesses because part-time labour is
more adaptive.
 Urbanization: in some countries, such as Brazil, India and China, a very
large numbers of people have left rural areas to live in towns and cities.
This has provided businesses with more labour and created additional
markets to which goods and services can be supplied.

2. Technology
The development of new technology continues to have a huge impact on
businesses. New technology results in new products, which in turn provide new
market opportunities. Also, new technology means production becomes more
capital-intensive and costs are reduced.

Examples of use of technology:

 In the primary sector, the use of tractors and grain-drying machines and
automated feeding system have helped to lower costs in agriculture.
Chemical and pesticides have also helped to increase crop yields.
 In the secondary sector, the introduction of robots on production lines has
reduced costs. They are cheaper to employ than people because they can
work 24/7.
 The use of technology in service industries has reduced costs. For
example, use of automatic check in facilities in some hotels has reduced
labor costs in the hotel industry. Internet banking has also helped to
reduce banking costs because customers can manage their accounts
online.
 The use of IT has helped to reduce administration and communication
costs. For example, computer can carry out many routine tasks quickly. A
wide range of different information can be send electronically anywhere in
the world instantly.
 The rate technology changes seems to increase all the time. Businesses
usually welcome technology developments because they often provide
new product opportunities or help improve efficiency.
 Changes in technology can shorten the amount of time products can
be marketed for. This is because new products are quickly developed
to replace ones that use old technology.
 Developments in technology often mean that businesses can replace
labor with capital. This is welcomed because human resources are often
said to be the most difficult to manage. New technology also lower
cost.
 The developments of social media have helped to improve
communications between businesses and customers. This allows
business to remain aware of changing
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 consumer’s needs.

3. Social Media and Business

One of the most revolutionary external factors to affect businesses in recent years is
social media. Social media is the use of web- based platforms, such as Facebook,
Twitter ( X ), YouTube and Instagram, to exchange news, information, ideas,
photographs and other images.

Electronic devices, such as smartphones and tablets, enable people to exchange

this wide range of data instantly and globally. Social media has become a powerful
phenomenon and it is no surprise that businesses are making increasing use of it,
particularly for marketing their products.

4. Environment
Evidence suggests that as economic grow environmental damage increases.
Business are often blamed for pollution and congestion. Some examples of
other environmental issues include;

i. Global warming
Some of the greenhouse gases, such as carbon dioxide, which contribute to global
warming, come from factories. Also, economic development means that car owner
and air travel increases. The emissions from cars and air craft also add to global
warming.

ii. Habitat Destruction

Some business development destroys wildlife habitats and spoils the natural
environment. For example, around one half of the forests that once covered the
planet are now gone.

iii. Resource depletion

In addition to the loss of forests, many other resources are at risk of running out.

 Oil, coal, gas and minerals are non-renewable resources and, therefore,
cannot be replaced. Because of this, as business development gathers pace,
these resources are depleted.
 Fish stocks are failing
 Fertile soil, which is needed to grow food, is being lost. The loss is caused
by deforestation, poor farming practices, over grazing, the increasing size of
urban areas and land pollution.

iv. Sustainable Development

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 Many governments are promoting the idea of sustainable development. This
means that people should satisfy their needs and enjoy better living standards
without doing so in ways that will reduce the quality of life of future
generations.

Businesses may respond to environmental issues in a number of ways . for example, to

help reduce resource depletion business could;

 Design packaging that can be reused or recycled

 Use more energy- efficient equipment or renewable energy sources
 Explore ways of selling waste to other businesses as by-product
 Reduce business travel and use video conferencing for meetings

5. Political
Businesses need to be cautious if they develop interests in politically unstable
countries. Political factors can also influence business in stable, democratic
counties. The activities of pressure groups can also play a role in influencing
business activity. Some examples of political factors may include;

 The issue of national security has become a priority for many countries. If
measures designed to improve national security restricts the movement of
goods, people and capital, this could have a negative impact on businesses.
 Pressure groups which aims to eliminate the harm done by smoking, can
affect business. For example, it might post some information on its website
that further discourages people to smoke. This could clearly affect the
tobacco industry.
 A new government might be elected which is very pro- business. This
might encourage more people to become entrepreneurs. It might also
mean that more foreign investment may be attracted.
REVISION QUESTIONS

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 Topic 8; MEASURING SUCCESS OF A BUSINESS
Owners can measure and judge success of their businesses depending on the
objectives of the business. For example, if a company’s main objective is to
maximize profit, the amount of profit made by a firm can be used to measure its
success.

Ways through Which Success of a Business Can Be Measured

1. Revenue
The amount of revenue generated by a business is a guide to its success. If revenue
increases in each year, most business owners feel they are making a success in
business. Whether this can be regarded as a success, depends on their objectives,
trading conditions over the period of time and revenue received by the rivals in
industry.

2. Market share
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 Market share refers to the percentage of the consumer in the total market that are
enjoying your products.
It is better for a business to have a market share than a smaller one. With this large
market share the business might be able to dominate in the market and perhaps
allow it to charge higher prices. A business that continually increases its market
share will be considered successful because it is winning sales from its rivals.
However, measuring the market share may be challenging since information about
the size of the total market and the revenues of the main suppliers in that market is
needed.

3. Consumer satisfaction
How consumer’s needs and wants are satisfied can be used when measuring
success. If the customer service is good, a successful business will find that it has
loyal customers and a growing customer base.
If customer satisfaction levels rise over a period of time, the company will
consider itself being successful. This is why many businesses are becoming more
customer- focused and make efforts to get feedback from their customers.
4. Profit

Most private sector businesses aim to make a profit. Therefore, rising profits
should signal improving success. However, a number of factors have to be
taken into account.
◻ It is possible to make higher profits if there is no competition in the market.
Therefore, profits made by a monopoly are not as impressive as profits made in a
competitive market.
◻ The amount of profit made by a business will often depend on its size. For
example, large businesses are likely to make more profit than sole
proprietorship.
◻ Profits should be compared with that made by other businesses in the same
industry. This will provide a better measure of success.
◻ Profit can only be used to measure success if the objective of the business is to maximize
profit.

5. Growth (The size of the business)

Most businesses aim to grow, so the size of a business can be used to
measure success. The following are ways of measuring size;
◻ Turnover (Revenue) -the larger the revenue (value of sales) the larger the size of the
business
◻ Number of employees- the more the number of employees the larger the business is.
◻ Market share –a business with larger market share is deemed large. E.g a
business with 43% market share is more successful than one which has 9%
market share in the same industry.
◻ Amount of capital employed – refers to the amount of money invested. The
more the money invested the larger the business.
◻ EU definition of size – they define the size a business according to
turnover, number of employees and capital employed.
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 A growing business is likely to be considered successful particularly if growth is
sustained over a period of time.
6. Owner (shareholder) satisfaction
Most shareholders buy shares with the aim of making money. Overtime, they want
dividends and share prices to rise. They therefore tend to focus on short term
returns.
When dividends are frozen or cut, they might see this as a sign of failure or
weakness. They have the opinion that successful companies increase dividends each
year.
Private limited companies have a different view of success. Such companies are
owned by family or people who are known to each other. They are also likely to
be involved in the running of the business. Success to them might mean survival
in the market, rising salaries or business growth. Small business owners may also
measure success differently for example they may feel that a business is
successful if it continues to provide financial security.
7. Employee satisfaction
The needs of employees in a business are likely to be different from those of
shareholders or other owners.
Employees depend on business for their livelihood. If a business is growing and
profitable, employees are likely to get higher wages, more benefits and perhaps a
bonus. They will also feel more secure in their jobs. Employees also have other
needs they want to be met e.g good working conditions, honest treatment and
safety. If an employer is able to satisfy most of these needs, then in their opinion,
they will be considered successful
Making a business more profitable may not always mean success from an
employee’s perspective. For example, if a business is laying off workers to cut on
cost in order to drive up profits, those workers who are made redundant are not
likely to consider that the business is successful. 5 | Page

Topic 9; REASONS FOR BUSINESS FAILURE

Introduction
Business Failure refers to a company ceasing (stop) operations following its
inability to make a profit or to bring it in enough revenue to cover its expenses.
Some of the causes of business failure includes:
1. Cash flow problems

Cash flow problems cause many businesses to fail because they run out of cash.
Some entrepreneurs focus too much on profit and forget about the importance of
cash. These are some of the reasons why a business may run out of cash:
i. Overtrading

This occurs when a business is attempting to fund a large volume of production

with insufficient cash. This can happen even if the business if profitable. This
problem is that cash runs out while the business is spending money or resources
to meet rising number of orders.
ii. Investing too much on fixed assets

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 When a business first starts trading, funds are limited. Spending large amount
initially on equipment, vehicles and other capital items can quickly use up
resources. it may be better to lease some of these assets to protect cash reserves.
iii. Allowing too much credit

A great deal of business relies on credit. This means that goods are sold and the
customer pays for them at a later date. One of the dangers is that businesses allow
their customer too long for payment.
iv. Over borrowing

Businesses may borrow to finance growth. As more loans are taken out, interest
costs arise. To avoid over borrowing, a business may try to raise more capital
from owners.
v. Seasonal factors

Sometimes trade varies for seasonal reasons. In agriculture, cereal farmers have a large
cash inflow when their harvest is sold.
vi. Unexpected expenditure

Business have to prepare for unseen expenditure. Equipment break down, tax
demands, strikes and bad debts are common example.
vii. External factors
Sometimes events that are outside the control of the business cause cash flow problems.
Examples include changes in consumer taste, changes in legislation.
viii. Poor financial management

Inexperience in managing cash or a poor understating of the way cash flow into
and out of a business may lead to cash flow problems.

2. Lack of finance
Both new and established businesses may fail if they cannot attract funding.
Established businesses may fail to get funding because their track record is poor
and they therefore present too much of a risk for investors. If a business does not
raise enough money before trading begins it will risk failure.
3. Not competitive

Some businesses fail because they are unable to compete effectively in the market.
Some of the reasons why businesses eventually lose out to their rivals include;
i. New entrants in the market

A new rival enters the market and takes away their trade so they are overrun by the
competitors. Competitors may bring out superior products, are able to read market
conditions effectively, charge lower prices because their costs are lower or use
destroyer pricing

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 ii. Ineffective cost control

If a business cannot keep its costs down, it might result into it charging higher
prices. This might lead to loss of trade to low-cost competitors. The high costs
might be as a result of being too small to get raw materials at lower prices, being
wasteful or paying too much for some of its resources.
iii. Ineffective marketing

Businesses may struggle to compete if their marketing is weak. This may be due to:
a) Launching a new product that fails to take off
b) Using inappropriate pricing strategies, which could mean that prices are too
high or too low. If the prices are too high, customers will switch to arrival. If they
are too low, customers might think that the quality of the product is poor.
c) Investing too much on overpriced advertisements that don’t always pay off

iv. Lack of business skills

Some businesses lack competitiveness and fail because their owners are not
sufficiently skilled. Entrepreneurs need skills such are creativity, good with
numbers, motivational and good decision makers. They also need skills in
communication, IT, marketing, financial management etc. lack of these skills may
lead to business failure.
v. Poor leadership

A business might lose its competitive edge in the market because the leader makes a
mistake. This could be the result of poor decision making or a failure to make urgent
changes
State three reasons why business stay small
1. The type of industry the business operates in
2. Market size
3. Owner objectives

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 Topic 10; COMMUNICATION
Communication is the sending and receiving of information.

ELEMENTS OF COMMUNICATION
Communication involves four elements namely sender, information, receiver and feedback.

sender

feedback information

receiver

The process of effective

communication Effective communication involves

four elements:

 Sender or transmitter of the message- this is the person who wishes to pass the
information to others.
 Medium of communication or the method for sending the message –
a letter is an example of written communication and a meeting is a
method of verbal communication.
 Receiver- the person to whom the message should be sent
 Feedback- the reply from the receiver which shows whether the
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 message has arrived, been understood and, if necessary, acted upon.
Channels of communication

These are the routes through which the information flow. It includes vertical
(downward or upward), horizontal and diagonal communication.

1. Downward communication
It’s the passing of messages from the top of the organization to those
at the bottom For example, managers giving instructions or
information to subordinates.
Note: subordinates are people who work under the control of a more senior worker

Downward communication is important because:

 Subordinates look to their managers for leadership and guidance.

 It allows the decisions made by management to be carried out by employees.
 It allows managers to command, control and organize the business.

Disadvantages
 Does not allow feedback
 The message might be altered after passing different levels.

2. Upward communication
Means passing messages from the bottom of an organization to
those at the top For example, workers giving feedback to
managers, or making requests.

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 Importance of upward communication

i. Helps managers to understand the views and needs of the subordinates

ii. Make managers aware of a problem
iii. Helps staff to feel that they are valued.
iv. Results in higher morale for staff and new ideas are contributed to the business.
v. Provides managers with information to help make decisions.

3. Horizontal communication
Means exchange of information between parties on the same level in an
organization hierarchy. For example between departments.

Importance of horizontal communication

i. Allows people at the same level of management to communicate with each other.
ii. Information and ideas can be exchanged both formally and informally

Disadvantage of horizontal communication

i. Can cause conflict between departments e.g. production department
asks the finance department for a budget to hire staff but is rejected.

INTERNAL AND EXTERNAL COMMUNICATION

Internal communication is the type of communication that takes place
inside a business between employees for example

 A manager giving a warning to a subordinate for repeated lateness

 A board meeting where directors are discussing a possible merger

External communication is the type of communication that takes place

between the business and those outside such as customers, investors or
the authorities. For example, a letter enquiry sent to a supplier.
FORMAL AND INFORMAL COMMUNICATION
Formal communication is the when people use recognized channels when communicating.
Informal communication is when people use non- approved channels such as ‘on the
grapevine’ which means people passing unofficial information through gossips and
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 rumours.
Grapevine can be used by management to find out what people feel. This helps them
in making decisions. However, information from grapevine can be misleading and
confusing.

THE EFFECTS OF POOR COMMUNICATION TO A BUSINESS

 Mistakes occur- poor communication can lead to

mistakes occurring in a business e.g. production of
defective goods which cannot be sold.

 Decision making is slowed down- if information takes too

long to reach the destination or recipient, there may be a
delay in decision making. This could result in the business
missing out on an important opportunity.

 Poor motivation for workers- poor communication can frustrate

employees and could result in a higher absenteeism and staff
turn-over.

 Increase in costs of doing business- poor communication can

lead to wastage of resources e.g if completion of a project is
delayed due to a breakdown in communication, financial
penalties might be incurred.

 Bad reputation- poor communication with outsiders such as

customers and suppliers could damage the image of the
business

Summary of problems of Ineffective Communication in Business

 Ineffective communication can result in expensive problems. For

example, higher staff turnover, staff absences, poor customer service,
and more work-related injuries, difficulties making changes, higher
legal costs and lower profits.

 suppliers. In the case of customers, poor communication can result in

misunderstandings, misinformation and poor-quality customer service.

 If communication problem cannot be solved, customers may find

alternative shops or suppliers which will result in lost revenues and
lower profits. If communication break down with suppliers’ production
may be halted because crucial supplies have failed to arrive.
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 BENEFITS OF EFFECTIVE COMMUNICATION TO A BUSINESS
1. Helps to manage staff- by giving them clear instructions and
performance targets to achieve so that business can be successful
carry out its activities.
2. Keep staff informed of changes- this helps them to perform their duties more
effectively.
3. Helps to get information from employees and customers
especially on ways to improve their products and service.
4. Makes it easy to instantly communicate with suppliers, customers,
banks and other service providers- who are the essential people when
carrying out their business activities.

BARRIERS TO EFFECTIVE COMMUNICATION

Barriers to communication are things that get in the way of good communication.
Communication is effective if the message is understood by the receiver the way it
was intended.
Examples of barriers are:

1. Lack of clarity (unclear message)- if a message is not clear it may

be misinterpreted or ignored due to poor communication. Unclear
communication may be the result of poorly written or poorly
expressed message. For example, instructions may be given to an
employee that do not contain enough detail.

2. Technological breakdown- a lot business communication is done

electronically. If technology is faulty, communication may become
unclear or break down. E.g mobile telephone conversation often be
unclear because of a weak signal. Also emails cannot be sent if
broadband connection are lost.

3. Poor communication skills- if the sender has poor

communication skills, the message will not be clear. E.g poor
spelling or weak grammar in written message will affect
communication.

4. Use of jargon- jargon should not be used when communicating with

people outside the group that uses certain terminologies. Customers
often get frustrated when employees use jargons.

5. Long chain of command- if the chain of command is long,

messages take longer to pass through the chain and may become
distorted on the way.
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 6. Using wrong medium- if the sender uses an inappropriate medium an
important message may be missed. A business must use the most
appropriate method. Examples of appropriate use of communication
media are :
ii. Confidential information- such as people’s details should be
communicated securely using a letter.
iii. Sensitive information- such as a staff disciplinary matter, should be
communicated face- to face.
iv. Some communication – such as a job offer, must be supported by a
document such as a letter
v. If immediate feedback is required- verbal communicated using forms.

vi. Complex and detailed information- is best communicated using forms.

7. Different countries, language and culture- if the language and

culture of the sender differs from the receiver’s the communication
may be more challenging. In multinational companies’ people may
be working in different countries where languages and culture
vary.
OVERCOMING BARRIERS TO EFFECTIVE COMMUNICATION
The barriers to communication can be overcome through the following ways:
a. Recruitment of staff with good communication skills. If an applicant
is not unable to communicate effectively during an interview, they
should not be hired.
b. Training of staff on how to communicate effectively. Staff can be
trained to improve verbal and written communication skills when
dealing with customers on the phone.
c. Shortening the chain of command- a business should have a shorter chain
of command to improve communication. A shorter chain of command means
that information van pass through an organization more quickly. Flatter
organizations might also lead to more upward communication, which means
that managers might have a better understanding of employee ideas and
morale.
d. Technological improvement- having an improved technology may improve
the communication process in a business. Faulty equipment such as old
telephone sets should be replaced. Staff should be trained on how to use the
new IT systems to improve communication

e. Organizing social events- internal communication can be improved if social

events such as games, parties are organized. For staff. These provide
opportunities for workers from different departments to come together to
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 know each other, might help staff to bond and develop working
relationships thus help to improve communications.
f. Culture change- if a business has a culture of poor communication, it will
be important to make changes. A business might need to introduce some
formal communication systems. It might need to remove physical barriers,
such as partitions between work stations, provide larger and more open
work spaces and perhaps introduce an “open door” policy, through which
staff are encouraged to communicate with the seniors. A business must also
avoid withholding important information and encourage upward
communication. Generally, a business will need to work towards a climate
of openness and trust.
g. Sending clear message- clear and precise language should be used to pass information.
COMMUNICATION METHODS
These are ways through which information is passed on from the sender to the
receiver e.g face- to face, written, electronic etc.
1. Face- to face communication
This takes place when information is exchanged by people who can see each
other e.g an interview where a candidate is being interviewed for a job.
Advantages

 Allows immediate feedback

 Positive body language can be used to reinforce the message
 Allows new ideas to be generated during conversation
 Saves time

Disadvantages

 Negative body language may create a barrier

 Does not allow a record of the message to be kept for future reference
 Non- relevant information may be included
 In a large meeting, some people may not listen

2. Written communication
This is when a written information is passed on the receiver by the
sender. Examples of written communication include:
a) Letters- letters are common way to send written information because
they are flexible, confidential and easily understood.
b) Reports- used to communicate important information a formal
manner and detailed about a particular issue.
c) Memorandums (short written notes)- used to communicate
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 information internally in a summary, for example reminding people of a
meeting.
d) Forms- used to collect information for applicants- e.g new students joining a new
school.
e) Notice boards- are cheap to use and can pass information to a large
number of people at one.
Advantages of written communication
1. Allows record of the message to be kept as evidence for future reference.
2. can be used for certain messages involving complicated details
which might be misunderstood.
3. Written message can be copied and sent to many people at once
4. Negative body language cannot interfere
with the message Disadvantages of written
communication
1. Direct feedback is not always possible
2. It is not easy to check that the message has been received and acted
upon as with verbal communication
3. The language used can be difficult for some receivers to understand.
4. There is no opportunity for body language to be used to reinforce the message.

3. Electronic Communication
Involves uses of electronic systems to send information
instantly Examples
a. Email- it allows businesses and individuals to communicate by
sending text, audio, images or combination instantly via computers.
Disadvantage is that it can be ignored

b. Internet- information is sent through a website. It can be used in

internal and external communication to
 Market products by displaying them on shopping sites
 Advertise jobs to people inside and outside
 Obtain information about other companies and products for market research
 Deal with customer queries (issues) online
 Provide general information about the history and nature of the business

c. Mobile phones- They are valuable method of communication for

business. They can be used to send text messages. Valuable when
employees work .Mobile phones are cheap to use as a method of
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 communication over long distances and for sending short memos and
images.
d. Intranet- This is where computers in an organisation are linked
together to allow communication. This enables users to access
common information. Changes made to information can be updated
instantly and be available to all.
e. Videoconferencing and teleconferencing- it allows people in
different places to have face-to-face meetings by using a system
of cameras, computers and telephones. Teleconferencing is similar
but participants in the conference calls are all linked by telephone
f. Public address (PA)systems: messages are broadcast over the
loudspeaker system for everyone to hear.
g. Electronic notice boards- perform similar function to PA systems
except that are written messages, video and sound are used.
Examples electronic notice boards are found in banks, arrival and
departure areas in airport.
h. Social media- businesses rely heavily on the use of social media
platforms such as Facebook and twitter to communicate internally and
also with customers. For example they can gather information from
customers all over the world to find out what they think of a new product.
This information is up-to-date and can be sent instantly. Social media
might also be used internally so that employees can communicate
information.
Advantages of electronic communication
 It is easier to use as a form of communication.
 Quick way to communicate to many people at once.
 Save time when communicating
 Relatively cheap form of communication
 Availability of evidence for future references e.g. email conversations
 Communication can be combined to reinforce the message example use
of images, text and sound.
Disadvantages of electronic (online) communication
 In some areas it is not possible to get a broadband connection network
 Connections can be lost during communication
 It is expensive to set up and maintain communication devices such as computers

 Computer viruses can result in loss of files

 Computer hackers may get hold of sensitive and confidential information
 Email inboxes may get “clogged up" (filled) with electronic junk mail called spam.
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 Suitability of the methods of communication
1. Face to face communication
Most suitable where it is essential that information is communicated quickly. it is a
very cheap of means of communicating and can encourage almost immediate
feedback on issues and ideas, leading to faster decision making and therefore
faster commercial activity overall.
Example
A. A meeting between a customer and a supplier to discuss the design and
specification of a one-off piece of machinery design to order

2. Written
communication
Most suitable
when:
a. it is essential to have a written record of information that has
been discussed or that is being communicated so that it can be
referred to at a later date. For instance, a written agreement or
contract for services that are to be provided by one company to
another.
b. when there is a lot of information to consider it's almost
impossible to expect people to remember everything again a
written record is more important.

3. Electronic forms of communication

Most suited choice of communication when there is
a. need for a high-speed
b. sending information over long distance since it is cheap

Factors affecting choice of communication methods

a. Nature of communication
For example, an instruction from a manager to an employee may be given
verbally. A customers requesting details about company’s product may be
sent a letter of introduction and a catalogue of products.
b. The number of people that need to be communicated to
For example, a request from a manager to a member of staff to do
something maybe agreed during a meeting or requested by email. A
new catalogue and price list for products offered may be sent to
customers on a database by post or email with an attachment to save
money.
c. Speed of delivery
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 In an emergency such as the breakdown of equipment or injury of a
member of staff, the communication has to be instant. In this case indirect
contact by phone with the desired person will be the best method. A
request for information that is needed in two weeks can be sent by mail
memo or later.
d. Costs incurred using the method of communication
Some communication methods such as sending letters and catalogue in
the post to customers can be very expensive. If a business needs to cut
costs it may consider cheap alternatives such as sending catalogue to
customers via email.
e. Length of the message or details of information to be passed on
Some information that needs to be communicated may contain a lot of
detail, data or technical instructions. In this case a written form of
communication like a letter or report is required so that it can be referred
to again as necessary.
f. Whether a record is needed
Very formal agreements may be required to be recorded in a written
contract which is signed by both parties to say they agree with the
contents.

Importance of communication in the global economy

Trade between world economies has grown tremendously in the last 50 years
because of many improved systems of communications such as use of internet.
These new systems mean that there is no need for traders to meet in a market
place anymore so the nature of trade in the global economy is very different
from how it used to be 50 years ago.
Developments such as the internet and mobile telecoms which allows organizations
to instantly communicate with each other from nearly anywhere in the world has
led to increase in global trade. Communication needs to be rapid accurate and
suitable for the global transmission.

CHAPTER REVIEW QUESTIONS

1. Which of the following is an example of external communication
A. Sending a customer information about a special offer
B. A department staff meeting
C. A training session for a new recruit
D. A presentation by the chairman to the senior management team

2. Which of the following is a disadvantage of face-to-face communication

A. You take too much time
B. It fails to encourage corporation
C. Negative body language may create a barrier
D. Only a minority of staff are able to use this method

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 3. Which of the following is an example of upward communication
A. The board of directors addressing the shareholders
B. The board of directors addressing all employees
C. Are supervisor a singing operative if they can work overtime
D. Are purchasing officer teaching new recruit how to complete a requisition form

4. Which of the following is most likely to require written communication

A. Informing staff of end of month party
B. Inviting a job applicant for an interview
C. A job interview
D. Asking a colleague for a very urgent needed piece of information
5. Which of the following is the most appropriate method of
communication for requesting delivery of components
A. A business report
B. A telephone call
C. Email
D. Letter

6. Which of the following communications needs to be supported with a document

A. An online job advert
B. Are request to an employee to stay an extra 10 minutes to complete an order
C. A job offers
D. A presentation to potential customers

7. A business with a flat organization structure will experience

A. A slower communication through the chain of command
B. Quicker communication through the chain of command
C. The development of poor communication skills among senior management
D. Difficulties in training staff in communication skills

8. What is meant by vertical communication? give an example

9. Why is upward communication helpful to businesses?

10. What is meant by grapevine communication?

11. Describe what is meant by a barrier to communication. Discuss how a

business might improve the communication skills of its staff

12. Analyse why communication is important to a business

13. Assess the benefits to a business of using social media as a means of communication

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 Topic 11; ECONOMIES OF SCALE
• Economies of scale are the factors that lead to the reduction
in the average costs as a business increase in size.

• Big firms can usually produce goods cheaper than smaller

firms. As a firm increases in its size, average costs start to fall. In the
figure below, when the firm is producing 20,000 units of output, the
average cost is $ 25. If it raises output to
40.000 units, average costs fall to $ 15. The firm can produce its 70.000
units at its lowest average costs of $ 10 per unit. If the firm goes beyond
70,000 units, average costs will start to rise. For example, if the firm
increases its size and produces 90,000 units, average costs will now rise
to $ 12.50 per unit. This is due to diseconomies of scale which arise
because of inefficiency.

INTERNAL ECONOMIES OF SCALE

Internal economies of scale are the cost benefits that an individual
firm can enjoy when it grows.
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 There are various types of internal economies of scale:
 Purchasing economies

When a business buys a large number of resources, for example, raw

materials or spare parts, they are able to gain discount for bulk buying.
Bulk buying is a purchasing economy. This reduces the unit cost of
each item bought and gives the firm an advantage over smaller firms
which but in smaller quantities.
 Marketing economies

There are a number of advantages for a firm when marketing its

products. For example, it may be cost effective for a large firm to run
its own delivery vehicles than depend on other firms. His would be
cheaper than paying another distributer. Marketing economies can
occur because some marketing costs, such as producing a television
advert, are fixed. These costs can spread over more units of output for a
larger firm. Therefore, the average cost of the advert is smaller for a
larger firm.
 Financial economies

Larger firms are often able to raise capital more cheaply than smaller
ones. Banks consider lending to larger organizations is less risky than
lending to small ones. A lower rate of interest, is therefore often
charged. They also have a wider variety of sources to choose from. For
example, a larger limited company can raise money by selling shares.
This option is not available to a sole trader.
 Technical economies

Technical economies arise because larger firms are usually more

efficient than smaller ones. Larger manufacturing firms often use flow
production methods. There can be more specialization and more
investment in machinery. Specialist machines are used to produce
items in a continuous flow with workers responsible for just one stage
of production.
Smaller businesses cannot usually afford this expensive equipment. It
could also be that they sell their products in smaller quantities and flow
of production could not
be justified. The use of flow production and the latest equipment
will reduce the average cost of the larger manufacturing business.
For example, a big frim will make a better use of on essential resource
than a smaller frim such as a CAD (Computer Aided Design)
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 software.
 Managerial economies

As a firm grows, they can manage to pay for specialist managers such as
marketing managers and qualified accountants. This increases
efficiency and average costs fall. Small firms cannot usually afford to
pay for specialist managers.
 Risk bearing economies

Larger firms are more likely to have wider product ranges and sell
into a wider variety of markets. This reduces the risk in business.
For example, many supermarkets have extended their product
ranges to include household goods, consumer durables, books and
furniture.

EXTERNAL ECONOMIES OF SCALE

These are advantages enjoyed by all firms in an industry as the

whole industry grows leading to fall in average costs.
External economies of scale are more likely to arise if an industry is
concentrated in particular region. Examples include:
 Skilled labour

if an industry is concentrated in an area, there may be a buildup of

labour with skills and work experience required by that industry. This
reduces training costs for the new workers. Institutions are also more
likely to provide vocational courses required by the local industry.
 Infrastructure

If a particular industry dominates a region a region, the roads,

railways, ports and other facilities will be constructed to suit that
industry needs. For example, a specialized industrial estate may be
developed to help a local IT industry.
 Ancillary and commercial services

An established industry in the region will encourage suppliers, such as

specialist marketing and banking, in that industry to set up close by. For
example, all firms in the industry will benefit from their services, like
the car industry in the Midlands, England.
 Co-operation
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 When firms in the same industry are located close to each other, they
are likely to co-operate with each other so that they can all gain. For
example, they might join to share the cost and benefit of research and
development center, as high-tech businesses do in the Silicon Valley,
California, USA.

DISECONOMIES OF SCALE
These are the factors that lead to an increase in average costs as a
business grows beyond a certain size.
The figure above shows that if a firm continues to expand average
costs eventually rise. For example, the firm increases its size and
produces 90.000 units, average costs will now rise to $ 12.50 per unit.
Examples of diseconomies of scale include:
 Bureaucracy

If a business becomes too bureaucratic, it means too many resources are

used in administration. Too much time can be spent filling forms or
writing reports. If resources are wasted in administration, average costs
will start to rise.
 Poor communication

The larger the organization, the more difficult it becomes to send and
receive accurate messages. Communication can also become difficult
due to language and cultural differences. If there is slow inaccurate
communication, then serious mistakes can occur that lead to lower
efficiency and higher average costs.
 Low morale or poor labour relations
If a firm becomes too big, relations between workers and managers
may deteriorate. Management may fail to understand workers and
they may become demotivated. As a result, conflicts may occur and
resources may be wasted resolving them. In a small firm, it is
possible to establish relationships between workers and top
managers.

 Poor control and co-ordination

A very large business may be difficult to control and co-ordinate. There

may be a need for more supervision which will raise costs.
 Slow decision making
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 It often takes longer for decisions made by top managers to reach all
groups of workers in a larger firm. This could mean that it will take a
long time for workers to respond and act upon manager’s decisions.
The top managers may have no contact at all with the customers and
they could become too detached from the products and markets the
firms operate in.

Other limits to Growth

Diseconomies of scale are likely to discourage businesses from
growing too big. However, there are a number of other barriers that
might prevent a business from growing in size. These include:
I. Lack of finance

Some businesses would like to grow but are unable to raise the finances
needed to expand. Growth usually require investment in new resources
such as property extensions, new machinery, equipment and more labour.
Many small businesses that want to grow are still seen as too risky by
lenders.
II. Nature of the market

Some markets are too small to sustain very large companies. For
example, the market for luxury yachts is limited. Only a relative
number of very wealthy people
can afford to buy a luxury yacht. Therefore, businesses in this market will
struggle to grow into very large firms.
III. Lack of managerial skills

Some businesses may be prevented from growing because the owners

do not have the managerial skills required to run a large business
operation. For example, the skills needed to run a grocery store are not
exactly the same as those needed to run a large chain of grocery stores.
To run a very large business, owners need good leadership skills and
highly effective communication skills.
IV. Lack of motivation to grow

Some business owners do not want to grow their businesses. They

may be happy running a small business.
They may be making enough profit to satisfy their needs and do not want
the responsibility of taking on more workers, expanding operations and
borrowing more money.
Conclusion
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 To conclude, as businesses grow. At some point, disadvantages of being
big are eventually greater than the benefits. These costs may include:
 Loss of control
 Communication problems
 The need for more supervision and extra layers of communication
 The increasing amounts of delegation
 The geographical spread of resources
 The near impossibility of establishing a common business culture
 Employing a single unified IT system.

CHAPTER REVIEW QUESTIONS

1. Employing a specialist cost accountant in a growing business is an example

of which type of economy?
A. Technical economy C. Managerial economy
B. Risk-bearing economy D. Marketing economy

2. What impact will internal economies of scale have on cost?

A. Total cost fall C. Variable costs rise
B. Average costs rise D. Average costs fall

3. Which of the following is an example of an external economy of scale?

A. Increased cooperation and information sharing between businesses
B. Rising costs of inputs
C. Lower costs due to bulk buying
D. Better efficiency from specialization

4. Which of the following is a possible limit to business growth?

A. Fall in the exchange rate C. Marketing constraints
B. Government restrictions D. Lack of finance

5. How does economies of scale affect cost?

A. Falling total cost C. Rising variable cost
B. Rising average cost D. Falling average cost

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 6. Which of the following will fall due to economies of scale?
A. Variable costs C. Total costs
B. Fixed costs D. Average costs

7. Which of the following is not an internal economy?

A. Marketing economy C. Technical economies
B. Co-operation D. Financial economies

8. Bulk buying is an example of which of the following?

A. Marketing economy C. Risk-bearing economy
B. Technical economy D. Purchasing economy

9. Many supermarkets have extended product ranges to include household

goods, books, and furniture. This is an example of:
A. Marketing economy C. Risk-bearing economy
B. Financial economy D. Purchasing economy

10. Which of the following is not an example of external economy?

A. Ancillary and commercial services C. Infrastructure
B. Bureaucracy D. Availability of skilled labour

11. What is meant by the term “scale” in business?

12. Why is employing a specialist marketing manager an economy of scale?

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YEAR 10 BUSINESS NOTES

Topic 12; MOTIVATION

Motivation is the willingness and desire to work and to achieve certain goals.

Motivation are also factors that influence the behavior of

employees towards achieving set business goals.

SOURCES OF MOTIVATION

i. it comes from enjoyment of work

ii. It comes from desire to achieve specific goals example
earn additional money or attain promotion
iii. It also comes from the sense of satisfaction gained from
completing something or achieving a successful outcome
after a difficult project or problem is solved

WHY DOES MOTIVATION MATTER IN A BUSINESS/IMPORTANCE

OF MOTIVATION TO A BUSINESS

It matters because worker’s behavior is determined by what motivates them.

ability (skills and experience) +motivation =high

productivity. BENEFITS OF A WELL MOTIVATED

WORKFORCE.

i. Better productivity
Well motivated employees are likely to work hard and ensure they
complete tasks quickly. As a result, the amount produced by each
employee increases. This can lead to lower unit costs and therefore
enable a firm to sell its products at a lower price.
ii. Reduces absenteeism

Well motivated workers feel that their jobs are important and are not likely to

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 take off using excuses such as minor illnesses
iii. Lower staff turn over
Motivated employees are less likely to leave their jobs to work for a
competitor. This is beneficial for a business because the cost of
recruiting and training new workers will be low.
❖ Staff turnover refers to the rate at which workers are leaving an organization.

Staff turnover = [Link] employees leaving an

organization
Total staff employed

iv. Increases innovation

Well motivated workers /employees are more likely to create new

products, new production processes and new systems that will help
an organization to be competitive. This is because the motivated
employees are more committed to work.

v. Improves cooperation

Well motivated workers are likely to work as a team in order to achieve

common goals that will help to improve the well-being of the
organization.

Summary of benefits of motivation

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 THEORIES OF MOTIVATION

There are a number of theories that have been developed to try and explain
what actually motivates workers

1. Maslow’s hierarchy of needs

2. Herzberg theory
3. Fredrick Taylor

MASLOWS HIERACHY

It was developed by Abraham Maslow who recognized that there

were different needs that motivates workers

This needs were arranged in a hierarchy that is usually presented in a

pyramid as shown below.

1. Physiological needs

These are basic needs and they include food, clothing and shelter.

Individuals work in order to earn a salary that will help them obtain

these survival needs.

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 2. Safety and security needs

People need protection from any harm or danger and physical and
psychological threats.

They include safe working environment, job security etc

3. Love and belonging

Employees need affection, attention and to be cared for. They
also want to belong to a recognized group in an organization.
4. Esteem needs
Employees need to be recognized and respected and their
achievements praised.

5. Self-actualization
This means that people need to reach their full potential and
feel some fulfillment in what they do.
Work satisfies people’s needs in the following ways

For ones needs to be satisfied, Maslow said that

 Once one set of needs has been satisfied, they are no longer a
motivator. Workers can only be motivated by achieving the next set
of needs in the hierarchy.
 If lower needs are met, workers cannot be motivated if a business tries
to meet higher needs. For example, if pay was adequate, workers
would not be motivated if a business wasn’t giving workers the
chance to be creative.

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  If a business fails to meet a particular need, workers are not likely to be
motivated.
For example, if a worker is overlooked (failing to be noticed) for
promotion, that worker may start to slack or look for another job.

HERZBERG TWO FACTOR THEORY.

Fredrick Herzberg discovered that certain factors at work help to give
employees job satisfaction. He called this motivator.

Those factors that leave workers dissatisfied are called hygiene factors

They are as shown in the table below

Herzberg said businesses must find ways of giving workers job

satisfaction to motivate them. For example, they would have to ensure
that jobs are interesting and that workers achievements are recognized.
Workers must also be given the chance to excel and win promotion.
As a result, job enrichment could be used to motivate workers. However,
Herzberg also said that hygiene factors would not motivate workers. But
if hygiene factors such as pay, working conditions and the quality of
supervision was inadequate, workers would not be motivated.

F. W. TAYLOR:
Taylor based his ideas on the assumption that workers were motivated by
personal gains, mainly money and that increasing pay would increase
productivity (amount of output produced). Therefore, he proposed the
piece-rate system, whereby workers get paid for the number of output they
produce. So in order, to gain more money, workers would produce more.
He also suggested a scientific management in production organization, to
break down labour (essentially division of labour) to maximize output.
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 However, this theory is not entirely true. There are various other
motivators in the modern workplace, some even more important than
money. The piece rate system is not very practical in situations where
output cannot be measured (service industries) and also will lead to
(high) output that doesn’t guarantee high quality.

MOTIVATING FACTORS
They are divided into two;
 Financial factors
 Non-financial factors
FINANCIAL REWARDS
1) Wages: often paid weekly. They can be calculated in two ways:
Time-Rate: pay based on the number of hours worked. Although
output may increase, it doesn’t mean that workers will work sincerely
and use the time to produce more- they may simply waste time on
very few output since their pay is based only on how long they work.
The productive and unproductive worker will get paid the same
amount, irrespective of their output.
Piece-Rate: pay based on the number of output produced.
An example is an employee packaging grapes in a
vineyard being paid 50 cents per kilo.

Disadvantages
 This doesn’t ensure that quality output is produced. Thus, efficient
workers may feel demotivated as they’re getting the same pay as
inefficient workers, despite their efficiency.
 Piece rates cannot be used if work cannot be measured. For example, if
it is difficult to measure the output of a hotel receptionist, driver etc
 Workers might use dangerous practices trying to work too fast. For
example, machinists may remove protective guards to speed up
production and therefore risk injury.

2) Salary: paid monthly or annually.

3) Commission: paid to salesperson, based on a percentage of sales
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 they’ve made. The higher the sales, the more the pay. Although this
will encourage salespersons to sell more products and increase
profits, it can be very stressful for them because no sales made
means no pay at all.
4) Bonus: additional amount paid to workers for good work.
For example, machinists maybe paid a bonus if they reach a
weekly production target. They can also be paid to a group of
workers. For example, a sales team may get a bonus if the
whole team meets a sales target.
5) Performance-related pay: paid based on performance. An appraisal
(assessing the effectiveness of an employee by senior management
through interviews, observations, comments from colleagues etc.) is
used to measure this performance and a pay is given based on this.
6) Profit-sharing: a scheme whereby a proportion of the company’s
profits is distributed to workers. Workers will be motivated to work
better so that a higher profit is made. Share ownership: shares in the
firm are given to employees so that they can become part owners of
the company. This will increase employees’ loyalty to the company,
as they feel a sense of belonging.
Advantages of profit sharing
 It helps to motivate workers. This is because if they
produce more, the business is likely to make more profits.
This means the share of the profits will be more.
 It might help to unite workers and Shareholders-They will
have the same goal because both shareholders will benefit
from higher profits.
 All employees will be involved whether they are
production workers or administrative workers,
 It can be used to show workers that they are appreciated,

7) Share ownership: shares in the firm are given to employees so that

they can become part owners of the company. This will increase
employees’ loyalty to the company, as they feel a sense of
belonging. It means that they are entitled to a share in the profits
known as dividends.
NON FINANCIAL REWARDS.
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 • Fringe benefits are non-financial rewards given to employees

Businesses use non-financial rewards for number of reasons

 some workers are not motivated by money
 some workers attach more importance to non-financial rewards
 financial incentive schemes are not always appropriate for many workers
 since more and more people work in teams, individual financial
rewards are less appropriate.

Examples of non-financial benefits include

• Children’s education fees paid for
• Free holidays/trips

OTHER NON FINANCIAL BENEFITS

• Job Satisfaction: the enjoyment derived from the feeling that

you’ve done a good job. Employees have different ideas about what
motivates them- it could be pay, promotional opportunities, team
involvement, relationship with superiors,
level of responsibility, chances for training, the working hours, status
of the job etc. Responsibility, recognition and satisfaction are in
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 particular very important. So, how can companies ensure that they’re
workers are satisfied with the job, other than the motivators
mentioned above?

• Job Rotation: involves workers swapping around jobs and doing

each specific task for only a limited time and then changing round
again. This increases the variety in the work itself and will also make
it easier for managers to move around workers to do other jobs if
somebody is ill or absent. The tasks themselves are not made more
interesting, but the switching of tasks may avoid boredom among
workers. This is very common in factories with a huge production
line where workers will move from retrieving products from the
machine to labelling the products to packing the products to putting
the products into huge cartons.
• Job Enlargement: where extra tasks of similar level of work
are added to a worker’s job description. These extra tasks will not
add greater responsibility or work for the employee, but make
work more interesting. E.g.: a worker hired to stock shelves will
now, as a result of job enlargement, arrange stock on shelves, label
stock, fetch stock etc.
• Job Enrichment: involves adding tasks that require more
skill and responsibility to a job. This gives employees a sense
of trust from senior management and motivate them to carry out
the extra tasks effectively. Some additional training may also be
given to the employee to do so.
E.g.: a receptionist employed to welcome customers will now, as a result
of job enrichment, deal with telephone enquiries, word-process letters etc.
• Team-working: a group of workers is given responsibility for a
particular process, product or development. They can decide as a
team how to organize and carry out the tasks. The
workers take part in decision making and take responsibility for the
process. It gives them more control over their work and thus a
sense of commitment, increasing job satisfaction. Working as a
group will also add to morale, fulfill social needs and lead to job
satisfaction.
• Opportunities for training: providing training will make workers
feel that their work is being valued. Training also provides them
opportunities for personal growth and development, thereby
attaining job satisfaction
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 • Opportunities of promotion: providing opportunities for
promotion will get workers to work more efficiently and fill them
with a sense of self-actualization and job satisfaction.

Topic 13; CASH FLOW FORECASTING

Meaning of cash flow
 Is the money that moves into and out of the business?
 Cash is the most liquid of all business assets. They are the notes
and coins that a business keeps on the premises and any money it
has in the bank.
 Without cash, a business cannot trade. If a business does not have
enough cash to pay its immediate bills, it cannot trade
Importance of cash
 To pay suppliers for the materials and components that have
been purchased. Failure to pay suppliers on time may mean
they will refuse to trade in the future.
 To pay for overheads, such as rent, electricity, insurance and
telephone charges. If the bills are not paid there is a risk that
such services will be cut.
 To pay for wages and salaries every week or month. If a
business cannot pay its employees, it would not be very long
before they walked out.
 To prevent business failure. If a business runs out of cash, it
may become insolvent. This means that the business cannot
pay its debts. This would usually result to business closing
down.
 Unless a business can raise cash immediately to pay the most
pressing debt, the business will collapse.
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  A business will have a better control over its cash flow if it:
 Keeps up to date records of financial transactions.
 Always plans ahead by producing accurate cash flow forecasts.
 Operates an efficient credit control system which
prevents slow or late payment.

Difference between cash and profit

 At the end of trading period, the value of profit will not be the
same as the cash balance.
 This is because of the following reasons;
a) Some goods are sold on credit (trade payables) so at the end of the
period, some customers will still owe money. Therefore, profit is
greater than cash. Similarly, a business may receive cash at the
beginning of a trading period from credit sells made in the
previous period. This increases the cash balance, but not affect
profit.
b) At times, owners might put more cash into business. This will
increase the cash balance but have no effect on the profits made.
c) Purchase of fixed assets such as machinery will reduce cash
balance, but have no effect on the profits. This is because
purchase of assets is not included for the purposes of calculating
profits
d) The amount of cash at the end of the period will be different
from profits because at the beginning of the year the cash
balance is unlikely to be zero.

Cash inflow and outflows

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 Cash inflow

 This is the money entering the business. (flow of money into the business)
 Cash flows into the business when income is received.
 Examples of cash flows
include
 Sales of products for cash
 Fresh capital from the owner
 Loans
 Revenue
 Interest
 Sale of assets
 Payment made by debtors
Cash out flows
 This is the money moving out of a business when payments
are made. This includes
 Paying wages and salaries in cash
 Purchasing goods or materials for cash
 Paying for utilities, rent and tax
 Purchasing fixed assets

Forecast cash inflow and outflow for Salah Motors Illustration

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 Net cash flow
 This is the difference between the cash inflows and cash outflows.
 A business will hope that for most of the time the net cash flow is
positive. This means that cash flows in than flows out. However,
there will be times when the net cash flow is negative. This means
that a business may have to borrow some money.
Cash flow forecasts
 A cash flow forecast is a financial document that shows the
expected cash inflows and cash out flows over a future
period.
 It also shows the closing balance at the end of each month.
 All the figures are estimated because they are in the future. The
forecast shows the planned cash flow of the business month by
month.

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 Importance of cash flow forecasts
a) Helps identify cash shortages
A forecast will help to identify in advance when a business might
need to borrow cash. the forecast clearly shows how much cash is left
at the end of each month. This helps to identify when, or if, a bank
overdraft will be needed.
b) Supporting applications for funding
When trying to raise finance, lenders often insist that businesses
support their application with a cash flow forecast. This will help to
show the future outlook for the business.
c) Help when planning the business.
Careful planning in business is important. It helps to clarify aims and
improve performance. Producing a cash flow forecast is a key part of the
planning process.

d) Monitoring cash flow

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 A business should compare the predicted figures in the cash flow
forecast with those that actually occur. By doing this, it can find out
where problems have occurred. It could then try to investigate the
reasons why the figures were different.

Topic 14; COSTS AND BREAK-EVEN ANALYSIS

1. COSTS
 Definition: costs ~ these are expenses that must be met when setting up
and running up abusiness.
Why does production generate costs?
 The production of goods and provision of services uses up resources. For
example, tyre production uses resources; a rubber, synthetic fabrics, steel
bands, machinery, labour and energy. These resources represent some of
the cost generated during the tyre production.
 Other costs will also be incurred e.g. marketing, distribution and administration costs.
 All these cost and many other costs can be classified according to how they
behave. When output changes i.e.
a) Fixed cost
b) Variable cost

a) Fixed costs
 Definition: These are costs that do not vary with the level of output.
 Examples of fixed costs include;
 Rent
 Business rates
 Advertising
 Insurance premiums
 Interest payment
 Research and development costs.
 This cost will not increase even if a firm produces more output. However,
fixed cost has to be met if the firm produces nothing.

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  Fixed costs are sometimes called overheads.
Fixed costs for Frampton Training

60
Fixed cost (US $ 000s)

50

40 Fixed

30

20

5 10 15 20 25 30

 Therefore in the diagram the fixed cost is US$40, 000 regardless of the
number of courses undertaken.
b) Variable Cost

Definition: These are costs that changes when the output level change.

 If a firm produces more output, variable costs will also increase, similarly if
output levels are cut variable costs will fall.
 Examples of variable costs include: -
i. Raw materials
ii. Packaging
iii. Fuel
iv. Labour

N/B: If a firm produce nothing, the variable cost will be zero.

100
Variable cost
80
Variable cost (US$ 000s)

60

40
20

50 100 150 200 250

Number of courses

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  The business has variable cost of US$ 500 per course
 If 100 courses are provided then the variable cost will be US $ 50, 000 (US$ 500×100)
 The variable costs from the graph indicates that variable costs change
whenever output changes.
Total Costs

Definition: It is the fixed cost and variable costs added together.

160 Total cost

120
Total cost (000s)

80

40

50 100 150 200 250

Number of courses

From the previous calculation;

If Millhouse Training provides places for 100 training courses, total

costs will be; TC = US $ 40, 000 + (100 × US $ 500)

(US $ 40, 000 + US $ 50, 000)

= 90, 000

= US $ 90, 000

Average Costs

Definition: The average cost of production (AC) is the cost of producing a single unit of
output.

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Average cost (AC) equals total cost (TC) divided by quantity produced (Q).

AC = TC / Q

For example, if Millhouse Training provides 100 places (Q = 100) on a training course, the average
cost is calculated as:

AC = TC / 100

𝑈𝑆$ 90, 000/100

= 𝑈𝑆$ 900

 This means that each trainee at Millhouse cost US $ 900 each.

Total Revenue

Definition: This is money generated from the sale of output.

 TR (Total Revenue) can be calculated by multiplying the price of each unit

by the number of units sold.

Total Revenue (TR) = 𝑃𝑟𝑖𝑐𝑒 × 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦

 If Millhouse Training in the earlier example charged US $ 1500 for its

training courses, the total revenue from the sale of 100 courses is given by;

TR = US $ 1500 × 100 = US $ 150, 000

 This means Millhouse produce US $ 150, 000 of revenue from providing
100 places on its training.
Calculating Profit
 One of the main reason why firms calculate their costs and revenue is to
workout profit and loss.
 Profit is the difference between total revenue and total costs.

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Profit = 𝑇𝑜𝑡𝑎𝑙 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 − 𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡
 N/B: If the total costs are greater than total revenue then a loss is made.
Chapter review questions
1. What is meant by variable costs?
2. What is meant by fixed costs?
3. Which of the following is an example of a fixed business cost?
A. Raw materials
B. Interest payments
C. Packaging
D. Wages of production workers
4. If total costs are US$ 35,000,000 and output of 100 000
units. What are the average costs?
A. US $100000
B. US $35
C. US $350
D. US $3500
5. If variable cost is £10 per unit and fixed costs are £400,000. What is
the total cost of producing 50000 units?
A. £900,000
B. £450,000
C. £4,000,000
D. £500,000

6. Which of the following expressions is true?

A. Profit =TC+TR
B. Average costs = FC-Q
C. TR=P*FC
D. Profit = TR-TC
2. BREAK-EVEN ANALYSIS
Definition:
an economic tool that is used to determine the cost structure of a company or the
number of units that need to be sold to cover the cost

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 Break-even point- This is a level of output where total costs and total
revenue are exactly the same i.e. neither profit nor loss is made.
Calculate the break-even point
 To calculate the break-even point, the following information is needed;
a) Fixed cost
b) Variable cost per unit
c) Selling price per unit
 The following formula can be used to calculate the break-even point.

Break-even point =

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 𝑓𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡
𝑠𝑒𝑙𝑙𝑖𝑛𝑔 𝑝𝑟𝑖𝑐𝑒−𝑣𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑐𝑜𝑠𝑡 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡

N/B:
Selling price – variable costs is known as contribution

Example
Ed Winchester has a contract with a house builder to install fire alarms in state
owned council houses. Ed charges US $ 20, 000 p.a and a variable costs are US $ 5
per installation. How many alarms have to be installed before the business breaks
even?

Solution

Break-even point = 𝑓𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡

𝑠𝑒𝑙𝑙𝑖𝑛𝑔 𝑝𝑟𝑖𝑐𝑒−𝑣𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑐𝑜𝑠𝑡 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡

𝑈𝑆 $ 20,000
=
𝑈𝑆 $ 25−𝑈𝑆 $ 5

𝑈𝑆 $ 20,000
=
𝑈𝑆 $ 20
= 1000 𝑢𝑛𝑖𝑡𝑠
 Therefore, Ed has to fit 1000 fire alarms to break-even.
Break-even chart

Definition: The graph that shows the total cost and total revenue.
 Output is measured on the horizontal axis and revenue, cost and profit are measured on
the
vertical axis

 Margin of safety is the mount of output available to be sold above the break-even
point where the firm makes a profit.

Illustration Break- even chart for Ed Winchester

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 What does the break-even chart show?

 The break-even point is where total cost and total revenue meet or intersect.
In this example the business breaks even when 1000 fire alarms are fitted.
At this point, the total cost and total revenue are both US$ 25, 000.
 At any point / level of output below the break-even point the business makes a loss.
 At any level of output above the break-even point the business makes a profit for example
if;
 Ed Winchester fits 2000 fire alarms, the business will make a profit
of US $ 20, 000 (total costs are US $ 30, 000 and total revenue is
US $ 50, 000)

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  If Ed Winchester fits 2000 alarms, the margin of safety is 1000
units. This is the range of output over which the business can make
a profit. (The difference between current output and the break-even
level of output).
 Some break-even charts show fixed cost. In this example, a horizontal line
at US $ 20, 000 would show fixed costs.

Constructing a Break-Even Chart

 Following the steps below will guide on how to draw a break even chat.
 Nanjing Holdings assembles circuit boards to go inside electronic devices. Fixed costs
areUS
$ 10, 000, variable costs are US $ 10 per circuit board and the assembled
boards are sold for US $ 20 each.

Step 1: It is useful to know the break-even point before constructing the chat.
This helps to check that your chart is correct. Calculate the break-even point
using the formula given earlier. In this example the break-even points is 100
units (US $ 10, 000 ÷ [US $ 20 – US $ 10] )

Step 2: Since both total cost and total revenue are straight line, two sets of points
(or co- ordinates) on the graph are needed to construct the lines. It is necessary to
choose two levels of output and work out the total cost and total revenue at each
level.

 Choosing 0 as one level makes the calculation easier. If output is 0, TC will be

US $ 10,000. (remember that fixed costs are incurred even when nothing is produced)
 When output is 0(zero), TR will also be 0 (there are no sales if nothing is produced)
 When choosing the second level of output, choose a value that is double
the break-even point. This means the break-even point will appear right
in the middle of the chart.

 Therefore, the second level of output will be 2000 (2 × 1000)

 When output is 2000, TC = US $ 10000 + (US $ 10 × 2000) = US $ 30, 000.
 When output is 2000, TR = US $ 20 × 2000 = US $ 40, 000.

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  The values of TR and TC at each level of output can be summarized below

Output Total cost (TC) Total revenue (TR)

0 US$10000 US$0

2000 US$30000 US$40000

Step 3
 The values shown above represent two sets of co-ordinates which can be used
to plot TC and TR for the break-even chart
 Output is measured on the horizontal axis and goes up to 2,000
 Costs, revenue and profit are measured on the vertical axis and go up to US$40,000
 TC can be drawn by placing the co-ordinates (0, US$10,000) and (2000,
US$30,000 on the graph and joining them with a straight line
 TR can be drawn by placing the co-ordinates (0,0) and (2000, US$40000).
The chart is shown below

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 Effects of changes in price and cost in the break-even chart
The break event chart can be used to show the effects on the break-even point
when there is changes in costs and price.
 If price is higher TR will be steeper and break-even point will shift to
the left. This is shown below in figure A.
 If price is lower TR will be flatter and the break-even point will shift to the right
 If FC is higher, TC will move upwards with the steepness unchanged and
break-even willshift to the right.
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  If FC are lower, TC will move downwards with steepness unchanged
and break-even point will shift to the left.
 If VC is higher, TC will be steeper and break-even point will shift to
the right. This is shown below in figure B.
 If VC is lower TC will be flatter and break -even point will shift to the left.

Figure A.

Figure B.

Advantages of break-even charts

 Shows how much output a business has to produce in order to break even.
 Manages are able to read off from the graph the expected profit or loss to
be made at any level of output.

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  The impact on profits or loss of certain business decisions can
also be shown by redrawing the graph
 Can be used to show the safety margin
Limitations of break-even charts
 Break even charts are constructed assuming that all goods produced by the
firm are actually sold. The graph does not show the possibility that inventories
may build up if notall goods are sold.
 Fixed costs only remain constant if this scale of production does not
change. Example a decision to double output is almost certainly going
to increase fixed costs.
 Regular charts concentrate on the break-even point of production but there
many other aspects of the operation of a business which needs to be analysed
by manages. Examplehow to reduce wastage or how to increase sales.
 The accuracy of the break-even charts depends on the quality and accuracy
of data usedto construct TC and TR curve. If the data is poor and the
inaccurate, the conclusion drawn on the basis of the data will be wrong.
 The simple break- even charts are drawn on assumption that TC and TR
curves can be drawn with straight lines. In practice they may not be straight
lines for example in order to increase sales, a business may need to offer
discounts for large orders. Total revenue will fall at high output. In this case
the TR line will rise up and then eventually fall. Also a business can lower
costs by bulk buying. So costs may fall at high outputs hence TC will be
curved.
Chapter Review questions
1. A business that breaks even has to revenue of US$ 5,600,000 and fixed cost of US
$2,000,0000 Therefore the value of variable costs is
A. US $2,000,000
B. US $5 600,000
C. US $7600,000
D. US $3600,000
2. A business charges US $25 per unit for its output. Fixed costs are US $ 1
million and variable costs are US $5 per unit. How much should the
business produce to sell to break even?
A. US $ 50,000
B. US $ 50
C. 20 Units
D. 50,000 Units
3. A business breaks even when 5,000 units are produced. If price is US $20
and fixed costs are US $20,000 the break-even cost per unit is

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 A. US $ 16
B. US $ 50
C. US $ 20
D. US $ 4
4. An increase in fixed cost will do which of the following
A. A shift the break-even point to the left
B. Make total cost functions steeper
C. Shift the break-even point to the right
D. Make the cost function flatter
5. What are the limitations of break-even analysis to a business?
Discuss at least two limitations in your analysis
6. Describe what will happen to the break-even point if variable cost were to increase
7. Azeem has produced a Break- even graph for the salon
8. Assess the benefits of Azeem using break-even analysis to see if his new
shop will make a profit.
9. EC ltd could use a break-even graph to find out the level of sales needed to make a
profit.
10. On the graph are four letters A, B, C and D. Give the correct
label for each one. A
B C D

Topic 15; RECRUITMENT AND SELECTION

When businesses hire new employees, they need to attract the best people- those
with the right skills and experience. This is called recruitment and selection
Recruitment is important because if the wrong people are selected it can be
expensive. If new recruits leave, all the cost of advertising, interviewing, induction
and training will have to be repeated
In large business the human resources department is responsible for employing
staff. A business may need staff because of the following reasons:

• Growth: The business may be expanding thus requiring more workers.

• Replacement: Workers may be leaving for one reason or another and need to be
replaced.

• Promotion: When an employee is promoted, a

vacancy is created. Recruitment is therefore
necessary to fill such vacancy.
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 • Workers may also be required on temporally basis to cover staff absence
due to maternity, paternity or education leaves.

• Others may be as a result of death of worker.

Recruitment Documents
 Job description
 Persons specification
 Application form
 Curriculum Vitae (CV) or Resume

STAGES IN THE RECRUITMENT PROCESS

The whole recruitment process may be broken down into a number of stages as shown below

1. Job analysis
The first stage of the recruitment is to carry out a job analysis which
involves identifying the number and type of staff that needs to be
recruited and then identifying the tasks and responsibilities to be carried
out by the new employee.

2. Writing a job description and a person specification

A job description is a document that shows clearly the tasks, duties and responsibilities
expected of a worker for a particular job.

Contents of job description

 Job title
 department
 Tasks and responsibilities
 The condition of employment such as salary, hours of working f and other
benefits

Functions of job description

 Show clearly what is expected of an employee in regard to their
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 tasks, duties and responsibilities.
 Used in writing a job specification.
 It’s used for appraisal: to see how well an employee has performed in
relation to what was expected of them.
 Extracts from it is used in the job adverts

2. Person (Job) specification

A person specification is a document which outlines the skills, qualifications,
experience attitudes an any other characteristics that would be expected of
a person appointed to do a particular job. it’s used to screen applicants when
sorting applications; applications that do not match the person specification
can be ignored.

Contents of job specification

 The level of educational qualification
 The type and years of experience
 Special skills, knowledge or particular aptitude
 Personal character

Importance of job specification

 it assists the Human Resource Manager to prepare a job advertisement
 It helps the Human Resource Manager to shortlist candidates for an interview
 It will assist the Human Resource Manager to identify training
needs of successful candidates

3. Advertising the vacancy

Advertising costs money so businesses must place the job advertisements
in places where there are more likely to attract sufficient interest from the
right sort of applicants.
Places of advertisement may include word of mouth, local newspapers, national newspapers,
specialist magazines, recruitment agencies, televisions, billboards etc.

Content of the job advertisement

 Job title
 Name, address, email and telephone number of employer
 Brief details of job description
 Skills, qualifications and experience required for the job
 Salary and other benefits
 Methods of applications
 Conditions of employment

4. Receiving applications and shortlisting

A job advertisement will require the applicant to apply in writing. This can either be
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 by completing application form or by writing a letter of applications and
enclosing a copy of curriculum vitae (CV). A business must sort through the
applicants and produce a short list.

Application form
It is document written in a standard form and used to gather information from
job applicants. Every applicant will be expected to submit a list of information on
the form. One advantage is that ensures the same data is collected from each
applicant which makes comparison between them easier.
The following list includes common information requested:

 Full name address and other contact details

 Personal or tax identification numbers such as national insurance number
 Education details
 Employment history
 Qualifications and experience
 Name and addresses of two referees
Advantages of using application forms
 The skills and experience of the applicants can be compared very quickly
 It’s speeds up the process to read and analyze information from a
large number of different applicants.

Curriculum Vitae(CV) or resume

A CV or resume is a summary of a person’s qualifications, experience and
qualities written by the job seeker.
It is similar to an application form but it is not written in a standard form. It
is produced by the job seeker and is therefore personalized. It allows a job
seeker to express their individuality.
Contents of CV
 Name, address, telephone number
 Date of birth
 Nationality
 Education and qualification
 Work experience
 Positions of responsibilities
 Interests
 Names of referees

5. Shortlisting
This is the process of selecting a small group of candidates suitable for interviewing.
It involves sorting through all the applications forms or CVs and choosing those
applicants that best match the person specification. This is done after the deadline
has been reached for receiving applications. It can be time consuming tasks if
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 hundreds of people have made an application.

6. Interviewing and selection

Job applicants who have been shortlisted will be called for an interview. This is
where interviewer can find out more about the applicants by asking direct
questions face-to-face. It also gives candidates the opportunity to provide more
detailed information and to ask questions about the job and business. Interviewer
is often done by people who are experienced or have been trained in interviewing.
Interviewers are likely to be more effective if:

 They have been carefully planned

 All candidates are asked same questions and probably same order
 Measures are taken to try to make candidates feel more at ease
 More than one person carries out the interview
 Candidates are encouraged to talk by asking open questions
 Candidates are given opportunities to ask questions about the
role or business Interviewer are still the most widely used form of
selection. The main purpose of an

interview are:

 Help clarify information on the application form or CV

 Assess motivation, attitude, commitment and communication skills
 Challenge candidates by asking searching questions such as how they
might deal with a specific work-related problem.

After the right candidate has been selected, they might be required to sign a contract
of employment The contract of employment
It is a legal recruitment for employers to provide a new with a written contract of
employment to sign.
Contents of employment contract
 Name of the employer and the employee
 Job title
 Date of commencement (starting to work)
 Hours to be worked
 Amount of notice to be given to terminate the employment
that the employer must give to end the employment
 Rate of pay and any other benefits
 When payment will be made
 Holiday entitlement if any

7. Rejecting Unsuccessful Applicants

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 When the suitable applicant has been offered the job and has accepted it, the
unsuccessful applicants should be informed that they have not got the job and
thanked for applying.

INTERNAL AND EXTERNAL RECRUITMENT

a) Internal Recruitment
This is appointing someone who already works for the business.
A business might do this by advertising the post internally or by appointing
somebody who is thought to be suitable for the job.

Advantages of internal recruitment

 It’s cheaper because it saves on advertising
 It saves on time
 The person is already known to the business and his
reliability and potential are known
 Internal recruits are familiar with company policy and working practices.
 Staff may be more motivated if they know there is a chance of promotion

Disadvantages of internal recruitment

 Doesn’t allow new ideas or experiences to come into the business
 There may be jealousy and rivalry between existing employees
 If one vacancy is filled another may be created
 The number of applicants to choose from is limited.

b) External Recruitment
It is where new staff are recruited from outside the business
External recruitment is when a vacancy is filled up by someone who is not an
existing employee and will be new to the business.

Advantages of external recruitment

 A business will a much larger pool of potential employees to choose from.
 A new person maybe very talented and have some fresh ideas
which could help the business become more competitive
 It reduces internal jealousy and rivalry among workers
 There is no vacancy created like in internal recruitment.
 Chances of getting the right person are higher
than in internal recruitment.

Disadvantages of external recruitment

 Costly as money is needed for advertisement and interviewing.
 The employee is not known to the business and therefore reliability
and potential are not known
 The new employee may not know the organization’s way of
working and what is expected of him or her

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  External recruitment may lead to demotivation of workers when they
do not see one of them being promoted

Types of Employment
a) Full-time Employment

This is where a business takes on an employee who is expected to work the full
working week - usually five days. The number of hours may vary in different
countries. For example, in the EU a full-time worker is not expected to work for
more than 48 hours per week. Full-time workers may be entitled to certain benefits
and rights in addition to pay, including health insurance or overtime pay.

Advantages of full-time workers

 More likely to receive training because the worker is seen to be permanent.
 Takes a short period to recruit.
 The employee is more committed to the job and business.
 More likely to be promoted because of gaining skills and
experience as full- time employee.

Disadvantages of full-time workers

 More expensive the employing part time worker.
 Not easier to extend business operating hours.
 Not flexible in the hours of work on the part of employee.

b) Part-Time employment
A part-time worker is someone who works fewer hours than a full-time worker.
There is no specific number but it might be less than 30 hours, for example.

Advantages of part-time employment

 They have flexible working hours so gives businesses some flexibility. This
means they can be employed for short periods, for example, at weekends when
the business is at its busiest.
 Easier to ask employees just to work at busy times, such as weekends
 Easier for the business to extend its working hours
 It suits certain employees such as students who cannot work full time
because of studies or parents who want to take care of their children.
 Less expensive than employing full time workers. They may not be
provided with other benefits like insurance cover.

Disadvantages of part-time workers to the employer

 Less likely to be trained because the worker is perceived to leave any
time. This can lead to poor quality of the output.
 Takes longer to recruit part-time workers to fill up the position of full-time workers.

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  The employee can be less committed to the business.
 More difficult to communicate with part-time workers when they are not in work
place.

c) Job Share
This is where two-time workers share the work and pay of a single full-time post.

Advantages of job share

 Suitable for employees who want to reduce their working hours, to
provide more leisure or family time.
 Makes employees more motivated and less stressed since they
have themselves chosen to reduce the amount of work they
have to do.
 A business enjoys ideas and enthusiasm of two people rather than one.

Disadvantages of job share

 The two people have to work as team and interact effectively for it to work effectively.

Other types of employment

A number of other employments exist. These are likely to provide businesses with
more flexibility and may help improve efficiency since people are only employed
when needed. They include;

d) Casual Employment
Casual work is often used in the hospitality industry where people are required
to help staff at specific events, such as Indian Premier League.

Advantages of casual employment

 Provides a great deal of flexibility for the business. Some workers are ‘on- call’.
 Saves the business costs associated with hiring of full-time employee,
such as health insurance and overtime.
Disadvantages of casual employment
 Casual workers may lack the commitment of their full-time or part-time colleagues.
 Casual workers do not get any guarantee of work form their
employer. Their hours of work are often variable and uncertain.
 Not entitled to certain benefits and rights, such as health insurance and overtime.

e) Seasonal Employment
This is where a work is regular and full time but short lived for a particular time
of the year. For example, a farm manager may need extra workers during the
harvest period and in the UK, postal delivery workers are needed before
Christmas to help out with heavy volume of cards and parcels.

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 Advantages of seasonal employment
 Provides a business with flexibility since seasonal workers are laid off
when the season ends.
 Some people prefer seasonal work because it suits their lifestyle.
 It may appeal to people like to travel.

Disadvantages of seasonal employment

 Not entitled to certain benefits and rights, such as health insurance
and overtime, in addition to pay.
 Less likely to be trained because the worker is perceived to leave any
time. This can lead to poor quality of the output.
 The employee can be less committed to the business.

f) Temporary Employment
This is where a business employee a person for a short period of time to cover
for absent workers, for example, such as those on maternity leave or long-
term sickness. The work is likely to be full-time but the length of the contract
may vary – perhaps between 3 and 12 months.

Advantages of temporary employment

 Suitable for job seekers to earn some income while they look
for a permanent job.
 Might provide a ‘doorway’ into a permanent position.

Disadvantages of temporary employment

 Not entitled to certain benefits and rights, such as health insurance
and overtime, in addition to pay.

Topic 16; LEGAL CONTROLS OVER

EMPLOYMENT AND THEIR EFFECTS
Government have passed laws that affect equal employment
opportunities. The effects of these laws are that people should be
treated equally in the workspace and when being recruited, and that
they should be paid equal amounts for similar workforce.

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 Equal opportunities
This is when the employer bases there decisions on the ability of
candidates, not race, gender, religion or age when employing or
promoting people. Discrimination is choosing one person rather than
another based on characteristics such as age, gender or religion

Effects on business
.it requires that businesses have to be careful when working on
advertisement for a job
.when selecting an employee for a job they must treat all applicants equally
. Businesses should recruit and promote staff on merit alone and this
should help to increase motivation at work

Employee protection
Employees need protection in the following areas:

Discrimination is to make a choice based on unfair reasons. Workers can

be discriminated against because of:
a) Gender
Gender discrimination usually though not exclusive occurs when a
woman in a work place doesn’t receive equal treatment. In many
countries laws have been placed to help deal with the problem of
gender discrimination. Example of a UK law shown below:
The Equal Pay Act 1970 states that an employee doing the same or broadly
similar work as members of the staff of the opposite sex is entitled to
equal rates of pay and working conditions.
Legislations like above are likely to have the following impact on businesses:
.Advertisement for jobs must not specify a particular gender. Both
genders must have equal opportunities in appointments.
.reference to work titles in job adverts must be genderless. For
example police officers or sales person.
.Promotion must not be made on the basis of gender and people
cannot be dismissed because they are male or female.
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 .Wages for staff occupying the same position must be the same for both
male and female.
.Businesses will have to take more care when designing internal
documents such as personal specifications and job descriptions.
This is to ensure jobs do not limit applicants from a particular
gender.

b). Race and religion

Businesses should ensure they do not discriminate on grounds of
color, race, ethnicity origin or nationality.

the Race Relations Act 1976 makes it illegal to discriminate on

grounds of race. This means that businesses cannot appoint
someone who is white in preference to someone who is from an
ethnic minority.
(N.B This was changed in 2002 and 2003 to include a wider range of
organizations and groups)

Some examples of the effects of race legislation on businesses may

include the following
1. Businesses cannot prevent employees from wearing ethnic or
religious clothing such as Muslims wearing the burka
2. The use of selection tests must be monitored to ensure that their
styles do not discriminate against people from a minority
background
3. Businesses must take into account the religion holidays or ethnic groups
4. Businesses cannot refuse to employ people from a particular ethnic or
religious
group
5. Workers must receive awareness training to encourage equality
of treatment and to prevent racial harassment.

c) Disability
-Protection in the work place exists in many countries for people with
disabilities, unemployment rates for people with disabilities around
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 the world tend to be higher than those without disabilities. Employers
are now obliged to make reasonable adjustments to their working
practices and work environment to help accommodate disabled
employees. Some examples are shown below
.Improve access to the workplace by widening door and providing
ramps for wheel chairs.
. Allow disabled workers time to attend medical appointments,
such as physiotherapy sessions.
. alter equipment’s (software and hardware) to accommodate those with
sight or hearing difficulties.
. Allow more time for training
The Equality Act 2010 says “a disability is a physical or mental
impairment which has a substantial and long term adverse effect on
your ability to carry out
normal day-to-day activities”. The Act makes it unlawful for a business
to discriminate on the grounds of disability.

d) Sexual preference

Discrimination against people on grounds of their sexual preference is

illegal in some countries. This is because laws have been passed to
protect their rights. However, it must be remembered that in many
countries laws may be different. For example homosexuality is a
criminal offence in 38 out of 55 African countries.
Most cases of sexual preference discrimination result from harassment or
bullying. However, businesses must take care to avoid sexual preference
discrimination in recruitment, pay, terms and conditions of employment,
promotion and training opportunities and dismissal
e) Age
Age discrimination in a work place occurs when a business decision
is made on the grounds of a person’s age. For example a person
aged 32 is given promotion because another person aged 66 was
considered to old-even though 66 years old was equally qualified
and had more experience.
Many countries don’t have specific age discrimination legislation but
protection is still provided under laws that make discrimination of all
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 types illegal . For example in New Zealand the Human Rights Act
1993 has been amended to provide
protection against age discrimination.
Examples of possible effects on businesses of such legislations are given below
1. It would be illegal not to offer job to someone on the grounds of age
2. Businesses should take measures to prevent older workers from
being harassed in the work place.
3. In interviews assumptions cannot be made about the ages of
candidates or their suitability for job on grounds age.
4. A business cannot state that a specific number of years’ experience
is needed to apply for a job. This might disadvantage younger
applicants.

In most countries there now laws which make sure that all employers
.Protect workers from dangerous machines
.Provide safety equipment and clothing
.Maintain reasonable workplace temperatures
.Provide hygiene conditions and washing facilities
.Dont insist on excessive long shifts and provide breaks in the work time table

The following examples of dismissal are unfair

.Dismissal for joining a trade union
.Dismissal for being pregnant
. Dismissal when no warnings are given before dismissal
Workers can take their case to an industrial tribunal if they feel they
have been dismissed. Industrial tribunal are similar to courts of law and
they are used to hear disputes between workers and employers

Workers have a right to be paid for work they do for employers.

The rights and obligations of employers and employees are
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 written in a contract agreement. Content of the contract of
employment
.Nature of job
.Hours of work
.Wage rate to be paid
.How frequently wage rate will be paid

Minimum wage laws

A minimum wage is the minimum amount per hour, which most
workers are entitled to it involves passing legislations that means
no employer is allowed to pay wage below the limit set.
Employers face a penalty if they pay wages that are lower than
the national minimum wage they will be entitled to have arrears of
wages repaid at current rates.

Reasons why government set Legal Minimum Wages

1. To benefit disadvantaged workers-it is argued that people such as
women
2. To reduce poverty-in many countries minimum wages are
often part of a broad strategy to end poverty. The minimum
wage raises the wages of low income workers in general not
just those below the official poverty line.
3. To help businesses-a minimum wage should promote greater
equality and fairness involving workers. As a result, workers
will be better motivated.
This should reduce staff turnover and raise productivity.

Advantages of legal minimum wage to workers

.Prevents unskilled workers from being exploited by the employers
.It encourages employers to train unskilled workers to make sure that
they
are more productive
.It will encourage more people to seek work
.Low paid workers will earn more and will be able to afford better life.

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 Disadvantages of minimum wage
.It increases businesses costs which will force them to
increase prices of goods
.Some employers will not be able to afford this wage rates making
workers redundant
.Other workers receiving just above the minimum level may ask
for higher wages
.It is suggested that higher wages encourage businesses to replace labor
with capital and outsource production to countries where labor is
cheaper.
However, this may not be possible for many sorts of businesses. For
example, fast food chains cannot outsource production
because they are a service industry. Neither can they easily
replace customer service workers with machines.

Reasons why businesses should follow laws designed to

prevent discrimination in the work place
It is in the interest of the business to follow laws designed to
prevent discrimination in the work place. If they do not businesses
may
.Be involved in expensive legal battles
.Fail to recruit or promote the best staff for the post
.Demotivate certain sections of the workforce
.Create unnecessary tension or conflict between employees

TRADE UNIONS
A trade union is a group of workers who have joined
together to ensure there interests are protected

Benefits of joining a trade union

.Improved conditions of employment i:e rates of pay, holidays
and hours of work.
.Improved working environments i:e health and safety, noise
and temperatures.
.Improved benefits for members who aren’t working because they
are sick, retired or have made redundant(retrenchment)
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 .Improve job satisfaction by encouraging training
.Advice and/or financial support if a member thinks they have been
unfairly treated
.Strength in members
Disadvantage of being a member of a trade union
.Costs money to be a member i:e registration and monthly subscriptions
.May be required to take industrial action even if they do not agree.

Topic 16; TRAINING

Training is development of employee’s skills and knowledge in order
to perform the job well to increase efficiency and effectiveness. It
involves increasing the knowledge and skills of workers to enable
them to do their job more effectively.

Importance of training
1. Improves the efficiency of the work force, decreasing supervision needed
2. Allows employees to acquire new skills, improve existing ones,
perform better and increase productivity.
3. Improve opportunity for internal promotion.
4. Part of training involves teaching new recruits how to work safely
in their new environment
5. Improved customer services
6. Ability to use technology
7. May be used to introduce a new method of production
8. Provides training for unskilled workers to make them more
valuable to the business
9. Decreases supervision needed

Objectives of training
1. Increase skills to improve flexibility of labor force.
2. Increase knowledge and enhance creativity and innovation.
3. Change people’s attitudes and be able to cope with
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 changes in the organization.
4. Raise awareness for workers
5. Reduce costs. Through increased efficiency, reduced
recruitment costs or improved health and safety.
6. it increases revenue through improved image, quality or service.
7. Reduces labor turnover and remain competitive. (it refers to
the number of staff leaving the organization each year)
Benefits of training to the business
1. Increased efficiency leading to lower costs
2. Increased revenues and higher profitability
3. Improved innovation and flexibility
4. Lower labor turnover
5. Improved health and safety

Benefits of training to the employee

1. Better job performance
2. Higher productivity and possibly higher pay
3. Higher job satisfaction
4. Better career prospects (higher chances of promotion)
5. Less chances of workplace accidents

Types of training
there are three main types of training
1. Induction training
training given to new employees when they first start a [Link] might involve:
.A complete tour of the workspace
.Introduction to work and job colleagues
.Company policies such as dress code, disciplinary procedures and holidays
.Company history, aims and
objectives explaining the internal
organization structure
.Outlining the layout of the premises
.Making clear essential health and safety issues such as procedures during fire

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 Advantages of Induction Training
1. Helps new employees to settle into their job quickly
2. Reduces chances of workers making mistakes
3. It is a legal requirement to give health and safety training at the start of the
job
4. Motivates the new workers to take up the job

Disadvantages of Induction Training

1. It is time consuming
2. Delays the start of the employees commencing their job
3. It may be costly, but no work is being done by the worker
4. If poorly done may demotivate the new worker who may leave the business.

2. On –the-job training
Training that takes place while doing the job.

Approaches of on-the-job
1. watching another worker- involves a new recruit watching and
copying(shadowing) the actions of an experienced and competent
employee. This method can work well if the existing staff is a good
and committed trainer. If not the quality of training might be poor.

2. Mentoring- where the trainee is paired with an experienced

staff for a given period the trainee is put to work on their own
without direct supervision where employees alternate between
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 different jobs during their course of employment but can call on
the mentor for advice and guidance. Mentoring may be used to
help train teachers.

3. Job rotation- may involve new recruit spending a period of time

in several different departments at a business. By working in a
range of different departments the employee will learn the
different skills required and will gain a broad knowledge of how
business works. This approach will also improve the
flexibility of the business.

Advantages of on-the-job training

.It ensures there is some production from the worker while they are training.
.It usually costs less than off-the-job training
. Can be easy to organize.
.Training is based on the specified needs of the business.
.Individual tuition is given at work place minimizing travel costs.
.Relevant because trainees learn by actually doing the job.

Disadvantages of on-the-job training

.The trainer may have bad habits and may pass on to the new worker
.There is potential disruption to production. The trainer will be less
productive during training period.
.Increase in wastage of materials as the new worker learns doing the job.
.The learning environment may not be ideal.

[Link]-the-job training
This involves being trained away from the work place by a specialist trainer.
It often involves classroom learning, using lecture, role play, case
studies or computer simulations.
Approaches of Off-the-job training:
1. College/university courses- It is where employees go from the
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 work place to a local college or university to study for qualifications
that are relevant to their job. Employees may also study for
qualifications at home through distance learning programmers’
business may support the member of staff by:
.Giving them time off to study.
.Meeting the costs of courses and qualifications.

2. Confrence-It involves staff attending an event where experts deliver lectures

or
workshops. Most popular form of off-the-job training.

Advantages of off-the-job training

.A broad range of skills can be taught using different techniques.
.Flexible teaching hours such as over the weekends.
. The business will only need to pay for courses needed by the employee.
.Employees may be taught a variety of skills and this makes them more
versatile.
.It often uses expert trainers who have up-to-date knowledge of
business practices.
.Customers and others are not put at risk.

Disadvantages of off-the-job training

.Costs are high such as travelling and accommodation
. May take a lot of time to organize.
.Some of the off-the-job training is expensive if provided by specialists.
.It means wages are paid but no work is being done by the worker during
training.
.The additional qualifications mean it is easier for the employee to
leave and find new job
.May raise employee expectations of promotion
.Some aspects of work cannot be taught off-the-job.

Need for training

The main reason for training is to provide workers with skills and
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 knowledge with skills and knowledge needed to do their jobs
effectively. As a result, their productivity will increase. However
there are other reasons(benefits):
1. keeping workers up to date
workers will need training if there are changes that might affect their job.
Some examples might include:
.new health and safety procedures
.new technology
.after a takeover
.new working legislations
.new working practices

2. improving labor flexibility

Some businesses train their workers in a range of different jobs so
that they are multi skilled. This provides a business with added
flexibility.

3. Improving job satisfaction and motivation

Workers will feel more secure if they have been trained to do their job
effectively. Not being able to do a job properly will be a source of
anxiety, frustration and dissatisfaction for workers. It is also argued
that training can be used to motivate workers.

4. New jobs in the business

Sometimes, owing to expansion, new products or new technology, new
jobs are created. This often means that some staff will need retraining.

Limitations(disadvantages) of training to a business

Some businesses are unwilling to invest heavily in training because
of its limitations and costs. Some of the main ones are outlined
below.
1. Loss of output whilst training
If workers are involved in off-the-job training they will not be
producing anything. This will result to lower output levels. Even if
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 workers are trained on the job there may be a loss of output owing
to mistakes and slow work associated with learners.

2. High costs of training courses and other resources

Training can be very expensive. Businesses will have to pay
training providers if they use external training. Even internal
training can be expensive if specialists training staff and
equipment is needed.

3. Employees may leave once trained

Businesses are likely to get very frustrated if employees leave and join a rival
company after they have invested in training them. Some
businesses actually target workers that have already been trained
by others to avoid such costs.

4. Learning by doing
Some businesses might argue that training is limited because
workers do not really start learning how to do the job until they
arrive at their work stations. In some cases the actual work
environment with all the stress and distractions cannot be easily
taught through simulation.

Government training schemes

It is common for the government to provide training. Some of the

schemes available are:
Apprenticeships: They earn a wage and work alongside experienced
staff to gain job-specific skills
National Vocational Qualification (NVQs): This is a ‘competence-
based’ qualification. This means that people learn practical, work
related tasks, designed to help develop the skills and knowledge
required to do a job.
Cost of training
.Training courses and other resources. Business have to pay the
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 training providers and buy training materials which is costly.
.Loss of output. If workers are involved in off-the-job training, they will
not be producing anything.
.Employees leaving. This can be frustrating to the business if
employees leave after they are trained. The business will have
incurred training cost and time which goes to waste

Workforce planning
It is the establishing the workforce needed by the business for the
foreseeable future in terms of the numbers and skills of
employees required.
The number required will depend upon the firm’s sales forecasts, its
future plans such as expansion or automation, and its objectives eg.
Introducing new types of products. Downsizing is the reduction of
employees due to a number of reasons such as:
 Factory outlet closure
 Merging of companies
 Reduction in number of customers
 Falling demand for their goods and services
 Introduction of automation

Essentials of workforce planning:

 Finding out the skills of all the present employee
 Counting out anyone who will be leaving soon
 Consulting with existing staff on retraining to fill the new jobs
 Preparing recruitment plans to show how many staff will be recruited
Ways of reducing staff:

Dismissal: This is where a worker is told to leave a job

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 because his work or behavior is unsatisfactory. Reasons for
dismissal include Constant lateness, stealing, drunkenness.
Redundancy: This is when an employee is no longer needed and so
loses his/her job. The following features may be considered for
redundancy:
 Length of time employed by the business
 Employment history of the worker (bad or good)
 Which department need to loose or train
 Some workers may volunteer
Other ways may include retirement and resignation.
 NB: Workers with essential skills that are needed by the
business or whose skills could be transferred to other
departments are often retained.

Topic 17; MARKET RESEARCH

Market research is the process of gathering, analyzing and interpreting
information about marketing and consumption of goods and services.
Purpose (Importance) of Market research
1. To identify and understand customer needs.
A business will be more successful if it can supply products
that meet customer’s needs. This means that a business has
to gather information to identify these needs. For example,
a vacuum cleaner manufacturer will need to find out which
product features are important to potential customers.
These might include model design and style, colour,
durability and easy of storage.
A business needs to anticipate customer needs. This means to
try to predict what customers want in advance and respond to
changes very quickly. Businesses operate in a rapidly
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 changing environment and have to keep up with the latest
trends, fashion, technology and design.
Note: Durability – staying in good condition for a long
time, even if used a lot.
Anticipate – to expect that something will happen and be ready to for
it.

2. To identify gaps in the market.

If a business can spot a gap in the market it is likely to gain a
competitive edge for a while. It may be able to generate
higher levels of revenue and profit before a competitor
arrives. Finding untapped markets is not easy but gathering
information from people might help.
Note: untapped – supply, market or talent that is available
but has not yet been exploited.
3. It reduces the risk of failure.
Setting up a business or launching a new product is risky. As
market get large, and as competition gets fiercer, launching
new products becomes even riskier. The likelihood of failure
is high but investment in effective market research can help
reduce the risk of failure. Therefore, it is very important that
market research is carried out accurately.

4. To make informed business decisions

Businesses have to make countless decisions and generally the
quality of decision making can be improved if managers have
access to meaningful information. Market research can
provide a wide range of information that could be used to
improve decision making particularly when making marketing
decisions.
Example

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Pricing decision
A business was considering a price cut to boost sales volume and revenue. The current price was
US$10 per unit and current sales were 1,500,000 units. It carried out some research to find out
how consumers could react to a 20 per cent reduction in price to US$8 per unit. After
interviewing a sample of 1000 customers, it discovered that sales would increase by 12 per cent.
The effect on total revenue of the planned price cut is shown below.
When P= US$10, TR=US$10 × 1,500,000 = US$15,000,000.
When P=US$8, TR=US$8 × 1,680,000 (1,500,000+ 12 per cent) =US$13,440,000.
Consequently, the business found out through market research that the planned price reduction
would reduce revenue from US$15,000,000 TO US$13,440,000. As a result, the plan was
abandoned and a drop in price avoided.

Summary: Importance (Purpose) of Market Research

i. To identify and understand customer needs.
ii. To identify gaps in the market.
iii. To reduce the risk of failure.
iv. To make informed business decisions
Types of
information
Market research
can find out
1. Quantitative information –
Information that can be expressed in numbers and can be
measured. Answers questions about the quantity of
something, e.g. how many cars were sold in 2022 within
Kenya. Surveys and government publications are common
sources of quantitative data.
Advantages of quantitative data
1. Quantitative data is often easier to gather, process
and present to readers.
2. It is also regarded as being open to less
interpretation than qualitative data.

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 2. Qualitative information –

Information about attitudes, beliefs, and intentions of

consumers, usually in written form. Answers questions where
an opinion or judgement is necessary, e.g. why do more
women than men buy perfumes? Focus groups, interviews
and social media can be used to gather qualitative data.
Consumer messages on social media about a product in the
market would be an example of qualitative data.

Advantages of qualitative data

1. Can be
quite detailed.
Disadvantage
1. Open to many different interpretations. This means
that there may be disagreements within a business
about the usefulness of qualitative data.
2. It more difficult to analyze statistically than quantitative data.
Types of market
research PRIMARY
RESEARCH (FIELD)
Primary research is the collection of new information that
does not already exist.
Businesses use primary research to gather information that
does not already exist. It involves collecting new
information from primary sources. Primary data is usually
gathered by asking questions or observing people’s
behavior.
The main advantage of primary research is that it is original and
the information gathered can be tailored to the needs of the
business.
However, primary research is often time consuming and
expensive especially when a business hires a market research
agency to carry out research.
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  Agencies are experts in gathering, presenting
and analyzing information.

Methods of primary research

1. Questionnaires
A questionnaire is a list of written questions. They are very
common in market research and are used to record the views and
opinions of respondents.
Features of a good a questionnaire
i. Have a balance of open and closed questions
ii. Closed questions have definite answers whereas
open questions have many different possible
answers.
iii. Contain clear and simple questions
iv. Should not contain leading questions
v. Be concise

Types of
Questionnaires
1. Postal surveys
Questions are sent out to people and they are asked to
complete them in their own time.
Advantage
i. May be more convenient for busy people as they
complete them in their own time.
Disadvantage
i. Majority of questionnaires are never returned. This
means that resources are wasted.

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 2. Telephone interviews
Advantages

i.
The main advantage of interviewing people over the
telephone is that it is cheaper.
ii. A wide geographical area can be covered.
Disadvantages
i. Only people with telephones can be interviewed
ii. Only short, not too personal interviews can be carried out.
iii. Some people do not like being telephoned by
businesses. [Link] interviews
These are often carried out in the field and the interviewer fills in
the answers.
Advantage
i. Questions can be explained if a respondent is confused.
ii. It may be possible to collect more detailed information.
Disadvantage
i. Many people do not like being approached to be interviewed.
iv. Online surveys
Online surveys can be carried out on specialized websites.
These allow the researcher to put questionnaires on the
website. The researcher will then email people to ask them
to go onto the websites and complete the questionnaire.
Advantages
i. Online surveys may be more sophisticated because
they can use a wider range of images.
ii. They are cheaper to administer and can be made
available to respondents 24/7.
iii. They can be interactive and may be fun to complete.
Disadvantages
i. Many people still ignore them.
ii. Sample used may not be representative. This is
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 because online surveys are only presented to internet
users. The views of others will be neglected even
though they may be potential customers.
Advantages of questionnaires
i. Detailed information can be gathered about the product
ii. Customers’ opinions about the product can be obtained
iii. They can be linked to prize draws websites to
encourage people to fill in the questionnaire.
Disadvantages of questionnaires
i. Carrying out questionnaires can take a lot of time and money
ii. Collating and analyzing the results is also time consuming
iii. If questions are not well thought out, the answers to
them will not be very accurate.

3. Interviews
When interviews are used, the interviewer (person asking
questions) will have ready-prepared questions for the
interviewee (person answering questions).
Advantages of interviews
i. The interviewer is able to explain any question that the
interviewee does not understand.
ii. Detailed information about what the interviewee likes
and dislikes about a product can be gathered
Disadvantages of interviews
i. Interviews are very time-consuming to carry out
and, therefore, they are often an expensive way of
gathering information.
ii. Whether consciously or unconsciously, the
interviewer could lead the interviewee into answering
in a particular way, resulting in inaccurate results due
to interviewer bias.
Samples
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 A sample is the group of people who are selected to respond to a
market research exercise such as a questionnaire.
When deciding who ask to fill in a questionnaire or who to
interview, a sample would be selected as it would be too
expensive and impractical to try to include all the relevant
population. There are different ways of choosing samples.
The most common approach is to choose a random sample
e.g. picking names out of a hat.
i. Random sample – is when people are selected at
random as a source of information for market
research. This means that every member of the
population has an even chance of being selected.
ii. Stratified or Quota sample – is when people are
selected on the basis of certain characteristics such as
age, gender, or income as a source of information for
market research. This will help get representation
across different groups.
iii. Focus Groups or Consumer Panels: A focus group is a
group of people who are representative of the target
market who agree to provide information about a
specific product. If a business wants very detailed
information from customers, it might use focus groups
or consumer panels. A number of customers are invited
to attend a discussion led by market researchers.
Consumer panels are
groups of customers asked for feedback over a
period about a product. This approach allows
businesses to see how consumers react to changes in
the products.
Advantages of focus groups
i. This is a relatively cost effective method of collecting
information
ii. They can provide detailed information about consumers’
opinions.
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 Disadvantages of focus groups
i. The group may be small so generalizing from the
results may not be reliable.
ii. They can be time consuming
iii. It can be expensive in terms of meeting the cost of
transport and accommodation facilities.
4. Observation
This is where market researchers ‘watch’ the behavior of
customers. This approach might be used in retail outlets. For
example, observers might record the amount of time
customers spend looking at particular products and displays
in the store.
Observation can take the form of:
i. Recording e.g. meters can be fitted to monitor
which television channels are being watched.
ii. Watching – includes such activities counting how
many people go into a particular shop and also come
out having bought something.
iii. Audits e.g. the counting of stock in shops to see
which products have sold well.
Advantages of observation
i. It is quite inexpensive way of gathering data.
Disadvantages of observation
i. Because there is no feedback, using this method, a lot
of questions may go unanswered.
ii. The information only gives basic of figures. It does not
provide the business with reasons for consumer
decisions.
5. Test marketing
This involves selling a new product in a restricted
geographical area to test it and sales level before a national
launch. After a set period, feedback is gathered from
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 customers. The feedback is used to make modifications to
the product before the final launch. This reduces the risk of
failure.

SECONDARY (DESK) RESEARCH

Secondary research, or desk research, is the collection of
information that has already been collected and is
available for use by others.
Businesses use secondary or desk research to collect
information that already exists. The information collected
may be internal or external.
Internal sources
A lot of information may be readily and cheaply available
from the firm’s own records. Relevant qualitative data will
be available from sales department and finance department.
Examples of internal sources of information include:
i. Sales department sales records, pricing data, customer
records and sales reports.
ii. Opinions of distribution and public relations personnel
iii. Customer service
department External
Sources
This is when information is obtained from outside the firm.
Examples of external sources include:
i. Government statistics – are detailed source of general
information about such things as population and its
age structure.
ii. Market research agencies – are specialist agencies who
carry out research on behalf of companies or anyone
who commission them. They sometimes publish
reports of their research into a particular market. These
reports are expensive to obtain.
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 iii. Trade association – if there is trade association for the
industry, it often provides information for the
businesses in that industry. For example, there might
be an agricultural association which helps farmers
who grow particular crops.
Advantages of secondary data
i. Quick and easier to gather e.g. data may be
immediately available on intranets or online.
ii. It is often cheaper way of gathering information as the
research has already been done by others.
Disadvantages of secondary research
i. Data collected might not be exactly what the
business needs because it was initially carried
out for some other purpose.
ii. Data may be out of date and therefore not accurate.
iii. Articles in newspapers sometimes have a bias
and important information is left out
deliberately.
See summary below of sources of secondary data.

Role of social media in collecting market research data

Social media is playing an increasing role in marketing.
Businesses use social media platforms and blogs to gather
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 information. Social media can provide a cheap way of
gathering information about a firm’s customers, market,
brand appearance and other market issues. For
example, most social media platforms offer numerous ways to
analyze trends and conduct market research. By searching the
latest posts and popular terms, it is possible to gain some
understanding of emerging trends and see what customers are
talking about in real time.
One example of this is conducting hashtag searches. By
setting up a few searches with hashtags related to a specific
brand, industry or product, instant notifications can be
received when customers, clients or competitors use key
terms. Quite often the interaction is not led by businesses;
they can simply observe or join in as equal. This can result
in a variety of answers and discoveries that might have
remained hidden using other research methods.
Advantages of using social media for market research
i. Broad reach – can reach millions of people all around the world.
ii. Ability to target – it allows specific groups of
people to be targeted.
iii. Easy – high-level IT skills and complex equipment are
not needed. Importance of the reliability of market research
data
It is important to ensure that the data gathered is reliable. If a
market research data is inaccurate or out of date, any
decisions based on the data are likely to be unsound. The
reliability of data often depends on the number of people
questioned and whether they represent the views of everyone.
Ideally, information could be gathered from every single
person in a market. However, this could take too long and
cost too much money. To overcome this problem, businesses
use a sample of people.
The behavior and views of the sample must be representative of
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 all the people in the market, otherwise, the data will be biased
and unreliable.
Advantages of marketing research
i.
New products may come in the market due to
active market research. These new products assist
in improving standards of living of consumers.
ii. Market research helps to improve the quality of products.
iii. Enables firms to identify new markets for their products.
Limitations of market research
i. Market research is an expensive undertaking
ii. If the recommendation of a market research is not
implemented, the money spent on it will goes to
waste.
iii. Market research data may be biased. For example, if
the sample used is not representative, any
conclusions drawn on the basis of the sample will be
inaccurate.

Topic 18; IMPORATNCE OF MARKETING

Introduction
Most businesses operate in competitive markets. Customers will only buy products if they:
 Meet their needs
 Are fairly priced
 Are conveniently located
 Are brought to their attention
Businesses are aware of this and understands that to be successful, their products have to be
marketed effectively. there are different ways of doing this.

Market and marketing Markets and marketing

 A market is where goods and services are sold.

 A market exists when buyers and sellers communicate and

exchange goods for money Examples of markets include;

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 a) Consumer goods markets – where products such as food, cosmetics furniture and
magazines are sold.

b) Markets for services – these are varied and could include services for
individuals such as banking, or business services such as cleaning.
c) The housing market – where people buy and sell properties.

d) commodity markets – where raw materials such as oil, copper,

wheat and coffee are traded. What is marketing?

 Marketing is a process of identifying, participating and

satisfying consumer needs profitably.

 Marketing involves a range of activities that help a business to sell products. Marketing
involves;

 Identifying the needs and wants of consumers.

 Designing products that meet these needs.

 Understanding the threat from competitors.

 Telling customers about products.

 Charging the right price.

 Persuading customers to buy products.

 Making products available in convenient locations.

Functions of Marketing Department

i. Market research
People may be employed to gather, process and present data
about customer need, market changes and impact of competitors
actions. This information is used to make key decisions such as
improving existing products or create new ones.

ii. Product development and planning

This involves deciding which products should be produced and marketed e.g should
old potatoes re-launched or withdrawn and replaced with new ones?

iii. Pricing
The marketing department has to decide what prices should be
charged for the range of products sold by the business. Costs,
competitors, the state of the market and type of products will
influence this decision.
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 iv. Sales promotion
People working in this section have to develop interesting and
effective methods of promotion e.g. gifts coupons, discounts, buy-
one –get – free offers competitions and loyalty cards.

v. Advertising
Businesses have to create innovative and effective adverts. They are
responsible for organizing the advertising pf product: choosing type
of advertising media and buying space from the media e.g. adverts are
filmed if they are to be on television, or designed if they are to be on
newspapers.

vi. Packaging
The marketing department will play a key role in the design of
packaging. Packaging is important because it often says a great deal
about the product itself.

vii. Distribution
This involves organizing transportation and securing contracts with
retailers and wholesalers for example:

The Importance (aims) of marketing

The central aim of marketing is to:

1. Satisfying customer needs

 Business needs to satisfy customer needs and wants. This means that they have to
produce goods and offer services that customers are prepared to buy.

 Business can identify customer needs by carrying out market research which is
always the first step in satisfying customer wants.

 Collecting reliable information helps the business to identify needs and wants.

 Businesses should anticipate customer needs i.e. try to predict what customers want
in advance and respond to changes very quickly.
1. Building customer relationships

 Many businesses should try to build relationships with their customers. This means
that they try to establish a bond with them through effective communication and do
everything possible to meet their needs.

 Some of the methods that can be used to achieve this includes;

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 a) Take complaints very seriously

b) Build trust

c) Personalize communication

d) Say thank you to the customers

e) Know your customers

f) Connect regularly

1. Keeping customer loyalty

 Once a business has attracted the customer, they should work to retain them.

 To retain a customer, the business must continue to satisfy customer needs and wants
by:

i. developing new products,

ii. providing first class customer service,

iii. maintaining effective communication links,

iv. delivering reliability and responding to any changes in the market.

v. The business may also maintain customer loyalty by maintaining a strong brand
name.

vi. rewarding their loyal customers. one of the best ways to retain customers is
to reward their loyalty. Some examples of customer loyalty schemes are:

a) Reward cards
Rewards are given to customers anytime they make a purchase, for example, in a
supermarket.

 At times customers are awarded points any time they purchase. The points may
be redeemed or used as shopping vouchers.

b) Free gifts

 Loyal customers may receive free gifts from a business

c) Charitable donations

 A business could also reward customer loyalty by making charitable donations

as a result of a customer purchase.

 The size of donation may be linked to the value of purchase.

d) Partnership deals

 Some businesses set up deals with other businesses to share the cost and benefits
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 of rewarding customer loyalty.
Product and market orientation

 Product orientation is where a business focuses on the design and the manufacturer of
the product itself rather than the needs of customers. They then try to persuade people
to buy it.

 Market orientation is where a business focuses on the needs of consumers when

developing products. they do not make products until they know what people want.

Market share and market analysis

 Market share- This is the share of the total market that

a particular business or product enjoys in a specific
market.

 Businesses are often interested in their market share. The pie

chart below shows the market share for executive cars in
UK. The bestselling model is Mercedes Benz S class
followed by BMW 7 series. Businesses always aim at
increasing their market share at the expense of their rivals.
If a firm dominates the market, it can charge high price

a business can be more successful if it carries a market analysis.

 Market analysis ~ involves finding out about the features or characteristics of a market.
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  A business may gather both quantitative and qualitative information when assessing the
market.

 The business should find out about:

a) The size of the market.

b) The current growth rate in the market and the potential growth.
c) The size and number of businesses currently operating in the market.

d) The factors that might influence possible changes in the market.

e) Opportunities segmenting the market

f) The way consumers behave in the market such as where they like to buy
products and how they like to use them.

 Normally, market analysis should be ongoing at all times. Markets are dynamic i.e.
they keep on changing all the time.

 A business must therefore keep in touch with the market developments and respond to
them appropriately.

Niche marketing and mass marketing

 Mass marketing is when a business sells their products to all consumers and markets
them in the same way. Some of the products sold using this method may include fast
moving consumer goods e.g. crisps, soft drinks etc.

 The number of customers in these markets is huge. This means that the business can
produce large quantities at a lower unit cost by exploiting economics of scale. This
might result in higher sales and higher profits. However, there is often a lot of
competition in mass markets and therefore businesses may need to spend a lot of
money marketing these products.

 A niche market is a small market segment, a segment that sometimes has not
been serviced by larger businesses.

 Niche marketing involves selling to a small customer group, sometimes with specific
needs. Small firms can survive by supplying niche markets. They can often avoid
competition, It is also a lot easier to focus on the needs of the customer in a niche
market. examples of niche markets may include graduation gifts, wedding planning
etc.

Responding to changes in the market

 Most markets keep on changing with time. They are dynamic i.e. they may grow, shrink,
break–up and emerge.

Reasons why markets change

1. Changing customer needs

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  The reason for change in markets is because the needs of customers change.

 These needs change because;

i) Consumers’ income changes so they choose different products.

ii) Consumers become better educated and develop more sophisticated tastes.
iii) Consumers are influence by changes in social habits. Example, more people
are concerned about the environmental and resource depletion and
therefore want to recycle their waste.

iv) Fashions change overtime.

v) New technologies result in different needs.

 Businesses should therefore monitor markets, identify changes in customer needs and
be prepared to develop new products or services in order to meet these new needs.

 Failure to do so may mean that market share is lost to more responsive rivals.

2. Changing customer / consumer spending patterns

 Businesses can gather information about spending patterns in markets. They can carry
out their own research, use statics generated by the government or purchase market
research reports from specialized market research
agencies.

3. Increased competition

 Competition is the rivalry that exists between businesses in the market.

 The behavior of competitors in the market needs to be monitored very carefully.

 Competitors put businesses under some pressure as businesses have to encourage

customers to keep buying their products. They will use a range of methods to attract
customers e.g.

 Lowering prices

 Making their products appear different to those of rivals

 Offering better quality products

 Using more powerful or attractive advertising or promotions

 Offering high quality customer service

Large verses small businesses

 Marketing is important to all businesses. However large businesses, with their depth
resources, are likely to invest more in activities such as market research. Some large
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 businesses may employ specialists to carry out these functions.

Topic 19; MARKET SEGMENTATION

Meaning of market segmentation

 This is the dividing of a market into different sections and each section is made up
of consumers who have similar needs.
 A Market segment is a part of a whole market made of customers with similar
characteristics.
 Some businesses concentrate on producing one product for one particular segment.
 Some businesses produce a range of different products and target them at several different
segments.
 Some businesses aim their products at nearly all consumers.
 By dividing markets into segments, businesses can more easily supply products that meet
customers’ needs.

Methods of market segmentation

a) Location / Geographical segmentation

 Different customer groups are likely to have different needs depending on where they
live. Example, groups living in very hot climate e.g. the Middle East will have
different needs from those living in cooler climates.
 There might also be differences between groups living in different parts of the same
country.

b) Demographic segmentation
 This is dividing the market based on certain characteristics of the population such
as, according to the age, gender, income, social class, ethnic origin or religion of the
population.
i) Age
 Infants, teenagers, young adults and the over 65s are likely to have different needs
because of their age. Quite a lot of products are targeted to different consumer groups on
the grounds of age.
 Example, clothes are produced in different sizes and styles for people in different age
groups.
ii) Gender
 Businesses are likely to target male and female consumers with different products. For,
example, producers of clothes, cars, magazines, perfumes and drinks target different
products to different genders.
iii) Income
 Income in most countries varies considerably. As a result, businesses target products at
certain income groups.
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  Example, producer of luxury handbags targets very high-income groups.
iv) social class
 Businesses pay a lot of attention to different social- economic groups. Such groups
are usually based on occupations. These can be used by businesses to target
products. Example, sports cars might be targeted at young professionals.
v) Ethnic origin
 Many countries in the world are becoming more cosmopolitan, with populations made of
different ethnic groups. This is important for businesses because different ethnic groups
are likely to have different needs owing to their varying cultures.
vi) Religion
 It is not uncommon for different religious groups to have different needs. Example,
Muslims do not eat pork.

c) Lifestyle (or psychographic) segmentation.

 Lifestyle could also be used to divide the market. This may include the following
examples;
 Television broadcasters may target sports channels at sports levels.
 Adventure holidays may be targeted at ‘outdoor types’, who like to try new things
and take risks.
 Organic foods might be targeted at people who are more about the environment.
Benefits of market segmentation
a) Businesses that produce different products for different market segments can
increase revenue. This is because some businesses can charge higher prices to
different customer groups. In the airline industry, many airlines offer three
different levels of service - economy, business class and first class
b) Customers may be more loyal to a business that provides products that are designed
specifically for them.
c) Businesses may avoid wasting promotional resources if they only target their
adverts at those people who are really interested in the product.
d) Some businesses can market a wide range of goods to different customer groups.

Large verses small businesses

 Market segmentation is important for both large and small businesses. For example,
small businesses may target their products solely at a specific market niche. In
contrast, a large business may look at a market and decide to target several segments
with specifically designed products.

NOTE: After segmentation a business may decide to concentrate

on selling to a mass market or niche market:
Mass Market
This is a market where same products are sold to all consumers
and is marketed in the same way. Fast moving consumer goods
such as crisps and breakfast cereals are sold in mass market.

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 Benefit/Advantages of selling in mass market- The
number of customers in these markets is huge. This means
that the mass market is cost efficient as it can produce goods
in large quantities at a lower unit cost by exploiting
economies of scale.
Disadvantages - there is a lot of competition in mass markets and
therefore the business often spends a lot of
money marketing these products.

Niche Markets
is a small segment of the market made of customer with specific needs.

• It involves selling to small customer group, sometimes with specific needs.

• Small firms can actually survive by supplying
niche markets by avoiding competition.

Advantages of niche market

1. It is easier to focus on the needs of the customers in a niche market.

2. Less competition
3. Helps business build brand loyalty
• Examples of niche markets includes: graduation gifts,
dog training, wedding planning etc.

Disadvantages of Niche Market:

1. Lack of economies of scale: these are the advantages that a large firm
enjoys when it does mass production, for example, lower cost of
production.

2. Risks of over dependence on a single product or market

3. Likely to attract competition if successful.
4. Vulnerable to market changes.

Topic 20; THE MARKETING MIX

Def. Marketing mix are elements of a firm’s marketing that are designed to meet
the needs of customers (usually referred to as the 4P’s).
A good marketing strategy is the one that meets the needs of its customers. This
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means that the business must:
 Design and produce high quality products.
 Charge a price that is acceptable to consumers.
 Let the consumers know about the product by promotion.
 Make products available in the right place and at the right time.

THE 4P’S (ELEMENTS) OF MARKETING MIX

1. PRODUCT
Products have to fulfill or exceed customer’s expectations. They have certain
features that the business must get right.
 Functional – Products must perform the function for which they were bought.
 Appearance – Products must look good. The shape size and color of products
must be appealing to the customers. Eg Jewellery.
 Unique selling point (USP) – This means that a product has a particular
characteristic that makes it unique from those of its competitors.
 Product life cycle (PLC) – Many products have a limited life, during which
sales will rise and fall. A business may need to modify its products or create
new ones when they decline.
Product – can either be a good e.g. mobile phone or a service e.g. Holidays,
banking and telecommunications
 These products can be split into: consumer good/service such as clothes, motor
cars, food and entertainment and producer goods such as machinery, tools and
equipment.
Product Development
It refers to all stages involved in bringing a product from concept or idea through
market release and beyond. In other words, product development incorporates a
product's entire journey
Stages in Product Development:
 Generating Ideas for a new product. - ideas for new products may come from
business owners, customers, competitors, staff and research and development.
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 Analysis of each idea- is products marketable, practical and legal. - various
alternative solutions are suggested and one particular solution is selected.
 Development- it could involve carrying out experiments, using simulations,
building models, producing samples and initial testing.
 Test marketing the product – involves testing the product in a small section of
the total market to know what customers think about the product.
 Modifying the product- any substantial change made to the attributes (size,
shape, color, style, price, etc.) of a product; usually undertaken in an attempt to
revitalize it in order to increase demand.
 Commercialization and launching the product- during this stage, business puts
the final touches to the product.

Branding and Packaging of Products.

 Many businesses give their product a name, which are called ‘brand names’
it might be the name of the product, a product group or the business itself.
Some brands are well known and worth a great deal of money, eg coca cola.
 The other aspect of the product is the packaging. Consumers normally link
the quality of packaging with the quality of the product itself, eg perfume,
confectionery, make up etc. This will make it easy for consumers to
differentiate the product from those of rival companies. It also helps in
protecting the product against physical damage, and keeping it clean.
Factors influencing choice of packaging of a product
NB: you can list the factors in point form

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Product Life Cycle (PLC)
Level of sales at the different stages through which a product passes over time.

 Development Stage: At this stage sales are zero. This is because the product is
being researched, designed and tested. It is not yet in the market. Development
costs are very high and can damage the cash flow of a business. If a product
does not make it beyond this stage, all the money invested in developing is lost.
 Introduction Stage: Businesses often introduce a new product by an official
launch. There may be a presentation or a party to give the products a good
promotion. Costs will continue to be high. New production facilities may be
needed and spending on promotion is high. The price charged by a business for
the product may vary, some may use high price (skimming) or low price
(penetration) to get established in the market.
 Growth Stage: If product is successful, sales will start to grow. The business
will get increased revenue and start recovering the costs of development.
Production costs are likely to fall and the product start to make a profit. Sales
may start to fall at the end of this stage since competitors are beginning to
launch their versions of the product.
 Maturity and saturation: Eventually sales will start to level off. Development
and launch costs will have been recovered and the product will be making a
profit. Cash flow will also be improving. As more businesses enter the market,
it will become saturated and some will be forced out. The price may fall and
promotion strategies change. Some businesses will try to prolong the life of
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 their product before it declines. They use extension strategies.
 Decline stage: Sales of many products decline and they are eventually
withdrawn. This may be due to change in consumer taste, new technology or
even a new product in the market. Where possible, a business will replace the
declining product with new ones Examples of products in the decline stage are
typewriters, cheques and fax machines.
Extension strategies for a product
These are strategies that prolong the life of a product before it starts to decline.
These strategies help the product to generate more income/cash. Examples of such
strategies are:
 Finding new markets for the product – eg selling abroad.
 Finding new uses for the product
 Modifying the product
 Develop the product range, like bringing new flavors
 Change the appearance or packaging, eg coca cola selling coke in cans, glass
bottles and plastic bottles of different sizes.
 Encourage more frequent use of the product

Boston Matrix
Boston matrix is a 2 by 2 matrix which describes products according to the market
share they enjoy and whether the market has any potential for growth.
The Boston Matrix may be used to help analyze the products marketed by a
business. It enables the business to place their different products into different
categories according to their market share and position in life cycle. There are four
positions in the matrix where products might be placed. They are:
 The star
 The cash cow
 The Problem child
 The Dog
The Boston Matrix model

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The Boston Matrix describes products in four different ways.
 The Star: They are valuable products for a business. They have high market
share but also the potential for growth. They are likely to be profitable.
 Cash Cows: They are mature products. They have high market share but
market is not likely to grow very much. They generate a steady flow of income
for the business.
 Problem Child (Question Marks): These products have low market share but
the market is growing. If the right marketing action is taken, these products
could do well. They have potential.
 Dogs: These are products at the end of their life cycle. They have low market
share and the market is not likely to grow any more. They are likely to be
replaced with new products.
Revision quiz

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 2. PRICE
Introduction
 Setting the price of a product is a vital marketing decision. If the price is set too
high, customers may not buy the product, if it’s set too low, it might be an
indication that the product is of poor quality.
 The business may also struggle to make a profit at low prices. Businesses can
use a number of methods to set their prices. In most markets the prices charged
by a business reflect prevailing market conditions. This means that prices are
heavily influenced by forces of demand and supply.
 Demand is what customers are willing and able to buy at a given price. Demand
is determined by customers. Supply is determined by businesses. It is the
amount businesses are willing to offer for sale at a given price.

Factors that affect the Price charged by a business

1. Marketing mix- prices has to fit in other elements in the mix eg ‘up-market’
products must have a higher prices.
2. Objectives – Pricing can be used to achive certain aims, eg a very low price
can be set can be set to drive out rivals.
3. Taxes – Many goods have taxes on them, eg in the UK there are heavy
taxes on tobacco and petrol.
4. Competition – Prices are often influenced by those charged by rivals. If
there is a lot of competition, a firm will have less control over price.
5. Consumer perception – Consumers want value for money so prices must
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 reflect this.
6. Cost – Costs have to be covered so that a profit is made. Thus, as costs rises
prices will also rise.
7.
Pricing Strategies
A pricing strategy is a set of plans designed to meet a specific marketing aim.
Businesses can choose from a range of different pricing strategies when setting
prices.
1. Cost Based Pricing:(Cost-Plus Pricing)
Business has to set prices that generate profit. One method which ensures that costs
are covered is cost plus or cost based pricing. It involves adding a mark up to total
costs. This method is common with retailers. The disadvantage of this method is
that it ignores market conditions, and prices set may be too high resulting in low
sales.
2. Skimming or Creaming:
Some businesses may launch a product into a market charging a high price for a
limited time period. The main objective is to generate high levels of income with
the new product before competitors arrive on the scene. This may help recover the
high costs incurred in product development. Pharmaceutical companies use this
method.
3. Penetration Pricing:
Sometimes a business will introduce a new product and charge a low price for a
limited period of time. The aim is to get the product established in the market.
Businesses using this strategy hope that customers will be attracted by low prices
and will continue to buy even when the price rises.
4. Promotional Pricing
Usually involves lowering the prices of a product for a short period of time to draw
in customers. Prices might be cut for a number of reasons;
a) To get rid of old stock
b) To generate some cash quickly to help solve cash flow problem
c) To generate renewed interests in an existing product
d) To attempt to win a larger share of the market by encouraging brand
switching
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 Examples of promotional pricing include;
• Psychological pricing: One common method is to set the price slightly
below a round figure. Eg charging $99.99 instead of $100. Consumers are
tricked into thinking that 99.99 is significantly cheaper than $100.
• Loss leaders: Some products are sold at a price lower than their cost, mostly
common in supermarkets. The objective of this strategy is to draw the
customers into a store where they will buy the loss leader.
Once in the store it is hoped that customers may buy other products that are
profitable, generating an overall profit.
• Discounts and sales: Businesses often cut prices for a short period of time.
They have sales where goods are sold below a standard price. Some of these
sales are seasonal.

5. Competition Based Pricing

Some businesses take a very close look at what their rivals are charging when
setting their prices. Commonly used by businesses operating in a fiercely
competitive environment. The advantage of this strategy is that a price war is likely
to be avoided. It is considered to be a safe pricing. A market leader can set a price
and all others will follow. This is price leadership.
 Predatory/Destroyer pricing: This is setting the prices too low in order to
drive other players out of the market.
 Discriminatory pricing: This is charging different prices for the same
product at different markets.

N/B: Most small businesses have less control over what price they charge. They
tend to use cost plus pricing because it’s easy to use and compute and ensure profit
is made and costs are covered. In addition, they tend to be price followers.
In contrast, large firms have more control over which pricing method to use
because they are dominant in the market and have more liberty on what price
strategy to use.

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